**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

                                                                                

----

 

# **FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2001**

** **

## **Commission File Number 333-70363**

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**DECRANE HOLDINGS CO.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                     |   | **13-4019703**      |
|----------------------------------|--------|---------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer    |
| incorporation or  organization)  |   | Identification No.) |

 

**c/oCredit Suisse First Boston / DLJ Merchant Banking Partners II, L.P.**

**ElevenMadison Avenue, New York, NY 10010**

(Address, including zipcode, of principal executive offices)

 

**(212)892-3000**

(Registrant's telephonenumber, including area code)

----

 

**c/o DLJMerchant Banking Partners II, L.P.**

**277 ParkAvenue, New York, NY 10172**

**(212)892-3000**

 

(Former address andtelephone number of principal executive offices, if changed since last report)

----

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

ýYes     oNo

----

 

The number of shares ofRegistrant's Common Stock, $.01 par value, outstanding as ofNovember 9, 2001 was 3,914,274 shares.

 

 

** **

**Table ofContents**

 

 
| **Part I - Financial  Information**  |
|--------------------------------------|
|                                 |   |
|                                 |   |
| **Item 1.**                          | **Financial Statements  (Unaudited)** |
|                                 |   |
|                                 | Consolidated Balance Sheets  as of September 30, 2001 and December 31, 2000 |
|                                 |   |
|                                 | Consolidated  Statements of Operations for the three months and nine months ended September  30, 2001 and 2000 |
|                                 |   |
|                                 | Consolidated  Statements of Stockholders’ Equity for the nine months ended September 30,  2001 |
|                                 |   |
|                                 | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2001 and  2000 |
|                                 |   |
|                                 | Condensed  Notes to Consolidated Financial Statements |
|                                 |   |
| **Item  2.**                         | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|                                 |   |
|                                 | Overview |
|                                 |   |
|                                 | Recent Developments |
|                                 |   |
|                                 | Results of Operations |
|                                 |   |
|                                 | Liquidity and Capital  Resources |
|                                 |   |
|                                 | Recently  Issued Accounting Pronouncements |
|                                 |   |
| **Item  3.**                         | **Quantitative  and Qualitative Disclosure About Market Risk** |
|                                 |   |
|                                 | Interest Rate Risk |
|                                 |   |
|                                 | Foreign Currency  Exchange Risk |
|                                 |   |
| **Part II – Other Information** |
|                                 |   |
| **Item 1.**                          | **Legal Proceedings** |
|                                 |   |
| **Item 6.**                          | **Exhibits and  Reports on Form 8-K** |
|                                 |   |
|                                 | Exhibits |
|                                 |   |
|                                 | Reports on Form 8-K |
|                                 |   |
| **Signatures**                       |

 

 

**PART I –FINANCIAL INFORMATION**

**ITEM 1.          FINANCIAL STATEMENTS**

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

**Consolidated Balance Sheets**

**(Inthousands, except share data)**

|                                                                                                                                                    |   | **September  30,** |    | **December  31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|--------|
|                                                                                                                                                    |   | **2001**           |    | **2000**          |   |
|                                                                                                                                                    |   | **(Unaudited)**    |    |              |   |
| **Assets**                                                                                                                                              |   |               |    |              |   |
| Current assets                                                                                                                                          |   |               |    |              |   |
| Cash and cash  equivalents                                                                                                                              |   | $                  | 7,445   |              | $      | 8,199 |   |
| Accounts  receivable, net                                                                                                                               |   | 69,779             |    | 53,131            |   |
| Inventories                                                                                                                                             |   | 91,935             |    | 83,677            |   |
| Deferred income  taxes                                                                                                                                  |   | 13,057             |    | 15,090            |   |
| Prepaid expenses  and other current assets                                                                                                              |   | 2,148              |    | 987               |   |
| Total current  assets                                                                                                                                   |   | 184,364            |    | 161,084           |   |
|                                                                                                                                                    |   |               |    |              |   |
| Property and  equipment, net                                                                                                                            |   | 63,886             |    | 59,491            |   |
| Other assets,  principally intangibles, net                                                                                                             |   | 424,922            |    | 439,582           |   |
| Total assets                                                                                                                                            |   | $                  | 673,172 |              | $      | 660,157 |   |
|                                                                                                                                                    |   |               |    |              |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholders’ Equity**                                                                  |   |               |    |              |   |
| Current  liabilities                                                                                                                                    |   |               |    |              |   |
| Current portion  of long-term debt                                                                                                                      |   | $                  | 14,499  |              | $      | 9,289 |   |
| Accounts payable                                                                                                                                        |   | 24,154             |    | 20,304            |   |
| Accrued  liabilities                                                                                                                                    |   | 48,474             |    | 70,472            |   |
| Income taxes  payable                                                                                                                                   |   | 1,303              |    | 3,505             |   |
| Total current  liabilities                                                                                                                              |   | 88,430             |    | 103,570           |   |
|                                                                                                                                                    |   |               |    |              |   |
| Long-term debt                                                                                                                                          |   | 389,772            |    | 373,990           |   |
| Deferred income  taxes                                                                                                                                  |   | 43,944             |    | 37,013            |   |
| Other long-term  liabilities                                                                                                                            |   | 2,492              |    | 2,650             |   |
|                                                                                                                                                    |   |               |    |              |   |
| Commitments and  contingencies (Note 8)                                                                                                                 |   |               |    |              |   |
|                                                                                                                                                    |   |               |    |              |   |
| Minority  interest in preferred stock of subsidiary                                                                                                     |   | 26,906             |    | 23,179            |   |
| Mandatorily  redeemable preferred stock                                                                                                                 |   | 52,390             |    | 47,252            |   |
|                                                                                                                                                    |   |               |    |              |   |
| Stockholders’  equity                                                                                                                              |   |               |    |              |   |
| Undesignated  preferred stock, $.01 par value, 1,140,000 shares authorized; none issued and  outstanding as of September 30, 2001 and December 31, 2000 |   | —             |    | —            |   |
| Common stock,  $.01 par value, 10,000,000 shares authorized; 3,914,274 shares issued and  outstanding as of September 30, 2001 and December 31, 2000    |   | 39                 |    | 39                |   |
| Additional  paid-in capital                                                                                                                             |   | 77,437             |    | 82,298            |   |
| Notes receivable  for shares sold                                                                                                                       |   | (2,657             | )       | (2,552            | )      |
| Accumulated  deficit                                                                                                                                    |   | (3,877             | )       | (5,595            | )      |
| Accumulated  other comprehensive loss                                                                                                                   |   | (1,704             | )       | (1,687            | )      |
| Total  stockholders’ equity                                                                                                                        |   | 69,238             |    | 72,503            |   |
| Total  liabilities and stockholders’ equity                                                                                                        |   | $                  | 673,172 |              | $      | 660,157 |   |

 

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

**ConsolidatedStatements of Operations**

**(Inthousands)**
|                                                |   | **Three Months Ended** |    | **Nine Months Ended** |   |
|-----------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                                |   | **September  30,**     |    | **September  30,**    |   |
|                                                |   | **2001**               |    | **2000**              |   | **2001** |   | **2000** |   |
|                                                |   | **(Unaudited)**        |    |
| Revenues                                            |   | $                      | 100,185 |                  | $      | 93,149 |   | $ | 301,696 |   | $ | 254,421 |   |
| Cost of sales                                       |   | 67,409                 |    | 62,018                |   | 201,299 |   | 169,527 |   |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Gross profit                                        |   | 32,776                 |    | 31,131                |   | 100,397 |   | 84,894 |   |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Operating  expenses                                 |   |                   |    |                  |   |   |   |   |   |
| Selling, general  and administrative expenses       |   | 13,963                 |    | 11,526                |   | 42,059 |   | 32,465 |   |
| Amortization of  intangible assets                  |   | 4,936                  |    | 4,699                 |   | 14,857 |   | 12,949 |   |
| Total operating  expenses                           |   | 18,899                 |    | 16,225                |   | 56,916 |   | 45,414 |   |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Income from  operations                             |   | 13,877                 |    | 14,906                |   | 43,481 |   | 39,480 |   |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Other expenses                                      |   |                   |    |                  |   |   |   |   |   |
| Interest expense                                    |   | 9,654                  |    | 11,264                |   | 29,984 |   | 29,977 |   |
| Minority  interest in preferred stock of subsidiary |   | 1,287                  |    | 1,000                 |   | 3,727 |   | 1,000 |   |
| Other expenses  (income), net                       |   | (25                    | )       | 55                    |   | 92 |   | 228 |   |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Income before  provision for income taxes           |   | 2,961                  |    | 2,587                 |   | 9,678 |   | 8,275 |   |
| Provision for  income taxes                         |   | 3,386                  |    | 2,697                 |   | 7,960 |   | 5,643 |   |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Net income  (loss)                                  |   | (425                   | )       | (110                  | )      | 1,718 |   | 2,632 |   |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Noncash  preferred stock dividend accretion         |   | (1,772                 | )       | (1,544                | )      | (5,138 | ) | (4,477 | ) |
|                                                |   |                   |    |                  |   |   |   |   |   |
| Net loss  applicable to common stockholders         |   | $                      | (2,197  | )                     | $      | (1,654 | ) | $ | (3,420 | ) | $ | (1,845 | ) |

 

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

**ConsolidatedStatements of Stockholders’ Equity**

**(Inthousands, except share data)**

|                                       |   |             |   |       |   | **Additional****Paid-in****Capital** |   | **Notes****Receivable****For  Shares****Sold** |   | **Accumulated****Deficit** |   | **Accumulated****Other****Comprehensive****Loss** |   |   |   |
|--------------------------------------------|--------|------------------|--------|------------|--------|--------------------------------------|--------|------------------------------------------------|--------|----------------------------|--------|---------------------------------------------------|--------|--------|--------|
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |
|                                       |   | **Common Stock** |   |       |   |                                 |   |                                           |   |
|                                       |   | **Shares**       |   | **Amount** |   |                                 |   |                                           |   | **Total**                  |   |
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   |   |   |
| Balance, December 31, 2000                 |   | 3,914,274        |   | $          | 39     |                                 | $      | 82,298                                         |   | $                          | (2,552 | )                                                 | $      | (5,595 | )      | $ | (1,687 | ) | $ | 72,503 |   |
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   |   |   |
| Comprehensive income                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   |   |   |
| Net income                                 |   | —           |   | —     |   | —                               |   | —                                         |   | 1,718                      |   | —                                            |   | 1,718  |   |
| Translation adjustment                     |   | —           |   | —     |   | —                               |   | —                                         |   | —                     |   | (17                                               | )      | (17    | )      |
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   | 1,701  |   |
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   |   |   |
| Noncash preferred stock dividend accretion |   | —           |   | —     |   | (5,138                               | )      | —                                         |   | —                     |   | —                                            |   | (5,138 | )      |
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   |   |   |
| Compensatory stock option expense          |   | —           |   | —     |   | 277                                  |   | —                                         |   | —                     |   | —                                            |   | 277    |   |
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   |   |   |
| Notes receivable interest accrued          |   | —           |   | —     |   | —                               |   | (105                                           | )      | —                     |   | —                                            |   | (105   | )      |
|                                       |   |             |   |       |   |                                 |   |                                           |   |                       |   |                                              |   |   |   |
| Balance, September 30, 2001 (Unaudited)    |   | 3,914,274        |   | $          | 39     |                                 | $      | 77,437                                         |   | $                          | (2,657 | )                                                 | $      | (3,877 | )      | $ | (1,704 | ) | $ | 69,238 |   |

 

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

**ConsolidatedStatements of Cash Flows**

**(Inthousands)**

|                                                                              |   | **Nine  Months Ended** |   |
|-----------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                              |   | **September  30,**     |   |
|                                                                              |   | **2001**               |   | **2000** |   |
|                                                                              |   | **(Unaudited)**        |   |
| **Cash  flows from operating activities**                                         |   |                   |   |   |   |
| Net income                                                                        |   | $                      | 1,718  |   | $ | 2,632 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |   |                   |   |   |   |
| Depreciation and  amortization                                                    |   | 25,561                 |   | 21,233 |   |
| Deferred income  taxes                                                            |   | 6,801                  |   | 4,019 |   |
| Minority interest  in preferred stock of subsidiary                               |   | 3,727                  |   | 1,000 |   |
| Other, net                                                                        |   | 605                    |   | 797 |   |
| Changes in  assets and liabilities, net of effect from acquisitions               |   |                   |   |   |   |
| Accounts  receivable                                                              |   | (17,072                | )      | (12,891 | ) |
| Inventories                                                                       |   | (8,260                 | )      | (9,011 | ) |
| Prepaid expenses  and other assets                                                |   | (2,684                 | )      | (1,162 | ) |
| Accounts payable                                                                  |   | 3,832                  |   | 904 |   |
| Accrued  liabilities                                                              |   | (7,894                 | )      | (9,610 | ) |
| Income taxes  payable                                                             |   | 11                     |   | 981 |   |
| Other long-term  liabilities                                                      |   | (143                   | )      | (1,108 | ) |
| Net cash  provided by (used for) operating activities                             |   | 6,202                  |   | (2,216 | ) |
|                                                                              |   |                   |   |   |   |
| **Cash  flows from investing activities**                                         |   |                   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired                                 |   | (13,529                | )      | (87,215 | ) |
| Capital  expenditures                                                             |   | (9,794                 | )      | (17,701 | ) |
| Other, net                                                                        |   | 635                    |   | 71 |   |
| Net cash used  for investing activities                                           |   | (22,688                | )      | (104,845 | ) |
|                                                                              |   |                   |   |   |   |
| **Cash  flows from financing activities**                                         |   |                   |   |   |   |
| Net senior  credit facility borrowings                                            |   | 19,600                 |   | 71,400 |   |
| Proceeds from  the sale of preferred stock of subsidiary                          |   | —                 |   | 25,000 |   |
| Proceeds from  the sale of common stock                                           |   | —                 |   | 7,976 |   |
| Other long-term  borrowings                                                       |   | 1,989                  |   | 2,958 |   |
| Principal  payments on term debt, capitalized leases and other debt               |   | (5,198                 | )      | (4,096 | ) |
| Deferred  financing costs                                                         |   | (580                   | )      | (2,000 | ) |
| Other, net                                                                        |   | (118                   | )      | (247 | ) |
| Net cash  provided by financing activities                                        |   | 15,693                 |   | 100,991 |   |
|                                                                              |   |                   |   |   |   |
| Effect of  foreign currency translation on cash                                   |   | 39                     |   | — |   |
|                                                                              |   |                   |   |   |   |
| Net decrease in  cash and cash equivalents                                        |   | (754                   | )      | (6,070 | ) |
| Cash and cash  equivalents at beginning of period                                 |   | 8,199                  |   | 7,918 |   |
| Cash and cash  equivalents at end of period                                       |   | $                      | 7,445  |   | $ | 1,848 |   |

 

 

The accompanying notesare an integral part of the consolidated financial statements.

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

**CondensedNotes to Consolidated Financial Statements**

**(Unaudited)**

**Note 1.           ConsolidatedFinancial Statements**

The consolidated interim financial statements includedin this report are unaudited. The Company believes the interim financialstatements are presented on a basis consistent with the audited financialstatements. The Company also believes that the interim financial statementscontain all adjustments necessary for a fair statement of the results for suchinterim periods. All of these adjustments are normal recurring adjustments. Theresults of operations for interim periods do not necessarily predict theoperating results for the full year. The consolidated balance sheet as ofDecember 31, 2000 has been derived from audited financial statements but doesnot include all disclosures required by accounting principles generallyaccepted in the United States of America as permitted by interim reportingrequirements. The information included in this report should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the audited financial statements and relatednotes included in the Company’s 2000 Form 10-K. Some reclassifications havebeen made to prior periods’ financial statements to conform to the 2001presentation.

 

**Note 2.           UnauditedPro Forma Results of Operations for 2000 Acquisitions**

Unaudited pro forma consolidated results of operationsare presented in the table below for the nine months ended September 30, 2000.The pro forma results of operations reflects the companies acquired during2000, which are not reflected in the September 30, 2000 historical results, asif all of the acquisitions were consummated as of January 1, 2000. Historicalresults for 2001, which reflects the companies acquired during 2000, arepresented for comparability. Amounts are in thousands.

|                          |   | **Nine  Months Ended** |    |
|-------------------------------|--------|------------------------|---------|
|                          |   | **September  30,**     |    |
|                          |   | **2001**               |    | **2000** |   |
|                          |   | **Historical**         |    | **Pro  Forma** |   |
|                          |   | **(Unaudited)**        |    |
| Revenues                      |   | $                      | 301,696 |   | $ | 278,051 |   |
| EBITDA, as  defined (Note 10) |   | 67,789                 |    | 66,985 |   |
| Net income                    |   | 1,718                  |    | 1,069 |   |
|                               |        |                        |         |  |  |  |  |

 

The pro forma results of operations do not purport torepresent what actual results would have been if the transactions describedabove occurred on such dates or to project the results of operations for anyfuture period. The above information reflects adjustments for inventory,depreciation, amortization, general and administrative expenses and interest expensebased on the new cost basis and debt and capital structure of the Companyfollowing the acquisitions.

 

**Note 3.           Inventories**

Inventories are comprised of the following as ofSeptember 30, 2001 and December 31, 2000 (amounts in thousands):

|               |   | **September  30,** |   | **December  31,** |   |
|--------------------|--------|--------------------|--------|-------------------|--------|
|               |   | **2001**           |   | **2000**          |   |
|               |   | **(Unaudited)**    |   |              |   |
| Raw materials      |   | $                  | 49,441 |              | $      | 49,235 |   |
| Work-in process    |   | 34,752             |   | 26,749            |   |
| Finished goods     |   | 7,742              |   | 7,693             |   |
| Total  inventories |   | $                  | 91,935 |              | $      | 83,677 |   |

 

Inventoried costs are not in excess of estimatedrealizable value and include direct engineering, production and tooling costs,and applicable manufacturing overhead. In accordance with industry practice,inventoried costs include amounts relating to programs and contracts with longproduction cycles. Included above are program costs, principally engineering,of $14,545,000 at September 30, 2001 and $8,603,000 at December 31, 2000related to long-term contracts that will be recoverable based on future sales.Periodic assessments are performed to ensure recoverability of program costsand adjustments are made, if necessary, to reduce inventoried costs toestimated realizable value. No adjustments were required in 2001 and 2000.

 

**Note 4.           AccruedLiabilities**

Accrued liabilities are comprised of the following asof September 30, 2001 and December 31, 2000 (amounts in thousands):

|                                                             |   | **September  30,** |   | **December  31,** |   |
|------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|
|                                                             |   | **2001**           |   | **2000**          |   |
|                                                             |   | **(Unaudited)**    |   |              |   |
| Acquisition  related contingent consideration                    |   | $                  | 6,204  |              | $      | 20,154 |   |
| Customer  advances and deposits                                  |   | 9,389              |   | 14,082            |   |
| Salaries, wages,  compensated absences and payroll related taxes |   | 14,066             |   | 15,337            |   |
| Accrued interest                                                 |   | 8,092              |   | 3,730             |   |
| Other accrued  liabilities                                       |   | 10,723             |   | 17,169            |   |
| Total accrued  liabilities                                       |   | $                  | 48,474 |              | $      | 70,472 |   |

 

**Note 5.           Long-TermDebt**

Long-term debt includes the following amounts as ofSeptember 30, 2001 and December 31, 2000 (amounts in thousands):

|                                                                                            |   | **September  30,** |    | **December  31,** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|--------|
|                                                                                            |   | **2001**           |    | **2000**          |   |
|                                                                                            |   | **(Unaudited)**    |    |              |   |
| Senior credit  facility                                                                         |   |               |    |              |   |
| $25 million  working capital revolving line of credit                                           |   | $                  | —  |              | $      | — |   |
| $25 million  acquisition revolving line of credit                                               |   | 12,000             |    | 12,400            |   |
| Term loans                                                                                      |   | 280,132            |    | 263,443           |   |
|                                                                                            |   |               |    |              |   |
| 12% senior  subordinated notes                                                                  |   | 100,000            |    | 100,000           |   |
|                                                                                            |   |               |    |              |   |
| Capital lease  obligations and equipment term debt financing, secured by property and equipment |   | 8,404              |    | 5,231             |   |
|                                                                                            |   |               |    |              |   |
| Other  indebtedness                                                                             |   | 3,735              |    | 2,205             |   |
| Total long-term  debt                                                                           |   | 404,271            |    | 383,279           |   |
| Less current  portion                                                                           |   | (14,499            | )       | (9,289            | )      |
| Long-term debt,  less current portion                                                           |   | $                  | 389,772 |              | $      | 373,990 |   |

 

In April 2001, the Company amended its senior creditfacility and borrowed the remaining $20,000,000 of funds committed under itsterm loan facility. The net proceeds were used to repay amounts thenoutstanding under the acquisition revolving line of credit. Principal paymentsfor the additional term loan are due in $50,000 quarterly installments through2005 and $4,763,000 quarterly installments through 2006. The term loan bearsinterest, at the Company’s option, based on a margin of either 2.75% over theprime rate or 4.00% over the LIBOR rate.

 

**Note 6.           IncomeTaxes**

The provision for income taxes differs from the amountdetermined by applying the applicable U.S. statutory federal rate to incomebefore income taxes primarily due to the effects of state and foreign incometaxes and non-deductible expenses, principally goodwill amortization andminority interest in preferred stock of subsidiary. The difference in theeffective tax rates between periods is mostly a result of the relationship ofnon-deductible expenses to income before income taxes.

 

**Note 7.           CapitalStructure**

**Mandatorily Redeemable Preferred Stock**

The table below summarizes the increase in mandatorilyredeemable preferred stock during the nine months ended September 30, 2001.

|                                              |   | **DeCrane  Aircraft**                                |   | **DeCrane  Holdings**    |   |
|---------------------------------------------------|--------|------------------------------------------------------|--------|--------------------------|--------|
|                                              |   | **16%  Preferred Stock**                             |   | **14%  Preferred Stock** |   |
|                                              |   | **Number**                                           |   | **Mandatory**            |   | **Unamortized** |   | **Net** |   | **Number** |   | **Mandatory** |   |
|                                              |   | **of**                                               |   | **Redemption**           |   | **Issuance** |   | **Book** |   | **of** |   | **Redemption** |   |
|                                              |   | **Shares**                                           |   | **Value**                |   | **Discount** |   | **Value** |   | **Shares** |   | **Value** |   |
|                                              |   | **(in  thousands, except share and per share data)** |   |
| Balance, December  31, 2000                       |   | 270,400                                              |   | $                        | 27,040 |   | $ | (3,861 | ) | $ | 23,179 |   | 342,417 |   | $ | 47,252 |   |
| Accrued  dividends and redemption value accretion |   | 33,763                                               |   | 3,376                    |   | 351 |   | 3,727 |   | — |   | — |   |
| Noncash dividend  accretion                       |   | —                                               |   | —                   |   | — |   | — |   | — |   | 5,138 |   |
| Balance,  September 30, 2001 (Unaudited)          |   | 304,163                                              |   | $                        | 30,416 |   | $ | (3,510 | ) | $ | 26,906 |   | 342,417 |   | $ | 52,390 |   |
|                                              |   |                                                 |   |                     |   |   |   |   |   |   |   |   |   |
| Per share  liquidation value as of                |   |                                                 |   |                     |   |   |   |   |   |   |   |   |   |
| September 30, 2001  (Unaudited)                   |   |                                                 |   | $                        | 100.00 |   |   |   |   |   |   |   | $ | 153.00 |   |

 

DeCrane Aircraft’s 16% preferred stock is reflected asminority interest in preferred stock of subsidiary in the consolidatedfinancial statements.

***DeCrane Aircraft 16% MandatorilyRedeemable Preferred Stock***

Holders of the preferred stock are entitled toreceive, when, as and if declared, dividends at a rate equal to 16% per annum.Prior to June 30, 2005, DeCrane Aircraft may, at its option, pay dividendseither in cash or by the issuance of additional shares of preferred stock. Forthe nine months ended September 30, 2001, DeCrane Aircraft elected toissue 33,763 additional shares in lieu of cash dividend payments; such shareshave been reflected as a component of minority interest in preferred stock ofsubsidiary.

***DeCrane Holdings 14% MandatorilyRedeemable Preferred Stock***

Holders of the preferred stock are entitled toreceive, when, as and if declared, dividends at a rate equal to 14% per annum.Prior to September 30, 2005, dividends are not paid in cash but instead accreteto the liquidation value of the preferred stock, which, in turn increases theredemption obligation. For the nine months ended September 30, 2001, theliquidation preference on the DeCrane Holdings preferred stock increased by$5,138,000 to reflect the noncash dividend accretion.

 

**Note 8.           Commitmentsand Contingencies**

**Contingent Acquisition Consideration**

The determinable amounts of the Company’s remainingmaximum contingent consideration payment obligations, as of September 30, 2001,are summarized below. The contingent consideration is payable based upon theacquired companies level of attainment of their defined performance criteria infuture periods and excludes amounts earned and recorded through September 30,2001 (Notes 4 and 9). Provided the defined performance criteria is attained forthe future years ending December 31, the Company’s determinable maximumcontingent consideration payment obligation will be (amounts in thousands):

|                                   |   | **(Unaudited)** |   |
|----------------------------------------|--------|-----------------|--------|
| For  the year ending December 31,      |   |            |   |
| 2001                                   |   | $               | 700    |   |
| 2002                                   |   | 600             |   |
| Total  maximum determinable obligation |   | $               | 1,300  |   |

 

Contingent consideration, if any, is payable duringthe first quarter of the following year.

 

**Note 9.           ConsolidatedStatements of Cash Flows**

The following information supplements the Company’sconsolidated statements of cash flows (amounts in thousands):

|                                                                                  |   | **Nine  Months Ended** |   |
|---------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                  |   | **September  30,**     |   |
|                                                                                  |   | **2001**               |   | **2000** |   |
|                                                                                  |   | **(Unaudited)**        |   |
| Components of  cash paid for acquisitions                                             |   |                   |   |   |   |
| Fair value of  assets acquired                                                        |   | $                      | — |   | $ | 77,904 |   |
| Liabilities  assumed                                                                  |   | —                 |   | (20,516 | ) |
| Cash paid                                                                             |   | —                 |   | 57,388 |   |
| Less cash  acquired                                                                   |   | —                 |   | (292 | ) |
| Net cash paid  for companies acquired during the period                               |   | —                 |   | 57,096 |   |
|                                                                                  |   |                   |   |   |   |
| Contingent  consideration paid for previously completed acquisitions                  |   | 17,075                 |   | 29,825 |   |
| Cash purchase  price reductions received related to previously completed acquisitions |   | (3,718                 | )      | — |   |
| Additional  acquisition related expenses                                              |   | 172                    |   | 294 |   |
| Total cash paid  for acquisitions                                                     |   | $                      | 13,529 |   | $ | 87,215 |   |

 

During the nine months ended September 30, 2001, theCompany settled its asserted claims against the sellers of two companiesacquired in 2000 for breach of representation and warranty provisions containedin the purchase agreements. The Company received $3,718,000 from the sellersupon entering into the settlement agreements, which also provided that theCompany pay in 2002 a minimum of $3,125,000 of previously contingentconsideration for the year ending December 31, 2001. The $3,125,000 minimumcontingent consideration payable is reflected as an accrued liability as ofSeptember 30, 2001.

**Note 10.         BusinessSegment Information**

The Company supplies products and services to thegeneral aviation industry. The Company’s subsidiaries are organized into threegroups, each of which are strategic businesses that are managed separatelybecause each business develops, manufactures and sells distinct products andservices. The groups and a description of their businesses are as follows:

•     *CabinManagement* – provides interior cabin components for the corporateaircraft market, including furniture, cabinetry, seats and in-flightentertainment systems;

•     *SpecialtyAvionics* – designs, engineers and manufactures electroniccomponents, display devices and interconnect components and assemblies; and

•     *SystemsIntegration* – provides auxiliary fuel tanks, auxiliary power unitsand system integration services.

Management utilizes more than one measurement toevaluate group performance and allocate resources, however, EBITDA isconsidered to be the primary measurement of overall group economic returns andcash flows. Management defines EBITDA as earnings before interest, incometaxes, depreciation and amortization, restructuring and asset impairmentcharges, acquisition related charges and other noncash and nonoperatingcharges. This is consistent with the manner in which the Company’s lenders andultimate investors measure its overall performance.

The accounting policies of the groups aresubstantially the same as those described in the summary of significantaccounting policies in Note 1 to the audited financial statements. Sometransactions are recorded at the Company’s corporate headquarters and are notallocated to the groups, such as, most of the Company’s cash and cashequivalents, debt and related net interest expense, corporate headquarterscosts and income taxes.

|                         |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                         |   | **2001**                               |    | **2000**                              |   | **2001** |   | **2000** |   |
|                         |   | **(Unaudited)**                        |    |
| Revenues                     |   |                                   |    |                                  |   |   |   |   |   |
| Cabin Management             |   | $                                      | 50,719  |                                  | $      | 50,303 |   | $ | 155,590 |   | $ | 127,081 |   |
| Specialty  Avionics          |   | 31,902                                 |    | 28,164                                |   | 94,999 |   | 81,006 |   |
| Systems  Integration         |   | 18,528                                 |    | 14,870                                |   | 53,023 |   | 47,262 |   |
| Inter-group  elimination (1) |   | (964                                   | )       | (188                                  | )      | (1,916 | ) | (928 | ) |
| Consolidated  totals         |   | $                                      | 100,185 |                                  | $      | 93,149 |   | $ | 301,696 |   | $ | 254,421 |   |
|                         |   |                                   |    |                                  |   |   |   |   |   |
| EBITDA (2)                   |   |                                   |    |                                  |   |   |   |   |   |
| Cabin Management             |   | $                                      | 10,703  |                                  | $      | 12,115 |   | $ | 33,791 |   | $ | 33,496 |   |
| Specialty  Avionics          |   | 9,014                                  |    | 7,491                                 |   | 26,243 |   | 19,622 |   |
| Systems  Integration         |   | 4,407                                  |    | 3,925                                 |   | 13,281 |   | 10,881 |   |
| Corporate (3)                |   | (1,845                                 | )       | (1,491                                | )      | (5,146 | ) | (4,836 | ) |
| Inter-group  elimination (4) |   | (281                                   | )       | 119                                   |   | (380 | ) | 119 |   |
| Consolidated  totals         |   | $                                      | 21,998  |                                  | $      | 22,159 |   | $ | 67,789 |   | $ | 59,282 |   |

 

 
|                             |   | **September  30,** |    |
|----------------------------------|--------|--------------------|---------|
|                             |   | **2001**           |    | **2000** |   |
|                             |   | **(Unaudited)**    |    |
| Total assets (as  of period end) |   |               |    |   |   |
| Cabin Management                 |   | $                  | 330,445 |   | $ | 282,364 |   |
| Specialty  Avionics              |   | 225,462            |    | 229,198 |   |
| Systems  Integration             |   | 77,642             |    | 81,604 |   |
| Corporate (5)                    |   | 39,939             |    | 28,259 |   |
| Inter-group  elimination (6)     |   | (316               | )       | (288 | ) |
| Consolidated  totals             |   | $                  | 673,172 |   | $ | 621,137 |   |

 

----

| (1)    |   | Inter-group sales are accounted for at prices comparable to sales to  unaffiliated customers, and are eliminated in consolidation. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                               |
| (2)    |   | The table below reconciles EBITDA to consolidated income from  operations and income before income taxes (amounts in thousands).   |

 

|                                                |   | **Three  Months Ended** |   | **Nine  Months Ended** |   |
|-----------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                |   | **September  30,**      |   | **September  30,**     |   |
|                                                |   | **2001**                |   | **2000**               |   | **2001** |   | **2000** |   |
|                                                |   | **(Unaudited)**         |   |
| Consolidated  EBITDA                                |   | $                       | 21,998 |                   | $      | 22,159 |   | $ | 67,789 |   | $ | 59,282 |   |
| Depreciation and  amortization (a)                  |   | (8,066                  | )      | (7,166                 | )      | (23,914 | ) | (19,537 | ) |
| Acquisition  related charges not capitalized        |   | (14                     | )      | (1                     | )      | (117 | ) | (8 | ) |
| Other noncash  charges                              |   | (41                     | )      | (86                    | )      | (277 | ) | (257 | ) |
| Consolidated  income from operations                |   | 13,877                  |   | 14,906                 |   | 43,481 |   | 39,480 |   |
|                                                |   |                    |   |                   |   |   |   |   |   |
| Interest expense                                    |   | (9,654                  | )      | (11,264                | )      | (29,984 | ) | (29,977 | ) |
| Minority  interest in preferred stock of subsidiary |   | (1,287                  | )      | (1,000                 | )      | (3,727 | ) | (1,000 | ) |
| Other (expenses)  income, net                       |   | 25                      |   | (55                    | )      | (92 | ) | (228 | ) |
| Consolidated  income before income taxes            |   | $                       | 2,961  |                   | $      | 2,587 |   | $ | 9,678 |   | $ | 8,275 |   |

----

|   |   | (a)                                                                                                                          |   | Reflects depreciation and amortization of long-lived assets, goodwill  and other intangible assets. Excludes amortization of deferred financing  costs, which are classified as a component of interest expense, of $570,000  and $593,000 for the three months ended September 30, 2001 and 2000,  respectively, and $1,647,000 and $1,696,000 for the nine months ended  September 30, 2001 and 2000, respectively. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                         |
| (3)    |   | Reflects the Company’s corporate headquarters costs and expenses not  allocated to the groups.                          |
|   |   |                                                                                                                         |
| (4)    |   | Reflects elimination of the effect of inter-group profits in  inventory.                                                     |
|   |   |                                                                                                                         |
| (5)    |   | Reflects the Company’s corporate headquarters assets, excluding  investments in and notes receivable from subsidiaries. |
|   |   |                                                                                                                         |
| (6)    |   | Reflects elimination of inter-group receivables and profits in  inventory as of period end.                                  |

**Note 11.         RecentlyIssued Accounting Pronouncements**

**SFAS Nos. 141 and 142**

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

SFAS No. 141 establishes accounting and reportingstandards for business combinations. SFAS No. 141 requires that all businesscombinations be accounted for using the purchase method of accounting andprovides criteria for the initial recognition and measurement of goodwill andother intangible assets. SFAS No. 141 is effective for all businesscombinations initiated or completed after June 30, 2001. For business combinationscompleted prior to July 1, 2001, SFAS No. 141 is effective concurrent with theadoption of SFAS No. 142.

SFAS No. 142 establishes accounting and reportingstandards for goodwill and other intangible assets subsequent to theiracquisition. SFAS No. 142 eliminates the current requirement to amortizegoodwill and other indefinite-lived intangible assets requiring insteadperiodic impairment testing with a loss charged to the results of operation inthe periods in which impairment occurs. Finite-lived intangible assets areamortized and are also subject to periodic impairment testing. Adoption of SFASNo. 142 is required for the Company’s fiscal year beginning January 1, 2002.

The Company is currently evaluating the impact the newaccounting standards will have on its financial position and results ofoperations upon adoption on January 1, 2002; there will be no impact on cashflows. While the full, net of tax, impact has yet to be determined, adoption ofthe new standards will result in the following:

•     Under the criteria established in SFAS No.141, the values ascribed to the assembled workforces acquired are notrecognized as an intangible asset apart from goodwill. As a result, the netbook value ascribed to the assembled workforces, net of deferred income taxliabilities, will be reclassified to goodwill as of January 1, 2002.

•     Adoption of SFAS No. 142 on January 1, 2002will reduce amortization expense in future periods. If SFAS No. 142 had beeneffective as of the beginning of 2001, goodwill and assembled workforcesamortization totaling $10,657,000 for the nine months endedSeptember 30, 2001 would have been eliminated.

The Company has until June 30, 2002 to complete itstransitional impairment testing of goodwill associated with adopting SFAS No.142 and until March 31, 2002 to complete its transitional impairment testing ofother intangible assets. The amount of impairment losses recognizable uponadoption, if any, is not known at this time.

**SFAS No. 144**

In October 2001, the Financial Accounting StandardsBoard issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets, ” which replaces SFAS No. 121, “Accounting for Impairment ofLong-Lived Assets and for Long-Lived to be Disposed Of” and also replaces andbroadens the provisions of APB Opinion No. 30, “Reporting Results of Operations– Reporting the Effects of Disposal of a Segment of a Business.

SFAS No. 144 establishes one accounting model, basedon framework established in SFAS No. 121, for the recognition, measurement andreporting of impairment of long-lived assets to be held and used andmeasurement of long-lived assets to be disposed of by sale. Adoption of SFASNo. 144 is required for the Company’s fiscal year beginning January 1, 2002although early application is permitted. The Company is currently evaluatingthe impact this new standard will have on its financial position, results ofoperations and cash flows.

 

**Note 12.         Impactof Events of September 11, 2001**

The September 11, 2001 terrorist attack on the UnitedStates is adversely impacting the commercial airline industry. All domesticairlines were grounded for a three-day period and, since resuming service, mostmajor U.S. carriers have announced substantially reduced flight schedules,temporary or permanent retirement of a portion of their fleets, and workforcereductions aggregating over 100,000 employees. As a result of the substantialreduction in airline traffic arising from the terrorist attack and itsaftermath, as well as other factors such as the weakening economy, the airlineindustry is expected to incur extremely large losses for the year 2001.Accordingly, the airlines appear to be taking measures to conserve cash in partby deferring or eliminating the purchase of parts and components for their fleetaircraft and by canceling or deferring the delivery of new aircraft on orderwith original equipment manufacturers. These actions, in turn, will have anunfavorable impact upon that portion of our business. The commercial andregional original equipment and aftermarket/retrofit portion of our business iscurrently estimated at approximately 28% of our revenues.

In addition, an estimated 64% of our revenues arecurrently derived from the corporate aircraft original equipment andaftermarket/retrofit business. We are unable to determine the impact of theterrorist attack on this portion of our business, although the weakeningeconomy may negatively impact this business as well.

In September 2001, the Financial Accounting StandardsBoard’s Emerging Issues Task Force issued EITF No. 01-10, “Accounting for theImpact of the September 11, 2001 Terrorist Acts,” which provides guidance onhow the costs related to the terrorist acts should be reported, how todetermine whether an asset impairment loss should be recognized and howliabilities for losses and other costs should be recognized and reported.

The Company has begun an assessment of potentiallosses and costs it may incur or actions that may be necessary as a result ofthe events of September 11th and its aftermath. But given therelatively brief period since that date, the Company is not currently able todetermine the impact that significant changes in industry conditions will haveon its consolidated financial position, results of operations or cash flows. Asa result, the Company’s financial statements as of and for the three months andnine months ended September 30, 2001 do not include any charges directly orindirectly resulting from the terrorist acts as addressed in EITF No. 01-10.However, given the magnitude of the events mentioned above and the possiblesubsequent effects, the impact could be material in future periods. As lossesand/or costs, if any, become estimable, they will be recognized as a componentof earnings from operations.

**Note 13.         Supplemental Condensed ConsolidatingFinancial Information**

In conjunction with the senior credit facility and 12%senior subordinated notes described in Note 5, the following condensedconsolidating financial information is presented segregating DeCrane Aircraft,as the issuer, and guarantor and non-guarantor subsidiaries. The accompanyingfinancial information in the guarantor subsidiaries column reflects thefinancial position, results of operations and cash flows for those subsidiariesguaranteeing the senior credit facility and the notes. DeCrane Holdings in nota guarantor of either the senior credit facility or the notes and is thereforereflected in the non-guarantor subsidiary column.

The guarantor subsidiaries are wholly-ownedsubsidiaries of the DeCrane Aircraft and their guarantees are full andunconditional on a joint and several basis. There are no restrictions on theability of the guarantor subsidiaries to transfer funds to the issuer in theform of cash dividends, loans or advances. Separate financial statements of theguarantor subsidiaries are not presented because management believes that suchfinancial statements would not be material to investors. Investments insubsidiaries in the following condensed consolidating financial information areaccounted for under the equity method of accounting. Consolidating adjustmentsinclude the following:

(1)       Elimination of investments insubsidiaries.

(2)       Elimination of intercompany accounts.

(3)       Elimination of intercompany sales betweenguarantor and non-guarantor subsidiaries.

(4)       Elimination of equity in earnings ofsubsidiaries.

 

 

**BalanceSheets**

 
|                                                                                     |   | **September 30, 2001 (Unaudited)** |       |
|------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                     |   |                               |       |   |   | **Non-** |   |   |   |   |   |
|                                                                                     |   |                               |       | **Guarantor** |   | **Guarantor** |   | **Consolidating** |   | **Consolidated** |   |
|                                                                                     |   | **Issuer**                         |       | **Subsidiaries** |   | **Subsidiaries** |   | **Adjustments** |   | **Total** |   |
|                                                                                     |   | **(in thousands)**                 | ** ** |
| **Assets**                                                                               |   |                               |       |   |   |   |   |   |   |   |   |
| Current assets                                                                           |   |                               |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                                  | 6,728      |   | $ | 223 |   | $ | 494 |   | $ | — |   | $ | 7,445 |   |
| Accounts receivable, net                                                                 |   | —                             |       | 67,778 |   | 2,001 |   | — |   | 69,779 |   |
| Inventories                                                                              |   | —                             |       | 90,029 |   | 1,906 |   | — |   | 91,935 |   |
| Other current assets                                                                     |   | 13,216                             |       | 1,851 |   | 138 |   | — |   | 15,205 |   |
| Total current assets                                                                     |   | 19,944                             |       | 159,881 |   | 4,539 |   | — |   | 184,364 |   |
|                                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 3,502                              |       | 57,535 |   | 2,849 |   | — |   | 63,886 |   |
| Other assets, principally intangibles, net                                               |   | 16,493                             |       | 398,488 |   | 9,941 |   | — |   | 424,922 |   |
| Investments in subsidiaries                                                              |   | 408,647                            |       | 21,214 |   | 125,989 |   | (555,850 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 262,681                            |       | 97,888 |   | 4,633 |   | (365,202 | )(2) | — |   |
| Total assets                                                                             |   | $                                  | 711,267    |   | $ | 735,006 |   | $ | 147,951 |   | $ | (921,052 | ) | $ | 673,172 |   |
|                                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
|                                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholders’ Equity**   |   |
| Current liabilities                                                                      |   |                               |       |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                                  | 13,066     |   | $ | 1,420 |   | $ | 13 |   | — |   | $ | 14,499 |   |
| Other current liabilities                                                                |   | 26,426                             |       | 45,741 |   | 1,764 |   | — |   | 73,931 |   |
| Total current liabilities                                                                |   | 39,492                             |       | 47,161 |   | 1,777 |   | — |   | 88,430 |   |
|                                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                                           |   | 379,757                            |       | 10,015 |   | — |   | — |   | 389,772 |   |
| Intercompany payables                                                                    |   | 97,888                             |       | 267,314 |   | — |   | (365,202 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 43,892                             |       | 1,869 |   | 675 |   | — |   | 46,436 |   |
|                                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                       |   | 26,906                             |       | — |   | — |   | — |   | 26,906 |   |
| Mandatorily redeemable preferred stock                                                   |   | —                             |       | — |   | 52,390 |   | — |   | 52,390 |   |
|                                                                                     |   |                               |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity                                                                |   |                               |       |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 123,332                            |       | 338,684 |   | 92,916 |   | (480,113 | )(1) | 74,819 |   |
| Retained earnings (deficit)                                                              |   | —                             |       | 69,963 |   | 1,897 |   | (75,737 | )(1) | (3,877 | ) |
| Accumulated other comprehensive loss                                                     |   | —                             |       | — |   | (1,704 | ) | — |   | (1,704 |   |
| Total stockholders’ equity                                                          |   | 123,332                            |       | 408,647 |   | 93,109 |   | (555,850 | ) | 69,238 |   |
| Total liabilities, mandatorily redeemable preferred stock and  stockholders’ equity |   | $                                  | 711,267    |   | $ | 735,006 | r | $ | 147,951 |   | $ | (921,052 | ) | $ | 673,172 |   |

 

 
|                                                                                     |   | **December 31, 2000** | ** ** |
|------------------------------------------------------------------------------------------|--------|-----------------------|------------|
|                                                                                     |   |                  |       |   |   | **Non-** |   |   |   |   | ** ** |
|                                                                                     |   |                  |       | **Guarantor** |   | **Guarantor** |   | **Consolidating** |   | **Consolidated** | ** ** |
|                                                                                     |   | **Issuer**            |       | **Subsidiaries** |   | **Subsidiaries** |   | **Adjustments** |   | **Total** | ** ** |
|                                                                                     |   | **(in thousands)**    | ** ** |
| **Assets**                                                                               |   |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Current assets                                                                           |   |                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                     | 7,553      |   | $ | 233 |   | $ | 413 |   | $ | — |   | $ | 8,199 |   |
| Accounts receivable, net                                                                 |   | —                |       | 51,396 |   | 1,735 |   | — |   | 53,131 |   |
| Inventories                                                                              |   | —                |       | 82,013 |   | 1,664 |   | — |   | 83,677 |   |
| Other current assets                                                                     |   | 14,814                |       | 1,118 |   | 145 |   | — |   | 16,077 |   |
| Total current assets                                                                     |   | 22,367                |       | 134,760 |   | 3,957 |   | — |   | 161,084 |   |
|                                                                                     |   |                  |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 4,423                 |       | 52,303 |   | 2,765 |   | — |   | 59,491 |   |
| Other assets, principally  intangibles, net                                              |   | 16,514                |       | 412,730 |   | 10,338 |   | — |   | 439,582 |   |
| Investments in subsidiaries                                                              |   | 394,794               |       | 20,739 |   | 123,994 |   | (539,527 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 251,725               |       | 92,991 |   | 3,863 |   | (348,579 | )(1) | — |   |
| Total assets                                                                             |   | $                     | 689,823    |   | $ | 713,523 |   | $ | 144,917 |   | $ | (888,106 | ) | $ | 660,157 |   |
|                                                                                     |   |                  |       |   |   |   |   |   |   |   |   |
|                                                                                     |   |                  |       |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity**   |   |
| Current liabilities                                                                      |   |                  |       |   |   |   |   |   |   |   |   |
| Current portion of long-term  debt                                                       |   | $                     | 7,997      |   | $ | 1,266 |   | $ | 26 |   | $ | — |   | $ | 9,289 |   |
| Other current liabilities                                                                |   | 38,635                |       | 54,384 |   | 1,262 |   | — |   | 94,281 |   |
| Total current liabilities                                                                |   | 46,632                |       | 55,650 |   | 1,288 |   | — |   | 103,570 |   |
|                                                                                     |   |                  |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                                           |   | 368,837               |       | 5,147 |   | 6 |   | — |   | 373,990 |   |
| Intercompany payables                                                                    |   | 92,991                |       | 255,588 |   | — |   | (348,579 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 36,742                |       | 2,344 |   | 577 |   | — |   | 39,663 |   |
|                                                                                     |   |                  |       |   |   |   |   |   |   |   |   |
| Minority interest in preferred  stock of subsidiary                                      |   | 23,179                |       | — |   | — |   | — |   | 23,179 |   |
| Mandatorily redeemable  preferred stock                                                  |   | —                |       | — |   | 47,252 |   | — |   | 47,252 |   |
|                                                                                     |   |                  |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity                                                                |   |                  |       |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 124,763               |       | 338,729 |   | 97,777 |   | (481,484 | )(1) | 79,785 |   |
| Retained earnings (deficit)                                                              |   | (3,321                | )          | 56,065 |   | (296 | ) | (58,043 | )(1) | (5,595 | ) |
| Accumulated other  comprehensive loss                                                    |   | —                |       | — |   | (1,687 | ) | — |   | (1,687 | ) |
| Total stockholders’ equity                                                          |   | 121,442               |       | 394,794 |   | 95,794 |   | (539,527 | ) | 72,503 |   |
| Total liabilities, mandatorily  redeemable preferred stock and stockholders’ equity |   | $                     | 689,823    |   | $ | 713,523 |   | $ | 144,917 |   | $ | (888,106 | ) | $ | 660,157 |   |

 

 

**Statementsof Operations**

 
|                                                |   | **Nine Months Ended September 30, 2001 (Unaudited)** | ** ** |
|-----------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                |   |                                                 |       |   |   | **Non-** |   |   |   |   | ** ** |
|                                                |   |                                                 |       | **Guarantor** |   | **Guarantor** |   | **Consolidating** |   | **Consolidated** | ** ** |
|                                                |   | **Issuer**                                           |       | **Subsidiaries** |   | **Subsidiaries** |   | **Adjustments** |   | **Total** | ** ** |
|                                                |   | **(in thousands)**                                   | ** ** |
| Revenue                                             |   | $                                                    | —     |   | $ | 299,019 |   | $ | 8,594 | $ | $ | (5,917 | )(3) | $ | 301,696 |   |
| Cost  of sales                                      |   | —                                               |       | 199,982 |   | 7,234 |   | (5,917 | )(3) | 201,299 |   |
|                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                               |       | 99,037 |   | 1,360 |   | — |   | 100,397 |   |
|                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses       |   | 6,790                                                |       | 34,658 |   | 611 |   | — |   | 42,059 |   |
| Amortization of intangible  assets                  |   | 152                                                  |       | 14,405 |   | 300 |   | — |   | 14,857 |   |
| Interest expense                                    |   | 29,082                                               |       | 887 |   | 15 |   | — |   | 29,984 |   |
| Minority interest in preferred  stock of subsidiary |   | —                                               |       | — |   | 3,727 |   | — |   | 3,727 |   |
| Intercompany charges                                |   | (18,055                                              | )          | 18,055 |   | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries                 |   | (13,898                                              | )          | (593 | ) | (5,445 | ) | 19,936 | (4) | — |   |
| Other expenses (income), net                        |   | 248                                                  |       | 151 |   | (307 | ) | — |   | 92 |   |
| Provision for income taxes  (benefit)               |   | (9,764                                               | )          | 17,576 |   | 148 |   | — |   | 7,960 |   |
|                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net income                                          |   | $                                                    | 5,445      |   | $ | 13,898 |   | $ | 2,311 |   | $ | (19,935 | ) | $ | 1,718 |   |

 

 
|                                                |   | **Nine Months Ended September 30, 2000  (Unaudited)** |   |
|-----------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                |   |                                                  |   |   |   | **Non-** |   |   |   |   |   |
|                                                |   |                                                  |   | **Guarantor** |   | **Guarantor** |   | **Consolidating** |   | **Consolidated** |   |
|                                                |   | **Issuer**                                            |   | **Subsidiaries** |   | **Subsidiaries** |   | **Adjustment** |   | **Total** |   |
|                                                |   | **(in thousands)**                                    |   |
| Revenues                                            |   | $                                                     | — |   | $ | 252,477 |   | $ | 8,838 |   | $ | (6,894 | )(3) | $ | 254,421 |   |
| Cost of sales                                       |   | —                                                |   | 169,591 |   | 6,830 |   | (6,894 | )(3) | 169,527 |   |
|                                                |   |                                                  |   |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                                |   | 82,886 |   | 2,008 |   | — |   | 84,894 |   |
|                                                |   |                                                  |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses       |   | 5,535                                                 |   | 25,969 |   | 961 |   | — |   | 32,465 |   |
| Amortization of intangible assets                   |   | 152                                                   |   | 12,479 |   | 318 |   | — |   | 12,949 |   |
| Interest expense                                    |   | 29,665                                                |   | 309 |   | 3 |   | — |   | 29,977 |   |
| Minority interest in preferred stock of  subsidiary |   | —                                                |   | — |   | 1,000 |   | — |   | 1,000 |   |
| Intercompany charges                                |   | (11,798                                               | )      | 11,798 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                  |   | (13,210                                               | )      | (696 | ) | (3,632 | ) | 17,538 |   | (4 | ) |
| Other expenses (income), net                        |   | 261                                                   |   | 61 |   | (94 | ) | — |   | 228 |   |
| Provision for income taxes (benefit)                |   | (14,237                                               | )      | 19,756 |   | 124 |   | — |   | 5,643 |   |
|                                                |   |                                                  |   |   |   |   |   |   |   |   |   |
| Net income                                          |   | $                                                     | 3,632  |   | $ | 13,210 |   | $ | 3,328 |   | $ | (17,538 | ) | $ | 2,632 |   |

 

 

 

**Statements of Cash Flows**

 
|                                                                |   | **Nine Months Ended September 30, 2001 (Unaudited)** | ** ** |
|---------------------------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                                |   |                                                 |       |   |   | **Non-** |   |   |   |   |   |
|                                                                |   |                                                 |       | **Guarantor** |   | **Guarantor** |   | **Consolidating** |   | **Consolidated** |   |
|                                                                |   | **Issuer**                                           |       | **Subsidiaries** |   | **Subsidiaries** |   | **Adjustments** |   | **Total** |   |
|                                                                |   | **(in thousands)**                                   | ** ** |
| **Cash flows from operating activities**                            |   |                                                 | ** ** |   | ** ** |   | ** ** |   |   |   | ** ** |
| Net income                                                          |   | $                                                    | 5,445      |   | $ | 13,898 |   | $ | 2,311 |   | $ | (19,936 | )(4) | $ | 1,718 |   |
| Noncash adjustments                                                 |   |                                                 |       |   |   |   |   |   |   |   |   |
| Equity in earnings of  subsidiaries                                 |   | (13,898                                              | )          | (593 | ) | (5,445 | ) | 19,936 | (4) | — |   |
| Other noncash adjustments                                           |   | 9,639                                                |       | 22,393 |   | 4,662 |   | — |   | 36,694 |   |
| Changes in working capital                                          |   | (3,766                                               | )          | (27,573 | ) | (871 | ) | — |   | (32,210 | ) |
| Net cash provided by (used  for) operating activities               |   | (2,580                                               | )          | 8,125 |   | 657 |   | — |   | 6,202 |   |
|                                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities**                            |   |                                                 |       |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions,  net of cash acquired                   |   | (13,529                                              | )          | — |   | — |   | — |   | (13,529 | ) |
| Capital expenditures and other                                      |   | (125                                                 | )          | (8,438 | ) | (596 | ) | — |   | (9,159 | ) |
| Net cash used for investing  activities                             |   | (13,654                                              | )          | (8,438 | ) | (596 | ) | — |   | (22,688 | ) |
|                                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities**                            |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net senior credit facility  borrowings                              |   | 19,600                                               |       | — |   | — |   | — |   | 19,600 |   |
| Other long-term borrowings                                          |   | —                                               |       | 1,989 |   | — |   | — |   | 1,989 |   |
| Principal payments on term  debt, capitalized leases and other debt |   | (3,611                                               | )          | (1,568 | ) | (19 | ) | — |   | (5,198 | ) |
| Deferred financing costs                                            |   | (580                                                 | )          | — |   | — |   | — |   | (580 | ) |
| Other, net                                                          |   | —                                               |       | (118 | ) | — |   | — |   | (118 | ) |
| Net cash provided by (used  for) financing activities               |   | 15,409                                               |       | 303 |   | (19 | ) | — |   | 15,693 |   |
|                                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Effect of foreign currency  translation on cash                     |   | —                                               |       | — |   | 39 |   | — |   | 39 |   |
|                                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net increase (decrease) in  cash and equivalents                    |   | (825                                                 | )          | (10 | ) | 81 |   | — |   | (754 | ) |
| Cash and equivalents at  beginning of period                        |   | 7,553                                                |       | 233 |   | 413 |   | — |   | 8,199 |   |
|                                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of  period                              |   | $                                                    | 6,728      |   | $ | 223 |   | $ | 494 |   | $ | — |   | $ | 7,445 |   |

 

 
|                                                                      |   | **Nine Months Ended September 30, 2000 (Unaudited)** | ** ** |
|---------------------------------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                                      |   | ** **                                           |       |   |   | **Non-** |   |   |   |   |   |
|                                                                      |   |                                                 |       | **Guarantor** |   | **Guarantor** |   | **Consolidating** |   | **Consolidated** |   |
|                                                                      |   | **Issuer**                                           |       | **Subsidiaries** |   | **Subsidiaries** |   | **Adjustments** |   | **Total** |   |
|                                                                      |   | **(in thousands)**                                   | ** ** |
| **Cash flows from operating activities**                                  |   |                                                 | ** ** |   | ** ** |   | ** ** |   |   |   | ** ** |
| Net income                                                                |   | $                                                    | 3,632      |   | $ | 13,210 |   | $ | 3,328 |   | $ | (17,538 | )(4) | $ | 2,632 |   |
| Noncash adjustments                                                       |   |                                                 |       |   |   |   |   |   |   |   |   |
| Equity in earnings of  subsidiaries                                       |   | (13,210                                              | )          | (696 | ) | (3,632 | ) | 17,538 | (4) | — |   |
| Other noncash adjustments                                                 |   | 6,467                                                |       | 18,864 |   | 1,718 |   | — |   | 27,049 |   |
| Changes in working capital                                                |   | (11,146                                              | )          | (19,529 | ) | (1,222 | ) | — |   | (31,897 | ) |
| Net cash provided by (used  for) operating activities                     |   | (14,257                                              | )          | 11,849 |   | 192 |   | — |   | (2,216 | ) |
|                                                                      |   |                                                 |       |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities**                                  |   |                                                 |       |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions                                                |   | (87,507                                              | )          | 292 |   | — |   | — |   | (87,215 | ) |
| Investment in subsidiary                                                  |   | —                                               |       | — |   | (7,976 | ) | 7,976 | (1) | — |   |
| Capital expenditures and other                                            |   | (3,626                                               | )          | (13,642 | ) | (362 | ) | — |   | (17,630 | ) |
| Net cash used for investing  activities                                   |   | (91,133                                              | )          | (13,350 | ) | (8,338 | ) | 7,976 |   | (104,845 | ) |
|                                                                      |   |                                                 |       |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities**                                  |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net senior credit facility  borrowings                                    |   | 71,400                                               |       | — |   | — |   | — |   | 71,400 |   |
| Proceeds from sale of  preferred stock                                    |   | 25,000                                               |       | — |   | — |   | — |   | 25,000 |   |
| Capital contribution to  subsidiary of proceeds from sale of common stock |   | 7,976                                                |       | — |   | 7,976 |   | (7,976 | )(1) | 7,976 |   |
| Other long-term borrowings                                                |   | —                                               |       | 2,958 |   | — |   | — |   | 2,958 |   |
| Principal payments on term  debt, capitalized leases and other debt       |   | (3,419                                               | )          | (664 | ) | (13 | ) | — |   | (4,096 | ) |
| Deferred financing costs                                                  |   | (2,000                                               | )          | — |   | — |   | — |   | (2,000 | ) |
| Other, net                                                                |   | (50                                                  | )          | (197 | ) | — |   | — |   | (247 | ) |
| Net cash provided by financing  activities                                |   | 98,907                                               |       | 2,097 |   | 7,963 |   | (7,976 | ) | 100,991 |   |
|                                                                      |   |                                                 |       |   |   |   |   |   |   |   |   |
| Effect of foreign currency  translation on cash                           |   | —                                               |       | — |   | — |   | — |   | — |   |
|                                                                      |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net increase (decrease) in  cash and equivalents                          |   | (6,483                                               | )          | 596 |   | (183 | ) | — |   | (6,070 | ) |
| Cash and equivalents at  beginning of period                              |   | 7,839                                                |       | (323 | ) | 402 |   | — |   | 7,918 |   |
|                                                                      |   |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of  period                                    |   | $                                                    | 1,356      |   | $ | 273 |   | $ | 219 |   | $ | — |   | $ | 1,848 |   |

 

 

**ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

The following discussions should be read inconjunction with our financial statements and accompanying notes included inthis report.

 

**Overview**

Our financial position and results of operations havebeen affected by our history of acquisitions. As a result, our historicalfinancial statements do not reflect the financial position and results ofoperations of our current businesses. Our most recent acquisitions, whichaffect the comparability of the historical financial condition and results ofoperations described herein, consist of our Cabin Management Group’sacquisitions of Carl F. Booth & Co. on May 11, 2000 and ERDA on June 30,2000.

Our historical financial statements reflect thefinancial position, results of operations and cash flows of the acquiredbusinesses subsequent to their respective acquisition dates.

 

**RecentDevelopments**

**Impactof the Events of September 11, 2001**

The September 11, 2001 terrorist attack on the UnitedStates is adversely impacting the commercial airline industry. All domesticairlines were grounded for a three-day period and, since resuming service, mostmajor U.S. carriers have announced substantially reduced flight schedules,temporary or permanent retirement of a portion of their fleets, and workforcereductions aggregating over 100,000 employees. As a result of the substantialreduction in airline traffic arising from the terrorist attack and itsaftermath, as well as other factors such as the weakening economy, the airlineindustry is expected to incur extremely large losses for the year 2001.Accordingly, the airlines appear to be taking measures to conserve cash in partby deferring or eliminating the purchase of parts and components for theirfleet aircraft and by canceling or deferring the delivery of new aircraft onorder with original equipment manufacturers. These actions, in turn, will havean unfavorable impact upon that portion of our business. The commercial andregional original equipment and aftermarket/retrofit portion of our business iscurrently estimated at approximately 28% of our revenues.

In addition, an estimated 64% of our revenues arecurrently derived from the corporate aircraft original equipment andaftermarket/retrofit business. We are unable to determine the impact of theterrorist attack on this portion of our business, although the weakeningeconomy may negatively impact this business as well.

We have begun an assessment of potential losses andcosts we may incur or actions that may be necessary as a result of the eventsof September 11th and its aftermath. But given the relatively briefperiod since that date, we are not currently able to determine the impact thatsignificant changes in industry conditions will have on our consolidatedfinancial position, results of operations or cash flows. As a result, ourfinancial statements as of and for the three months and nine months endedSeptember 30, 2001 do not include any charges directly or indirectly resultingfrom the terrorist acts. However, given the magnitude of the events mentionedabove and the possible subsequent effects, the impact could be material infuture periods. As losses and/or costs, if any, become estimable, they will berecognized as a component of earnings from operations.

**Resultsof Operations**

**ThreeMonths Ended September 30, 2001 Compared to Three Months Ended September 30,2000**

**Revenues.* ***Revenues increased $7.1 million, or 7.6%,to $100.2 million for the three months ended September 30, 2001 from $93.1million for the three months ended September 30, 2000. By segment, revenueschanged as follows:
|                     |   | **Increase  (Decrease)** |   |
|--------------------------|--------|--------------------------|--------|
|                     |   | **From  2000**           |   |
|                     |   | **Amount**               |   | **Percent** |   |
|                     |   | **(in  millions)**       |   |   |   |
| Cabin Management         |   | $                        | 0.4    |   | 0.8 | % |
| Specialty  Avionics      |   | 3.7                      |   | 13.3 |   |
| Systems  Integration     |   | 3.7                      |   | 24.6 |   |
| Inter-group  elimination |   | (0.7                     | )      |   |   |
| Total                    |   | $                        | 7.1    |   |   |   |

 

*Cabin Management. *Revenues increased by $0.4 million, or 0.8% over theprior year, due to:

•     a $3.1 million increase in cabin furniture,seating and related products revenues reflecting higher volume prior to theSeptember 11th terrorist attack; offset by

•     a $2.7 million decrease in cabin managementsystems revenues due to delays in new product development.

*SpecialtyAvionics.*  Revenues increased by $3.7 million, or 13.3%over the prior year, due to:

•     a $2.7 million increase in cockpit audio,communications, lighting and power and control devices revenues; and

•     a $1.0 million revenue increase resultingfrom higher volume for our interconnect products.

*Systems Integration.* Revenues increased by $3.7 million, or 24.6% over the prior year, dueto:

•     a $5.1 million increase in auxiliary fueltank system and power unit revenues; offset by

•     a $1.4 million decrease in cabin and flightdeck systems integration revenues.

 

**Gross profit.** Gross profit increased $1.6 million, or 5.3%, to $32.8 million for thethree months ended September 30, 2001. Gross profit as a percent of revenuesdecreased to 32.7% for the three months ended September 30, 2001 from 33.4% forthe same period last year primarily as a result of reduced profit margins inour Cabin Management group. By segment, gross profit changed as follows:
|                     |   | **Increase  (Decrease)** |   |
|--------------------------|--------|--------------------------|--------|
|                     |   | **From  2000**           |   |
|                     |   | **Amount**               |   | **Percent** |   |
|                     |   | **(in  millions)**       |   |   |   |
| Cabin Management         |   | $                        | (0.3   | ) | (1.8% | ) |
| Specialty  Avionics      |   | 2.0                      |   | 20.7 |   |
| Systems  Integration     |   | 0.8                      |   | 14.7 |   |
| Inter-group  elimination |   | (0.9                     | )      |   |   |
| Total                    |   | $                        | 1.6    |   |   |   |

 

*Cabin Management.* Gross profit decreased by $0.3 million, or 1.8% from the prior year,primarily due to:

•     a $1.3 million increase in gross profitfrom our cabin furniture and seating products; offset by

•     a $1.6 million decrease due to lower cabinmanagement systems sales volume.

*Specialty Avionics.* Gross profit increased by $2.0 million, or 20.7% over the prior year,due principally to higher volume for our cockpit audio, communications,lighting and power and control devices products.

*Systems Integration.* Gross profit increased by $0.8 million, or 14.7% over the prior year,due to:

•     a $1.2 million increase due primarily tohigher auxiliary fuel tank systems volume; offset by

•     a $0.4 million decrease resulting fromlower cabin and flight deck systems integration services volume.

 

**Selling, general and administrativeexpenses.**  Selling, general and administrative expensesincreased $2.5 million, or 21.1%, to $14.0 million for the three months endedSeptember 30, 2001, from $11.5 million for the same period last year. SG&Aexpenses as a percent of revenues increased to 13.9% for the three months endedSeptember 30, 2001 compared to 12.4% for the same period last year. By segment,SG&A expenses changed as follows:
|                 |   | **Increase  (Decrease)** |   |
|----------------------|--------|--------------------------|--------|
|                 |   | **From  2000**           |   |
|                 |   | **Amount**               |   | **Percent** |   |
|                 |   | **(in  millions)**       |   |   |   |
| Cabin Management     |   | $                        | 1.5    |   | 35.3 | % |
| Specialty  Avionics  |   | 0.3                      |   | 7.9 |   |
| Systems  Integration |   | 0.3                      |   | 14.2 |   |
| Corporate            |   | 0.4                      |   | 20.6 |   |
| Total                |   | $                        | 2.5    |   |   |   |

 

 

*CabinManagement. *SG&A expenses increased by $1.5million, or 35.3% over the prior year, due to increases in expenses to supportincreased production and new programs.

 

*Specialty Avionics.* SG&A expenses increased by $0.3 million, or 7.9% over the prioryear, due to an increase in labor and employee benefit costs in support ofrevenue growth.

*Systems Integration.* SG&A expenses increased by $0.3 million, or 14.2% over the prior year,due to refocusing our cabin and flight deck systems integration services toproduct offerings requiring higher levels of sales and marketing, programmanagement and customer service support.

*Corporate.* SG&A expenses increased by $0.4 million, or 20.6% over the prioryear, primarily due to an increase in promotional costs.

 

**Depreciation and amortization ofintangibles.**  Depreciation and amortization expense, whichincludes amortization of goodwill and identifiable intangible assets, increased$0.9 million, or 12.6%, for the three months ended September 30, 2001. Theincrease results from the inclusion of additional depreciation reflecting ourcapital expenditures during the period.

 

**EBITDA and Operating income.** EBITDA decreased $0.2 million to $22.0 million, or 0.7%, for the threemonths ended September 30, 2001, from $22.2 million for the same period lastyear. EBITDA as a percent of revenues decreased to 22.0% for the three monthsended September 30, 2001, from 23.8% for the same period last year. Operatingincome decreased $1.0 million to $13.9 million, or 6.9%, for the three monthsended September 30, 2001, from $14.9 million for the same period last year. Bysegment, EBITDA changed as follows:
|                                           |   | **Increase  (Decrease)** |   |
|------------------------------------------------|--------|--------------------------|--------|
|                                           |   | **From  2000**           |   |
|                                           |   | **Amount**               |   | **Percent** |   |
|                                           |   | **(in  millions)**       |   |   |   |
| EBITDA                                         |   |                     |   |   |   |
| Cabin Management                               |   | $                        | (1.4   | ) | (11.7 | )% |
| Specialty  Avionics                            |   | 1.5                      |   | 20.3 |   |
| Systems  Integration                           |   | 0.5                      |   | 12.3 |   |
| Corporate                                      |   | (0.4                     | )      | (23.7 | ) |
| Inter-group  elimination                       |   | (0.4                     | )      |   |   |
| Total EBITDA                                   |   | (0.2                     | )      |   |   |
|                                           |   |                     |   |   |   |
| Depreciation and  amortization                 |   | (0.9                     | )      |   |   |
| Other noncash  and acquisition related charges |   | 0.1                      |   |   |   |
| Total operating  income                        |   | $                        | (1.0   | ) |   |   |

 

 

*Cabin Management.* EBITDA decreased by $1.4 million, or 11.7% from the prior year,primarily due to an increase in SG&A expenses.

*Specialty Avionics.* EBITDA increased by $1.5 million, or 20.3% over the prior year, due tohigher gross profit margins.

*SystemsIntegration.*  EBITDA increased by $0.5 million, or 12.3%over the prior year, due to higher auxiliary fuel tank systems revenues andfavorable manufacturing efficiencies.

 

*Corporate.* Expenses increased by $0.4 million, or 23.7% from the prior year, due toan increase in SG&A expenses.

 

**Interest expense.** Interest expense decreased $1.6 million to $9.7 million for the threemonths ended September 30, 2001, from $11.3 million for the same period lastyear, due to:

•     a $2.3 million decrease resulting fromlower average interest rates charged by our lenders during 2001; offset by

•     a $0.7 million increase resulting fromhigher levels of indebtedness.

 

**Minority interest in preferred stockof subsidiary. **Minority interest increased $0.3 millionto $1.3 million for the three months ended September 30, 2001 compared to $1.0million for the same period in 2000. Minority interest reflects the accrueddividends and redemption value accretion during the periods on DeCrane Aircrafts’16% preferred stock issued on June 30, 2000.

 

**Provision for income taxes.** The provision for income taxes differs from the amount determined byapplying the applicable U.S. statutory federal rate to the income before incometaxes primarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization and minorityinterest in preferred stock of subsidiary. The difference in the effective taxrates between periods is mostly a result of the relationship of non-deductibleexpenses to income before income taxes.

 

**Net loss.** Net loss increased $0.3 million to a net loss of $0.4 million for thethree months ended September 30, 2001 compared to a net loss of $0.1million for the same period in 2000.

 

**Net loss applicable to commonstockholders.**  Net loss applicable to common stockholdersincreased $0.5 million to a net loss of $2.2 million for the three months endedSeptember 30, 2001 compared to a net loss of $1.7 million for the sameperiod in 2000. The increase in the net loss applicable to common stockholdersis attributable to:

•     a $0.3 million increase in the net loss,which is net of a $0.3 million increase in the charge for minority interest inpreferred stock of subsidiary issued on June 30, 2000; and

•     a $0.2 million increase in noncashpreferred stock dividend accretion on our 14% mandatorily redeemable preferredstock.

 

**Bookings.** Bookings decreased $11.3 million, or 11.5%, to $86.6 million for thethree months ended September 30, 2001 compared to $97.9 million for the sameperiod in 2000. The decrease in bookings for 2001 results from the timing ofreceipt of orders and reflects one effect of the events of September 11thand its aftermath.

 

**Backlogat end of period.**  Backlog increased $5.3 million to $183.6million as of September 30, 2001 compared to $178.3 million as of December 31,2000. The increase in backlog for 2001 primarily relates to:

•     a $8.5 million increase in our SpecialtyAvionics and Cabin Management groups; offset by

•     a $3.2 million decrease in our SystemsIntegration group.

 

**NineMonths Ended September 30, 2001 Compared to Nine Months Ended September 30,2000**

**Revenues.* ***Revenues increased $47.3 million, or18.6%, to $301.7 million for the nine months ended September 30, 2001 from$254.4 million for the nine months ended September 30, 2000. By segment, revenueschanged as follows:
|                     |   | **Increase  (Decrease)** |   |
|--------------------------|--------|--------------------------|--------|
|                     |   | **From  2000**           |   |
|                     |   | **Amount**               |   | **Percent** |   |
|                     |   | **(in  millions)**       |   |   |   |
| Cabin Management         |   | $                        | 28.5   |   | 22.4 | % |
| Specialty  Avionics      |   | 14.0                     |   | 17.3 |   |
| Systems  Integration     |   | 5.8                      |   | 12.2 |   |
| Inter-group  elimination |   | (1.0                     | )      |   |   |
| Total                    |   | $                        | 47.3   |   |   |   |

 

*Cabin Management. *Revenues increased by $28.5 million, or 22.4% over theprior year, due to:

•     the inclusion of $23.8 million of revenuesresulting from our acquisitions of Carl F. Booth & Co. and ERDA in 2000;and

•     a $4.7 million increase in shipments ofcabin furniture and related products revenues.

*SpecialtyAvionics.*  Revenues increased by $14.0 million, or17.3% over the prior year, due to:

•     a $11.0 million increase in cockpit audio,communications, lighting and power and control devices revenues; and

•     a $3.0 million revenue increase resultingfrom higher volume for our interconnect products.

*Systems Integration.* Revenues increased by $5.8 million, or 12.2% over the prior year, dueto:

•     a $8.9 million increase in auxiliary fueltank system and power unit revenues; offset by

•     a $3.1 million decrease in cabin and flightdeck systems integration revenues resulting from reducing the number of productofferings to focus on our core product lines.

 

**Gross profit.** Gross profit increased $15.5 million, or 18.3%, to $100.4 million forthe nine months ended September 30, 2001. Gross profit as a percent of revenuesof 33.3% for the nine months ended September 30, 2001 is comparable to 33.4%for the same period last year. By segment, gross profit changed as follows:
|                     |   | **Increase  (Decrease)** |   |
|--------------------------|--------|--------------------------|--------|
|                     |   | **From  2000**           |   |
|                     |   | **Amount**               |   | **Percent** |   |
|                     |   | **(in  millions)**       |   |   |   |
| Cabin Management         |   | $                        | 3.5    |   | 8.2 | % |
| Specialty  Avionics      |   | 8.9                      |   | 35.4 |   |
| Systems  Integration     |   | 3.8                      |   | 23.2 |   |
| Inter-group  elimination |   | (0.7                     | )      |   |   |
| Total                    |   | $                        | 15.5   |   |   |   |

 

*Cabin Management.* Gross profit increased by $3.5 million, or 8.2% over the prior year,primarily due to:

•     a $7.1 million increase in gross profitresulting from our 2000 acquisitions; and

•     a $0.3 million increase related to highervolume; offset by

•     a $3.9 million decrease resulting fromnonrecurring startup costs associated with four new programs and therationalization of production between manufacturing facilities.

*Specialty Avionics.* Gross profit increased by $8.9 million, or 35.4% over the prior year,due to:

•     a $4.9 million increase related to highervolume for our cockpit audio, communications, lighting and power and controldevices products;

•     a $3.6 million increase related to a shiftin product mix to items with higher margins; and

•     a $0.4 million increase related to highervolume for our interconnect products.

*Systems Integration.* Gross profit increased by $3.8 million, or 23.2% over the prior year,due to:

•     a $3.6 million increase due to higherauxiliary fuel tank systems volume;

•     a $1.2 million increase resulting, in part,from improved operating results subsequent to our fourth quarter 1999restructuring; offset by

•     a $0.7 million decrease resulting fromlower cabin and flight deck systems integration services volume; and

•     a $0.3 million decrease in profit marginson auxiliary fuel tank systems.

 

 

**Selling, general and administrativeexpenses.**  Selling, general and administrative expensesincreased $9.6 million, or 29.6%, to $42.1 million for the nine months endedSeptember 30, 2001, from $32.5 million for the same period last year. SG&Aexpenses as a percent of revenues increased to 13.9% for the nine months endedSeptember 30, 2001 compared to 12.8% for the same period last year. By segment,SG&A expenses changed as follows:
|                 |   | **Increase  (Decrease)** |   |
|----------------------|--------|--------------------------|--------|
|                 |   | **From  2000**           |   |
|                 |   | **Amount**               |   | **Percent** |   |
|                 |   | **(in  millions)**       |   |   |   |
| Cabin Management     |   | $                        | 5.5    |   | 48.7 | % |
| Specialty  Avionics  |   | 2.0                      |   | 22.8 |   |
| Systems  Integration |   | 1.1                      |   | 16.1 |   |
| Corporate            |   | 1.0                      |   | 17.6 |   |
| Total                |   | $                        | 9.6    |   |   |   |

 

*Cabin Management. *SG&A expenses increased by $5.5 million, or 48.7%over the prior year, due to:

•     a $3.1 million increase in expensesresulting from our 2000 acquisitions; and

•     a $2.4 million increase in expenses tosupport increased production and new programs.

*Specialty Avionics.* SG&A expenses increased by $2.0 million, or 22.8% over the prior year,due to:

•     a $1.9 million increase in labor andemployee benefit costs in support of revenue growth; and

•     a $0.1 million increase in research anddevelopment costs.

*Systems Integration. *SG&A expenses increased by $1.1 million, or 16.1%over the prior year, due to refocusing our cabin and flight deck systemsintegration services to product offerings requiring higher levels of sales andmarketing, program management and customer service support.

*Corporate.* SG&A expenses increased by $1.0 million, or 17.6% over the prioryear, primarily due an increase in promotional costs.

 

**Depreciation and amortization ofintangibles.**  Depreciation and amortization expense, whichincludes amortization of goodwill and identifiable intangible assets, increased$4.4 million, or 22.4%, for the nine months ended September 30, 2001. Theincrease results from the inclusion of $2.2 million of depreciation andamortization expense in 2001 from companies we acquired during 2000 andadditional depreciation reflecting our capital expenditures during the period.

 

**EBITDA and Operating income.** EBITDA increased $8.5 million to $67.8 million, or 14.4%, for the ninemonths ended September 30, 2001, from $59.3 million for the same period lastyear. EBITDA as a percent of revenues decreased to 22.5% for the nine monthsended September 30, 2001, from 23.3% for the same period last year. Operatingincome increased $4.0 million to $43.5 million, or 10.1%, for the nine monthsended September 30, 2001, from $39.5 million for the same period last year. Bysegment, EBITDA changed as follows:
|                                           |   | **Increase  (Decrease)** |   |
|------------------------------------------------|--------|--------------------------|--------|
|                                           |   | **From  2000**           |   |
|                                           |   | **Amount**               |   | **Percent** |   |
|                                           |   | **(in  millions)**       |   |   |   |
| EBITDA                                         |   |                     |   |   |   |
| Cabin Management                               |   | $                        | 0.3    |   | 0.9 | % |
| Specialty  Avionics                            |   | 6.6                      |   | 33.7 |   |
| Systems  Integration                           |   | 2.4                      |   | 22.1 |   |
| Corporate                                      |   | (0.3                     | )      | (6.4 | ) |
| Inter-group  elimination                       |   | (0.5                     | )      |   |   |
| Total EBITDA                                   |   | 8.5                      |   |   |   |
|                                           |   |                     |   |   |   |
| Depreciation and  amortization                 |   | (4.4                     | )      |   |   |
| Other noncash  and acquisition related charges |   | (0.1                     | )      |   |   |
| Total operating  income                        |   | $                        | 4.0    |   |   |   |

 

*Cabin Management.* EBITDA increased by $0.3 million, or 0.9% over the prior year, primarilydue to:

•     a $5.0 million increase resulting from our2000 acquisitions; offset by

•     a $4.7 million decrease resulting fromnonrecurring startup costs associated with four new programs and therationalization of production between manufacturing facilities.

*Specialty Avionics.* EBITDA increased by $6.6 million, or 33.7% over the prior year, due tohigher demand for our commercial aircraft products prior to the September 11thterrorist attack. See “Recent Developments – Impact of the Events ofSeptember 11, 2001.”

*Systems Integration. *EBITDA increased by $2.4 million, or 22.1% over theprior year, due principally to higher auxiliary fuel tank systems revenues andfavorable manufacturing efficiencies.

 

**Interest expense.** Interest expense was $30.0 million for both the nine months endedSeptember 30, 2001 and 2000, and reflects the following:

•     a $5.0 million increase resulting fromhigher levels of indebtedness; offset by

•     a $5.0 million decrease resulting fromlower average interest rates charged by our lenders during 2001.

 

**Minority interest in preferred stockof subsidiary.**  Minority interest increased $2.7 million to$3.7 million for the nine months ended September 30, 2001 compared to $1.0million for the same period in 2000. Minority interest reflects the accrueddividends and redemption value accretion during the periods on DeCraneAircrafts’ 16% preferred stock issued on June 30, 2000.

 

**Provision for income taxes.** The provision for income taxes differs from the amount determined byapplying the applicable U.S. statutory federal rate to the income before incometaxes primarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization and minorityinterest in preferred stock of subsidiary. The difference in the effective taxrates between periods is mostly a result of the relationship of non-deductibleexpenses to income before income taxes.

 

**Net income.** Net income decreased $0.9 million to $1.7 million for the nine monthsended September 30, 2001 compared to $2.6 million for the same periodin 2000.

 

**Net loss applicable to commonstockholders.**  Net loss applicable to common stockholdersincreased $1.6 million to a net loss of $3.4 million for the nine months endedSeptember 30, 2001 compared to a net loss of $1.8 million for the sameperiod in 2000. The increase in the net loss applicable to our commonstockholder is attributable to:

•     a $0.9 million decrease in net income,which is net of a $2.7 million increase in the charge for minority interest inpreferred stock of subsidiary issued on June 30, 2000; and

•     a $0.7 million increase in noncashpreferred stock dividend accretion on our 14% mandatorily redeemable preferredstock.

 

**Bookings.** Bookings increased $45.1 million, or 17.2%, to $307.0 million for thenine months ended September 30, 2001 compared to $261.9 million for the sameperiod in 2000. The increase in bookings for 2001 results from:

•     a $22.5 million increase associated withcompanies we acquired in 2000; and

•     a $22.6 million increase related tobusiness growth, principally related to product lines in our Cabin Managementand Specialty Avionics groups.

As described in “Recent Developments – Impact of theEvents of September 11, 2001,” the terrorist attack is having asevere adverse impact on the commercial airline industry and, in turn, willhave an unfavorable impact on portions of our business. In addition, theoverall weakening economy may adversely impact other portions of our businessas well. We are not currently able to determine the impact these events willhave on our bookings for future periods. However, given the magnitude of theseevents, the impact could be material.

**Liquidityand Capital Resources**

We have required cash primarily to fund acquisitions,capital expenditures and for working capital. Our principal sources ofliquidity have been cash flow from operations, third party borrowings and theissuance of common and preferred stock.

Cash provided by operating activities was $6.2 millionfor the nine months ended September 30, 2001, which is the net of $38.4 millionof cash provided by operations after adding back depreciation, amortization andother noncash items, $32.1 million used for working capital, and $0.1 millionused to reduce other liabilities. The following factors contributed to the$32.1 million working capital increase:

•     a $17.1 million accounts receivableincrease resulting from higher revenues, timing differences relating tocompletion of projects versus the associated collection and the timing of othercollections;

•     a $8.2 million inventory increase resultingfrom longer production lead times and new program costs, primarily engineering,for new cabin interior products and components;

•     a $2.7 million increase in prepaid andother assets; and

•     a $4.1 million net decrease in accountspayable and accrued expenses.

Cash used for investing activities was $22.7 millionfor the nine months ended September 30, 2001, and consisted of:

•     $17.1 million of contingent acquisitionconsideration paid during 2001; and

•     $9.8 million for capital expenditures;offset by

•     $3.6 million cash purchase price reductionsreceived for previously completed acquisitions; and further offset by

•     $0.6 million of proceeds from the sale ofproperty and equipment, principally an owned manufacturing facility replacedwith a larger leased facility.

We anticipate spending approximately $13.0 million forcapital expenditures in 2001.

Cash provided by financing activities was $15.7million for the nine months ended September 30, 2001 and was primarily used tofund the payment of contingent acquisition consideration and capitalexpenditures. We obtained these funds by borrowing $19.6 million under oursenior credit facility and $2.0 million of other long-term borrowings. We used$5.2 million to make principal payments on our senior term debt, capitalizedleases and other debt.

At September 30, 2001, senior credit facilityborrowings totaling $292.1 million are at variable interest rates based ondefined margins over the current prime or LIBOR rates. At September 30, 2001 wehad $95.9 million of working capital and had $25.0 million of borrowingsavailable under our working capital credit facility and $13.0 million availableunder our acquisition credit facility.

We will be affected by economic, financial,competitive, legislative, regulatory, business and other factors beyond ourcontrol. As described in “Recent Developments – Impact of the Events ofSeptember 11, 2001,” the terrorist attack is having a severe adverseimpact on the commercial airline industry and, in turn, will have anunfavorable impact on portions of our business. In addition, the overallweakening economy may adversely impact other portions of our business as well.As a result, we are taking measures to conserve cash by deferring oreliminating planned capital expenditures and any workforce expansion and byconserving working capital.

Although we cannot be certain, we believe thatoperating cash flow, together with borrowings under our bank credit facility,will be sufficient to meet our future short- and long-term operating expenses,working capital requirements, capital expenditures and debt serviceobligations. However, our ability to pay principal or interest, to refinanceour debt and to satisfy our other debt obligations will depend on our futureoperating performance.

In addition, we are continually consideringacquisitions that complement or expand our existing businesses or that mayenable us to expand into new markets. Future acquisitions may requireadditional debt, equity financing or both. We may not be able to obtain anyadditional financing on acceptable terms.

 

**RecentlyIssued Accounting Pronouncements**

**SFAS Nos. 141 and 142**

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

SFAS No. 141 establishes accounting and reportingstandards for business combinations. SFAS No. 141 requires that all businesscombinations be accounted for using the purchase method of accounting andprovides criteria for the initial recognition and measurement of goodwill andother intangible assets. SFAS No. 141 is effective for all businesscombinations initiated or completed after June 30, 2001. For businesscombinations completed prior to July 1, 2001, SFAS No. 141 is effectiveconcurrent with the adoption of SFAS No. 142.

SFAS No. 142 establishes accounting and reportingstandards for goodwill and other intangible assets subsequent to theiracquisition. SFAS No. 142 eliminates the current requirement to amortizegoodwill and other indefinite-lived intangible assets requiring insteadperiodic impairment testing with a loss charged to the results of operation inthe periods in which impairment occurs. Finite-lived intangible assets areamortized and are also subject to periodic impairment testing. Adoption of SFASNo. 142 is required for our fiscal year beginning January 1, 2002.

We are currently evaluating the impact the newaccounting standards will have on our financial position and results ofoperations upon adoption on January 1, 2002; there will be no impact on cashflows. While the full, net of tax, impact has yet to be determined, adoption ofthe new standards will result in the following:

•     Under the criteria established in SFAS No.141, the values ascribed to the assembled workforces acquired are notrecognized as an intangible asset apart from goodwill. As a result, the netbook value ascribed to the assembled workforces, net of deferred income taxliabilities, will be reclassified to goodwill as of January 1, 2002.

•     Adoption of SFAS No. 142 on January 1, 2002will reduce amortization expense in future periods. If SFAS No. 142 had beeneffective as of the beginning of 2001, goodwill and assembled workforcesamortization totaling $10,657,000 for the nine months endedSeptember 30, 2001 would have been eliminated.

We have until June 30, 2002 to complete ourtransitional impairment testing of goodwill associated with adopting SFAS No.142 and until March 31, 2002 to complete our transitional impairment testing ofother intangible assets. The amount of impairment losses recognizable uponadoption, if any, is not known at this time.

 

**SFAS No. 144**

In October 2001, the Financial Accounting StandardsBoard issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets, ” which replaces SFAS No. 121, “Accounting for Impairment ofLong-Lived Assets and for Long-Lived to be Disposed Of” and also replaces andbroadens the provisions of APB Opinion No. 30, “Reporting Results of Operations– Reporting the Effects of Disposal of a Segment of a Business.

SFAS No. 144 establishes one accounting model, basedon framework established in SFAS No. 121, for the recognition, measurement andreporting of impairment of long-lived assets to be held and used andmeasurement of long-lived assets to be disposed of by sale. Adoption of SFASNo. 144 is required for our fiscal year beginning January 1, 2002 althoughearly application is permitted. We are currently evaluating the impact this newstandard will have on our financial position, results of operations and cashflows.

 

**EITF No. 01-10**

In September 2001, the Financial Accounting StandardsBoard’s Emerging Issues Task Force issued EITF No. 01-10, “Accounting for theImpact of the September 11, 2001 Terrorist Acts,” which provides guidance onhow the costs related to the terrorist acts should be reported, how todetermine whether an asset impairment loss should be recognized and howliabilities for losses and other costs should be recognized and reported.

We have begun an assessment of potential losses andcosts we may incur or actions that may be necessary as a result of the eventsof September 11th and its aftermath. But given the relatively brief periodsince that date, we are not currently able to determine the impact thatsignificant changes in industry conditions will have on our consolidatedfinancial position, results of operations or cash flows. As a result, ourfinancial statements as of and for the three months and nine months endedSeptember 30, 2001 do not include any charges directly or indirectly resultingfrom the terrorist acts as addressed in EITF No. 01-10. However, given themagnitude of the events mentioned above and the possible subsequent effects,the impact could be material in future periods. As losses and/or costs, if any,become estimable, they will be recognized as a component of earnings fromoperations.

**ITEM 3.          QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

We are exposed to various market risks, includinginterest rates and changes in foreign currency exchange rates. Market risk isthe potential loss arising from adverse changes in market rates and prices,such as interest rates and foreign currency exchange rates. From time to timewe use derivative financial instruments to manage and reduce risks associatedwith these factors. We do not enter into derivatives or other financialinstruments for trading or speculative purposes.

**InterestRate Risk.** A significant portion of our capital structure is comprised of long-termvariable- and fixed-rate debt.

Market risk related to our variable-rate debt isestimated as the potential decrease in pre-tax earnings resulting from anincrease in interest rates. The interest rates applicable to variable-rate debtare, at our option, based on defined margins over the current prime or LIBORrates. At September 30, 2001, the current prime rate was 6.00% and the currentLIBOR rate was 3.99%. Based on $292.1 million of variable-rate debt outstandingas of September 30, 2001, a hypothetical one percent rise in interest rates, to7.00% for prime rate borrowings and 4.99% for LIBOR borrowings, would reduceour pre-tax earnings by $2.9 million annually. We have, during periods prior to1998, purchased interest rate cap contracts to limit our exposure related torising interest rates on our variable-rate debt. While we have not entered intosimilar contracts during the last three years, we may do so in the futuredepending on our assessment of future interest rate trends.

The estimated fair value of our $100.0 millionfixed-rate long-term debt is approximately $90.0 million at September 30, 2001.Market risk related to our fixed-rate debt is deemed to be the potentialincrease in fair value resulting from a decrease in interest rates. Forexample, a hypothetical ten percent decrease in the interest rates, from 12.0%to 10.8%, would increase the fair value of our fixed-rate debt by approximately$7.0 million.

**Foreign Currency Exchange Rate Risk.**** **Our foreign customers are located in various parts ofthe world, primarily Western Europe, the Far East and Canada, and one of oursubsidiaries operates in Western Europe and one has a manufacturing facility inMexico. To limit our foreign currency exchange rate risk related to sales toour customers, orders are primarily valued and sold in U.S. dollars. From timeto time we have entered into forward foreign exchange contracts to limit ourexposure related to foreign inventory procurement and operating costs. While wehave not entered into any such contracts since 1998 and no such contracts areopen as of September 30, 2001, we may do so in the future depending on ourassessment of future foreign exchange rate trends.

**SpecialNote Regarding Forward-Looking Statements**

All statements other than statements of historicalfacts included in this report are considered forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are subject to known and unknown risks,uncertainties and other factors, which are difficult to predict. We arevulnerable to a variety of factors that affect many businesses, such as:

•     fuel prices and general economic conditionsthat affect demand for aircraft and air travel, which in turn affect demand forour products and services;

•     terrorist attacks and military conflictsthat affect demand for aircraft and air travel, which in turn affect demand forour products and services;

•     our reliance on key customers and theadverse effect a significant decline in business from any one of them wouldhave on our business;

•     changes in prevailing interest rates andthe availability of financing to fund our plans for continued growth;

•     competition from larger companies;

•     Federal Aviation Administration prescribedstandards and licensing requirements, which apply many of the products andservices we provide;

•     inflation, and other general changes incosts of goods and services;

•     liability and other claims asserted againstus that exceeds our insurance coverage;

•     the ability to attract and retain qualifiedpersonnel;

•     labor disturbances; and

•     changes in operating strategy, or ouracquisition and capital expenditure plans.

Changes in such factors could cause our actual resultsto differ materially from those contemplated in such forward-lookingstatements. Although we believe that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to be correct. We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. You should not rely on our forward-looking statements asif they were certainties.

**Incorporationof Documents by Reference**

We have filed with the Securities and ExchangeCommission, and are including within this report by referring to it here, ourForm 10-K for the year ended December 31, 2000. The Form 10-K includes ouraudited financial statements, which we refer to in this report.

You may read and copy any reports, statements or otherinformation we file at the SEC’s reference room in Washington D.C. Please callthe SEC at (202) 942-8090 for further information on the operation of thereference rooms. You can also request copies of these documents, upon paymentof a duplicating fee, by writing to the SEC, or review our SEC filings on theSEC’s EDGAR web site, which can be found at http://www.sec.gov. You may alsowrite or call us at our corporate office. Our corporate offices are located at2361 Rosecrans Avenue, Suite 180, El Segundo, California 90245. Our telephonenumber is (310) 725–9123.

 

**PART II– OTHER INFORMATION**

**ITEM 1.          LEGAL PROCEEDINGS**

Refer to the legal proceedings described in Item 3 ofour Form 10-K for the year ended December 31, 2000.

 

**ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K**

a.         Exhibits

3.2.1.1         Certificate of Amendment of Certificateof Incorporation of DeCrane Aircraft Holdings, Inc. dated October 17, 2001 *

10.10.4        Increased Commitments Agreement, datedas of April 27, 2001, pursuant to Third Amended and Restated Credit Agreement,dated as of May 11, 2000, as amended by the First Amendment to the ThirdAmended and Restated Credit Agreement, dated as of June 30, 2000 **

                                                

*      Filed herewith

**   Filed as an exhibit to our Form 10-Q datedMarch 31, 2001 filed with the Commission on May 14, 2001

 

b.         Reports on Form8-K

None

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|              | **DECRANE HOLDINGS CO. (Registrant)** |
|-------------------|---------------------------------------|
|              |                                  |   |
|              |                                  |   |
| November 13, 2001 | By:                                   | /s/  Richard J. Kaplan |
|              | Name:                                 | Richard J. Kaplan |
|              | Title:                                | Assistant Secretary and Assistant Treasurer |
|              |                                  | (chief accounting officer) |
|              |                                  |   |