**UNITEDSTATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q/A**

**(AMENDMENTNO. 1)**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31,2003**

 

**Commission File Number 333-70363**

 

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**DECRANE HOLDINGS 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/oCredit Suisse First Boston / DLJ Merchant Banking Partners II, L.P.Eleven Madison Avenue, New York, NY 10010**

(Address, including zip code, of principalexecutive offices)

 

**(212)325-2000**

(Registrant’s telephone number, includingarea code)

 

**(NotApplicable)**

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

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  ý** **Yes   o No

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).  o Yes   ý No

 

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The number of shares of Registrant’s Common Stock, $.01 par value,outstanding as of May 15, 2003 was 4,116,627 shares.

 

 

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**Tableof Contents**

 
| **Part I – Financial Information** |
|-----------------------------------------|
|                                    |
| **Explanatory  Note**                   |
|                                    |
| **Item 1.**                             | **Financial Statements (Unaudited)** |
|                                    |   |
|                                    | Consolidated Balance Sheets as of March 31, 2003 and  December 31, 2002 |
|                                    |   |
|                                    | Consolidated Statements of Operations for  the three months ended March 31, 2003 and 2002 |
|                                    |   |
|                                    | Consolidated Statements of Stockholders’  Equity (Deficit) for the three months ended March 31, 2003 |
|                                    |   |
|                                    | Consolidated Statements of Cash Flows for  the three months ended March 31, 2003 and 2002 |
|                                    |   |
|                                    | Condensed Notes to Consolidated Financial  Statements |
|                                    |   |
| **Item 2.**                             | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |
|                                    |   |
|                                    | Recent Developments |
|                                    |   |
|                                    | Industry Overview and Trends |
|                                    |   |
|                                    | Results of Operations |
|                                    |   |
|                                    | Performance Measures |
|                                    |   |
|                                    | Three months ended March 31, 2003 |
|                                    |   |
|                                    | Restructuring,  Asset Impairment and Other Related Charges |
|                                    |   |
|                                    | Goodwill Impairment Charges |
|                                    |   |
|                                    | Liquidity and Capital Resources |
|                                    |   |
|                                    | Disclosure of Contractual Obligations and  Commitments |
|                                    |   |
|                                    | Disclosure About Off-Balance Sheet  Commitments and Indemnities |
|                                    |   |
|                                    | Recent Accounting Pronouncements |
|                                    |   |
|                                    | Special Note Regarding Forward Looking  Statements and Risk Factors |
|                                    |   |
| **Item 3.**                             | **Quantitative and Qualitative Disclosure  About Market Risk** |
|                                    |   |
| **Item 4.**                             | **Controls and Procedures** |
|                                    |   |
| **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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**Explanatory Note**

 

DeCrane Holdings Co. isfiling this Amendment No. 1 on Form 10-Q/A for the quarterly period endedMarch 31, 2003 to amend and restate, in its entirety, its Quarterly Reporton Form 10-Q originally filed with the Securities and Exchange Commission onMay 20, 2003 (referred to herein as the “Original Report” and the “AmendedReport”).  Except for thereclassifications described below, no changes have been made in this AmendedReport to the consolidated financial position, results of operations or cashflows we reported in our Original Report.  This Amended Report only modifies and updates our disclosures forevents occurring subsequent to the filing of our Original Report, as describedbelow, which resulted in our independent accountants revising and reissuingtheir report accompanying our financial statements included in Amendment No. 1on Form 10-K/A filed concurrently herewith but otherwise does not otherwisereflect events occurring after the May 20, 2003 filing of our OriginalReport or modify or update the disclosures set forth in that Original Report inany way to reflect any changes in our business or our consolidated financialposition, results of operations or cash flows subsequent to the filing date ofthe Original Report.  For theconvenience of the reader, we deemed it desirable to amend and restate ourOriginal Report in its entirety to provide clarity as to the events that haveoccurred.

 

As described in ourOriginal Report, during the fourth quarter of fiscal 2002 we embarked on a planto sell the Specialty Avionics Group and entered into a definitive agreement tosell the group on March 14, 2003. The sale was consummated on May 23, 2003, subsequent to the filingof our Original Report.  In addition, atthe time of filing our Original Report, our failure to consummate the sale by June 30,2003 would have been an event of default under our amended senior creditfacility.  As a result, our independentaccountants qualified their report on our audited financial statements withrespect to our ability to continue as a going concern.  Consummation of the sale alleviated ourindependent accountants’ doubt about our ability to continue as a goingconcern.  As a result, our independentaccountants issued a revised, unqualified report on our financial statements.

 

In this Amended Report,we are reclassifying our consolidated statements of financial position, resultsof operations and cash flows to reflect the Specialty Avionics Group as adiscontinued operation for all periods presented.  In addition, we are also making similar conforming changes toother parts of the Original Report as well.

 

This Amended Reportshould be read in conjunction with our Amendment No. 1 on Form 10-Q/A for thequarterly period ended June 30, 2003 as well as our Amendment No. 1 onForm 10-K/A for the fiscal year ended December 31, 2002 filed concurrentlywith this Amended Report.  As requiredby Rule 12b-15 of the Securities Exchange Act of 1934, our Chief ExecutiveOfficer and Chief Financial Officer are providing updated certificationspursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and updatedwritten statements pursuant to Title 18 United States Code Section 1350,as adopted pursuant to Section 906 of the Act.

 

i

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.****                             FINANCIALSTATEMENTS**

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated BalanceSheets**

 
| **(In thousands, except share  data)**                                                                                                                        |   | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-----------------------------|------------|
|                                                                                                                                                          |   | **(Unaudited)**          |       |                        |       |
| **Assets**                                                                                                                                                    |   |                     |       |                        |       |
| Current  assets:                                                                                                                                              |   |                     |       |                        |       |
| Cash and  cash equivalents                                                                                                                                    |   | $                        | 14,637     |                        | $          | 12,421 |   |
| Accounts  receivable, net                                                                                                                                     |   | 26,568                   |       | 26,354                      |       |
| Inventories                                                                                                                                                   |   | 70,736                   |       | 59,300                      |       |
| Deferred  income taxes                                                                                                                                        |   | 17,412                   |       | 16,430                      |       |
| Prepaid  expenses and other current assets                                                                                                                    |   | 2,399                    |       | 1,724                       |       |
| Current  assets of discontinued operations                                                                                                                    |   | 152,003                  |       | 160,741                     |       |
| Total  current assets                                                                                                                                         |   | 283,755                  |       | 276,970                     |       |
|                                                                                                                                                          |   |                     |       |                        |       |
| Property and  equipment, net                                                                                                                                  |   | 35,460                   |       | 36,139                      |       |
| Goodwill                                                                                                                                                      |   | 196,430                  |       | 196,430                     |       |
| Other  assets, principally intangibles, net                                                                                                                   |   | 40,394                   |       | 39,428                      |       |
| Total assets                                                                                                                                                  |   | $                        | 556,039    |                        | $          | 548,967 |   |
|                                                                                                                                                          |   |                     |       |                        |       |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**                                                              |   |                     |       |                        |       |
| Current  liabilities:                                                                                                                                         |   |                     |       |                        |       |
| Current  portion of long-term debt                                                                                                                            |   | $                        | 17,492     |                        | $          | 16,317 |   |
| Accounts  payable                                                                                                                                             |   | 15,571                   |       | 13,055                      |       |
| Accrued  liabilities                                                                                                                                          |   | 23,016                   |       | 31,494                      |       |
| Income taxes  payable                                                                                                                                         |   | 46                       |       | —                      |       |
| Current  liabilities of discontinued operations                                                                                                               |   | 20,909                   |       | 19,928                      |       |
| Total  current liabilities                                                                                                                                    |   | 77,034                   |       | 80,794                      |       |
|                                                                                                                                                          |   |                     |       |                        |       |
| Long-term  debt, less current portion                                                                                                                         |   | 386,520                  |       | 364,700                     |       |
| Deferred  income taxes                                                                                                                                        |   | 26,414                   |       | 27,077                      |       |
| Other  long-term liabilities                                                                                                                                  |   | 6,239                    |       | 7,364                       |       |
|                                                                                                                                                          |   |                     |       |                        |       |
| Commitments  and contingencies (Note 11)                                                                                                                      |   |                     |       |                        |       |
|                                                                                                                                                          |   |                     |       |                        |       |
| Mandatorily  redeemable preferred stock:                                                                                                                      |   |                     |       |                        |       |
| Minority  interest in 16% preferred stock of subsidiary                                                                                                       |   | 35,678                   |       | 34,081                      |       |
| Mandatorily  redeemable 14% preferred stock                                                                                                                   |   | 64,400                   |       | 62,222                      |       |
|                                                                                                                                                          |   |                     |       |                        |       |
| Stockholders’ equity (deficit):                                                                                                                          |   |                     |       |                        |       |
| Undesignated preferred stock, $.01 par value,  1,140,000 shares authorized; none issued and outstanding as of March 31,  2003 and December 31, 2002 |   | —                   |       | —                      |       |
| Common stock, $.01 par value, 10,000,000 shares  authorized; 4,116,627 shares issued and outstanding as of March 31, 2003  and December 31, 2002    |   | 41                       |       | 41                          |       |
| Additional paid-in capital                                                                                                                                    |   | 69,947                   |       | 72,125                      |       |
| Notes receivable for shares sold                                                                                                                              |   | (2,628                   | )          | (2,591                      | )          |
| Accumulated deficit                                                                                                                                           |   | (107,242                 | )          | (96,485                     | )          |
| Accumulated other comprehensive loss                                                                                                                          |   | (364                     | )          | (361                        | )          |
| Total stockholders’ equity (deficit)                                                                                                                     |   | (40,246                  | )          | (27,271                     | )          |
| Total  liabilities, mandatorily redeemable preferred stock and stockholders’ equity                                                                      |   | $                        | 556,039    |                        | $          | 548,967 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

1

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatements of Operations**

 
|                                                              |   | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------|--------|----------------------------------------|------------|
| **(In thousands)**                                                |   | **2003**                               | ** ** | **2002** | ** ** |
|                                                              |   | **(Unaudited)**                        | ** ** |
| Revenues                                                          |   | $                                      | 41,900     |   | $ | 60,819 |   |
| Cost of  sales                                                    |   | 30,903                                 |       | 44,381 |   |
|                                                              |   |                                   |       |   |   |
| Gross profit                                                      |   | 10,997                                 |       | 16,438 |   |
|                                                              |   |                                   |       |   |   |
| Operating  expenses:                                              |   |                                   |       |   |   |
| Selling,  general and administrative expenses                     |   | 7,905                                  |       | 12,159 |   |
| Amortization  of intangible assets                                |   | 912                                    |       | 843 |   |
| Total  operating expenses                                         |   | 8,817                                  |       | 13,002 |   |
|                                                              |   |                                   |       |   |   |
| Income from  operations                                           |   | 2,180                                  |       | 3,436 |   |
|                                                              |   |                                   |       |   |   |
| Other  expenses:                                                  |   |                                   |       |   |   |
| Interest  expense                                                 |   | 5,869                                  |       | 5,948 |   |
| Minority  interest in preferred stock of subsidiary               |   | 1,597                                  |       | 1,382 |   |
| Other  expenses, net                                              |   | 339                                    |       | 113 |   |
|                                                              |   |                                   |       |   |   |
| Loss from  continuing operation before provision for income taxes |   | (5,625                                 | )          | (4,007 | ) |
| Income tax  benefit                                               |   | 1,265                                  |       | 1,141 |   |
|                                                              |   |                                   |       |   |   |
| Loss from  continuing operations                                  |   | (4,360                                 | )          | (2,866 | ) |
|                                                              |   |                                   |       |   |   |
| Discontinued  operations and change in accounting principle:      |   |                                   |       |   |   |
| Loss from  discontinued operations, net of tax                    |   | (6,397                                 | )          | (37,440 | ) |
| Cumulative  effect of change in accounting principle              |   | —                                 |       | (17,828 | ) |
|                                                              |   |                                   |       |   |   |
| Net loss                                                          |   | (10,757                                | )          | (58,134 | ) |
|                                                              |   |                                   |       |   |   |
| Noncash  preferred stock dividend accretion                       |   | (2,178                                 | )          | (1,898 | ) |
|                                                              |   |                                   |       |   |   |
| Net loss  applicable to common stockholders                       |   | $                                      | (12,935    | ) | $ | (60,032 | ) |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

2

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatement of Stockholders’ Equity (Deficit)**

 
| **(In thousands, except share  data)**          |              |      |       | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-------------------------------------------------|-------------------|-----------|------------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
|                                            |              |      |       |                             |   |                                    |   |
|                                            | **Common  Stock** |      |       |                             |   |                                    |   |
|                                            | **Shares**        |      | **Amount** |                             |   |                                    |   |                     |   |
|                                            |              |      |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, December 31,  2002                |              | 4,116,627 |       | $                                | 41     |                                    | $      | 72,125                   |   | $                                           | (2,591 | )         | $      | (96,485 | ) | $ | (361 | ) | $ | (27,271 | ) |
|                                            |              |      |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive income  (loss):                   |              |      |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                        |              | —    |       | —                           |   | —                                  |   | —                   |   | (10,757                                     | )      | —    |   | (10,757 | ) |
| Unrealized loss on interest  rate swap contract |              | —    |       | —                           |   | —                                  |   | —                   |   | —                                      |   | (3        | )      | (3 | ) |
|                                            |              |      |       |                             |   |                                    |   |                     |   |                                        |   |      |   | (10,760 | ) |
|                                            |              |      |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Noncash dividend accretion  on preferred stock  |              | —    |       | —                           |   | (2,178                                  | )      | —                   |   | —                                      |   | —    |   | (2,178 | ) |
|                                            |              |      |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Notes receivable interest  accrued              |              | —    |       | —                           |   | —                                  |   | (37                      | )      | —                                      |   | —    |   | (37 | ) |
|                                            |              |      |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, March 31,  2003 (Unaudited)       |              | 4,116,627 |       | $                                | 41     |                                    | $      | 69,947                   |   | $                                           | (2,628 | )         | $      | (107,242 | ) | $ | (364 | ) | $ | (40,246 | ) |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

3

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatements of Cash Flows**

 
|                                                                               |   | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|--------|----------------------------------------|------------|
| **(In thousands)**                                                                 |   | **2003**                               | ** ** | **2002** | ** ** |
|                                                                               |   | **(Unaudited)**                        |       |
| **Cash flows from operating activities:**                                          |   |                                   |       |   |   |
| Net loss                                                                           |   | $                                      | (10,757    | ) | $ | (58,134 | ) |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                                   |       |   |   |
| Loss from  discontinued operations                                                 |   | 6,397                                  |       | 37,440 |   |
| Minority  interest in preferred stock of subsidiary                                |   | 1,597                                  |       | 1,382 |   |
| Cumulative  effect of change in accounting principle                               |   | —                                 |       | 17,828 |   |
| Depreciation  and amortization                                                     |   | 3,211                                  |       | 3,356 |   |
| Noncash  portion of restructuring, asset impairment and other related charges      |   | —                                 |       | 3,145 |   |
| Deferred  income taxes                                                             |   | (1,869                                 | )          | 186 |   |
| Other, net                                                                         |   | 404                                    |       | 146 |   |
| Changes in  assets and liabilities:                                                |   |                                   |       |   |   |
| Accounts  receivable                                                               |   | (233                                   | )          | 2,758 |   |
| Inventories                                                                        |   | (11,434                                | )          | (2,751 | ) |
| Prepaid  expenses and other assets                                                 |   | (3,248                                 | )          | (1,128 | ) |
| Accounts  payable                                                                  |   | 2,521                                  |       | 646 |   |
| Accrued  liabilities                                                               |   | (7,877                                 | )          | (4,275 | ) |
| Income taxes  payable                                                              |   | 46                                     |       | 174 |   |
| Other  long-term liabilities                                                       |   | (1,125                                 | )          | 222 |   |
| Net cash  provided by (used for) operating activities                              |   | (22,367                                | )          | 995 |   |
|                                                                               |   |                                   |       |   |   |
| **Cash flows from investing activities:**                                          |   |                                   |       |   |   |
| Cash paid  for acquisition contingent consideration                                |   | (600                                   | )          | (707 | ) |
| Capital  expenditures                                                              |   | (1,098                                 | )          | (419 | ) |
| Net cash  used for investing activities                                            |   | (1,698                                 | )          | (1,126 | ) |
|                                                                               |   |                                   |       |   |   |
| **Cash flows from financing activities:**                                          |   |                                   |       |   |   |
| Net borrowings  under senior credit facility                                       |   | 27,150                                 |       | — |   |
| Principal  payments on term debt, capitalized leases and other debt                |   | (4,210                                 | )          | (396 | ) |
| Deferred  financing costs                                                          |   | —                                 |       | (1,629 | ) |
| Other, net                                                                         |   | —                                 |       | (71 | ) |
| Net cash  provided by (used for) financing activities                              |   | 22,940                                 |       | (2,096 | ) |
|                                                                               |   |                                   |       |   |   |
| Net cash  provided by discontinued operations                                      |   | 3,341                                  |       | 3,961 |   |
|                                                                               |   |                                   |       |   |   |
| Net increase  in cash and cash equivalents                                         |   | 2,216                                  |       | 1,734 |   |
| Cash and  cash equivalents at beginning of period                                  |   | 12,421                                 |       | 9,478 |   |
| Cash and  cash equivalents at end of period                                        |   | $                                      | 14,637     |   | $ | 11,212 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

4

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**Condensed Notes toConsolidated Financia****l Statements**

**(Unaudited)**

 

**Note 1.**                                   Summary ofSignificant Accounting Policies

 

**Basis of Presentation**

 

These consolidatedinterim financial statements are unaudited. The Company believes the interim financial statements are presented on abasis consistent with the audited financial statements and include alladjustments necessary for a fair presentation of the financial condition,results of operations and cash flows for such interim periods.  All of these adjustments are normalrecurring adjustments.

 

Preparation of theseconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the Company to makeestimates and judgments that affect the reported amounts of assets, liabilitiesand disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues and expensesduring the reporting periods.  Actualresults could 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, 2002 has beenderived from audited financial statements but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica as permitted by interim reporting requirements.  These consolidated interim financialstatements should be read in conjunction with Management’s Discussion andAnalysis of Financial Condition and Results of Operations and the auditedfinancial statements and related notes included in the Company’s 2002 Form 10-K/ Amendment No. 1, as described below.

 

As the Company originallydescribed in its Form 10-K for the year ended December 31, 2002, itsfailure to consummate the sale of the Specialty Avionics Group by June 30,2003 would have been an event of default under the amended senior creditfacility.  As a result, the Company’sindependent accountants qualified their report on its audited financialstatements for the year ended December 31, 2002 with respect to itsability to continue as a going concern. The sale was consummated on May 23, 2003 and repayment of $130.0 millionof borrowings alleviated the independent accountants’ doubt about the Company’sability to continue as a going concern. As a result, the Company’s independent accountants issued a revised,unqualified report on its financial statements, which the Company included inAmendment No. 1 to its Form 10-K for the year ended December 31, 2002.

 

Reclassifications havealso been made to the financial statements for all periods presented, principallyto reflect the disposition of the Specialty Avionics Group as a discontinuedoperation (Note 2).

 

5

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**Stock Option Plan**

** **

The Company has onestock-based employee compensation plan, which is more fully described in Note15.  As permitted under SFAS No. 123,“Accounting for Stock-Based Compensation,” the Company measures compensationexpense related to the employee stock option plan utilizing the intrinsic valuemethod as prescribed by Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost isreflected in net income (loss), as all options granted under the plan had anexercise price equal to the value of the underlying common stock on the date ofgrant.

 

The following tableillustrates the effect on net income if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employee compensation.

 
|                                                                                                                                           |   | **Three  Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
| **(In thousands)**                                                                                                                             |   | **2003**                                |       | **2002** | ** ** |
|                                                                                                                                           |   | **(Unaudited)**                         |       |
| Net loss, as  reported                                                                                                                         |   | $                                       | (10,757    | ) | $ | (58,134 | ) |
| Less total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |   | (94                                     | )          | (94 | ) |
| Pro forma  net loss                                                                                                                            |   | $                                       | (10,851    | ) | $ | (58,228 | ) |

 

The effect of applyingSFAS No. 123 may not be representative of the pro forma effect in futureyears since additional options may be granted during those future years.

 

**Accounting Pronouncements Adopted January 1, 2003**

** **

Effective January 1,2003 the Company adopted the following accounting pronouncements.

 

*SFAS No. 145 – Rescission of SFAS Nos. 4, 44, and 64,Amendment of SFAS No. 13, and Technical Corrections*

* *

Among other things, SFASNo. 145 rescinds various pronouncements regarding early extinguishment of debtand allows extraordinary accounting treatment for early extinguishment onlywhen the provisions of Accounting Principles Board Opinion No. 30,“Reporting the Results of Operations–Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions” are met. Adoption of this new standard did not have an impact on the Company’sconsolidated financial position, results of operations or cash flow.

 

6

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*SFAS No. 146 – Accounting for Costs Associated with Exitor Disposal Activities*

* *

SFAS No. 146 supersedesprevious accounting guidance, principally Emerging Issues Task Force Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  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 SFAS No. 146 are requiredto be applied prospectively to exit or disposal activities initiated afterDecember 31, 2002.  Since theCompany has not initiated any disposal activities within the scope of SFAS No.146 during 2003, the adoption of this new standard did not have an impact onthe Company’s consolidated financial position, results of operations or cashflow.  However, the Company believesSFAS No. 146 may affect the timing of recognizing future restructuring costs,as well as the amounts recognized, depending on the nature of the exit ordisposal activity and the timing of the related estimated cash flows.

 

*FASB Interpretation No. 45 – Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*

* *

FIN No. 45 elaborates onthe disclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  The interpretation alsoclarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The initialrecognition and initial measurement provisions of FIN No. 45 are applicable tothe Company on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  However, thedisclosure requirements in FIN No. 45 are effective for the Company’s financialstatements for periods ending after December 15, 2002.

 

The Company is not aparty to any agreement in which it is a guarantor of indebtedness of otherstherefore the adoption of interpretation did not have an impact on theCompany’s financial position, results of operations or cash flows.  The disclosure requirements of thisinterpretation were adopted by the Company as of December 31, 2002.

 

**Recently Issued Accounting Pronouncement**

 

*SFAS No. 150 – Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*

* *

Issued in May 2003,SFAS No. 150 establishes standards for the classification and measurement ofcertain financial instruments with characteristics of both liabilities andequity.  SFAS No. 150 requires classificationof financial instruments within its scope as a liability, including financialinstruments issued in the form of shares that are mandatorily redeemable,because those financial instruments are deemed to be, in essence, obligationsof the issuer.  The Company is currentlyevaluating the impact this new standard will have on its financial position,results of operations and cash flows. However, the Company

 

7

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believesit will be required to reclassify its mandatorily redeemable preferred stock asa liability commencing July 1, 2003 and reflect subsequent changes in theredemption obligation as a charge against pre-tax income.

 

**Note 2.**                                   Disposition ofSpecialty Avionics Group

 

During the fourth quarterof fiscal 2002 the Company assessed its long-term business strategies in lightof current aerospace industry conditions. The Company believes that as the aerospace industry recovers, the demandfor its Cabin Management and Systems Integration Groups’ products and servicesfor business, VIP and head-of-state aircraft will return to historical levelsand, accordingly, the Company decided to focus its resources in these marketsegments.  To accomplish this objective,the Company embarked on a plan to sell its Specialty Avionics Group, which ishighly dependent on the commercial airline industry.

 

On March 14, 2003,the Company entered into a definitive agreement to sell its equity interests inthe subsidiaries comprising its Specialty Avionics Group to Wings Holdings, Inc.,an affiliate of Odyssey Investment Partners, LLC, for $140,000,000 incash.  The sale was consummated onMay 23, 2003.  The selling price issubject to a post-closing adjustment related to the amount of working capitalat closing.  Proceeds of $130,000,000from the sale were used to repay senior credit facility borrowings (Note8).  The sale of the Specialty AvionicsGroup is not expected to affect the operations of the remaining operatinggroups.

 

Based upon the fair valueof the group implied in the definitive agreement, the Company determined thatthe carrying value of the group’s net assets was not fully recoverable.  As required by SFAS No. 142, the Companyrecorded a goodwill impairment charge of $7,500,000 during the three monthsended March 31, 2003 to reduce the carrying value to the estimatednet realizable value established by the definitive agreement.  The Company expects to record a modest$689,000 gain, net of tax, on the sale during the second quarter of fiscal2003, based on the actual financial position of the group on the date ofsale.  The ultimate gain or loss on thesale is subject to finalizing the post-closing adjustment, which is notexpected to be material, if any.

 

As a result of the sale,the Specialty Avionics Group is presented as a discontinued operation in theaccompanying consolidated financial statements.  The financial statements for prior periods have been reclassifiedto segregate the group’s assets and liabilities, results of operations and cashflows for all periods.

 

In accordance with theFinancial Accounting Standards Board’s Emerging Issues Task Force Issue No.87-24, “Allocation of Interest to Discontinued Operations,” as amended,interest expense includes interest on debt that is to be assumed by the buyeras well as interest on the $130,000,000 of debt that was required to be repaidas a result of the sale.  Interestexpense was based on the historical interest rates charged during each of theperiods.  In addition, and also inaccordance with EITF 87-24, costs and expenses exclude the allocation ofgeneral corporate overhead.

 

 

8

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The following tables summarizethe financial position, results operations and cash flows of the SpecialtyAvionics Group.

 
| **(In thousands)**                          |   | **March 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|---------------------------------------------|--------|--------------------------|------------|-----------------------------|------------|
|                                        |   | **(Unaudited)**          |       |                        |       |
| Assets:                                     |   |                     |       |                        |       |
| Current  assets                             |   | $                        | 41,523     |                        | $          | 41,614 |   |
| Property and  equipment, net                |   | 15,153                   |       | 15,744                      |       |
| Other  assets, principally intangibles, net |   | 95,327                   |       | 103,383                     |       |
| Total assets                                |   | 152,003                  |       | 160,741                     |       |
|                                        |   |                     |       |                        |       |
| Liabilities:                                |   |                     |       |                        |       |
| Current  liabilities                        |   | 8,728                    |       | 8,288                       |       |
| Long-term  liabilities                      |   | 12,181                   |       | 11,640                      |       |
| Total  liabilities                          |   | 20,909                   |       | 19,928                      |       |
|                                        |   |                     |       |                        |       |
| Net assets  of the Specialty Avionics Group |   | $                        | 131,094    |                        | $          | 140,813 |   |

 
|                                                 |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------|--------|-----------------------------------------|--------|
| **(In thousands)**                                   |   | **2003**                                |   | **2002** |   |
|                                                 |   | **(Unaudited)**                         |   |
| Results of  Operations:                              |   |                                    |   |   |   |
| Revenues                                             |   | $                                       | 23,470 |   | $ | 25,344 |   |
|                                                 |   |                                    |   |   |   |
| Operating  expenses:                                 |   |                                    |   |   |   |
| Costs and  expenses                                  |   | 18,992                                  |   | 19,405 |   |
| Impairment  of goodwill                              |   | 7,500                                   |   | — |   |
| Amortization  of intangible assets                   |   | 557                                     |   | 557 |   |
| Total  operating expenses                            |   | 27,049                                  |   | 19,962 |   |
|                                                 |   |                                    |   |   |   |
| Income  (loss) from operations                       |   | (3,579                                  | )      | 5,382 |   |
|                                                 |   |                                    |   |   |   |
| Other  expenses:                                     |   |                                    |   |   |   |
| Interest  expense:                                   |   |                                    |   |   |   |
| Debt  required to be repaid with proceeds from sale  |   | 1,806                                   |   | 1,811 |   |
| Debt  obligations assumed by the buyer               |   | 202                                     |   | 204 |   |
| Other  expenses, net                                 |   | 101                                     |   | 33 |   |
|                                                 |   |                                    |   |   |   |
| Pre-tax  income (loss)                               |   | (5,688                                  | )      | 3,334 |   |
| Provision  for income taxes                          |   | (709                                    | )      | (1,452 | ) |
|                                                 |   |                                    |   |   |   |
| Income  (loss) before change in accounting principle |   | (6,397                                  | )      | 1,882 |   |
| Cumulative  effect of change in accounting principle |   | —                                  |   | (39,322 | ) |
| Net loss  from discontinued operations               |   | $                                       | (6,397 | ) | $ | (37,440 | ) |

 

9

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|                                                  |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------|--------|-----------------------------------------|--------|
| **(In thousands)**                                    |   | **2003**                                |   | **2002** | ** ** |
|                                                  |   | **(Unaudited)**                         |   |
| Cash Flows  Provided By (Used For):                   |   |                                    |   |   |   |
| Operating  activities                                 |   | $                                       | 4,138  |   | $ | 4,587 |   |
| Investing  activities                                 |   | (269                                    | )      | (204 | ) |
| Financing  activities                                 |   | (587                                    | )      | (104 | ) |
| Net  (increase) decrease in cash and cash equivalents |   | 57                                      |   | (315 | ) |
| Effect of  foreign currency translation on cash       |   | 2                                       |   | (3 | ) |
| Net cash  provided by discontinued operations         |   | $                                       | 3,341  |   | $ | 3,961 |   |

 

**Note 3.**                                   Restructuring, AssetImpairment and Other Related Charges

** **

During the three monthsended March 31, 2003 and the year ended December 31, 2002, the Companyrecorded restructuring, asset impairment and other related charges as follows:

 
|                                          |   | **Charges  Recorded During** |       |
|-----------------------------------------------|--------|------------------------------|------------|
|                                          |   | **2003**                     |       | **Year Ended  December 31, 2002** |   |
| **(In thousands)**                            |   | **1st  Quarter**             | ** ** | **1st  Quarter** | ** ** | **2nd, 3rd  & 4th  Quarters** | ** ** | **Total** | ** ** |
|                                          |   | **(Unaudited)**              |       |
| Nature of  charges:                           |   |                         |       |   |   |   |   |   |   |
| Asset  Realignment Restructuring              |   | $                            | —     |   | $ | — |   | $ | 6,901 |   | $ | 6,901 |   |
| Seat  Manufacturing Facilities Restructuring  |   | —                       |       | 4,043 |   | 2,251 |   | 6,294 |   |
| Other asset  impairment related charges       |   | 7,500                        |       | — |   | 12,048 |   | 12,048 |   |
| Total  pre-tax charges                        |   | $                            | 7,500      |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |
|                                          |   |                         |       |   |   |   |   |   |   |
| Business  segment recording the charges:      |   |                         |       |   |   |   |   |   |   |
| Cabin  Management                             |   | $                            | —     |   | $ | 4,043 |   | $ | 9,152 |   | $ | 13,195 |   |
| Systems  Integration                          |   | —                       |       | — |   | 4,060 |   | 4,060 |   |
| Total  continuing operations                  |   | —                       |       | 4,043 |   | 13,212 |   | 17,255 |   |
| Discontinued  operations (Specialty Avionics) |   | 7,500                        |       | — |   | 7,988 |   | 7,988 |   |
| Total  pre-tax charges                        |   | $                            | 7,500      |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |
|                                          |   |                         |       |   |   |   |   |   |   |
| Charged to  operations:                       |   |                         |       |   |   |   |   |   |   |
| Cost of  sales                                |   | $                            | —     |   | $ | 1,214 |   | $ | 9,462 |   | $ | 10,676 |   |
| Selling,  general and administrative expenses |   | —                       |       | 2,829 |   | 3,750 |   | 6,579 |   |
| Discontinued  operations (Specialty Avionics) |   | 7,500                        |       | — |   | 7,988 |   | 7,988 |   |
| Total  pre-tax charges                        |   | $                            | 7,500      |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |
|                                          |   |                         |       |   |   |   |   |   |   |
| Components  of charges:                       |   |                         |       |   |   |   |   |   |   |
| Continuing  operations:                       |   |                         |       |   |   |   |   |   |   |
| Noncash  charges                              |   | $                            | —     |   | $ | 3,145 |   | $ | 8,311 |   | $ | 11,456 |   |
| Cash charges                                  |   | —                       |       | 898 |   | 4,901 |   | 5,799 |   |
| Total  continuing operations pre-tax charges  |   | —                       |       | 4,043 |   | 13,212 |   | 17,255 |   |
| Discontinued  operations noncash charges      |   | 7,500                        |       | — |   | 7,988 |   | 7,988 |   |
| Total  pre-tax charges                        |   | $                            | 7,500      |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |

 

10

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**Asset Realignment Restructuring**

 

During the second quarterof fiscal 2001, the Company’s Cabin Management Group adopted a restructuringprogram to realign production programs between its manufacturingfacilities.  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, the Company announced and implemented a further restructuringprogram in December 2001 designed to reduce costs and conserve workingcapital.  This program includedpermanently closing one manufacturing facility and idling a second facility foran indefinite period, curtailing several product development programs andinstituting workforce reductions.  Dueto the ongoing weakness of the business, VIP and head-of-state aircraft market,the Company decided during the second quarter of fiscal 2002 to permanentlyclose the temporarily idled manufacturing facility.  The restructuring, asset impairment and other related chargesrecorded during fiscal 2002 were comprised of the following:

 

•                  *Impairment of Long-Lived Assets.*  The decision to permanently close theadditional manufacturing facility resulted in an additional impairment ofproperty and equipment and, accordingly, these assets were written down totheir estimated net realizable value in 2002. Net realizable values are based on estimated current market values andthe actual losses could exceed these estimates.

 

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

 

•                  *Other AssetImpairment Related Charges.* Other expenses pertain to provisions for estimated losses on uncompletedlong-term contracts aggregating $2,577,000 and other related charges expensedas incurred.

 

The components of theamounts incurred were as follows:

 
|                                 |   | **Charges Recorded During the  Year Ended December 31, 2002** |       |
|--------------------------------------|--------|--------------------------------------------------------------------|------------|
| **(In thousands)**                   |   | **1stQuarter**                                                     | ** ** | **2nd,  3rd & 4th  Quarters** | ** ** | **Total** | ** ** |
|                                 |   | **(Unaudited)**                                                    |       |   |   |
| Impairment of long-lived assets      |   | $                                                                  | —     |   | $ | 2,557 |   | $ | 2,557 |   |
| Excess inventory write-downs         |   | —                                                             |       | 1,265 |   | 1,265 |   |
| Other restructuring-related expenses |   | —                                                             |       | 3,079 |   | 3,079 |   |
| Total pre-tax charges                |   | $                                                                  | —     |   | $ | 6,901 |   | $ | 6,901 |   |

 

This restructuringprogram was completed during the fourth quarter of fiscal 2002.

 

11

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**Seat Manufacturing Facilities Restructuring**

** **

During the first quarterof fiscal 2002, the Company announced it would consolidate the production offour seating and related manufacturing facilities into two, resulting in thepermanent closure of two facilities. This program was designed to improve manufacturing efficiencies and tofurther reduce costs and conserve working capital.  In connection with this restructuring program, the Companyrecorded pre-tax charges to operations totaling $6,294,000 during 2002 forrestructuring, asset impairment and other related charges.  The charges were comprised of the following:

 

•                  *Inventory and Accounts Receivable Write-Downs.*  Inconnection with the consolidation of all production, the Company discontinuedmanufacturing certain products, principally those which overlap.  Inventory and certain receivables related tothe discontinued products were written down to net realizable value.

 

•                  *Impairment of Long-Lived Assets.*  The restructuring program 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 were terminatedin connection with the permanent closure of the manufacturing facilities.

 

•                  *Lease Termination and Other Related Costs.*  Lease termination and other related costsare comprised of the net losses expected to be incurred under existinglong-term lease 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 Asset Impairment 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.  Such costs were charged to expense asincurred.

 

The components of theamounts incurred were as follows:

 
|                                          |   | **Charges Recorded During the  Year Ended December 31, 2002** |       |
|-----------------------------------------------|--------|--------------------------------------------------------------------|------------|
| **(In thousands)**                            |   | **1stQuarter**                                                     | ** ** | **2nd,  3rd & 4th  Quarters** | ** ** | **Total** | ** ** |
|                                          |   | **(Unaudited)**                                                    |       |   |   |
| Inventory and accounts receivable write-downs |   | $                                                                  | 1,445      |   | $ | 755 |   | $ | 2,200 |   |
| Impairment of long-lived assets               |   | 1,700                                                              |       | (326 | ) | 1,374 |   |
| Severance and other compensation costs        |   | 450                                                                |       | — |   | 450 |   |
| Lease termination and other related costs     |   | 300                                                                |       | — |   | 300 |   |
| Other restructuring-related expenses          |   | 148                                                                |       | 1,822 |   | 1,970 |   |
| Total pre-tax charges                         |   | $                                                                  | 4,043      |   | $ | 2,251 |   | $ | 6,294 |   |

 

This restructuringprogram was completed during the second quarter of fiscal 2002.

 

12

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**Other Asset Impairment Related Charges**

 

Due to continued weaknessin the commercial aircraft portion of the business, in the fourth quarter offiscal 2002 the Company recorded a pre-tax charge of $12,048,000 for additionalasset impairments.  Of this amount,$7,672,000 related to the Company’s annual goodwill impairment testing pursuantto SFAS No. 142 and $4,376,000 related to inventories and was charged to costof goods sold.  Charges totaling$7,988,000 pertained to discontinued operations.

 

As described in Note 2,on March 14, 2003, the Company entered into a definitive agreement to sellits equity interests in the subsidiaries comprising its Specialty AvionicsGroup for $140,000,000 in cash.  Basedupon the fair value of the group implied in the definitive agreement, theCompany determined that the carrying value of the group’s net assets was notfully recoverable.  As a result, theCompany recorded a goodwill impairment charge of $7,500,000 during the threemonths ended March 31, 2003 to reduce the carrying value to estimatednet realizable value.

 

**Note 4.**                                   Inventories

** **

Inventories are comprisedof the following as of March 31, 2003 and December 31, 2002:

 
| **(In thousands)**                                                           |   | **March 31,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**          |   |                        |   |
| Raw materials                                                                |   | $                        | 33,179 |                        | $      | 28,911 |   |
| Work-in-process:                                                             |   |                     |   |                        |   |
| Direct and  indirect manufacturing costs                                     |   | 10,696                   |   | 6,843                       |   |
| Program  costs, principally engineering                                      |   | 16,095                   |   | 14,769                      |   |
| Finished  goods                                                              |   | 1,187                    |   | 4,773                       |   |
| Costs and  estimated earnings in excess of billings on uncompleted contracts |   | 9,579                    |   | 4,004                       |   |
| Total  inventories                                                           |   | $                        | 70,736 |                        | $      | 59,300 |   |

 

Periodic assessments areperformed to ensure recoverability of the program costs and adjustments aremade, if necessary, to reduce inventoried costs to estimated realizablevalue.  No adjustments were requiredduring the year ended December 31, 2002 or the first three months offiscal 2003.

 

13

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Total costs and estimatedearnings on all uncompleted contracts as of March 31, 2003 andDecember 31, 2002 are comprised of the following:

 
| **(In thousands)**                                                            |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                          |   | **(Unaudited)**          |   |                        |   |
| Costs  incurred on uncompleted contracts                                      |   | $                        | 50,122 |                        | $      | 49,572 |   |
| Estimated  earnings recognized                                                |   | 66,965                   |   | 63,699                      |   |
| Total costs  and estimated earnings                                           |   | 117,087                  |   | 113,271                     |   |
| Less  billings to date                                                        |   | (107,600                 | )      | (109,880                    | )      |
| Net                                                                           |   | $                        | 9,487  |                        | $      | 3,391 |   |
|                                                                          |   |                     |   |                        |   |
| Balance  sheet classification:                                                |   |                     |   |                        |   |
| Asset –  Costs and estimated earnings in excess of billings              |   | $                        | 9,579  |                        | $      | 4,004 |   |
| Liability –  Billings in excess of costs and estimated earnings (Note 7) |   | (92                      | )      | (613                        | )      |
| Net                                                                           |   | $                        | 9,487  |                        | $      | 3,391 |   |

 

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

 

**Note 5.**                                   Goodwill

 

Goodwill was $196,430,000as of March 31, 2003 and December 31, 2002.

 

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.  During 2002, the Company completed the transitionalimpairment testing of goodwill recorded as of January 1, 2002 as requiredunder SFAS No. 142.  Fair value of eachreporting unit was determined using a discounted cash flow approach taking intoconsideration projections based on the individual characteristics of thereporting units, historical trends, market multiples for comparable businessesand independent appraisals.  Unallocatedgoodwill was allocated to the reporting units for impairment testing purposes.

 

The results indicatedthat the carrying value of goodwill was impaired.  The resulting impairment was primarily attributable to a changein the evaluation criteria for goodwill utilized under previous accountingguidance to the fair value approach stipulated in SFAS No. 142.  In accordance with the transitionalprovision of SFAS No. 142, the Company recorded a $17,828,000 noncashwrite-down of goodwill (net of $878,000 income tax benefit) as ofJanuary 1, 2002 as a cumulative effect of a change in accountingprinciple.  An additional $39,322,000noncash write-down of goodwill pertained to the Specialty Avionics Group and isincluded in the loss from discontinued operations.

 

14

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**Note6.**                                  OtherAssets, Principally Intangibles

** **

Other assets arecomprised of the following as of March 31, 2003 and December 31,2002:

 
| **(In thousands)**                                       |   | **March 31,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                     |   | **(Unaudited)**          |   |                        |   |
| Identifiable  intangible assets with finite useful lives |   | $                        | 28,193 |                        | $      | 29,105 |   |
| Deferred  financing costs                                |   | 8,433                    |   | 9,168                       |   |
| Other  non-amortizable assets                            |   | 3,768                    |   | 1,155                       |   |
| Total other  assets                                      |   | $                        | 40,394 |                        | $      | 39,428 |   |

 

**Identifiable Intangible Assets with Finite UsefulLives**

 

Identifiable intangibleassets with finite useful lives are comprised of the following as ofMarch 31, 2003 and December 31, 2002:

 
|                           |   | **March 31,  2003 (Unaudited)** |       | **December 31,  2002**   |       |
|--------------------------------|--------|--------------------------------------|------------|-------------------------------|------------|
| **(In thousands)**             |   | **Cost**                             | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|                           |   |                                 |       |                          |       |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                                    | 22,272     |                          | $          | (5,110 | ) | $ | 17,162 |   | $ | 22,272 |   | $ | (4,738 | ) | $ | 17,534 |   |
| Customer contracts             |   | 8,390                                |       | (4,995                        | )          | 3,395 |   | 8,390 |   | (4,695 | ) | 3,695 |   |
| Engineering drawings           |   | 7,645                                |       | (1,903                        | )          | 5,742 |   | 7,645 |   | (1,776 | ) | 5,869 |   |
| Other identifiable intangibles |   | 2,955                                |       | (1,061                        | )          | 1,894 |   | 2,955 |   | (948 | ) | 2,007 |   |
| Total identifiable intangibles |   | $                                    | 41,262     |                          | $          | (13,069 | ) | $ | 28,193 |   | $ | 41,262 |   | $ | (12,157 | ) | $ | 29,105 |   |

 

Estimated annualamortization expense for all identifiable intangible assets with finite usefullives for the five-year period ending December 31, 2007 is as follows:2003 – $3,644,000; 2004 – $3,644,000; 2005 – $3,477,000; 2006 – $2,275,000; and2007 – $2,175,000.

 

**Note 7.**                                   Accrued Liabilities

** **

Accrued liabilities arecomprised of the following as of March 31, 2003 and December 31,2002:

 
| **(In thousands)**                                                           |   | **March 31,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**          |   |                        |   |
| Salaries, wages, compensated absences and payroll  related taxes             |   | $                        | 6,115  |                        | $      | 9,212 |   |
| Customer advances and deposits                                               |   | 4,205                    |   | 4,662                       |   |
| Accrued interest                                                             |   | 4,042                    |   | 7,465                       |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |   | 92                       |   | 613                         |   |
| Acquisition related contingent consideration                                 |   | —                   |   | 600                         |   |
| Other accrued liabilities                                                    |   | 8,562                    |   | 8,942                       |   |
| Total accrued liabilities                                                    |   | $                        | 23,016 |                        | $      | 31,494 |   |

 

15

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**Note8.**                                  Long-TermDebt

** **

Long-term debt includesthe following amounts as of March 31, 2003 and December 31, 2002:

 
| **(In thousands)**                                                                    |   | **March 31,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                  |   | **(Unaudited)**          |    |                        |   |
| Senior credit facility:                                                               |   |                     |    |                        |   |
| Term loans                                                                            |   | $                        | 260,925 |                        | $      | 264,200 |   |
| Revolving line of credit                                                              |   | 33,150                   |    | 6,000                       |   |
| 12% senior subordinated notes                                                         |   | 100,000                  |    | 100,000                     |   |
| Capital lease obligations and term debt financing,  secured by property and equipment |   | 9,937                    |    | 10,331                      |   |
| Other indebtedness                                                                    |   | —                   |    | 486                         |   |
| Total long-term debt                                                                  |   | 404,012                  |    | 381,017                     |   |
| Less current portion                                                                  |   | (17,492                  | )       | (16,317                     | )      |
| Long-term debt, less current portion                                                  |   | $                        | 386,520 |                        | $      | 364,700 |   |

 

On March 28, 2003the Company received requisite lender approval to amend its senior credit facilityto permit the sale of its Specialty Avionics Group, provided that net proceedsof at least $130,000,000 from the sale are used to repay senior credit facilityborrowings.  Upon consummation of thesale on May 23, 2003, the Company repaid $130,000,000 of senior creditborrowings with the estimated net proceeds from the sale.  The Company may be required to repayadditional borrowings upon final determination of the net proceeds from thesale.

 

The amendment alsorevised various financial covenants (which the Company would otherwise have notbeen able to meet as of March 31, 2003), decreases by $10,000,000 themaximum permitted revolving line of credit borrowings to $40,000,000, increasesthe prime rate and LIBOR interest margins by 1.5% and permits the issuance ofspecified types of additional indebtedness and the repurchase of a portion ofthe Company’s 12% senior subordinated notes with the proceeds from the sale ofjunior securities.

 

**Note 9.**                                   Income Taxes

 

For the three monthsended March 31, 2003 and 2002, the provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate toincome before income taxes primarily due to the effects of state and foreignincome taxes and minority interest in preferred stock of subsidiary, which isnot deductible for income tax purposes.

 

16

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**Note10.**                           CapitalStructure

 

**Mandatorily Redeemable Preferred Stock**

** **

The table belowsummarizes the increase in mandatorily redeemable preferred stock during thethree months ended March 31, 2003.

 
|                                                               |   | **DeCrane  Aircraft  16% Preferred Stock** |       | **DeCrane  Holdings  14% Preferred Stock** |       |
|--------------------------------------------------------------------|--------|--------------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands, except share and per share data)**                |   | **Number  of  Shares**                     | ** ** | **Mandatory  Redemption  Value**           | ** ** | **Unamortized  Issuance  Discount** | ** ** | **Net  Book  Value** | ** ** | **Number  of  Shares** | ** ** | **Mandatory  Redemption  Value** | ** ** |
|                                                               |   |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Balance, December 31, 2002                                    |   | 370,061                                    |       | $                                          | 37,006     |   | $ | (2,925 | ) | $ | 34,081 |   | 342,417 |   | $ | 62,222 |   |
| Accrued dividends and redemption value accretion                   |   | 14,803                                     |       | 1,480                                      |       | 117 |   | 1,597 |   | — |   | — |   |
| Noncash dividend accretion                                         |   | —                                     |       | —                                     |       | — |   | — |   | — |   | 2,178 |   |
| Balance, March 31, 2003 (Unaudited)                           |   | 384,864                                    |       | $                                          | 38,486     |   | $ | (2,808 | ) | $ | 35,678 |   | 342,417 |   | $ | 64,400 |   |
|                                                               |   |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Per share liquidation value as of March 31,  2003 (Unaudited) |   |                                       |       | $                                          | 100.00     |   |   |   |   |   |   |   | $ | 188.07 |   |

 

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

 

***DeCrane Aircraft 16% Mandatorily Redeemable Preferred Stock***

** **

Holders of the preferredstock are entitled to receive, when, as and if declared, dividends at a rateequal to 16% per annum.  Prior toJune 30, 2005, DeCrane Aircraft may, at its option, pay dividends either incash or by 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 inlieu of cash dividends; such shares are reflected as a component of minorityinterest in preferred stock of subsidiary.

 

***DeCrane Holdings 14% Mandatorily Redeemable Preferred Stock***

** **

Holders of the preferredstock are entitled to receive, when, as and if declared, dividends at a rateequal to 14% per annum.  Prior toSeptember 30, 2005, dividends are not paid in cash but instead accrete tothe liquidation value of the preferred stock, which, in turn, increases theredemption obligation.

 

17

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**Note11.**                           Commitmentsand Contingencies

** **

**Litigation**

** **

As part of itsinvestigation of the crash of Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the“CTSB”) initially notified the Company that it recovered burned wire that wasattached to the in-flight entertainment system installed on some of Swissair’saircraft by one of the Company’s subsidiaries. The Company’s subsidiary has worked vigorously over the last five yearswith the CTSB investigators in the fact-finding investigation of this catastrophicincident.  On March 27, 2003, theCTSB released its final report on its investigation.  This report indicated that the CTSB was unable to conclusivelydetermine the cause of the fire which led to the crash of the aircraft.

 

The Company was adefendant in most, but not all, of the actions brought by the estates of the229 victims of the crash.  The actions,which sought damages and costs in unstated amounts, claimed negligence, strictliability, and breach of warranty. Virtually all of the cases have been settled by Boeing and Swissair’sinsurers and both assignment of the claims against, and releases in favor of,the Company have been obtained by the Boeing and Swissair insurers.

 

Boeing and Swissair havemade a claim (but have not commenced litigation) against the Company tocontribute to the amounts paid to settle the cases.  As there is no litigation pending, no discovery has been taken byeither side as to liability for the crash. The Company believes that it is not responsible for the crash and, inany event, it maintains insurance for such matters.  The Company further believes that any loss it may sustain uponthe ultimate resolution of this matter, if any, will not exceed the amount ofinsurance coverage maintained. Accordingly, no accrual for loss has been recorded.

 

The Company and itssubsidiaries are also involved in other routine legal and administrative proceedingsincident to the normal conduct of business. Management believes the ultimate disposition of all such matters willnot have a material adverse effect on the Company’s business, consolidatedfinancial position, results of operations or cash flows.

 

**Note 12.**                            Business SegmentInformation

** **

The Company suppliesproducts and services to the business, VIP and head-of-state aircraft marketwithin the aerospace industry.  TheCompany’s subsidiaries are organized into two groups, each of which is astrategic business that develops, manufactures and sells distinct products andservices.  The groups and a descriptionof their businesses are as follows:

 

•                  *Cabin Management –* manufactures interiorcabin components, including cabin interior furnishings, cabin managementsystems, seating and composite components;

 

•                  *Systems Integration –* manufacturesauxiliary fuel systems and auxiliary power units, provides system integrationservices, provides aircraft completion and refurbishment services and is aBoeing Business Jet authorized service center.

 

In prior periods, theCompany’s Specialty Avionics Group was a third strategic business for whichsegment information was provided.  As aresult of the sale of the Specialty Avionics Group, this group is reflected asa discontinued operation and segment information for prior periods has beenrestated.

 

18

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Management utilizes morethan one measurement to evaluate group performance and allocate resources;however, management considers Adjusted EBITDA, as defined, to be the primarymeasurement of a group’s overall core economic performance and return oninvested capital.  Management also usesAdjusted EBITDA in the Company’s annual budget and planning process for futureperiods, as one of the decision-making criteria for funding discretionarycapital expenditures and product development programs and as the measure indetermining the value of acquisitions and dispositions.  The board of directors uses Adjusted EBITDAas one of the performance metrics for determining the amount of bonuses awardedto pursuant to the Company’s cash incentive bonus plan and as an indicator ofenterprise value used in determining the exercise price of stock optionsgranted and the acceleration of stock option vesting pursuant to the Company’sincentive stock option plan.

 

Management definesAdjusted EBITDA as earnings before interest, income taxes, depreciation andamortization, restructuring, asset impairment and other related charges,acquisition related charges not capitalized and other noncash and nonoperatingcharges.  Management believes thepresentation of this measure is relevant and useful to investors because itallows investors and analysts to view group performance in a manner similar tothe method used by management, helps improve their ability to understand theCompany’s core segment performance, adjusted for items management believes areunusual, and makes it easier to compare the Company’s results with othercompanies that have different financing, capital structures and tax rates.  In addition, management believes thesemeasures are consistent with the manner in which its lenders and investorsmeasure the Company’s overall performance and liquidity, including its abilityto service debt and fund discretionary capital expenditure and productdevelopment programs.

 

The financial measureAdjusted EBITDA, as defined, excludes certain charges reflected in theCompany’s financial statements which are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).  However, the Company’s presentation of AdjustedEBITDA is in accordance with the GAAP requirements of SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information,” whichrequires the Company to report the primary measure of segment performance usedby management to evaluate and manage its businesses.  The Company’s method of calculating Adjusted EBITDA may not beconsistent with that of other companies and should be viewed in conjunctionwith measurements that are computed in accordance GAAP, such as net income(loss), the nearest comparable GAAP financial measure.  A reconciliation of Adjusted EBITDA to netincome (loss) is included herein to clarify the differences between thesefinancial measures.

 

The accounting policiesof the groups are substantially the same as those described in the summary ofsignificant accounting policies (Note 1) to the audited financialstatements.  Some transactions are recordedat the Company’s corporate headquarters and are not allocated to the groups,such as most of the Company’s cash and cash equivalents, debt and related netinterest expense, corporate headquarters costs and income taxes.

 

19

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The tables belowsummarize selected financial data by business segment.

 
|                           |   | **Three Months Ended  March 31,** |       |
|--------------------------------|--------|----------------------------------------|------------|
| **(In thousands)**             |   | **2003**                               | ** ** | **2002** | ** ** |
|                           |   | **(Unaudited)**                        |       |
| Revenues:                      |   |                                   |       |   |   |
| Cabin  Management              |   | $                                      | 30,620     |   | $ | 45,867 |   |
| Systems  Integration           |   | 12,132                                 |       | 15,077 |   |
| Inter-group  elimination (1)   |   | (852                                   | )          | (125 | ) |
| Consolidated  totals           |   | $                                      | 41,900     |   | $ | 60,819 |   |
|                           |   |                                   |       |   |   |
| Adjusted  EBITDA (as defined): |   |                                   |       |   |   |
| Cabin Management               |   | $                                      | 4,550      |   | $ | 7,461 |   |
| Systems  Integration           |   | 2,157                                  |       | 4,296 |   |
| Corporate  (2)                 |   | (2,112                                 | )          | (1,558 | ) |
| Inter-group  elimination (3)   |   | 110                                    |       | 111 |   |
| Consolidated  totals (4)       |   | $                                      | 4,705      |   | $ | 10,310 |   |

 
| **(In thousands)**                            |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                          |   | **(Unaudited)**          |    |                        |   |
| Total assets  (as of period end):             |   |                     |    |                        |   |
| Cabin  Management                             |   | $                        | 284,258 |                        | $      | 281,655 |   |
| Systems  Integration                          |   | 70,226                   |    | 62,437                      |   |
| Corporate  (5)                                |   | 49,555                   |    | 44,247                      |   |
| Inter-group  elimination (6)                  |   | (3                       | )       | (113                        | )      |
| Continuing  operations                        |   | 404,036                  |    | 388,226                     |   |
| Discontinued  operations (Specialty Avionics) |   | 152,003                  |    | 160,741                     |   |
| Consolidated  totals                          |   | $                        | 556,039 |                        | $      | 548,967 |   |

 

----

(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.

 

20

----

 

(4)                      The tablebelow reconciles the financial measure Adjusted EBITDA, as defined, to netincome (loss).

 
|                                                       |   | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|--------|----------------------------------------|------------|
| **(In thousands)**                                         |   | **2003**                               | ** ** | **2002** | ** ** |
|                                                       |   | **(Unaudited)**                        | ** ** |
| Consolidated  Adjusted EBITDA (as defined)                 |   | $                                      | 4,705      |   | $ | 10,310 |   |
| Restructuring,  asset impairment and other related charges |   | —                                 |       | (4,043 | ) |
| Depreciation  and amortization of long-lived assets (a)    |   | (2,516                                 | )          | (2,767 | ) |
| Acquisition  related charges not capitalized               |   | (9                                     | )          | (10 | ) |
| Other  noncash charges                                     |   | —                                 |       | (54 | ) |
| Interest  expense                                          |   | (5,869                                 | )          | (5,948 | ) |
| Minority  interest in preferred stock of subsidiary        |   | (1,597                                 | )          | (1,382 | ) |
| Other  expenses, net                                       |   | (339                                   | )          | (113 | ) |
| Provision  for income tax benefit                          |   | 1,265                                  |       | 1,141 |   |
| Loss from  discontinued operations, net of tax             |   | (6,397                                 | )          | (37,440 | ) |
| Cumulative  effect of change in accounting principle       |   | —                                 |       | (17,828 | ) |
| Net loss                                                   |   | $                                      | (10,757    | ) | $ | (58,134 | ) |

 

----

(a)                      Reflectsdepreciation and amortization of long-lived assets and amortization of deferredfinancing costs, which are classified as a component of interest expense, asfollows:

 
|                                                |   | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------------|--------|-----------------------------------------|------------|
| **(In thousands)**                                  |   | **2003**                                | ** ** | **2002** | ** ** |
|                                                |   | **(Unaudited)**                         |       |
| Depreciation  and amortization of long-lived assets |   | $                                       | 2,516      |   | $ | 2,767 |   |
| Amortization  of deferred financing costs           |   | 695                                     |       | 589 |   |
| Consolidated  depreciation and amortization         |   | $                                       | 3,211      |   | $ | 3,356 |   |

 

(5)                      Reflects theCompany’s corporate headquarters assets, excluding investments in and notesreceivable from subsidiaries.

 

(6)                      Reflectselimination of inter-group receivables and profits in inventory as of periodend.

 

21

----

 

**Note 13.**   Supplemental Condensed Consolidating FinancialInformation

** **

In conjunction with the12% senior subordinated notes described in Note 8, the following condensedconsolidating financial information is presented segregating DeCrane Aircraft,as the issuer, and guarantor and non-guarantor subsidiaries.  The accompanying financial information inthe guarantor subsidiaries column reflects the financial position, results ofoperations and cash flows for those subsidiaries guaranteeing the senior creditfacility and the notes.  DeCraneHoldings is not a guarantor of the notes and is therefore reflected in thenon-guarantor subsidiary column with DeCrane Aircraft’s non-guarantorsubsidiaries.

 

The guarantorsubsidiaries are wholly-owned subsidiaries of the Company and their guaranteesare 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 toinvestors.  Investments in subsidiariesin the following condensed consolidating financial information are accountedfor under the equity method of accounting. Consolidating adjustments include the following:

 

(1)                     Elimination of investments insubsidiaries.

 

(2)                     Elimination of intercompanyaccounts.

 

(3)                     Elimination of equity in earningsof subsidiaries.

 

22

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**Balance Sheets**

 
|                                                                                               |   | **March 31, 2003 (Unaudited)** |    |
|----------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
| **(In thousands)**                                                                                 |   | **Issuer**                          |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                                         |   |                                |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                    |   |                                |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |   | $                                   | 14,551  |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 14,637 |   |
| Accounts receivable, net                                                                           |   | —                              |    | 26,568 |   | — |   | — |   | 26,568 |   |
| Inventories                                                                                        |   | —                              |    | 70,736 |   | — |   | — |   | 70,736 |   |
| Other current assets                                                                               |   | 19,129                              |    | 682 |   | — |   | — |   | 19,811 |   |
| Assets of discontinued operations                                                                  |   | —                              |    | 157,983 |   | 4,844 |   | (10,824 | )(1) | 152,003 |   |
| Total current assets                                                                               |   | 33,680                              |    | 256,055 |   | 4,844 |   | (10,824 | ) | 283,755 |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                        |   | 2,281                               |    | 33,179 |   | — |   | — |   | 35,460 |   |
| Other assets, principally intangibles, net                                                         |   | 13,594                              |    | 223,230 |   | — |   | — |   | 236,824 |   |
| Investments in subsidiaries                                                                        |   | 347,091                             |    | — |   | 24,518 |   | (371,609 | )(1) | — |   |
| Intercompany receivables                                                                           |   | 271,905                             |    | 164,269 |   | 5,834 |   | (442,008 | )(2) | — |   |
| Total assets                                                                                       |   | $                                   | 668,551 |   | $ | 676,733 |   | $ | 35,196 |   | $ | (824,441 | ) | $ | 556,039 |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**   |   |                                |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                  |   | $                                   | 16,360  |   | $ | 1,132 |   | $ | — |   | $ | — |   | $ | 17,492 |   |
| Other current liabilities                                                                          |   | 10,895                              |    | 27,738 |   | — |   | — |   | 38,633 |   |
| Liabilities of discontinued operations                                                             |   | —                              |    | 21,055 |   | (146 | ) | — |   | 20,909 |   |
| Total current liabilities                                                                          |   | 27,255                              |    | 49,925 |   | (146 | ) | — |   | 77,034 |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                               |   | 377,822                             |    | 8,698 |   | — |   | — |   | 386,520 |   |
| Intercompany payables                                                                              |   | 171,139                             |    | 270,869 |   | — |   | (442,008 | )(2) | — |   |
| Other long-term liabilities                                                                        |   | 32,139                              |    | 514 |   | — |   | — |   | 32,653 |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock:                                                            |   |                                |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                                 |   | 35,678                              |    | — |   | — |   | — |   | 35,678 |   |
| Mandatorily redeemable 14% preferred stock                                                         |   | —                              |    | — |   | 64,400 |   | — |   | 64,400 |   |
|                                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity (deficit):                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                    |   | 116,987                             |    | 337,592 |   | 82,800 |   | (470,019 | )(1) | 67,360 |   |
| Retained earnings (deficit)                                                                        |   | (92,469                             | )       | 9,499 |   | (111,858 | ) | 87,586 | (1)  | (107,242 | ) |
| Accumulated other comprehensive loss                                                               |   | —                              |    | (364 | ) | — |   | — |   | (364 | ) |
| Total stockholders’ equity (deficit)                                                          |   | 24,518                              |    | 346,727 |   | (29,058 | ) | (382,433 | ) | (40,246 | ) |
| Total liabilities, mandatorily redeemable preferred  stock and stockholders’ equity (deficit) |   | $                                   | 668,551 |   | $ | 676,733 |   | $ | 35,196 |   | $ | (824,441 | ) | $ | 556,039 |   |

 

23

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|                                                                                               |   | **December 31, 2002** |    |
|----------------------------------------------------------------------------------------------------|--------|----------------------------|---------|
| **(In thousands)**                                                                                 |   | **Issuer**                 |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                                         |   |                       |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                    |   |                       |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |   | $                          | 12,343  |   | $ | 78 |   | $ | — |   | $ | — |   | $ | 12,421 |   |
| Accounts receivable, net                                                                           |   | —                     |    | 26,354 |   | — |   | — |   | 26,354 |   |
| Inventories                                                                                        |   | —                     |    | 59,300 |   | — |   | — |   | 59,300 |   |
| Other current assets                                                                               |   | 17,711                     |    | 443 |   | — |   | — |   | 18,154 |   |
| Assets of discontinued operations                                                                  |   | —                     |    | 166,507 |   | 5,197 |   | (10,963 | )(1)  | 160,741 |   |
| Total current assets                                                                               |   | 30,054                     |    | 252,682 |   | 5,197 |   | (10,963 | ) | 276,970 |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                        |   | 2,485                      |    | 33,654 |   | — |   | — |   | 36,139 |   |
| Other assets, principally intangibles, net                                                         |   | 11,708                     |    | 224,150 |   | — |   | — |   | 235,858 |   |
| Investments in subsidiaries                                                                        |   | 348,559                    |    | — |   | 35,312 |   | (383,871 | )(1)  | — |   |
| Intercompany receivables                                                                           |   | 276,121                    |    | 172,389 |   | 5,740 |   | (454,250 | )(2) | — |   |
| Total assets                                                                                       |   | $                          | 668,927 |   | $ | 682,875 |   | $ | 46,249 |   | $ | (849,084 | ) | $ | 548,967 |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**   |   |                       |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                  |   | $                          | 15,337  |   | $ | 980 |   | $ | — |   | $ | — |   | $ | 16,317 |   |
| Other current liabilities                                                                          |   | 16,786                     |    | 27,763 |   | — |   | — |   | 44,549 |   |
| Liabilities of discontinued operations                                                             |   | —                     |    | 19,954 |   | (26 | ) | — |   | 19,928 |   |
| Total current liabilities                                                                          |   | 32,123                     |    | 48,697 |   | (26 | ) | — |   | 80,794 |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                               |   | 355,568                    |    | 9,132 |   | — |   | — |   | 364,700 |   |
| Intercompany payables                                                                              |   | 178,242                    |    | 276,008 |   | — |   | (454,250 | )(2) | — |   |
| Other long-term liabilities                                                                        |   | 33,601                     |    | 840 |   | — |   | — |   | 34,441 |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                                 |   | 34,081                     |    | — |   | — |   | — |   | 34,081 |   |
| Mandatorily redeemable 14% preferred stock                                                         |   | —                     |    | — |   | 62,222 |   | — |   | 62,222 |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity (deficit):                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                    |   | 118,621                    |    | 337,592 |   | 85,015 |   | (471,653 | )(1)  | 69,575 |   |
| Retained earnings (deficit)                                                                        |   | (83,309                    | )       | 10,967 |   | (100,962 | ) | 76,819 | (1)  | (96,485 | ) |
| Accumulated other comprehensive loss                                                               |   | —                     |    | (361 | ) | — |   | — |   | (361 | ) |
| Total stockholders’ equity                                                                    |   | 35,312                     |    | 348,198 |   | (15,947 | ) | (394,834 | ) | (27,271 | ) |
| Total liabilities, mandatorily redeemable preferred  stock and stockholders’ equity (deficit) |   | $                          | 668,927 |   | $ | 682,875 |   | $ | 46,249 |   | $ | (849,084 | ) | $ | 548,967 |   |

 

24

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**Statements of Operations**

 
|                                               |   | **Three Months Ended March 31, 2003 (Unaudited)** |   |
|----------------------------------------------------|--------|--------------------------------------------------------|--------|
| **(In thousands)**                                 |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Revenues                                           |   | $                                                      | — |   | $ | 41,900 |   | $ | — |   | $ | — |   | $ | 41,900 |   |
| Cost of sales                                      |   | —                                                 |   | 30,903 |   | — |   | — |   | 30,903 |   |
|                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Gross profit                                       |   | —                                                 |   | 10,997 |   | — |   | — |   | 10,997 |   |
|                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses       |   | 3,036                                                  |   | 4,869 |   | — |   | — |   | 7,905 |   |
| Amortization of intangible assets                  |   | —                                                 |   | 912 |   | — |   | — |   | 912 |   |
| Interest expense                                   |   | 5,820                                                  |   | 49 |   | — |   | — |   | 5,869 |   |
| Minority interest in preferred stock of subsidiary |   | —                                                 |   | — |   | 1,597 |   | — |   | 1,597 |   |
| Intercompany charges                               |   | (6,523                                                 | )      | 6,523 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                     |   | 4,411                                                  |   | 69 |   | 9,160 |   | (13,640 | )(3) | — |   |
| Other expenses, net                                |   | 174                                                    |   | 165 |   | — |   | — |   | 339 |   |
| Provision for income taxes (benefit)               |   | 2,242                                                  |   | (3,507 | ) | — |   | — |   | (1,265 | ) |
| Loss from discontinued operations                  |   | —                                                 |   | 6,328 |   | 69 |   | — |   | 6,397 |   |
|                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net loss                                           |   | $                                                      | (9,160 | ) | $ | (4,411 | ) | $ | (10,826 | ) | $ | 13,640 |   | $ | (10,757 | ) |

 
|                                                |   | **Three Months Ended March 31, 2002 (Unaudited)** |    |
|-----------------------------------------------------|--------|--------------------------------------------------------|---------|
| **(In thousands)**                                  |   | **Issuer**                                             |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                |   |                                                   |    |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                                      | —  |   | $ | 60,819 |   | $ | — |   | $ | — |   | $ | 60,819 |   |
| Cost of sales                                       |   | —                                                 |    | 44,381 |   | — |   | — |   | 44,381 |   |
|                                                |   |                                                   |    |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                                 |    | 16,438 |   | — |   | — |   | 16,438 |   |
|                                                |   |                                                   |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses        |   | 3,180                                                  |    | 8,979 |   | — |   | — |   | 12,159 |   |
| Amortization of intangible assets                   |   | —                                                 |    | 843 |   | — |   | — |   | 843 |   |
| Interest expense                                    |   | 5,873                                                  |    | 75 |   | — |   | — |   | 5,948 |   |
| Minority interest in preferred stock of subsidiary  |   | —                                                 |    | — |   | 1,382 |   | — |   | 1,382 |   |
| Intercompany charges                                |   | (7,150                                                 | )       | 7,150 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                      |   | 53,802                                                 |    | 9,523 |   | 56,752 |   | (120,077 | )(3) | — |   |
| Other expenses, net                                 |   | 91                                                     |    | 22 |   | — |   | — |   | 113 |   |
| Provision for income tax benefit                    |   | (528                                                   | )       | (613 | ) | — |   | — |   | (1,141 | ) |
| Loss from discontinued operations                   |   | —                                                 |    | 27,917 |   | 9,523 |   | — |   | 37,440 |   |
| Cumulative effect of change in accounting principle |   | 1,484                                                  |    | 16,344 |   | — |   | — |   | 17,828 |   |
|                                                |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net loss                                            |   | $                                                      | (56,752 | ) | $ | (53,802 | ) | $ | (67,657 | ) | $ | 120,077 |   | $ | (58,134 | ) |

 

25

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**Statements of Cash Flows**

 
|                                                 |   | **Three Months Ended March 31, 2003 (Unaudited)** |   |
|------------------------------------------------------|--------|--------------------------------------------------------|--------|
| **(In thousands)**                                   |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**           |   |                                                   |   |   |   |   |   |   |   |   |   |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                                      | (9,160 | ) | $ | (4,411 | ) | $ | (10,826 | ) | $ | 13,640 | (3) | $ | (10,757 | ) |
| Loss from discontinued operations                    |   | —                                                 |   | 6,328 |   | 69 |   | — |   | 6,397 |   |
| Noncash adjustments:                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                       |   | 4,411                                                  |   | 69 |   | 9,160 |   | (13,640 | )(3) | — |   |
| Other noncash adjustments                            |   | 237                                                    |   | 1,509 |   | 1,597 |   | — |   | 3,343 |   |
| Changes in working capital                           |   | (16,438                                                | )      | (4,912 | ) | — |   | — |   | (21,350 | ) |
| Net cash used for operating activities               |   | (20,950                                                | )      | (1,417 | ) | — |   | — |   | (22,367 | ) |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**           |   |                                                   |   |   |   |   |   |   |   |   |   |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired     |   | (600                                                   | )      | — |   | — |   | — |   | (600 | ) |
| Capital expenditures                                 |   | (3                                                     | )      | (1,095 | ) | — |   | — |   | (1,098 | ) |
| Net cash used for investing activities               |   | (603                                                   | )      | (1,095 | ) | — |   | — |   | (1,698 | ) |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities:**           |   |                                                   |   |   |   |   |   |   |   |   |   |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                |   | 27,150                                                 |   | — |   | — |   | — |   | 27,150 |   |
| Principal payments on long-term debt and leases      |   | (3,389                                                 | )      | (821 | ) | — |   | — |   | (4,210 | ) |
| Net cash provided by (used for) financing activities |   | 23,761                                                 |   | (821 | ) | — |   | — |   | 22,940 |   |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued operations         |   | —                                                 |   | 3,341 |   | — |   | — |   | 3,341 |   |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents                 |   | 2,208                                                  |   | 8 |   | — |   | — |   | 2,216 |   |
| Cash and equivalents at beginning of period          |   | 12,343                                                 |   | 78 |   | — |   | — |   | 12,421 |   |
|                                                 |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                |   | $                                                      | 14,551 |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 14,637 |   |

 

26

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|                                                 |   | **Three Months Ended March 31, 2002 (Unaudited)** |    |
|------------------------------------------------------|--------|--------------------------------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                                             |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**           |   |                                                   |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                                      | (56,752 | ) | $ | (53,802 | ) | $ | (67,657 | ) | $ | 120,077 | (3) | $ | (58,134 | ) |
| Loss from discontinued operations                    |   | —                                                 |    | 27,917 |   | 9,523 |   | — |   | 37,440 |   |
| Noncash adjustments:                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                       |   | 53,802                                                 |    | 9,523 |   | 56,752 |   | (120,077 | )(3) | — |   |
| Other noncash adjustments                            |   | 2,516                                                  |    | 22,145 |   | 1,382 |   | — |   | 26,043 |   |
| Changes in working capital                           |   | 4,724                                                  |    | (9,078 | ) | — |   | — |   | (4,354 | ) |
| Net cash provided by (used for) operating activities |   | 4,290                                                  |    | (3,295 | ) | — |   | — |   | 995 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**           |   |                                                   |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired     |   | (707                                                   | )       | — |   | — |   | — |   | (707 | ) |
| Capital expenditures                                 |   | (4                                                     | )       | (415 | ) | — |   | — |   | (419 | ) |
| Net cash used for investing activities               |   | (711                                                   | )       | (415 | ) | — |   | — |   | (1,126 | ) |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities:**           |   |                                                   |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Deferred financing costs                             |   | (1,629                                                 | )       | — |   | — |   | — |   | (1,629 | ) |
| Principal payments on long-term debt and leases      |   | (97                                                    | )       | (299 | ) | — |   | — |   | (396 | ) |
| Other, net                                           |   | (368                                                   | )       | 297 |   | — |   | — |   | (71 | ) |
| Net cash used for financing activities               |   | (2,094                                                 | )       | (2 | ) | — |   | — |   | (2,096 | ) |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued operations         |   | —                                                 |    | 3,961 |   | — |   | — |   | 3,961 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents                 |   | 1,485                                                  |    | 249 |   | — |   | — |   | 1,734 |   |
| Cash and equivalents at beginning of period          |   | 9,641                                                  |    | (163 | ) | — |   | — |   | 9,478 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                |   | $                                                      | 11,126  |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 11,212 |   |

 

27

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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.

 

**RecentDevelopments**

** **

On May 23, 2003, weconsummated the sale of our equity interests in the subsidiaries comprising theSpecialty Avionics Group to Wings Holdings, Inc., an affiliate of OdysseyInvestment Partners, LLC, for $140.0 million in cash.  Proceeds of $130.0 million from the sale were used to repaysenior credit facility borrowings, in accordance with the facility’s termswhich were amended to permit the sale.

 

As we originallydescribed in our Form 10-K for the year ended December 31, 2002, ourfailure to consummate the sale of the Specialty Avionics Group by June 30,2003 would have been an event of default under the amended senior creditfacility.  As a result, our independentaccountants qualified their report on our audited financial statements for theyear ended December 31, 2002 with respect to our ability to continue as agoing concern.  Consummation of the saleand repayment of $130.0 million of borrowings alleviated our independentaccountants’ doubt about our ability to continue as a going concern.  As a result, our independent accountantsissued a revised, unqualified report on our financial statements, which weincluded in Amendment No. 1 to our Form 10-K for the year ended December 31,2002.  See “—Liquidity and CapitalResources–Recent Developments Affecting Financial Condition and Liquidity”below for additional information.

 

The sale of the SpecialtyAvionics Group is not expected to affect the operations of the remainingoperating groups.  As a result of thesale, the Specialty Avionics Group is presented as a discontinued operation inour consolidated financial statements and our discussion below of our resultsof operations reflects only continuing operations for all periods.

 

**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: business, VIP andhead-of-state aircraft and, to a lesser extent, commercial and regionalaircraft.  The September 11, 2001terrorist attack on the United States, ongoing concerns about global terrorism,the current Middle-Eastern military conflicts, the SevereAcute Respiratory Syndrome(SARS) epidemic and weak global economic conditions are all adverselyimpacting the aerospace industry.

 

In response to certain ofthese adverse conditions, we announced and implemented a restructuring programin December 2001 designed to reduce expenses and conserve workingcapital.  This program includedpermanently closing one manufacturing facility and idling a second facility foran indefinite period, curtailing several product development programs andinstituting workforce reductions. During the first quarter of fiscal 2002, we also announced we wouldconsolidate the production of four Cabin Management manufacturing facilitiesinto two facilities, resulting in the permanent closure of two additionalfacilities.  During the second quarterof fiscal 2002, we also announced we would permanently close the temporarilyidled manufacturing facility.  See“—Restructuring, Asset Impairment and Other Related Charges” below foradditional information.

 

The business, VIP andhead-of-state aircraft portion of our business experienced weakness during 2002and will continue to experience weakness throughout 2003 as evidenced byvarious manufacturers’ announced plans to temporarily suspend production atvarious times throughout the year in response to the weak demand for newaircraft.  However, we believe business,VIP and head-of-state aircraft deliveries may experience a modest recovery in2004 and continuing recovery thereafter. The

 

28

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commercial aircraftportion of our business, which subsequent to the sale of the Specialty AvionicsGroup accounts for less than 5% of consolidated revenues, also experiencedsignificant weakness in 2002 and the first half of 2003 and we believe thiscondition will continue through 2003 and into 2004, with potential recovery notexpected to occur until at least 2005. Our beliefs are based on the assumptions that we will experienceeconomic recovery and there are no further negative geo-political developmentsaffecting our industry.

 

**Results ofOperations**

 

### **Performance Measures**

### ** **

The following discussionof our results of operations includes discussions of financial measures andoperating statistics we use to evaluate the performance of, and trends in, ourbusinesses.  We believe the presentationof these measures and statistics are relevant and useful to investors becauseit allows them to view performance and trends in a manner similar to themethods we use.  These measures andstatistics, and why they are important to us and could be of interest to you,are described below.

 

**Adjusted EBITDA.**  Our discussion of the results of operationsincludes discussions of financial measures determined in accordance withaccounting principles generally accepted in the United States of America(“GAAP”) as well as the financial measure Adjusted EBITDA, which excludescertain charges reflected in our GAAP basis financial statements.  Our presentation of Adjusted EBITDA is inaccordance with the GAAP requirements of SFAS No. 131, “Disclosures about Segmentsof an Enterprise and Related Information,” which requires us to report theprimary measure of segment performance we use to evaluate and manage ourbusinesses.

 

We utilize more than onemeasurement to evaluate segment performance and allocate resources among ouroperating segments; however, we consider Adjusted EBITDA, as defined below, tobe the primary measurement of overall operating segment core economicperformance and return on invested capital. We also use Adjusted EBITDA in the annual budgeting and planning forfuture periods, as one of the decision-making criteria for fundingdiscretionary capital expenditure and product development programs and as themeasure for determining the value of acquisitions and dispositions.  Our board of directors uses Adjusted EBITDAas one of the performance metrics for determining the amount of bonuses awardedto pursuant to the cash incentive bonus plan and as an indicator of enterprisevalue used in determining the exercise price of stock options granted and theacceleration of stock option vesting pursuant the incentive stock option plan.

 

We define Adjusted EBITDAas earnings before interest, income taxes, depreciation and amortization,restructuring, asset impairment and other related charges, acquisition relatedcharges not capitalized and other noncash and nonoperating charges.  We believe the presentation of this measureis relevant and useful to investors because it allows investors and analysts toview segment performance in a manner similar to the method we use, helpsimprove their ability to understand our core segment performance, adjusted foritems we believe are unusual, and makes it easier to compare our results withother companies that have different financing, capital structures and taxrates.  In addition, we believe thesemeasures are consistent with the manner in which our lenders and investorsmeasure our overall performance and liquidity, including our ability to servicedebt and fund discretionary capital expenditure and product developmentprograms.

 

Our method of calculatingAdjusted EBITDA may not be consistent with that of other companies and shouldbe viewed in conjunction with measurements that are computed in accordanceGAAP, such as net income (loss), the nearest comparable GAAP financial measure.  Adjusted EBITDA should not be viewed assubstitutes for or superior to net income (loss), cash flow from operations orother data prepared in accordance with GAAP as a measure of our profitabilityor liquidity.  The notes to ourfinancial statements include information about our operating segments,including Adjusted EBITDA, and

 

29

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should be read inconjunction with the discussions presented herein.  The notes to our financial statements also include areconciliation of Adjusted EBITDA to net income (loss) to clarify thedifferences between these financial measures.

 

**Bookings and Backlog.**  Bookings and backlog are operatingstatistics we use as leading trend indicators of future demand for our productsand services.  Bookings and backlog arebased upon the value of purchase orders received from our customers, which willresult in revenues, if and when such orders are filled.

 

Bookings represent thetotal invoice value of purchase orders received during the period and backlogrepresents the total invoice value of unfilled purchase orders as of the end ofa period.  Orders may be subject tochange or cancellation by the customer prior to shipment.  The level of unfilled orders at any givendate during the year will be materially affected by the timing of our receiptof orders and the speed with which those orders are filled.

 

### **Three MonthsEnded**March 31, 2003 Compared to Three MonthsEnded March 31, 2002

### ** **

Our results of operationshave been affected by restructuring, asset impairment and other related chargesrelating to our 2002 restructuring program and goodwill impairmentcharges.  These charges, which affectthe comparability of our reported results of operations between periods, aremore fully described in “—Restructuring, Asset Impairment and Other RelatedCharges” and “—Goodwill Impairment Charges” below.

 

**Revenues.* ***Revenuesdecreased $18.9 million, or 31.1%, to $41.9 million for the three months endedMarch 31, 2003 from $60.8 million for the three months endedMarch 31, 2002.  By segment,revenues changed as follows:

 
|                    |   | **Increase (Decrease)  From 2002** |   |
|-------------------------|--------|------------------------------------|--------|
| **(In  millions)**      |   | **Amount**                         |   | **Percent** |   |
|                    |   |                               |   |   |   |
| Cabin Management        |   | $                                  | (15.2  | ) | (33.2 | )% |
| Systems Integration     |   | (2.9                               | )      | (19.5 | ) |
| Inter-group elimination |   | (0.8                               | )      |   |   |
| Total                   |   | $                                  | (18.9  | ) |   |   |

 

*CabinManagement. *Revenuesdecreased by $15.2 million, or 33.2% compared to the prior year.  The decrease, which is across all of ourproduct and services categories, is caused by the ongoing adverse impact ofweak global economic conditions which reduces the affordability of business,VIP and head-of-state aircraft and therefore demand for the products andservices we provide.  The 2003 decreaseconsists of:

 

•                  a$11.5 million decrease in aircraft furniture and related products revenues;

 

•                  a$1.6 million decrease in cabin management and entertainment systems revenues;

 

•                  a$1.6 million decrease in seating products revenues; and

 

•                  a$0.5 million decrease in other product and services revenues.

 

The revenue decrease wascaused by lower order volume from our customers as opposed to a loss ofcustomers or price reductions.  Thedecrease in order volume is attributable to weak global economic conditions andthe impact these conditions are having on manufacturers of business, VIP andhead-of-state aircraft and therefore demand for the products and services weprovide to them.  Weak global economicconditions have reduced the amount of discretionary income available topurchase and operate

 

30

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these types ofaircraft.  As a result, themanufacturers of these aircraft have experienced a decrease in orders for newaircraft which, in turn, reduces the orders our customers place with us.

 

Revenuesfrom Textron and Bombardier, our principal customers, decreased $10.6 millioncompared to the prior year as a result of the decrease in orders and resultingproduction of aircraft they are experiencing due to the economic downturn.  Bombardier temporarily suspended productionof various models of aircraft for several weeks during the first quarter offiscal 2003 in response to their low order backlog.  Textron has announced plans for a similar planned shut downduring the second and third quarters of fiscal 2003 as well.  We also experienced similar volume decreasesfrom our other customers during the period.

 

*SystemsIntegration.*  Revenuesdecreased by $2.9 million, or 19.5% compared to the prior year, due to:

 

•                  a$2.3 million decrease resulting from reduced demand for our business, VIP andhead-of-state aircraft products and services due to the adverse impact weakglobal economic conditions are having on the demand for those types of aircraftas follows:

 

•                  a$1.7 million decrease in our aircraft completion and modification revenues; and

 

•                  a$0.6 million decrease in BBJ auxiliary fuel systems revenues; and

 

•                  a$0.6 million decrease in the commercial aircraft systems integrationengineering services we provide resulting from the aftermath ofSeptember 11th.

 

**Grossprofit.**  Gross profitdecreased $5.4 million, or 33.1%, to $11.0 million for the three months endedMarch 31, 2003 from $16.4 million for the same period last year.  By segment, gross profit changed as follows:

 
|                |   | **Increase (Decrease)  From 2002** |   |
|---------------------|--------|------------------------------------|--------|
| **(In millions)**   |   | **Amount**                         |   | **Percent** |   |
|                |   |                               |   |   |   |
| Cabin Management    |   | $                                  | (2.6   | ) | (25.4 | )% |
| Systems Integration |   | (2.8                               | )      | (46.7 | ) |
| Total               |   | $                                  | (5.4   | ) |   |   |

 

*CabinManagement.*  Grossprofit decreased by $2.6 million, or 25.4% compared to the prior year,primarily due to:

 

•                  a$3.4 million decrease in profit margins due to lower volume for our business,VIP and head-of-state aircraft furniture and seating products; and

 

•                  a$0.4 million decrease in gross profit related to lower volume for our cabinmanagement and entertainment systems; offset by

 

•                  a$1.2 million increase caused by restructuring charges incurred in 2002 relatedto the consolidation of our seating and related manufacturing operations.

 

*SystemsIntegration.*  Grossprofit decreased by $2.8 million, or 46.7% compared to the prior year,primarily due to:

 

•                  a$2.4 million decrease resulting from lower revenues and unfavorable overheadabsorption as a result of lower production and delivery of business/VIPaircraft auxiliary fuel tank systems; and

 

•                  a$0.4 million decrease in the commercial aircraft systems integrationengineering services provided.

 

31

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**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $4.3 million, or 35.0%, to $7.9 million for the three months endedDecember 31, 2003, from $12.2 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                |   | **Increase (Decrease)  From 2002** |   |
|---------------------|--------|------------------------------------|--------|
| **(In millions)**   |   | **Amount**                         |   | **Percent** |   |
|                |   |                               |   |   |   |
| Cabin Management    |   | $                                  | (3.4   | ) | (81.6 | )% |
| Systems Integration |   | (0.7                               | )      | (64.2 | ) |
| Corporate           |   | (0.2                               | )      |   |   |
| Total               |   | $                                  | (4.3   | ) |   |   |

 

*CabinManagement. *SG&Aexpenses decreased by $3.4 million, or 81.6% compared to the prior year, dueto:

 

•                  a$2.8 million reduction resulting from restructuring charges recorded in 2002related to the consolidation of our seating and related manufacturingoperations; and

 

•                  a$0.6 million decrease in expenses resulting from cost reduction measuresimplemented in response to lower sales volume resulting from the weak globaleconomic conditions.

 

*Systems Integration. *SG&A expenses decreased by $0.7 million, or 64.2%compared to the prior year, due to lower labor and employee benefit costsresulting from workforce reductions in 2003.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $0.3 million to$2.5 million for the three months ended March 31, 2003 from $2.8 millionfor the same period last year, primarily resulting from reduced capitalexpenditures and a lower depreciable base resulting from impairment chargesrecorded during 2002, as follows:

 
|                                        |   | **Increase (Decrease)  From 2002** |   |
|---------------------------------------------|--------|------------------------------------|--------|
| **(In millions)**                           |   | **Amount**                         |   | **Percent** |   |
|                                        |   |                               |   |   |   |
| Depreciation charged to:                    |   |                               |   |   |   |
| Cost of sales                               |   | $                                  | (0.2   | ) | (15.3 | )% |
| Selling, general and administrative expense |   | (0.2                               | )      | (19.0 | ) |
| Amortization of intangible assets           |   | 0.1                                |   | 8.2 |   |
| Total                                       |   | $                                  | (0.3   | ) |   |   |

 

**AdjustedEBITDA.**  As describedabove in “—Performance Measures–Adjusted EBITDA,” we use this financial measureto evaluate the core economic performance of our operating segments.  The notes to our financial statementsinclude additional information about Adjusted EBITDA, and should be read inconjunction with the discussions presented herein.  The notes to our financial statements also include areconciliation of Adjusted EBITDA to net income (loss), a GAAP financialmeasure, to clarify the differences between these two measures.

 

*Cabin Management. *Adjusted EBITDA decreased by $2.9 million, or 39.0%compared to the prior year primarily due to:

 

•                  a$3.3 million decrease in gross profit related to lower volume in ourbusiness/VIP aircraft furniture and seating operations;

 

•                  a$0.4 million decrease in gross profit related to lower volume in our cabinmanagement and entertainment systems; offset by,

 

•                  a$0.2 million increase in gross profit related to other products and services;and

 

•                  a$0.6 million decrease in SG&A spending.

 

32

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*Systems Integration. *Adjusted EBITDA decreased by $2.1 million, or 49.8%over the prior year, due to lower sales volume partially offset by reducedSG&A spending resulting from workforce reductions.

 

**Operatingincome.**  Operatingincome decreased $1.3 million or 36.5%, to $2.2 million for the three monthsended March 31, 2003, from $3.5 million for the same period lastyear.  Operating income changed asfollows:

 
|                |   | **Increase (Decrease)  From 2002** |   |
|---------------------|--------|------------------------------------|--------|
| **(In millions)**   |   | **Amount**                         |   | **Percent** |   |
|                |   |                               |   |   |   |
| Cabin Management    |   | $                                  | 0.7    |   | 32.6 | % |
| Systems Integration |   | (2.1                               | )      | (58.3 | ) |
| Corporate           |   | 0.1                                |   |   |   |
| Total               |   | $                                  | (1.3   | ) |   |   |

 

*CabinManagement.*  Operatingincome increased by $0.7 million, or 32.6% compared to the prior year,primarily due to:

 

•                  a$4.0 million increase resulting from restructuring charges recorded in 2002related to the consolidation of our seating and related manufacturingoperations; offset by

 

•                  a$3.3 million decrease in gross profit, principally related to lower revenues inour business, VIP and head-of-state aircraft furniture and seating operations.

 

*SystemsIntegration. *Operatingincome decreased by $2.1 million, or 58.3% compared to the prior year,primarily the result of lower sales volume, partially offset by reducedSG&A spending resulting from workforce reductions.

 

**Interestexpense.**  Interestexpense decreased $0.1 million, or 1.3%, to $5.9 million for the three monthsended March 31, 2003 compared to $6.0 million for the same period lastyear.  We expect interest expense toincrease in 2003 as a result of a 1.5% increase in interest rates charged byour lenders as a result of the amendment to our senior credit facility,partially offset by lower principal balances outstanding.

 

**Minorityinterest in preferred stock of subsidiary. **Minority interest increased $0.2 million to $1.6million for the three months ended March 31, 2003 compared to $1.4 millionfor the same period last year.  Minorityinterest reflects the accrued dividends, which are compounded quarterly, andredemption value accretion during the periods on DeCrane Aircrafts’ 16%preferred stock.

 

**Provisionfor income taxes.**  Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to the income before income taxesprimarily due to the effects of state and foreign income taxes and minorityinterest in preferred stock of subsidiary, which is not deductible for incometax purposes.

 

**Loss from continuing operations.**  The loss from continuing operationsincreased $1.5 million to $4.4 million for the three months endedMarch 31, 2003 compared to $2.9 million for the same period last year,primarily due to:

 

•                  a$5.3 million loss increase, principally related to lower revenues; and

 

•                  a$0.2 million increase in minority interest in preferred stock of subsidiary;offset by

 

•                  a$4.0 million loss decrease resulting from restructuring charges recorded in2002 related to the consolidation of our seating and related manufacturingoperations.

 

33

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**Loss from discontinued operations.**  Loss from discontinued operations decreased$31.1 million, to a loss of $6.4 million for the three months endedMarch 31, 2003 compared to a loss of $37.5 million for the same periodlast year.  The decrease is primarilydue to:

 

•                  a$39.4 million charge in 2002 to reflect the cumulative effect on discontinuedoperations of the change in accounting principle associated with initial adoptionof SFAS No. 142, “Goodwill and Other Intangible Assets;” offset by

 

•                  a$7.5 million charge in 2003 for the impairment of goodwill to reduce thecarrying value of the assets sold to their estimated net realizable value basedupon the $140.0 million fair value implied in definitive agreement to sell theSpecialty Avionics Group.

 

The 2002 and 2003 chargesare attributable to the goodwill impairment of one of the three reporting unitswithin the Specialty Avionics Group. Aggregate goodwill was $80.7 million as of December 31, 2002 and$73.2 million as of March 31, 2003, after the $7.5 million 2003 impairmentcharge.  See “—Goodwill ImpairmentCharges” below for additional information.

 

**Cumulative effect of change inaccounting principle.** The $17.8 million charge in 2002to reflect the cumulative effect on continuing operations of the change inaccounting principle was a result of transitional goodwill impairment chargesrecognized upon initial adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets,” as described in “—Goodwill Impairment Charges”below. Including the $39.4 million charged to discontinued operations, thetotal charge to reflect the cumulative effect of the change in accountingprinciple was $57.2 million.

 

**Netloss.**  Net loss decreased$47.3 million to a net loss of $10.8 million for the three months endedMarch 31, 2003 compared to a net loss of $58.1 million for the same periodlast year.  The decrease is primarilydue to the $57.2 million charge in 2002 to reflect the cumulative effect of thechange in accounting principle offset by a $7.5 million charge in 2003 for theimpairment of goodwill related to discontinued operations.

 

**Netincome (loss) applicable to common stockholders. **Netloss applicable to our common stockholders decreased $47.1 million to a netloss of $12.9 million for the three months ended March 31, 2003 comparedto a net loss of $60.0 million for the same period last year.  The decrease in the net loss applicable toour common stockholder is attributable to:

 

•                  a$57.2 million charge in 2002 to reflect the cumulative effect of the change inaccounting principle; offset by

 

•                  a$7.5 million charge in 2003 for the impairment of goodwill related todiscontinued operations;

 

•                  a$1.5 million increase in our loss from continuing operations and a $0.9 milliondecrease in income from discontinued operations, before the cumulative effectof the change in accounting principle; and

 

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

 

**Bookings. **Bookings decreased $15.7million, or 27.5%, to $41.4 million for the three months ended March 31,2003 compared to $57.1 million for the same period last year.  The decrease in bookings for 2003 is due todecreases in orders for all of our business segments.

 

**Backlog at end of period.**  Backlog decreased $0.5 million to $66.3million as of March 31, 2003 compared to $66.8 million as ofDecember 31, 2002.

 

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As described in“—Industry Overview and Trends,” the acts and ongoing threats of global terrorism,the current military conflicts, SARS epidemic and weak global economicconditions are having an adverse impact on our business, resulting in thedecrease in bookings during 2003 and related backlog at the end of theperiod.  In addition, we believe thatsome of our customers have substantially reduced their order lead times whichmay have adversely affected bookings during the period.

 

We are not able topredict the continuing impact these events will have on bookings and backlog infuture periods.  However, given themagnitude of these events, the adverse impact could be material.

 

**Restructuring**,Asset Impairment and Other Related Charges

** **

The following discussionshould be read in conjunction with Note 3 accompanying our financial statementsincluded in this report.

 

During the three monthsended March 31, 2003 and the year ended December 31, 2002, we recordedrestructuring, asset impairment and other related pre-tax charges, principallyrelated to our restructuring activities. These charges are summarized in the table below.

 
|                                          |   | **Charges Recorded During** |   |
|-----------------------------------------------|--------|-----------------------------|--------|
|                                          |   | **2003**                    |   | **Year Ended December 31, 2002** |   |
| **(In millions)**                             |   | **1st  Quarter**            |   | **1st  Quarter** |   | **2nd, 3rd & 4th  Quarters** |   | **Total** |   |
|                                          |   |                        |   |   |   |   |   |   |   |
| Nature of  charges:                           |   |                        |   |   |   |   |   |   |   |
| Asset  Realignment Restructuring              |   | $                           | — |   | $ | — |   | $ | 6.9 |   | $ | 6.9 |   |
| Seat  Manufacturing Facilities Restructuring  |   | —                      |   | 4.0 |   | 2.3 |   | 6.3 |   |
| Goodwill  impairment charges                  |   | 7.5                         |   | — |   | 7.7 |   | 7.7 |   |
| Other asset  impairment related charges       |   | —                      |   | — |   | 4.3 |   | 4.3 |   |
| Total  pre-tax charges                        |   | $                           | 7.5    |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |
|                                          |   |                        |   |   |   |   |   |   |   |
| Business  segment recording the charges:      |   |                        |   |   |   |   |   |   |   |
| Cabin  Management                             |   | $                           | — |   | $ | 4.0 |   | $ | 9.2 |   | $ | 13.2 |   |
| Systems  Integration                          |   | —                      |   | — |   | 4.0 |   | 4.0 |   |
| Total  continuing operations                  |   | —                      |   | 4.0 |   | 13.2 |   | 17.2 |   |
| Discontinued  operations (Specialty Avionics) |   | 7.5                         |   | — |   | 8.0 |   | 8.0 |   |
| Total  pre-tax charges                        |   | $                           | 7.5    |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |
|                                          |   |                        |   |   |   |   |   |   |   |
| Charged to  operations:                       |   |                        |   |   |   |   |   |   |   |
| Cost of  sales                                |   | $                           | — |   | $ | 1.2 |   | $ | 9.4 |   | $ | 10.6 |   |
| Selling,  general and administrative expenses |   | —                      |   | 2.8 |   | 3.8 |   | 6.6 |   |
| Discontinued  operations (Specialty Avionics) |   | 7.5                         |   | — |   | 8.0 |   | 8.0 |   |
| Total  pre-tax charges                        |   | $                           | 7.5    |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |
|                                          |   |                        |   |   |   |   |   |   |   |
| Components  of charges:                       |   |                        |   |   |   |   |   |   |   |
| Continuing  operations:                       |   |                        |   |   |   |   |   |   |   |
| Noncash  charges                              |   | $                           | — |   | $ | 3.1 |   | $ | 8.3 |   | $ | 11.4 |   |
| Cash charges                                  |   | —                      |   | 0.9 |   | 4.9 |   | 5.8 |   |
| Total  continuing operations pre-tax charges  |   | —                      |   | 4.0 |   | 13.2 |   | 17.2 |   |
| Discontinued  operations noncash charges      |   | 7.5                         |   | — |   | 8.0 |   | 8.0 |   |
| Total  pre-tax charges                        |   | $                           | 7.5    |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |

 

### **Asset Realignment Restructuring**

### ** **

During the second quarterof fiscal 2001, we adopted a restructuring program to realign aircraft furnitureproduction 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

 

35

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aftermath, as well as theweakening of global economic conditions, we announced and implemented a furtherrestructuring plan in December 2001 designed to reduce costs and conserveworking capital.  This plan includedpermanently closing one manufacturing facility and idling a second facility foran indefinite period, curtailing several product development programs andinstituting workforce reductions.  Thisprogram primarily affected our Cabin Management and Specialty Avionics Groups.

 

Due to the ongoingweakness of the business, VIP and head-of-state aircraft market, we decidedduring the second quarter of fiscal 2002 to permanently close the temporarilyidled manufacturing facility.  Inconnection with this decision, we recorded additional pre-tax charges tooperations totaling $6.9 million during the year ended December 31, 2002,of which $3.8 million were noncash charges, for restructuring, asset impairmentcharges and other related expenses.

 

This restructuring planwas completed during the fourth quarter of fiscal 2002.

 

### **Seat Manufacturing Facilities Restructuring**

### ** **

During the first quarterof fiscal 2002, we announced we would consolidate the production of fourseating and related manufacturing facilities into two, resulting in thepermanent closure of two facilities. This plan was designed to improve manufacturing efficiencies and tofurther reduce costs and conserve working capital.  In connection with this restructuring plan, we recorded pre-taxcharges to operations totaling $6.3 million during the year endedDecember 31, 2002, of which $3.6 million were noncash charges, forrestructuring, asset impairment and other related restructuring charges.

 

The restructuring, assetimpairment and other related expenses are comprised of charges for currentasset write-downs, the impairment of long-lived assets, severance and leasetermination costs and other restructuring-related expenses pertaining to FAAretesting and recertification, moving, transportation and travel costs andshutdown and startup costs.

 

This restructuring planwas completed during the second quarter of fiscal 2002.

 

Nominal future monthlycash payments will be required during the remainder of 2003 due to leasepayments on the vacated facilities and the incurrence of other facility exitcosts related to both restructuring programs. The future cash payments will be funded from existing cash balances andinternally generated cash from operations.

 

### **Goodwill Impairment Charges**

### ** **

During the first quarterof fiscal 2003, we entered into a definitive agreement to sell the SpecialtyAvionics Group.  Based upon the fairvalue of the group implied in the definitive agreement, we determined that thecarrying value of one of the reporting unit’s net assets was not fullyrecoverable.  As a result, we recorded agoodwill impairment charge of $7.5 million during the three months endedMarch 31, 2003 to reduce the carrying value to the estimated netrealizable value established by the definitive agreement.

 

Due to continued weaknessin the commercial aircraft portion of our business, in the fourth quarter of fiscal2002 we recorded a pre-tax charge of $7.7 million related to our annualgoodwill impairment testing pursuant to SFAS No. 142.  The impairment charge pertained to the Specialty Avionics Group.

 

See “—Goodwill ImpairmentCharges” below for additional information.

 

36

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### **Other Asset Impairment Related Charges**

### ** **

Due to continued weaknessin the commercial aircraft portion of our business, in the fourth quarter offiscal 2002 we recorded a pre-tax charge of $4.3 related to inventories and wascharged to cost of goods sold.  Chargestotaling $0.3 million pertained to the Specialty Avionics Group.

 

**GoodwillImpairment Charges**

** **

The following discussionshould be read in conjunction with Notes 2, 3 and 5 accompanying our unauditedfinancial statements included in this report.

 

Our results of operationsfor the three months ended March 31, 2003 and 2002 have been affected bythe adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” andgoodwill impairment charges.

 

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

 

•                  *Reclassificationof Intangible Assets.* Intangible assets relating to acquired assembled workforce intangiblesnot meeting the criteria for recognition apart from goodwill were reclassifiedto goodwill, net of deferred income taxes.

 

•                  *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.

 

•                  *AnnualTesting for Goodwill Impairment.* In lieu of periodic goodwill amortization charges, SFAS No. 142 requiresgoodwill to be tested annual for impairment, or when events or changes incircumstances indicate the carrying value may not be recoverable.

 

During 2002, we completedthe transitional impairment testing of goodwill recorded as of January 1,2002 as required under SFAS No. 142. Fair value of each reporting unit was determined using a discounted cashflow approach taking into consideration projections based on the individualcharacteristics of the reporting units, historical trends, market multiples forcomparable businesses and independent appraisals.  Our Cabin Management Group consists of three reporting units, ourSystems Integration Group consists of two and the Specialty Avionics consistsof three.  Unallocated goodwill wasallocated to the reporting units for impairment testing purposes.  The results indicated that the carryingvalue of goodwill was impaired at one of the reporting units within each of ouroperating groups.  The resultingimpairment was primarily attributable to a change in the evaluation criteriafor goodwill utilized under previous accounting guidance to the fair valueapproach stipulated in SFAS No. 142.  Inaccordance with the transitional provision of SFAS No. 142, we recorded a $17.8million noncash write-down of goodwill (net of $0.9 million income tax benefit)as of January 1, 2002 as a cumulative effect of a change in accountingprinciple.  An additional $39.4 millionnoncash write-down of goodwill pertained to the Specialty Avionics Group and isincluded in the loss from discontinued operations.

 

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Changes in the carryingamount of goodwill, by business segment, for the three months endedMarch 31, 2003 are as follows:

 
|                            |   | **Continuing Operations**    |   | **Discontinued  Operations**    |   |
|---------------------------------|--------|------------------------------|--------|---------------------------------|--------|
| **(In millions)**               |   | **Cabin  Management  Group** |   | **Systems  Integration  Group** |   | **Corporate** |   | **Total** |   | **Specialty  Avionics  Group** |   |
|                            |   |                         |   |                            |   |   |   |   |   |   |   |
| Balance, December 31, 2002 |   | $                            | 173.9  |                            | $      | 20.8 |   | $ | 1.7 |   | $ | 196.4 |   | $ | 80.7 |   |
| Impairment charge               |   | —                       |   | —                          |   | — |   | — |   | (7.5 | ) |
| Balance, March 31, 2003    |   | $                            | 173.9  |                            | $      | 20.8 |   | $ | 1.7 |   | $ | 196.4 |   | $ | 73.2 |   |

 

During the first quarterof fiscal 2003, we entered into a definitive agreement to sell the SpecialtyAvionics Group.  Based upon the fairvalue of the group implied in the definitive agreement, we determined that thecarrying value of the group’s net assets was not fully recoverable.  As required by SFAS No. 142, we recorded agoodwill impairment charge of $7.5 million during the three months endedMarch 31, 2003 to reduce the carrying value to the estimated netrealizable value established by the definitive agreement.  We recorded a modest $0.7 million gain onthe sale during the second quarter of fiscal 2003, based on the actualfinancial position of the group on the date of sale.  However, the ultimate gain or loss on the sale is subject tofinalizing the post-closing adjustment, which is not expected to be material,if any.

 

**Liquidity andCapital Resources**

** **

We are a holding companyand have no direct material operations. Our only asset is our ownership of allof the common stock of DeCrane Aircraft, and our only material liability is ourguarantee of the DeCrane Aircraft senior credit facility.  Our principal liquidity needs are for incometaxes and, beginning in 2005, the payment cash dividends on our preferredstock.

 

Our only source of cashis dividends from DeCrane Aircraft.  Thesenior credit facility and senior subordinated notes described below areobligations of DeCrane Aircraft and impose limitations on its ability to paydividends to us.  We believe thatDeCrane Aircraft’s debt instruments will permit it to supply us with sufficientcash to meet the cash needs referred to above for several years.  However, if that is not the case, we wouldnot be able to satisfy those needs, because we have no other source of cashother than dividends from DeCrane Aircraft. We would then be required to secure alternate financing, which may notbe available on acceptable terms, or at all.

 

DeCrane Aircraft’sprincipal cash needs are for debt service, working capital, capitalexpenditures and strategic acquisitions, as well as to provide us with cash tofinance our needs.  Its principalsources of liquidity are expected to be cash flow from operations, potentialcapital market transactions and third party borrowings, principally under itssenior credit facility.

 

### **Cash Flows During the Three Months EndedMarch 31, 2003**

### ** **

Net cash used byoperating activities was $22.4 million for the three months endedMarch 31, 2003 and consisted of $1.1 million of cash used by operationsafter adding back depreciation, amortization, the noncash portion of ourrestructuring and asset impairment charges and other noncash items, $20.2million used for working capital and $1.1 million to reduce otherliabilities.  The following factorscontributed to the $20.2 million working capital increase:

 

•                  an$11.5 million inventory increase principally related to long-term contracts;

 

•                  a$5.4 million decrease in accounts payable and accrued expenses, primarilyresulting from reduced purchasing commensurate with lower revenues; and

 

38

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•                  a$3.3 million increase in prepaid expenses and other assets, consistingprincipally of expense associated with the sale of the Specialty AvionicsGroup.

 

We expect working capitalincreases, if any, to moderate during the remainder of 2003.

 

Net cash used for investingactivities was $1.7 million for the three months ended March 31, 2003 andconsisted of:

 

•                  $1.1million for capital expenditures; and

 

•                  $0.6million of contingent acquisition consideration paid during 2003.

 

We anticipate spendingapproximately $4.0 to $4.5 million for capital expenditures in 2003.  As of March 31, 2003, there are noremaining acquisition contingent consideration payment obligations.

 

Net cash provided byfinancing activities was $22.9 million for the three months endedMarch 31, 2003.  Cash of $27.1million was provided by revolving line of credit borrowings under our seniorcredit facility.  Cash of $4.2 millionwas used for principal payments on our term debt, capitalized lease obligationsand other debt.

 

### **Capital Resources and Debt Obligations as ofMarch 31, 2003**

 

As of March 31,2003, we had $75.6 million of working capital, excluding the assets andliabilities of our discontinued operations, compared to $55.4 million as ofDecember 31, 2002.  As ofMarch 31, 2003, we also had $6.5 million of borrowings available under ourrevolving line of credit, as amended in March 2003 and described below,compared to $43.6 million available as of December 31, 2002.  Our revolving line of credit expires inSeptember 2004.  We may not be ableto replace it on commercially acceptable terms, or at all.  As of March 31, 2003, our senior creditfacility borrowings totaling $294.1 million are at variable interest ratesbased on defined margins over the current prime rate or LIBOR, compared to$270.2 million as of December 31, 2002. We also had $100.0 million of 12% senior subordinated notes as ofMarch 31, 2003 and December 31, 2002 and other indebtedness totaling$9.9 million outstanding as of March 31, 2003 compared to $10.8 million asof December 31, 2002.

 

The increase in workingcapital is principally attributable to spending $11.5 million for inventorypursuant to long-term contracts and reducing accounts payable and accruedexpenses by $5.4 million between the periods. These expenditures were funded through borrowings under our revolvingline credit, which is part of our senior credit facility.  In addition, the March 2003 seniorcredit facility amendment reduced by $10.0 million the maximum permittedborrowings under the revolving line of credit.

 

The senior creditfacility and senior subordinated notes indenture impose restrictive andfinancial covenants on us.  InMarch 2003, terms and financial covenants contained in our senior creditfacility were amended to, among other things, permit the sale of the SpecialtyAvionics Group which was consummated on May 23, 2003.  As required by the amendment, we repaid$130.0 million of senior credit facility borrowings with the proceeds from thesale.  See “–Recent DevelopmentsAffecting Financial Condition and Liquidity” below for additional information.

 

### **Recent Developments Affecting FinancialCondition and Liquidity**

 

As more fully describedin “—Industry Overview and Trends,” the acts and ongoing threats of globalterrorism, the current military conflicts, SARS epidemic and weak globaleconomic conditions are all adversely impacting our business.  In response, we implemented restructuringprograms in 2001 and 2002, as described in “—Restructuring, Asset Impairment andOther Related Charges,” designed to reduce costs and conserve working capital.

 

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During the fourth quarterof fiscal 2002, we further assessed our long-term business strategies in lightof current aerospace industry conditions. In addition, we subsequently determined that we would likely not be incompliance with our senior credit facility’s financial covenants in 2003.  We believe that when the aerospace industryrecovers, the demand for our Cabin Management and Systems Integration groups’ productsand services for business, VIP and head-of-state aircraft will return tohistorical levels and, accordingly, we decided to focus our resources in thesemarket segments.  To accomplish thisobjective, we embarked on a plan to sell the Specialty Avionics Group, which ishighly dependent on the commercial airline industry.

 

On March 14, 2003,we entered into a definitive agreement to sell our equity interests in the subsidiariescomprising the Specialty Avionics Group for $140.0 million in cash and receivedrequisite lender approval on March 28, 2003 to amend the senior creditfacility to permit the sale.  We consummatedthe sale on May 23, 2003 and, as required by the senior credit facilityamendment, used $130.0 million of the proceeds from the sale to repay seniorcredit facility borrowings.  The seniorcredit facility amendment also relaxes various financial covenants for 2003 andbeyond, decreases by $10.0 million the maximum permitted revolving line ofcredit borrowings to $40.0 million, increases the prime rate and LIBOR interestmargins by 1.5% and permits the issuance of specified types of additionalindebtedness and the repurchase of up to $20.0 million aggregate principalamount of our 12% senior subordinated notes with the proceeds from the sale ofjunior securities.  Junior securitiesmeans: (i) senior subordinated notes issued by us that are unsecured and do notprovide for any scheduled redemptions or prepayments or any sinking fundinstallment payments or maturities prior to the termination of the seniorcredit facility, or other indebtedness subordinated in right of payment to ourobligations under the senior credit facility, and whose material terms aresatisfactory to the lenders; and (ii) equity securities issued by us.

 

The table below reflectssenior credit facility borrowings as of March 31, 2003, adjusted toreflect the $130.0 million repayment with the proceeds from the sale and theadjustment of the future maturities pursuant to the amendment.

 
|                                      |   | **Senior  Credit Facility Borrowings  As of March 31, 2003** |   |
|-------------------------------------------|--------|-------------------------------------------------------------------|--------|
| **(In millions)**                         |   | **Historical**                                                    |   | **Repayment** |   | **As  Adjusted** | ** ** |
|                                      |   |                                                              |   |   |   |   |   |
| Total maturities during the:              |   |                                                              |   |   |   |   |   |
| Nine months ending December 31, 2003 |   | $                                                                 | 11.4   |   | $ | (11.4 | ) | $ | — |   |
| Year ending December 31, 2004        |   | 79.9                                                              |   | (39.2 | ) | 40.7 |   |
| Year ending December 31, 2005        |   | 96.6                                                              |   | (29.7 | ) | 66.9 |   |
| Year ending December 31, 2006        |   | 106.2                                                             |   | (49.7 | ) | 56.5 |   |
| Total senior credit facility borrowings   |   | $                                                                 | 294.1  |   | $ | (130.0 | ) | $ | 164.1 |   |

 

We believe our expectedoperating cash flows, together with borrowings under our senior credit facility($6.5 million of which was available as of March 31, 2003 ($10.5 millionon a pro forma basis), the commitment for which expires inSeptember 2004), will be sufficient to meet our future short- andlong-term operating expenses, working capital requirements, capitalexpenditures and debt service obligations for the next twelve months.  However, our ability to comply with our debtfinancial covenants, pay principal or interest and satisfy our other debtobligations will depend on our future operating performance as well ascompetitive, legislative, regulatory, business and other factors beyond ourcontrol.  Although we cannot be certain,we expect to be in compliance with the revised financial covenants through theend of the year based on our current operating plan.

 

In addition, we arecontinually considering acquisitions that complement or expand our existingbusinesses or that may enable us to expand into new markets, some of which maybe material.  Future acquisitions may requireadditional debt, equity financing or both. We may not be able to obtain any

 

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additional financing onacceptable terms.  We are not currentlyparty to any definitive acquisition agreements.

 

**Disclosureof Contractual Obligations and Commitments**

** **

The following tablesummarizes our known contractual obligations to make future cash payments as ofMarch 31, 2003, as well an estimate of the periods during which thesepayments are expected to be made.  The obligationshave also been adjusted to reflect the repayment of $130.0 million of seniorcredit facility borrowings with the proceeds from the May 23, 2003 sale ofthe Specialty Avionics Group, assuming the sale was consummated onMarch 31, 2003 and the repayment had occurred on that date.

 
|                                                            |   |      |   | **Years  Ending December 31,** |   |
|-----------------------------------------------------------------|--------|-----------|--------|-------------------------------------|--------|
| **(In millions)**                                               |   | **Total** |   | **2003**                            |   | **2004  and  2005** |   | **2006  and  2007** |   | **2008  and  Beyond** | ** ** |
|                                                            |   |      |   |                                |   |   |   |   |   |   |   |
| Obligations as of March 31, 2003:                          |   |      |   |                                |   |   |   |   |   |   |   |
| Long-term debt (a):                                             |   |      |   |                                |   |   |   |   |   |   |   |
| Senior credit facility                                          |   | $         | 294.1  |                                | $      | 11.4 |   | $ | 176.5 |   | $ | 106.2 |   | $ | — |   |
| 12% senior subordinated notes                                   |   | 100.0     |   | —                              |   | — |   | — |   | 100.0 |   |
| Capital lease obligations and other indebtedness                |   | 9.9       |   | 0.7                                 |   | 2.3 |   | 0.2 |   | 6.7 |   |
| Total long-term debt                                            |   | 404.0     |   | 12.1                                |   | 178.8 |   | 106.4 |   | 106.7 |   |
|                                                            |   |      |   |                                |   |   |   |   |   |   |   |
| Operating lease obligations                                     |   | 14.9      |   | 1.3                                 |   | 3.2 |   | 3.9 |   | 6.5 |   |
| Mandatorily redeemable preferred stock redemption  obligations: |   |      |   |                                |   |   |   |   |   |   |   |
| DeCrane Aircraft preferred stock (b)                            |   | 38.5      |   | —                              |   | — |   | — |   | 38.5 |   |
| DeCrane Holdings preferred stock (c)                            |   | 64.4      |   | —                              |   | — |   | — |   | 64.4 |   |
|                                                            |   |      |   |                                |   |   |   |   |   |   |   |
| Total obligations as of March 31, 2003                     |   | 521.8     |   | 13.4                                |   | 182.0 |   | 110.3 |   | 216.1 |   |
|                                                            |   |      |   |                                |   |   |   |   |   |   |   |
| Senior credit facility repayment with proceeds from  the sale   |   | (130.0    | )      | (11.4                               | )      | (68.9 | ) | (49.7 | ) | — |   |
| Total obligations, as adjusted                                  |   | $         | 391.8  |                                | $      | 2.0 |   | $ | 113.1 |   | $ | 60.6 |   | $ | 216.1 |   |

 

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(a)                      Excludes interest payments.  Interest on the 12% senior subordinatednotes is payable semiannually.  Thesenior credit facility bears interest at a variable rate and therefore the amountof future interest payments are uncertain.

 

(b)                     Dividends accrue quarterly at theannual rate of 16% and are payable, at our option, either in cash or by theissuance of additional shares of preferred stock.  Since the issuance of the preferred stock in June 2000, wehave elected to issue additional shares in lieu of cash dividend payments andmay continue to do so until June 2005, after which time we are required topay quarterly dividends in cash.  If weelect to continue issuing additional shares until June 2005, our mandatoryredemption obligation on March 31, 2009, the mandatory redemption date,will be $54.8 million and our annual cash dividend payment obligation will be$8.8 million, payable quarterly, commencing September 2005.

 

(c)                      Dividends accrue quarterly at a14% annual rate.  Prior toSeptember 30, 2005, dividends are not paid in cash but instead accrete tothe liquidation value of the preferred stock. Our annual cash dividend payment obligation will be $12.7 million,payable quarterly, commencing December 31, 2005 and our mandatoryredemption obligation on September 30, 2009, the mandatory redemptiondate, will be $90.8 million.

 

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**DisclosureAbout Off-Balance Sheet Commitments and Indemnities**

** **

During our normal courseof business, we have entered into agreements containing indemnities pursuant towhich we may be required to make payments in the future.  These indemnities are in connection withfacility leases and liabilities for specified claims arising from investmentbanking services our financial advisors provide to us.  The duration of these indemnities,commitments and guarantees varies, and in certain cases, is indefinite.  Substantially all of these indemnitiesprovide no limitation on the maximum potential future payments we could beobligated to make and is not quantifiable. We have not recorded any liability for these indemnities since no claimshave been asserted to date.

 

In connection with thesale of the Specialty Avionics Group, we made indemnities to the buyer withrespect to a number of customary, and certain other specific, representationsand warranties.  Our indemnities withrespect to some of these matters are limited in terms of duration with themaximum of potential future payments capped at $14.0 million and ourindemnities with respect to specified environmental matters will expire notlater than October 2010 and provides for a maximum liability of $5.0million, while others will have no limitations.  In addition, the $140.0 million selling price is subject to apotential post-closing adjustment related to the amount of working capital atclosing.  Although we cannot be certain,we believe the potential adjustment will not be material.  The post-closing adjustment, if any, wouldbe payable by us in cash upon its final determination.

 

As of March 31, 2003and December 31, 2002, we also had an irrevocable standby letter of creditin the amount of $0.4 million issued and outstanding under our senior creditfacility.

 

**Recent AccountingPronouncements**

** **

**Accounting Pronouncements AdoptedJanuary 1, 2003**

 

As more fully describedin Note 1 accompanying our financial statements included in this report, weadopted the provisions of the following accounting pronouncements effective January 1,2003:

 

•                  SFAS No. 145,“Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and TechnicalCorrections;”

 

•                  SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities;”

 

•                  SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure;” and

 

•                  FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Other.”

 

**Recently Issued Accounting Pronouncement**

 

*SFAS No. 150 – Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*

 

Issued in May 2003,SFAS No. 150 establishes standards for the classification and measurement ofcertain financial instruments with characteristics of both liabilities andequity.  SFAS No. 150 requiresclassification of financial instruments within its scope as a liability,including financial instruments issued in the form of shares that aremandatorily redeemable, because those financial instruments are deemed to be,in essence, obligations of the issuer. We are currently evaluating the impact this new standard will have onour financial position, results of operations and cash flows.  However, we believe we will be required toreclassify our mandatorily redeemable preferred stock as a liability commencingJuly 1, 2003 and reflect subsequent changes in the redemption obligationas a charge against pre-tax income.

 

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**SpecialNote Regarding Forward-Looking Statements and Risk Factors**

** **

All statements other thanstatements of historical facts included in this report are considered forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  These forward-looking statementsare subject to known and unknown risks, uncertainties and other factors, whichare difficult to predict.  We arevulnerable to a variety of factors that 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;

 

•                  acts,and ongoing threats, of global terrorism, military conflicts and healthepidemics that affect demand for aircraft and air travel, which in turn affectdemand 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;

 

•                  priceand availability of raw materials, component parts and electrical energy;

 

•                  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.

 

Some of the moresignificant factors listed above are further described in our Annual Report onForm 10-K (Amendment No. 1) and should be read in conjunction with thisreport.  Changes in such factors couldcause our actual results to differ materially from those contemplated in suchforward-looking statements.  Although webelieve that the expectations reflected in such forward-looking statements arereasonable, we can give no assurance that such expectations will prove to becorrect.  We undertake no obligation torelease publicly any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.  You should notrely on our forward-looking statements as if they were certainties.

 

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

 

We are exposed to variousmarket risks, including interest rates and changes in foreign currency exchangerates.  Market risk is the potentialloss arising from adverse changes in prevailing market rates and prices.  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 risk related toour variable-rate debt is estimated as the potential decrease in pre-tax earningsresulting from an increase in interest rates. The interest rates applicable to variable-rate debt are, at our option,based on defined margins over the current prime rate or LIBOR.  As of March 31, 2003, the current primerate was 4.25% and the current LIBOR was 1.38%.  Based on $294.1 million of variable-rate debt outstanding as ofMarch 31, 2003, a hypothetical one percent rise in interest rates, to5.25% for prime rate borrowings and 2.38% for LIBOR borrowings, would reduceour pre-tax earnings by $2.9 million annually.

 

To limit a portion of 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 $3.3 million of variable-ratedebt converted to fixed-rate debt outstanding as of March 31, 2003, 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 estimated fair valueof our $100.0 million fixed-rate long-term debt increased $11.0 million, or27.5%, to approximately $51.0 million as of March 31, 2003 from $40.0million as of December 31, 2002.  Althoughwe cannot be certain, we believe the increase may have been a result of ourannouncement that we had entered into a definitive agreement to sell theSpecialty Avionics Group.  Market riskrelated to our fixed-rate debt is deemed to be the potential increase in fairvalue resulting from a decrease in interest rates.  For example, a hypothetical ten percent decrease in the interestrates, from 12.0% to 10.8%, would increase the fair value of our fixed-ratedebt by approximately $7.0 million.

 

**Foreign Currency Exchange Rate Risk.**  Our foreign customers are located in variousparts of the world, primarily Canada, the Far and Middle East and WesternEurope, and we have subsidiaries with manufacturing facilities in Mexico.  To limit our foreign currency exchange raterisk related to sales to our customers, orders are almost always valued andsold in U.S. dollars.  We have enteredinto forward foreign exchange contracts in the past, primarily to limit theSpecialty Avionics Group’s exposure related to foreign inventory procurementand operating costs.  While we have notentered into any such contracts since 1998, we may do so in the futuredepending on the volume of non-U.S. dollar denominated transactions and ourassessment of future foreign exchange rate trends.

 

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**ITEM 4.****                             CONTROLS AND PROCEDURES**

 

**Evaluation of disclosure controls andprocedures.**  Our ChiefExecutive Officer and Chief Financial Officer have evaluated our disclosurecontrols and procedures within 90 days of the initial filing of this report onMay 20, 3003.  These controls andprocedures are designed to ensure that all of the information required to bedisclosed by us in our periodic reports filed with the Securities and ExchangeCommission (the “Commission”) is recorded, processed, summarized and reportedwithin the time periods specified by the Commission and that the information iscommunicated to the Chief Executive Officer and Chief Financial Officer on atimely basis.  Based on theirevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were suitable and effective.

 

**Changes in internal controls.**  Subsequent to the date of their evaluationand prior to the date of the initial filing on May 20, 3003, there have beenno significant changes in our internal controls or in other factors that couldsignificantly affect the internal controls, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

**PARTII****– OTHERINFORMATION**

 

**ITEM1.****                             LEGAL PROCEEDINGS**

 

As part of itsinvestigation of the crash of Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the“CTSB”) initially notified us that it recovered burned wire that was attachedto the in-flight entertainment system installed on some of Swissair’s aircraftby one of our subsidiaries.  Oursubsidiary has worked vigorously over the last five years with the CTSBinvestigators in the fact-finding investigation of this catastrophicincident.  On March 27, 2003, theCTSB released its final report on its investigation.  This report indicated that the CTSB was unable to conclusivelydetermine the cause of the fire which led to the crash of the aircraft.

 

We were a defendant inmost, but not all, of the actions brought by the estates of the 229 victims ofthe crash.  The actions, which soughtdamages and costs in unstated amounts, claimed negligence, strict liability,and breach of warranty.  Virtually allof the cases have been settled by Boeing and Swissair’s insurers and bothassignment of the claims against, and releases in favor, of us have beenobtained by the Boeing and Swissair insurers.

 

Boeing and Swissair havemade a claim (but have not commenced litigation) against us to contribute tothe amounts paid to settle the cases. As there is no litigation pending, no discovery has been taken by eitherside as to liability for the crash.  Webelieve that our subsidiary is not responsible for the crash and, in any event,we maintain insurance for such matters. We further believe that any loss we may sustain upon the ultimateresolution of this matter, if any, will not exceed the amount of insurancecoverage maintained.  Accordingly, noaccrual for loss has been recorded in our financial statements.

 

We are also involved inother routine legal and administrative proceedings incident to the normalconduct of business.  We believe theultimate disposition of all such matters will not have a material adverseeffect on our business, consolidated financial position, results of operationsor cash flows.

 

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

 

a.                           Exhibits

 

31.1                                       ChiefExecutive Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002 *

 

31.2                                       ChiefFinancial Officer Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002 *

 

32                                                ChiefExecutive Officer and Chief Financial Officer Certifications Pursuant toPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

 

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*                                                     Filedherewith

 

b.                          Reports on Form 8-K

 

On March 17, 2003,we filed a Form 8-K Current Report regarding DeCrane Aircraft entering into adefinitive agreement to sell its Specialty Avionics Group.  The text of the press release is containedin the filing.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                  | **DECRANE HOLDINGS CO. (Registrant)** |
|-----------------------|---------------------------------------|
|                  |                                  |   |
|                  |                                  |   |
| October 9,  2003 | By:                                   | /s/  RICHARD J. KAPLAN |   |
|                  | Name:                                 | Richard  J. Kaplan |
|                  | Title:                                | Chief  Financial Officer and  Assistant Secretary |

 

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