** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

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** **

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2002**

 

**Commission File Number 333-70363**

** **

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**DECRANEHOLDINGS CO.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                                 |   | **13-4019703**                        |
|------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)              |   | (I.R.S. Employer  Identification No.) |
|                                                                         |   |                                  |
| **c/o Credit Suisse First Boston / DLJ Merchant Banking Partners II,  L.P.** |
| **Eleven Madison Avenue, New York, NY 10010**                                |
| (Address, including zip code, of principal executive offices)                |
|                                                                         |   |                                  |
| **(212) 325-2000**                                                           |
| (Registrant’s telephone number, including area code)                    |

 

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** **

**(NotApplicable)**

 

(Former address and telephone number ofprincipal executive offices, if changed since last report)

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

ýYes     oNo

 

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The number ofshares of Registrant’s Common Stock, $.01 par value, outstanding as ofAugust 9, 2002 was 3,899,235 shares.

 

 

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**Table of Contents**

 
| **Part I - Financial Information** |
|------------------------------------|
|                               |   |   |
| **Item 1.**                        | **Financial Statements (Unaudited)** |   |
|                               |   |   |
|                               | Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 |   |
|                               |   |   |
|                               | Consolidated Statements of Operations for  the three months and six months ended June 30, 2002 and 2001 |   |
|                               |   |   |
|                               | Consolidated Statements of Stockholders’ Equity for the six months  ended June 30, 2002 |   |
|                               |   |   |
|                               | Consolidated Statements of Cash Flows for  the six months ended June 30, 2002 and 2001 |   |
|                               |   |   |
|                               | Condensed  Notes to Consolidated Financial Statements |   |
|                               |   |   |
| **Item 2.**                        | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations** |   |
|                               |   |   |
|                               | Industry Overview and Trends |   |
|                               |   |   |
|                               | Results of Operations |   |
|                               |   |   |
|                               | Restructuring, Asset Impairment and Other  Nonrecurring Charges |   |
|                               |   |   |
|                               | Liquidity and Capital Resources |   |
|                               |   |   |
|                               | Recent 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**                     |   |   |

 

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.          FINANCIALSTATEMENTS**

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated Balance Sheets**

 
| ***(In thousands, except share data)***                                                                                                                                      |   | **June 30,  2002** |    | **December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                         |   | **(Unaudited)**         |    |                        |   |
|                                                                                                                                                                         |   |                    |    |                        |   |
| **Assets**                                                                                                                                                                   |   |                    |    |                        |   |
| Current assets:                                                                                                                                                              |   |                    |    |                        |   |
| Cash and cash equivalents                                                                                                                                                    |   | $                       | 8,995   |                        | $      | 9,794 |   |
| Accounts receivable, net                                                                                                                                                     |   | 49,276                  |    | 58,451                      |   |
| Inventories                                                                                                                                                                  |   | 84,279                  |    | 86,498                      |   |
| Deferred income taxes                                                                                                                                                        |   | 10,428                  |    | 14,063                      |   |
| Prepaid expenses and other current assets                                                                                                                                    |   | 3,821                   |    | 2,559                       |   |
| Total current assets                                                                                                                                                         |   | 156,799                 |    | 171,365                     |   |
|                                                                                                                                                                         |   |                    |    |                        |   |
| Property and equipment, net                                                                                                                                                  |   | 55,033                  |    | 61,073                      |   |
| Other assets, principally intangibles, net                                                                                                                                   |   | 410,155                 |    | 413,273                     |   |
| Total assets                                                                                                                                                                 |   | $                       | 621,987 |                        | $      | 645,711 |   |
|                                                                                                                                                                         |   |                    |    |                        |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’  Equity**                                                                                       |   |                    |    |                        |   |
| Current liabilities:                                                                                                                                                         |   |                    |    |                        |   |
| Current portion of long-term debt                                                                                                                                            |   | $                       | 17,609  |                        | $      | 13,899 |   |
| Accounts payable                                                                                                                                                             |   | 17,431                  |    | 19,051                      |   |
| Accrued liabilities                                                                                                                                                          |   | 37,001                  |    | 56,626                      |   |
| Income taxes payable                                                                                                                                                         |   | 222                     |    | 133                         |   |
| Total current liabilities                                                                                                                                                    |   | 72,263                  |    | 89,709                      |   |
|                                                                                                                                                                         |   |                    |    |                        |   |
| Long-term debt                                                                                                                                                               |   | 386,979                 |    | 386,351                     |   |
| Deferred income taxes                                                                                                                                                        |   | 26,696                  |    | 33,597                      |   |
| Other long-term liabilities                                                                                                                                                  |   | 7,744                   |    | 7,438                       |   |
|                                                                                                                                                                         |   |                    |    |                        |   |
| Commitments and contingencies (Note 10)                                                                                                                                      |   |                    |    |                        |   |
|                                                                                                                                                                         |   |                    |    |                        |   |
| Minority  interest in preferred stock of subsidiary                                                                                                                          |   | 31,055                  |    | 28,240                      |   |
| Mandatorily  redeemable preferred stock                                                                                                                                      |   | 58,085                  |    | 54,223                      |   |
|                                                                                                                                                                         |   |                    |    |                        |   |
| Stockholders’  equity:                                                                                                                                                  |   |                    |    |                        |   |
| Undesignated preferred  stock, $.01 par value, 1,140,000 shares authorized; none issued and  outstanding as of June 30, 2002 and December 31, 2001                           |   | —                  |    | —                      |   |
| Common stock,  $.01 par value, 10,000,000 shares authorized; 3,899,235 and 3,914,274 shares  issued and outstanding as of June 30, 2002 and December 31, 2001,  respectively |   | 39                      |    | 39                          |   |
| Additional  paid-in capital                                                                                                                                                  |   | 71,364                  |    | 75,542                      |   |
| Notes receivable  for shares sold                                                                                                                                            |   | (2,532                  | )       | (2,668                      | )      |
| Accumulated  deficit                                                                                                                                                         |   | (29,007                 | )       | (24,658                     | )      |
| Accumulated  other comprehensive loss                                                                                                                                        |   | (699                    | )       | (2,102                      | )      |
| Total  stockholders’ equity                                                                                                                                             |   | 39,165                  |    | 46,153                      |   |
| Total  liabilities and stockholders’ equity                                                                                                                             |   | $                       | 621,987 |                        | $      | 645,711 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

1

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**DECRANE HOLDINGS CO.AND SUBSIDIARY**

 

**ConsolidatedStatements of Operations**

 
| ***(In thousands)***                                |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|-----------------------------------------------------|--------|-----------------------------------|------------|--------------------------------------|------------|
|                                                |   | **2002**                          | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                |   | **(Unaudited)**                   | ** ** |
| Revenues                                            |   | $                                 | 86,332     |                                 | $          | 102,780 |   | $ | 172,495 |   | $ | 201,931 |   |
| Cost of sales                                       |   | 64,494                            |       | 70,204                               |       | 124,942 |   | 134,310 |   |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Gross profit                                        |   | 21,838                            |       | 32,576                               |       | 47,553 |   | 67,621 |   |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Operating expenses:                                 |   |                              |       |                                 |       |   |   |   |   |
| Selling, general and administrative  expenses       |   | 14,794                            |       | 13,436                               |       | 30,291 |   | 28,096 |   |
| Amortization of intangible assets                   |   | 1,431                             |       | 4,955                                |       | 2,831 |   | 9,921 |   |
| Total operating expenses                            |   | 16,225                            |       | 18,391                               |       | 33,122 |   | 38,017 |   |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Income from operations                              |   | 5,613                             |       | 14,185                               |       | 14,431 |   | 29,604 |   |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Other expenses:                                     |   |                              |       |                                 |       |   |   |   |   |
| Interest expense                                    |   | 8,195                             |       | 9,875                                |       | 16,158 |   | 20,330 |   |
| Minority interest in preferred stock of  subsidiary |   | 1,433                             |       | 1,241                                |       | 2,815 |   | 2,440 |   |
| Other expenses, net                                 |   | 239                               |       | 12                                   |       | 385 |   | 117 |   |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Income (loss) before provision for income  taxes    |   | (4,254                            | )          | 3,057                                |       | (4,927 | ) | 6,717 |   |
| Provision for income taxes (benefit)                |   | (889                              | )          | 2,187                                |       | (578 | ) | 4,574 |   |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Net income (loss)                                   |   | (3,365                            | )          | 870                                  |       | (4,349 | ) | 2,143 |   |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Noncash preferred stock dividend accretion          |   | (1,964                            | )          | (1,712                               | )          | (3,862 | ) | (3,366 | ) |
|                                                |   |                              |       |                                 |       |   |   |   |   |
| Net loss applicable to common stockholders          |   | $                                 | (5,329     | )                                    | $          | (842 | ) | $ | (8,211 | ) | $ | (1,223 | ) |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

2

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**DECRANE HOLDINGS CO. ANDSUBSIDIARY**

 

**ConsolidatedStatement of Stockholders’ Equity**

 
|                                                                                                 |   | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** |       | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other   Comprehensive  Loss** |   | **Total** |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------|------------|----------------------------------|------------|-----------------------------------------|--------|--------------------------|--------|----------------------------------------------|--------|-----------|--------|
|                                                                                                 |
| ** **                                                                                           |
| ***(In thousands, except share data)***                                                              |   | **Shares**        | ** ** | **Amount**                       | ** ** | ** **                              |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Balance,  December 31, 2001                                                                     |   | 3,914,274         |       | $                                | 39         |                                    | $      | 75,542                   |   | $                                            | (2,668 | )         | $      | (24,658 | ) | $ | (2,102 | ) | $ | 46,153 |   |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Comprehensive  income (loss):                                                                        |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Net loss                                                                                             |   | —            |       | —                           |       | —                                  |   | —                   |   | (4,349                                       | )      | —    |   | (4,349 | ) |
| Translation  adjustment                                                                              |   | —            |       | —                           |       | —                                  |   | —                   |   | —                                       |   | 1,483     |   | 1,483 |   |
| Unrealized loss  on interest rate swap contract                                                      |   | —            |       | —                           |       | —                                  |   | —                   |   | —                                       |   | (80       | )      | (80 | ) |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   | (2,946 | ) |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Sale of common  stock                                                                                |   | 3,704             |       | —                           |       | 100                                     |   | —                   |   | —                                       |   | —    |   | 100 |   |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Repurchase of  common stock and cashless exercise of options, net of related note receivable  repaid |   | (18,743           | )          | —                           |       | (568                                    | )      | 200                      |   | —                                       |   | —    |   | (368 | ) |
| (tax benefit of  options exercised)                                                                  |   | —            |       | —                           |       | 14                                      |   | —                   |   | —                                       |   | —    |   | 14 |   |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Noncash dividend  accretion on preferred stock                                                       |   | —            |       | —                           |       | (3,862                                  | )      | —                   |   | —                                       |   | —    |   | (3,862 | ) |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Compensatory  stock option expense                                                                   |   | —            |       | —                           |       | 138                                     |   | —                   |   | —                                       |   | —    |   | 138 |   |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Notes receivable  interest accrued                                                                   |   | —            |       | —                           |       | —                                  |   | (64                      | )      | —                                       |   | —    |   | (64 | ) |
|                                                                                                 |   |              |       |                             |       |                                    |   |                     |   |                                         |   |      |   |   |   |
| Balance,  June 30, 2002 (Unaudited)                                                             |   | 3,899,235         |       | $                                | 39         |                                    | $      | 71,364                   |   | $                                            | (2,532 | )         | $      | (29,007 | ) | $ | (699 | ) | $ | 39,165 |   |
|                                                                                                      |        |                   |            |                                  |            |                                         |        |                          |        |                                              |        |           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

3

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** **

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated Statements of Cash Flows**

 
|                                                                               |   | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
| ***(In thousands)***                                                               |   | **2002**                             | ** ** | **2001** | ** ** |
|                                                                               |   | **(Unaudited)**                      |       |
| **Cash flows from operating activities:**                                          |   |                                 |       |   |   |
| Net income (loss)                                                                  |   | $                                    | (4,349     | ) | $ | 2,143 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                 |       |   |   |
| Depreciation and amortization                                                      |   | 9,950                                |       | 16,925 |   |
| Noncash portion of restructuring and asset  impairment charges                     |   | 5,910                                |       | — |   |
| Minority interest in preferred stock of  subsidiary                                |   | 2,815                                |       | 2,440 |   |
| Deferred income taxes                                                              |   | (1,124                               | )          | 1,406 |   |
| Other, net                                                                         |   | 295                                  |       | 597 |   |
| Changes in assets and liabilities, net of  effect from acquisitions:               |   |                                 |       |   |   |
| Accounts receivable                                                                |   | 8,741                                |       | (8,714 | ) |
| Inventories                                                                        |   | 167                                  |       | (10,029 | ) |
| Prepaid expenses and other assets                                                  |   | (1,713                               | )          | (1,299 | ) |
| Accounts payable                                                                   |   | (1,667                               | )          | 3,828 |   |
| Accrued liabilities                                                                |   | (13,842                              | )          | (8,705 | ) |
| Income taxes payable                                                               |   | 58                                   |       | 2,223 |   |
| Other long-term liabilities                                                        |   | 350                                  |       | 80 |   |
| Net cash provided by operating activities                                          |   | 5,591                                |       | 895 |   |
|                                                                               |   |                                 |       |   |   |
| **Cash flows from investing activities:**                                          |   |                                 |       |   |   |
| Cash paid for acquisitions                                                         |   | (5,890                               | )          | (13,529 | ) |
| Capital expenditures                                                               |   | (2,492                               | )          | (6,365 | ) |
| Other, net                                                                         |   | —                               |       | 635 |   |
| Net cash used for investing activities                                             |   | (8,382                               | )          | (19,259 | ) |
|                                                                               |   |                                 |       |   |   |
| **Cash flows from financing activities:**                                          |   |                                 |       |   |   |
| Net borrowings under senior credit facility                                        |   | 8,000                                |       | 21,400 |   |
| Other long-term borrowings                                                         |   | 545                                  |       | — |   |
| Proceeds from the sale of common stock                                             |   | 100                                  |       | — |   |
| Principal payments on term debt,  capitalized leases and other debt                |   | (4,567                               | )          | (3,035 | ) |
| Deferred financing costs                                                           |   | (1,663                               | )          | (580 | ) |
| Repurchase of common stock and options                                             |   | (368                                 | )          | — |   |
| Other, net                                                                         |   | (99                                  | )          | (93 | ) |
| Net cash provided by financing activities                                          |   | 1,948                                |       | 17,692 |   |
|                                                                               |   |                                 |       |   |   |
| Effect of foreign currency translation on  cash                                    |   | 44                                   |       | 9 |   |
|                                                                               |   |                                 |       |   |   |
| Net decrease in cash and cash equivalents                                          |   | (799                                 | )          | (663 | ) |
| Cash and cash equivalents at beginning of  period                                  |   | 9,794                                |       | 8,199 |   |
| Cash and cash equivalents at end of period                                         |   | $                                    | 8,995      |   | $ | 7,536 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

4

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Condensed Notes to Consolidated FinancialStatements**

**(Unaudited)**

** **

**Note 1.           Consolidated Financial Statements**

** **

**Basis of Presentation**

 

The consolidated interimfinancial statements included in this report are unaudited.  The Company believes the interim financialstatements are presented on a basis consistent with the audited financialstatements and include all adjustments necessary for a fair presentation of thefinancial condition, results of operations and cash flows for such interimperiods.  All of these adjustments arenormal recurring adjustments.

 

Preparation of these consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires the Company to make estimatesand judgments that affect the reported amounts of assets, liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting periods.  Actual resultscould differ from those estimates.

 

The results of operationsfor interim periods do not necessarily predict the operating results for anyother interim period or for the full year. The consolidated balance sheet as of December 31, 2001 has been derivedfrom audited financial statements but does not include all disclosures requiredby accounting principles generally accepted in the United States of America aspermitted by interim reporting requirements. The information included in this report should be read in conjunctionwith Management’s Discussion and Analysis of Financial Condition and Results ofOperations and the audited financial statements and related notes included inthe Company’s 2001 Form 10-K.  Somereclassifications have been made to prior periods’ financial statements toconform to the 2002 presentation.

 

**Note 2.           Accounting Pronouncements**

** **

**Accounting PronouncementsAdopted January 1, 2002**

* *

*SFAS No. 141 and142*

 

Effective January 1,2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”and the provisions of SFAS No. 141, “Business Combinations,” which wererequired to be adopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncementsresulted in the following:

 

•                            *Reassessmentof Useful Lives of Intangible Assets.*  The reassessment of the useful lives of intangible assetsacquired on or before June 30, 2001 was completed during the first quarter offiscal 2002.  The remaining useful liveswere deemed appropriate.

 

•                            *Reclassificationof Intangible Assets.* Intangible assets relating to acquired assembled workforce intangiblesnot meeting the criteria for recognition apart from goodwill were reclassifiedto goodwill.

 

•                            *Discontinuanceof Goodwill Amortization.* Goodwill is deemed to be an indefinite-lived asset.  As a result, and in accordance with SFAS No.142, the recording of periodic goodwill amortization charges was discontinuedeffective January 1, 2002.

 

5

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During the second quarterof fiscal 2002, the Company completed the first step of the requiredtransitional impairment testing of goodwill recorded at January 1, 2002associated with adopting SFAS No. 142.  The results indicate potential impairment in reporting unitswithin the Specialty Avionics and Systems Integration business segments.  The second step of the transitionalimpairment testing, which is required to be performed to measure the amount ofimpairment losses, if any, will be completed no later than December 31,2002.  The transitional impairmentlosses, if any, will be reflected as a cumulative effect of a change inaccounting principle as of January 1, 2002.

 

A reconciliation ofreported net income (loss) to net income (loss) adjusted to reflect the impactof the discontinuance of the amortization of goodwill and other intangibleassets is as follows:

 
|                                                                |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|---------------------------------------------------------------------|--------|-----------------------------------|------------|--------------------------------------|------------|
| ***(In thousands)***                                                |   | **2002**                          | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                |   | **(Unaudited)**                   |       |
| Reported net income (loss)                                          |   | $                                 | (3,365     | )                                    | $          | 870 |   | $ | (4,349 | ) | $ | 2,143 |   |
| Add back goodwill and assembled workforce  amortization, net of tax |   | —                            |       | 2,870                                |       | — |   | 5,751 |   |
| Adjusted net income (loss)                                          |   | $                                 | (3,365     | )                                    | $          | 3,740 |   | $ | (4,349 | ) | $ | 7,894 |   |

* *

*SFAS No. 143*

 

Effective January 1,2002, the Company also adopted SFAS No. 143, “Accounting for Asset RetirementObligations,” which requires recognition of the fair value of liabilitiesassociated with the retirement of long-lived assets when a legal obligation toincur such costs arises as a result of the acquisition, construction,development and/or the normal operation of a long-lived asset.  Adoption of SFAS No. 143 is required for theCompany’s fiscal year beginning January 1, 2003 although early application ispermitted.  Adoption of SFAS No. 143 didnot have an impact on the Company’s business, consolidated financial position,results of operations or cash flows.

 

*SFAS No. 144*

 

Effective January 1,2002, the Company also adopted SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” which addresses the accounting and reportingfor the impairment or disposal of long-lived assets.  Adoption of SFAS No. 144 did not have an impact on the Company’sbusiness, consolidated financial position, results of operations or cash flows.

** **

**Recently IssuedAccounting Pronouncement**

* *

*SFAS No. 145*

 

In May 2002, theFinancial Accounting Standards Board issued SFAS No. 145, “Rescission of SFASNos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescindsvarious pronouncements regarding early extinguishment of debt and allowsextraordinary accounting treatment for early extinguishment only when theprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met.  SFAS No. 145provisions regarding early extinguishment of debt are generally effective forfiscal years beginning after May 15, 2002. The Company believes this new standard will not have an impact on itsbusiness, consolidated financial position, results of operations or cash flow.

 

6

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*SFAS No. 146*

 

In June 2002, theFinancial Accounting Standards Board issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 supersedes previous accounting guidance, principallyEmerging Issues Task Force Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).”

 

SFAS No. 146 requiresthat the liability for costs associated with an exit or disposal activity beinitially measured at fair value and recognized when the liability isincurred.  In periods subsequent toinitial measurement, changes to the liability are measured using thecredit-adjusted risk-free rate that was used in the initial measurement of theliability recorded.  The cumulativeeffect of a change resulting from revisions to either the timing or the amountof estimated cash flows is recognized as an adjustment to the liability in theperiod of the change and charged to the same line items in the statement ofoperations used when the related costs were initially recognized.  Under EITF No. 94-3, a liability for an exitcost was recognized at the date of a company’s commitment to an exit plan.

 

The provisions of SFASNo. 146 are required to be applied prospectively to exit or disposal activitiesinitiated after December 31, 2002. The Company believes SFAS No. 146 may affect the timing of recognizingfuture restructuring costs, as well as the amounts recognized, depending on thenature of the exit or disposal activity and the timing of the related estimatedcash flows.

 

**Note 3.           Restructuring, Asset Impairment andOther Nonrecurring Charges**

 

During the three monthsand six months ended June 30, 2002 and 2001, the Company recordedrestructuring, asset impairment and other nonrecurring pre-tax charges relatedto two restructuring plans as follows:

 
|                                              |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|---------------------------------------------------|--------|-----------------------------------|------------|--------------------------------------|------------|
| ***(In thousands)***                              |   | **2002**                          | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                              |   | **(Unaudited)**                   | ** ** |
| Restructuring plan:                               |   |                              |       |                                 |       |   |   |   |   |
| 2002 Seat Manufacturing Facilities  Restructuring |   | $                                 | 2,251      |                                 | $          | — |   | $ | 6,294 |   | $ | — |   |
| 2001 Restructuring and Asset Impairment Charges   |   | 5,415                             |       | 3,902                                |       | 5,415 |   | 3,902 |   |
| Total pre-tax charges                             |   | $                                 | 7,666      |                                 | $          | 3,902 |   | $ | 11,709 |   | $ | 3,902 |   |
|                                              |   |                              |       |                                 |       |   |   |   |   |
| Charged to operations:                            |   |                              |       |                                 |       |   |   |   |   |
| Cost of sales                                     |   | $                                 | 4,732      |                                 | $          | 3,902 |   | $ | 5,946 |   | $ | 3,902 |   |
| Selling, general and administrative expenses      |   | 2,934                             |       | —                               |       | 5,763 |   | — |   |
| Total pre-tax charges                             |   | $                                 | 7,666      |                                 | $          | 3,902 |   | $ | 11,709 |   | $ | 3,902 |   |
|                                              |   |                              |       |                                 |       |   |   |   |   |
| Components of charges:                            |   |                              |       |                                 |       |   |   |   |   |
| Cash charges                                      |   | $                                 | 4,901      |                                 | $          | 3,902 |   | $ | 5,799 |   | $ | 3,902 |   |
| Noncash charges                                   |   | 2,765                             |       | —                               |       | 5,910 |   | — |   |
| Total pre-tax charges                             |   | $                                 | 7,666      |                                 | $          | 3,902 |   | $ | 11,709 |   | $ | 3,902 |   |

 

7

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**2002 Seat ManufacturingFacilities Restructuring**

 

In first quarter offiscal 2002, the Company announced it would consolidate the production of fourseating and related manufacturing facilities into two, resulting in thepermanent closure of two facilities.  Inconnection with this restructuring plan, the Company recorded nonrecurringpre-tax charges to operations totaling $6,294,000 during 2002 for restructuringand asset impairment charges and other related expenses.  The restructuring and asset impairmentcharges and other related expenses are comprised of the following:

 

•                            *Inventory and Accounts Receivable Write-Downs.*  Inconnection with the consolidation of all production, the Company willdiscontinue manufacturing certain products, principally those whichoverlap.  Inventory and certainreceivables related to the discontinued products were written down to net realizablevalue.

 

•                            *Impairment of Long-Lived Assets.*  The restructuring plan resulted in theimpairment of property and equipment and, accordingly, these assets werewritten down to their net realizable value.

 

•                            *Severance and Other Compensation Costs.*  Approximately 115 employees have been or willbe terminated in connection with the permanent closure of the manufacturingfacilities.

 

•                            *Lease Termination and Other Related Costs.*  Lease termination and other related costsare comprised of the net losses expected to be incurred under existing long-termlease agreements for the facilities being permanently vacated.  The losses have been reduced by the expectedsublease income.  These expected losseswere based on estimated current market rates and anticipated dates that thesefacilities are subleased.  Ifmarket-rates decrease or should it take longer than expected to sublease thesefacilities, the actual loss could exceed these estimates.

 

•                            *Other Nonrecurring Restructuring-Related Expenses.*  Other expenses pertain to FAA retesting andrecertification of products manufactured at a different facility, moving,transportation and travel costs and shutdown / startup costs.

 

The Company substantiallycompleted the restructuring during the second quarter of fiscal 2002.  The components of the restructuring, assetsimpairment and other nonrecurring charges are as follows:

 
|                                               |   |               |        |                  |     |       |       | **Balance at    June 30,  2002** |   |
|----------------------------------------------------|--------|--------------------|-------------|-----------------------|----------|------------|------------|---------------------------------------|--------|
|                                               |   | **Total  Charges** |        | **Amounts  Incurred** |     |       |
| ***(In thousands)***                               |   | ** **         | **Noncash** | ** **            | **Cash** | ** ** | ** ** |
|                                               |   | **(Unaudited)**    | ** **  |
| Restructuring  and assets impairment charges:      |   |               |        |                  |     |       |       |                                  |   |
| Inventory  and accounts receivable write-downs     |   | $                  | 2,200       |                  | $        | (2,200     | )          | $                                     | — |   | $ | — |   |
| Impairment  of property and equipment              |   | 1,374              |        | (1,374                | )        | —     |       | —                                |   |
| Severance  and other compensation costs            |   | 450                |        | —                |     | (450       | )          | —                                |   |
| Lease  termination and other related costs         |   | 300                |        | —                |     | —     |       | 300                                   |   |
| Total  restructuring and asset impairment charges  |   | 4,324              |        | $                     | (3,574   | )          | $          | (450                                  | )      | $ | 300 |   |
|                                               |   |               |        |                  |     |       |       |                                  |   |
| Other  nonrecurring restructuring-related expenses |   | 1,970              |        |                  |     |       |       |                                  |   |
| Total  pre-tax charges                             |   | $                  | 6,294       |                  |     |       |       |                                  |   |   |

 

The remaining balance ofrestructuring costs includes lease termination and other exit costs.  The manufacturing facilities were closedduring June 2002; however, future cash payments will extend beyond this datedue to future lease payments on the vacated facilities and the incurrence ofother exit costs.  Future cash paymentswill be funded from existing cash balances and internally generated cash fromoperations.

 

8

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**2001Restructuring and Asset Impairment Charges**

 

During the second quarterof fiscal 2001, the Company adopted a restructuring plan to realign aircraftfurniture production programs among its manufacturing facilities.  In addition, and in response to the adverseimpact on the aerospace industry resulting from the September 11th terrorist attack and itsaftermath, as well as the weakening of global economic conditions, the Companyannounced and implemented a further restructuring plan in December 2001designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  These plans primarilyaffected the Company’s Cabin Management and Specialty Avionics Groups.

 

In connection with theserestructuring plans, the Company recorded nonrecurring pre-tax charges tooperations of $28,658,000 in fiscal 2001 ($3,902,000 million during the threemonths and six months ended June 30, 2001), of which $22,058,000 were noncashcharges, for the impairment of long-lived assets and restructuring costsrelated to write-downs and write-offs of inventoried costs, costs associatedwith the realignment of aircraft furniture production programs among facilities,severance, lease termination and other related costs.  As of December 31, 2001, $27,049,000 had been incurred and theremaining $1,609,000 was reflected as an accrued liability.

 

Due to the ongoingweakness of the corporate/VIP aircraft market, the Company decided during thesecond quarter of fiscal 2002 to permanently close the temporarily idledmanufacturing facility.  In connectionwith this decision, the Company recorded additional nonrecurring pre-tax chargesto operations totaling $5,415,000 during 2002 for restructuring and assetimpairment charges and other related expenses.

 

The restructuring and asset impairment charges andother related expenses are comprised of the following:

 

•       *Impairment ofLong-Lived Assets.*  Thepermanent closure of the manufacturing facility resulted in the impairment ofproperty and equipment and, accordingly, these assets were written down totheir estimated net realizable value. Net realizable values were based on estimated current market values andthe actual losses could exceed these estimates.

 

•         *Excess Inventory Write-Downs.*  Inventory was further written down to netrealizable value for quantities on hand exceeding current and forecast orderbacklog requirements.

 

•         *OtherNonrecurring Restructuring-Related Charges.*  Other expenses pertain to provisions forestimated losses on uncompleted long-term contracts aggregating $2,577,000 andother nonrecurring charges.

 

9

----

 

The components of the charges and amounts incurredduring the six months ended June 30, 2002 are as follows:

 
|                                               |   | **Balance at  December 31,  2001** |               | **(Unaudited)** |                  |
|----------------------------------------------------|--------|------------------------------------|--------------------|-----------------|-----------------------|
|                                               |   |                               |               |            |                  |   |   |   | **Balance at  June 30,  2002** |   |
|                                               |   | ** **                         | **Total  Charges** | ** **      | **Amounts  Incurred** | ** ** | ** ** |
| ***(In thousands)***                               |   | ** **                         | ** **         | **Noncash**     | ** **            | **Cash** | ** ** | ** ** |
|                                               |   |                               |               |            |                  |   |   |   |   |   |   |
| Severance  and other compensation costs            |   | $                                  | 1,185              |            | $                     | — |   | $ | — |   | $ | (861 | ) | $ | 324 |   |
| Lease  termination and other related costs         |   | 424                                |               | —          |                  | — |   | (207 | ) | 217 |   |
| Impairment  of property and equipment              |   | —                             |               | 1,756           |                  | (1,756 | ) | — |   | — |   |
| Excess  inventory write-downs                      |   | —                             |               | 580             |                  | (580 | ) | — |   | — |   |
| Total restructuring and assets impairment  charges |   | $                                  | 1,609              |            | 2,336                 |   | $ | (2,336 | ) | $ | (1,068 | ) | $ | 541 |   |
|                                               |   |                               |               |            |                  |   |   |   |   |   |   |
| Other  nonrecurring restructuring-related charges  |   |                               |               | 3,079           |                  |   |   |   |   |   |   |
| Total pre-tax charges                              |   |                               |               | $               | 5,415                 |   |   |   |   |   |   |   |
|                                                    |        |                                    |                    |                 |                       |  |  |  |  |  |  |  |  |  |  |  |  |

 

Through June 30,2002, severance and other compensation costs of approximately $1,700,000 havebeen paid, of which $861,000 was incurred during the six months endedJune 30, 2002.  The amounts paid todate have been to manufacturing and administrative employees terminated at themanufacturing facilities being closed. Since the September 11th terrorist attack, the Company has, in addition to thepositions eliminated as a result of the 2002 plant closures described above,reduced its total workforce by approximately 500 employees, or 18.5%, as ofJune 2002, of which approximately 260 employees had separated as ofDecember 31, 2001.  TheCompany expects to incur the remaining costs during the third quarter of fiscal2002 when the additional manufacturing facility being closed ceases operationsand the remaining personnel are terminated.

 

The remaining balance ofrestructuring costs includes lease termination and other exit costs.  The restructuring plan related to leasedfacilities was completed during the second quarter of fiscal 2002; however,future cash payments will extend beyond this date due to future lease paymentson the vacated facility and the incurrence of other exit costs.

 

Future cash payments willbe funded from existing cash balances and internally generated cash fromoperations.

 

**Note 4.           Inventories**

 

Inventories are comprisedof the following as of June 30, 2002 and December 31, 2001:

 
|                                                                         |   | **June 30,  2002** |       | **December 31,  2001** |       |
|------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|------------|
| ***(In thousands)***                                                         |   |                    |       |
|                                                                         |   | **(Unaudited)**         | ** ** |                        | ** ** |
| Raw materials                                                                |   | $                       | 46,236     |                        | $          | 50,503 |   |
| Work-in-process:                                                             |   |                    |       |                        |       |
| Direct and indirect manufacturing costs                                      |   | 15,391                  |       | 16,260                      |       |
| Program costs, principally engineering  costs                                |   | 12,511                  |       | 10,974                      |       |
| Finished goods                                                               |   | 6,126                   |       | 3,089                       |       |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | 4,015                   |       | 5,672                       |       |
| Total inventories                                                            |   | $                       | 84,279     |                        | $          | 86,498 |   |

 

10

----

 

Inventoried costs are notin excess of estimated realizable 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 that will be recovered from future sales.  Periodic assessments are performed to ensurerecoverability of the program costs and adjustments are made, if necessary, toreduce inventoried costs to estimated realizable value.  In connection with the 2001 restructuring,$7,908,000 of previously inventoried program costs were determined to beunrecoverable and were charged to cost of sales during the fourth quarter offiscal 2001; no adjustments were required during the first six months of fiscal2002.

 

Total costs and estimatedearnings on all uncompleted contracts as of June 30, 2002 andDecember 31, 2001 are comprised of the following:

 
| ***(In thousands)***                                                          |   | **June 30,  2002** |       | **December 31,  2001** |       |
|-------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|------------|
|                                                                          |   | **(Unaudited)**         | ** ** |                        | ** ** |
| Costs incurred on uncompleted contracts                                       |   | $                       | 67,675     |                        | $          | 46,757 |   |
| Estimated  earnings recognized                                                |   | 67,920                  |       | 50,413                      |       |
| Total costs and estimated earnings                                            |   | 135,595                 |       | 97,170                      |       |
| Less billings to date                                                         |   | (134,805                | )          | (102,653                    | )          |
| Net                                                                           |   | $                       | 790        |                        | $          | (5,483 | ) |
|                                                                          |   |                    |       |                        |       |
| Balance sheet classification:                                                 |   |                    |       |                        |       |
| Asset – Costs and estimated earnings in  excess of billings              |   | $                       | 4,015      |                        | $          | 5,672 |   |
| Liability – Billings in excess of costs and  estimated earnings (Note 6) |   | (3,225)                 |       | (11,155)                    |       |
| Net                                                                           |   | $                       | 790        |                        | $          | (5,483) |   |

 

Revenues and earnings forproducts manufactured under long-term contracts are recognized under thepercentage-of-completion method using total contract price, actual costs incurredto date and an estimate of the completion costs for each contract.  Provisions for estimated losses onuncompleted contracts are made in the period in which such losses aredetermined.  The Company recorded aprovision for estimated losses totaling $2,577,000 during the six months endedJune 30, 2002 relating to uncompleted contracts at the furniture manufacturingfacility being permanently closed (Note 3).

 

**Note 5.           Other Assets**

 

Other assets arecomprised of the following as of June 30, 2002 and December 31, 2001:

 
|                                                     |   | **June 30,  2002** |       | **December 31,  2001** |       |
|----------------------------------------------------------|--------|-------------------------|------------|-----------------------------|------------|
| ***(In thousands)***                                     |   |                    |       |
|                                                     |   | **(Unaudited)**         | ** ** |                        | ** ** |
| Goodwill                                                 |   | $                       | 343,279    |                        | $          | 337,443 |   |
| Identifiable intangible assets with finite  useful lives |   | 54,635                  |       | 63,648                      |       |
| Deferred financing costs                                 |   | 10,571                  |       | 10,204                      |       |
| Other non-amortizable assets                             |   | 1,670                   |       | 1,978                       |       |
| Total other assets                                       |   | $                       | 410,155    |                        | $          | 413,273 |   |

 

11

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**Goodwill**

 

Changes in the carryingamount of goodwill, by business segment (Note 12), for the six months endedJune 30, 2002 and the year ended December 31, 2001 are as follows:

 
|                                                                                                                       |   | **Cabin  Management  Group** |       | **Specialty  Avionics  Group** |          | **Systems  Integration  Group** |                    |   |   |    |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|--------------------------------|---------------|---------------------------------|-------------------------|--------|--------|---------|--------|
|                                                                                                                       |   |                         |       |                           |          |                            | **Consolidated  Total** |   |
| ***(In thousands)***                                                                                                       |   | ** **                   | ** ** | ** **                     | **Corporate** | ** **                      | ** **              |
| Six months ended June 30, 2002:                                                                                       |   |                         |       |                           |          |                            |                    |   |   |    |   |
| Balance, December 31, 2001                                                                                            |   | $                            | 178,715    |                           | $             | 126,495                         |                    | $      | 28,277 |    | $      | 3,956 |   | $ | 337,443 |   |
| Reclassification of intangible assets  relating to assembled workforce, net of tax, upon adoption of SFAS No. 141  and 142 |   | 3,076                        |       | 1,221                          |          | 386                             |                    | 120    |   | 4,803   |   |
| Foreign currency translation                                                                                               |   | —                       |       | 1,033                          |          | —                          |                    | — |   | 1,033   |   |
| Balance, June 30, 2002 (Unaudited)                                                                                    |   | $                            | 181,791    |                           | $             | 128,749                         |                    | $      | 28,663 |    | $      | 4,076 |   | $ | 343,279 |   |
|                                                                                                                       |   |                         |       |                           |          |                            |                    |   |   |    |   |
| Year ended December 31, 2001:                                                                                         |   |                         |       |                           |          |                            |                    |   |   |    |   |
| Balance, December 31, 2000                                                                                            |   | $                            | 187,797    |                           | $             | 131,472                         |                    | $      | 32,982 |    | $      | 4,105 |   | $ | 356,356 |   |
| Amortization during the period                                                                                             |   | (6,640                       | )          | (4,709                         | )             | (1,180                          | )                       | (149   | )      | (12,678 | )      |
| Impairment losses recognized                                                                                               |   | (5,058                       | )          | —                         |          | (3,525                          | )                       | — |   | (8,583  | )      |
| Contingent consideration earned, including  acquisition related expenses                                                   |   | 3,832                        |       | —                         |          | —                          |                    | — |   | 3,832   |   |
| Cash received from sellers, net of  additional liabilities recorded, upon settlement of asserted claims                    |   | (1,216                       | )          | —                         |          | —                          |                    | — |   | (1,216  | )      |
| Foreign currency translation                                                                                               |   | —                       |       | (268                           | )             | —                          |                    | — |   | (268    | )      |
| Balance, December 31, 2001                                                                                            |   | $                            | 178,715    |                           | $             | 126,495                         |                    | $      | 28,277 |    | $      | 3,956 |   | $ | 337,443 |   |

** **

**IdentifiableIntangible Assets with Finite Useful Lives**

 

Identifiable intangibleassets with finite useful lives are comprised of the following as ofJune 30, 2002 and December 31, 2001:

 
|                            |   | **June 30,  2002 (Unaudited)** |       | **December 31,  2001**   |    |
|---------------------------------|--------|-------------------------------------|------------|-------------------------------|---------|
|                            |   |                                |       | **Accumulated  Amortization** |    |   |   |   |   | **Accumulated  Amortization** |   |   |   |
| ***(In thousands)***            |   | **Cost**                            | ** ** | ** **                    | **Net** | ** ** | **Cost** | ** ** | ** ** | **Net** | ** ** |
|                            |   |                                |       |                          |    |   |   |   |   |   |   |   |   |
| FAA  certifications             |   | $                                   | 45,816     |                          | $       | (10,012 | ) | $ | 35,804 |   | $ | 45,816 |   | $ | (8,485 | ) | $ | 37,331 |   |
| Engineering  drawings           |   | 14,619                              |       | (3,303                        | )       | 11,316 |   | 14,617 |   | (2,816 | ) | 11,801 |   |
| Assembled  workforce            |   | —                              |       | —                        |    | — |   | 11,499 |   | (4,535 | ) | 6,964 |   |
| Other  identifiable intangibles |   | 13,073                              |       | (5,558                        | )       | 7,515 |   | 12,293 |   | (4,741 | ) | 7,552 |   |
| Total  identifiable intangibles |   | $                                   | 73,508     |                          | $       | (18,873 | ) | $ | 54,635 |   | $ | 84,225 |   | $ | (20,577 | ) | $ | 63,648 |   |
|                                 |        |                                     |            |                               |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Estimated annualamortization expense for all identifiable intangible assets with finite usefullives for the five-year period ending December 31, 2006 is as follows:2002 – $5,601,000; 2003 – $5,574,000; 2004 – $5,521,000; 2005 – $5,521,000; and2006 – $4,423,000.

 

12

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**Note 6.           Accrued Liabilities**

 

Accrued liabilities arecomprised of the following as of June 30, 2002 and December 31, 2001:

 
|                                                                         |   | **June 30,  2002** |       | **December 31,  2001** |       |
|------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|------------|
| ***(In thousands)***                                                         |   |                    |       |
|                                                                         |   | **(Unaudited)**         | ** ** |                        | ** ** |
| Salaries,  wages, compensated absences and payroll related taxes             |   | $                       | 10,005     |                        | $          | 17,179 |   |
| Accrued  interest                                                            |   | 7,216                   |       | 4,692                       |       |
| Accrued  warranty costs                                                      |   | 5,819                   |       | 4,227                       |       |
| Billings  in excess of costs and estimated earnings on uncompleted contracts |   | 3,225                   |       | 11,155                      |       |
| Customer  advances and deposits                                              |   | 885                     |       | 3,260                       |       |
| Acquisition  related contingent consideration                                |   | —                  |       | 6,904                       |       |
| Other  accrued liabilities                                                   |   | 9,851                   |       | 9,209                       |       |
| Total  accrued liabilities                                                   |   | $                       | 37,001     |                        | $          | 56,626 |   |

 

**Note 7.           Long-Term Debt**

 

Long-term debt includesthe following amounts as of June 30, 2002 and December 31, 2001:

 
|                                                                                  |   | **June 30,  2002** |       | **December 31,  2001** |       |
|---------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|------------|
| ***(In thousands)***                                                                  |   |                    |       |
|                                                                                  |   | **(Unaudited)**         | ** ** |                        | ** ** |
| Senior  credit facility:                                                              |   |                    |       |                        |       |
| Revolving  line of credit                                                             |   | $                       | 20,000     |                        | $          | 12,000 |   |
| Term  loans                                                                           |   | 272,963                 |       | 275,706                     |       |
|                                                                                  |   |                    |       |                        |       |
| 12%  senior subordinated notes                                                        |   | 100,000                 |       | 100,000                     |       |
|                                                                                  |   |                    |       |                        |       |
| Capital  lease obligations and term debt financing, secured by property and equipment |   | 10,686                  |       | 10,745                      |       |
|                                                                                  |   |                    |       |                        |       |
| Other  indebtedness                                                                   |   | 939                     |       | 1,799                       |       |
| Total  long-term debt                                                                 |   | 404,588                 |       | 400,250                     |       |
| Less  current portion                                                                 |   | (17,609                 | )          | (13,899                     | )          |
| Long-term  debt, less current portion                                                 |   | $                       | 386,979    |                        | $          | 386,351 |   |

 

On March 19, 2002, theCompany amended certain of the terms of its senior credit facility.  The amendment combines two $25,000,000working capital and acquisitions lines of credit into a single $50,000,000working capital line of credit, increases the prime rate and LIBOR rate marginsby 50 basis points, resulting in a range of 2.00% to 3.25% for prime rateborrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amends certainfinancial covenants, principally through December 31, 2003.

 

**Note 8.           Income Taxes**

 

For the three months andsix months ended June 30, 2002, the provision for income taxes differsfrom the amount determined by applying the applicable U.S. statutory federalrate to income before income taxes primarily due to the effects of state andforeign income taxes and minority interest in preferred stock of subsidiarywhich is not deductible for income tax purposes.

 

13

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For the three months andsix months ended June 30, 2001, the provision for income taxes differsfrom the amount determined by applying the applicable U.S. statutory federalrate to income before income taxes primarily due to the effects of state andforeign income taxes and non-deductible expenses, principally goodwillamortization and minority interest in preferred stock of subsidiary.  Prior to the January 1, 2002 adoption ofSFAS No. 142, goodwill was amortized for financial reportingpurposes.

 

During the six monthsended June 30, 2002, the Company reclassified to long-term approximately$4,000,000 of loss carryforwards classified as current at December 31, 2001 toreflect the portion of the carryforwards the Company does not expect to utilizeduring the 2002 fiscal year.

 

**Note 9.           Capital Structure**

 

**MandatorilyRedeemable Preferred Stock**

 

The table belowsummarizes the increase in mandatorily redeemable preferred stock during thesix months ended June 30, 2002.

 
|                                                              |   | **DeCrane  Aircraft  16% Preferred Stock** |       | **DeCrane  Holdings  14% Preferred Stock** |       |
|-------------------------------------------------------------------|--------|--------------------------------------------|------------|--------------------------------------------|------------|
|                                                              |   | **Number  of  Shares**                     | ** ** | **Mandatory  Redemption  Value**           | ** ** | **Unamortized  Issuance  Discount** | ** ** | **Net  Book  Value** | ** ** | **Number  of  Shares** | ** ** | **Mandatory  Redemption  Value** | ** ** |
|                                                              |   | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| ***(In thousands, except share and per share data)***             |   | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** |
|                                                              |   |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Balance,  December 31, 2001                                  |   | 316,330                                    |       | $                                          | 31,633     |   | $ | (3,393 | ) | $ | 28,240 |   | 342,417 |   | $ | 54,223 |   |
| Accrued dividends  and redemption value accretion                 |   | 25,812                                     |       | 2,581                                      |       | 234 |   | 2,815 |   | — |   | — |   |
| Noncash dividend  accretion                                       |   | —                                     |       | —                                     |       | — |   | — |   | — |   | 3,862 |   |
| Balance,  June 30, 2002 (Unaudited)                          |   | 342,142                                    |       | $                                          | 34,214     |   | $ | (3,159 | ) | $ | 31,055 |   | 342,417 |   | $ | 58,085 |   |
|                                                              |   |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Per share  liquidation value as of June 30, 2002 (Unaudited) |   |                                       |       | $                                          | 100.00     |   |   |   |   |   |   |   | $ | 169.63 |   |

 

DeCrane Aircraft’s 16%preferred stock is reflected as minority interest in preferred stock ofsubsidiary in the consolidated financial statements.

 

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

 

Holders of the preferredstock are entitled to receive, when, as and if declared, dividends at a rateequal to 16% per annum.  Prior to June30, 2005, DeCrane Aircraft may, at its option, pay dividends either in cash orby the issuance of additional shares of preferred stock.  Since the preferred stock issuance date onJune 30, 2000, DeCrane Aircraft has elected to issue additional shares in lieuof cash dividends; such shares are reflected as a component of minorityinterest in preferred stock of subsidiary.

*** ***

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

 

Holders of the preferredstock are entitled to receive, when, as and if declared, dividends at a rateequal to 14% per annum.  Prior to September30, 2005, dividends are not paid in cash but instead accrete to the liquidationvalue of the preferred stock, which, in turn, increases the redemptionobligation.

 

14

----

 

**Note 9.           Capital Structure (Continued)**

** **

**CommonStock, Stock Options Exercised and Notes Receivable for Shares Sold**

 

During the six monthsended June 30, 2002, DeCrane Holdings repurchased and canceled 18,743 commonshares from former members of DeCrane Aircraft management.  The former management members also electedto exercise 9,252 vested stock options on a cashless basis.  The $14,000 income tax benefit associatedwith the stock options exercised was also credited to additional paid-incapital.  In connection with therepurchase, a note receivable collateralized by the repurchased common stockwas repaid.

 

DeCrane Holdings alsosold 3,704 common shares for $100,000 during the six months endedJune 30, 2002.

 

**Note 10.         Commitments and Contingencies**

** **

**Litigation**

** **

As part of itsinvestigation of the crash Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the “CTSB”)notified the Company that they recovered burned wire that was attached to thein-flight entertainment system installed on some of Swissair’s aircraft by oneof the Company’s subsidiaries.  TheCompany is fully cooperating with the CTSB and has been advised that the CTSBintends to issue a final report on its investigation in February, 2003.  The Company believes that no evidence existsthat would indicate the equipment installed by its subsidiary malfunctioned orfailed during the flight.  Families ofthe 229 persons who died aboard the flight have filed actions in federal andstate courts against the Company, and many other unaffiliated parties,including Swissair and Boeing.  Theactions claim negligence, strict liability and breach of warranty relating tothe installation and testing of the in-flight entertainment system.  The actions seek compensatory and punitivedamages and costs in an unstated amount. All of the actions have been transferred to the United States DistrictCourt for the Eastern District of Pennsylvania and assigned under MDL Case No.1269 for coordinated or consolidated pretrial proceedings.  The Company intends to defend the claimsvigorously.

 

The Companyand its subsidiaries are also involved in other routine legal andadministrative proceedings incident to the normal conduct of business.  Management believes the ultimate dispositionof all such matters will not have a material adverse effect on the Company’sbusiness, consolidated financial position, results of operations or cash flows.

 

**ContingentAcquisition Consideration**

 

The Company’s remainingmaximum contingent acquisition consideration payment obligation is $600,000 asof June 30, 2002.  The contingentconsideration is payable based upon an acquired company’s level of attainmentof its defined performance criteria for the year ending December 31, 2002 andexcludes amounts earned and recorded through December 31, 2001.  The contingent consideration, if any, ispayable during the first quarter of fiscal 2003.

 

 

15

----

 

**Note 11.         Consolidated Statements of Cash Flows**

 

The following information supplements the Company’sconsolidated statements of cash flows:

 
|                                                                                                 |   | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
| ***(In thousands)***                                                                                 |   | **2002**                             | ** ** | **2001** | ** ** |
|                                                                                                 |   | **(Unaudited)**                      | ** ** |
| Components of cash paid for acquisitions:                                                            |   |                                 |       |   |   |
| Contingent consideration paid for  previously completed acquisitions                                 |   | $                                    | 5,826      |   | $ | 17,075 |   |
| Cash purchase price reductions received as  a result of settling asserted claims against the sellers |   | —                               |       | (3,718 | ) |
| Additional acquisition related expenses                                                              |   | 64                                   |       | 172 |   |
| Total cash paid for acquisitions                                                                     |   | $                                    | 5,890      |   | $ | 13,529 |   |

 

During the six monthsended June 30, 2001, the Company received cash of $3,718,000 in settlement ofclaims for breach of representation and warranty provisions contained in thepurchase agreements asserted against the sellers of two companies acquired in2000. The settlement agreement also clarified the calculation of the contingentconsideration provisions of the purchase agreement and further provided thatthe Company pay in 2002 a minimum of $2,750,000 of previously contingentconsideration for the year ending December 31, 2001. The $2,750,000 minimumcontingent consideration was paid during the six months ended June 30, 2002.

 

**Note 12.         Business Segment Information**

 

The Company suppliesproducts and services to the aerospace industry.  The Company’s subsidiaries are organized into three groups, eachof which are strategic businesses that develop, manufacture and sell distinctproducts and services.  The groups and adescription of their businesses are as follows:

 

•                       *Cabin Management —* provides interior cabincomponents for the corporate/VIP aircraft market, including cabin interiorfurnishings, cabin management and entertainment systems, seating and compositecomponents;

 

•                       *Specialty Avionics —* designs, engineersand manufactures electronic components, display devices and interconnectcomponents and assemblies; and

 

•                       *Systems*Integration*—* provides auxiliary fuel tanks,auxiliary power units and system integration services.

 

Management utilizes morethan one measurement to evaluate group performance and allocate resources,however, management considers EBITDA to be the primary measurement of overalleconomic returns and cash flows. Management defines EBITDA as earnings before interest, income taxes,depreciation and amortization, acquisition related charges and other noncash,nonoperating and nonrecurring charges. This is consistent with the manner in which lenders and ultimateinvestors measure the Company’s overall performance.

 

The accounting policiesof the groups are substantially the same as those described in the summary ofsignificant accounting policies in Note 1 to the audited financialstatements.  Some transactions arerecorded at the Company’s corporate headquarters and are not allocated to thegroups, such as most of the Company’s cash and cash equivalents, debt andrelated net interest expense, corporate headquarters costs and income taxes.

 

16

----

 

The tables below summarize selected financial data bybusiness segment.

 
|                        |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|-----------------------------|--------|-----------------------------------|------------|--------------------------------------|------------|
| ***(In thousands)***        |   | **2002**                          | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                        |   | **(Unaudited)**                   | ** ** |
| Revenues:                   |   |                              |       |                                 |       |   |   |   |   |
| Cabin Management            |   | $                                 | 48,232     |                                 | $          | 53,932 |   | $ | 94,099 |   | $ | 105,291 |   |
| Specialty Avionics          |   | 25,039                            |       | 31,824                               |       | 50,383 |   | 63,097 |   |
| Systems Integration         |   | 13,223                            |       | 17,761                               |       | 28,300 |   | 34,495 |   |
| Inter-group elimination (1) |   | (162                              | )          | (737                                 | )          | (287 | ) | (952 | ) |
| Consolidated totals         |   | $                                 | 86,332     |                                 | $          | 102,780 |   | $ | 172,495 |   | $ | 201,931 |   |
|                        |   |                              |       |                                 |       |   |   |   |   |
| EBITDA:                     |   |                              |       |                                 |       |   |   |   |   |
| Cabin Management            |   | $                                 | 1,376      |                                 | $          | 9,690 |   | $ | 4,794 |   | $ | 23,088 |   |
| Specialty Avionics          |   | 6,691                             |       | 9,402                                |       | 13,702 |   | 17,229 |   |
| Systems Integration         |   | 4,096                             |       | 4,778                                |       | 8,392 |   | 8,874 |   |
| Corporate (2)               |   | (1,629                            | )          | (1,365                               | )          | (3,187 | ) | (3,301 | ) |
| Inter-group elimination (3) |   | (111                              | )          | (99                                  | )          | — |   | (99 | ) |
| Consolidated totals (4)     |   | $                                 | 10,423     |                                 | $          | 22,406 |   | $ | 23,701 |   | $ | 45,791 |   |
|                        |   |                              |       |                                 |       |   |   |   |   |
| Adjusted EBITDA (5):        |   |                              |       |                                 |       |   |   |   |   |
| Cabin Management            |   | $                                 | 9,042      |                                 | $          | 13,592 |   | $ | 16,503 |   | $ | 26,990 |   |
| Specialty Avionics          |   | 6,691                             |       | 9,402                                |       | 13,702 |   | 17,229 |   |
| Systems Integration         |   | 4,096                             |       | 4,778                                |       | 8,392 |   | 8,874 |   |
| Corporate                   |   | (1,629                            | )          | (1,365                               | )          | (3,187 | ) | (3,301 | ) |
| Inter-group elimination     |   | (111                              | )          | (99                                  | )          | — |   | (99 | ) |
| Consolidated totals         |   | $                                 | 18,089     |                                 | $          | 26,308 |   | $ | 35,410 |   | $ | 49,693 |   |

 
|                             |   | **June 30,** |       |
|----------------------------------|--------|-------------------|------------|
| ***(In thousands)***             |   | **2002**          |       | **2001** |   |
|                             |   | **(Unaudited)**   | ** ** |
| Total assets (as of period end): |   |              |       |   |   |
| Cabin Management                 |   | $                 | 297,006    |   | $ | 320,619 |   |
| Specialty Avionics               |   | 209,676           |       | 225,199 |   |
| Systems Integration              |   | 76,123            |       | 78,498 |   |
| Corporate (6)                    |   | 39,304            |       | 41,014 |   |
| Inter-group elimination (7)      |   | (122              | )          | (197 | ) |
| Consolidated totals              |   | $                 | 621,987    |   | $ | 665,133 |   |

 

----

(1)                      Inter-groupsales are accounted for at prices comparable to sales to unaffiliatedcustomers, and are eliminated in consolidation.

 

(2)                      Reflects theCompany’s corporate headquarters costs and expenses not allocated to thegroups.

 

(3)                      Reflectselimination of the effect of inter-group profits in inventory.

 

17

----

 

(4)           The table below reconcilesconsolidated EBITDA to income from operations and income before income taxes.

 
|                                               |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|----------------------------------------------------|--------|-----------------------------------|------------|--------------------------------------|------------|
| ***(In thousands)***                               |   | **2002**                          | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                               |   | **(Unaudited)**                   | ** ** |
| Consolidated EBITDA                                |   | $                                 | 10,423     |                                 | $          | 22,406 |   | $ | 23,701 |   | $ | 45,791 |   |
| Depreciation and amortization (a)                  |   | (4,258                            | )          | (8,153                               | )          | (8,654 | ) | (15,848 | ) |
| Acquisition related charges not capitalized        |   | (468                              | )          | (22                                  | )          | (478 | ) | (103 | ) |
| Other noncash charges                              |   | (84                               | )          | (46                                  | )          | (138 | ) | (236 | ) |
| Consolidated income from operations                |   | 5,613                             |       | 14,185                               |       | 14,431 |   | 29,604 |   |
|                                               |   |                              |       |                                 |       |   |   |   |   |
| Interest expense                                   |   | (8,195                            | )          | (9,875                               | )          | (16,158 | ) | (20,330 | ) |
| Minority interest in preferred stock of subsidiary |   | (1,433                            | )          | (1,241                               | )          | (2,815 | ) | (2,440 | ) |
| Other expenses, net                                |   | (239                              | )          | (12                                  | )          | (385 | ) | (117 | ) |
| Consolidated income (loss) before income  taxes    |   | $                                 | (4,254     | )                                    | $          | 3,057 |   | $ | (4,927 | ) | $ | 6,717 |   |

 

----

(a)                                  Reflectsdepreciation and amortization of long-lived assets, goodwill (for periods priorto the January 1, 2002 adoption of SFAS No. 142) and other intangibleassets.  Excludes amortization ofdeferred financing costs, which are classified as a component of interestexpense.  The table below reconcilesdepreciation and amortization of long-lived assets to consolidated depreciationand amortization.

 
|                                                |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|-----------------------------------------------------|--------|-----------------------------------|------------|--------------------------------------|------------|
| ***(In thousands)***                                |   | **2002**                          | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                |   | **(Unaudited)**                   | ** ** |
| Depreciation and amortization of long-lived  assets |   | $                                 | 4,258      |                                 | $          | 8,153 |   | $ | 8,654 |   | $ | 15,848 |   |
| Amortization of deferred financing costs            |   | 707                               |       | 524                                  |       | 1,296 |   | 1,077 |   |
| Consolidated depreciation amortization              |   | $                                 | 4,965      |                                 | $          | 8,677 |   | $ | 9,950 |   | $ | 16,925 |   |

 

(5)                                  ReflectsEBITDA before Cabin Management’s restructuring, asset impairment and othernonrecurring charges (Note 3) of:

 

•                  $7,666,000and $11,709,000 for the three months and six months ended June 30, 2002,respectively, and

 

•                  $3,902,000the three months and six months ended June 30, 2001.

 

(6)                                  Reflectsthe Company’s corporate headquarters assets, excluding investments in and notesreceivable from subsidiaries.

 

(7)           Reflects elimination of inter-groupreceivables and profits in inventory as of period end.

 

18

----

 

**Note 13.         Supplemental Condensed ConsolidatingFinancial Information**

 

In conjunction with thesenior credit facility and 12% senior subordinated notes described inNote 7, the following condensed consolidating financial information ispresented segregating DeCrane Aircraft, as the issuer, and guarantor andnon-guarantor subsidiaries.  Theaccompanying financial information in the guarantor subsidiaries columnreflects the financial position, results of operations and cash flows for thosesubsidiaries guaranteeing the senior credit facility and the notes.  DeCrane Holdings in not a guarantor ofeither the senior credit facility or the notes and is therefore reflected inthe non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantorsubsidiaries.

 

The guarantorsubsidiaries are wholly-owned subsidiaries of the DeCrane Aircraft and theirguarantees are full and unconditional on a joint and several basis.  There are no restrictions on the ability ofthe guarantor subsidiaries to transfer funds to the issuer in the form of cashdividends, loans or advances.  Separatefinancial statements of the guarantor subsidiaries are not presented becausemanagement believes that such financial statements would not be material to investors.  Investments in subsidiaries in the followingcondensed consolidating financial information are accounted for under theequity method of accounting. Consolidating adjustments include the following:

 

(1)          Elimination ofinvestments in subsidiaries.

 

(2)          Elimination ofintercompany accounts.

 

(3)          Elimination ofintercompany sales between guarantor and non-guarantor subsidiaries.

 

(4)          Elimination of equity inearnings of subsidiaries.

 

19

----

 

**BalanceSheets**

 
|                                                                                     |   | **June 30,  2002 (Unaudited)** |       |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                                     |   | **Issuer**                          |       | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
| **(*****In thousands)***                                                                 |   | ** **                          | ** ** | ** ** | ** ** | ** ** |
|                                                                                     |   |                                | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Assets**                                                                               |   |                                |       |   |   |   |   |   |   |   |   |
|                                                                                     |   |                                |       |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                                |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                                   | 8,496      |   | $ | 98 |   | $ | 401 |   | $ | — |   | $ | 8,995 |   |
| Accounts receivable, net                                                                 |   | —                              |       | 47,766 |   | 1,510 |   | — |   | 49,276 |   |
| Inventories                                                                              |   | —                              |       | 82,815 |   | 1,464 |   | — |   | 84,279 |   |
| Other current assets                                                                     |   | 12,074                              |       | 1,903 |   | 272 |   | — |   | 14,249 |   |
| Total current assets                                                                     |   | 20,570                              |       | 132,582 |   | 3,647 |   | — |   | 156,799 |   |
|                                                                                     |   |                                |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 2,930                               |       | 49,689 |   | 2,414 |   | — |   | 55,033 |   |
| Other assets, principally intangibles, net                                               |   | 15,804                              |       | 383,760 |   | 10,591 |   | — |   | 410,155 |   |
| Investments in subsidiaries                                                              |   | 406,475                             |       | 20,641 |   | 100,481 |   | (527,597 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 267,907                             |       | 143,017 |   | 4,887 |   | (415,811 | )(2) | — |   |
| Total assets                                                                             |   | $                                   | 713,686    |   | $ | 729,689 |   | $ | 122,020 |   | $ | (943,408 | ) | $ | 621,987 |   |
|                                                                                     |   |                                |       |   |   |   |   |   |   |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholders’ Equity**   |   |                                |       |   |   |
| Current liabilities:                                                                     |   |                                |       |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                                   | 15,659     |   | $ | 1,943 |   | $ | 7 |   | $ | — |   | $ | 17,609 |   |
| Other current liabilities                                                                |   | 15,996                              |       | 37,438 |   | 1,220 |   | — |   | 54,654 |   |
| Total current liabilities                                                                |   | 31,655                              |       | 39,381 |   | 1,227 |   | — |   | 72,263 |   |
|                                                                                     |   |                                |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                                           |   | 377,710                             |       | 9,269 |   | — |   | — |   | 386,979 |   |
| Intercompany payables                                                                    |   | 143,017                             |       | 272,794 |   | — |   | (415,811 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 32,300                              |       | 1,938 |   | 202 |   | — |   | 34,440 |   |
|                                                                                     |   |                                |       |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                       |   | 31,055                              |       | — |   | — |   | — |   | 31,055 |   |
| Mandatorily redeemable preferred stock                                                   |   | —                              |       | — |   | 58,085 |   | — |   | 58,085 |   |
|                                                                                     |   |                                |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                                               |   |                                |       |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 116,806                             |       | 336,986 |   | 86,843 |   | (471,764 | )(1) | 68,871 |   |
| Retained earnings (deficit)                                                              |   | (18,857                             | )          | 69,489 |   | (23,806 | ) | (55,833 | )(1) | (29,007 | ) |
| Accumulated other                                                                        |   |                                |       |   |   |   |   |   |   |   |   |
| comprehensive loss                                                                       |   | —                              |       | (168 | ) | (531 | ) | — |   | (699 | ) |
| Total stockholders’ equity                                                          |   | 97,949                              |       | 406,307 |   | 62,506 |   | (527,597 | ) | 39,165 |   |
| Total liabilities, mandatorily redeemable preferred stock and  stockholders’ equity |   | $                                   | 713,686    |   | $ | 729,689 |   | $ | 122,020 |   | $ | (943,408 | ) | $ | 621,987 |   |
|                                                                                          |        |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

20

----

 
|                                                                                     |   | **December 31,  2001** |    |
|------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| ***(In thousands)***                                                                     |   | **Issuer**                  |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                        |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                        |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                           | 9,641   |   | $ | (92 | ) | $ | 245 |   | $ | — |   | $ | 9,794 |   |
| Accounts receivable, net                                                                 |   | —                      |    | 56,973 |   | 1,478 |   | — |   | 58,451 |   |
| Inventories                                                                              |   | —                      |    | 84,864 |   | 1,634 |   | — |   | 86,498 |   |
| Other current assets                                                                     |   | 15,153                      |    | 1,138 |   | 331 |   | — |   | 16,622 |   |
| Total current assets                                                                     |   | 24,794                      |    | 142,883 |   | 3,688 |   | — |   | 171,365 |   |
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 3,355                       |    | 55,152 |   | 2,566 |   | — |   | 61,073 |   |
| Other assets, principally intangibles, net                                               |   | 15,348                      |    | 388,269 |   | 9,656 |   | — |   | 413,273 |   |
| Investments in subsidiaries                                                              |   | 403,786                     |    | 20,697 |   | 105,146 |   | (529,629 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 256,360                     |    | 121,030 |   | 4,300 |   | (381,690 | )(2) | — |   |
| Total assets                                                                             |   | $                           | 703,643 |   | $ | 728,031 |   | $ | 125,356 |   | $ | (911,319 | ) | $ | 645,711 |   |
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholders’ Equity**   |   |                        |    |   |
| Current liabilities:                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                           | 11,839  |   | $ | 2,054 |   | $ | 6 |   | $ | — |   | $ | 13,899 |   |
| Other current liabilities                                                                |   | 24,849                      |    | 49,854 |   | 1,107 |   | — |   | 75,810 |   |
| Total current liabilities                                                                |   | 36,688                      |    | 51,908 |   | 1,113 |   | — |   | 89,709 |   |
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| Long-term debt                                                                           |   | 376,392                     |    | 9,959 |   | — |   | — |   | 386,351 |   |
| Intercompany payables                                                                    |   | 120,998                     |    | 260,660 |   | 32 |   | (381,690 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 38,847                      |    | 1,806 |   | 382 |   | — |   | 41,035 |   |
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                       |   | 28,240                      |    | — |   | — |   | — |   | 28,240 |   |
| Mandatorily redeemable preferred stock                                                   |   | —                      |    | — |   | 54,223 |   | — |   | 54,223 |   |
|                                                                                     |   |                        |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                                               |   |                        |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 119,801                     |    | 336,986 |   | 91,021 |   | (474,895 | )(1) | 72,913 |   |
| Retained earnings (deficit)                                                              |   | (17,323                     | )       | 66,800 |   | (19,401 | ) | (54,734 | )(1) | (24,658 | ) |
| Accumulated other comprehensive loss                                                     |   | —                      |    | (88 | ) | (2,014 | ) | — |   | (2,102 | ) |
| Total stockholders’ equity                                                          |   | 102,478                     |    | 403,698 |   | 69,606 |   | (529,629 | ) | 46,153 |   |
| Total liabilities, mandatorily redeemable preferred stock and  stockholders’ equity |   | $                           | 703,643 |   | $ | 728,031 |   | $ | 125,356 |   | $ | (911,319 | ) | $ | 645,711 |   |

 

21

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**Statementsof Operations**

 
|                                               |   | **Six Months  Ended June 30, 2002 (Unaudited)** |       |
|----------------------------------------------------|--------|------------------------------------------------------|------------|
|                                               |   |                                                 |       | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
| ***(In thousands)***                               |   | **Issuer**                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Revenues                                           |   | $                                                    | —     |   | $ | 170,541 |   | $ | 4,937 |   | $ | (2,983 | )(3) | $ | 172,495 |   |
| Cost of sales                                      |   | —                                               |       | 123,795 |   | 4,130 |   | (2,983 | )(3) | 124,942 |   |
|                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Gross profit                                       |   | —                                               |       | 46,746 |   | 807 |   | — |   | 47,553 |   |
|                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses       |   | 4,273                                                |       | 25,325 |   | 693 |   | — |   | 30,291 |   |
| Amortization of intangible assets                  |   | —                                               |       | 2,830 |   | 1 |   | — |   | 2,831 |   |
| Interest expense                                   |   | 15,682                                               |       | 473 |   | 3 |   | — |   | 16,158 |   |
| Minority interest in preferred stock of subsidiary |   | —                                               |       | — |   | 2,815 |   | — |   | 2,815 |   |
| Intercompany charges                               |   | (14,310                                              | )          | 14,310 |   | — |   | — |   | — |   |
| Equity in (earnings) loss of subsidiaries          |   | (2,689                                               | )          | (43 | ) | 1,534 |   | 1,198 | (4)  | — |   |
| Other expenses, net                                |   | 174                                                  |       | 54 |   | 157 |   | — |   | 385 |   |
| Provision for income taxes (benefit)               |   | (1,596                                               | )          | 1,108 |   | (90 | ) | — |   | (578 | ) |
|                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                  |   | $                                                    | (1,534     | ) | $ | 2,689 |   | $ | (4,306 | ) | $ | (1,198 | ) | $ | (4,349 | ) |

 

 
|                                                |   | **Six Months  Ended June 30, 2001 (Unaudited)** |       |
|-----------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                |   |                                                 |       | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
| ***(In thousands)***                                |   | **Issuer**                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                                    | —     |   | $ | 200,161 |   | $ | 5,810 |   | $ | (4,040 | )(3) | $ | 201,931 |   |
| Cost of sales                                       |   | —                                               |       | 133,334 |   | 5,016 |   | (4,040 | )(3) | 134,310 |   |
|                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                               |       | 66,827 |   | 794 |   | — |   | 67,621 |   |
|                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
|  Selling, general and  administrative expenses |   | 4,361                                                |       | 23,293 |   | 442 |   | — |   | 28,096 |   |
| Amortization of intangible assets                   |   | 101                                                  |       | 9,618 |   | 202 |   | — |   | 9,921 |   |
| Interest expense                                    |   | 19,786                                               |       | 531 |   | 13 |   | — |   | 20,330 |   |
| Minority interest in preferred stock of subsidiary  |   | —                                               |       | — |   | 2,440 |   | — |   | 2,440 |   |
| Intercompany charges                                |   | (10,581                                              | )          | 10,581 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                  |   | (11,973                                              | )          | (214 | ) | (4,583 | ) | 16,770 | (4)  | — |   |
| Other expenses (income), net                        |   | 161                                                  |       | 81 |   | (125 | ) | — |   | 117 |   |
| Provision for income taxes (benefit)                |   | (6,438                                               | )          | 10,964 |   | 48 |   | — |   | 4,574 |   |
|                                                |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net income                                          |   | $                                                    | 4,583      |   | $ | 11,973 |   | $ | 2,357 |   | $ | (16,770 | ) | $ | 2,143 |   |

 

22

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**Statementsof Cash Flows**

 
|                                                 |   | **Six Months  Ended June 30, 2002 (Unaudited)** |   |
|------------------------------------------------------|--------|------------------------------------------------------|--------|
| ***(In thousands)***                                 |   | **Issuer**                                           |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**           |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                    |   | $                                                    | (1,534 | ) | $ | 2,689 |   | $ | (4,306 | ) | $ | (1,198 | )(4) | $ | (4,349 | ) |
| Noncash adjustments:                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| Equity in (earnings) loss of subsidiaries            |   | (2,689                                               | )      | (43 | ) | 1,534 |   | 1,198 | (4) | — |   |
| Other noncash adjustments                            |   | 834                                                  |   | 13,848 |   | 3,164 |   | — |   | 17,846 |   |
| Changes in working capital                           |   | 4,974                                                |   | (12,662 | ) | (218 | ) | — |   | (7,906 | ) |
| Net cash provided by operating activities            |   | 1,585                                                |   | 3,832 |   | 174 |   | — |   | 5,591 |   |
|                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**           |   |                                                 |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired     |   | (5,890                                               | )      | — |   | — |   | — |   | (5,890 | ) |
| Capital expenditures                                 |   | (46                                                  | )      | (2,384 | ) | (62 | ) | — |   | (2,492 | ) |
| Return of capital from subsidiary, net               |   | —                                               |   | — |   | 268 |   | (268 | )(1) | — |   |
| Net cash provided by (used for) investing activities |   | (5,936                                               | )      | (2,384 | ) | 206 |   | (268 | ) | (8,382 | ) |
|                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities:**           |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                |   | 8,000                                                |   | — |   | — |   | — |   | 8,000 |   |
| Other long-term borrowings                           |   | —                                               |   | 545 |   | — |   | — |   | 545 |   |
| Principal payments on long-term debt and leases      |   | (2,863                                               | )      | (1,704 | ) | — |   | — |   | (4,567 | ) |
| Deferred financing costs                             |   | (1,663                                               | )      | — |   | — |   | — |   | (1,663 | ) |
| Other, net                                           |   | (268                                                 | )      | (99 | ) | (268 | ) | 268 | (1) | (367 | ) |
| Net cash provided by (used for) financing activities |   | 3,206                                                |   | (1,258 | ) | (268 | ) | 268 |   | 1,948 |   |
|                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on cash       |   | —                                               |   | — |   | 44 |   | — |   | 44 |   |
|                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and equivalents      |   | (1,145                                               | )      | 190 |   | 156 |   | — |   | (799 | ) |
| Cash and equivalents at beginning of period          |   | 9,641                                                |   | (92 | ) | 245 |   | — |   | 9,794 |   |
|                                                 |   |                                                 |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                |   | $                                                    | 8,496  |   | $ | 98 |   | $ | 401 |   | $ | — |   | $ | 8,995 |   |

 

23

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|                                                               |   | **Six Months  Ended June 30, 2001 (Unaudited)** |       |
|--------------------------------------------------------------------|--------|------------------------------------------------------|------------|
|                                                               |   |                                                 |       | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
| ***(In thousands)***                                               |   | **Issuer**                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**                         |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net income                                                         |   | $                                                    | 4,583      |   | $ | 11,973 |   | $ | 2,357 |   | $ | (16,770 | )(4) | $ | 2,143 |   |
| Noncash adjustments:                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                 |   | (11,973                                              | )          | (214 | ) | (4,583 | ) | 16,770 | (4)  | — |   |
| Other noncash adjustments                                          |   | 3,457                                                |       | 14,902 |   | 3,009 |   | — |   | 21,368 |   |
| Changes in working capital                                         |   | (1,686                                               | )          | (20,293 | ) | (637 | ) | — |   | (22,616 | ) |
| Net cash provided by (used for) operating activities               |   | (5,619                                               | )          | 6,368 |   | 146 |   | — |   | 895 |   |
|                                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**                         |   |                                                 |       |   |   |   |   |   |   |   |   |
|                                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired                   |   | (13,529                                              | )          | — |   | — |   | — |   | (13,529 | ) |
| Capital expenditures and other                                     |   | (109                                                 | )          | (5,135 | ) | (486 | ) | — |   | (5,730 | ) |
| Net cash used for investing activities                             |   | (13,638                                              | )          | (5,135 | ) | (486 | ) | — |   | (19,259 | ) |
| **Cash flows from financing  activities:**                         |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                              |   | 21,400                                               |       | — |   | — |   | — |   | 21,400 |   |
| Principal payments on term debt, capitalized leases and other debt |   | (1,827                                               | )          | (1,197 | ) | (11 | ) | — |   | (3,035 | ) |
| Deferred financing costs                                           |   | (580                                                 | )          | — |   | — |   | — |   | (580 | ) |
| Other, net                                                         |   | —                                               |       | (93 | ) | — |   | — |   | (93 | ) |
| Net cash provided by (used for) financing activities               |   | 18,993                                               |       | (1,290 | ) | (11 | ) | — |   | 17,692 |   |
|                                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on cash                     |   | —                                               |       | — |   | 9 |   | — |   | 9 |   |
|                                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Net decrease in cash and equivalents                               |   | (264                                                 | )          | (57 | ) | (342 | ) | — |   | (663 | ) |
| Cash and equivalents at beginning of period                        |   | 7,553                                                |       | 233 |   | 413 |   | — |   | 8,199 |   |
|                                                               |   |                                                 |       |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                              |   | $                                                    | 7,289      |   | $ | 176 |   | $ | 71 |   | $ | — |   | $ | 7,536 |   |

 

24

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**ITEM 2.****                          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionsshould be read in conjunction with our financial statements and accompanyingnotes included in this report.

**Industry Overviewand Trends**

 

We compete in theaircraft products and services market of the aerospace industry.  The market for our products and services islargely driven by demand in the three civil aircraft markets: commercial,regional and corporate/VIP aircraft. Currently, we provide a minimal amount of products and services to themilitary aircraft market and are therefore relatively unaffected by defensespending and other factors affecting that market.

 

The September 11, 2001terrorist attack on the United States and weak global economic conditions areadversely impacting the commercial airline industry and, in turn, are having anunfavorable impact upon that portion of our business.  The commercial and regional original equipment andaftermarket/retrofit portions of our business are currently estimated atapproximately 31% of our revenues.

 

In addition, an estimated60% of our revenues are currently derived from the corporate/VIP aircraftoriginal equipment and aftermarket/retrofit business.  The weak global economic conditions have negatively impacted thisportion of our business as well, although not as severely as the commercialmarket.  The remaining 9% of ourrevenues are derived from the military aircraft and other markets.

 

In response to theseadverse conditions, we announced and implemented a restructuring plan inDecember 2001 designed to reduce expenses and conserve working capital.  This plan includes permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  During the first quarter offiscal 2002, we also announced we would consolidate the production of fourCabin Management manufacturing facilities into two facilities, resulting in thepermanent closure of two additional facilities.  During the second quarter of fiscal 2002, we also announced wewould permanently close the temporarily idled manufacturing facility.  See “—Restructuring, Asset Impairment andOther Nonrecurring Charges” below for additional information.

 

We believe the commercialaircraft portion of our business will experience significant weakness during2002 and 2003, with potential recovery occurring during 2004 or 2005.  We also believe the corporate/VIP aircraftportion of our business will experience somewhat more moderate weakness during2002 and 2003 with aircraft deliveries recovering in 2004 and continuing growththereafter.

 

**Results of Operations**

 

Our results of operationsfor the three months and six months ended June 30, 2002 and 2001 havebeen affected by restructuring, asset impairment and other nonrecurring chargesrelating to our 2001 and 2002 restructuring plans.  These restructuring charges, which affect the comparability ofour reported results of operations between periods, are more fully described in“—Restructuring, Asset Impairment and Other Nonrecurring Charges” below.

 

25

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**ThreeMonths Ended June 30, 2002 Compared to Three Months Ended June 30,2001**

 

**Revenues.* ***Revenuesdecreased $16.4 million, or 16.0%, to $86.4 million for the three months endedJune 30, 2002 from $102.8 million for the three months ended June 30,2001.  By segment, revenues changed asfollows:

 
|                    |   | **Increase  (Decrease)  From 2001** |        |
|-------------------------|--------|-------------------------------------|-------------|
| ***(In millions)***     |   | **Amount**                          |        | **Percent** | ** ** |
|                    |   |                                |        |   |   |
| Cabin Management        |   | $                                   |  (5.7  | ) | (10.5 | )% |
| Specialty Avionics      |   | (6.8                                | )           | (21.3 | ) |
| Systems Integration     |   | (4.5                                | )           | (25.6 | ) |
| Inter-group elimination |   | 0.6                                 |        |   |   |
| Total                   |   | $                                   |  (16.4 | ) |   |   |

* *

*CabinManagement. *Revenuesdecreased by $5.7 million, or 10.5% compared to the prior year.  The decrease, which is across most of ourproduct and services categories, is caused by the adverse impact the weak globaleconomic conditions are having on the corporate/VIP aircraft market in 2002versus 2001 as follows:

 

•                  a$2.3 million decrease in aircraft furniture and related products revenues;

 

•                  a$3.2 million decrease in cabin management and entertainment systems revenues;and

 

•                  a$1.4 million decrease in seating products revenues; offset by

 

•                  a$1.2 million increase in other product and services revenues.

 

*SpecialtyAvionics.*  Revenuesdecreased by $6.8 million, or 21.3% compared to the prior year, due to decreasesin commercial aircraft production affecting the following product lines:

 

•                  a$4.1 million volume decrease in interconnect products; and

 

•                  a$2.7 million decrease in cockpit audio, communications, lighting and power andcontrol devices revenues.

 

*SystemsIntegration.*  Revenuesdecreased by $4.5 million, or 25.6% compared to the prior year, due to:

 

•                  a$2.3 million decrease in the commercial aircraft systems integrationengineering services we provide in the aftermath of September 11th;and

 

•                  a$2.2 million decrease resulting from reduced production and delivery ofcorporate/VIP aircraft auxiliary fuel tanks.

 

**Grossprofit.**  Gross profitdecreased $10.8 million, or 33.0%, to $21.8 million for the three months endedJune 30, 2002.  By segment, gross profitchanged as follows:

 
|                    |   | **Increase  (Decrease)  From 2001** |       |
|-------------------------|--------|-------------------------------------|------------|
| ***(In millions)***     |   | **Amount**                          | ** ** | **Percent** | ** ** |
|                    |   |                                |       |   |   |
| Cabin Management        |   | $                                   | (6.0       | ) | (43.8 | )% |
| Specialty Avionics      |   | (3.7                                | )          | (30.4 | ) |
| Systems Integration     |   | (1.1                                | )          | (15.7 | ) |
| Inter-group elimination |   | —                              |       |   |   |
| Total                   |   | $                                   | (10.8      | ) |   |   |
|                         |        |                                     |            |  |  |  |  |  |  |  |

 

26

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Gross profit is reducedby restructuring charges pertaining to our Cabin Management group’s 2001 and2002 restructuring plans totaling $4.7 million for the three months endedJune 30, 2002 and $3.9 million for the same period last year.  Excluding these charges, gross profitdecreased $10.0 million, or 27.4%, to $26.5 million for the three months endedJune 30, 2002 compared to $36.5 million for the same period last yearand gross profit as a percent of revenues was 30.7% for the three months endedJune 30, 2002 compared to 35.5% for the same period last year.

 

*CabinManagement.*  Grossprofit decreased by $6.0 million, or 43.8% compared to prior year, primarilydue to:

 

•                  a$3.5 million decrease in profit margins associated with lower volume for ourcorporate/VIP aircraft furniture and seating products;

 

•                  a$1.7 million decrease in gross profit related to lower volume for our cabinmanagement and entertainment systems; and

 

•                  a$0.8 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans.

 

*SpecialtyAvionics.*  Grossprofit decreased by $3.7 million, or 30.4% compared to the prior year, due to:

 

•                  a$2.1 million decrease related to lower volume for our cockpit audio,communications, lighting and power and control devices products; and

 

•                  a$1.6 million decrease caused by lower volume for our interconnect products.

 

*SystemsIntegration.*  Grossprofit decreased by $1.1 million, or 15.7% compared to the prior year, due tolower sales volume.

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesincreased $1.4 million, or 10.1%, to $14.8 million for the three months endedJune 30, 2002, from $13.4 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                |   | **Increase  (Decrease)  From 2001** |       |
|---------------------|--------|-------------------------------------|------------|
| ***(In millions)*** |   | **Amount**                          | ** ** | **Percent** | ** ** |
|                |   |                                |       |   |   |
| Cabin Management    |   | $                                   | 2.4        |   | 45.8 | % |
| Specialty Avionics  |   | (1.1                                | )          | (28.5 | ) |
| Systems Integration |   | (0.4                                | )          | (16.6 | ) |
| Corporate           |   | 0.5                                 |       |   |   |
| Total               |   | $                                   | 1.4        |   |   |   |

 

SG&A expensesincludes restructuring charges pertaining to our Cabin Management group’s 2001and 2002 restructuring plans totaling $3.0 million for the three months endedJune 30, 2002.  Excluding thesecharges, SG&A expenses decreased $1.6 million, or 11.9%, to $11.8 millionfor the three months ended June 30, 2002 compared to $13.4 millionfor the same period last year and SG&A expenses as a percent of revenueswas 13.7% for the three months ended June 30, 2002 compared to 13.0%for the same period last year.

 

*CabinManagement. *SG&Aexpenses increased by $2.4 million, or 45.8% over the prior year, due to:

 

•                  a$3.0 million increase caused by restructuring charges relating to our 2001 and2002 restructuring plans; offset by

 

27

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•                  a$0.6 million decrease in expenses as a result of cost reduction measuresimplemented in 2001 and 2002 in response to lower sales volume resulting fromthe weak global economic conditions.

 

*SpecialtyAvionics.*  SG&Aexpenses decreased by $1.1 million, or 28.5% compared the prior year, due tolower labor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

 

*SystemsIntegration. *SG&Aexpenses decreased by $0.4 million, or 16.6% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

 

*Corporate. *SG&A expensesincreased by $0.5 million compared to the prior year, primarily due to higherinsurance and employee benefit costs.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $3.9 million to$4.3 million for the three months ended June 30, 2002 compared to $8.2 millionfor the same period in 2001, primarily resulting from the adoption of newaccounting standards.

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill andOther Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-livedasset and, as a result, the recording of periodic goodwill amortization chargeswas discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating toacquired assembled workforce intangibles not meeting the criteria forrecognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $3.5 million forthe three months ended June 30, 2001, which includes $0.4 million of assembledworkforce amortization, now deemed part of goodwill.

 

Excluding the effect ofthe accounting change, depreciation and amortization decreased $0.4 million asa result of lower depreciable costs resulting from the impairment of long-livedassets recorded during the fourth quarter of fiscal 2001 and 2002, partiallyoffset by additional depreciation resulting from capital expenditures duringthe period.

 

**EBITDAand Operating income.** EBITDA decreased $12.0 million, or 53.5%, to $10.4 million for the threemonths ended June 30, 2002, from $22.4 million for the same period lastyear.  Operating income decreased $8.6million to $5.6 million for the three months ended June 30, 2002, from $14.2million for the same period last year. EBITDA and operating income changed as follows:

 
|                                          |   | **Increase  (Decrease)  From 2001** |       |
|-----------------------------------------------|--------|-------------------------------------|------------|
| ***(In millions)***                           |   | **Amount**                          | ** ** | **Percent** | ** ** |
| EBITDA:                                       |   |                                |       |   |   |
| Cabin Management                              |   | $                                   | (8.3       | ) | (85.8 | )% |
| Specialty Avionics                            |   | (2.7                                | )          | (28.8 | ) |
| Systems Integration                           |   | (0.7                                | )          | (14.3 | ) |
| Corporate                                     |   | (0.3                                | )          | (19.4 | ) |
| Inter-group elimination                       |   | —                              |       |   |   |
| Total EBITDA                                  |   | (12.0                               | )          |   |   |
|                                          |   |                                |       |   |   |
| Depreciation and amortization                 |   | 3.9                                 |       |   |   |
| Other noncash and acquisition related charges |   | (0.5                                | )          |   |   |
| Total operating income                        |   | $                                   | (8.6       | ) |   |   |

 

28

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EBITDA andoperating income are reduced by restructuring charges pertaining to our CabinManagement group’s 2001 and 2002 restructuring plans totaling $7.7 million forthe three months ended June 30, 2002 and $3.9 million for the sameperiod last year.  Excluding thesecharges, EBITDA decreased $8.2 million, or 31.2%, to $18.1 million for thethree months ended June 30, 2002 compared to $26.3 million for thesame period last year and EBITDA as a percent of revenues was 20.9% for thethree months ended June 30, 2002 compared to 25.6% for the sameperiod last year.  Excluding thesecharges, operating income decreased $4.8 million, or 26.5%, to $13.3 millionfor the three months ended June 30, 2002 compared to $18.1 millionfor the same period last year.

 

*Cabin Management.*  EBITDA decreased by $8.3 million, or 85.8%compared to the prior year, primarily due to:

 

•                  a$3.8 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans;

 

•                  a$3.1 million decrease related principally to lower revenues in ourcorporate/VIP aircraft furniture seating operations; and

 

•                  a$1.4 million decrease resulting from lower sales volume for our cabinmanagement and entertainment systems.

 

*Specialty Avionics.*  EBITDA decreased by $2.7 million, or 28.8%compared to the prior year, as a result of lower demand for our commercialaircraft products offset by the effect of cost reduction programs implementedin 2001 and a favorable shift in product mix.

 

*Systems Integration. *EBITDA decreased by$0.7 million, or 14.3% over the prior year, due to lower sales volume partiallyoffset by reduced SG&A spending resulting from workforce reductions.

 

**Interest expense.**  Interest expense decreased $1.7 million, or17.2%, to $8.2 million for the three months ended June 30, 2002 compared to$9.9 million for the same period last year due almost entirely to lower averageinterest rates charged by our lenders during 2002.

 

**Minority interest in preferred stock ofsubsidiary.** Minority interest increased $0.2 million to $1.4 million for the threemonths ended June 30, 2002 compared to $1.2 million for the same periodlast year.  Minority interest reflectsthe accrued dividends, which are compounded quarterly, and redemption valueaccretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

 

**Provision for income taxes.**  The provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate tothe income before income taxes primarily due to the effects of state andforeign income taxes and non-deductible expenses, principally goodwillamortization for periods prior to the January 1, 2002 adoption of SFAS No. 142,and minority interest in preferred stock of subsidiary.  The difference in the effective tax ratesbetween periods is mostly the result of the adoption of SFAS No. 142.

 

**Net income (loss).**  Net income decreased $4.2 million to a netloss of $3.4 million for the three months ended June 30, 2002compared to net income of $0.8 million for the same period last year.

 

**Net loss applicable to common stockholders.**  Net loss applicable to common stockholdersincreased $4.5 million to a net loss of $5.3 million for the three months endedJune 30, 2002 compared to a net loss of $0.8 million for the same periodlast year.  The increase in the net lossapplicable to our common stockholders is attributable to:

 

•                  a$4.2 million net loss increase, which is net of a $0.2 million increase in thecharge for minority interest in preferred stock of subsidiary; and

 

29

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•                  a$0.3 million increase in noncash preferred stock dividend accretion on our 14%mandatorily redeemable preferred stock resulting from the quarterly compoundingof the dividends accreted.

 

**Bookings. **Bookings decreased $35.4 million, or 32.0%, to$75.3 million for the three months ended June 30, 2002 compared to $110.7million for the same period last year. The decrease in bookings for 2002 is due to decreases in orders for allthree of our business segments.

 

**Backlog at end of period.**  Backlog decreased $18.2 million to $131.7million as of June 30, 2002 compared to $149.9 million as of December 31,2001.

 

The decreasein bookings and resulting backlog in 2002 primarily results from the continuingadverse impact on our businesses of the aftermath of the events of September 11thand weak global economic conditions.

 

As describedin “—Industry Overview and Trends,” the events of September 11th andits aftermath are having an adverse impact on the aerospace industry and, inturn, are having an unfavorable impact on the commercial airline portion of ourbusiness.  In addition, weak globaleconomic conditions have negatively impacted other portions of our business aswell.  We are not currently able todetermine the continuing impact these events will have on our bookings andresulting backlog for future periods. However, given the magnitude of these events, the impact could bematerial.

 

**SixMonths Ended June 30, 2002 Compared to Six Months Ended June 30, 2001**

 

**Revenues.* ***Revenuesdecreased $29.4 million, or 14.6%, to $172.5 million for the six months endedJune 30, 2002 from $201.9 million for the six months ended June 30, 2001.  By segment, revenues changed as follows:

 
|                    |   | **Increase  (Decrease)  From 2001** |       |
|-------------------------|--------|-------------------------------------|------------|
| ***(In millions)***     |   | **Amount**                          | ** ** | **Percent** | ** ** |
|                    |   |                                |       |   |   |
| Cabin Management        |   | $                                   | (11.2      | ) | (10.6 | )% |
| Specialty Avionics      |   | (12.7                               | )          | (20.1 | ) |
| Systems Integration     |   | (6.2                                | )          | (18.0 | ) |
| Inter-group elimination |   | 0.7                                 |       |   |   |
| Total                   |   | $                                   | (29.4      | ) |   |   |

 

*Cabin Management. *Revenues decreased by $11.2 million, or10.6% compared to the prior year.  Thedecrease, which is across most of our product and services categories, iscaused by the adverse impact the weak global economic conditions are having onthe corporate/VIP aircraft market in 2002 versus 2001 as follows:

 

•                  a$4.5 million decrease in aircraft furniture and related products revenues;

 

•                  a$6.2 million decrease in cabin management and entertainment systems revenues;and

 

•                  a$3.7 million decrease in seating products revenues; offset by

 

•                  a$3.2 million increase in other product and services revenues.

 

*Specialty Avionics.*  Revenues decreased by $12.7 million, or20.1% compared to the prior year, due to decreases in commercial aircraftproduction affecting the following product lines:

 

•                  a$7.7 million volume decrease in interconnect products; and

 

•                  a$5.0 million decrease in cockpit audio, communications, lighting and power andcontrol devices revenues.

 

30

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*Systems Integration.*  Revenues decreased by $6.2 million, or 18.0%compared to the prior year, due to:

 

•                  a$4.1 million decrease in the commercial aircraft systems integrationengineering services we provide in the aftermath of September 11th;and

 

•                  a$2.1 million decrease resulting from reduced production and delivery ofcorporate/VIP aircraft auxiliary fuel tanks.

 

**Gross profit.**  Gross profit decreased $20.1 million, or29.7%, to $47.6 million for the six months ended June 30, 2002.  By segment, gross profit changed as follows:

 
|                    |   | **Increase  (Decrease)  From 2001** |       |
|-------------------------|--------|-------------------------------------|------------|
| ***(In millions)***     |   | **Amount**                          | ** ** | **Percent** | ** ** |
|                    |   |                                |       |   |   |
| Cabin Management        |   | $                                   | (13.9      | ) | (43.7 | )% |
| Specialty Avionics      |   | (4.7                                | )          | (21.2 | ) |
| Systems Integration     |   | (1.6                                | )          | (11.5 | ) |
| Inter-group elimination |   | 0.1                                 |       |   |   |
| Total                   |   | $                                   | (20.1      | ) |   |   |

 

Gross profitis reduced by restructuring charges pertaining to our Cabin Management group’s2001 and 2002 restructuring plans totaling $5.9 million for the six monthsended June 30, 2002 and $3.9 million for the same period lastyear.  Excluding these charges, grossprofit decreased $18.0 million, or 25.2%, to $53.5 million for the six monthsended June 30, 2002 compared to $71.5 million for the same periodlast year and gross profit as a percent of revenues was 31.0% for the sixmonths ended June 30, 2002 compared to 35.4% for the same period lastyear.

 

*Cabin Management.*  Gross profit decreased by $13.9 million, or43.7% compared to prior year, primarily due to:

 

•                  a$8.5 million decrease in profit margins associated with lower volume for ourcorporate/VIP aircraft furniture and seating products;

 

•                  a$3.4 million decrease in gross profit related to lower volume for our cabinmanagement and entertainment systems; and

 

•                  a$2.0 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans.

 

*Specialty Avionics.*  Gross profit decreased by $4.7 million, or21.2% compared to the prior year, due to:

 

•                  a$3.0 million decrease related to lower volume for our cockpit audio,communications, lighting and power and control devices products; and

 

•                  a$1.7 million decrease caused by lower volume for our interconnect products.

 

*Systems Integration.*  Gross profit decreased by $1.6 million, or11.5% compared to the prior year, due to lower sales volume.

 

31

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**Selling, general and administrative expenses.**  Selling, general and administrative expensesincreased $2.2 million, or 7.8%, to $30.3 million for the six months ended June30, 2002, from $28.1 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                |   | **Increase  (Decrease)  From 2001** |       |
|---------------------|--------|-------------------------------------|------------|
| ***(In millions)*** |   | **Amount**                          | ** ** | **Percent** | ** ** |
|                |   |                                |       |   |   |
| Cabin Management    |   | $                                   | 4.8        |   | 43.2 | % |
| Specialty Avionics  |   | (1.4                                | )          | (18.9 | ) |
| Systems Integration |   | (1.1                                | )          | (20.3 | ) |
| Corporate           |   | (0.1                                | )          |   |   |
| Total               |   | $                                   | 2.2        |   |   |   |

 

SG&Aexpenses includes restructuring charges pertaining to our Cabin Managementgroup’s 2001 and 2002 restructuring plans totaling $5.8 million for the sixmonths ended June 30, 2002. Excluding these charges, SG&A expenses decreased $3.6 million, or12.8%, to $24.5 million for the six months ended June 30, 2002compared to $28.1 million for the same period last year and SG&A expensesas a percent of revenues was 14.2% for the six months endedJune 30, 2002 compared to 13.9% for the same period last year.

 

*Cabin Management. *SG&A expenses increased by $4.8million, or 43.2% over the prior year, due to:

 

•                  a$5.8 million increase caused by restructuring charges relating to our 2001 and2002 restructuring plans; offset by

 

•                  a$1.0 million decrease in expenses as a result of cost reduction measuresimplemented in 2001 and 2002 in response to lower sales volume resulting fromthe weak global economic conditions.

 

*Specialty Avionics.*  SG&A expenses decreased by $1.4 million,or 18.9% compared the prior year, due to lower labor and employee benefit costsresulting from workforce reductions implemented during the fourth quarter offiscal 2001.

 

*Systems Integration. *SG&A expensesdecreased by $1.1 million, or 20.3% compared to the prior year, due to lowerlabor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

 

*Corporate. *SG&A expenses decreased by $0.1 millioncompared to the prior year, primarily due to workforce and travel expensereductions offset by increases in insurance and employee benefit costs.

 

**Depreciation and amortization of intangibles.**  Depreciation and amortization expensedecreased $7.2 million to $8.6 million for the six months ended June 30, 2002compared to $15.8 million for the same period in 2001, primarily resulting fromthe adoption of new accounting standards.

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill andOther Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-livedasset and, as a result, the recording of periodic goodwill amortization chargeswas discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating toacquired assembled workforce intangibles not meeting the criteria forrecognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $7.1 million forthe six months ended June 30, 2001, which includes $0.8 million of assembledworkforce amortization, now deemed part of goodwill.

 

32

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Excluding theeffect of the accounting change, depreciation and amortization decreased $0.1million as a result of lower depreciable costs resulting from the impairment oflong-lived assets recorded during the fourth quarter of fiscal 2001 and 2002,partially offset by additional depreciation resulting from capital expendituresduring the period.

 

**EBITDA and Operating income.**  EBITDA decreased $22.1 million, or 48.2%, to$23.7 million for the six months ended June 30, 2002, from $45.8 million forthe same period last year.  Operatingincome decreased $15.2 million to $14.4 million for the six months ended June30, 2002, from $29.6 million for the same period last year.  EBITDA and operating income changed asfollows:

 
|                                           |   | **Increase  (Decrease)  From 2001** |       |
|------------------------------------------------|--------|-------------------------------------|------------|
| ***(In millions)***                            |   | **Amount**                          | ** ** | **Percent** | ** ** |
|                                           |   |                                |       |   |   |
| EBITDA:                                        |   |                                |       |   |   |
| Cabin Management                               |   | $                                   | (18.3      | ) | (79.2 | )% |
| Specialty Avionics                             |   | (3.5                                | )          | (20.5 | ) |
| Systems Integration                            |   | (0.5                                | )          | (5.4 | ) |
| Corporate                                      |   | 0.1                                 |       | 3.4 |   |
| Inter-group elimination                        |   | 0.1                                 |       |   |   |
| Total EBITDA                                   |   | (22.1                               | )          |   |   |
|                                           |   |                                |       |   |   |
| Depreciation and amortization                  |   | 7.2                                 |       |   |   |
| Other noncash and acquisition related  charges |   | (0.3                                | )          |   |   |
| Total operating income                         |   | $                                   | (15.2      | ) |   |   |

 

EBITDA andoperating income are reduced by restructuring charges pertaining to our CabinManagement group’s 2001 and 2002 restructuring plans totaling $11.7 million forthe six months ended June 30, 2002 and $3.9 million for the sameperiod last year.  Excluding thesecharges, EBITDA decreased $14.3 million, or 28.8%, to $35.4 million for the sixmonths ended June 30, 2002 compared to $49.7 million for the sameperiod last year and EBITDA as a percent of revenues was 20.5% for the sixmonths ended June 30, 2002 compared to 24.6% for the same period lastyear.  Excluding these charges,operating income decreased $7.4 million, or 22.1%, to $26.1 million for the sixmonths ended June 30, 2002 compared to $33.5 million for the sameperiod last year.

 

*Cabin Management.*  EBITDA decreased by $18.3 million, or 79.2%compared to the prior year, primarily due to:

 

•                  a$7.8 million decrease related principally to lower revenues in ourcorporate/VIP aircraft furniture and seating operations;

 

•                  a$7.8 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans; and

 

•                  a$2.7 million decrease resulting from lower sales volume for our cabinmanagement and entertainment systems.

 

*Specialty Avionics.*  EBITDA decreased by $3.5 million, or 20.5%compared to the prior year, as a result of lower demand for our commercialaircraft products offset by the effect of cost reduction programs implementedin 2001 and 2002 and a favorable shift in product mix.

 

*Systems Integration. *EBITDA decreased by$0.5 million, or 5.4% over the prior year, due to lower sales volume partiallyoffset by reduced SG&A spending resulting from workforce reductions.

 

33

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**Interest expense.**  Interest expense decreased $4.1 million, or20.2%, to $16.2 million for the six months ended June 30, 2002 compared to$20.3 million for the same period last year due almost entirely to loweraverage interest rates charged by our lenders during 2002.

 

**Minority interest in preferred stock ofsubsidiary.** Minority interest increased $0.4 million to $2.8 million for the sixmonths ended June 30, 2002 compared to $2.4 million for the same periodlast year.  Minority interest reflectsthe accrued dividends, which are compounded quarterly, and redemption valueaccretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

 

**Provision for income taxes.**  The provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate tothe income before income taxes primarily due to the effects of state andforeign income taxes and non-deductible expenses, principally goodwillamortization for periods prior to the January 1, 2002 adoption ofSFAS No. 142, and minority interest in preferred stock ofsubsidiary.  The difference in theeffective tax rates between periods is mostly the result of the adoption ofSFAS No. 142.

 

**Net income (loss).**  Net income decreased $6.4 million to a netloss of $4.3 million for the six months ended June 30, 2002 comparedto net income of $2.1 million for the same period last year.

 

**Net loss applicable to common stockholders.**  Net loss applicable to common stockholdersincreased $7.0 million to a net loss of $8.2 million for the six months endedJune 30, 2002 compared to a net loss of $1.2 million for the same periodlast year.  The increase in the net lossapplicable to our common stockholders is attributable to:

 

•                  a$6.4 million net loss increase, which is net of a $0.4 million increase in thecharge for minority interest in preferred stock of subsidiary; and

 

•                  a$0.6 million increase in noncash preferred stock dividend accretion on our 14%mandatorily redeemable preferred stock resulting from the quarterly compoundingof the dividends accreted.

 

**Bookings. **Bookings decreased $66.2 million, or 30.0%, to$154.2 million for the six months ended June 30, 2002 compared to $220.4million for the same period last year. The decrease in bookings for 2002 is due to decreases in orders for allthree of our business segments.

 

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**Restructuring, Asset Impairment and OtherNonrecurring Charges**

 

The followingdiscussion should be read in conjunction with Note 3 accompanying our financialstatements included in this report.

 

During thethree months and six months ended June 30, 2002 and 2001, we recordedrestructuring, asset impairment and other nonrecurring pre-tax charges relatedto two restructuring plans. These charges, and the effect these charges had onour reported results of operations for the periods, are summarized below.

 
|                                              |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |       |
|---------------------------------------------------|--------|-----------------------------------|------------|--------------------------------------|------------|
| ***(In millions)***                               |   | **2002**                          | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                              |   |                              |       |                                 |       |   |   |   |   |
| Restructuring plan:                               |   |                              |       |                                 |       |   |   |   |   |
| 2002 Seat Manufacturing Facilities  Restructuring |   | $                                 | 2.3        |                                 | $          | — |   | $ | 6.3 |   | $ | — |   |
| 2001 Restructuring and Asset Impairment  Charges  |   | 5.4                               |       | 3.9                                  |       | 5.4 |   | 3.9 |   |
| Total pre-tax charges                             |   | $                                 | 7.7        |                                 | $          | 3.9 |   | $ | 11.7 |   | $ | 3.9 |   |
|                                              |   |                              |       |                                 |       |   |   |   |   |
| Charged to operations:                            |   |                              |       |                                 |       |   |   |   |   |
| Cost of sales                                     |   | $                                 | 4.7        |                                 | $          | 3.9 |   | $ | 5.9 |   | $ | 3.9 |   |
| Selling, general and administrative  expenses     |   | 3.0                               |       | —                               |       | 5.8 |   | — |   |
| Total pre-tax charges                             |   | $                                 | 7.7        |                                 | $          | 3.9 |   | $ | 11.7 |   | $ | 3.9 |   |
|                                              |   |                              |       |                                 |       |   |   |   |   |
| Components of charges:                            |   |                              |       |                                 |       |   |   |   |   |
| Cash charges                                      |   | $                                 | 4.9        |                                 | $          | 3.9 |   | $ | 5.8 |   | $ | 3.9 |   |
| Noncash charges                                   |   | 2.8                               |       | —                               |       | 5.9 |   | — |   |
| Total pre-tax charges                             |   | $                                 | 7.7        |                                 | $          | 3.9 |   | $ | 11.7 |   | $ | 3.9 |   |
|                                              |   |                              |       |                                 |       |   |   |   |   |
| As reported:                                      |   |                              |       |                                 |       |   |   |   |   |
| Gross profit                                      |   | $                                 | 21.8       |                                 | $          | 32.6 |   | $ | 47.6 |   | $ | 67.6 |   |
| Selling, general and administrative  expenses     |   | 14.8                              |       | 13.4                                 |       | 30.3 |   | 28.1 |   |
| EBITDA                                            |   | 10.4                              |       | 22.4                                 |       | 23.7 |   | 45.8 |   |
| Operating income                                  |   | 5.6                               |       | 14.2                                 |       | 14.4 |   | 29.6 |   |
| Pre-tax income (loss)                             |   | (4.3                              | )          | 3.1                                  |       | (4.9 | ) | 6.7 |   |
|                                              |   |                              |       |                                 |       |   |   |   |   |
| As adjusted:                                      |   |                              |       |                                 |       |   |   |   |   |
| Gross profit                                      |   | $                                 | 26.5       |                                 | $          | 36.5 |   | $ | 53.5 |   | $ | 71.5 |   |
| Selling, general and administrative  expenses     |   | 11.8                              |       | 13.4                                 |       | 24.5 |   | 28.1 |   |
| EBITDA                                            |   | 18.1                              |       | 26.3                                 |       | 35.4 |   | 49.7 |   |
| Operating income                                  |   | 13.3                              |       | 18.1                                 |       | 26.1 |   | 33.5 |   |
| Pre-tax income                                    |   | 3.4                               |       | 7.0                                  |       | 6.8 |   | 10.6 |   |

 

**2002Seat Manufacturing Facilities Restructuring**

 

In 2002, weannounced we would consolidate the production of four seating and relatedmanufacturing facilities into two, resulting in the permanent closure of two facilities.  In connection with this restructuring plan,we recorded nonrecurring pre-tax charges to operations totaling $6.3 millionduring the six months ended June 30, 2002 ($2.3 million during the three monthsended June 30, 2002) for restructuring, asset impairment and otherrelated restructuring expenses.

 

Therestructuring and asset impairment charges and other related expenses arecomprised of charges for inventory and accounts receivable write-downs, theimpairment of long-lived assets, severance and lease termination costs andother restructuring-related expenses pertaining to FAA retesting andrecertification, moving, transportation and travel costs and shutdown andstartup costs.

 

35

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The restructuringplan was substantially completed during the second quarter of fiscal 2002.  A $0.3 million restructuring reserve remainsat June 30, 2002 for lease termination and other related costs.  The manufacturing facilities were closedduring June 2002; however, future cash payments will extend beyond this datedue to future lease payments on the vacated facilities and the incurrence ofother exit costs.  Future cash paymentswill be funded from existing cash balances and internally generated cash fromoperations.

 

**2001Restructuring and Asset Impairment Charges**

 

During thesecond quarter of fiscal 2001, we adopted a restructuring plan to realignaircraft furniture production programs among our manufacturing facilities.  In addition, and in response to the adverseimpact on the aerospace industry resulting from the September 11thterrorist attack and its aftermath, as well as the weakening of global economicconditions, we announced and implemented a further restructuring plan inDecember 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  These plans primarilyaffected our Cabin Management and Specialty Avionics Groups.

 

In connectionwith these restructuring plans, we recorded nonrecurring pre-tax charges tooperations of $28.7 million in fiscal 2001 ($3.9 million during the threemonths and six months ended June 30, 2001), of which $22.1 million were noncashcharges, for the impairment of long-lived assets and restructuring costsrelated to write-downs and write-offs of inventoried costs, costs associatedwith the realignment of aircraft furniture production programs amongfacilities, severance, lease termination and other related costs.  As of December 31, 2001, $27.1 million hadbeen incurred and the remaining $1.6 million was reflected as an accruedliability.

 

Due to theongoing weakness of the corporate/VIP aircraft market, we decided during thesecond quarter of fiscal 2002 to permanently close the temporarily idledmanufacturing facility.  In connectionwith this decision, we recorded additional nonrecurring pre-tax charges tooperations totaling $5.4 million during the second quarter of fiscal 2002 forrestructuring and asset impairment charges and other related expenses.

 

At December31, 2001, the remaining $1.6 million restructuring reserve was for severance,lease termination and other related costs. During the six months ended June 30, 2002, we paid $1.1 million ofthese costs resulting in a $0.5 million restructuring reserve remaining atJune 30, 2002.  We expect to incurthe remaining severance costs during the third quarter of fiscal 2002 when theadditional manufacturing facility being closed ceases operations and theremaining personnel are terminated.  Therestructuring plan related to leased facilities was completed during the secondquarter of fiscal 2002; however, future cash payments will extend beyond thisdate due to future lease payments on the vacated facility and the incurrence ofother exit costs.  Future cash paymentswill be funded from existing cash balances and internally generated cash fromoperations.

 

36

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**Liquidityand Capital Resources**

 

We haverequired cash primarily to fund acquisitions and capital expenditures and forworking capital.  Historically, ourprincipal sources of liquidity have been cash flow from operations, third partyborrowings and the issuance of common and preferred stock.

 

Net cashprovided by operating activities was $5.6 million for the six months ended June30, 2002 and consisted of $13.5 million of cash provided by operations afteradding back depreciation, amortization, the noncash portion of ourrestructuring and asset impairment charges and other noncash items, $8.3million used for working capital, and $0.4 million provided by an increase inother liabilities.  The followingfactors contributed to the $8.3 million working capital increase:

 

**•**                  a $15.5 million net decrease inaccounts payable and accrued expenses; and

 

•                  a$1.7 million increase in prepaid expenses and other current assets; offset by

 

•                  a$8.7 million accounts receivable decrease resulting from timing differencesrelating to progress and final billings on long-term contracts versus theassociated collection and the timing of other collections; and further offsetby

 

•                  a$0.2 million inventory decrease.

 

Net cash usedfor investing activities was $8.4 million for the six months ended June 30,2002 and consisted of:

 

•                  $5.9million of contingent acquisition consideration paid during 2002; and

 

•                  $2.5million for capital expenditures.

 

We anticipatespending approximately $6.0 to $8.0 million for capital expenditures in 2002,which includes approximately $2.0 million for improvements to the seatmanufacturing facilities that will house the combined operations of thefacilities being closed in 2002.

 

Net cashprovided by financing activities was $1.9 million for the six months ended June30, 2002.  Cash was provided by $8.0million of net revolving line of credit borrowings under our senior creditfacility, $0.5 million of additional long-term borrowings and $0.1 million fromthe sale of common stock.  Cash of $6.7million was used for principal payments on our term debt, capitalized leasesand other debt, financing costs associated with amending our senior creditfacility and the repurchase of stock and options from former management employees.

 

At June 30,2002, senior credit facility borrowings totaling $293.0 million are at variableinterest rates based on defined margins over the current prime or LIBORrates.  At June 30, 2002, we also had$84.5 million of working capital and had $30.0 million of borrowings availableunder our revolving line of credit.

 

We are beingaffected by economic, financial, competitive, legislative, regulatory, businessand other factors beyond our control. As described in “—Industry Overview and Trends,” the September 11thterrorist attack and its aftermath is having a severe adverse impact on theaerospace industry and, in turn, is having an unfavorable impact on portions ofour business.  In addition, the weakglobal economic conditions are adversely impacting other portions of ourbusiness as well.  As described in“—Restructuring, Asset Impairment and Other Nonrecurring Charges,” we aretaking measures to reduce costs and conserve working capital.

 

Although wecannot be certain, we believe our operating cash flows, together withborrowings under our bank credit facility, will be sufficient to meet ourfuture short- and long-term operating expenses, working capital requirements,capital expenditures and debt service obligations for the next

 

37

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twelve months.  However, our ability to pay principal orinterest, to refinance our debt and to satisfy our other debt obligations willdepend on our future operating performance.

 

In addition,we are continually considering acquisitions that complement or expand ourexisting businesses or that may enable us to expand into new markets.  Future acquisitions may require additionaldebt, equity financing or both.  We maynot be able to obtain any additional financing on acceptable terms.

 

**RecentAccounting Pronouncements**

 

**Accounting Pronouncements Adopted January 1,2002**

 

As more fullydescribed in Note 2 accompanying our financial statements included in thisreport, we adopted the provisions of the following accounting pronouncementseffective January 1, 2002:

 

•                  SFAS No. 142,“Goodwill and Other Intangible Assets” and the provisions ofSFAS No. 141, “Business Combinations,” which were required to beadopted concurrent with the adoption of SFAS No. 142;

 

•                  SFAS No. 143,“Accounting for Asset Retirement Obligations;” and

 

•                  SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

**Recently Issued Accounting Pronouncement**

* *

*SFAS No. 145*

 

In May 2002,the Financial Accounting Standards Board issued SFAS No. 145,“Rescission of SFAS Nos. 4, 44, and 64, Amendment ofSFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds variouspronouncements regarding early extinguishment of debt and allows extraordinaryaccounting treatment for early extinguishment only when the provisions ofAccounting Principles Board Opinion No. 30, “Reporting the Results ofOperations–Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions” aremet.  SFAS No. 145 provisionsregarding early extinguishment of debt are generally effective for fiscal yearsbeginning after May 15, 2002.  Webelieve this new standard will not have an impact on our business, consolidatedfinancial position, results of operations or cash flow.

 

*SFAS No. 146*

 

In June 2002,the Financial Accounting Standards Board issued SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  SFAS No. 146 supersedes previous accounting guidance, principallyEmerging Issues Task Force Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).”

 

SFAS No. 146requires that the liability for costs associated with an exit or disposalactivity be initially measured at fair value and recognized when the liabilityis incurred.  In periods subsequent toinitial measurement, changes to the liability are measured using thecredit-adjusted risk-free rate that was used in the initial measurement of theliability recorded.  The cumulativeeffect of a change resulting from revisions to either the timing or the amountof estimated cash flows is recognized as an adjustment to the liability in theperiod of the change and charged to the same line items in the statement ofoperations used when the related costs were initially recognized.  Under EITF No. 94-3, a liability for an exitcost was recognized at the date of a company’s commitment to an exit plan.

 

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The provisionsof SFAS No. 146 are required to be applied prospectively to exit or disposalactivities initiated after December 31, 2002.  We believe SFAS No. 146 may affect thetiming of recognizing future restructuring costs, as well as the amountsrecognized, depending on the nature of the exit or disposal activity and thetiming of the related estimated cash flows.

 

**Common European Currency**

 

We haveevaluated, and will continue to evaluate, the effects on our operations of theEuropean Economic Monetary Union conversion to the Euro.  We do not expect the introduction and use ofthe Euro, including our costs to adapt our information systems for thisconversion, to be material to our business, financial position, results ofoperations or cash flows.

 

**Special Note Regarding Forward-LookingStatements**

 

All statementsother than statements of historical facts included in this report areconsidered forward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Theseforward-looking statements are subject to known and unknown risks,uncertainties and other factors, which are difficult to predict.  We are vulnerable to a variety of factorsthat affect many businesses, such as:

 

•                  fuelprices and general economic conditions that affect demand for aircraft and airtravel, which in turn affect demand for our products and services;

 

•                  terroristattacks and military conflicts that affect demand for aircraft and air travel,which in turn affect demand for our products and services;

 

•                  ourreliance on key customers and the adverse effect a significant decline inbusiness from any one of them would have on our business;

 

•                  changesin prevailing interest rates and the availability of financing to fund ourplans for continued growth;

 

•                  competitionfrom larger companies;

 

•                  FederalAviation Administration prescribed standards and licensing requirements, whichapply to many of the products and services we provide;

 

•                  inflation,and other general changes in costs of goods and services;

 

•                  liabilityand other claims asserted against us that exceeds our insurance coverage;

 

•                  theability to attract and retain qualified personnel;

 

•                  labordisturbances; and

 

•                  changesin operating strategy, or our acquisition and capital expenditure plans.

 

Changes insuch factors could cause our actual results to differ materially from thosecontemplated in such forward-looking statements.  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 release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  You should not rely on our forward-lookingstatements as if they were certainties.

 

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**ITEM 3.****                                         QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposedto various market risks, including interest rates and changes in foreigncurrency exchange rates.  Market risk isthe potential loss arising from adverse changes in prevailing market rates andprices.  From time to time, we use derivativefinancial instruments to manage and reduce risks associated with thesefactors.  We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

**Interest Rate Risk****.**  A significant portion of our capitalstructure is comprised of long-term variable and fixed-rate debt.

 

Market riskrelated to our variable-rate debt is estimated as the potential decrease inpre-tax earnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime or LIBOR rates.  At June30, 2002, the current prime rate was 4.75% and the current LIBOR rate was2.03%.  Based on $293.0 million ofvariable-rate debt outstanding as of June 30, 2002, a hypothetical one percentrise in interest rates, to 5.75% for prime rate borrowings and 3.03% for LIBORborrowings, would reduce our pre-tax earnings by $2.9 million annually.

 

To limit ourexposure related to rising interest rates, we have entered into an interestrate swap contract to effectively convert $4.5 million of variable-rateindustrial revenue bonds to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedgeagainst changes in the amount of future cash flows associated with interestpayments on this portion of our variable-rate debt.  Market risk related to this interest rate swap contract isestimated as the potential higher interest expense we will incur if thevariable interest rate decreases below the 4.2% fixed rate.  Based on the $4.5 million of variable-ratedebt converted to fixed-rate debt outstanding as of June 30, 2002, ahypothetical one percent decrease in the variable interest rate to 3.2%, wouldreduce our pre-tax earnings by less than $0.1 million annually.

 

The estimatedfair value of our $100.0 million fixed-rate long-term debt is approximately$92.0 million at June 30, 2002.  Marketrisk related to our fixed-rate debt is deemed to be the potential increase infair value resulting from a decrease in interest rates.  For example, a hypothetical ten percentdecrease in the interest rates, from 12.0% to 10.8%, would increase the fairvalue of our fixed-rate debt by approximately $7.0 million.

 

**Foreign Currency Exchange Rate Risk****.**  Our foreign customers are located in variousparts of the world, primarily Western Europe, the Far East and Canada, and wehave subsidiaries with manufacturing facilities in Switzerland and Mexico.  To limit our foreign currency exchange raterisk related to sales to our customers, orders are primarily valued and sold inU.S. dollars.  From time to time we haveentered into forward foreign exchange contracts to limit our exposure relatedto foreign inventory procurement and operating costs.  While we have not entered into any such contracts since 1998, wemay do so in the future depending on our assessment of future foreign exchangerate trends.

 

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**PARTII – OTHER INFORMATION**

 

**ITEM 1.****                             LEGALPROCEEDINGS**

 

As part of its investigation of the crash off the Canadian coast onSeptember 2, 1998 of Swissair Flight 111, the Canadian Transportation SafetyBoard ("TSB") notified us that they recovered burned wire that wasattached to the in-flight entertainment system installed on some of Swissair'saircraft by one of our subsidiaries.  Weare fully cooperating with the CTSB and have been advised that the CTSB intendsto issue a final report on its investigation in February, 2003.  We believe that no evidence exists thatwould indicate the equipment installed by our subsidiary malfunctioned orfailed during the flight.  Families ofthe 229 persons who died aboard the flight have filed actions in federal andstate courts against us, and many other parties unaffiliated with us, includingSwissair and Boeing.  The actions claimnegligence, strict liability and breach of warranty relating to theinstallation and testing of the in-flight entertainment system.  The actions seek compensatory and punitivedamages and costs in an unstated amount. All of the actions have been transferred to the United States DistrictCourt for the Eastern District of Pennsylvania and assigned under MDL Case No.1269 for coordinated or consolidated pretrial proceedings.  We intend to defend the claims vigorously.

 

We are party to other litigation incident to the normal course ofbusiness.  We do not believe that theoutcome of all such matters in which we are currently involved will have amaterial adverse effect on our business, financial position, results ofoperations or cash flows.

 

**ITEM 6.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 
| a.     |   | Exhibits |                                                                                                                                                   |
|--------|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |     |                                                                                                                                                   |
|   |   | 3.26.1.1 | Articles of  Amendment amending the Restated Articles of Incorporation of ERDA, Inc.  (changing its name to DeCrane Aircraft Seating Company, Inc.) ** |
|   |   |     |                                                                                                                                                   |
|   |   | 3.30.1   | Certificate  of Formation of DeCrane Cabin Interiors, LLC **                                                                                           |
|   |   |     |                                                                                                                                                   |
|   |   | 3.30.2   | Limited  Liability Company Agreement of DeCrane Cabin Interiors, LLC **                                                                                |
|   |   |     |                                                                                                                                                   |
|   |   | 21.1     | List of  Subsidiaries of Registrant **                                                                                                                 |

 

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**          Previouslyfiled

 
| b.     |   | Reports on Form 8-K |
|--------|--------|---------------------|
|   |   |                |   |
|   |   | None                |   |

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|             | **DECRANE HOLDINGS CO. (Registrant)** |
|------------------|---------------------------------------|
|             |                                  |   |
|             |                                  |   |
| August 12,  2002 | By:                                   | /s/  Richard J. Kaplan |
|             | Name:                                 | Richard J.  Kaplan |
|             | Title:                                | Senior Vice  President, Chief Financial Officer, Secretary and Treasurer |

 

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