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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-22371
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DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1645569
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2361 ROSECRANS AVENUE, SUITE 180
EL SEGUNDO, CALIFORNIA 90245
(310) 725-9123
(Address of Principal Executive Offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $.01 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 4, 1998, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, based on the closing
price for the registrant's Common Stock in the Nasdaq National Market on such
date, was approximately $53,796,127.25. This calculation does not reflect a
determination that certain persons are affiliates of the registrant for any
other purposes.
The number of shares of Common Stock outstanding on March 4, 1998 was 5,318,563.
DOCUMENTS INCORPORATED BY REFERENCE:
The information set forth under Part III, Items 11, 12 and 13 of this Report is
incorporated by reference from the Company's definitive proxy statement for the
1998 annual meeting of stockholders, which will be filed with the Commission
within 120 days after the close of the fiscal year.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
DeCrane Aircraft Holdings, Inc. and subsidiaries (collectively, the
"Company") manufactures avionics components and provides avionics systems
integration services in certain niche markets of the commercial and high-end
corporate jet aircraft industries. The products and services offered by the
Company are utilized primarily in commercial and corporate aircraft to connect,
support and/or integrate various avionics systems, including cabin avionics
systems and flight deck avionics systems. The Company's targeted markets consist
of commercial aircraft and avionics original equipment manufacturers ("OEM's"),
the commercial aircraft retrofit market, the commercial aircraft aftermarket and
high-end corporate jet market. The Company also sells products and services to
the military aircraft market.
The Company seeks to maximize its sales by emphasizing the complementary
nature of its products and services. Components manufactured by the Company
include: (i) contacts (of which the Company believes it is the largest supplier
of bulk contacts to the commercial aircraft OEMs); (ii) connectors (which often
utilize the contacts manufactured by the Company); (iii) harness assemblies
(which often utilize the connectors manufactured by the Company); and (iv)
avionics support structures (which often are packaged with the Company's
connectors and harness assemblies in installation kits). The Company also
manufactures dichroic liquid crystal display ("LCD") devices, which are used
with flight deck avionics, and believes it is the largest supplier of such
devices to the commercial aircraft OEMs. In addition, the Company provides
stereo systems, video monitors, amplifiers, chimes and paging devices, headphone
systems and passenger switch and cabin lighting and climate controls for the
high-end corporate jet market. The systems integration services provided by the
Company include design and engineering, Federal Aviation Administration ("FAA")
certification, manufacture of installation kits and systems installation. The
Company manufactures many of the components required to complete a systems
integration project, which it believes provides it a critical competitive
advantage.
The Company was formed in 1989 to capitalize on emerging trends in the
aircraft market through acquisitions. Since its formation, the Company has
completed nine acquisitions of businesses or assets. A summary of these
transactions follows:
APPROXIMATE
YEAR OF PRINCIPAL PRODUCTS AND PURCHASE
TRANSACTION TARGET SERVICES(1) PRICE(2)
- ------------ ------------------------------------------ -------------------------------- ----------------
(IN MILLIONS)
1990 Hollingsead International, Inc. Avionics support structures $ 9.1(3)
1991 Tri-Star Electronics International, Inc. Contacts and connectors *(4)
1991 Tri-Star Europe, S.A. Contact blanks *(4)
1991 Tri-Star Technologies, Inc. Wire marking equipment *(4)
1991 Cory Components, Inc. Connectors & harness assemblies 7.7(5)
1996 Aerospace Display Systems, Inc. Dichroic LCD devices 13.4(6)
1996 Elsinore Engineering services 2.6(7)
1996 AMP Facility Contact blanks 6.8(8)
1997 Audio International, Inc. Cabin management &
entertainment products 24.7(9)
- --------------------------
(1) At the time of the transaction.
(2) Includes, where applicable, related fees and expenses and post closing
adjustments.
(3) Includes Hollingsead International, Inc. and its wholly owned subsidiary
(collectively "Hollingsead").
(4) Although each of Tri-Star Electronics International, Inc., ("Tri-Star"),
Tri-Star Europe S.A. ("Tri-Star Europe") and Tri-Star Technologies, Inc.
("TST") was acquired pursuant to a separate agreement, the purchase price,
which was $10.4 million for all three entities, was determined in the
aggregate.
(5) The Company acquired 75% of Cory Components, Inc. ("Cory Components") in
1991 for approximately $2.0 million. In February 1996, the Company acquired
the 25% which it did not already own for approximately $5.7 million.
(6) Reflects the acquisition of the Aerospace Display Systems division from
Allard Industries, Inc. ("ADS").
(7) Includes Elsinore Aerospace Services, Inc. and the Elsinore Engineering
Services division of Elsinore L.P. (collectively "Elsinore").
(8) Reflects the purchase of certain manufacturing assets (collectively, the
"AMP Facility") from AMP, Inc. ("AMP").
(9) Subject to contingent consideration of up to $6,000,000 depending on certain
performance criteria for Audio International, Inc. ("Audio").
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The Company commenced its operations in October 1990 with the acquisition of
Hollingsead, which, at the time of the acquisition, was solely a manufacturer of
avionics support structures. The Company expanded its manufacturing operations
with the 1991 acquisition of Tri-Star, Tri-Star Europe and TST and Cory
Components (the "Tri-Star Companies"). The Company's management has refocused
and expanded the businesses which were acquired in the Hollingsead and Tri-Star
transactions. By capitalizing on Hollingsead's manufacturing strength in
avionics support structures, which are used extensively in the systems
integration process, the Company has expanded Hollingsead into a full-service
systems integrator concentrated in the retrofit market. Concurrently, the
Company has enhanced the market positions of the Tri-Star Companies as a leading
supplier of certain low-cost, high-quality avionics components. Management has
focused on reducing costs, improving quality and increasing the market
penetration of the components manufactured by these companies.
During the last two years, the Company completed: (i) the acquisitions of
ADS and Elsinore; (ii) the purchase of the AMP Facility; (iii) the acquisition
of the remaining 25% interest in Cory Components which it did not already own;
and (iv) the acquisition of Audio. The acquisition of ADS, a manufacturer of
dichroic LCD devices, which the Company believes is the largest supplier of such
products to commercial aircraft OEMs, expanded the Company's offering of
components used in flight deck avionics systems. The acquisition of ADS has
allowed the Company to capitalize on the upturn in aircraft OEM production by
increasing its revenue content per aircraft. The acquisition of Elsinore, with
its Designated Alteration Station ("DAS") approval, permits the Company to
issue, through Elsinore, on behalf of the FAA, certification that the designs of
aircraft modifications performed in connection with systems integration services
conform to all pertinent FAA requirements. Such certifications are issued as
FAA-approved Supplemental Type Certificates ("STCs"), which constitute, in
effect, specific FAA design approval for each modification. In addition, the
acquisition of Elsinore enhanced the Company's systems integration capabilities
and increased the number of engineering personnel dedicated to the Company's
systems integration effort by approximately 50%. The acquisition of Elsinore
also provided the Company with an important new customer in the aircraft
industry, Daimler-Benz Aerospace Airbus GmbH, and the opportunity to obtain
additional customers. The Company's purchase of the AMP Facility added contact
capability and capacity which enables the Company to optimize and expand its
contact manufacturing operations. The AMP Facility enables the Company to
produce contact blanks using a cold-heading manufacturing process which, when
used for high volume production, is more cost effective than screw machine
operations. As a result of the purchase of the AMP Facility, the Company has
significantly increased its sales of contacts and the number of distributors to
which it sells. The Company believes Audio, which it acquired in November 1997,
is the nation's largest and leading independent provider of premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market. The acquisition of Audio expanded the Company's
offering of products and systems for the corporate jet market.
INDUSTRY OVERVIEW AND TRENDS
The Company participates in the commercial, high-end corporate jet and
military segments of the aircraft industry. Within those segments, the Company
sells to commercial and high-end corporate jet OEMs, major avionics equipment
OEMs and military aircraft OEMs as well as to the aircraft retrofit market,
aircraft component aftermarket and corporate jet modification centers. According
to the 1997 CURRENT MARKET OUTLOOK ("the Boeing Report") published by the
Commercial Airplane Group of the Boeing Company ("Boeing"), expenditures for new
commercial jet aircraft production are expected to total approximately $490
billion for the period from 1996 through 2006; and worldwide air travel will
average 4.9% annual growth over the next two decades. The aircraft component
retrofit market (the integration of new systems into existing aircraft) and the
aircraft component aftermarket (the manufacture and sale of replacement products
for existing aircraft) are served by a highly fragmented group of companies,
including many of the OEMs. The aviation industry has been consolidating at an
increasing pace in recent years, and it is expected that such consolidation will
continue for the foreseeable future.
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The market for commercial aircraft designed to carry 100 or more passengers
is served principally by Boeing and Airbus Industrie ("Airbus"). The market for
commercial aircraft designed to carry fewer than 100 passengers is served by
more than a half dozen other manufacturers. The major systems installed on new
commercial and military aircraft, such as flight deck avionics systems, are
produced by a limited number of OEMs, including AlliedSignal, Rockwell Collins,
General Electric, Honeywell, Raytheon and Sextant Avionique. Components and
sub-systems for new aircraft are provided by a much more fragmented group of
smaller, specialized companies such as the Company. The Company markets its
commercial aircraft products directly to the aircraft OEMs as well as to the
major systems OEMs. In some cases, the Company sells its products under private
label agreements with certain component manufacturers.
The Company believes that there are numerous barriers to entry which limit
access to the aircraft industry. These barriers include: (i) general FAA
certification requirements, including those necessary to perform aircraft
modifications or maintenance; (ii) required compliance with military
specifications for certain products sold to commercial and military markets;
(iii) required compliance with qualification and approval standards imposed by
aircraft and avionics systems OEMs in addition to FAA aircraft manufacturing and
aircraft modification design and installation standards; (iv) reluctance of OEMs
to list new companies as approved vendors on the engineering drawings of the
OEMs (referred to as "print position"); and (v) significant initial capital
investment and tooling requirements necessary for the manufacture of certain
aircraft components and systems.
The Company believes the following trends are affecting the commercial and
corporate aircraft industry:
INCREASED DEMAND FOR NEW COMMERCIAL AIRCRAFT. The Boeing Report cites that
over the next decade, the world jetliner fleet is projected to grow from 11,500
aircraft at the end of 1996 to nearly 17,000 aircraft in 2006 and to 23,600 by
2016; and the report estimates that, over the next 20 years, the industry will
require 16,160 new aircraft both to support the projected world fleet expansion
and to replace capacity lost as aircraft are removed from commercial airline
service. According to aircraft delivery schedules revised in January 1998,
combined annual deliveries from Boeing (including the former McDonnell Douglas
Corporation ("McDonnell Douglas")) and Airbus are projected to increase from 397
aircraft in 1996 and 557 in 1997 to an estimated 785 in 1998. The Company
believes that every commercial aircraft model currently produced by Boeing and
Airbus contains components manufactured by it. The Boeing Report notes that the
pent-up demand for replacement aircraft, and upcoming deadlines for noise
abatement, which may take some older aircraft out of service, will require
carriers to add capacity in order to keep pace with traffic growth.
INCREASED DEMAND FOR NEW CORPORATE JET AIRCRAFT. According to the
ALLIEDSIGNAL ANNUAL BUSINESS AVIATION OUTLOOK, 2,300 new corporate jet aircraft
are expected to be delivered from 1997 through 2001, a 61% increase over the
previous five year period. The Company believes that the increase in new
corporate jet aircraft production is being driven by a number of factors,
including: (i) the introduction of new, larger and more efficient aircraft; (ii)
the growing popularity of fractional aircraft ownership; (iii) the minimal
availability of used aircraft; (iv) the need for long range flights to expanding
international markets; and (v) the increased demand for more expedient travel.
INDUSTRY CONSOLIDATION--REDUCTION IN NUMBER OF APPROVED SUPPLIERS AND
VENDORS. In order to reduce purchasing costs and have greater control over
quality, OEMs and aircraft operators have been reducing the number of vendors
and suppliers from whom they purchase. Suppliers and vendors must now possess
the critical mass and production and distribution capabilities required to
provide a broader range of products and services to airlines and OEMs on a
just-in-time basis. These requirements, coupled with the high level of
fragmentation within the aerospace industry, have led many companies to realize
significant internal synergies and external marketing benefits from merging.
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INCREASED DEMAND FOR CABIN AVIONICS SYSTEMS. In recent years, there has
been an increase in demand for cabin avionics systems, including in-flight
passenger telecommunications systems and in-flight entertainment systems, such
as video, video-on-demand and other interactive systems. The Company also
believes that demand for cabin avionics systems and flight deck avionics systems
is increasing, primarily as a result of: (i) a desire by airlines for additional
revenue-producing services; (ii) longer flights combined with a demand by
airline passengers for more sophisticated forms of in-flight services; and (iii)
the advent of new technologies and FAA mandates related to aircraft safety and
navigation.
PROLIFERATION OF NEW SAFETY REQUIREMENTS. The advent of new technologies
and FAA mandates are driving a proliferation of new safety systems for
airplanes. The world's airlines, aircraft and avionics OEMs and regulatory
agencies have coordinated to develop industry standards, regulations and system
requirements for future air navigation systems ("FANS"). Through the
implementation of FANS, a complete modernization of both airborne and
ground-based air traffic management systems is expected to be introduced. As
overall navigation system accuracy is improved, new navigation systems, such as
global positioning systems ("GPS"), will be required. Other new technologies
which have already been mandated include the traffic collision avoidance system
("TCAS"), cargo hold fire detection and suppression systems and windshear
detection systems. In anticipation of new FAA recommendations and mandates, many
airlines have already begun to install enhanced ground proximity warning
systems, predictive windshear detection systems and enhanced digital flight data
recorders. Each of these systems presents aircraft avionics retrofit
opportunities to the Company.
DOWNSIZING AND OUTSOURCING. Airlines have come under increasing pressure to
reduce operating and capital costs associated with providing services. In
response, airlines have increased purchases of certain components from third
parties and have outsourced certain repair, overhaul and retrofit functions.
Similarly, aircraft and avionics OEMs increasingly are reducing their level of
vertical integration by outsourcing more manufacturing, repair and retrofit
functions to third parties. The Company believes that these trends are creating
increased demand for low-cost, high-quality component manufacturers and systems
integrators, such as the Company.
COMPETITIVE STRENGTHS
The Company believes that it is well-positioned to take advantage of the
current trends and expected growth in the commercial and high-end corporate jet
aircraft industry as a result of the following competitive strengths:
LEADING POSITIONS IN NICHE MARKETS. The Company successfully has
established strong positions in several specialized niches within the commercial
aircraft industry. The Company believes that it is the largest supplier of bulk
contacts to the commercial aircraft OEMs. The Company also believes it is the
largest supplier of dichroic LCD devices for use by commercial aircraft OEMs and
a major supplier of harness assemblies for use in in-flight entertainment
systems. The Company believes it is the largest provider of premium, customized
aircraft entertainment and cabin management products and systems for the
high-end corporate jet market. The Company seeks to utilize its strong market
positions to compete more effectively as well as to capitalize on industry
consolidation trends.
RECORD OF SUCCESSFUL ACQUISITIONS. Since its formation in 1989, the Company
has completed nine acquisitions of businesses or assets, including, in 1997, the
acquisition of Audio and, in 1996, the acquisitions of ADS and Elsinore and the
purchase of the AMP Facility. The Company has demonstrated its ability to: (i)
identify strategic acquisition targets; (ii) complete the acquisitions of
identified targets; (iii) retain key management; and (iv) increase revenues of
an acquired company, often while refocusing that company's business strategy.
The Company believes that its acquisition success has resulted from its ability
to identify and screen acquisition candidates, implement an effective cost
reduction program and expand and diversify the products and services provided by
an acquired company. In the past, acquisitions by the Company have resulted in
increased indebtedness and interest expense which has caused the
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Company to incur net losses in each year since its inception despite positive
operating income. See "Risk Factors--Risks Associated with Acquisitions," below.
ALIGNMENT WITH LEADING AVIONICS AND AIRCRAFT OEMS AND SUPPLIERS. The
Company seeks to maximize its growth by establishing long-term relationships
with leaders in the Company's primary markets. For example, the Company has
entered into supply agreements with Boeing. The Company believes that through
these agreements it is the supplier of a substantial majority of the bulk
contacts for all aircraft currently manufactured by Boeing and the sole source
supplier of certain connectors for in-flight entertainment systems installed by
Boeing on its 777 aircraft. The Company is also: (i) a preferred supplier of
harness assemblies to Matsushita Avionics Systems ("Matsushita") for its
in-flight entertainment systems; (ii) a preferred systems integrator for the
fire suppression and smoke detection systems of Securaplane and Kidde Safety;
(iii) a preferred systems integrator for Canadian Marconi Co. and Smiths
Industries plc in navigation systems; and (iv) a preferred systems integrator
for Honeywell's GPS systems.
LOW-COST, HIGH-QUALITY OPERATIONS. The Company believes that it has
established low-cost operations through well-defined cost reduction programs,
technological development and the use of vertical integration, where
appropriate. The Company's low-cost operations are demonstrated, for example, by
the growth of the Company's contact private labeling programs under which the
Company supplies contacts to many of its competitors.
The Company uses sophisticated procedures and processes to ensure its
products meet or exceed industry and customer quality requirements. Many
customers formally have recognized the effectiveness of the Company's quality
programs by issuing quality approval letters, awarding quality compliance
certificates and authorizing the Company's inspection personnel to act as the
authorized quality representative of the customer. For example, in February
1996, the Company received Boeing's D1-9000 Advanced Quality System award, and
two of the Company's facilities are currently ISO-9001 or ISO-9002 certified.
ENGINEERING AND RELATED TECHNICAL CAPACITY INCLUDING INDUSTRY AND REGULATORY
CERTIFICATIONS. The Company believes that it is one of the few companies with
the capability to perform full-service systems integration functions (design and
engineering, FAA certification, installation kit manufacturing and installation
of cabin avionics and flight deck avionics systems on aircraft). The Company
employs FAA-certified airframe and power-plant mechanics who are authorized to
perform certain aircraft modification functions, and approximately 12% of the
Company's employees are engineering personnel. This level of expertise enables
the Company to respond rapidly and effectively to the technical requirements of
its customers as well as to capitalize on the outsourcing trends in its
industry. The Company's subsidiaries hold numerous Parts Manufacturer Approval
("PMA") authorizations from the FAA, permitting them to manufacture and sell
various parts in many different aircraft; three FAA domestic repair station
certificates, authorizing them to perform certain aircraft modifications; and
one of only 26 DASs worldwide which are authorized by the FAA to provide
approval of certain aircraft modifications as the FAA's designee certificates
(all as of December 31, 1997). The FAA approvals obtained by the Company's
subsidiaries are owned, and may only be used by, the subsidiary obtaining such
approval.
MANAGEMENT DEPTH AND EXPERIENCE. The Company has assembled a team of
executives, program managers and engineers from many of the major manufacturers
and suppliers to the aircraft industry. Key management and professional
employees of the Company bring experience with them from such companies as The
B.F. Goodrich Co. ("B.F. Goodrich"), BE Aerospace, Inc., COMSAT Corp.,
Honeywell, Hughes-Avicom International, Inc., Litton Industries, Inc.,
Matsushita and McDonnell Douglas, providing the Company with broad commercial
aircraft industry expertise. On average, the Company's executive management has
approximately 18 years of related industry experience.
GROWTH STRATEGY
The Company's principal strategy is to establish and expand leading
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industries, with a focus on the
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manufacture of avionics components and the integration of avionics systems. The
Company seeks to achieve these leading positions while maintaining a balance of
revenues among the OEM market, the retrofit market and the aftermarket. The
Company believes that such a strategy will position it for growth over an entire
aircraft industry economic cycle. Specifically, the Company seeks to:
COMPLETE ADDITIONAL STRATEGIC ACQUISITIONS. The Company seeks to leverage
its core competencies in existing and additional markets, and add new expertise
in the avionics and systems integration fields, by identifying and pursuing
complementary acquisitions that offer strategic value, such as economies of
scale, product line extensions, new customer relationships or increased
manufacturing capacity. While there can be no assurance that the Company will
complete additional acquisitions, the Company believes that the fragmented
nature of the market for aircraft components and systems integration services
will provide the Company with additional opportunities to exploit industry
consolidation trends. See "Risk Factors--Risks Associated with Acquisitions,"
below.
CAPITALIZE ON GROWTH IN AIRCRAFT PRODUCTION AND INCREASED DEMAND FOR CABIN
AVIONICS. The Company believes its strong market positions and alignment with
many of the leading commercial aircraft industry participants will enable it to
capitalize on the projected increases in the production of commercial and
high-end corporate aircraft. For example, the Company believes that every
aircraft currently produced by Boeing (including McDonnell Douglas) and Airbus
includes components manufactured by the Company. The Company also believes that
its products are on each model of high-end corporate jet aircraft sold today.
The Company works closely with OEMs and modification centers to meet their
delivery and scheduling requirements, and, in some cases, to provide total,
turnkey solutions to new aircraft. Additionally, the Company believes that the
demand for cabin avionics systems is increasing, primarily as a result of: (i) a
desire by airlines for additional revenue-producing services; (ii) longer
flights; and (iii) increased passenger demand for more sophisticated forms of
in-flight services. The Company believes that this increased demand represents a
significant retrofit and aftermarket opportunity for cabin avionics systems, as
well as the components (such as contacts, connectors and harness assemblies) and
systems integration and installation services necessary to such systems.
EXPAND AND DIVERSIFY SYSTEMS INTEGRATION SERVICES. Historically, the
Company's systems integration services have been concentrated in the in-flight
passenger telecommunications market. In 1995, the Company commenced an effort to
diversify the types of systems which it retrofits onto aircraft by expanding its
expertise and sales efforts to include navigation and satellite communication,
safety, and in-flight entertainment systems. As of December 31, 1997, the
Company had contracted to provide systems integration services for GPS
(Continental Airlines through Honeywell and KLM Royal Dutch Airlines through
Canadian Marconi Co. and Smiths Industries plc), smoke detection/fire
suppression safety systems (Southwest Airlines through Securaplane and Northwest
Airlines through Kidde Safety) and in-flight entertainment systems (Swiss Air
Transport Co. Ltd. ("Swissair") through Interactive Flight Technologies Inc.
("IFT")). In the Company's area of systems integration, it believes that it is
one of the few companies which has in-house capabilities in each of the four
elements of systems integration (design and engineering, certification,
installation kit manufacturing and system installation).
CAPITALIZE ON COMPLEMENTARY PRODUCTS AND SERVICES. The majority of the
Company's products and services are utilized to provide an interface between an
aircraft and its avionics systems. Over the past several years, the Company
increasingly has combined certain of the components which it manufactures in
order to create higher value-added products, and develop further market
opportunities through cross-selling and vertical integration of its products.
For example, the contacts manufactured by the Company often are utilized as an
integral component of the Company's connectors. In turn, the connectors
manufactured by the Company often are utilized as primary components of the
Company's harness assemblies. Additionally, in support of the systems
integration services provided by the Company, the Company's harness assemblies
often are packaged with its avionics support structures to form the foundation
for the installation kits which are then sold to the Company's systems
integration customers. By
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emphasizing the complementary nature of its products and services, the Company
seeks to maximize penetration with existing customers and compete more
effectively for new customers.
PRODUCTS AND SERVICES
The Company's principal products and services are: contacts; connectors;
harness assemblies; avionics support structures; dichroic LCD devices;
entertainment and cabin management products; and the integration of certain
cabin and flight deck avionics systems into different aircraft models. The
Company believes that its products are used in each of the commercial aircraft
models currently produced by Boeing (including McDonnell Douglas models) and
Airbus, the two largest commercial aircraft OEMs. In 1997, sales of five classes
of product or service accounted for the bulk of the Company's revenues (pro
forma for the acquisition of Audio): contacts (approximately 30%), connectors
(approximately 22%), systems integration (approximately 15%), dichroic LCD
devices (approximately 11%), and entertainment and cabin management products
(approximately 11%). No other product or service accounted for more than 10% of
the Company's pro forma revenues in 1997.
CONTACTS
The Company produces precision-machined contacts for use in commercial
aircraft. Contacts conduct electronic signals or electricity and are installed
at the terminus of a wire or an electronic or electrical device. The Company
supplies contacts for use in connectors found in virtually every electronic and
electrical system on the aircraft. Over the last three years the Company has
successfully initiated private labeling programs whereby the Company
manufactures contacts for several of the major connector manufacturers. The
Company sells contacts directly to aircraft and avionics OEMs and, through its
private labeling programs, to connector manufacturers who sell connectors to the
aircraft and avionics OEMs under their brand name. The Company believes that it
is able to sell contacts on a private label basis because of its reputation for
high quality, its levels of service and its low-cost manufacturing operations.
The Company believes that it is the supplier of a substantial majority of the
bulk contact requirements for all aircraft currently manufactured by Boeing.
CONNECTORS
The Company manufactures and sells to the commercial aircraft industry
electronic and electrical connectors, which provide the electronic or electrical
link between discrete wires and devices. Connectors also serve as a separable
interface that facilitates assembly, installation, repair and removal of wires
or equipment. The Company manufactures a narrow range of electrical and
electronic connectors that are designed and manufactured specifically to operate
in the harsh airborne environment of an aircraft and to meet the critical
performance requirements demanded by the commercial aircraft market. The Company
produces connectors that are used in aircraft galleys, flight decks and control
panels in the passenger cabin. The Company is the sole-source supplier of
certain connectors for in-flight entertainment systems installed by Boeing on
its 777 aircraft.
The Company characterizes its connectors as follows: (i) application
specific--designed and developed by the Company for a specific application,
usually for a single customer; (ii) proprietary--Company-designed connectors
which are sold to the broad market for a variety of applications, often evolving
over time from an application specific product; and (iii) industry
standard--produced in accordance with an industry or military controlled design
or specification and sold to the broad market to which the design or
specification relates. Examples of the Company's application specific,
proprietary and industry standard connectors are as follows:
APPLICATION SPECIFIC. The Company manufactures a connector used as an
electrical distribution block for Boeing's 777 aircraft. Currently, this
product is used solely for this application; however, in the future, it
could be used in similar applications on other aircraft.
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PROPRIETARY. The CQ connector family is an application specific product
designed by the Company for use with in-flight entertainment and cabin
management systems on Boeing's 777 aircraft.
INDUSTRY STANDARD. The Company sells standard connectors, built to U.
S. military specification ("mil-spec") standards, which can be used in many
applications without further testing or certification.
HARNESS ASSEMBLIES
The Company produces harness assemblies for use in cabin avionics systems,
primarily in-flight entertainment systems. A harness assembly is made from wire,
which the Company buys from its vendors, and connectors, contacts and hardware,
which the Company manufactures. The Company sells its harness assemblies to
avionics OEMs. In addition, the Company uses harness assemblies in its systems
integration activities. The Company is currently a primary supplier of harness
assemblies to Matsushita, one of the largest manufacturers of in-flight
entertainment systems.
AVIONICS SUPPORT STRUCTURES
The Company has designed, patented and produced a wide range of avionics
support structures for use on commercial aircraft. Avionics support structures
are typically comprised of trays, shelving, racks, mounts, and insertion and
extraction devices which are combined with other components to form the
installation kit that securely holds and connects avionics equipment to the
aircraft and other systems or devices such as antennae, flight instruments and
power supplies. Avionics support structures are used to support and
environmentally cool (using fans and air chambers) the avionics equipment,
including navigation, communication and flight control equipment. Avionics
support structures are generally located in the avionics bay of an aircraft and
are secured to the frame of the aircraft. The Company's avionics support
structures are recognized by its customers under the Box-Mount-TM- name which
the Company believes is highly respected in the marketplace. The Company sells
its avionics support structures to aircraft and avionics OEMs, airlines and
major modification centers. In addition, these products are essential components
included in the installation kits which are used in the Company's systems
integration operations.
DICHROIC LCD DEVICES
Through the acquisition of ADS, the Company became a leading manufacturer of
dichroic LCDs and modules (which are LCDs packaged with a backlight source and
direct drive electronics) used in commercial and military aircraft. The Company
believes it is a primary supplier of dichroic LCD devices to aircraft and
avionics OEMs and the U.S. military.
The Company's dichroic LCD products, which provide output information to the
flight crew, are used in a variety of flight deck applications, including flight
control systems, fuel quantity indicators, airborne communications and safety
systems. Dichroic LCD products are widely used in the aerospace industry because
of their high performance characteristics and custom design. Key performance
characteristics of dichroic LCD devices include high readability in sunlight and
darkness, ability to withstand wide temperature fluctuations and readability
from extreme viewing angles. During the development phase of flight deck
avionics, the Company works closely with its customers to develop products that
meet the customers' requirements which are subsequently incorporated into new or
modified flight decks.
The Company also manufactures electronic clocks which utilize its dichroic
LCD devices. The Company's clocks utilize its dichroic LCD technology and are
suitable for use in general aviation, business, commercial and military
aircraft. The Company believes that it is the only clock manufacturer which has
designed a line of clocks capable of serving all types of aircraft.
9
ENTERTAINMENT AND CABIN MANAGEMENT
Through its recent acquisition of Audio, the Company became a leading
supplier of aircraft entertainment and cabin management product and systems to
the high-end corporate jet market. Audio brings to the Company additional
expertise in: (i) cabin management systems including switching and control
modules; (ii) audio and video components; and (iii) systems engineering and the
integration of cabin management electronics. The Company provides stereo
systems, video monitors, amplifiers, chimes and paging devices, headphone
systems and passenger switch and cabin lighting and climate controls. The
Company sells its entertainment and cabin management products and systems to
corporate jet OEMs and major modification centers.
SYSTEMS INTEGRATION
The Company performs all of the functions necessary to retrofit an existing
aircraft with an avionics system that previously did not exist on the aircraft,
or replace an existing system with an updated one. As a full-service systems
integrator, the Company provides design and engineering, FAA certification,
installation kit manufacturing and systems installation services required to
retrofit an aircraft with a new system. A summary of these functions follows:
DESIGN AND ENGINEERING. The Company provides a full range of systems,
electrical and mechanical engineering services to its customers through its
staff of qualified and experienced engineers and program management
personnel. The Company's engineers work proactively with its customers in
all phases of the systems integration effort to achieve an engineering
design data package. This engineering design data package provides
information to: (i) certify product compliance with applicable industry and
FAA standards and regulations; (ii) define the manufacturing requirements
for kit implementation; and (iii) provide installation definition for actual
installation of the system onto aircraft.
FAA CERTIFICATION. The Company employs on a full-time basis or
contracts for FAA-certified Designated Engineering Representatives ("DERs")
to evaluate the engineering design data package, coordinate compliance
testing to applicable FAA regulations and obtain formal FAA approval of the
engineering design data package. These DERs facilitate FAA approval of the
Company's products and services. In general, DERs evaluate the design of an
aircraft modification, part or system, ensure compliance with the applicable
Federal Aviation Regulations and oversee product testing to ensure the
airworthiness of the aircraft as modified. DERs also either issue, on behalf
of the FAA, certain approvals, or work with the FAA to obtain certain
approvals directly from the FAA. Significant aircraft modifications by
anyone other than the aircraft manufacturer require the issuance of an STC,
which constitutes an FAA determination that the design of the modification
meets all pertinent FAA requirements. STCs may be issued directly by the FAA
or on behalf of the FAA by an approved DAS. The acquisition of Elsinore and
its DAS approval enables the Company to issue STCs for certain modifications
without applying directly to the FAA for such certifications.
INSTALLATION KIT MANUFACTURING. The Company ordinarily applies for and
receives multi-aircraft STCs which constitute design approval for a
modification which may be applied to any aircraft of a particular type. The
approved modifications commonly are referred to as "installation kits." Such
installation kits generally include: (i) parts, components, and
sub-assemblies; and (ii) detailed instructions on approved installation. The
installation kit and all of its elements are defined in the STC in a Master
Data List. Once the Company has an STC, issued directly by the FAA or by the
Company's DAS through Elsinore, the Company applies to the FAA for a PMA or
a supplement to an existing PMA, which allows the Company to manufacture the
installation kit in accordance with the approved design and data package.
10
SYSTEMS INSTALLATION. The Company employs a dedicated team of
FAA-certified mechanics and repairmen to ensure proper installation of the
installation kits and associated avionics systems. These mechanics and
repairmen, who have extensive installation experience over a broad range of
commercial aircraft models, operate within the provisions and limitations of
the FAA repair station certificates which cover the Company's three repair
stations. The Company believes that its staff of kit installation personnel
is sufficiently large and diverse in talent to complete multiple
installation projects simultaneously at different locations.
During 1997 and currently, the Company has focused its systems integration
efforts on the following three general categories of systems: (i) in-flight
entertainment systems; (ii) safety systems; and (iii) GPS and navigation
systems. The Company has targeted these three areas because it believes
significant retrofit opportunities exist due to the advent of new technologies
and the need for the airlines to: (i) capture incremental revenues without
increased capital investment (in-flight entertainment); (ii) satisfy increased
safety and regulatory requirements; and (iii) reduce operating expenses
(navigation). A summary of recent Company activity in each of these categories
follows:
IN-FLIGHT ENTERTAINMENT SYSTEMS. The Company is a preferred components
supplier to Cathay Pacific Airlines (through Matsushita), as well as a
supplier of kits to United Airlines (through BE Aerospace, Inc.). Each of
these companies have designed digital interactive passenger entertainment
systems which provide video-on-demand, video games and other electronic
gaming.
SAFETY SYSTEMS. The Company is an integrator of safety systems which
are required by the FAA, or voluntarily adopted by airlines. The Company was
recently selected to integrate smoke detection and suppression systems for
Kidde Safety and Securaplane on aircraft for Northwest Airlines and
Southwest Airlines, respectively. The Company believes significant
opportunity exists for the integration of these types of safety systems onto
aircraft worldwide, and will continue to grow as additional safety
requirements and industry practices are mandated, such as enhanced digital
flight data recorders and ground proximity warning systems.
GPS AND NAVIGATION SYSTEMS. The Company has entered into agreements to
provide systems integration services for GPS on thirteen 747-200/300
aircraft and one MD-82 aircraft. The Company believes that GPS and similar
systems (consistent with the FANS initiative) will be retrofitted into
numerous aircraft over the next few years. In many cases, the airlines are
electing to replace older navigation systems with newer GPS technology due
to avionics obsolescence and significantly increased maintenance costs. In
December 1997, the Company signed a memorandum of understanding with
Honeywell whereby it will become Honeywell's preferred systems integrator
for GPS.
INDUSTRY REGULATION AND APPROVALS
The aviation industry is highly regulated in the U.S. by the FAA and is
regulated in other countries by similar agencies to ensure that aviation
products and services meet stringent safety and performance standards. The
Company and its customers are subject to these regulations. In addition, many of
these customers impose their own compliance and quality requirements on the
Company.
The FAA prescribes standards and licensing requirements for aircraft
components, licenses private repair stations and issues DAS approval, which
gives the holder the right to certify the design of aircraft modifications on
behalf of the FAA. As a result of the FAA's oversight of the Company, the FAA
can authorize or deny authorization of many of the services and products
provided by the Company. Any FAA denial of such required authorizations would
preclude the ability of the Company to provide the pertinent service or product.
Should the Company fail to comply with the applicable FAA standards or
regulations, the FAA would have available to it a wide-range of enforcement
options. Such enforcement options include: (i) issuance of a warning letter or a
letter of correction to the Company; (ii) initiation of a civil penalty action
against the Company; (iii) suspension or emergency suspension of a Company
certificate or approval; or (iv) the revocation or emergency revocation of a
Company certificate or approval.
11
In July of 1997, the FAA notified the Company that one of the Company's
FAA-approved repair stations needed to support its DAS status did not fully
comply with certain requirements to support some of the FAA ratings it held. The
FAA granted the Company until September 10, 1997 to bring the facilities into
full compliance, and curtailed the operations of the repair station 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 support of its
enforcement powers. In the event the FAA were to suspend or revoke a Company
certificate or approval on an emergency basis, the Company would be obliged to
cease immediately the manufacture of products and the delivery of services which
require such certificate or approval. In the event the FAA were to suspend or
revoke a Company certificate or approval on other than an emergency basis, the
Company would be permitted to continue the manufacture of products and the
delivery of services which require such certificate or approval pending any
available appeals. However, if the FAA were to prevail in any such appeal, upon
the completion of the appeal process the Company would be obliged to cease the
manufacture of such products and the delivery of such services. In addition, in
the event the FAA were to determine that the Company's noncompliance with the
applicable FAA standards or regulations created a safety hazard, the FAA could
order that the pertinent component or aircraft immediately cease to be operated
until appropriate corrective action is taken. This could require the grounding
of aircraft and/or the removal of affected components from aircraft already
returned to service. The Company's FAA approvals are owned, and may only be used
by, the subsidiary obtaining such approval.
All aircraft operated by airlines in the United States must be of a type
which has received an FAA type certificate ("TC"). A TC is issued by the FAA
after the FAA determines that the aircraft type design meets the applicable FAA
airworthiness standards. After a type design has been approved through the
issuance of a TC by the FAA, a manufacturer with rights to the TC can apply for
FAA approval to produce the aircraft. This approval is a "production
certificate." Any major change in design of a type certificated aircraft which
is not significant enough to require a new application for a TC under the FAA's
rules must still be approved by the FAA. FAA approval of such a design change
developed by an entity other than the TC holder is issued under an STC. There
are two types of STCs: a "single-aircraft" STC, which may be applied to a single
aircraft, and a "multi-aircraft" STC, which may be applied to all aircraft of a
particular type design, for example, all Boeing 747-400s.
The Company has obtained well over 100 STCs, most of which were obtained on
behalf of its customers in connection with the Company's systems integration
services. Some of the foregoing STCs are or will be transferred to the Company's
customers; as of December 31, 1997, the Company owns and/or manages 85 STCs. A
substantial proportion of these are multi-aircraft STCs. The Company foresees
the need to obtain additional STCs so that it can expand the services it
provides and the customers it serves.
Proposed aircraft modifications can be tested and approved and STCs issued
directly by the FAA or on behalf of the FAA by holders of DAS approvals. DAS
approvals are granted to domestic repair stations, air carriers, commercial
operators of large aircraft, and manufacturers which demonstrate their ability
to provide the personnel and follow specific procedures to ensure the issuance
of STCs only for appropriate design modifications. Each DAS approval holder is
specifically limited by the FAA as to the type of STCs which it can issue. The
Company, which holds a DAS approval through Elsinore, can now issue many of the
STCs (both single and multi-aircraft) it requires in connection with its systems
integration operations. This has eliminated the need for the Company, in most
instances, to apply to the FAA for STC approvals, enabling the Company to obtain
STCs more quickly than in the past.
After obtaining an STC, the Company must apply for a PMA or a PMA supplement
to produce the modification installation kit covered by the STC. The Company has
four PMAs and multiple supplements
12
to each of its PMAs. Each initial PMA is, in general, 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. The Company routinely applies for and
receives PMA supplements. The Company also is required to have FAA authority to
perform the installation of a modification kit. This authority is provided
either by the Company's PMAs and supplements or its repair station certificates.
In order for a company to perform certain repair, engineering, installation or
other services on aircraft, its facility must be designated as an FAA-authorized
repair station. As of December 31, 1997, the Company has four such repair
stations.
In addition to FAA approval of the design, production, and installation of
modifications, the FAA certifies personnel. Selected Company personnel have been
certified by the FAA to perform certain tasks related to the design, production,
and performance of aircraft modifications. Such certified personnel include
mechanics and repairmen. In addition, the FAA delegates some of its oversight
responsibilities, such as testing and inspection responsibilities, to
FAA-certified designees. The Company employs FAA designees on a full-time basis
to facilitate FAA approval and oversight of the Company's activities. In
addition, the Company contracts with additional FAA designees as they are
needed.
Mil-specs are frequently used by both military and commercial customers in
the aerospace industry to define and control characteristics of a product.
Through the use of a government Qualified Parts List ("QPL") and Qualified
Vendor's List ("QVL"), the customer is assured that a product or service has met
all of the requirements set forth in the mil-specs. Parts listed with a QPL
allow others to reliably design parts to interface with such parts as a result
of the mil-spec standards used. The Company believes that it holds more QPLs for
its contact product line than any other manufacturer.
SALES AND MARKETING
The Company's commercial aircraft products are sold through a group of
geographically assigned direct sales personnel and agents. Technical product
sales support for these sales personnel is provided through product line
managers and the Company's product engineering personnel. Customer service
communication is provided by geographically assigned sales correspondents
located in the Company's manufacturing facilities. The Company may also assign
responsibility for marketing, sales and/or services for certain key customers to
one of the Company's executives. The Company has four authorized distributors
who purchase, stock and resell certain of the Company's product lines.
The Company's systems integration services are sold by sales managers
employed by the Company who are assigned to geographic territories. Because of
the significant amount of technical engineering work required in the sales
process, these sales managers are generally assisted by a support team which
includes program management, installation and engineering personnel. The support
team specializes in one of: (i) in-flight entertainment; (ii) safety systems;
and (iii) GPS and navigation. At such time as the Company obtains a contract for
the system proposed by the sales manager, the support teams continue to manage
the project throughout the entire integration process.
CUSTOMERS
In 1997, the Company sold its products and services to approximately 1,300
customers. The Company's primary customers include aircraft and avionics OEMs,
airlines, aircraft component manufacturers and distributors, and aircraft repair
and modification companies. The Company's two largest customers for the fiscal
year ended December 31, 1997 were Boeing and Matsushita, which accounted for
approximately 19.0% and 11.2%, respectively, of the Company's consolidated
revenues. In addition, a significant portion of the Company's sales of
components are sold to Boeing indirectly through sales to suppliers of Boeing.
Historically, the Company's systems integration operations have been
affected by the timing and magnitude of program awards, at times resulting in
quarterly and yearly fluctuations in revenue and earnings, such as the one-time
growth created by the 1996 contract to provide systems integration services
13
for IFT's in-flight entertainment system on 19 wide-body aircraft for Swissair.
That program has been substantially completed (in 16 of the 19 aircraft) as of
December 31, 1997, and no follow-on contracts have been booked with IFT.
However, the Company believes that it has lessened its exposure to such
fluctuations by developing capabilities in multiple major systems integration
areas: in-flight entertainment systems, safety systems, and GPS and other
navigation systems. The Company has secured orders for integration services in
each of these targeted areas. The Company believes that in 1998 it will more
than significantly offset the reduction in revenues related to the IFT business
with system integration services for in-flight entertainment systems for United
Airlines (through BE Aerospace, Inc.) and fire suppression and detection
services for Southwest Airlines (through Securaplane), Northwest Airlines
(through Kidde Safety) and American Airlines (through B.F. Goodrich/Whitaker),
as well as a cabin pressurization system for Northwest Airlines and Air Canada
(through the Hamilton Standard division of United Technologies, Inc. ("Hamilton
Standard")). The Company believes that potential retrofit opportunities exist
for the cabin pressurization system with other operators of DC9-30 and DC9-50
series aircraft. The timing and magnitude of program awards for systems
integration services may make other customers significant sources of
nonrecurring income in a single year. However, the Company believes that it will
continue to be able to significantly offset such year-to-year fluctuations with
new contracts. See Item 7: "Management's Discussion and Analysis of Financial
Condition and Results of Operation--General," below.
Most of the Company's sales to Boeing are pursuant to contracts which may be
terminated by Boeing at any time. One contract provides that: (i) if the Company
reduces its prices or lead times of like quantity of comparable items to
customers other than Boeing, then the Company must sell on the same terms to
Boeing; and (ii) if other Boeing suppliers offer to sell to Boeing products
comparable to those of the Company at prices more than 5% lower than the prices
specified in such contract, the Company must either similarly reduce its prices
or permit Boeing to delete the affected products from the contract. Another
contract provides that Boeing is not obligated to order any products covered by
the agreement if: (i) Boeing's customers specify an alternate product; (ii) the
product in Boeing's judgement is not technologically competitive at the time;
(iii) Boeing changes the design of an aircraft such that the Company's products
are no longer required for such aircraft; or (iv) Boeing reasonably determines
that the Company cannot support Boeing's requirements for products in the
amounts and within the delivery schedules Boeing requires. The Company's
contracts with Boeing grant Boeing an irrevocable non-exclusive worldwide
license to use the Company's patents, designs, trade secrets, semiconductor mask
works and tooling related to the development, production and maintenance or
repair of products sold to Boeing upon the occurrence of certain events,
including: (i) the acquisition by or transfer to a third party of any of the
Company's rights to manufacture products for Boeing; (ii) upon various defaults
by the Company; and (iii) the bankruptcy of the Company. The Company generally
sells components and services to Matsushita pursuant to purchase orders, but
does not have any supply contracts with either company.
MANUFACTURING AND QUALITY CONTROL
The Company manufactures contacts, connectors, harness assemblies, dichroic
LCD devices and avionics support structures. Many of these products involve
similar manufacturing processes which have become core competencies of the
Company. The Company manufactures these products using process-specific
equipment and procedures that have been custom-designed or fabricated to provide
high-quality products at the lowest possible cost to the Company. The Company is
vertically integrated from concept and design through final assembly, testing
and certification for these production processes. The Company believes this
vertical integration is critical to assuring product performance, customer
service and competitive pricing.
The Company has implemented programs to reduce costs, including overhead
expenses, and maximize return on capital. In some cases these programs have
involved the use of proprietary equipment or processes which have enabled the
Company to reduce costs while maintaining high quality levels. For example, the
Company uses a proprietary selective plating process which allows the Company to
minimize
14
the usage of gold when plating contacts. The Company has enhanced and expanded
the use of this process, as well as other plating processes.
Certain of the Company's customers have developed their own design, product
performance, manufacturing process and quality system standards and require
their suppliers, including the Company, to comply with such standards. As a
result, the Company has developed and implemented comprehensive quality system
policies and procedures which meet or exceed the requirements of its customers.
Many of the Company's customers have recognized formally the effectiveness of
the Company's quality programs by issuing quality approval letters and awarding
quality compliance certificates. In addition, certain customers have authorized
the Company's inspection personnel to act as the authorized quality
representative of the customer. This authorization enables the Company to ship
directly into the inventory stockrooms of these customers, eliminating the need
for receiving inspection activities by these customers.
The Company uses sophisticated equipment and procedures to ensure the
quality of its products and to comply with mil-specs and FAA certification
requirements. The Company performs a variety of testing procedures, including
environmental testing under different temperature, humidity and altitude levels,
shock and vibration testing and X-ray fluorescent measurement. These procedures,
together with other customer approved techniques for document, process and
quality control, are used throughout the Company's manufacturing facilities.
RAW MATERIALS AND COMPONENT PARTS
The components which the Company manufactures require the use of various raw
materials including gold, aluminum, copper, rhodium, plating chemicals and
plastics, the availability and prices of which may fluctuate. The price of raw
materials represents a significant portion of the sales price of many of the
Company's products. Although some of the Company's contracts have prices tied to
the price of raw materials, increases in raw materials prices cannot always be
recovered in product sale prices. The Company also purchases a variety of
manufactured component parts from various suppliers. Raw materials and component
parts are generally available from multiple suppliers at competitive prices.
However, any delay in the Company's ability to obtain necessary raw materials
and component parts may affect its ability to meet customer production needs.
PATENTS AND PROPRIETARY INFORMATION
The Company has various trade secrets, proprietary information, trademarks,
trade names, patents, copyrights and other intellectual property rights which
the Company believes, in the aggregate (but not individually), are important to
its business.
COMPETITION
The Company competes with a number of established companies that have
significantly greater financial, technological and marketing resources than the
Company. The Company believes that its ability to compete depends on high
product performance, short lead-time and timely delivery, competitive price, and
superior customer service and support.
The niche markets within the aircraft industry served by the Company are
relatively fragmented with several competitors for each of the products and
services provided by the Company. Due to the global nature of the commercial
airline industry, competition in these categories comes from both U.S. and
foreign companies. However, the Company knows of no single competitor that
provides the same range of products and services as those provided by the
Company.
The Company's principal competitors in contacts and connectors are large and
diversified corporations which produce a broad range of products. The Company's
principal competitor in the contact market is Deutsch Engineered Connecting
Devices, a division of the Deutsch Co. In the connector market, the Company's
principal competitors include ITT Canon (a division of ITT Industries, Inc.),
AMP and Radiall
15
S.A. Several of these companies are also customers of the Company. The Company's
principal competitors for avionics support structures include smaller companies
such as Barry Controls, Inc., Electronic Cable Specialists ("ECS") and
Vibrachoc, a subsidiary of Compagnie Generale d'Electricite. The main competitor
for dichroic LCD devices is Cristalloid, Inc. The main competitors for
entertainment and cabin management products and systems for corporate jet
aircraft are Pacific Systems Corporation, Baker Electronics and DPI Labs.
Competitors which provide portions of systems integration services include ECS,
the engineering departments of certain airlines and numerous independent
airframe maintenance and modification companies.
BACKLOG
Bookings increased $30.1 million, or 36.7%, to $112.1 million for 1997
compared to $81.9 for 1996. The increase in bookings for 1997 includes a net
$12.3 million attributable to ADS, which was acquired in September 1996. As of
December 31, 1997, the Company had a sales order backlog of $49.0 million,
including $2.4 million for Audio, which was acquired on November 14, 1997
compared to $44.4 million as of December 31, 1996. Approximately 7.0% of the
purchase orders outstanding as of December 31, 1997 are scheduled for delivery
for 1999 and beyond.
Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year will be
materially affected by the timing of the Company's receipt of orders and the
speed with which those orders are filled. Accordingly, the Company's backlog at
December 31, 1997 is not necessarily indicative of actual shipments or sales for
any future period, and period-to-period comparisons may not be meaningful.
EMPLOYEES
As of December 31, 1997, the Company had 1,233 employees (including 134
temporary employees), of whom 146 were in engineering (including 17 temporary
employees), 39 were in sales, 923 were in manufacturing operations (including
108 temporary employees) and 125 were in finance and administration (including 9
temporary employees). None of the Company's employees are subject to a
collective bargaining agreement, and the Company has not experienced any
material business interruption as a result of labor disputes since it was
formed. The Company believes that it has a good relationship with its employees.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state, local, and foreign
environmental requirements, including those relating to discharges to air,
water, and land, the handling and disposal of solid and hazardous waste, and the
cleanup of properties affected by hazardous substances. In addition, certain
environmental laws, such as Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA") and similar state laws, impose strict,
retroactive, and joint and several liability upon persons responsible for
releases or potential releases of hazardous substances. The Company has sent
waste to treatment, storage, or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. The Company has received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency as to the
Company's use of certain such sites. In addition, some of the Company's
operations are located on properties which are contaminated to varying degrees.
However, the Company has not incurred, nor does it expect to incur, significant
costs to address such contamination because entities other than the Company have
been held primarily responsible for such contamination, the levels of
contamination are sufficiently low so as not to require remediation or the
Company is indemnified against such costs. In most cases the Company does not
believe that its liability for past waste disposal is material. However, in a
limited number of cases the Company does not have sufficient information to
assess its potential liability, if any. It is possible, given the retroactive
nature of CERCLA liability, that the Company will from time to time receive
additional notices of potential liability, relating to current or former
activities.
16
The Company has been and is in substantial compliance with environmental
requirements and believes it has no liabilities under environmental
requirements, except those which would not be expected to have a material
adverse effect on the Company's business, results of operations, or financial
condition. However, some risk of environmental liability is inherent in the
nature of the Company's business and the Company might in the future incur
material costs to meet current or more stringent compliance, cleanup, or other
obligations pursuant to environmental requirements. See Item 3 "Legal
Proceedings" and "Risk Factors--Environmental Risks; Environmental Regulation"
below.
RISK FACTORS
Statements in this Annual Report on Form 10-K, including those concerning
the Company's expectations regarding the effect of industry trends on the
Company, competitive advantages, strategies, future sales, gross profits,
capital expenditures, selling, general and administrative expenses, and cash
requirements, include certain forward-looking statements. Accordingly, actual
results may vary materially from such expectations. Factors which could cause
actual results to differ from expectations include the risk factors described
below. There can be no assurance that the Company's results of operations will
not be adversely affected by one or more of these factors.
COMMERCIAL AIRCRAFT INDUSTRY RISKS. Among the Company's principal customers
are the world's commercial aircraft and avionics OEMs. The principal market for
such OEMs is the commercial airline industry, which is cyclical and has been
adversely affected by a number of factors, including, but not limited to,
increased fuel and labor costs and intense price competition. The commercial
airline industry may be adversely affected by increased regulatory scrutiny in
the wake of several major airline disasters and threats of terrorism. Several
domestic and foreign commercial airlines have encountered significant financial
difficulties, resulting in certain of such airlines ceasing to conduct business
or seeking protection from creditors. These financial difficulties, as well as
certain other factors, caused new commercial aircraft deliveries to decline from
a peak of approximately 767 aircraft in 1991 to approximately 380 aircraft in
1995 according to AEROSPACE AND AIRTRANSPORT CURRENT ANALYSIS published by
Standard and Poor's Industry Surveys (the "S&P Report"). Another industry
downturn could adversely affect the Company's business. See "Industry Overview
and Trends" above.
HIGH-END CORPORATE JET AIRCRAFT INDUSTRY RISKS. Among the Company's
customers are the world's high-end corporate jet aircraft OEMs. The principal
markets for such OEMs are large corporations and wealthy individuals. The
corporate jet market is cyclical and has been adversely affected by a number of
factors, including, but not limited to, the general state of the U.S. economy,
corporate profits, interest rates and commercial airline fares. An industry
downturn could adversely affect the Company's business.
SUBSTANTIAL LEVERAGE; HISTORY OF NET LOSSES AND DEFAULTS. In 1997, the
Company reported its first net profit since its inception. Contributing to the
profit was the repayment of a significant portion of its outstanding
indebtedness with the net proceeds of the Company's initial public offering
("IPO") of Common Stock completed on April 16, 1997. Prior to the IPO, the
Company operated with substantial leverage and debt service requirements since
its inception. As a result, the Company experienced net losses in each year from
1990 through 1996, despite positive operating income. In addition, until 1996
the Company at times was not in compliance with certain financial covenants
contained in its debt agreements. In each case such non-compliance was waived by
the lenders. Since March 1996, the Company has been in compliance with all
financial covenants contained in its debt agreements. There can be no assurance
as to the future profitability of the Company nor can there be assurance that
the Company will remain in compliance with the covenants contained in its debt
agreements. The Company's senior revolving line of credit (the "Credit
Facility") is guaranteed by each of the Company's subsidiaries and is secured by
substantially all the assets of the Company and its subsidiaries. In the event
that the Company is unable to remain in compliance with the covenants contained
in its debt agreements, the lenders could declare all
17
amounts owed under such debt agreements to be immediately due and payable, which
could have a material adverse effect on the Company. See Item 6, Item 7 and Item
8 below.
SECONDARY PUBLIC OFFERING; SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION
RIGHTS. The Company has filed a Form S-1 (Amendment No. 1) with the Securities
and Exchange Commission on March 11, 1998 (the "1998 Form S-1"), under which it
plans to offer 1,918,000 shares of newly-issued common stock of the Company
("Common Stock") to the public, and certain shareholders of the Company have
indicated the intent to sell an aggregate of 652,000 additional unregistered
shares simultaneously, in a proposed underwritten public offering (the "Proposed
1998 Offering"). The Proposed 1998 Offering, or sales of a substantial number of
additional shares of Common Stock in the public market after such offering, or
the expectation that such sales could occur, could adversely affect the market
price of the Common Stock and the Company's ability to raise capital through a
subsequent offering of securities. Of the 7,236,563 shares of Common Stock to be
outstanding after the Proposed 1998 Offering, 5,411,225 shares will be available
for resale in the public market without restriction immediately following such
offering if held by holders who are not "affiliates" of the Company (as defined
in the Securities Act of 1933, as amended (the "Securities Act")). All of the
remaining shares are "restricted securities" within the meaning of Rule 144
adopted under the Securities Act. These restricted securities were issued and
sold by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. After expiration of a 90-day lock-up
period following the Proposed 1998 Offering, pursuant to agreements with the
Underwriters: (i) all restricted securities will be available for resale
pursuant to the limitations of Rule 144; and (ii) the Company, pursuant to its
certificate of incorporation (the "Certificate"), may authorize the issuance of
additional shares of Common Stock and shares of one or more series of voting
preferred stock. The issuance of additional shares of capital stock could result
in the dilution of the voting power of then-outstanding shares of Common Stock.
In addition, following the expiration of the foregoing 90-day lock-up period,
certain stockholders have the right, pursuant to the terms and conditions of a
registration rights agreement (the "Registration Rights Agreement"), to require
the Company to: (i) effect (in the aggregate) up to four registrations under the
Securities Act covering all or any portion of the unregistered shares of Common
Stock held by such stockholders, provided that if the Company effects a
registration at the request of a stockholder, no further demand may be made for
a period of at least nine months; and (ii) include all or any portion of such
stockholders' shares of Common Stock in any proposed registration by the Company
of shares of Common Stock (subject to reduction to the extent that the managing
underwriter, if any, is of the opinion that such inclusion would adversely
affect the marketing of the securities to be sold therein).
FLUCTUATIONS IN QUARTERLY AND YEARLY RESULTS. The Company's business is
subject to quarterly and yearly fluctuations. Specifically, the magnitude of
certain systems integration programs relative to the Company's overall business
has the potential to expose the Company's results of operations to fluctuations
in quarterly and yearly results. In addition, irregular timing of awards or
cancellations of systems integration contracts, as well as development and
technology delays by OEMs or their suppliers, could further exacerbate such
fluctuations in quarterly and yearly operations. If such events occur, the
results of operations of the Company may be adversely affected. See Item 7
below.
DEPENDENCE ON KEY CUSTOMERS. The Company's two largest customers for the
fiscal year ended December 31, 1997, were Boeing and Matsushita, which accounted
for approximately 19.0% and 11.2%, respectively, of the Company's consolidated
revenues. For the year ended December 31, 1997, revenues from Boeing would have
been 20.9% had its acquisition of McDonnell Douglas been consummated on January
1, 1997. In addition, a significant portion of the Company's sales of components
are sold to Boeing indirectly through sales to suppliers of Boeing. Most of the
Company's sales to Boeing are pursuant to contracts which may be terminated by
Boeing at any time. In addition, under certain circumstances, Boeing may enforce
alternative economic terms pursuant to such contracts in which case the
contracts could become less commercially favorable to the Company or the Company
may elect to terminate the applicable portion of such contracts. There can be no
assurance that Boeing will not terminate any of its contracts
18
with the Company. The five year contract under which the Company supplies a
substantial majority of the bulk contact requirements for Boeing ends in
September 1998. There can be no assurances that the Company will be awarded the
subsequent contract by Boeing for its bulk contact requirements. During October
1997, Boeing announced that parts shortages caused by its supplier network and
production chain disrupted its production schedules and adversely affected its
production and delivery rates. Boeing shut down its 737 and 747 production lines
for approximately a month and did not resume normal production rates until late
November 1997. There can be no assurances that Boeing will not suffer further
production schedule disruptions. The Company generally sells components and
services to Matsushita pursuant to purchase orders, but does not have any supply
contracts with Matsushita.
The loss of any one or more of the Company's key customers could have a
material adverse effect on the Company. See "Customers" above, and Item 7 below.
REGULATION. The FAA prescribes standards and licensing requirements for
aircraft components, licenses private repair stations and issues DAS approvals,
which give the holder the right to certify certain aircraft design modifications
on behalf of the FAA. The ability of the Company to arrange for rapid government
certification of its systems integration services is important to the Company's
business and depends on its continuing access to or use of private repair
stations, DASs, and FAA-designated and FAA-certified engineering professionals.
There can be no assurance that: (i) the Company will continue to have adequate
access to such stations and professionals; or (ii) the current public and
congressional scrutiny of the FAA's inspection philosophy and mechanisms will
not result in the changes to the standards for the use of such private repair
stations or DASs, or their elimination, either of which could have a material
adverse effect on the Company. The FAA curtailed the Company's use of a DAS for
several months during 1997 until certain of its facilities were brought into
compliance with the FAA's regulations governing DAS status. See "Industry
Regulation and Approvals" above. In addition, although the Company believes that
it possesses all required domestic and foreign governmental licenses and
certificates, including without limitation PMAs and STCs, any delay in obtaining
or failure to obtain a required license or certificate, or the revocation or
limitation of such licenses or certificates, could have a material adverse
effect on the Company's operations. See "Industry Regulation and Approvals"
above.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company's ability to grow by
acquisition is dependent upon, and may be limited by, the availability of
suitable acquisition candidates and capital, and by restrictions contained in
the Company's debt agreements. In addition, growth by acquisition involves risks
that could adversely affect the Company's results of operations, including
difficulties in integrating the operations and personnel of acquired companies,
the amortization of acquired intangible assets and the potential loss of key
employees of acquired companies. In the past, acquisitions by the Company have
resulted in increased indebtedness and interest expense which caused the Company
to incur net losses in each year since its inception, until 1997, despite
positive operating income. There can be no assurance that the Company will be
able to identify suitable acquisition candidates, obtain the capital necessary
to pursue its acquisition strategy, consummate acquisitions on satisfactory
terms or, if any acquisitions are consummated, satisfactorily integrate such
acquired businesses into the Company. See "General" and "Growth Strategy" above,
and Item 7 below.
COMPETITION. The Company operates in a highly competitive industry and
competes against a number of companies, some of which have significantly greater
financial, technological and marketing resources than the Company. The Company
believes that its ability to compete depends on high product performance, short
lead-time and timely delivery, competitive pricing, superior customer service
and support and continued certification under customer quality requirements and
assurance programs. There can be no assurance that the Company will be able to
compete successfully with respect to these or other factors. See "Competition"
above.
ASIAN FINANCIAL MARKETS. The Asian markets are important markets for
commercial aircraft and avionics OEMs. There can be no assurance that the
current crisis in the Asian financial markets will not
19
result in cancellation of orders for new aircraft or deferral of deliveries, and
negatively impact the OEMs, which could have a material adverse effect on the
Company.
GOLD AND COPPER. A significant portion of the cost of the materials used in
the contacts manufactured by the Company is comprised of the cost of gold, and
to a lesser extent, the cost of copper. Accordingly, a significant increase in
the price of gold or copper could have a material adverse effect on the
Company's results of operations. The Company has not purchased commodities
contracts for gold or copper and does not anticipate doing so in the future. See
"Raw Materials and Component Parts," above.
FOREIGN CURRENCY. The Company has a manufacturing facility in Switzerland
and incurs in Swiss Francs a significant percentage of the cost of the contacts
it manufactures in Switzerland. Therefore the Company's financial results are
subject to fluctuations of the Swiss Franc in relation to the U.S. Dollar. From
1996 through 1998, solely in an effort to mitigate the effects of currency
fluctuations, the Company has entered into forward exchange contracts to
purchase Swiss Francs and it expects to engage in such hedging transactions in
the future. However, there can be no assurance that such transactions will
prevent currency fluctuations from adversely affecting the Company's results of
operations. See Item 7 below.
SUPPLY OF QUALIFIED ENGINEERING PERSONNEL. The Company's ability to attract
and retain a high-quality engineering staff is important to its business.
Competition for qualified avionics engineers is intense. There can be no
assurance that the Company will be able to retain its existing engineering staff
or fill new positions or vacancies created by expansion or turnover. See
"Products and Services" and "Employees," above.
CONTROL OF COMPANY BY PRINCIPAL STOCKHOLDERS. Nassau Capital Partners, L.P.
and NAS Partners I L.L.C. (collectively, "Nassau"), Brantley Venture Partners
II, L.P. ("Brantley") and DSV Partners, IV ("DSV") beneficially own 16.4%, 9.2%
and 9.3%, respectively, of the issued and outstanding Common Stock. (The
foregoing ownership percentages are expected to change after completion of the
Proposed 1998 Offering. See item 12 below.) Nassau, Brantley and DSV, among
others, are parties to a shareholders agreement with the Company which requires
the Company to include on the Company's slate of nominees for director a person
designated by each of Nassau, Brantley and DSV, for so long as each such
stockholder owns at least 5% of the Common Stock. See Item 13 below. The terms
of the present Board members nominated by Nassau, Brantley and DSV do not expire
until 2000, 1999 and 1999, respectively, notwithstanding any decreases to such
beneficial owners' ownership of Common Stock. See Item 10 below.
EXCESS LOSS RISKS. The Company currently has in force aviation products
insurance. However, there can be no assurance that the Company's existing
insurance coverage will be adequate to cover future claims that may arise or
that such coverage can be renewed at commercially reasonable rates.
ENVIRONMENTAL RISKS; ENVIRONMENTAL REGULATION. The Company's business
operations and facilities are subject to a number of federal, state, local and
foreign environmental laws and regulations. In addition, certain environmental
laws such as the Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and similar state laws impose strict,
retroactive and joint and several liability upon persons responsible for
releases or potential releases of hazardous substances. The Company has sent
waste to treatment, storage or disposal facilities that have been designated as
National Priority List sites under CERCLA or equivalent listings under state
laws. The Company has received CERCLA requests for information or allegations of
potential responsibility from the Environmental Protection Agency ("EPA") as to
the Company's use of certain such sites. It is possible, given the retroactive
nature of CERCLA liability, that the Company will, from time to time, receive
additional notices of potential liability relating to current or former
activities. There can be no assurance that the Company will not incur
significant costs for prior waste disposal by the Company or its predecessors.
In addition, some of the Company's operations are located on properties which
are contaminated to varying degrees. There can be no assurance that the Company
will not incur significant costs in the future to
address contamination.
20
There can be no assurance that the Company will not incur significant costs
in the future due to current or former operations and waste disposal practices
or changing environmental compliance requirements. See "Environmental Matters"
above and Item 3, "Legal Proceedings," below.
DISRUPTIONS AT THE COMPANY'S FACILITIES. A significant portion of the
Company's manufacturing and administrative operations are currently located in
the greater Los Angeles, California area, an area that may be subject to
earthquakes or other natural disasters. An earthquake or other natural disaster
could have a material adverse effect on the Company's business and operating
results. See Item 2 below.
YEAR 2000 COMPLIANT. Due to numerous acquisitions made over the past
several years, the Company operates several stand-alone systems using different,
and in some cases internally customized, software purchased prior to the
Company's acquisition of the relevant operating units. The Company concluded
that essentially all existing software should be upgraded to newer,
off-the-shelf, integrated manufacturing and business application software. In
1997, the Company commenced the implementation of this strategy. One of the
criteria to be used in selecting the software is that it be Year 2000 compliant.
Failure to complete the migration to such software by the Year 2000 could have a
material adverse effect on the Company.
ANTI-TAKEOVER PROVISIONS. The Board of Directors has the authority to issue
up to 10,000,000 additional shares of Preferred Stock (the "Undesignated
Preferred Stock") and to determine the terms and number of shares constituting
any wholly unissued series of Undesignated Preferred Stock. The Board, without
further approval of the holders of Common Stock, may issue shares of
Undesignated Preferred Stock with rights that could adversely affect the rights
of the holders of Common Stock. The issuance of shares of Undesignated Preferred
Stock under certain circumstances could have the effect of delaying or
preventing a change of control of the Company or other corporate actions. In
addition, certain provisions of the Certificate and the Company's bylaws (the
"Bylaws") and of Delaware law could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of the Common
Stock.
ITEM 2. PROPERTIES
The Company leases most of its facilities, with lease terms ranging from one
to nine years, as reflected in the following table.
APPROXIMATE
SQUARE LEASE
LOCATION DESCRIPTION FOOTAGE EXPIRATION
- ------------------------------ ------------------------------------------- ------------- -------------
El Segundo, CA Manufacturing and engineering facility 81,300 2000
Garden Grove, CA Manufacturing and engineering facility 58,300 2004
Lugano, Switzerland Manufacturing facility 28,000 2003
Hatfield, PA Manufacturing and engineering facility 27,500 1999
Lugano, Switzerland Manufacturing facility 21,000 2001
Irvine, CA Manufacturing facility 16,400 1999
Wiltshire, United Kingdom Manufacturing facility 5,700 2013
El Segundo, CA Executive offices 5,000 2004
Santa Barbara, CA Engineering facility 3,500 2000
Seattle, WA Engineering facility 3,200 1999
Santa Ana, CA Engineering facility 1,300 1999
Additionally, the Company owns an 18,000 square foot manufacturing and
engineering facility in North Little Rock, Arkansas. The Company believes its
properties are in good condition and are adequate to support its operations for
the foreseeable future.
21
ITEM 3. LEGAL PROCEEDINGS
The Company's manufacturing facility in El Segundo, California, has received
several notices of violation related to its wastewater discharge permit. The
Company has taken various corrective measures. However, the Company continues to
experience difficulty in meeting the wastewater flow limitations contained in
its discharge permit and is evaluating additional measures, including seeking
modification to its permit. If the Company is not able to resolve these issues,
it may be required to install new treatment equipment. However, the cost for
such installation is not expected to be material, and the Company does not
believe that the notices will result in any material sanctions. See "Risk
Factors--Environmental Regulation" and "Environmental Matters" in Item 1.
The Company is a party to a license agreement with McDonnell Douglas (now a
part of Boeing) pursuant to which the Company may request certain data in order
to design and market modifications to aircraft manufactured by McDonnell
Douglas. The agreement provides that the Company will pay McDonnell Douglas a
royalty of five percent of the net sales price of all modifications sold by the
Company for which the Company has requested data from McDonnell Douglas. The
Company has requested data for a single modification, which modification the
Company believes is exempt from the obligation to pay royalties under the
agreement. In 1996, McDonnell Douglas made a demand for $650,000 for royalties.
The Company does not believe that it is obligated to McDonnell Douglas in any
amount. However, there can be no assurance that the Company will not be required
to pay royalties to McDonnell Douglas.
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades under the symbol "DAHX" on the Nasdaq
National Market. The following table sets forth the range of high and low
closing sales prices for the common stock for the period from the IPO on April
16, 1997 to December 31, 1997, the end of the fiscal year.
PERIOD HIGH LOW
- ---------------------------------------- ---------- ----------
2nd Quarter Fiscal 1997*................ $ 14 7/8 $ 9 3/4
3rd Quarter Fiscal 1997................. $ 19 1/4 $ 14 5/8
4th Quarter Fiscal 1997................. $ 21 $ 15 1/4
- ------------------------
* from April 16, 1997
The last reported sales price for the Common Stock on Nasdaq on March 4,
1998 was $18.25 per share. As of March 4, 1997, there were 5,318,563 shares of
Common Stock outstanding, which were held by 28 shareholders of record.
DIVIDENDS. The Company has never paid cash dividends on the Common Stock
and does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain
22
future earnings to finance operations and the expansion of its business. Any
future determination to pay cash dividends will be made at the discretion of the
Company's board of directors and will be dependent upon the Company's financial
condition, operating results, capital requirements and such other factors as the
Board deems relevant. Further, the Company's Credit Facility prohibits payment
of dividends, and the Company expects that any future debt arrangements may also
include such a prohibition.
RECENT SALES OF UNREGISTERED SECURITIES PRIOR TO 1997 RECAPITALIZATION AND
IPO. (1) Pursuant to a Securities Purchase Agreement dated February 9, 1996
among the Company, R.G. MacDonald, Charles Becker, Robert Rankin and John
Hinson, officers of the Company, the Company sold 75,000 shares of Series C
preferred stock for a purchase price of $1.50 per share. The sale of these
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act. (2) Pursuant to a Securities Purchase Agreement dated as of
February 20, 1996 between the Company and Nassau, the Company issued for an
aggregate purchase price of $6.5 million: (i) 2,000,000 shares of Series D
Preferred Stock, and (ii) warrants to purchase 194,618 shares of Common Stock.
The issuance of these securities was exempt from registration pursuant to
Section 4(2) of the Securities Act. (3) Pursuant to a Securities Purchase
Agreement dated September 18, 1996 among the Company, Nassau and Electra, the
Company sold (i) $2.0 million aggregate principal amount of 15% convertible
notes and 49,079 warrants to purchase Common Stock, for a purchase price of $3.0
million, and (ii) 750,000 shares of Series E Preferred Stock and 49,079 warrants
to purchase Common Stock, for a purchase price of $3.0 million. The issuance of
such securities was exempt from registration under Section 4(2) of the
Securities Act. (4) Pursuant to an Amended and Restated Credit Agreement dated
as of September 18, 1996 among the Company, the Company issued to ING (U.S.)
Capital Corporation and Provident Bank 70,892 warrants to purchase Common Stock
as additional consideration for amendments to the Prior Credit Facility. The
issuance of these securities was exempt from registration pursuant to Section
4(2) of the Securities Act.
1997 RECAPITALIZATION AND IPO; USE OF PROCEEDS FROM IPO. 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 the
following: (i) senior revolving line of credit borrowings of $15,356,000; (ii)
senior term notes aggregating $16,531,000; (iii) senior subordinated notes
payable to related parties aggregating $7,000,000; and (iv) convertible notes
payable to related parties aggregating $3,000,000. In conjunction with the debt
repayment, the Company incurred a $3,436,000 extraordinary charge, before an
income tax benefit of $1,358,000, which is comprised of: (i) a $1,943,000
write-off of deferred financing costs; (ii) a $1,149,000 write-off of
unamortized original issued discounts; and (iii) a $344,000 charge for a
prepayment penalty and other related expenses.
The recapitalization of the Company conducted in connection with the IPO and
which occurred immediately prior to consummation of the IPO (the
"Recapitalization"), provided for the following additional sales, transfers or
conversions of unregistered securities: (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 convertible preferred stock warrants and 9,355 common stock warrants
into a total of 16,585 shares of Common Stock; and (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. In December 1997, the
Company issued an additional 16,918 shares of Common Stock to Electra and 33,825
shares to Nassau to correct a disputed calculation regarding the number of
shares that should have been issued as part of the foregoing recapitalization in
the conversions described above. The issuance and conversion of such securities
was exempt from registration pursuant to Section 3(a)(9) of the Securities Act.
23
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996(1) 1997(2)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 48,197 $ 47,092 $ 55,839 $ 65,099 $ 108,903
Cost of sales............................................... 36,258 36,407 43,463 49,392 80,247
--------- --------- --------- --------- ---------
Gross profit................................................ 11,939 10,685 12,376 15,707 28,656
Selling, general and administrative expenses................ 7,953 7,716 9,426 10,747 15,756
Amortization of intangible assets........................... 1,210 1,209 1,115 709 905
--------- --------- --------- --------- ---------
Operating income............................................ 2,776 1,760 1,835 4,251 11,995
Interest expense............................................ 2,940 3,244 3,821 4,248 3,154
Other (income) expense, net................................. (148) 332 382 108 243
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes, cumulative
effect of accounting change and extraordinary item........ (16) (1,816) (2,368) (105) 8,598
Provision for income taxes (3).............................. (620) (613) (1,078) (712) (3,344)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of accounting change
and extraordinary item.................................... (636) (2,429) (3,446) (817) 5,254
Cumulative effect of accounting change (4).................. (121) -- -- -- --
Extraordinary loss from debt refinancing (5)................ -- (264) -- -- (2,078)
--------- --------- --------- --------- ---------
Net income (loss)........................................... $ (757) $ (2,693) $ (3,446) $ (817) $ 3,176
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stockholders......... $ (972) $ (2,891) $ (3,307) $ (6,357) $ 531
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per common share
Basic
Income (loss) before accounting change and
extraordinary item.................................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .69
Cumulative effect of accounting change (4).............. (1.46) -- -- -- --
Extraordinary loss (5).................................. -- (3.15) -- -- (.55)
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted
Income (loss) before accounting change and
extraordinary item.................................... $ (10.25) $ (31.27) $ (38.45) $ (73.92) $ .62
Cumulative effect of accounting change (4).............. (1.46) -- -- -- --
Extraordinary loss (5).................................. -- (3.15) -- -- (.42)
--------- --------- --------- --------- ---------
Net income (loss)....................................... $ (11.71) $ (34.42) $ (38.45) $ (73.92) $ .20
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma before extraordinary item (6)
Basic............................................................................................... $ 1.16
Diluted............................................................................................. 1.10
OTHER FINANCIAL DATA:
Depreciation and amortization............................... $ 3,553 $ 3,868 $ 4,542 $ 4,343 $ 5,372
Bookings (7)................................................ 46,830 47,896 50,785 81,914 112,082
Backlog at end of period (8)................................ 23,933 24,493 19,761 44,433 49,005
DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................................. $ (637) $ 11,459 $ 12,583 $ 10,486 $ 24,772
Total assets................................................ 34,653 37,685 36,329 69,266 99,137
Total debt.................................................. 19,653 23,874 24,672 42,250 38,838
Mandatorily redeemable preferred stock and common stock
warrants.................................................. 5,818 2,329 1,633 6,879 --
Stockholders' equity (deficit).............................. (2,618) 766 (1,697) 1,236 39,527
24
(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 ADS and Elsinore beginning
September 18, 1996 and December 5, 1996, respectively, the dates on which
they were acquired.
(2) Includes the effect of the acquisition of Audio beginning November 14, 1997,
the date on which it was acquired.
(3) Prior to the acquisition of the remaining 25% minority interest in Cory
Components in 1996, the Company did not consolidate the earnings of Cory
Components for tax purposes. As such, despite a consolidated pre-tax loss in
each of the years, the Company recorded a provision for income taxes from
1993 up to the date of the acquisition of the remaining 25% minority
interest in 1996 which primarily relates to Cory Components.
(4) Represents the adoption, as of January 1, 1993, of SFAS 109, "Accounting for
Income Taxes."
(5) Represents: (i) the write-off of unamortized deferred financing costs,
unamortized original issue discounts and a prepayment penalty incurred as
result of the refinancing by the Company of a substantial portion of its
debt in November 1994; and (ii) the write off, net of an income tax benefit,
of deferred financing costs, unamortized original issue discounts, a
prepayment penalty and other related expenses incurred as a result of the
repayment of debt by the Company with the proceeds from its IPO in 1997.
(6) Pro forma for the Recapitalization, IPO and the application of the net
proceeds therefrom. See Item 5, above.
(7) Bookings represent the total invoice value of purchase orders received
during the period. See Item 1, "Backlog," above.
(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 Item 1, "Backlog",
above.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The Company's results of operations have been affected by its history of
acquisitions. Since its formation in 1989, the Company has completed nine
acquisitions of businesses or assets, the most recent of which, Audio, was
closed in November 1997. The Company's revenues have grown at a 47.4% compounded
annual rate from 1995, the year of the most recent low in commercial aircraft
production, through 1997, pro forma for the acquisition of Audio. During this
same period, operating income as a percentage of revenues increased to 11.0%
from 3.3%, primarily as a result of increased sales volume without a
corresponding increase in fixed costs, a shift in the sales mix toward more
profitable products, variable cost reductions and price increases.
The Company's principal strategy is to establish and expand leading market
positions in high-margin, niche markets within the commercial aircraft and
high-end corporate jet industries, with a focus on the manufacturing of avionics
components and the integration of avionics systems. The Company seeks to achieve
these leading market positions while maintaining a balance of revenues among the
OEM market, the retrofit market and the aftermarket. The Company believes that
such a strategy will position it for growth over an entire aircraft industry
economic cycle. For example, the Company's revenues grew 31% without
acquisitions from 1992 through 1995, a period in which new aircraft deliveries
by Boeing and Airbus declined from 603 to 330.
All of the Company's acquisitions have been accounted for under the purchase
method of accounting which resulted in approximately $40.3 million of goodwill
reflected on the balance sheet as of December 31, 1997. The annual amortization
of goodwill will result in non-cash charges to future operations of
approximately $1.6 million per year (of which approximately 40% of such
amortization is deductible for tax purposes).
Historically, the Company's systems integration operations have been
affected by the timing and magnitude of program awards, at times resulting in
quarterly and yearly fluctuations in revenue and earnings, such as the one-time
growth created by the 1996 contract to provide systems integration services for
in-flight entertainment system developed by IFT on 19 wide-body aircraft for
Swissair. That program has been substantially completed (in 16 of the 19
aircraft) as of December 31, 1997, and no follow-on contracts have been booked
with IFT. However, the Company believes that it has lessened its exposure to
such fluctuations by developing capabilities in multiple major systems
integration areas: in-flight entertainment systems, safety systems, and GPS and
other navigation systems.
In April 1997, the Company used the net proceeds from the IPO, together with
borrowings under the Credit Facility, to repay outstanding: (i) senior revolving
line of credit borrowings; (ii) senior term notes; (iii) senior subordinated
notes; and (iv) convertible subordinated notes payable. In conjunction with the
debt repayment, the Company incurred a $2.1 million extraordinary charge, net of
an estimated $1.4 million income tax benefit, which is comprised of: (i) a $1.9
million write-off of deferred financing costs; (ii) a $1.2 million write-off of
unamortized original issued discounts; (iii) a $0.3 million charge for a
prepayment penalty and expenses; and (iv) a $0.1 million write-off of the
unamortized portion of an interest rate cap agreement.
Certain of the contact blanks used by the Company in the production of its
contacts are manufactured at the Company's Swiss facility and shipped to its El
Segundo, California facility for plating and assembly. In 1996, 1997 and 1998,
solely in an effort to mitigate the effects of currency fluctuations between the
U.S. Dollar and the Swiss Franc, the Company entered into forward exchange
contracts at fixed rates and plans to continue this forward exchange program in
the future. The Company does not engage in any currency exchange transactions
for trading or speculative purposes. Gains and losses on foreign exchange
contracts are recognized currently in the consolidated statements of operations.
In the fourth quarter of 1997, the
26
Company recorded a $0.5 million unrealized market value loss on the open 1998
contracts. In 1996, the Company did not experience any material changes in the
cost of contact blanks resulting from currency fluctuations.
RESULTS OF OPERATIONS
The following table sets forth the items in the Company's consolidated
statements of operations as percentages of its revenues for the periods
indicated:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- ------- -------
Revenues.......................................................... 100.0% 100.0% 100.0%
Cost of sales..................................................... 77.8 75.9 73.7
------- ------- -------
Gross profit...................................................... 22.2 24.1 26.3
Selling, general and administrative expenses...................... 16.9 16.5 14.5
Amortization of intangible assets................................. 2.0 1.1 0.8
------- ------- -------
Operating income.................................................. 3.3 6.5 11.0
Interest expense.................................................. 6.8 6.5 2.9
Other expense, net................................................ 0.7 0.2 0.2
------- ------- -------
Income (loss) before provision for income taxes, and extraordinary
item............................................................ (4.2) (0.2) 7.9
Provision for income taxes........................................ (2.0) (1.1) (3.1)
------- ------- -------
Income (loss) before extraordinary item........................... (6.2) (1.3) 4.8
Extraordinary loss from debt refinancing.......................... -- -- (1.9)
------- ------- -------
Net income (loss)................................................. (6.2)% (1.3)% 2.9%
------- ------- -------
------- ------- -------
Net income (loss) applicable to common stockholders............... (5.9)% (9.8)% 0.5%
------- ------- -------
------- ------- -------
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
REVENUES. Revenues increased $43.8 million, or 67.3%, to $108.9 million for
1997 from $65.1 million for 1996. Revenues increased primarily due to the
following: (i) the inclusion of $10.7 million of revenues from ADS, a
manufacturer of dichroic LCD devices acquired from Allard Industries, Inc. on
September 18, 1996; (ii) growth in the Company's private labeling programs of
$6.4 million; (iii) growth in contact sales of $6.3 million driven by new
aircraft production rate increases; (iv) an increase in sales of harness
assemblies for in-flight entertainment systems of $5.1 million; (v) an increase
in sales of specialty connectors for cabin management and in-flight
entertainment systems principally on Boeing's 777 aircraft of $4.9 million; (vi)
an increase of sales to IFT of $3.3 million relating to a major systems
integration program for Swissair; (vii) the inclusion of $3.0 million of revenue
from Elsinore which was acquired on December 5, 1996; (viii) new systems
integration programs for navigational systems of $1.5 million; (ix) the
inclusion of $1.3 million of revenue from Audio which was acquired on November
14, 1997; (x) a new systems integration program for United Parcel Service of
$0.9 million; and (xi) the overall growth in the commercial aircraft market.
Partially offsetting this increase was a decline in sales to AT&T Wireless
Services, Inc. ("AT&T Wireless") of $3.8 million, reflecting the completion in
late 1995 and early 1996 of a major systems integration program.
GROSS PROFIT. Gross profit increased $12.9 million, or 82.4%, to $28.7
million for 1997 from $15.7 million for 1996. Gross profit as a percentage of
revenues increased to 26.3% for 1997 from 24.1% for 1996. This increase in
profit margin was attributable to an increased sales volume, favorable mix,
savings from the rationalization of the AMP Facility with the Company's existing
facilities in El Segundo, California and Lugano, Switzerland, sustained price
increases and lower material costs.
27
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $5.0 million, or 46.6%, to $15.8
million for 1997 from $10.7 million for 1996. SG&A expenses as a percentage of
revenues decreased to 14.5% for 1997 from 16.5% for 1996. SG&A expenses
increased primarily due to the following: (i) the Company added staff to pursue
higher sales to OEMs and to develop capabilities for in-flight entertainment,
navigation and satellite communication and safety systems integration services;
(ii) the inclusion of SG&A expenses from (a) ADS, (b) the AMP Facility and (c)
Elsinore, which were acquired in late 1996; and (iii) the inclusion of SG&A
expenses from Audio which was acquired in 1997.
OPERATING INCOME. Operating income increased $7.7 million, or 182.2%, to
$12.0 million for 1997 from $4.3 million for 1996. Operating income as a
percentage of revenues increased to 11.0% for 1997 from 6.5% for 1996. The
increase in operating income resulted from the factors described above.
INTEREST EXPENSE. Interest expense decreased $1.1 million, or 25.8%, to
$3.2 million for 1997 from $4.2 million for 1996. The decrease resulted from the
completion of the IPO on April 16, 1997 and the repayment of a substantial
portion of the Company's debt with the proceeds.
PROVISION FOR INCOME TAXES. During 1997, the Company reduced its deferred
tax asset valuation allowance by $0.5 million to reflect the book benefit of
federal and state net operating loss carry forwards not previously recognized.
The Company has approximately $2.5 million of net operating loss carry forwards
available at December 31, 1997 for federal income tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During 1997, the Company incurred
a $2.1 million extraordinary charge, net of an estimated $1.4 million income tax
benefit, as a result of refinancing the Company's debt with the proceeds from
the IPO.
NET INCOME (LOSS). Net income increased $4.0 million to $3.2 million for
1997 from a net loss of $0.8 million for 1996. The increase is a result of the
factors described above.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable
to common stockholders increased $6.9 million to a net income of $0.5 million
for 1997 from a net loss applicable to common stockholders of $6.4 million for
1996. The increase resulted from the factors described above, plus a $2.1
million decrease in the redemption value adjustment of mandatorily redeemable
common stock warrants between the two periods. Current warrants were
subsequently redeemed. In addition, the increase was also influenced by a $0.8
million decrease in cumulative preferred stock dividends attributable to the
preferred stock that was converted into common stock as part of the 1997
Recapitalization of the Company.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
REVENUES. Revenues increased $9.3 million, or 16.6%, to $65.1 million for
1996 from $55.8 million for 1995. Revenues increased primarily due to the
following: (i) growth in contact sales driven by new aircraft production rate
increases and growth in the Company's private labeling programs of $6.4 million;
(ii) an increase of sales to IFT of $3.0 million in 1996 relating to a major
systems integration program for Swissair; (iii) the inclusion of $2.8 million of
revenues from ADS which was acquired on September 18, 1996; (iv) an increase in
sales of specialty connectors for cabin management and in-flight entertainment
systems on Boeing's 777 aircraft of $2.4 million; and (v) an increase in sales
of harness assemblies for in-flight entertainment systems of $2.4 million.
Partially offsetting this increase was a decline in sales to AT&T Wireless of
$9.2 million, reflecting the completion in 1995 of a major systems integration
program primarily for American Airlines.
GROSS PROFIT. Gross profit increased $3.3 million, or 26.9%, to $15.7
million for 1996 from $12.4 million for 1995. Gross profit as a percentage of
revenues increased to 24.1% for 1996 from 22.2% for 1995. This increase was
attributable to an improvement in gross profit as a percentage of revenues from
the sale
28
of contacts for 1996, partially offset by a decline in higher margin sales to
AT&T. This improvement resulted from sustained price increases, increased sales
volume, lower wage-related expenses and lower material costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $1.3
million, or 14.0%, to $10.7 million for 1996 from $9.4 million for 1995. SG&A
expenses as a percentage of revenues decreased to 16.5% for 1996 from 16.9% for
1995. SG&A expenses increased primarily due to the following: (i) the Company
added staff to pursue higher sales to OEMs and to develop capabilities for
in-flight entertainment, navigation and satellite communication and safety
systems integration services; and (ii) the inclusion of SG&A expenses from ADS
and Elsinore, which were acquired in 1996. This increase in SG&A expenses was
offset partially by the elimination of $0.7 million of expenses of the
acquisition of the remaining 25% minority interest in Cory Components, Inc.
OPERATING INCOME. Operating income increased $2.4 million, or 131.7%, to
$4.3 million for 1996 from $1.8 million for 1995. The increase in operating
income resulted from the factors described above and a decline of $0.4 million
in amortization of intangible assets as a result of the termination of certain
non-compete agreements.
INTEREST EXPENSE. Interest expense increased $0.4 million, or 11.2%, to
$4.2 million for 1996 from $3.8 million for 1995. This increase resulted from
higher outstanding indebtedness attributed to the funding of the acquisitions of
ADS and Elsinore and the purchase of the AMP Facility.
NET LOSS. Net loss decreased $2.6 million, or 76.3%, to $0.8 million for
1996 from a net loss of $3.4 million for 1995. The decrease in net loss resulted
from the factors described above and a lower tax provision resulting from the
acquisition of the remaining 25% minority interest in Cory Components, Inc. in
February 1996.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased $3.1 million, or 92.2%, to $6.4 million for 1996 from a
net loss applicable to common stockholders of $3.3 million for 1995. The
increase resulted from the change in redemption value of mandatorily redeemable
common stock warrants of $5.0 million (resulting from an increase in the value
of the warrants due to the Company's improved results from operations and the
anticipated price of the Common Stock as a result of the IPO) and the increase
in cumulative convertible preferred stock dividends of $0.7 million (resulting
from new issuances of preferred stock), which were offset in part by the
decrease in net loss of $2.6 million. As a result of the 1997 Recapitalization
of the Company, substantially all warrants were exchanged for Common Stock and
all preferred stock was converted into Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has required cash primarily to fund acquisitions and, to a
lesser extent, to fund capital expenditures and for working capital.
In 1997 and 1996, the Company generated cash from operating activities of
$4.6 million and $3.0 million, respectively. Cash from operating activities is
net of interest payments of $2.8 million and $3.0 million for 1997 and 1996,
respectively. With the net proceeds of the Proposed 1998 Offering to be received
by the Company, the Company estimates that it will repay a significant portion
of its debt. As a result, the related interest payments will decrease
substantially.
In 1997 and 1996, the Company used $5.2 million and $0.8 million,
respectively, in cash for working capital. The Company's accounts receivable
consist of trade receivables and unbilled receivables which are recognized
pursuant to the percentage of completion method of accounting. Trade receivables
increased $3.0 million and $2.7 million in 1997 and 1996, respectively, due to
higher sales. Unbilled receivables increased $0.2 million in 1997 as a result of
the systems integration program for Swissair (through IFT) that began in
mid-1996. Inventories increased by $5.0 million and $2.7 million in 1997 and
1996,
29
respectively, in support of sales growth. Accounts payable decreased by $0.4
million in 1997 and increased by $1.9 million in 1996. The foregoing amounts for
accounts receivable, inventories and accounts payable are consistent with the
amounts set forth in the Consolidated Statements of Cash Flow contained herein.
Net cash used in investing activities was $27.8 million for 1997 and $24.0
million for 1996. Of the $27.8 million used in 1997, $23.6 million related to
the acquisition of Audio in November 1997. (The total purchase price for the
Audio acquisition also included contingent consideration with a maximum of $6.0
million payable in 1999 and 2000.) Of the $24.0 million used in 1996, $22.6
million related to the acquisition of the remaining 25% minority interest in
Cory Components in February 1996, the acquisition of ADS in September 1996 and
the acquisition of Elsinore and the purchase of the AMP Facility in December
1996. Capital expenditures of $3.8 million and $1.5 million were made in 1997
and 1996, respectively. Capital expenditures were incurred in 1997 to: (i)
increase manufacturing capacity in support of revenue growth; (ii) improve
plating controls and capacity; and (iii) construct three additional selective
plating machines. The Company anticipates capital expenditures of approximately
$4.5 million in 1998.
Net cash provided by financing activities in 1997 was $23.0 million. The
Company raised $28.9 million in net proceeds from the sale of approximately 2.7
million shares of Common Stock in the IPO in April, 1997. The net proceeds from
the IPO were applied to repay amounts due under the Company's debt agreements,
including its prior senior revolving line of credit (the "Prior Credit
Facility"). Subsequently, in April 1997, concurrent with the IPO, the Company
replaced the Prior Credit Facility with the present Credit Facility, and in
November 1997 financed the Audio acquisition (including the related fees and
expenses) through a drawdown under the Credit Facility.
Net cash provided by financing activities in 1996, was $21.1 million.
Specifically, the Company financed the acquisition of the remaining 25% minority
interest in Cory Components, Inc. (including the related fees and expenses) in
February 1996 for $6.5 million, the acquisition of ADS (including the related
fees and expenses) in September 1996 for $11.4 million, and the acquisition of
Elsinore and the initial cash portion of the AMP Facility acquisition in
December 1996 for an aggregate of $8.0 million. The foregoing acquisitions were
financed by various combinations of convertible preferred stock (all of which
was subsequently converted to Common Stock during the 1997 recapitalization of
the Company), warrants for Common Stock, convertible notes, debt notes, and a
total of $2.1 million in drawdowns under the Prior Credit Facility.
Cash decreased $0.1 million in 1997 and remained unchanged in 1996 due to
the factors described above. The Company entered into the Credit Facility in
April, 1997 which initially provided for a $40.0 million senior revolving credit
facility which expires in 2002. The Credit Facility was amended to increase the
permitted maximum borrowings by $20.0 million to $60.0 million in November 1997,
concurrent with the closing of the acquisition of Audio. Availability under the
Credit Facility was $24.0 million and working capital aggregated $24.8 million
as of December 31, 1997. The interest rate under the Credit Facility was
initially, at the option of the Company, either the prime rate or 1% above a
certain floating interbank offered rate ("IBOR"). The interest rate is to be
reset quarterly based upon a ratio of debt to the Company's earnings before
interest, taxes, depreciation and amortization, pro forma (for acquisitions) for
the 12 month period ending on such date; the maximum rate is either 0.75% above
the prime rate or 2.0% above IBOR. The Credit Facility contains restrictive and
financial covenants, including a restriction on acquisitions having a purchase
price in excess of $10.0 million. The Credit Facility was amended to increase
the permitted maximum borrowings by $15.0 million to $75.0 million in February
1998 and is subject to an automatic reduction by $0.5 million on the last day of
each month commencing January 31, 1999.
The Company believes that the current levels of working capital and amounts
available under the Credit Facility will enable it to meet its liquidity
requirements through the end of 1999.
30
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise classify
items of other comprehensive income, as defined therein, by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company intends to fully comply with
the provisions of this statement upon its required adoption in the first quarter
of 1998, and does not anticipate a significant impact on the financial
statements.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." This
statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information pertaining
to the Company's operating segments will be reported on the basis that is used
internally for evaluating segment performance and making resource allocation
determinations. Management is currently studying the potential effects of
adoption of this statement, which is required beginning with the statement made
as of December 31, 1998.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements and other
statements that are not historical facts concerning, among other things, market
conditions of the aircraft industry, the demand for avionics components and
systems and future strategic acquisitions. There can be no assurance that the
Company has accurately identified and properly weighed all of the factors which
affect market conditions and demand for the Company's products and services,
that the public information upon which the Company has relied is accurate or
complete or that the Company's analysis of the market and demand for its
products and services is correct and, as a result, the strategy based on such
analysis will be successful. See "Risk Factors" in Item 1 for a more detailed
summary of factors which could affect future results.
ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants....................................... 32
Consolidated Balance Sheets as of December 31, 1996 and 1997............ 33
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997................................................... 34
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997................................ 35
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997................................................... 36
Notes to Consolidated Financial Statements.............................. 37
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
For the three years ended December 31, 1997
II--Valuation and Qualifying Accounts................................. 61
All other schedules are omitted because they are either not applicable or
the required information is shown in the consolidated financial statements or
notes thereto.
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
DeCrane Aircraft Holdings, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31,
1996 and 1997 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Los Angeles, California
February 24, 1998
32
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1996 1997
--------- ---------
ASSETS
Current assets
Cash and cash equivalents................................................................. $ 320 $ 206
Accounts receivable, net.................................................................. 13,185 18,152
Inventories............................................................................... 19,573 25,976
Prepaid expenses and other current assets................................................. 812 782
--------- ---------
Total current assets.................................................................... 33,890 45,116
Property and equipment, net................................................................. 12,187 14,054
Other assets, principally intangibles, net.................................................. 23,189 39,967
--------- ---------
Total assets.......................................................................... $ 69,266 $ 99,137
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings..................................................................... $ 1,974 $ 568
Current portion of long-term obligations to unaffiliated lenders.......................... 3,004 858
Convertible subordinated notes payable to related parties................................. 2,922 --
Accounts payable.......................................................................... 7,420 8,032
Accrued expenses.......................................................................... 7,241 6,911
Income taxes payable...................................................................... 843 3,975
--------- ---------
Total current liabilities............................................................... 23,404 20,344
--------- ---------
Long-term liabilities
Long-term obligations
Unaffiliated lenders.................................................................... 28,323 37,412
Related parties......................................................................... 6,027 --
Deferred income taxes..................................................................... 3,312 1,758
Minority interest......................................................................... 85 96
--------- ---------
Total long-term liabilities............................................................. 37,747 39,266
--------- ---------
Commitments and contingencies (Note 18)
Mandatorily redeemable common stock warrants................................................ 6,879 --
--------- ---------
Stockholders' equity
Cumulative convertible preferred stock, $.01 par value (no par value prior to February 19,
1997), 8,314,018 shares authorized; 6,847,705 shares issued and outstanding as of
December 31, 1996 (none as of December 31, 1997)........................................ 13,850 --
Undesignated preferred stock, $.01 par value, 10,000,000 shares initially authorized as of
February 19, 1997; none issued and outstanding.......................................... -- --
Common stock, no par value, 4,253,550 shares authorized; 85,593 shares issued and
outstanding prior to February 19, 1997.................................................. 216 --
Common stock, $.01 par value, 9,924,950 shares authorized as of February 19, 1997;
5,318,563 shares issued and outstanding as of December 31, 1997 (none as of December 31,
1996)................................................................................... -- 53
Additional paid-in capital................................................................ -- 51,057
Accumulated deficit....................................................................... (12,951) (11,444)
Foreign currency translation adjustment................................................... 121 (139)
--------- ---------
Total stockholders' equity.............................................................. 1,236 39,527
--------- ---------
Total liabilities and stockholders' equity............................................ $ 69,266 $ 99,137
--------- ---------
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
33
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- ----------
Revenues........................................................................ $ 55,839 $ 65,099 $ 108,903
Cost of sales................................................................... 43,463 49,392 80,247
--------- --------- ----------
Gross profit.............................................................. 12,376 15,707 28,656
--------- --------- ----------
Operating expenses
Selling, general and administrative expenses.................................. 9,426 10,747 15,756
Amortization of intangible assets............................................. 1,115 709 905
--------- --------- ----------
Total operating expenses.................................................... 10,541 11,456 16,661
--------- --------- ----------
Income from operations.......................................................... 1,835 4,251 11,995
Other expenses (income)
Interest expense
Unaffiliated lenders........................................................ 2,628 2,807 2,520
Related parties............................................................. 1,193 1,441 634
Other (income) expenses....................................................... 297 (85) 131
Minority interests............................................................ 85 193 112
--------- --------- ----------
Income (loss) before provision for income taxes and extraordinary item.......... (2,368) (105) 8,598
Provision for income taxes...................................................... 1,078 712 3,344
--------- --------- ----------
Income (loss) before extraordinary item......................................... (3,446) (817) 5,254
Extraordinary loss from debt refinancing, net of income tax benefit............. -- -- 2,078
--------- --------- ----------
Net income (loss)............................................................... (3,446) (817) 3,176
Adjustment to redemption value of mandatorily redeemable common stock
warrants...................................................................... 696 (4,320) (2,203)
Cumulative convertible preferred stock dividends................................ (557) (1,220) (442)
--------- --------- ----------
Net income (loss) applicable to common stockholders............................. $ (3,307) $ (6,357) $ 531
--------- --------- ----------
--------- --------- ----------
Income (loss) per common share
Basic
Income (loss) before extraordinary item..................................... $ (38.45) $ (73.92) $ .69
Extraordinary loss from debt refinancing.................................... -- -- (.55)
--------- --------- ----------
Net income (loss)........................................................... $ (38.45) $ (73.92) $ .14
--------- --------- ----------
--------- --------- ----------
Diluted
Income (loss) before extraordinary item..................................... $ (38.45) $ (73.92) $ .62
Extraordinary loss from debt refinancing.................................... -- -- (.42)
--------- --------- ----------
Net income (loss)........................................................... $ (38.45) $ (73.92) $ .20
--------- --------- ----------
--------- --------- ----------
Pro forma for the Recapitalization and initial public offering, before
extraordinary item (Unaudited)
Basic..................................................................... -- -- $ 1.16
Diluted................................................................... -- -- $ 1.10
The accompanying notes are an integral part of the consolidated financial
statements.
34
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
COMMON STOCK
------------------------------------------------
NO PAR VALUE $.01 PAR VALUE
CUMULATIVE --------------------- ------------------------
CONVERTIBLE NUMBER NUMBER
PREFERRED OF OF
STOCK SHARES AMOUNT SHARES AMOUNT
------------- --------- --------- ------------ ---------
Balance, December 31, 1994.............. $ 5,549 85,593 $ 58 -- $ --
Net loss................................ -- -- -- -- --
Adjustment to estimated redemption value
of mandatorily redeemable common stock
warrants............................... -- -- -- -- --
Translation adjustment.................. -- -- -- -- --
------------- --------- --------- ------------ ---
Balance, December 31, 1995.............. 5,549 85,593 58 -- --
Net loss................................ -- -- -- -- --
Adjustment to estimated redemption value
of mandatorily redeemable common stock
warrants............................... -- -- -- -- --
Issuance of cumulative convertible
preferred stock, net................... 8,301 -- -- -- --
Mandatorily redeemable common stock
warrants issued pursuant to
anti-dilution provisions............... -- -- -- -- --
Stock option compensation expense....... -- -- 158 -- --
Translation adjustment.................. -- -- -- -- --
------------- --------- --------- ------------ ---
Balance, December 31, 1996.............. 13,850 85,593 216 -- --
Delaware reorganization and reverse
stock split............................ -- (85,593) (216) 85,593 1
Adjustment to estimated redemption value
of mandatorily redeemable common stock
warrants............................... -- -- -- -- --
Recapitalization
Conversion of preferred stock into
common stock........................ (13,850) -- -- 1,941,804 19
Cashless exercise and conversion of
warrants............................ -- -- -- 524,293 6
Cancellation of mandatorily redeemable
common stock warrants............... -- -- -- -- --
Initial Public Offering
Proceeds from the offering, net....... -- -- -- 2,700,000 27
Cancellation of mandatorily redeemable
common stock warrants upon debt
repayment and reclassification of
warrants no longer redeemable....... -- -- -- -- --
Common shares issued pursuant to
anti-dilution provisions............ -- -- -- 50,743 --
Cashless exercise of common stock
warrants............................... -- -- -- 16,130 --
Net income.............................. -- -- -- -- --
Stock option compensation expense....... -- -- -- -- --
Translation adjustment.................. -- -- -- -- --
------------- --------- --------- ------------ ---
Balance, December 31, 1997.............. $ -- -- $ -- 5,318,563 $ 53
------------- --------- --------- ------------ ---
------------- --------- --------- ------------ ---
FOREIGN
CURRENCY
ADDITIONAL ACCUM- TRANSLATION
PAID-IN ULATED ADJUST-
CAPITAL DEFICIT MENT TOTAL
------------- ----------- ------------- -----------
Balance, December 31, 1994.............. $ -- $ (5,057) $ 216 $ 766
Net loss................................ -- (3,446) -- (3,446)
Adjustment to estimated redemption value
of mandatorily redeemable common stock
warrants............................... -- 696 -- 696
Translation adjustment.................. -- -- 287 287
------------- ----------- ----- -----------
Balance, December 31, 1995.............. -- (7,807) 503 (1,697)
Net loss................................ -- (817) -- (817)
Adjustment to estimated redemption value
of mandatorily redeemable common stock
warrants............................... -- (4,320) -- (4,320)
Issuance of cumulative convertible
preferred stock, net................... -- -- -- 8,301
Mandatorily redeemable common stock
warrants issued pursuant to
anti-dilution provisions............... -- (7) -- (7)
Stock option compensation expense....... -- -- -- 158
Translation adjustment.................. -- -- (382) (382)
------------- ----------- ----- -----------
Balance, December 31, 1996.............. -- (12,951) 121 1,236
Delaware reorganization and reverse
stock split............................ 215 -- -- --
Adjustment to estimated redemption value
of mandatorily redeemable common stock
warrants............................... -- (2,203) -- (2,203)
Recapitalization
Conversion of preferred stock into
common stock........................ 13,831 -- -- --
Cashless exercise and conversion of
warrants............................ 6,097 -- -- 6,103
Cancellation of mandatorily redeemable
common stock warrants............... -- 1,143 -- 1,143
Initial Public Offering
Proceeds from the offering, net....... 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............ 609 (609) -- --
Cashless exercise of common stock
warrants............................... -- -- -- --
Net income.............................. -- 3,176 -- 3,176
Stock option compensation expense....... 240 -- -- 240
Translation adjustment.................. -- -- (260) (260)
------------- ----------- ----- -----------
Balance, December 31, 1997.............. $ 51,057 $ (11,444) $ (139) $ 39,527
------------- ----------- ----- -----------
------------- ----------- ----- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
35
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Cash flows from operating activities
Net income (loss)............................................................... $ (3,446) $ (817) $ 3,176
Adjustments to reconcile net income (loss) to net cash provided by operating
activities
Depreciation and amortization................................................. 4,542 4,343 5,372
Extraordinary loss from debt refinancing...................................... -- -- 2,078
Unrealized loss on forward foreign exchange contracts......................... -- -- 469
Deferred income taxes......................................................... 867 88 (1,281)
Other, net.................................................................... 70 188 185
Changes in assets and liabilities
Accounts receivable......................................................... 2,256 (3,069) (3,159)
Inventories................................................................. (2,962) (2,665) (4,956)
Prepaid expenses and other assets........................................... 274 (3) (136)
Accounts payable............................................................ (1,004) 1,891 (361)
Accrued expenses............................................................ 682 2,477 (1,041)
Income taxes payable........................................................ 178 525 4,295
--------- --------- ---------
Net cash provided by operating activities................................. 1,457 2,958 4,641
--------- --------- ---------
Cash flows from investing activities
Purchase of stock of Audio International, Inc., net of cash acquired............ -- -- (23,597)
Purchase of net assets of Aerospace Display Systems............................. -- (11,693) --
Purchase of minority stockholder's interest..................................... -- (5,207) --
Purchase of net assets and stock of Elsinore Engineering Services and Elsinore
Aerospace Services, Inc....................................................... -- (1,300) --
Capital expenditures............................................................ (1,203) (5,821) (3,842)
Other, net...................................................................... (259) 5 (370)
--------- --------- ---------
Net cash used for investing activities.................................... (1,462) (24,016) (27,809)
--------- --------- ---------
Cash flows from financing activities
Initial public offering and application of the net proceeds
Proceeds from sale of common stock in the offering, net of $3,467 for
underwriting discounts, commissions and expenses paid in 1997............... -- -- 28,933
Borrowings under new credit facility, net of deferred financing costs of
$463........................................................................ -- -- 12,312
Repayment of debt, including $273 in prepayment penalties and expenses........ -- -- (42,160)
Financing of acquisitions
Revolving line of credit borrowings........................................... -- 6,399 23,597
Proceeds from issuance of cumulative convertible preferred stock and
mandatorily redeemable common stock warrants, net........................... -- 8,805 --
Senior term loan borrowings................................................... -- 5,000 --
Convertible subordinated note borrowings from related parties................. -- 3,000 --
Promissory note principal payments............................................ -- -- (1,095)
Net borrowings under revolving line of credit agreements........................ 1,972 1,191 2,906
Principal payments on capitalized lease and other long-term obligations......... (1,665) (2,001) (1,675)
Proceeds from issuance of cumulative convertible preferred stock, net........... -- 112 --
Payment of deferred financing costs............................................. -- (851) --
Other, net...................................................................... (266) (604) 139
--------- --------- ---------
Net cash provided by financing activities................................. 41 21,051 22,957
--------- --------- ---------
Effect of foreign currency translation on cash.................................... 33 22 97
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 69 15 (114)
Cash and cash equivalents at beginning of period.................................. 236 305 320
--------- --------- ---------
Cash and cash equivalents at end of period........................................ $ 305 $ 320 $ 206
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
36
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company")
manufactures avionics components and provides avionics systems integration
services in certain niche markets of the commercial and high-end corporate jet
aircraft industries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to
prior years' financial statements to conform to the 1997 presentation.
Preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
REORGANIZATION AND REVERSE STOCK SPLIT
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its cumulative convertible preferred stock and common stock and increased
the number of common shares and preferred shares authorized to 9,924,950 and
18,314,018 shares (which includes 10,000,000 shares of a newly designated series
of preferred stock), respectively.
Effective March 25, 1997, the Company effected a 3.53-for-1 reverse stock
split. All common share information set forth in the consolidated financial
statements and notes thereto has been restated to reflect the reverse stock
split.
INVENTORIES
Inventories are stated at the lower of cost, as determined under the
first-in, first-out ("FIFO") method, or market. Costs include materials, labor
and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives, ranging from two to
twenty years. Building and building improvements are depreciated using the
straight-line method over their estimated useful lives of forty years. Leasehold
improvements are amortized using the straight-line method over their estimated
useful lives or remaining lease term, whichever is less. Expenditures for
maintenance and repairs are expensed as incurred. The costs for improvements are
capitalized. Upon retirement or disposal, the cost and accumulated depreciation
of property and equipment are reduced and any gain or loss is recorded in income
or expense.
OTHER ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from
fifteen to thirty years. Other intangibles are amortized on a straight-line
basis over their estimated useful lives, ranging from ten to
37
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
twenty years. Revolving credit agreement deferred financing costs are amortized
on a straight-line basis over the term of the agreement. Term debt deferred
financing costs are amortized using the interest method over the terms of their
respective agreements.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. In the event the sum of the expected
undiscounted future cash flows resulting from the use of the asset is less than
the carrying amount of the asset, an impairment loss equal to the excess of the
asset's carrying value over its fair value is recorded. The Company has
recognized no such losses.
DERIVATIVES
Market value gains and losses on forward foreign exchange contracts are
recognized currently in the consolidated statements of operations.
INCOME TAXES
Deferred income taxes are determined using the liability method. A deferred
tax asset or liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the asset and/or liability for
deferred taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments are held for purposes other than trading. The
estimated fair values of all nonderivative financial instruments approximate
their carrying amounts at December 31, 1996 and 1997. The estimated fair value
of foreign currency forward exchange contracts is based on quotes obtained from
various financial institutions that deal in this type of instrument.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's U.K. and Swiss subsidiaries have
been translated into U.S. dollars from their functional currencies, pounds
sterling and Swiss francs, respectively, in the consolidated financial
statements. Assets and liabilities have been translated at the exchange rate on
the balance sheet date and income statement amounts have been translated at
average exchange rates in effect during the period. The net translation
adjustment is reflected as a component of stockholders' equity (deficit).
Realized foreign currency exchange gains (losses) included in other expenses
(income) in the consolidated statements of operations were $(314,000), $71,000
and $(72,000) for the years ended December 31, 1995, 1996 and 1997,
respectively.
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
38
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Refer to Note
16 for information concerning the pro forma effect on results of operations
assuming the fair value method of measuring compensation expense related to the
employee stock option plan was utilized as described in SFAS 123.
REVENUE RECOGNITION
Revenues from the sale of manufactured products, except for products
manufactured under long-term contracts, are recorded when products are shipped.
Revenues on long-term contracts are recognized using the
percentage-of-completion method based on costs incurred to date compared with
total estimated costs at completion. Unbilled accounts receivable were $465,000
and $654,000 at December 31, 1996 and 1997, respectively. Unbilled accounts
receivable are expected to be billed during the succeeding twelve-month period.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share are computed pursuant to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (Note
17). As the Company's historical capital structure is not indicative of its
structure after the Company's recapitalization and initial public offering (Note
2), pro forma income per common share is presented for 1997 and reflects the
Recapitalization and the initial public offering and the application of the
proceeds therefrom, as if both had occurred January 1, 1997 (Note 17).
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company is required to adopt SFAS 130
for its fiscal year beginning January 1, 1998; to enhance comparability,
reclassification of financial statements for earlier periods is required.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for disclosure about operating in segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The Company is required to adopt SFAS 131
for its fiscal year ending December 31, 1998. Comparative information for
earlier years must be restated to conform to the requirements of this standard.
39
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - RECAPITALIZATION AND CONSUMMATION OF INITIAL PUBLIC OFFERING
In January and March 1997, the holders of certain securities agreed to a
plan for the recapitalization of the Company (the "Recapitalization").
Completion of the Recapitalization was a condition to the consummation of the
Company's initial public offering (the "IPO") and, was effective concurrent
therewith. The IPO was consummated on April 16, 1997.
The Recapitalization provided for: (i) the conversion of all 6,847,705
shares of issued and outstanding cumulative convertible preferred stock
("Preferred Stock") into 1,941,804 shares of common stock; (ii) the cashless
exercise and conversion of all 52,784 and 9,355 issued and outstanding Preferred
Stock warrants and common stock warrants, respectively, into a total of 16,585
shares of common stock; (iii) the cashless exercise of 508,497 mandatorily
redeemable common stock warrants (the "Redeemable Warrants") into a total of
507,708 shares of common stock; and (iv) the cancellation of 95,368 Redeemable
Warrants.
Redeemable Warrants exercisable into 208,968 common shares remained after
the Recapitalization. Of this amount, 138,075 Redeemable Warrants were cancelled
upon the consummation of the IPO and repayment of the Company's senior
subordinated debt and convertible notes in accordance with the terms of the
respective warrant agreements. Redeemable Warrants exercisable into 70,893
common shares remained after the Recapitalization 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.
NOTE 3 - ACQUISITIONS
AUDIO INTERNATIONAL
On November 14, 1997, the Company purchased all of the outstanding stock of
Audio International, Inc. ("Audio International"). Audio International provides
premium, customized aircraft entertainment and cabin management products and
systems for the high-end corporate jet market.
The total purchase price was $24,726,000 in cash at closing, including
$726,000 in acquisition related costs, plus contingent consideration aggregating
a maximum of $6,000,000 payable over two years based on future attainment of
defined performance criteria. The acquisition was funded with borrowings under
the Company's revolving line of credit facility.
The acquisition was accounted for as a purchase and the $20,110,000
difference between the purchase price, excluding the contingent consideration,
and the fair value of the net assets acquired was recorded as goodwill and is
being amortized over 30 years. The amount of contingent consideration paid in
the future, if any, will increase goodwill and will be amortized prospectively
over the remaining period of the initial 30-year term.
The consolidated results of operations for the year ended December 31, 1997
include the operating results of Audio International subsequent to November 13,
1997.
40
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
MINORITY STOCKHOLDER'S 25% INTEREST
On February 20, 1996, the Company purchased the remaining 25% of a
subsidiary's stock it did not already own from the subsidiary's minority
stockholder (the "Minority Stockholder") for a total purchase price of
$5,748,000, including $334,000 of acquisition related costs and expenses (the
"Minority Interest Acquisition"). The purchase price consisted of $4,873,000
paid in cash at closing and a $600,000 non-interest bearing obligation payable
to the Minority Stockholder. The cash portion of the purchase price was funded
with the proceeds from the sale of Preferred Stock and Redeemable Warrants.
The acquisition was accounted for as a purchase and the $5,498,000
difference between the purchase price and 25% of the fair value of the net
assets acquired was recorded as goodwill and is being amortized over 26 years,
representing the remaining useful life of the goodwill recorded upon the initial
75% acquisition in October 1991.
The consolidated results of operations for the year ended December 31, 1996
include 100% of the operating results of the subsidiary subsequent to February
20, 1996. For the periods prior to February 20, 1996, the consolidated results
of operations include a charge for the Minority Stockholder's 25% ownership
interest.
For the periods prior to February 20, 1996, the Minority Stockholder, who is
also President of the subsidiary, was compensated pursuant to an employment
agreement. The employment agreement was cancelled as of February 20, 1996. For
the years ended December 31, 1995 and 1996, the Minority Stockholder earned
compensation of $851,000 and $22,000, respectively.
AEROSPACE DISPLAY SYSTEMS
On September 18, 1996, the Company purchased for cash substantially all of
the assets, subject to certain liabilities assumed, of the Aerospace Display
Systems division ("ADS") of Allard Industries, Inc. ("Allard"). The total
purchase price was $13,395,000, including $402,000 in acquisition related costs.
ADS develops and manufactures dichroic liquid crystal displays and modules for
commercial and military avionics systems.
The acquisition was funded with the proceeds from the sale of Preferred
Stock, convertible subordinated notes and Redeemable Warrants, borrowings under
the Company's revolving line of credit and a $2,000,000 non-interest bearing
obligation payable to certain Allard stockholders.
The acquisition was accounted for as a purchase and the $7,425,000
difference between the purchase price and the fair value of the net assets
acquired was recorded as goodwill and is being amortized over 30 years.
The consolidated results of operations for the year ended December 31, 1996
include the operating results of ADS subsequent to September 18, 1996.
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
41
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITIONS (CONTINUED)
acquisition related costs. The purchase price consisted of $1,000,000 paid in
cash at closing and a $1,250,000 15% promissory note payable to the sellers.
The purchase agreement provided for an adjustment of the purchase price
should the amount of working capital decline as of the closing date. The
purchase price was allocated to the assets acquired and liabilities assumed
using estimated fair values and $2,585,000 was assigned to goodwill, subject to
final determination of the purchase price. During 1997, the Company and the
sellers agreed to reduce the purchase price by $155,000 to reflect the decline
in working capital as of the closing date and, as a result, goodwill was
decreased by a corresponding amount during 1997.
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION AND IPO
Unaudited pro forma consolidated results of operations are presented in the
table below for the two years ended December 31, 1997 and are pro forma for the
Recapitalization, the IPO and the application of the net proceeds therefrom
(Note 2). For 1996, the results are also pro forma as if the Audio
International, Minority Interest and ADS acquisitions were consummated on
January 1, 1996; the pro forma effect of the Elsinore acquisition is not
material and, accordingly, is not reflected. For 1997, the results are pro forma
as if the Audio International acquisition was consummated on January 1, 1997.
Amounts are in thousands, except per share data.
PRO FORMA FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
Revenues.......................................... $ 82,939 $ 121,334
Income before extraordinary item.................. 2,284 5,252
Income applicable to common stockholders, before
extraordinary item.............................. 2,284 5,252
Pro forma income per common share, before
extraordinary item
Basic......................................... $ .45 $ .99
Diluted....................................... .44 .94
Pro forma weighted average number of common shares
outstanding
Basic......................................... 5,021 5,304
Diluted....................................... 5,209 5,606
The above information reflects adjustments for depreciation, amortization,
general and administrative expenses, minority interest and interest expense
based on the new cost basis and debt structure of the Company. In 1997, income
excludes the effect of a $2,078,000 extraordinary loss incurred in connection
with the Company's debt refinancing (Note 11).
NOTE 4 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS
ACCOUNTS RECEIVABLE
Accounts receivable is net of an allowance for doubtful accounts of $379,000
and $487,000 at December 31, 1996 and 1997, respectively.
42
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS (CONTINUED)
The Company is potentially subject to concentrations of credit risk as the
Company relies heavily on customers operating in the domestic and foreign
commercial and high-end corporate jet aircraft industries. Generally, the
Company does not require collateral or other security to support accounts
receivable subject to credit risk. Under certain circumstances, deposits or cash
on delivery terms are required. The Company maintains reserves for potential
credit losses and generally, such losses have been within management's
expectations.
SIGNIFICANT CUSTOMERS
Three customers each accounted for more than 10% of the Company's
consolidated revenues, as follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Customer A........................................................... 8.9% 15.8% 19.0%
Customer B........................................................... 25.4% 7.7% 1.1%
Customer C........................................................... 8.7% 7.2% 11.2%
Complete loss of either Customer A or C could have a significant adverse
impact on the results of operations expected in future periods. During the year
ended December 31, 1997, Customer A acquired another customer of the Company.
The above amounts for Customer A include the Company's revenue from the acquired
customer after its acquisition. For the year ended December 31, 1997, revenue
from Customer A would have been 20.9% had the acquisition been consummated on
January 1, 1997.
NOTE 5 - INVENTORIES
Inventories are comprised of the following (amounts in thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Raw material............................................................ $ 12,350 $ 14,224
Work-in process......................................................... 2,717 4,655
Finished goods.......................................................... 4,506 7,097
--------- ---------
Total inventories..................................................... $ 19,573 $ 25,976
--------- ---------
--------- ---------
Included above are costs relating to long-term contracts recognized on the
percentage of completion method of $1,378,000 and $125,000 at December 31, 1996
and 1997, respectively.
43
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment includes the following (amounts in thousands):
DECEMBER 31,
----------------------
1996 1997
---------- ----------
Machinery and equipment................................................................... $ 16,637 $ 18,151
Tooling................................................................................... 2,944 3,133
Computer equipment, furniture and fixtures................................................ 2,462 3,660
Land, buildings and leasehold improvements................................................ 1,676 3,580
---------- ----------
Total cost.............................................................................. 23,719 28,524
Accumulated depreciation and amortization............................................... (11,532) (14,470)
---------- ----------
Net property and equipment............................................................ $ 12,187 $ 14,054
---------- ----------
---------- ----------
Property and equipment under capital leases included above consists of the
following (amounts in thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Machinery and equipment..................................................................... $ 920 $ 1,160
Computer equipment, furniture and fixtures.................................................. 306 455
--------- ---------
Total cost................................................................................ 1,226 1,615
Accumulated depreciation and amortization................................................... (347) (523)
--------- ---------
Net property and equipment.............................................................. $ 879 $ 1,092
--------- ---------
--------- ---------
Depreciation of machinery and equipment under capital leases is included in
cost of sales in the consolidated financial statements.
On December 12, 1996, the Company purchased all of the manufacturing assets
and inventory relating to the cold-heading manufacturing facility of the
Qualitronix Division of AMP, Inc. (the "AMP Facility"). The purchase price of
$6,802,000 (including $2,433,000 of inventory purchased) consisted of $5,399,000
paid in cash at closing with the balance paid in January 1997. The $2,213,000
difference between the purchase price and the fair value of the individual
assets acquired was recorded as an intangible asset and is being amortized over
15 years.
44
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - OTHER ASSETS
Other assets includes the following and is net of accumulated amortization
for the respective periods as parenthetically noted (amounts in thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Goodwill (net of $808 and $1,682)........................................................... $ 19,756 $ 38,592
Deferred financing costs (net of $1,368 and $64) (Note 11).................................. 2,296 399
Other intangibles (net of $164 and $194).................................................... 274 596
Other non-amortizable assets................................................................ 863 380
--------- ---------
Other assets, net......................................................................... $ 23,189 $ 39,967
--------- ---------
--------- ---------
NOTE 8 - ACCRUED EXPENSES
Accrued expenses are comprised of the following (amounts in thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Salaries, wages, compensated absences and payroll related taxes................................ $ 2,842 $ 3,410
Other accrued expenses......................................................................... 4,399 3,501
--------- ---------
Total accrued expenses....................................................................... $ 7,241 $ 6,911
--------- ---------
--------- ---------
NOTE 9 - SHORT-TERM BORROWINGS
Short-term borrowings outstanding as of December 31, 1996 and 1997 includes
the following (amounts in thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Promissory note, 15% interest and principal payable as described below........................... $ 1,250 $ --
Short-term revolving line of credit.............................................................. 724 568
--------- ---------
Total short-term borrowings.................................................................... $ 1,974 $ 568
--------- ---------
--------- ---------
The promissory note was issued on December 5, 1996 in conjunction with the
Elsinore acquisition and was payable to the former owners. The promissory note,
as adjusted (Note 3), was repaid during 1997.
The Company's Swiss subsidiary has a short-term revolving line of credit
with a Swiss bank under which Swiss franc denominated borrowings of $724,000 and
$568,000 were outstanding at December 31, 1996 and 1997, respectively. Interest
on the line accrues at the bank's prime rate (5.25% at December 31, 1997) plus
0.25%. The line of credit is guaranteed by the Company.
NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES
In conjunction with the ADS acquisition, the Company sold 15% convertible
subordinated notes ("Convertible Notes") and Redeemable Warrants to a group of
investors, who are also related parties (Note 22). As described in Note 14,
$124,000 of the aggregate $3,000,000 proceeds was allocated to
45
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - CONVERTIBLE SUBORDINATED NOTES PAYABLE TO RELATED PARTIES (CONTINUED)
Redeemable Warrants in the consolidated financial statements. The corresponding
reduction in the recorded principal amount of the notes was treated as debt
discount and amortized as interest expense over the life of the notes. The
principal balance of the notes, plus accrued interest, was paid with a portion
of the IPO proceeds.
NOTE 11 - LONG-TERM OBLIGATIONS
Long-term obligations outstanding includes the following (amounts in
thousands):
DECEMBER 31,
--------------------
1996 1997
--------- ---------
Senior revolving line of credit............................................................. $ -- $ 36,000
Note payable to Arkansas Development Finance Authority, principal and interest at rates
ranging from 5.25% to 6.0%, secured by land, building and equipment....................... -- 712
Capital lease obligations and equipment term financing, with interest at 4.34 % to 18.08%,
secured by equipment...................................................................... 662 547
Acquisition financing payable to sellers
Payable to Allard stockholders (for the ADS acquisition), due in monthly installments of
$56,000 through August 18, 1999......................................................... 1,531 1,011
Payable to Minority Stockholder (for the Minority Interest acquisition), due in monthly
installments of $33,000 through December 15, 1997....................................... 383 --
Debt repaid with IPO proceeds
Senior revolving line of credit........................................................... 11,982 --
Senior term notes......................................................................... 16,769 --
Senior subordinated debt payable to related parties (Note 22)............................. 6,027 --
--------- ---------
Total long-term obligations............................................................. 37,354 38,270
Less current portion.................................................................... (3,004) (858)
--------- ---------
Long-term obligations, less current portion........................................... $ 34,350 $ 37,412
--------- ---------
--------- ---------
DEBT REPAID WITH IPO PROCEEDS
In April 1997, the Company used the net proceeds from the IPO (Note 2),
together with approximately $12,775,000 of proceeds from borrowings under a new
credit facility, to repay the following: (i) senior revolving line of credit
borrowings of $15,356,000; (ii) senior term notes aggregating $16,531,000; (iii)
senior subordinated notes payable to related parties aggregating $7,000,000; and
(iv) Convertible Notes payable to related parties aggregating $3,000,000. In
conjunction with the debt repayment, the Company incurred a $3,436,000
extraordinary charge, before an income tax benefit of $1,358,000, which is
comprised of: (i) a $1,943,000 write-off of deferred financing costs; (ii) a
$1,149,000 write-off of unamortized original issued discounts; and (iii) a
$344,000 charge for a prepayment penalty and other related expenses.
SENIOR CREDIT FACILITY
Concurrent with the completion of the IPO, the Company obtained a new credit
agreement with a group of banks for a $40 million senior revolving line of
credit, expiring in April 2002 (the "Credit
46
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED)
Facility"). The Credit Facility was amended in November 1997 in conjunction with
the Audio International acquisition to provide a $60 million revolving line of
credit. Borrowings under the Credit Facility are secured by assets totaling
$96,122,000 as of December 31, 1997. At December 31, 1997, additional borrowings
of $24,000,000 were available under the Credit Facility. In February 1998, the
Credit Facility was further amended to provide for a $75 million revolving line
of credit.
The Company, at its option, may elect to pay interest on Credit Facility
borrowings based on either the prime rate or interbank offered rate ("IBOR")
plus defined margins. The Company is required to pay a commitment fee, up to a
maximum 0.375%, on the unused portion of the Credit Facility. The weighted-
average interest rate on borrowings outstanding was 7.03% as of December 31,
1997. Interest rate margins and commitment fee rates are reset quarterly, based
upon a defined leverage ratio. The maximum interest rate margins are 0.75% above
the prime rate or 2.00% above the IBOR rate.
The Credit Facility contains certain restrictive covenants which require the
Company to: (i) maintain certain defined financial ratios such as interest
coverage, leverage and working capital, and minimum levels of net worth; and
(ii) limit capital expenditures, including capital lease obligations, and
additional indebtedness which may be incurred. The Credit Facility also
prohibits the Company from paying any cash dividends on its common stock.
ARKANSAS DEVELOPMENT FINANCE AUTHORITY
The note was assumed in conjunction with the Audio International acquisition
and is guaranteed by its former stockholders. The acquisition agreement provides
that the Company must obtain a release of the former stockholders' guarantees.
The Company is evaluating various alternatives including repayment of the note
by borrowing under the Credit Facility. The note is classified as a long-term
obligation as of December 31, 1997.
ACQUISITION FINANCING PAYABLE TO SELLERS
In conjunction with the Minority Interest Acquisition and the ADS
acquisition, the sellers provided financing that is payable in monthly
installments over an eighteen-month and a three-year period, respectively. The
Minority Stockholder and ADS payment obligations are non-interest bearing;
original issue discounts of 9.75% and 11.5%, respectively, are being amortized
over the payment obligation terms. Unamortized debt discounts were $264,000 and
$100,000 as of December 31, 1996 and December 31, 1997, respectively.
47
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - LONG-TERM OBLIGATIONS (CONTINUED)
AGGREGATE MATURITIES
The aggregate maturities of long-term obligations are as follows as of
December 31, 1997 (amounts in thousands):
YEAR ENDING DECEMBER 31,
1998................................................................................................. $ 942
1999................................................................................................. 633
2000................................................................................................. 46
2001................................................................................................. 17
2002................................................................................................. 36,728
Thereafter........................................................................................... 4
---------
Total aggregate maturities......................................................................... 38,370
Less unamortized debt discount..................................................................... (100)
---------
Total long-term obligations...................................................................... $ 38,270
---------
---------
NOTE 12 - INCOME TAXES
Income (loss) before income taxes and extraordinary item was taxed under the
following jurisdictions (amounts in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Domestic............................................................................ $ (2,534) $ (855) $ 7,509
Foreign............................................................................. 166 750 1,089
--------- --------- ---------
Total............................................................................. $ (2,368) $ (105) $ 8,598
--------- --------- ---------
--------- --------- ---------
48
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
The provisions for income taxes are as follows (amounts in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Current
U.S. federal........................................................................ $ 60 $ 269 $ 3,231
State and local..................................................................... 24 194 968
Foreign............................................................................. 127 161 426
--------- --------- ---------
Total current..................................................................... 211 624 4,625
--------- --------- ---------
Deferred
U.S. federal........................................................................ 751 70 (1,021)
State and local..................................................................... 226 21 (279)
Foreign............................................................................. (110) (3) 19
--------- --------- ---------
Total deferred.................................................................... 867 88 (1,281)
--------- --------- ---------
Total provision
U.S. federal........................................................................ 811 339 2,210
State and local..................................................................... 250 215 689
Foreign............................................................................. 17 158 445
--------- --------- ---------
Total provision................................................................... $ 1,078 $ 712 $ 3,344
--------- --------- ---------
--------- --------- ---------
Deferred tax liabilities (assets) are comprised of the following (amounts in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Gross deferred tax liabilities
Tax effect on earnings of subsidiary not consolidated for tax purposes.......... $ 2,431 $ 2,688 $ 2,688
Depreciable and amortizable assets.............................................. 781 991 996
Other........................................................................... 367 279 409
--------- --------- ---------
Gross deferred tax liabilities................................................ 3,579 3,958 4,093
--------- --------- ---------
Gross deferred tax (assets)
Inventory....................................................................... (1,376) (1,798) (2,811)
Loss carryforwards.............................................................. (1,391) (1,238) (865)
Accrued expenses................................................................ (220) (605) (697)
State income taxes.............................................................. -- -- (194)
Allowance for doubtful accounts................................................. (41) (68) (159)
Other........................................................................... (122) -- (184)
--------- --------- ---------
Gross deferred tax (assets)................................................... (3,150) (3,709) (4,910)
--------- --------- ---------
Deferred tax assets valuation allowance........................................... 2,681 3,063 2,575
--------- --------- ---------
Net deferred tax liability...................................................... $ 3,110 $ 3,312 $ 1,758
--------- --------- ---------
--------- --------- ---------
49
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal rate to the income
(loss) before income taxes and extraordinary item as a result of the following
differences (amounts in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Income tax (benefit) at U.S. statutory rates........................................... $ (805) $ (36) $ 2,923
Increase (decrease) resulting from
Tax on earnings of subsidiary not consolidated for tax purposes...................... 977 92 --
Book benefit not provided (provided) for net operating loss carryforwards............ 773 172 (488)
Amortization of assets and other expenses not deductible for income tax purposes..... 68 137 441
State income taxes, net of federal benefit........................................... 16 157 482
Lower tax rates on earnings of foreign subsidiaries.................................. (11) (65) (116)
Other, net........................................................................... 60 255 102
--------- --------- ---------
Income tax at effective rates...................................................... $ 1,078 $ 712 $ 3,344
--------- --------- ---------
--------- --------- ---------
Approximately $2,543,000 of the Company's loss carryforwards remained at
December 31, 1997 for federal income tax purposes. The carryforwards expire in
varying amounts through 2012. No benefit for the remaining loss carryforwards
has been recognized in the consolidated financial statements. The amount of loss
carryforwards that may be utilized in the future are subject to limitations
because of the occurrence of a change in control of the Company, as defined in
the Internal Revenue Code. A change in control occurred during 1996 as a result
of certain equity transactions and upon completion of the IPO. The amount of
loss carryforwards that may be used in the future is limited to approximately
$800,000 in each year for federal income tax purposes until fully utilized. The
deferred tax asset valuation allowance was reduced in 1997 by $488,000 to
reflect the amount of federal and state tax loss carryforwards that has been
utilized to reduce 1997 current income taxes.
Undistributed earnings of foreign subsidiaries are not material to the
consolidated financial statements. As such, foreign taxes that may be due, net
of U.S. foreign tax credits, have not been provided.
NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not use derivative financial instruments for trading
purposes but only to manage well-defined foreign exchange rate risks.
The Company enters into Swiss franc ("CHF") forward exchange contracts to
purchase Swiss francs as a general economic hedge against foreign inventory
procurement and manufacturing costs. Market value gains and losses on forward
foreign exchange contracts are recognized in the consolidated statements of
operations and aggregated a realized net loss of $316,000 and $487,000 for the
years ended December 31, 1996 and 1997, respectively (none in the year ended
December 31, 1995).
At December 31, 1997, the Company has twelve open forward exchange contracts
with one of its senior lenders to purchase a total of CHF 9,836,000 for
$7,200,000 at rates ranging between 1.341 and 1.391 CHF per U.S. dollar.
Settlement of the contracts is to occur in twelve equal monthly amounts of
$600,000 from January 15, 1998 through December 15, 1998. As of December 31,
1997, the Company has recognized in cost of sales an unrealized market value
loss of $469,000 on the open contracts.
50
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The Company believes exposure to derivative credit losses is minimal in the
event of nonperformance by the senior lender because any amounts due, but not
paid, to the Company by the senior lender could be offset against the Company's
principal and interest payments to the lender.
NOTE 14 - MANDATORILY REDEEMABLE COMMON STOCK WARRANTS
Mandatorily redeemable common stock warrants (the "Redeemable Warrants")
were issued in conjunction with various debt and equity transactions. During
1997, all Redeemable Warrants were either exercised or cancelled in conjunction
with the Recapitalization and IPO (Note 2). The table below summarizes the
transactions during the three-year period ended December 31, 1997 (amounts in
thousands, except share data).
REDEEMABLE WARRANTS
----------------------
NUMBER OF
COMMON
AMOUNT SHARES
--------- -----------
Balance, December 31, 1994................................................................. $ 2,329 446,296
Adjustment to estimated redemption value................................................... (696) --
--------- -----------
Balance, December 31, 1995................................................................. 1,633 446,296
Issued in conjunction with sale of Preferred Stock to finance Minority Interest
acquisition.............................................................................. 492 194,618
Issued in conjunction with sale of Convertible Notes and Preferred Stock to finance ADS
acquisition.............................................................................. 248 98,158
Issued pursuant to anti-dilution provisions upon the sale of Preferred Stock............... 7 2,868
Issued in conjunction with debt agreement amendment........................................ 179 70,893
Adjustment to estimated redemption value................................................... 4,320 --
--------- -----------
Balance, December 31, 1996................................................................. 6,879 812,833
Adjustment to redemption value to reflect the IPO per share price.......................... 2,203 --
Cashless exercise and conversion pursuant to the Recapitalization.......................... (6,103) (508,497)
Cancelled pursuant to the Recapitalization................................................. (1,143) (95,368)
Cancelled upon debt repayment with IPO proceeds............................................ (1,657) (138,075)
Reclassification of warrants no longer mandatorily redeemable to additional paid-in
capital.................................................................................. (179) (70,893)
--------- -----------
Balance, December 31, 1997................................................................. $ -- --
--------- -----------
--------- -----------
Prior to the IPO, the warrant holders had the right, after various dates and
contingent upon certain events, to require the Company to redeem the warrants
and, in certain instances, to purchase the common stock issued upon exercise of
the warrants. In all instances, the redemption or purchase price, was equal to
the greater of either fair market value, book value, or a value based upon a
defined formula which included, in part, an earnings multiple. During the years
ended December 31, 1995 and 1996, the Company increased (decreased) by
$(696,000) and $4,320,000, respectively, the amount ascribed to the Redeemable
Warrants to reflect estimated redemption value. Concurrent with the consummation
of the Recapitalization and IPO, the Company increased the redemption value by
$2,203,000 to reflect the $12.00 per share IPO price. The adjustments to
redemption value were charged (credited) to accumulated deficit.
51
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of December 31, 1996, the number of cumulative convertible preferred
shares authorized to be issued consisted of 8,314,018 shares in various series
("Preferred Stock"). All Preferred Stock was without par value. As of December
31, 1994, 1995 and 1996, there were 4,022,705, 4,022,705 and 6,847,705 shares
outstanding, respectively. At December 31, 1996, the Company also had Preferred
Stock warrants outstanding to purchase a total of 52,784 preferred shares at an
exercise price of $1.263 per share.
On February 19, 1997, the Company reorganized as a Delaware corporation. In
conjunction with the reorganization, the Company established a $.01 par value
for its Preferred Stock and increased the number of preferred shares authorized
to 18,314,018 shares, which includes 10,000,000 shares of a newly designated
series of preferred stock. As part of the Recapitalization, which occurred
concurrent with the IPO, all issued and outstanding shares of Preferred Stock
were converted into .28357 of a share of common stock. The Recapitalization also
provided for the cashless exercise and conversion of all Preferred Stock
warrants into 10,206 common shares. There were no shares of Preferred Stock or
warrants to purchase Preferred Stock outstanding as of December 31, 1997.
On February 9, 1996, certain members of Company management purchased for
$112,000 an aggregate of 75,000 preferred shares. On February 20, 1996, the
Company sold 2,000,000 preferred shares at $3.25 per share and issued Redeemable
Warrants to purchase 194,618 common shares to a related party (Note 22).
Proceeds from the sale aggregating $492,000 were ascribed to the Redeemable
Warrants to reflect their estimated fair market value on the issuance date. The
proceeds from the sale, net of issuance costs of $558,000, were used to fund the
Minority Interest Acquisition.
On September 18, 1996, the Company sold 750,000 preferred shares at $4.00
per share and issued Redeemable Warrants to purchase 49,079 common shares to
related parties (Note 22). Proceeds from the sale aggregating $124,000 were
ascribed to the Redeemable warrants to reflect their estimated fair market value
on the issuance date. The proceeds from the sale, net of issuance costs of
$137,000, were used to fund the ADS acquisition.
NOTE 16 - COMMON STOCK
At December 31, 1996 the Company was authorized to issue 4,253,550 common
shares, without par value and, in addition to the Redeemable Warrants, had
issued non-redeemable warrants to purchase a total of 9,355 common shares at an
exercise price of $4.454 per share. On February 19, 1997, in conjunction with
reorganizing as a Delaware corporation, the Company established a $.01 par value
for its common stock and increased to 9,924,950 the number of common shares
authorized. As of December 31, 1997, a total of 527,156 common shares were
reserved for issuance upon exercise of stock options outstanding under the
Company's stock option plan.
As part of the Recapitalization, the holders of the non-redeemable warrants
agreed to the cashless exercise and conversion of all warrants outstanding into
6,379 common shares. As described in Note 2, Redeemable Warrants to purchase
70,893 common shares at an exercise price of $14.11 per share remained after the
Recapitalization. Concurrent with the consummation of the IPO, the mandatory
redemption feature of these warrants was terminated and, consequently, became
non-redeemable warrants. In December 1997, the holders of these warrants elected
to exercise all of the warrants on a cashless basis and convert the warrants
into 16,130 common shares. No non-redeemable warrants were outstanding as of
December 31, 1997.
52
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - COMMON STOCK (CONTINUED)
The Company has a qualified stock option plan for key employees under which
options to purchase common shares may be granted. The plan permits the granting
of incentive stock options, as defined by Section 422 of the Internal Revenue
Code, non-qualified stock options, restricted stock options and stock
appreciation rights. The plan expires in 2003. Options generally vest in equal
installments over five years from the date of grant and remain exercisable until
December 31, 2002.
The following table summarizes the status of the Company's stock option plan
at December 31, 1995, 1996, and 1997 and the activity for the three years ended
December 31, 1997:
1995 1996 1997
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
Options outstanding at beginning of year........ 185,029 $ 0.529 208,423 $ 0.529 355,001 $ 1.724
Granted......................................... 37,573 0.529 147,031 3.413 163,662 15.574
Cancelled....................................... (14,179) 0.529 (453) 0.529 (17,403) 6.228
--------- --------- ---------
Options outstanding at end of year.............. 208,423 0.529 355,001 1.724 501,260 6.089
--------- --------- ---------
--------- --------- ---------
Options exercisable at end of year.............. 85,581 0.529 141,845 0.633 200,444 0.921
--------- --------- ---------
--------- --------- ---------
The following table summarizes information about stock options outstanding
and stock options exercisable at December 31, 1997:
OPTIONS OUSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- ------------------ -------------- ---------------- ------------- -------------- -------------
$0.529 - $1.234 303,998 7.0 years $ 0.724 194,556 $ 0.622
7.053 - 16.75 197,262 9.7 years 14.357 5,888 10.802
------- -------
501,260 8.1 years 6.089 200,444 0.921
------- -------
------- -------
The Company believes the per share exercise price of options granted through
February 1996 and subsequent to January 1997 approximated the fair market value
of the underlying common stock on the grant date. The exercise price of certain
options granted from February 1996 to January 1997 were deemed to be below the
fair market value of the underlying common stock on the grant date and such
difference is being recognized as additional compensation expense in the
consolidated financial statements on a straight line basis over the vesting
period of the underlying options. Compensation expense recognized was $158,000
and $240,000 for the years ended December 31, 1996 and 1997, respectively.
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
53
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - COMMON STOCK (CONTINUED)
the method of SFAS 123, the Company's net income (loss) and net income (loss)
per common share would have been as follows (amounts in thousands, except per
share data):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Net income (loss)
As reported...................................................................... $ (3,446) $ (817) $ 3,176
Pro forma........................................................................ (3,446) (822) 3,129
Net income (loss) per common share
Basic
As reported.................................................................... (38.45) (73.92) .14
Pro forma...................................................................... (38.45) (73.98) .13
Diluted
As reported.................................................................... (38.45) (73.92) .20
Pro forma...................................................................... (38.45) (73.98) .19
Weighted-average fair value of options granted
Compensatory stock options....................................................... -- 5.91 5.70
Non-compensatory stock options................................................... 0.10 0.10 5.08
For purposes of the pro forma presentation, the fair value for options
granted subsequent to the IPO (April 16, 1997) was estimated on the dates of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 5.8%; expected dividend
yield of 0%; expected life of 2.5 years; and expected stock price volatility of
39.9%. The fair value for options granted prior to the IPO was estimated on the
dates of grant using a minimum value method, assuming a risk-free interest rate
of 5.5% to 5.7% with no projected dividend yields. Unlike other permitted option
pricing models, the minimum value method excludes stock price volatility, which
could not be reasonably estimated for the Company prior to the IPO.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models, as well as the minimum value method, do not
necessarily provide a reliable single measure of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
granted in fiscal years after December 31, 1994 is amortized to expense over the
options' vesting period. The effects of applying SFAS 123 in providing the pro
forma disclosures are not likely to be representative of the effects on the
reported consolidated financial statements in future years.
NOTE 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED)
Income (loss) per common share ("EPS") have been computed pursuant to the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which became effective after December 15, 1997; all periods prior
thereto have been restated to conform with the provisions of this statement.
54
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - INCOME (LOSS) PER COMMON SHARE (UNAUDITED) (CONTINUED)
The following table provides a reconciliation of both income (loss) before
extraordinary item and the number of common shares used in the computations of
"basic" EPS, which utilizes the weighted average number of common shares
outstanding without regard to dilutive potential common shares, and "diluted"
EPS, which includes all such shares (amounts in thousands, except per share
data).
YEAR ENDED
DECEMBER 31, 1997
----------------------------
PRO FORMA
AS FOR
1995 1996 REPORTED RECAPITALIZATION
--------- --------- ----------- AND IPO
---------------
(UNAUDITED)
Income (loss) applicable to common shares - Numerator
Before extraordinary item...................................... $ (3,446) $ (817) $ 5,254 $ 6,154
Adjustment to Redeemable Warrant redemption value.............. 696 (4,320) (2,203) --
Preferred Stock dividends...................................... (557) (1,220) (442) --
--------- --------- ----------- ------
Income (loss) applicable to common shares (basic)............ (3,307) (6,357) 2,609 6,154
Preferred Stock dividends...................................... -- -- 442 --
--------- --------- ----------- ------
Income (loss) applicable to common shares (diluted).......... $ (3,307) $ (6,357) $ 3,051 $ 6,154
--------- --------- ----------- ------
--------- --------- ----------- ------
Shares - Denominator
Weighted average common shares outstanding (basic)............. 86 86 3,803 5,304
Add dilutive effect of
Preferred Stock outstanding prior to conversion.............. 1,141 1,710 559 --
Common stock options......................................... -- 188 302 302
Warrants outstanding prior to cancellation, conversion or
exercise................................................... 389 660 228 --
Less antidilutive effect of potential common shares............ (1,530) (2,558) -- --
--------- --------- ----------- ------
Weighted average common shares outstanding (diluted)......... 86 86 4,892 5,606
--------- --------- ----------- ------
--------- --------- ----------- ------
EPS - Income (loss) before extraordinary item
Basic.......................................................... $ (38.45) $ (73.92) $ .69 $ 1.16
Diluted........................................................ (38.45) (73.92) .62 1.10
Pro forma for Recapitalization and IPO assumes each occurred on January 1,
1997 (Note 2). Therefore, pro forma income per common share, before
extraordinary item, is computed using pro forma income before adjustment to
redemption value of Redeemable Warrants and Preferred Stock dividends. Pro forma
income before extraordinary item also reflects the sale by the Company of
2,700,000 shares of common stock in the IPO and the application of the net
proceeds therefrom.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is a party to a license agreement with McDonnell Douglas
Corporation (now part of The Boeing Company) pursuant to which the Company may
request certain data in order to design and market modifications to aircraft
manufactured by McDonnell Douglas. The agreement provides that the
55
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company will pay McDonnell Douglas a royalty of five percent of the net sales
price of all modifications sold by the Company for which the Company has
requested data from McDonnell Douglas. The Company has requested data for a
single modification, which modification the Company believes is exempt from the
obligation to pay royalties under the agreement. In 1996, McDonnell Douglas made
a demand for $650,000 for royalties. The Company does not believe that it is
obligated to McDonnell Douglas in any amount. However, there can be no assurance
that the Company will not be required to pay royalties to McDonnell Douglas.
Certain subsidiaries of the Company have recently been served in an action
filed in federal court by American International Airways, Inc., relating to the
conversion and modification of two Boeing 747 aircraft from passenger to
freighter configuration. No specific amount of damages is sought. The events in
question occurred prior to the Company's purchase of the relevant businesses
from its prior owner; the Company intends to deny any liability, and further
believes that it is indemnified with respect to any such liabilities.
The Company and its subsidiaries are also involved in other routine legal
and administrative proceedings incident to the normal conduct of business.
Management believes the ultimate disposition of these matters, as well as the
matters discussed in the preceding paragraphs, will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
LEASE COMMITMENTS
The Company leases certain facilities and equipment under various capital
and operating leases. Certain leases require payment of property taxes and
include escalation clauses. Future minimum capital and operating lease
commitments under non-cancelable leases are as follows as of December 31, 1997
(amounts in thousands):
CAPITAL OPERATING
LEASES LEASES
----------- -----------
Year ending December 31,
1998................................................................... $ 318 $ 2,909
1999................................................................... 203 2,732
2000................................................................... 50 2,274
2001................................................................... 21 1,855
2002................................................................... 17 1,771
2003 and thereafter.................................................... 9 5,547
----- -----------
Total minimum payments required........................................ 618 $ 17,088
-----------
-----------
Less amount representing future interest cost.......................... (71)
-----
Recorded obligation under capital leases............................. $ 547
-----
-----
Total rental expense charged to operations for the years ended December 31,
1995, 1996 and 1997 was $1,531,000, $1,614,000 and $2,065,000, respectively.
56
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19 - CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
During the three years ended December 31, 1997, the Company paid the
following amounts in cash (amounts in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Interest............................................................................. $ 3,275 $ 2,983 $ 2,842
Income taxes......................................................................... 33 132 300
INFORMATION ON NONCASH INVESTING AND FINANCING ACTIVITIES
Certain noncash investing and financing transactions occurred during the
three years ended December 31, 1997, as follows (amounts in thousands):
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Debt incurred for the acquisition of machinery and equipment......................... $ 33 $ 414 $ 182
Financing provided by sellers in connection with acquisitions........................ -- 3,492 --
Liabilities assumed in connection with acquisitions.................................. -- 2,687 2,581
The Recapitalization and IPO described in Note 2 included a series of
noncash transactions.
57
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20 - FOREIGN OPERATIONS AND EXPORT REVENUES
FOREIGN OPERATIONS
The Company operates in one business segment - avionics components
manufacturing and integration services. Domestic and foreign operations consist
of (amounts in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
Revenues
Gross revenues
United States.............................................................. $ 54,394 $ 64,383 $ 109,490
Western Europe............................................................. 9,388 10,882 12,240
--------- ---------- ----------
Total gross revenues..................................................... 63,782 75,265 121,730
--------- ---------- ----------
Less interarea transfers
United States.............................................................. (814) (1,496) (2,448)
Western Europe............................................................. (7,129) (8,670) (10,379)
--------- ---------- ----------
Total interarea transfers................................................ (7,943) (10,166) (12,827)
Net revenues
United States.............................................................. 53,580 62,887 107,042
Western Europe............................................................. 2,259 2,212 1,861
--------- ---------- ----------
Total net revenues....................................................... $ 55,839 $ 65,099 $ 108,903
--------- ---------- ----------
--------- ---------- ----------
Income from operations
United States................................................................ $ 1,354 $ 3,727 $ 10,833
Western Europe............................................................... 501 746 1,572
Interarea eliminations....................................................... (20) (222) (410)
--------- ---------- ----------
Total income from operations............................................... $ 1,835 $ 4,251 $ 11,995
--------- ---------- ----------
--------- ---------- ----------
Consolidated assets
United States................................................................ $ 34,425 $ 67,889 $ 98,076
Western Europe............................................................... 6,490 6,015 6,421
Interarea eliminations....................................................... (4,586) (4,638) (5,360)
--------- ---------- ----------
Total consolidated assets.................................................. $ 36,329 $ 69,266 $ 99,137
--------- ---------- ----------
--------- ---------- ----------
Interarea sales are accounted for at prices that the Company believes would
be equivalent to unaffiliated customer sales. Interarea transfers and
eliminations reflect the shipment of raw component parts between areas.
Operating income excludes net interest expense, other income (expense) and
minority interests that are directly attributable to the related operations.
Corporate assets are included with United States assets.
EXPORT REVENUES
Consolidated revenues include export revenues of $5,161,000, $6,484,000 and
$12,430,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Export revenues are primarily derived from sales to customers located in Western
Europe, the Far East and Canada.
58
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 - EMPLOYEE BENEFIT PLANS
The Company's Swiss subsidiary sponsors a defined contribution pension plan
covering substantially all of its employees as required by Swiss law.
Contributions and costs, which are shared equally by the Company and the
employees, are determined as a percentage of each covered employees' salary.
Company contributions and costs associated with the plan were $148,000, $151,000
and $157,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Substantially all of the Company's domestic employees are eligible to
participate in a 401(k) defined contribution plan (the "Plan"). Participation in
the Plan is at the discretion of each individual employee who is eligible to
participate. Each participating employee is permitted to contribute up to a
maximum amount defined in the Plan. The Company and its subsidiaries may make
periodic discretionary matching contributions to the Plan. The Company made
matching contributions of $41,000 during the year ended December 31, 1997. No
matching contributions were made to the plan during the years ended December 31,
1995 and 1996. The costs associated with administering the plan were not
significant for any period presented.
NOTE 22 - RELATED PARTY TRANSACTIONS
The Company's transactions with related parties included in the consolidated
financial statements are summarized in the table below (amounts in thousands):
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Senior Subordinated Lenders
Interest and advisory fees
Earned during the period......................................................... $ 912 $ 983 $ 358
Accrued and payable as of year end............................................... -- 43 --
Purchase of Convertible Notes, Preferred Stock and Redeemable Warrants in
conjunction with ADS acquisition................................................. -- 2,000 --
Fees and expenses earned........................................................... -- 36 --
Debt repaid with IPO proceeds
Senior subordinated debt......................................................... -- -- 7,000
Convertible Notes................................................................ -- -- 1,000
Investors
Purchases of debt and equity securities
Preferred Stock and Redeemable Warrants in conjunction with Minority Interest
acquisition.................................................................... -- 6,500 --
Convertible Notes, Preferred Stock and Redeemable Warrants in conjunction with
ADS acquisition................................................................ -- 4,000 --
Fees and expenses earned........................................................... -- 74 --
Convertible Notes
Interest earned during the period................................................ -- 86 98
Interest accrued and payable as of year end...................................... -- 86 --
Repaid with IPO proceeds......................................................... -- -- 2,000
59
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22 - RELATED PARTY TRANSACTIONS (CONTINUED)
Each related party is described below:
Senior Subordinated Lenders - Own 8.9% of the Company's issued and
outstanding common stock at December 31, 1997, were represented on the Company's
Board of Directors in 1995 and 1996, and provided a portion of the Company's
Convertible Notes financing and the Subordinated Debt (Notes 10, 11, 14, 15 and
16). The ownership percentage reflects the cashless exercise and conversion of
all Preferred Stock, Preferred Stock warrants, common stock warrants and
Redeemable Warrants into 451,370 common shares in conjunction with the
Recapitalization (Note 2).
Investors - Own 16.4% of the Company's issued and outstanding common stock
at December 31, 1997, are represented on the Company's Board of Directors, and
provided a portion of the Company's Convertible Notes and Preferred Stock
financing (Notes 10, 14, 15 and 16). The ownership percentage reflects the
cashless exercise and conversion of all Preferred Stock and Redeemable Warrants
into 840,808 common shares in conjunction with the Recapitalization (Note 2).
60
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND CHARGED TO END OF
CLASSIFICATION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------------------- ------------ ------------ --------------- ----------- ------------
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts................ $ 243,000 $ 66,000 $ 62,000(A) $ 112,000 $ 259,000
Reserve for excess, slow moving and potentially
obsolete material............................ $ 893,000 $ 416,000 -- $ 155,000 $ 1,154,000
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts................ $ 259,000 $ 68,000 $ 71,000(B) $ 19,000 $ 379,000
Reserve for excess, slow moving and potentially
obsolete material............................ $ 1,154,000 $ 1,055,000 -- $ 116,000 $ 2,093,000
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts................ $ 379,000 $ 111,000 $ 174,000(C) $ 177,000 $ 487,000
Reserve for excess, slow moving and potentially
obsolete material............................ $ 2,093,000 $ 1,374,000 $ 59,000(D) $ 162,000 $ 3,364,000
- ------------------------
(A) Comprised of the following:
Effect of foreign currency translation; $ 3,000
Recovery of amounts previously written off. 59,000
------------
$ 62,000
------------
------------
(B) Comprised of the following:
Effect of foreign currency translation; $ (4,000)
Recovery of amounts previously written off; 20,000
Attributable to companies acquired. 55,000
------------
$ 71,000
------------
------------
(C) Attributable to company acquired.
(D) Attributable to companies acquired.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the directors and
executive officers of the Company as of December 31, 1997:
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------------
R. Jack DeCrane 51 Chairman of the Board and Chief Executive Officer
R.G. MacDonald 67 Vice Chairman of the Board
Robert A. Rankin 45 Chief Financial Officer, Secretary and Treasurer
Roger L. Keller 53 Group Vice President of Systems
Charles H. Becker 51 Group Vice President of Components
James R. Bergman (a) 55 Director
Paul H. Cascio (b) 36 Director
Jonathan A. Sweemer (a)(b) 42 Director
Mitchell I. Quain 46 Director
- ------------------------
(a) Member of the Compensation Committee.
(b) Member of the Audit Committee.
The Company is currently evaluating other independent non-management
director candidates and anticipates that the Company's independent,
non-management directors will continue to represent a majority on each of the
Company's Audit Committee and Compensation Committee.
The Company's Board is divided into three classes. Directors of each class
will be elected at the annual meeting of stockholders of the Company (the
"Annual Meeting") held in the year in which the term of such class expires and
will serve thereafter for three years. Messrs. MacDonald and Quain serve as
class I directors for a term expiring as of the Annual Meeting in 1998. Messrs.
Cascio and Bergman serve as class II directors for a term expiring as of the
Annual Meeting in 1999. Messrs. DeCrane and Sweemer serve as class III directors
for a term expiring as of the Annual Meeting in 2000.
R. Jack DeCrane is the founder of the Company and has been Chairman of the
Board of Directors of the Company since it was founded in December 1989. Mr.
DeCrane served as President of the Company, which office then included the
duties of chief executive officer, until April 1993 when he was elected to the
newly-created office of Chief Executive Officer. Prior to founding the Company,
Mr. DeCrane held various positions at the aerospace division of B.F. Goodrich.
Mr. DeCrane was a Group Vice President at the aerospace division of B.F.
Goodrich with management responsibility for three business units from 1986 to
1989. Mr. DeCrane is his own appointee to the Board under the terms of an
agreement between the Company and certain of its shareholders and lenders.
R.G. MacDonald has been Vice Chairman of the Company since December 1996.
Mr. MacDonald has been a member of the Board since December 1994, and was
President of the Company from April 1993 until December 1996. The office of
President of the Company included the duties of chief operating officer. Mr.
MacDonald was a consultant to the Company from February 1993 to April 1993.
Prior to joining the Company, he served as President and Chief Executive Officer
of MDB Systems, Inc., a manufacturer of ruggedized computer disk systems, from
1990 to 1993.
62
Robert A. Rankin has been Chief Financial Officer, Secretary and Treasurer
of the Company since November 1993. Mr. Rankin joined the Company in 1992 as
Senior Vice President of Tri-Star, which office then included the duties of
chief financial officer of the Company. Prior to joining the Company, he was
Vice President of Finance for the Chandler Evans Control Systems subsidiary of
Coltec Industries, Inc., an aerospace company, from 1990 to 1992. He was
employed by the aerospace division of B.F. Goodrich from 1977 to 1989 in various
capacities, the most recent of which was as Controller of the aircraft wheel and
brake business unit of B.F. Goodrich.
Roger L. Keller has been Group Vice President of Systems of the Company
since December 1996. Mr. Keller has also served as President of Hollingsead
since December 1995, and was employed by the Company as Vice President of
Engineering, Sales and Program Management from May 1994 through November 1995.
Prior to joining the Company, he was Vice President of Engineering for Active
Noise and Vibration Technologies, Inc. from 1992 to 1994, and Vice President of
Sales, Marketing and Program Management for the Airtransport Services division
of Honeywell from 1986 to 1992.
Charles H. Becker has been Group Vice President of Components of the Company
since December 1996, and President of Tri-Star since December 1994. Prior to
joining the Company, Mr. Becker was President of the Interconnect Systems
Division of Microdot, Inc. from 1984 to 1994.
James R. Bergman has been a member of the Board since October 1991. He is a
founder and, since 1974, has been a general partner of DSV Associates, DSV
Partners III and DSV. Mr. Bergman is DSV's appointee to the Board under the
terms of an agreement between the Company and certain of its shareholders and
lenders. See "Shareholders Agreement" in Item 13. In August 1996, Mr. Bergman
became a general partner of Brantley Venture Partners III, L.P. (an affiliate of
Brantley). He is also a director of Maxim Integrated Products, Inc. and Quad
Systems Corporation.
Paul H. Cascio has been a member of the Board since September 1996. He is a
general partner of Brantley. Mr. Cascio also serves as Vice President and
Secretary of Brantley Capital Corporation. Mr. Cascio is Brantley's appointee to
the Board under the terms of an agreement between the Company and certain of its
shareholders and lenders. See "Shareholders Agreement" in Item 13. From December
1987 through May 1996, when he became a general partner of Brantley Venture
Partners, Mr. Cascio was a Managing Director and head of the Industrial
Manufacturing and Services Group in the corporate finance department at Dean
Witter Reynolds Inc.
Jonathan A. Sweemer has been a member of the Board since February 1996. He
has been a member of Nassau Capital L.L.C., the general partner of Nassau
Capital Partners, L.P. (collectively with NAS Partners I, L.L.C., referred to in
this document as "Nassau") since January 1995. From May 1992 to December 1994,
Mr. Sweemer was a Vice President for Princeton University Investment Co. Mr.
Sweemer is Nassau's appointee to the Board under the terms of an agreement
between the Company and certain of its shareholders and lenders. See
"Shareholders Agreement" in Item 13.
Mitchell I. Quain has been a member of the Board since May 1997. He is an
Executive Vice President of and has been a member of the board of Furman Selz
LLC since May 1997. From June 1975 to May 1997, he was a Managing Director of
and held other positions with Schroder & Co. Inc. Mr. Quain has more than 20
years of financial and operating experience. Certain stock options have been
granted to Mr. Quain, pursuant to a Board resolution providing for such options
for non-management directors who do not serve pursuant to the terms of the
Shareholder Agreement. See "Independent Director" in Item 13.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT; BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
James R. Bergman, a director of the Company, filed a Form 5 under Section
16(a) of the Exchange Act (a "Form 5") dated March 5, 1998, indicating a failure
to timely file a Form 3 under Section 16(a) of the Exchange Act (a "Form 3")
when required under Section 16(a), disclosing his indirect beneficial ownership
of a portion of the 493,439 shares of Common Stock directly owned by DSV (of
which he is a
63
general partner) at the time of the IPO. The foregoing Form 5 was required to
have been filed by February 15, 1998.
Jonathan Sweemer, a director of the Company, filed a Form 5 dated February
25, 1998, indicating a failure to timely file: (i) a Form 3 with respect to
869,160 shares of Common Stock beneficially owned by Nassau Capital Partners
L.P., at the time of the IPO, and (ii) a Form 4 under Section 16(a) of the
Exchange Act (a "Form 4") with respect to the acquisition of 33,526 additional
shares of Common Stock issued by the Company to Nassau Capital Partners L.P. to
correct a disputed calculation regarding the number of shares that should have
been issued as part of the 1997 recapitalization of the Company. Mr. Sweemer
disclaims any beneficial interest in any of the foregoing shares. The foregoing
Form 5 was required to have been filed by February 15, 1998.
Nassau Capital Partners L.P., filed a Form 5 dated February 25, 1998,
indicating a failure to timely file: (i) a Form 3 disclosing its beneficial
ownership of 869,160 shares of Common Stock at the time of the IPO, and (ii) a
Form 4 with respect to the acquisition of 33,526 additional shares of Common
Stock issued by the Company to correct a disputed calculation regarding the
number of shares that should have been issued as part of the 1997
recapitalization of the Company. The foregoing Form 5 was required to have been
filed by February 15, 1998.
Paul H. Cascio, a director of the Company, filed a Form 5 dated March 9,
1998, indicating a failure to timely file a Form 3, disclosing his indirect
beneficial ownership of the 490,928 shares of Common Stock directly owned by
Brantley Venture Partners, L.P. (of which he is a general partner of a general
partner), at the time of the IPO. The foregoing Form 5 was required to have been
filed by February 15, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is incorporated herein by reference to the
Company's definitive proxy statement, which will be filed with the Commission
within 120 days after the close of the fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 is incorporated herein by reference to the
Company's definitive proxy statement, which will be filed with the Commission
within 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is incorporated herein by reference to the
Company's definitive proxy statement, which will be filed with the Commissions
within 120 days after the close of the fiscal year.
64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. (i) FINANCIAL STATEMENTS
In addition to the Consolidated Financial Statements and Report of
Independent Accountants included at Item 8, the following are included
herein:
Schedules for the three years ended December 31, 1997:
II--Valuation and Qualifying Accounts, page 61.
All other Schedules have been omitted as inapplicable, or not required,
or because the required information is included in the Consolidated
Financial Statements or the notes thereto.
(ii) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant (incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
3.2 Bylaws of Registrant (incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-19939)
4.1 Specimen Certificate (incorporated by reference to Exhibit 2(1) of the Company's Form 8-A/A filed
April 14, 1997)
10.1 1993 Share Incentive Plan (incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.2 Tax Sharing Agreement dated March 15, 1993 between the Company TSH and Hollingsead International,
Inc. (incorporated by reference to the Company's Registration Statement on Form S-1, Registration
No. 333-19939)
10.3 Employment Agreement dated September 1, 1994 between the Company and R. Jack DeCrane (incorporated
by reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.4 Employment Agreement dated June 28, 1993 between the Company and R. G. MacDonald (incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.5 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's
Trust f/b/o John R. Allard (incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.6 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and the Allard Children's
Trust f/b/o Michael E. Allard (incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.7 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Younes Nazarian
(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.8 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and David and Angela
Nazarian, Trustees of the Nazarian Family Trust (incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
65
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
10.9 Restrictive Covenant Agreement among the Company, ADS Acquisition, Inc. and Gerald R. Allard,
Trustee of the Gerald R. Allard Revocable Trust of 1994 (incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.10.1 Fifth Amended and Restated Registration Rights Agreement dated January 10, 1997 among the Company,
Banc One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV
Parnters, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital
Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS
Partners I L.L.C. (incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-47457).
10.11 Fourth Amended and Restated Shareholders Agreement dated September 18, 1996 among the Company, Banc
One Capital Partners Corporation, Brantley Venture Partners II, L.P., R. Jack DeCrane, DSV
Partners, IV, Electra Investment Trust, P.L.C., Internationale Nederlanden (U.S.) Capital
Corporation, Electra Associates, Inc., The Provident Bank, Nassau Capital Partners L.P. and NAS
Partners I L.L.C. (incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.12 Lease dated September 1989 as amended on December 15, 1993 among Continental Development
Corporation, Tri-Star Electronics, Inc., and Cory Components, Inc. for real property in El Segundo,
CA (incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.13 Amended and Restated Credit Agreement, dated September 18, 1996, among the Company, ADS
Acquisition, Inc., Tri-Star Holdings, Inc., Tri-Star Electronics International, Inc., Tri-Star
Technologies, Inc., Tri-Star Technologies, Tri-Star Electronics Europe S.A., Mezzovico, Cory
Holdings, Inc., Cory Components, Inc., Hollingsead International, Inc., Hollingsead International
Limited, The Provident Bank, and Internationale Nederlanden (U.S.) Capital Corporation
(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.14 General Terms Agreement dated July 5, 1995 between the Boeing Company and Cory Components, Number
6-5752-0002 (incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.15 Special Business Provisions dated November 30, 1995 between the Boeing Company and Cory Components,
Number 6-5752-0004 (incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.16 Purchase Agreement 9423JC4548 between Boeing Defense & Space- Irving Co. and Cory Components,
January 1, 1995 through December 31, 1999 (incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-19939)
10.17 Electrical Contact Procurement Contract Letter of Agreement, dated June 28, 1993 between Boeing
Commercial Airplane Group and Tri-Star Electronics International (incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.18 Asset Purchase and Sale Agreement by and among Allard Industries, Inc., Gerald R. Allard, Trustee
of the Gerald R. Allard Revocable Trust of 1994, The Allard Children's Trust f/b/o John Allard, The
Allard Children's Trust f/b/o Michael E. Allard, Younes Nazarian and David and Angela Nazarian,
Trustees of the Nazarian Family Trust, the principal shareholders of Allard, the Company and ADS
Acquisition, Inc. (incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
66
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
10.19 Asset Purchase and Sale Agreement dated December 4, 1996 among the Company, EE Acquisition, Inc.,
William Lyon, and Elsinore LP (incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-19939)
10.20 Asset Purchase and Sale Agreement dated November 25, 1996 among AMP, Incorporated, the Whitaker
Corporation and DeCrane Aircraft Holdings, Inc. (incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.21 Stock Purchase Agreement, dated January 1, 1995, among the Company and Cory Components, Inc.
(incorporated by reference to the Company's Registration Statement on Form S-1, Registration No.
333-19939)
10.22 Securities Purchase Agreement, dated September 18, 1996 among the Company, Nassau Capital Partners
L.P., NAS Partners I L.L.C., and Electra Investment Trust P.L.C. (incorporated by reference to the
Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.23 Securities Purchase Agreement, dated February 20, 1996 among the Company, Nassau Capital Partners
L.P. and NAS Partners I L.L.C. (incorporated by reference to the Company's Registration Statement
on Form S-1, Registration No. 333-19939)
10.24 Securities Purchase Agreement dated November 2, 1994, as amended on February 20, 1996, among the
Company, Electra Investment Trust P.L.C. and Electra Associates, Inc. (incorporated by reference to
the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.25 Letter Agreement dated November 24, 1994 between the Company and Charles Becker (incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.31 Share Purchase Agreement dated February 9, 1996 among the Company, R.G. MacDonald, Charles Becker,
Robert Rankin (incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.32 Form of Amendment Agreement dated March 7, 1997 between the Company and Nassau (incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.33 401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the
Company and The Lincoln National Life Insurance Company (incorporated by reference to the Company's
Registration Statement on Form S-1, Registration No. 333-19939)
10.34 Agreement dated January 10, 1997 among the Company and its shareholders relating to the 1997
recapitalization of the Company (incorporated by reference to the Company's Registration Statement
on Form S-1, Registration No. 333-19939)
10.35 Loan and Security Agreement dated April 15, 1997 among DeCrane Aircraft Holdings, Inc., Bank of
America Illinois, as agent and lender, and the other lenders party thereto (incorporated by
reference to the Company's Registration Statement on Form S-1, Registration No. 333-19939)
10.35.1 Amendment No. 1 to Loan and Security Agreement dated October 21, 1997 among DeCrane Aircraft
Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto
(incorporated by reference to Exhibit 10.1 of the Company's Form 8-K/A (Amendment No. 1), filed
November 14, 1997)
67
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------
10.35.2 Amendment No. 2 to Loan and Security Agreement dated February 6, 1998 among DeCrane Aircraft
Holdings, Inc., Bank of America Illinois, as agent and lender, and the other lenders party thereto
(incorporated by reference to the Company's Registration Statement on Form S-1 (Amendment No. 1)
filed March 11, 1998, Registration No. 333-47457)
10.36 Agreement dated July 30, 1996 between Interactive Flight Technologies and Hollingsead
International, Inc (incorporated by reference to the Company's Registration Statement on Form S-1,
Registration No. 333-19939)
10.37 Stock Purchase and Sale Agreement dated as of October 31, 1997 by and among Robert S. Brown,
Richard Marsh, Wayne Richie, and DeCrane Aircraft Holdings, Inc (incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K/A (Amendment No. 1), filed November 14, 1997)
10.38 Lease among Kilroy Realty, L.P., Kilroy Realty Corporation and Hollingsead International for real
property in Garden Grove, California (incorporated by reference to Exhibit 10.38 to the Company's
Registration Statement on Form S-1 filed March 6, 1998, Registration No. 333-47457)
21.1 List of Subsidiaries of Registrant (incorporated by reference to Exhibit 21.1 to the Company's
Registration Statement on Form S-1 (Amendment No. 1) filed March 11, 1998, Registration No.
333-47457)
27.1 Financial Data Schedule for the twelve months ended December 31, 1997.
27.2 Financial Data Schedule (restated) for the twelve months ended December 31, 1996, three months
ended March 31, 1997, six months ended June 30, 1997 and nine months ended September 30, 1997.
b. REPORTS ON FORM 8-K
On November 3, 1997, the Company filed a Form 8-K Current Report with
respect to its signing of a definitive agreement to acquire Audio International,
Inc. and subsidiary.
On November 14, 1997, the Company filed a Form 8-K Current Report with
respect to the consummation of its acquisition of Audio International, Inc. and
subsidiary.
On January 28, 1998, the Company filed Amendment No. 1 to its Form 8-K
Current Report dated November 14, 1997 with respect to the consummation of its
acquisition of Audio International, Inc. and subsidiary. The amendment included
the audited consolidated financial statements of Audio International, Inc. and
subsidiary, including notes thereto and auditors' report thereon, as of December
31, 1996 and 1995 and for each of the years two years in the period ended
December 31, 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Registrant: DECRANE AIRCRAFT HOLDINGS, INC.
Date: March 30, 1998 By: /s/ R. JACK DECRANE
--------------------------------------
R. Jack DeCrane
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ---------------------------------------------- ---------------------------------------------- -----------------
/s/ R. JACK DECRANE Chairman of the Board, Chief Executive Officer
------------------------------------ and Director March 30, 1998
R. Jack DeCrane
/s/ R.G. MACDONALD
------------------------------------ Vice Chairman of the Board and Director March 30, 1998
R.G. MacDonald
/s/ ROBERT A. RANKIN Chief Financial Officer, Secretary and
------------------------------------ Treasurer (Principal accounting officer) March 30, 1998
Robert A. Rankin
/s/ JAMES R. BERGMAN
------------------------------------ Director March 30, 1998
James R. Bergman
/s/ PAUL H. CASCIO
------------------------------------ Director March 30, 1998
Paul H. Cascio
/s/ MITCHELL I. QUAIN
------------------------------------ Director March 30, 1998
Mitchell I. Quain
/s/ JONATHAN A. SWEEMER
------------------------------------ Director March 30, 1998
Jonathan A. Sweemer
69