**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q/A**

**(AMENDMENTNO. 1)**

 

**QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2003**

 

**Commission File Number 333-70363**

 

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| **DECRANE  HOLDINGS CO.**                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in  its charter)                                                                 |
|                                                                                                                    |   |   |
| **Delaware**                                                                                                            |   | **13-4019703** |
| (State or other jurisdiction of  incorporation or organization)                                                         |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                    |   |   |
| **c/o Credit Suisse First Boston / DLJ Merchant Banking Partners II,  L.P.  Eleven Madison Avenue, New York, NY 10010** |
| (Address, including zip code, of principal  executive offices)                                                          |
|                                                                                                                    |   |   |
| **(212) 325-2000**                                                                                                      |
| (Registrant’s telephone number, including  area code)                                                              |
|                                                                                                                    |   |   |
| **(Not Applicable)**                                                                                                    |
| (Former address and telephone number of  principal executive offices, if changed since last report)                     |

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing 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 CommonStock, $.01 par value, outstanding as of August 1, 2003 was 4,116,627shares.

 

 

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**Tableof Contents**

 
| **Part I – Financial Information** |
|-----------------------------------------|
|                                    |
| **Explanatory  Note**                   |
|                                    |
| **Item 1.**                             | **Financial Statements (Unaudited)** |
|                                    |   |
|                                    | Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 |
|                                    |   |
|                                    | Consolidated Statements of Operations for  the three months and six months ended June 30, 2003 and 2002 |
|                                    |   |
|                                    | Consolidated Statements of Stockholders’  Equity (Deficit) for the six months ended June 30, 2003 |
|                                    |   |
|                                    | Consolidated Statements of Cash Flows for  the six months ended June 30, 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 June 30, 2003 |
|                                    |   |
|                                    | Six months ended June 30, 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 ended June30, 2003 to amend and restate, in its entirety, its Quarterly Report on Form10-Q originally filed with the Securities and Exchange Commission on August 14,2003 (referred to herein as the “Original Report” and the “Amended Report”).  Except for the reclassifications describedbelow, no changes have been made in this Amended Report to the consolidatedfinancial position, results of operations or cash flows we reported in ourOriginal Report.  This Amended Reportdoes not reflect events occurring after the August 14, 2003 filing of ourOriginal Report or modify or update the disclosures set forth in that OriginalReport in any way to reflect any changes in our business or our consolidatedfinancial position, results of operations or cash flows subsequent to thefiling date of the Original Report.  Forthe convenience of the reader, we deemed it desirable to amend and restate ourOriginal Report in its entirety.

 

In this Amended Report,we are reclassifying our consolidated statements of financial position, resultsof operations and cash flows to reflect interest expense and general corporateoverhead allocations in accordance with EITF 87-24, “Allocation of Interest toDiscontinued Operations,” for all periods presented as described in Note 2accompanying our financial statements included in this report.  In addition, we are also making similarconforming changes to other parts of the Original Report as well.

 

This Amended Reportshould be read in conjunction with our Amendment No. 1 on Form 10-K/A for thefiscal year ended December 31, 2002 and our Amendment No. 1 on Form 10-Q/A forthe quarterly period ended March 31, 2003 filed concurrently with this AmendedReport.  As required by Rule 12b-15 ofthe Securities Exchange Act of 1934, our Chief Executive Officer and ChiefFinancial Officer are providing updated certifications pursuant to Section 302of the Sarbanes-Oxley Act of 2002 and updated written statements pursuant toTitle 18 United States Code Section 1350, as adopted pursuant to Section 906of the Act.

 

i

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**PART I – FINANCIALINFORMATION**

** **

**ITEM1.****                          FINANCIALSTATEMENTS**

** **

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**Consolidated BalanceSheets**

 
| **(In thousands, except share data)**                                                                                                              |   | **June 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                                                                               |   | **(Unaudited)**         |    |                        |   |
| **Assets**                                                                                                                                         |   |                    |    |                        |   |
| Current assets:                                                                                                                                    |   |                    |    |                        |   |
| Cash and cash equivalents                                                                                                                          |   | $                       | 3,673   |                        | $      | 12,421 |   |
| Accounts receivable, net                                                                                                                           |   | 20,726                  |    | 26,354                      |   |
| Inventories                                                                                                                                        |   | 63,125                  |    | 59,300                      |   |
| Deferred income taxes                                                                                                                              |   | 172                     |    | 16,430                      |   |
| Prepaid expenses and other  current assets                                                                                                         |   | 1,609                   |    | 1,724                       |   |
| Current assets of  discontinued operations                                                                                                         |   | —                  |    | 160,741                     |   |
| Total current assets                                                                                                                               |   | 89,305                  |    | 276,970                     |   |
|                                                                                                                                               |   |                    |    |                        |   |
| Property and equipment,  net                                                                                                                       |   | 34,801                  |    | 36,139                      |   |
| Goodwill                                                                                                                                           |   | 162,430                 |    | 196,430                     |   |
| Other assets, principally  intangibles, net                                                                                                        |   | 36,110                  |    | 39,428                      |   |
| Total assets                                                                                                                                       |   | $                       | 322,646 |                        | $      | 548,967 |   |
|                                                                                                                                               |   |                    |    |                        |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and  Stockholders’ Equity (Deficit)**                                                   |   |                    |    |                        |   |
| Current liabilities:                                                                                                                               |   |                    |    |                        |   |
| Current portion of  long-term debt                                                                                                                 |   | $                       | 8,485   |                        | $      | 16,317 |   |
| Accounts payable                                                                                                                                   |   | 9,847                   |    | 13,055                      |   |
| Accrued liabilities                                                                                                                                |   | 20,645                  |    | 31,494                      |   |
| Income taxes payable                                                                                                                               |   | 149                     |    | —                      |   |
| Current liabilities of  discontinued operations                                                                                                    |   | —                  |    | 19,928                      |   |
| Total current liabilities                                                                                                                          |   | 39,126                  |    | 80,794                      |   |
|                                                                                                                                               |   |                    |    |                        |   |
| Long-term debt, less  current portion                                                                                                              |   | 251,372                 |    | 364,700                     |   |
| Deferred income taxes                                                                                                                              |   | 387                     |    | 27,077                      |   |
| Other long-term  liabilities                                                                                                                       |   | 11,485                  |    | 7,364                       |   |
|                                                                                                                                               |   |                    |    |                        |   |
| Commitments and  contingencies (Note 11)                                                                                                           |   |                    |    |                        |   |
|                                                                                                                                               |   |                    |    |                        |   |
| Mandatorily redeemable  preferred stock:                                                                                                           |   |                    |    |                        |   |
| Minority interest in 16%  preferred stock of subsidiary                                                                                            |   | 37,335                  |    | 34,081                      |   |
| Mandatorily redeemable 14%  preferred stock                                                                                                        |   | 66,654                  |    | 62,222                      |   |
|                                                                                                                                               |   |                    |    |                        |   |
| Stockholders’ equity  (deficit):                                                                                                              |   |                    |    |                        |   |
| Undesignated preferred  stock, $.01 par value, 1,140,000 shares authorized; None issued and  outstanding as of June 30, 2003 and December 31, 2002 |   | —                  |    | —                      |   |
| Common stock, $.01 par  value, 10,000,000 shares authorized; 4,116,627 shares issued and outstanding  as of June 30, 2003 and December 31, 2002    |   | 41                      |    | 41                          |   |
| Additional paid-in capital                                                                                                                         |   | 67,693                  |    | 72,125                      |   |
| Notes receivable for  shares sold                                                                                                                  |   | (2,665                  | )       | (2,591                      | )      |
| Accumulated deficit                                                                                                                                |   | (148,418                | )       | (96,485                     | )      |
| Accumulated other  comprehensive loss                                                                                                              |   | (364                    | )       | (361                        | )      |
| Total stockholder’s equity  (deficit)                                                                                                         |   | (83,713                 | )       | (27,271                     | )      |
| Total liabilities,  mandatorily redeemable preferred stock and stockholder’s equity (deficit)                                                 |   | $                       | 322,646 |                        | $      | 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  June 30,** |    | **Six Months Ended  June 30,** |   |
|--------------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------------|--------|
| **(In thousands)**                                                 |   | **2003**                         |    | **2002**                            |   | **2003** |   | **2002** |   |
|                                                               |   | **(Unaudited)**                  |    |
| Revenues                                                           |   | $                                | 44,113  |                                | $      | 61,293 |   | $ | 86,013 |   | $ | 122,112 |   |
| Cost of sales                                                      |   | 45,383                           |    | 47,831                              |   | 76,286 |   | 92,212 |   |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Gross profit (loss)                                                |   | (1,270                           | )       | 13,462                              |   | 9,727 |   | 29,900 |   |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Operating expenses:                                                |   |                             |    |                                |   |   |   |   |   |
| Selling, general and  administrative expenses                      |   | 6,572                            |    | 12,088                              |   | 14,477 |   | 24,247 |   |
| Impairment of goodwill                                             |   | 34,000                           |    | —                              |   | 34,000 |   | — |   |
| Amortization of intangible  assets                                 |   | 914                              |    | 874                                 |   | 1,826 |   | 1,717 |   |
| Total operating expenses                                           |   | 41,486                           |    | 12,962                              |   | 50,303 |   | 25,964 |   |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Income (loss) from  operations                                     |   | (42,756                          | )       | 500                                 |   | (40,576 | ) | 3,936 |   |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Other expenses:                                                    |   |                             |    |                                |   |   |   |   |   |
| Interest expense                                                   |   | 6,468                            |    | 6,134                               |   | 12,337 |   | 12,082 |   |
| Minority interest in  preferred stock of subsidiary                |   | 1,657                            |    | 1,433                               |   | 3,254 |   | 2,815 |   |
| Other expenses, net                                                |   | 407                              |    | 86                                  |   | 746 |   | 199 |   |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Loss from continuing  operations before provision for income taxes |   | (51,288                          | )       | (7,153                              | )      | (56,913 | ) | (11,160 | ) |
| Income tax benefit                                                 |   | 9,365                            |    | 2,050                               |   | 10,630 |   | 3,191 |   |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Loss from continuing  operations                                   |   | (41,923                          | )       | (5,103                              | )      | (46,283 | ) | (7,969 | ) |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Discontinued operations  and change in accounting principle:       |   |                             |    |                                |   |   |   |   |   |
| Income (loss) from  discontinued operations, net of tax            |   | 747                              |    | 1,738                               |   | (5,650 | ) | (35,702 | ) |
| Cumulative effect of  change in accounting principle               |   | —                           |    | —                              |   | — |   | (17,828 | ) |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Net loss                                                           |   | (41,176                          | )       | (3,365                              | )      | (51,933 | ) | (61,499 | ) |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Noncash preferred stock  dividend accretion                        |   | (2,254                           | )       | (1,964                              | )      | (4,432 | ) | (3,862 | ) |
|                                                               |   |                             |    |                                |   |   |   |   |   |
| Net loss applicable to  common stockholders                        |   | $                                | (43,430 | )                                   | $      | (5,329 | ) | $ | (56,365 | ) | $ | (65,361 | ) |

 

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

 

2

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**ConsolidatedStatement of Stockholder’s Equity (Deficit)**

 
| **(In thousands, except share data)**          |   | **Common Stock** |   | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|------------------------------------------------|--------|------------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
| **Shares**                                     |   | **Amount**       |
|                                           |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, December 31, 2002                |   | 4,116,627        |   | $                                | 41     |                                    | $      | 72,125                   |   | $                                           | (2,591 | )         | $      | (96,485 | ) | $ | (361 | ) | $ | (27,271 | ) |
|                                           |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive income (loss):                   |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                       |   | —           |   | —                           |   | —                                  |   | —                   |   | (51,933                                     | )      | —    |   | (51,933 | ) |
| Unrealized loss on interest rate swap contract |   | —           |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (3        | )      | (3 | ) |
|                                           |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   | (51,936 | ) |
|                                           |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Noncash dividend accretion on preferred stock  |   | —           |   | —                           |   | (4,432                                  | )      | —                   |   | —                                      |   | —    |   | (4,432 | ) |
|                                           |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Notes receivable interest accrued              |   | —           |   | —                           |   | —                                  |   | (74                      | )      | —                                      |   | —    |   | (74 | ) |
|                                           |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, June 30, 2003 (Unaudited)             |   | 4,116,627        |   | $                                | 41     |                                    | $      | 67,693                   |   | $                                           | (2,665 | )         | $      | (148,418 | ) | $ | (364 | ) | $ | (83,713 | ) |

 

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

 

3

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatements of Cash Flows**

 
|                                                                               |   | **Six Months Ended  June 30,** |    |
|------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
| **(In thousands)**                                                                 |   | **2003**                            |    | **2002** |   |
|                                                                               |   | **(Unaudited)**                     |    |
| **Cash flows from operating activities:**                                          |   |                                |    |   |   |
| Net loss                                                                           |   | $                                   | (51,933 | ) | $ | (61,499 | ) |
| Adjustments to reconcile  net income to net cash provided by operating activities: |   |                                |    |   |   |
| Loss from discontinued  operations                                                 |   | 5,650                               |    | 35,702 |   |
| Minority interest in  preferred stock of subsidiary                                |   | 3,254                               |    | 2,815 |   |
| Cumulative effect of  change in accounting principle                               |   | —                              |    | 17,828 |   |
| Depreciation and  amortization                                                     |   | 6,342                               |    | 6,743 |   |
| Noncash portion of  restructuring, asset impairment and other related charges      |   | 43,926                              |    | 5,910 |   |
| Deferred income taxes                                                              |   | (11,659                             | )       | (1,008 | ) |
| Other, net                                                                         |   | 295                                 |    | 212 |   |
| Changes in assets and  liabilities:                                                |   |                                |    |   |   |
| Accounts receivable                                                                |   | 4,207                               |    | 7,725 |   |
| Inventories                                                                        |   | (12,705                             | )       | (1,786 | ) |
| Prepaid expenses and other  assets                                                 |   | 541                                 |    | (1,540 | ) |
| Accounts payable                                                                   |   | (2,251                              | )       | (1,090 | ) |
| Accrued liabilities                                                                |   | (10,755                             | )       | (14,340 | ) |
| Income taxes payable                                                               |   | 385                                 |    | 30 |   |
| Other long-term  liabilities                                                       |   | 4,761                               |    | 448 |   |
| Net cash used for  operating activities                                            |   | (19,942                             | )       | (3,850 | ) |
|                                                                               |   |                                |    |   |   |
| **Cash flows from investing activities:**                                          |   |                                |    |   |   |
| Net cash proceeds from  sale of Specialty Avionics Group                           |   | 132,800                             |    | — |   |
| Capital expenditures                                                               |   | (2,002                              | )       | (2,024 | ) |
| Cash paid for acquisition  contingent consideration                                |   | (600                                | )       | (5,890 | ) |
| Net cash provided by (used  for) investing activities                              |   | 130,198                             |    | (7,914 | ) |
|                                                                               |   |                                |    |   |   |
| **Cash flows from financing activities:**                                          |   |                                |    |   |   |
| Principal payments on term  debt, capitalized leases and other debt                |   | (130,448                            | )       | (4,486 | ) |
| Net borrowings under  senior revolving credit facility                             |   | 9,250                               |    | 8,000 |   |
| Deferred financing costs                                                           |   | —                              |    | (1,663 | ) |
| Other, net                                                                         |   | —                              |    | 277 |   |
| Net cash provided by (used  for) financing activities                              |   | (121,198                            | )       | 2,128 |   |
|                                                                               |   |                                |    |   |   |
| Net cash provided by  discontinued operations                                      |   | 2,194                               |    | 8,747 |   |
|                                                                               |   |                                |    |   |   |
| Net decrease in cash and  cash equivalents                                         |   | (8,748                              | )       | (889 | ) |
| Cash and cash equivalents  at beginning of period                                  |   | 12,421                              |    | 9,478 |   |
| Cash and cash equivalents  at end of period                                        |   | $                                   | 3,673   |   | $ | 8,589 |   |

 

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

 

4

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**CondensedNotes to Consolidated Financial Statements**

**(Unaudited)**

 

**Note1.**                                  Summary of Significant AccountingPolicies

** **

**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 all adjustmentsnecessary for a fair presentation of the financial condition, results ofoperations and cash flows for such interim periods.  All of these adjustments are normal recurring 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 andexpenses during the reporting periods. Actual results 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 been derivedfrom audited financial statements but does not include all disclosures requiredby accounting principles generally accepted in the United States of America aspermitted by interim reporting requirements. These consolidated interim financial statements should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the audited financial statements and relatednotes included in the Company’s 2002 Form 10-K / Amendment No. 1, as describedbelow.

 

As the Company originallydescribed in its Form 10-K for the year ended December 31, 2002 and Form 10-Qfor the three months ended March 31, 2003, its failure to consummate the saleof the Specialty Avionics Group by June 30, 2003 would have been an event ofdefault under the amended senior credit facility.  As a result, the Company’s independent accountants qualifiedtheir report on its audited financial statements for the year ended December31, 2002 with respect to its ability to continue as a going concern.  Consummation of the sale and repayment of$130.0 million of borrowings alleviated the independent accountants’ doubtabout the Company’s ability to continue as a going concern.  As a result, the Company’s independentaccountants issued a revised, unqualified report on its financial statements,which the Company included in Amendment No. 1 to its Form 10-K for the yearended December 31, 2002.

 

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

 

5

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**Stock Option Plan**

** **

The Company has onestock-based employee compensation plan, which is more fully described in thenotes to its audited financial statements. As permitted under SFAS No. 123, “Accounting for Stock-BasedCompensation,” the Company measures compensation expense related to theemployee stock option plan utilizing the intrinsic value method as prescribedby Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related interpretations. No stock-based employee compensation cost is reflected in net income(loss), as all options granted under the plan had an exercise price equal tothe value of the underlying common stock on the date of grant.

 

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  June 30,** |    | **Six Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------------|--------|
| **(In thousands)**                                                                                                                             |   | **2003**                         |    | **2002**                            |   | **2003** |   | **2002** |   |
|                                                                                                                                           |   | **(Unaudited)**                  |    |
| Net loss, as reported                                                                                                                          |   | $                                | (41,176 | )                                   | $      | (3,365 | ) | $ | (51,933 | ) | $ | (61,499 | ) |
| Less total stock-based  employee compensation expense determined under the fair value based method  for all awards, net of related tax effects |   | (94                              | )       | (94                                 | )      | (188 | ) | (188 | ) |
| Pro forma net loss                                                                                                                             |   | $                                | (41,270 | )                                   | $      | (3,459 | ) | $ | (52,121 | ) | $ | (61,687 | ) |

 

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 PronouncementsAdopted January 1, 2003**

** **

Effective January 1, 2003the 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, “Reportingthe Results of Operations–Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met.  Adoption of thisnew standard did not have an impact on the Company’s consolidated financialposition, or results of operations or cash flow.

 

6

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*SFAS No. 146 – Accounting for Costs Associated withExit or 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.

 

SFAS No. 146 affects thetiming of recognizing restructuring costs, as well as the amounts recognized,depending on the nature of the exit, disposal or restructuring activity and thetiming of the related estimated cash flows. As required by the provisions of SFAS No. 146, the Company applied itsprovisions to the restructuring activities initiated in June 2003 (Note 3).

 

*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 a party to any agreementin which it is a guarantor of indebtedness of others therefore the adoption ofinterpretation did not have an impact on the Company’s financial position,results of operations or cash flows. The disclosure requirements of this interpretation were adopted by theCompany as of December 31, 2002.

 

**Recently IssuedAccounting Pronouncement**

** **

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

* *

Issued in May 2003, SFASNo. 150 establishes standards for the classification and measurement of certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification offinancial 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 will berequired to reclassify all mandatorily redeemable preferred stock as aliability commencing July 1, 2003 and reflect quarterly dividend accretion onits 14% preferred stock as a charge against pre-tax income in future periods.

 

7

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**Note2.**                                  Disposition of Specialty 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, theCompany entered into a definitive agreement to sell its equity interests in thesubsidiaries 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 on May23, 2003.  The selling price is subjectto a post-closing adjustment related to the amount of working capital atclosing.  Proceeds of $130,000,000 fromthe sale were used to repay senior credit facility borrowings (Note 8).  The sale of the Specialty Avionics Group isnot expected to affect the operations of the remaining operating groups.

 

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 recorded a modest $689,000 gain,net of tax, on the sale during the second quarter of fiscal 2003, based on theactual financial position of the group on the date of sale.  The ultimate gain or loss on the sale issubject to finalizing the post-closing adjustment, which is not expected to bematerial, 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 tablessummarize the financial position, results operations and cash flows of theSpecialty Avionics Group.

 
| **(In thousands)**                         |   | **December 31,  2002** |    |
|--------------------------------------------|--------|-----------------------------|---------|
|                                       |   |                        |    |
| Assets:                                    |   |                        |    |
| Current assets                             |   | $                           | 41,614  |   |
| Property and equipment, net                |   | 15,744                      |    |
| Other assets, principally intangibles, net |   | 103,383                     |    |
| Total assets                               |   | 160,741                     |    |
|                                       |   |                        |    |
| Liabilities:                               |   |                        |    |
| Current liabilities                        |   | 8,288                       |    |
| Long-term liabilities                      |   | 11,640                      |    |
| Total liabilities                          |   | 19,928                      |    |
|                                       |   |                        |    |
| Net assets of the Specialty Avionics Group |   | $                           | 140,813 |   |

 
|                                                 |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|------------------------------------------------------|--------|----------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**                                   |   | **2003 (1)**                     |   | **2002**                            |   | **2003 (1)** |   | **2002** |   |
|                                                 |   | **(Unaudited)**                  |   |
| Results of Operations:                               |   |                             |   |                                |   |   |   |   |   |
| Revenues                                             |   | $                                | 13,125 |                                | $      | 25,039 |   | $ | 36,595 |   | $ | 50,383 |   |
|                                                 |   |                             |   |                                |   |   |   |   |   |
| Operating expenses:                                  |   |                             |   |                                |   |   |   |   |   |
| Costs and expenses                                   |   | 11,136                           |   | 19,369                              |   | 30,128 |   | 38,774 |   |
| Impairment of goodwill                               |   | —                           |   | —                              |   | 7,500 |   | — |   |
| Amortization of intangible  assets                   |   | 321                              |   | 557                                 |   | 878 |   | 1,114 |   |
| Total operating expenses                             |   | 11,457                           |   | 19,926                              |   | 38,506 |   | 39,888 |   |
|                                                 |   |                             |   |                                |   |   |   |   |   |
| Income (loss) from  operations                       |   | 1,668                            |   | 5,113                               |   | (1,911 | ) | 10,495 |   |
|                                                 |   |                             |   |                                |   |   |   |   |   |
| Other expenses:                                      |   |                             |   |                                |   |   |   |   |   |
| Interest expense:                                    |   |                             |   |                                |   |   |   |   |   |
| Debt required to be repaid  with proceeds from sale  |   | 1,146                            |   | 1,863                               |   | 2,952 |   | 3,674 |   |
| Debt obligations assumed  by the buyer               |   | 68                               |   | 198                                 |   | 270 |   | 402 |   |
| Other expenses, net                                  |   | 52                               |   | 153                                 |   | 153 |   | 186 |   |
|                                                 |   |                             |   |                                |   |   |   |   |   |
| Pre-tax income (loss)                                |   | 402                              |   | 2,899                               |   | (5,286 | ) | 6,233 |   |
| Provision for income taxes                           |   | 344                              |   | 1,161                               |   | 1,053 |   | 2,613 |   |
|                                                 |   |                             |   |                                |   |   |   |   |   |
| Income (loss) before  change in accounting principle |   | 58                               |   | 1,738                               |   | (6,339 | ) | 3,620 |   |
| Cumulative effect of  change in accounting principle |   | —                           |   | —                              |   | — |   | (39,322 | ) |
|                                                 |   |                             |   |                                |   |   |   |   |   |
| Income (loss) from  operations                       |   | 58                               |   | 1,738                               |   | (6,339 | ) | (35,702 | ) |
| Gain on sale, net of tax                             |   | 689                              |   | —                              |   | 689 |   | — |   |
|                                                 |   |                             |   |                                |   |   |   |   |   |
| Net income (loss) from  discontinued operations      |   | $                                | 747    |                                | $      | 1,738 |   | $ | (5,650 | ) | $ | (35,702 | ) |

 

----

(1)                      Reflects the results of operationsthrough May 23, 2003, the date of sale.

 

9

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|                                                  |   | **Six Months Ended  June 30,** |   |
|-------------------------------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**                                    |   | **2003 (1)**                        |   | **2002** |   |
|                                                  |   | **(Unaudited)**                     |   |
| Cash Flows Provided By  (Used For):                   |   |                                |   |   |   |
| Operating activities                                  |   | $                                   | 3,760  |   | $ | 9,441 |   |
| Investing activities                                  |   | (902                                | )      | (468 | ) |
| Financing activities                                  |   | (649                                | )      | (180 | ) |
| Net (increase) decrease in  cash and cash equivalents |   | (13                                 | )      | (90 | ) |
| Effect of foreign currency  translation on cash       |   | (2                                  | )      | 44 |   |
| Net cash provided by  discontinued operations         |   | $                                   | 2,194  |   | $ | 8,747 |   |

 

----

(1)                      Reflects cash flows through May 23, 2003,the date of sale.

 

**Note3.**                                  Restructuring, Asset Impairment and OtherRelated Charges

 

During the three monthsand six months ended June 30, 2003 and 2002, the Company recordedrestructuring, asset impairment and other related charges as follows:

** **
|                                                                       |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|----------------------------------------------------------------------------|--------|----------------------------------|--------|-------------------------------------|--------|
| **(In thousands)**                                                         |   | **2003**                         |   | **2002**                            |   | **2003** |   | **2002** |   |
|                                                                       |   | **(Unaudited)**                  |   |
| Nature of charges:                                                         |   |                             |   |                                |   |   |   |   |   |
| Seating Product Line and  Furniture Manufacturing Facilities Restructuring |   | $                                | 13,394 |                                | $      | — |   | $ | 13,394 |   | $ | — |   |
| Seat Manufacturing  Facilities Restructuring                               |   | —                           |   | 2,251                               |   | — |   | 6,294 |   |
| Asset Realignment  Restructuring                                           |   | —                           |   | 5,415                               |   | — |   | 5,415 |   |
| Goodwill impairment  charges                                               |   | 34,000                           |   | —                              |   | 41,500 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47,394 |                                | $      | 7,666 |   | $ | 54,894 |   | $ | 11,709 |   |
|                                                                       |   |                             |   |                                |   |   |   |   |   |
| Business segment recording  the charges:                                   |   |                             |   |                                |   |   |   |   |   |
| Cabin Management                                                           |   | $                                | 47,394 |                                | $      | 7,666 |   | $ | 47,394 |   | $ | 11,709 |   |
| Systems Integration                                                        |   | —                           |   | —                              |   | — |   | — |   |
| Total continuing  operations                                               |   | 47,394                           |   | 7,666                               |   | 47,394 |   | 11,709 |   |
| Discontinued operations  (Specialty Avionics)                              |   | —                           |   | —                              |   | 7,500 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47,394 |                                | $      | 7,666 |   | $ | 54,894 |   | $ | 11,709 |   |
|                                                                       |   |                             |   |                                |   |   |   |   |   |
| Charged to operations:                                                     |   |                             |   |                                |   |   |   |   |   |
| Cost of sales                                                              |   | $                                | 12,835 |                                | $      | 4,732 |   | $ | 12,835 |   | $ | 5,946 |   |
| Selling, general and  administrative expenses                              |   | 559                              |   | 2,934                               |   | 559 |   | 5,763 |   |
| Impairment of goodwill                                                     |   | 34,000                           |   | —                              |   | 34,000 |   | — |   |
| Discontinued operations  (Specialty Avionics)                              |   | —                           |   | —                              |   | 7,500 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47,394 |                                | $      | 7,666 |   | $ | 54,894 |   | $ | 11,709 |   |
|                                                                       |   |                             |   |                                |   |   |   |   |   |
| Components of charges:                                                     |   |                             |   |                                |   |   |   |   |   |
| Continuing operations:                                                     |   |                             |   |                                |   |   |   |   |   |
| Noncash charges                                                            |   | $                                | 43,926 |                                | $      | 2,765 |   | $ | 43,926 |   | $ | 5,910 |   |
| Cash charges                                                               |   | 3,468                            |   | 4,901                               |   | 3,468 |   | 5,799 |   |
| Total continuing  operations pre-tax charges                               |   | 47,394                           |   | 7,666                               |   | 47,394 |   | 11,709 |   |
| Discontinued operations  (noncash charges)                                 |   | —                           |   | —                              |   | 7,500 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47,394 |                                | $      | 7,666 |   | $ | 54,894 |   | $ | 11,709 |   |

** **

**10**

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** **

**Seating Product Line andFurniture Manufacturing Facilities Restructuring**

** **

During the second quarterof fiscal 2003, the Company consolidated its seating product line offerings andadopted a restructuring plan to down-size a furniture manufacturing facility inresponse to continuing weakness in the business, VIP and head-of-state aircraftmarket.  These actions were designed toreduce engineering, production and inventory carrying costs by supporting fewerproduct offerings and achieve profitability at the furniture manufacturingfacility based on its lower production levels. In connection with these actions, the Company recorded pre-tax chargesto operations totaling $13,394,000 during the second quarter of fiscal2003.  The charges are comprised of thefollowing:

 

•                  *Seating Product LineConsolidation. *Thecurtailment**of several seatingproduct offerings and conversion of seat products which incorporate a newsingle-design technology resulted in the write-off of $6,262,000 of inventoriedcosts related to the discontinued product offerings.

 

•                  *Lease Termination andRelated Charges. *Lease terminationcosts related to future estimated rental payments under existing long-termlease agreements for the facilities permanently vacated in connection withdown-sizing a furniture manufacturing facility.  Future payments have been reduced by the expected subleaseincome.  The net future payments arebased on estimated current market rates and anticipated dates that thesefacilities will be subleased.  Ifmarket-rates decrease or should it take longer than expected to sublease thesefacilities, the actual loss could exceed these estimates.  Other related charges include the write-offof leasehold improvements related to the vacated facilities.

 

•                  *Excess and ObsoleteInventory Write-Downs. *Inventory waswritten down by $3,073,000 to reflect its net realizable value for quantitieson hand exceeding current and forecast order backlog requirements and obsoleteinventory related to the curtailed seating product offerings.

 

•                  *Severance and OtherCompensation Costs. *The Companyhas reduced its total workforce at the down-sized facility by 49 employees, or37%, between December 31, 2002 and June 30, 2003.

 

The components of therestructuring, asset impairment and other related charges are as follows:

 
|                                                       |   |            |   |                 |   |              |   | **Balance at** |   |
|------------------------------------------------------------|--------|-----------------|--------|----------------------|--------|-------------------|--------|----------------|--------|
|                                                       |   | **Total**       |   | **Amounts Incurred** |   | **June 30,** |   |
| **(In thousands)**                                         |   | **Charges**     |   | **Noncash**          |   | **Cash**          |   | **2003**       |   |
|                                                       |   | **(Unaudited)** |   |
| Product development costs related to curtailed  programs   |   | $               | 6,262  |                 | $      | (6,262            | )      | $              | — |   | $ | — |   |
| Lease termination and other related charges                |   | 4,436           |   | (591                 | )      | —            |   | 3,845          |   |
| Excess and obsolete inventory write-downs                  |   | 3,073           |   | (3,073               | )      | —            |   | —         |   |
| Severance and other compensation costs                     |   | 183             |   | —               |   | (183              | )      | —         |   |
| Total                                                      |   | 13,954          |   | $                    | (9,926 | )                 | $      | (183           | )      | 3,845 |   |
|                                                       |   |            |   |                 |   |              |   |           |   |
| Present value discount, using an 8% imputed interest  cost |   | (560            | )      |                 |   |              |   | (560           | )      |
| Total pre-tax charges                                      |   | $               | 13,394 |                 |   |              |   |           | $      | 3,285 |   |

 

As required by SFAS No.146, the charges recorded were discounted by $560,000 to initially measure andreflect the liabilities incurred as a result of the restructuring plan at theirfair value as of June 30, 2003. The cumulative effect of a changes resulting from revisions to eitherthe timing or the amount of estimated cash flows will be recognized as anadjustment to the liability in the period of the change.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

11

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**Seat ManufacturingFacilities 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 plan was designed to improve manufacturing efficiencies and tofurther reduce costs and conserve working capital.  In connection with this restructuring plan, the Company recordedpre-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 ReceivableWrite-Downs.*  In connection with the consolidation ofall production, the Company discontinued manufacturing certain products,principally those which overlap. Inventory and certain receivables related to the discontinued productswere written down to net realizable value.

 

•                  *Impairment of Long-Lived Assets.* The restructuring plan resulted in the impairment of property andequipment and, accordingly, these assets were written down to their netrealizable value.

 

•                  *Severance and Other CompensationCosts.*  Approximately 115 employees were terminatedin connection with the permanent closure of the manufacturing facilities.

 

•                  *Lease Termination and Other RelatedCosts.*  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 RelatedExpenses.*  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)**                            |   | **1****st****Quarter**                                        |   | **2nd  Quarter** |   | **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 restructuring planwas completed during the second quarter of fiscal 2002.

 

12

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**Asset RealignmentRestructuring**

** **

During the second quarterof fiscal 2001, the Company’s Cabin Management Group adopted a restructuringplan to realign production programs between its manufacturing facilities.  In response to the adverse impact on theaerospace industry resulting from the September 11th terroristattack and its aftermath, as well as the weakening of global economicconditions, the Company announced and implemented a further restructuring planin December 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  Due to the ongoing weaknessof the business, VIP and head-of-state aircraft market, the Company decidedduring the second quarter of fiscal 2002 to permanently close the temporarilyidled manufacturing facility.  Therestructuring, asset impairment and other related charges recorded duringfiscal 2002 were comprised of the following:

 

•                  *Impairment of Long-Lived Assets.* The decision to permanently close the additional manufacturing facilityresulted in an additional impairment of property and equipment and,accordingly, these assets were written down to their estimated net realizablevalue in 2002.  Net realizable valuesare based on estimated current market values and the actual losses could exceedthese estimates.

 

•                  *Excess Inventory Write-Downs. *Inventory was written down to net realizable value forquantities on hand exceeding current and forecast order backlog requirements.

 

•                  *Other Asset ImpairmentRelated Charges.*  Other expenses pertain to provisions forestimated losses on uncompleted long-term contracts aggregating $2,577,000 andother related charges expensed as incurred.

 

The components of theamounts incurred were as follows:

 
|                                 |   | **Charges Recorded During the  Year Ended December 31, 2002** |   |
|--------------------------------------|--------|---------------------------------------------------------------|--------|
| **(In thousands)**                   |   | **2nd  Quarter**                                              |   | **3****rd****& 4th  Quarters** |   | **Total** |   |
|                                 |   | **(Unaudited)**                                               |   |   |   |
| Impairment of long-lived assets      |   | $                                                             | 1,756  |   | $ | 801 |   | $ | 2,557 |   |
| Excess inventory write-downs         |   | 580                                                           |   | 685 |   | 1,265 |   |
| Other restructuring-related expenses |   | 3,079                                                         |   | — |   | 3,079 |   |
| Total pre-tax charges                |   | $                                                             | 5,415  |   | $ | 1,486 |   | $ | 6,901 |   |

 

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

 

**Goodwill Impairment Charges**

 

As a result of thecontinuing weakness in the business, VIP and head-of-state aircraft market andthe decision to down-size a furniture manufacturing facility, the goodwillassociated with the furniture manufacturing reporting unit was tested forrecoverability and found to be impaired (Note 5).  As a result, $34,000,000 of goodwill associated with thereporting unit was written off and charged to operations.

 

As described in Note 2,on March 14, 2003, the Company entered into a definitive agreement to sell itsequity interests in the subsidiaries comprising its Specialty Avionics Groupfor $140,000,000 in cash.  Based uponthe fair value of the group implied in the definitive agreement, the Companydetermined that the carrying value of the group’s net assets was not fullyrecoverable.  As a result, the Companyrecorded a goodwill impairment charge of $7,500,000 during the three monthsended March 31, 2003 to reduce the carrying value to estimated netrealizable value.

 

13

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**Note4.**                                  Inventories

 

Inventories are comprisedof the following as of June 30, 2003 and December 31, 2002:

 
| **(In thousands)**                                                           |   | **June 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**         |   |                        |   |
| Raw materials                                                                |   | $                       | 31,470 |                        | $      | 28,911 |   |
| Work-in-process:                                                             |   |                    |   |                        |   |
| Direct and indirect  manufacturing costs                                     |   | 7,978                   |   | 6,843                       |   |
| Program costs, principally  engineering                                      |   | 12,746                  |   | 14,769                      |   |
| Finished goods                                                               |   | 1,392                   |   | 4,773                       |   |
| Costs and estimated  earnings in excess of billings on uncompleted contracts |   | 9,539                   |   | 4,004                       |   |
| Total inventories                                                            |   | $                       | 63,125 |                        | $      | 59,300 |   |

 

Periodic assessments areperformed to ensure recoverability of the program costs and adjustments aremade, if necessary, to reduce inventoried costs to estimated realizablevalue.  In connection with thecurtailment of several seating product offerings (Note 3), all inventoriedcosts related these programs, which aggregated $6,262,000, were charged to costof sales during the three months ended June 30, 2003.  In addition, $3,073,000 of excess and obsolete inventoryassociated with the curtailed seating product offerings and down-sizing of afurniture manufacturing facility was also charged to cost of sales during thethree months ended June 30, 2003.

 

Total costs and estimatedearnings on all uncompleted contracts as of June 30, 2003 andDecember 31, 2002 are comprised of the following:

 
| **(In thousands)**                                                            |   | **June 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                                          |   | **(Unaudited)**         |   |                        |   |
| Costs incurred on  uncompleted contracts                                      |   | $                       | 62,793 |                        | $      | 49,572 |   |
| Estimated earnings  recognized                                                |   | 83,133                  |   | 63,699                      |   |
| Total costs and estimated  earnings                                           |   | 145,926                 |   | 113,271                     |   |
| Less billings to date                                                         |   | (136,512                | )      | (109,880                    | )      |
| Net                                                                           |   | $                       | 9,414  |                        | $      | 3,391 |   |
|                                                                          |   |                    |   |                        |   |
| Balance sheet  classification:                                                |   |                    |   |                        |   |
| Asset – Costs and  estimated earnings in excess of billings              |   | $                       | 9,539  |                        | $      | 4,004 |   |
| Liability – Billings in  excess of costs and estimated earnings (Note 7) |   | (125                    | )      | (613                        | )      |
| Net                                                                           |   | $                       | 9,414  |                        | $      | 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 each contract.  Provisions for estimated losses onuncompleted contracts are made in the period in which such losses aredetermined.

 

14

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**Note5.**                                  Goodwill

** **

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 thetransitional impairment testing of goodwill recorded as of January 1, 2002 asrequired under SFAS No. 142.  Fair valueof each reporting unit was determined using a discounted cash flow approachtaking into consideration projections based on the individual characteristicsof the reporting units, historical trends, market multiples for comparablebusinesses and independent appraisals. Unallocated goodwill was allocated to the reporting units for impairmenttesting 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 of January 1,2002 as a cumulative effect of a change in accounting principle.  An additional $39,322,000 noncash write-downof goodwill pertained to the Specialty Avionics Group and is included in theloss from discontinued operations.

 

Changes in the carryingamount of goodwill, by business segment (Note 12), for the six months endedJune 30, 2003 are as follows:

 
|                                |   | **Continuing Operations**    |    | **Discontinued**                |   |
|-------------------------------------|--------|------------------------------|---------|---------------------------------|--------|
| **(In thousands)**                  |   | **Cabin  Management  Group** |    | **Systems  Integration  Group** |   | **Corporate** |   | **Total** |   | **Specialty  Avionics  Group** |   |
|                                |   |                         |    |                            |   |   |   |   |   |   |   |
| Balance, December 31, 2002          |   | $                            | 173,934 |                            | $      | 20,782 |   | $ | 1,714 |   | $ | 196,430 |   | $ | 80,722 |   |
| Impairment charges                  |   | (34,000                      | )       | —                          |   | — |   | (34,000 | ) | (7,500 | ) |
| Sale of Specialty Avionics  Group   |   | —                       |    | —                          |   | — |   | — |   | (73,222 | ) |
| Balance, June 30, 2003  (unaudited) |   | $                            | 139,934 |                            | $      | 20,782 |   | $ | 1,714 |   | $ | 162,430 |   | $ | — |   |

 

As described in Note 2,on March 14, 2003, the Company entered into a definitive agreement to sell itsequity interests in the subsidiaries comprising its Specialty AvionicsGroup.  Based upon the fair value of thegroup implied in the definitive agreement, the Company determined that thecarrying value of the group’s net assets was not fully recoverable.  As a result, the Company recorded a goodwillimpairment charge of $7,500,000 during the three months endedMarch 31, 2003 to reduce the carrying value to estimated net realizablevalue.

 

As required by SFAS No.142, the Company tests goodwill for impairment annually, on October 31stof each year, or when events or changes in circumstances indicate the carryingamount may not be recoverable.  Thegoodwill impairment model is a two-step process.  First, it requires a comparison of the book value of net assetsto the fair value of the related reporting units that have goodwill assigned tothem.  If the fair value is determinedto be less than book value, a second step is performed to compute the amount ofthe impairment.  In this process, a fairvalue for goodwill is estimated, based in part on the fair value of thereporting unit used in the first step, and is compared to its carryingvalue.  The amount by which carryingvalue exceeds fair value represents the amount of goodwill impairment.

 

15

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As a result of thecontinuing weakness in the business, VIP and head-of-state aircraft market andthe Company’s decision to down-size a furniture manufacturing facility in thesecond quarter of fiscal 2003, the Company determined that it should reevaluatethe carrying value of its goodwill prior to the annual October 31sttesting date.  Accordingly, the Companyperformed a step-one test of goodwill associated with its furnituremanufacturing reporting unit for recoverability and found the goodwill to beimpaired.  As a result, the Companyrecorded a pre-tax charge to operations of $34,000,000 during the three monthsended June 30, 2003 based on a comparison of the estimated book valueof the net assets of the reporting unit to its fair value.  The charge was primarily a result of adecrease in fair value caused by using lower cash flow forecasts based on themost recently reduced industry estimates of aircraft deliveries resulting fromoverall industry weakness.  The amountrecorded is an estimate and may be revised during the third quarter of fiscal2003 upon completion of step two of the goodwill impairment model, whichmeasures the amount of impairment.

 

**Note6.**                                  Other Assets

** **

Other assets are comprisedof the following as of June 30, 2003 and December 31, 2002:

 
| **(In thousands)**                                       |   | **June 30,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                     |   | **(Unaudited)**         |   |                        |   |
| Identifiable intangible  assets with finite useful lives |   | $                       | 27,281 |                        | $      | 29,105 |   |
| Deferred financing costs                                 |   | 7,793                   |   | 9,168                       |   |
| Other non-amortizable  assets                            |   | 1,036                   |   | 1,155                       |   |
| Total other assets                                       |   | $                       | 36,110 |                        | $      | 39,428 |   |

** **

**Identifiable Intangible Assets with Finite UsefulLives**

** **

Identifiable intangibleassets with finite useful lives are comprised of the following as ofJune 30, 2003 and December 31, 2002:

 
|                           |   | **June 30, 2003 (Unaudited)** |   | **December 31, 2002**    |   |
|--------------------------------|--------|------------------------------------|--------|-------------------------------|--------|
| **(In thousands)**             |   | **Cost**                           |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                           |   |                               |   |                          |   |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                                  | 22,272 |                          | $      | (7,636 | ) | $ | 14,636 |   | $ | 22,272 |   | $ | (4,738 | ) | $ | 17,534 |   |
| Customer contracts             |   | 8,390                              |   | (2,751                        | )      | 5,639 |   | 8,390 |   | (4,695 | ) | 3,695 |   |
| Engineering drawings           |   | 7,645                              |   | (2,436                        | )      | 5,209 |   | 7,645 |   | (1,776 | ) | 5,869 |   |
| Other identifiable intangibles |   | 2,955                              |   | (1,158                        | )      | 1,797 |   | 2,955 |   | (948 | ) | 2,007 |   |
| Total identifiable intangibles |   | $                                  | 41,262 |                          | $      | (13,981 | ) | $ | 27,281 |   | $ | 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.

 

16

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**Note7.**                                  Accrued Liabilities

 

Accrued liabilities arecomprised of the following as of June 30, 2003 and December 31, 2002:

 
| **(In thousands)**                                                           |   | **June 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**         |   |                        |   |
| Salaries, wages, compensated absences and payroll  related taxes             |   | $                       | 8,794  |                        | $      | 9,212 |   |
| Customer advances and deposits                                               |   | 2,103                   |   | 4,662                       |   |
| Accrued interest                                                             |   | 4,596                   |   | 7,465                       |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |   | 125                     |   | 613                         |   |
| Acquisition related contingent consideration                                 |   | —                  |   | 600                         |   |
| Other accrued liabilities                                                    |   | 5,027                   |   | 8,942                       |   |
| Total accrued liabilities                                                    |   | $                       | 20,645 |                        | $      | 31,494 |   |

 

**Note8.**                                  Long-Term Debt

 

Long-term debt includesthe following amounts as of June 30, 2003 and December 31, 2002:

 
| **(In thousands)**                                                                    |   | **June 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                  |   | **(Unaudited)**         |    |                        |   |
| Senior credit facility:                                                               |   |                    |    |                        |   |
| Term loans                                                                            |   | $                       | 134,925 |                        | $      | 264,200 |   |
| Revolving line of credit                                                              |   | 15,250                  |    | 6,000                       |   |
| 12% senior subordinated notes                                                         |   | 100,000                 |    | 100,000                     |   |
| Capital lease obligations and term debt financing,  secured by property and equipment |   | 9,682                   |    | 10,331                      |   |
| Other indebtedness                                                                    |   | —                  |    | 486                         |   |
| Total long-term debt                                                                  |   | 259,857                 |    | 381,017                     |   |
| Less current portion                                                                  |   | (8,485                  | )       | (16,317                     | )      |
| Long-term debt, less current portion                                                  |   | $                       | 251,372 |                        | $      | 364,700 |   |

 

During 2003, the Companyamended its senior credit facility to permit the sale of its Specialty AvionicsGroup.  Upon consummation of the sale onMay 23, 2003, the Company repaid $130,000,000 of senior credit borrowings withthe estimated net proceeds from the sale. The Company may be required to repay additional borrowings upon finaldetermination of the net proceeds from the sale.

 

The amendment alsorevised various financial covenants (which the Company would otherwise have notbeen able to meet), decreases by $10,000,000 the maximum permitted revolvingline of credit borrowings to $40,000,000, increases the prime rate and LIBORinterest margins by 1.5% and permits the issuance of specified types ofadditional indebtedness and the repurchase of up to $20,000,000 of theCompany’s 12% senior subordinated notes with the proceeds from the sale ofjunior securities.

 

17

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**Note9.**                                  Income Taxes

 

Thecomponents of income (loss) before income taxes and cumulative effect of changein accounting principle and the provisions for income tax benefit are asfollows:

 
|                                         |   | **Three Months Ended  June 30,** |    | **Six Months Ended********June 30,** |   |
|----------------------------------------------|--------|----------------------------------|---------|-------------------------------------------|--------|
|                                         |   |                             |    |
| **(In thousands)**                           |   | **2003**                         |    | **2002**                                  |   | **2003** |   | **2002** |   |
|                                         |   | **(Unaudited)**                  |    |
| Pre-tax income (loss)  reported by:          |   |                             |    |                                      |   |   |   |   |   |
| Continuing operations                        |   | $                                | (51,288 | )                                         | $      | (7,153 | ) | $ | (56,913 | ) | $ | (11,160 | ) |
| Discontinued operations                      |   | 402                              |    | 2,899                                     |   | (5,286 | ) | 6,233 |   |
| Consolidated pre-tax loss                    |   | $                                | (50,886 | )                                         | $      | (4,254 | ) | $ | (62,199 | ) | $ | (4,927 | ) |
|                                         |   |                             |    |                                      |   |   |   |   |   |
| Total provision for income  taxes (benefit): |   |                             |    |                                      |   |   |   |   |   |
| Income tax benefit based  on pre-tax loss    |   | $                                | (22,077 | )                                         | $      | (889 | ) | $ | (22,633 | ) | $ | (578 | ) |
| Net deferred tax assets  valuation allowance |   | 13,056                           |    | —                                    |   | 13,056 |   | — |   |
| Net income tax benefit                       |   | $                                | (9,021  | )                                         | $      | (889 | ) | $ | (9,577 | ) | $ | (578 | ) |
|                                         |   |                             |    |                                      |   |   |   |   |   |
| Allocation of total  provision:              |   |                             |    |                                      |   |   |   |   |   |
| Continuing operations                        |   | $                                | (9,365  | )                                         | $      | (2,050 | ) | $ | (10,630 | ) | $ | (3,191 | ) |
| Discontinued operations                      |   | 344                              |    | 1,161                                     |   | 1,053 |   | 2,613 |   |
| Net provision for income  tax benefit        |   | $                                | (9,021  | )                                         | $      | (889 | ) | $ | (9,577 | ) | $ | (578 | ) |

 

For the three months andsix months ended June 30, 2003 and 2002, the provision for income taxes,based on the reported consolidated pre-tax loss, differs from the amountdetermined by applying the applicable U.S. statutory federal rate to thepre-tax loss primarily due to the effects of state and foreign income taxes,the non-deductible portion of goodwill impairment charges and minority interestin preferred stock of subsidiary, which is not deductible for income taxpurposes.

 

As of June 30, 2003, theCompany had net deferred tax assets of $12,841,000, prior to recording thevaluation allowance in June 2003, as opposed to net deferred tax liabilities inprior periods.  The change to a netasset position was primarily caused by the $34,000,000 goodwill impairmentcharge recorded during the second quarter of fiscal 2003.  SFAS No. 109, “Accounting for Income Taxes,”requires the recognition of a deferred tax asset for the future income taxbenefit of the goodwill deductions that will be taken for income tax purposes(i.e. the goodwill that has been written off in the financial statements forbook purposes will continue to be amortized and deducted for tax purposes andaccordingly represents a new deferred tax asset).

 

As required by SFAS No.109, the Company evaluated its deferred assets for expected recoverabilitybased on the nature of the item, the associated taxing jurisdictions, the applicableexpiration dates and future taxable income forecasts that would impactutilization.  Since there is no losscarry back potential and the Company does not have any tax planning strategiesto assure recoverability, the only possibility for recovery of the net deferredassets is future taxable income.  Sincethere have been prior year losses, the Company believes it was not prudent torely on future income as the means to support the carrying value of the netassets.  As a result of the Company’sevaluation, it determined that recovery was not likely in certain taxingjurisdictions and applied its judgment in estimating the amount of valuationallowance necessary under the circumstances to reduce the assets carrying valueto realizable value.  Accordingly, theCompany recorded the $13,056,000 valuation allowance, eliminating the netdeferred asset, as of June 30, 2003.

 

18

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For periods prior to June30, 2003, the Company had net deferred tax liabilities ($9,002,000 as of March31, 2003 and $10,647,000 as of December 31, 2002).  The full realization of the deferred assets was achieved throughthe reversal of the deferred tax liabilities in future periods.  As a result, a valuation allowance was notrequired for periods prior to June 30, 2003.

 

Deferred tax assets andliabilities are comprised of the following as of June 30, 2003 andDecember 31, 2002:

** **
| **(In thousands)**                                            |   | **June 30,  2003** |   | **December 31,  2002** |   |
|---------------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                                          |   | **(Unaudited)**         |   |                        |   |
| Gross deferred tax assets:                                    |   |                    |   |                        |   |
| Loss carryforwards                                            |   | $                       | 14,768 |                        | $      | 12,173 |   |
| Accrued liabilities                                           |   | 7,081                   |   | 6,797                       |   |
| Inventory                                                     |   | 3,389                   |   | 4,252                       |   |
| Other                                                         |   | 848                     |   | 832                         |   |
| Gross deferred tax assets                                     |   | 26,086                  |   | 24,054                      |   |
|                                                          |   |                    |   |                        |   |
| Gross deferred tax (liabilities):                             |   |                    |   |                        |   |
| Intangible assets                                             |   | (9,300                  | )      | l4(31,267                   | )      |
| Program costs                                                 |   | (3,707                  | )      | (6,168                      | )      |
| Property and equipment                                        |   | (238                    | )      | (3,119                      | )      |
| Other                                                         |   | —                  |   | (56                         | )      |
| Gross deferred tax (liabilities)                              |   | (13,245                 | )      | (40,610                     | )      |
|                                                          |   |                    |   |                        |   |
| Net deferred assets (liabilities) before valuation  allowance |   | 12,841                  |   | (16,556                     | )      |
| Net deferred tax asset valuation allowance                    |   | (13,056                 | )      | —                      |   |
| Net deferred tax liability                                    |   | $                       | (215   | )                           | $      | (16,556 | ) |
|                                                          |   |                    |   |                        |   |
| Balance sheet classification:                                 |   |                    |   |                        |   |
| Continuing operations:                                        |   |                    |   |                        |   |
| Current deferred tax asset                                    |   | $                       | 172    |                        | $      | 16,430 |   |
| Noncurrent deferred tax (liability)                           |   | (387                    | )      | (27,077                     | )      |
| Net continuing operations                                     |   | (215                    | )      | (10,647                     | )      |
|                                                          |   |                    |   |                        |   |
| Discontinued operations:                                      |   |                    |   |                        |   |
| Current deferred tax asset                                    |   | —                  |   | 6,201                       |   |
| Noncurrent deferred tax (liability)                           |   | —                  |   | (12,110                     | )      |
| Net discontinued operations                                   |   | —                  |   | (5,909                      | )      |
| Net deferred tax (liability)                                  |   | $                       | (215   | )                           | $      | (16,556 | ) |

 

19

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**Note10.**                           Capital Structure

** **

**Mandatorily Redeemable Preferred Stock**

 

The table belowsummarizes the increase in mandatorily redeemable preferred stock during thesix months ended June 30, 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             |   | 30,206                                    |   | 3,020                                       |   | 234 |   | 3,254 |   | — |   | — |   |
| Noncash dividend accretion                                   |   | —                                    |   | —                                      |   | — |   | — |   | — |   | 4,432 |   |
| Balance, June 30, 2003 (Unaudited)                           |   | 400,267                                   |   | $                                           | 40,026 |   | $ | (2,691 | ) | $ | 37,335 |   | 342,417 |   | $ | 66,654 |   |
|                                                         |   |                                      |   |                                        |   |   |   |   |   |   |   |   |   |
| Per share liquidation value as of June 30, 2003  (Unaudited) |   |                                      |   | $                                           | 100.00 |   |   |   |   |   |   |   | $ | 194.66 |   |

 

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

** **

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

 

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

** **

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

 

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

 

**Note11.**                           Commitments and 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 thiscatastrophic incident.  On March 27,2003, the CTSB released its final report on its investigation.  This report indicated that the CTSB wasunable to conclusively determine the cause of the fire which led to the crashof the aircraft.

 

20

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Litigation (Continued)TheCompany was a defendant in most, but not all, of the actions brought by theestates of the 229 victims of the crash. The actions, which sought damages and costs in unstated amounts, claimednegligence, strict liability, and breach of warranty.  Virtually all of the cases have been settled by Boeing andSwissair’s insurers and both assignment of the claims against, and releases infavor 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 administrativeproceedings incident to the normal conduct of business.  Management believes the ultimate dispositionof all such matters will not have a material adverse effect on the Company’sbusiness, consolidated financial position, results of operations or cash flows.

 

**Note12.**                           Business Segment Information

 

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 interior cabin components,including cabin interior furnishings, cabin management systems, seating andcomposite components;

 

•                  *Systems Integration –* manufactures auxiliary fuel systems andauxiliary power units, provides system integration services, provides aircraftcompletion and refurbishment services and is a Boeing Business Jet authorizedservice 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.

 

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 options grantedand the acceleration of stock option vesting pursuant to the Company’sincentive stock option plan.

 

21

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Management definesAdjusted EBITDA as 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.  Management believes the presentation of thismeasure is relevant and useful to investors because it allows investors andanalysts to view group performance in a manner similar to the method used bymanagement, helps improve their ability to understand the Company’s coresegment performance, adjusted for items management believes are unusual, andmakes it easier to compare the Company’s results with other companies that havedifferent 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 the Company’sfinancial statements which are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).  However, the Company’s presentation ofAdjusted EBITDA 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 arerecorded at the Company’s corporate headquarters and are not allocated to thegroups, such as most of the Company’s cash and cash equivalents, debt and relatednet interest expense, corporate headquarters costs and income taxes.

 

The tables belowsummarize selected financial data by business segment.

 
|                           |   | **Three Months Ended  June 30,** |   | **Six Months Ended********June 30,** |   |
|--------------------------------|--------|----------------------------------|--------|-------------------------------------------|--------|
|                           |   |                             |   |
| **(In thousands)**             |   | **2003**                         |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                           |   | **(Unaudited)**                  |   |
| Revenues:                      |   |                             |   |                                      |   |   |   |   |   |
| Cabin Management               |   | $                                | 29,635 |                                      | $      | 48,232 |   | $ | 60,255 |   | $ | 94,099 |   |
| Systems Integration            |   | 14,718                           |   | 13,223                                    |   | 26,850 |   | 28,300 |   |
| Inter-group elimination  (1)   |   | (240                             | )      | (162                                      | )      | (1,092 | ) | (287 | ) |
| Consolidated totals            |   | $                                | 44,113 |                                      | $      | 61,293 |   | $ | 86,013 |   | $ | 122,112 |   |
|                           |   |                             |   |                                      |   |   |   |   |   |
| Adjusted EBITDA (as  defined): |   |                             |   |                                      |   |   |   |   |   |
| Cabin Management               |   | $                                | 4,310  |                                      | $      | 9,042 |   | $ | 8,860 |   | $ | 16,503 |   |
| Systems Integration            |   | 4,180                            |   | 4,096                                     |   | 6,337 |   | 8,392 |   |
| Corporate (2)                  |   | (1,395                           | )      | (1,629                                    | )      | (3,507 | ) | (3,187 | ) |
| Inter-group elimination  (3)   |   | 2                                |   | (111                                      | )      | 112 |   | — |   |
| Consolidated totals (4)        |   | $                                | 7,097  |                                      | $      | 11,398 |   | $ | 11,802 |   | $ | 21,708 |   |

 

22

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| **(In thousands)**                            |   | **June 30,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                          |   | **(Unaudited)**         |    |                        |   |
| Total assets (as of period  end):             |   |                    |    |                        |   |
| Cabin Management                              |   | $                       | 236,941 |                        | $      | 281,655 |   |
| Systems Integration                           |   | 69,049                  |    | 62,437                      |   |
| Corporate (5)                                 |   | 17,091                  |    | 44,247                      |   |
| Inter-group elimination  (6)                  |   | (435                    | )       | (113                        | )      |
| Continuing operations                         |   | 322,646                 |    | 388,226                     |   |
| Discontinued operations  (Specialty Avionics) |   | —                  |    | 160,741                     |   |
| Consolidated totals                           |   | $                       | 322,646 |                        | $      | 548,967 |   |

 

----

(1)                      Inter-group sales are accounted for atprices comparable to sales to unaffiliated customers, and are eliminated inconsolidation.

 

(2)                      Reflects the Company’s corporateheadquarters costs and expenses not allocated to the groups.

 

(3)                      Reflects elimination of the effect ofinter-group profits in inventory.

 

(4)                      The table below reconciles the financialmeasure Adjusted EBITDA, as defined, to net loss.

 
|                                                       |   | **Three Months Ended  June 30,** |    | **Six Months Ended********June 30,** |   |
|------------------------------------------------------------|--------|----------------------------------|---------|-------------------------------------------|--------|
|                                                       |   |                             |    |
| **(In thousands)**                                         |   | **2003**                         |    | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                       |   | **(Unaudited)**                  |    |
| Consolidated Adjusted  EBITDA (as defined)                 |   | $                                | 7,097   |                                      | $      | 11,398 |   | $ | 11,802 |   | $ | 21,708 |   |
| Restructuring, asset  impairment and other related charges |   | (47,394                          | )       | (7,666                                    | )      | (47,394 | ) | (11,709 | ) |
| Depreciation and  amortization of long-lived assets (a)    |   | (2,451                           | )       | (2,680                                    | )      | (4,967 | ) | (5,447 | ) |
| Acquisition related  charges not capitalized               |   | (8                               | )       | (468                                      | )      | (17 | ) | (478 | ) |
| Other noncash charges                                      |   | —                           |    | (84                                       | )      | — |   | (138 | ) |
| Interest expense                                           |   | (6,468                           | )       | (6,134                                    | )      | (12,337 | ) | (12,082 | ) |
| Minority interest in  preferred stock of subsidiary        |   | (1,657                           | )       | (1,433                                    | )      | (3,254 | ) | (2,815 | ) |
| Other expenses, net                                        |   | (407                             | )       | (86                                       | )      | (746 | ) | (199 | ) |
| Income tax benefit                                         |   | 9,365                            |    | 2,050                                     |   | 10,630 |   | 3,191 |   |
| Income (loss) from  discontinued operations                |   | 747                              |    | 1,738                                     |   | (5,650 | ) | (35,702 | ) |
| Cumulative effect of  change in accounting principle       |   | —                           |    | —                                    |   | — |   | (17,828 | ) |
| Net loss                                                   |   | $                                | (41,176 | )                                         | $      | (3,365 | ) | $ | (51,933 | ) | $ | (61,499 | ) |

 

----

(a)          Reflects depreciation and amortization of long-livedassets and amortization of deferred financing costs, which are classified as acomponent of interest expense, as follows:

 

23

----

 
|                                                |   | **Three Months Ended  June 30,** |   | **Six Months Ended********June 30,** |   |
|-----------------------------------------------------|--------|----------------------------------|--------|-------------------------------------------|--------|
|                                                |   |                             |   |
| **(In thousands)**                                  |   | **2003**                         |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                |   | **(Unaudited)**                  |   |
| Depreciation and  amortization of long-lived assets |   | $                                | 2,451  |                                      | $      | 2,680 |   | $ | 4,967 |   | $ | 5,447 |   |
| Amortization of deferred  financing costs           |   | 680                              |   | 707                                       |   | 1,375 |   | 1,296 |   |
| Consolidated depreciation  and amortization         |   | $                                | 3,131  |                                      | $      | 3,387 |   | $ | 6,342 |   | $ | 6,743 |   |

 

----

(5)                      Reflects the Company’s corporateheadquarters assets, excluding investments in and notes receivable fromsubsidiaries.

 

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

 

**Note13.**                           Supplemental Condensed ConsolidatingFinancial Information

 

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 in subsidiaries.

 

(2)          Elimination of intercompany accounts.

 

(3)          Elimination of equity in earnings of subsidiaries.

 

24

----

 

**Balance Sheets**

** **
|                                                                                               |   | **June 30, 2003 (Unaudited)** |    |
|----------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|
| **(In  thousands)**                                                                                |   | **Issuer**                    |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                                         |   |                          |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                    |   |                          |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |   | $                             | 3,571   |   | $ | 102 |   | $ | — |   | $ | — |   | $ | 3,673 |   |
| Accounts receivable, net                                                                           |   | —                        |    | 20,726 |   | — |   | — |   | 20,726 |   |
| Inventories                                                                                        |   | —                        |    | 63,125 |   | — |   | — |   | 63,125 |   |
| Other current assets                                                                               |   | 1,190                         |    | 591 |   | — |   | — |   | 1,781 |   |
| Total current assets                                                                               |   | 4,761                         |    | 84,544 |   | — |   | — |   | 89,305 |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                        |   | 2,105                         |    | 32,696 |   | — |   | — |   | 34,801 |   |
| Goodwill                                                                                           |   | 10,224                        |    | 152,206 |   |   |   |   |   | 162,430 |   |
| Other assets, principally intangibles, net                                                         |   | —                        |    | 36,110 |   | — |   | — |   | 36,110 |   |
| Investments in subsidiaries                                                                        |   | 289,218                       |    | — |   | (16,695 | ) | (272,523 | )(1) | — |   |
| Intercompany receivables                                                                           |   | 56,259                        |    | 74,846 |   | — |   | (131,105 | )(2) | — |   |
| Total assets                                                                                       |   | $                             | 362,567 |   | $ | 380,402 |   | $ | (16,695 | ) | $ | (403,628 | ) | $ | 322,646 |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**   |   |                          |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                  |   | $                             | 7,336   |   | $ | 1,149 |   | $ | — |   | $ | — |   | $ | 8,485 |   |
| Other current liabilities                                                                          |   | 10,477                        |    | 20,164 |   | — |   | — |   | 30,641 |   |
| Total current liabilities                                                                          |   | 17,813                        |    | 21,313 |   | — |   | — |   | 39,126 |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                               |   | 242,936                       |    | 8,436 |   | — |   | — |   | 251,372 |   |
| Intercompany payables                                                                              |   | 74,846                        |    | 56,259 |   | — |   | (131,105 | )(2) | — |   |
| Other long-term liabilities                                                                        |   | 6,332                         |    | 5,540 |   | — |   | — |   | 11,872 |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                                 |   | 37,335                        |    | — |   | — |   | — |   | 37,335 |   |
| Mandatorily redeemable 14% preferred stock                                                         |   | —                        |    | — |   | 66,654 |   | — |   | 66,654 |   |
|                                                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity (deficit):                                                               |   |                          |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                    |   | 115,293                       |    | 337,592 |   | 65,069 |   | (452,885 | )(1) | 65,069 |   |
| Retained earnings deficit                                                                          |   | (131,988                      | )       | (48,374 | ) | (148,418 | ) | 180,362 | (1) | (148,418 | ) |
| Accumulated other comprehensive loss                                                               |   | —                        |    | (364 | ) | — |   | — |   | (364 | ) |
| Total stockholders’ equity (deficit)                                                          |   | (16,695                       | )       | 288,854 |   | (83,349 | ) | (272,523 | ) | (83,713 | ) |
| Total liabilities, mandatorily redeemable preferred  stock and stockholders’ equity (deficit) |   | $                             | 362,567 |   | $ | 380,402 |   | $ | (16,695 | ) | $ | (403,628 | ) | $ | 322,646 |   |

 

25

----

 
|                                                                                               |   | **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 |   |

 

26

----

 

**Statements of Operations**

** **
|                                                |   | **Six Months Ended June 30, 2003 (Unaudited)** |    |
|-----------------------------------------------------|--------|------------------------------------------------|---------|
| **(In thousands)**                                  |   | **Issuer**                                     |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                              | —  |   | $ | 86,013 |   | $ | — |   | $ | — |   | $ | 86,013 |   |
| Cost of sales                                       |   | —                                         |    | 76,286 |   | — |   | — |   | 76,286 |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                         |    | 9,727 |   | — |   | — |   | 9,727 |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses        |   | 4,904                                          |    | 9,573 |   | — |   | — |   | 14,477 |   |
| Impairment of goodwill                              |   | —                                         |    | 34,000 |   | — |   | — |   | 34,000 |   |
| Amortization of intangible assets                   |   | —                                         |    | 1,826 |   | — |   | — |   | 1,826 |   |
| Interest expense                                    |   | 12,116                                         |    | 221 |   | — |   | — |   | 12,337 |   |
| Minority interest in preferred stock of subsidiary  |   | —                                         |    | — |   | 3,254 |   | — |   | 3,254 |   |
| Intercompany charges                                |   | (11,575                                        | )       | 11,575 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                      |   | 34,615                                         |    | 218 |   | 48,679 |   | (83,512 | )(3) | — |   |
| Other expenses, net                                 |   | 586                                            |    | 160 |   | — |   | — |   | 746 |   |
| Provision for income taxes (benefit)                |   | 8,033                                          |    | (18,663 | ) | — |   | — |   | (10,630 | ) |
| Loss from discontinued operations                   |   | —                                         |    | 5,432 |   | 218 |   | — |   | 5,650 |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Net loss                                            |   | $                                              | (48,679 | ) | $ | (34,615 | ) | $ | (52,151 | ) | $ | 83,512 |   | $ | (51,933 | ) |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
|                                                |   | **Six Months Ended June 30, 2002 (Unaudited)** |    |
| **(In thousands)**                                  |   | **Issuer**                                     |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                              | —  |   | $ | 122,112 |   | $ | — |   | $ | — |   | $ | 122,112 |   |
| Cost of sales                                       |   | —                                         |    | 92,212 |   | — |   | — |   | 92,212 |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                         |    | 29,900 |   | — |   | — |   | 29,900 |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses        |   | 5,788                                          |    | 18,459 |   | — |   | — |   | 24,247 |   |
| Amortization of intangible assets                   |   | —                                         |    | 1,717 |   | — |   | — |   | 1,717 |   |
| Interest expense                                    |   | 12,008                                         |    | 74 |   | — |   | — |   | 12,082 |   |
| Minority interest in preferred stock of subsidiary  |   | —                                         |    | — |   | 2,815 |   | — |   | 2,815 |   |
| Intercompany charges                                |   | (14,310                                        | )       | 14,310 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                      |   | 54,287                                         |    | 9,510 |   | 58,684 |   | (122,481 | )(3) | — |   |
| Other expenses, net                                 |   | 174                                            |    | 25 |   | — |   | — |   | 199 |   |
| Provision for income tax benefit                    |   | (747                                           | )       | (2,444 | ) | — |   | — |   | (3,191 | ) |
| Loss from discontinued operations                   |   | —                                         |    | 26,192 |   | 9,510 |   | — |   | 35,702 |   |
| Cumulative effect of change in accounting principle |   | 1,484                                          |    | 16,344 |   | — |   | — |   | 17,828 |   |
|                                                |   |                                           |    |   |   |   |   |   |   |   |   |
| Net loss                                            |   | $                                              | (58,684 | ) | $ | (54,287 | ) | $ | (71,009 | ) | $ | 122,481 |   | $ | (61,499 | ) |

 

27

----

 

**Statements of Cash Flows**

** **
|                                                         |   | **Six Months Ended June 30, 2003 (Unaudited)** |    |
|--------------------------------------------------------------|--------|------------------------------------------------|---------|
| **(In thousands)**                                           |   | **Issuer**                                     |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**                   |   |                                           |    |   |   |   |   |   |   |   |   |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Net loss                                                     |   | $                                              | (48,679 | ) | $ | (34,615 | ) | $ | (52,151 | ) | $ | 83,512 | (3) | $ | (51,933 | ) |
| Loss from discontinued operations                            |   | —                                         |    | 5,432 |   | 218 |   | — |   | 5,650 |   |
| Noncash adjustments:                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                               |   | 34,615                                         |    | 218 |   | 48,679 |   | (83,512 | )(3) | — |   |
| Other noncash adjustments                                    |   | (21,973                                        | )       | 61,060 |   | 3,254 |   | — |   | 42,341 |   |
| Changes in working capital                                   |   | 15,765                                         |    | (31,765 | ) | — |   | — |   | (16,000 | ) |
| Net cash used for operating activities                       |   | (20,272                                        | )       | 330 |   | — |   | — |   | (19,942 | ) |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**                   |   |                                           |    |   |   |   |   |   |   |   |   |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Net proceeds from sale of Specialty Avionics Group           |   | 132,800                                        |    | — |   | — |   | — |   | 132,800 |   |
| Capital expenditures                                         |   | (26                                            | )       | (1,976 | ) | — |   | — |   | (2,002 | ) |
| Cash paid for acquisitions                                   |   | (600                                           | )       | — |   | — |   | — |   | (600 | ) |
| Net cash provided by (used for) investing activities         |   | 132,174                                        |    | (1,976 | ) | — |   | — |   | 130,198 |   |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**                    |   |                                           |    |   |   |   |   |   |   |   |   |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Principal payments on long-term debt, leases and  other debt |   | (129,924                                       | )       | (524 | ) | — |   | — |   | (130,448 | ) |
| Net senior revolving credit facility borrowings              |   | 9,250                                          |    | — |   | — |   | — |   | 9,250 |   |
| Net cash used for financing activities                       |   | (120,674                                       | )       | (524 | ) | — |   | — |   | (121,198 | ) |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued operations                 |   | —                                         |    | 2,194 |   | — |   | — |   | 2,194 |   |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and equivalents              |   | (8,772                                         | )       | 24 |   | — |   | — |   | (8,748 | ) |
| Cash and equivalents at beginning of period                  |   | 12,343                                         |    | 78 |   | — |   | — |   | 12,421 |   |
|                                                         |   |                                           |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                        |   | $                                              | 3,571   |   | $ | 102 |   | $ | — |   | $ | — |   | $ | 3,673 |   |

 

28

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|                                                 |   | **Six Months Ended June 30, 2002 (Unaudited)** |    |
|------------------------------------------------------|--------|------------------------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                                     |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**           |   |                                           |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                              | (58,684 | ) | $ | (54,287 | ) | $ | (71,009 | ) | $ | 122,481 | (3) | $ | (61,499 | ) |
| Loss from discontinued operations                    |   | —                                         |    | 26,192 |   | 9,510 |   | — |   | 35,702 |   |
| Noncash adjustments:                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                       |   | 54,287                                         |    | 9,510 |   | 58,684 |   | (122,481 | )(3) | — |   |
| Other noncash adjustments                            |   | 2,318                                          |    | 27,367 |   | 2,815 |   | — |   | 32,500 |   |
| Changes in working capital                           |   | 3,664                                          |    | (14,217 | ) | — |   | — |   | (10,553 | ) |
| Net cash provided by (used for) operating activities |   | 1,585                                          |    | (5,435 | ) | — |   | — |   | (3,850 | ) |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**           |   |                                           |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions                           |   | (5,890                                         | )       | — |   | — |   | — |   | (5,890 | ) |
| Capital expenditures                                 |   | (46                                            | )       | (1,978 | ) | — |   | — |   | (2,024 | ) |
| Net cash used for investing activities               |   | (5,936                                         | )       | (1,978 | ) | — |   | — |   | (7,914 | ) |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities:**           |   |                                           |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| Net senior revolving credit facility borrowings      |   | 8,000                                          |    | — |   | — |   | — |   | 8,000 |   |
| Principal payments on long-term debt and leases      |   | (2,863                                         | )       | (1,623 | ) | — |   | — |   | (4,486 | ) |
| Deferred financing costs                             |   | (1,663                                         | )       | — |   | — |   | — |   | (1,663 | ) |
| Other, net                                           |   | (268                                           | )       | 545 |   | — |   | — |   | 277 |   |
| Net cash provided by (used for) financing activities |   | 3,206                                          |    | (1,078 | ) | — |   | — |   | 2,128 |   |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued operations         |   | —                                         |    | 8,747 |   | — |   | — |   | 8,747 |   |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and equivalents      |   | (1,145                                         | )       | 256 |   | — |   | — |   | (889 | ) |
| Cash and equivalents at beginning of period          |   | 9,641                                          |    | (163 | ) | — |   | — |   | 9,478 |   |
|                                                 |   |                                           |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                |   | $                                              | 8,496   |   | $ | 93 |   | $ | — |   | $ | — |   | $ | 8,589 |   |

 

29

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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.

** **

**Recent Developments**

 

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 andForm 10-Q for the three months ended March 31, 2003, our failure toconsummate the sale of the Specialty Avionics Group by June 30, 2003 would havebeen an event of default under the amended senior credit facility.  As a result, our independent accountantsqualified their report on our audited financial statements for the year endedDecember 31, 2002 with respect to our ability to continue as a goingconcern.  Consummation of the sale andrepayment 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 Overview and 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.  Weak global economicconditions, which were exacerbated by the September 11, 2001 terrorist attackon the United States, ongoing concerns about global terrorism, the current MiddleEastern military conflicts and the Severe Acute Respiratory Syndrome, or SARS,epidemic are all adversely impacting the aerospace industry and have led to adecrease in demand for business, VIP and head-of-state aircraft.  In response to certain of these adverseconditions, we have announced and implemented a series of restructuringactivities designed to reduce expenses and conserve working capital.  See “—Restructuring, Asset Impairment andOther Related Charges” below for additional 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 commercial aircraft portion of our business, which subsequent to thesale of the Specialty Avionics Group accounts for less than 5% of consolidatedrevenues, also experienced significant weakness in 2002 and the first half of2003 and we believe this condition will continue through 2003 and into 2004,with potential recovery not expected to occur until at least 2005.  Our beliefs are based on the assumptionsthat 

 

30

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we will experienceeconomic recovery and there are no further negative geo-political developmentsaffecting our industry.

** **

**Results of Operations**

 

### **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 operations includes discussions offinancial measures determined in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) as well as thefinancial measure Adjusted EBITDA, which excludes certain charges reflected inour GAAP basis financial statements. Our presentation of Adjusted EBITDA is in accordance with the GAAPrequirements of SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” which requires us to report the primary measure ofsegment performance we use to evaluate and manage our businesses.

 

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 financialmeasure.  Adjusted EBITDA should not beviewed as substitutes for or superior to net income (loss), cash flow fromoperations or other 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 should be read in conjunction with thediscussions presented herein.  The notesto our financial statements also include a reconciliation of Adjusted EBITDA tonet income (loss) to clarify the differences between these financial measures.

 

31

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**Bookings and Backlog.** Bookings and backlog are operating statistics we use as leading trendindicators of future demand for our products and services.  Bookings and backlog are based upon thevalue of purchase orders received from our customers, which will result inrevenues, 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 Months EndedJune 30**,2003 Compared to Three Months Ended June 30, 2002

 

Our results of operationshave been affected by restructuring, asset impairment and other related chargesrelating to a series of restructuring activities 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.* ***Revenues decreased $17.2 million, or 28.1%, to $44.1million for the three months ended June 30, 2003 from $61.3 million for thethree months ended June 30, 2002.  Bysegment, revenues changed as follows:

** **
|                    |   | **Increase (Decrease)  From 2002** |   |
|-------------------------|--------|------------------------------------|--------|
|                    |   |                               |
| **(In millions)**       |   | **Amount**                         |   | **Percent** |   |
|                    |   |                               |   |   |   |
| Cabin Management        |   | $                                  | (18.6  | ) | (38.6 | )% |
| Systems Integration     |   | 1.5                                |   | 11.3 |   |
| Inter-group elimination |   | (0.1                               | )      |   |   |
| Total                   |   | $                                  | (17.2  | ) |   |   |

 

*CabinManagement. *Revenues decreased by $18.6 million, or38.6% compared to the prior year.  Thedecrease, which is across substantially all of our product and servicescategories, is caused by the ongoing adverse impact of weak global economicconditions which reduces the affordability of business, VIP and head-of-stateaircraft and therefore demand for the products and services we provide.  The 2003 decrease consists of:

 

•                  a $18.0 million decrease in aircraftfurniture and related products revenues;

 

•                  a $1.2 million decrease in cabinmanagement and entertainment systems revenues; and

 

•                  a $0.2 million decrease in seatingproducts revenues; offset by,

 

•                  a $0.8 million increase in other productand services revenues.

 

Therevenue decrease was caused by lower order volume from our customers as opposedto a loss of customers or price reductions. The decrease in order volume is attributable to weak global economicconditions and the impact these conditions are having on manufacturers ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide to them.  Weakglobal economic conditions have reduced the amount of discretionary incomeavailable to purchase and operate these types of aircraft.  As a result, the manufacturers of theseaircraft have experienced a decrease in orders for new aircraft which, in turn,reduces the orders our customers place with us.

 

Revenuesfrom Textron and Bombardier, our principal customers, decreased $14.1 millioncompared to the prior year as a result of the decrease in orders and resultinglower production of aircraft they are experiencing due to the economicdownturn.  Both companies temporarilysuspended production

 

32

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of various models of aircraft for several weeks duringfiscal 2003 in response to their low order backlog resulting from the weakdemand for new aircraft.  We also expecta further decline in revenues from Textron during the third quarter of fiscal2003 as a result of their additional planned shut downs.  We also experienced similar volume decreasesfrom our other customers during the period.

 

*SystemsIntegration.*  Revenues increased by $1.5 million, or 11.3%compared to the prior year, due to:

 

•                  a $2.1 million increase resulting fromrevenue recognized pursuant to the “take-or-pay” provisions of a major supplycontract; offset by,

 

•                  a $0.6 million decrease in the commercialaircraft systems integration engineering services provided in the aftermath ofSeptember 11th and resulting down-turn in the commercial airlineindustry; the airline industry’s corresponding reduction in the size of itsoperating fleet and the delay or postponement of retrofit and refurbishmentprograms for the remaining operational fleet reduced demand for our integrationand engineering services.

 

**Gross profit. **Gross profitdecreased $14.8 million to a loss of $1.3 million for the three months endedJune 30, 2003 from $13.5 million for the same period last year.  By segment, gross profit changed as follows:

 
|                |   | **Increase (Decrease)****From 2002** |   |
|---------------------|--------|--------------------------------------|--------|
|                |   |                                 |
| **(In millions)**   |   | **Amount**                           |   | **Percent** |   |
|                |   |                                 |   |   |   |
| Cabin Management    |   | $                                    | (13.8  | ) | (182.5 | )% |
| Systems Integration |   | (1.0                                 | )      | (17.7 | ) |
| Total               |   | $                                    | (14.8  | ) |   |   |

* *

*CabinManagement.*  Gross profit decreased by $13.8 million, or182.5% compared to the prior year, primarily due to:

 

•                  a $5.9 million decrease in profit marginsdue to lower volume for our business, VIP and head-of-state aircraft furnitureand seating products; and

 

•                  a $0.6 million decrease in gross profitrelated to lower volume for our cabin management and entertainment systems; and

 

•                  a $8.1 million decrease caused byrestructuring charges incurred in 2003 as compared to those recorded in 2002related to the consolidation of our seating and related manufacturingoperations; offset by

 

•                  a $0.8 million increase in revenues forother products and services.

 

*SystemsIntegration.*  Gross profit decreased by $1.0 million, or17.7% compared to the prior year, primarily as a result of unfavorable overheadabsorption caused by lower production volume and a change in product deliverymix.

** **

**Selling,general and administrative expenses.**  Selling,general and administrative expenses decreased $5.5 million, or 45.4%, to $6.6million for the three months ended June 30, 2003, from $12.1 million for thesame period last year.  By segment,SG&A expenses changed as follows:

 

33

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|                |   | **Increase (Decrease)****From 2002** |   |
|---------------------|--------|--------------------------------------|--------|
|                |   |                                 |
| **(In millions)**   |   | **Amount**                           |   | **Percent** |   |
|                |   |                                 |   |   |   |
| Cabin Management    |   | $                                    | (4.0   | ) | (49.5 | )% |
| Systems Integration |   | (1.2                                 | )      | (56.7 | ) |
| Corporate           |   | (0.3                                 | )      |   |   |
| Total               |   | $                                    | (5.5   | ) |   |   |

 

*CabinManagement. *SG&A expenses decreased by $4.0million, or 49.5% compared to the prior year, due to:

 

•                  a $2.4 million reduction resulting fromrestructuring charges recorded in 2003 as compared to those recorded in 2002related to the consolidation of our seating and related manufacturingoperations; and

 

•                  a $1.6 million decrease in expensesresulting from cost reduction measures implemented in response to lower salesvolume resulting from the weak global economic conditions.

 

*Systems Integration. *SG&Aexpenses decreased by $1.2 million, or 56.7% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductions in2003.

** **

**Impairment of goodwill. **During the three months ended June 30, 2003, a $34.0million charge was recorded to reflect the additional impairment of goodwill inconnection with the impairment testing provision of SFAS No. 142, “Goodwill andOther Intangible Assets.”  Theadditional impairment results from continued weak global economic conditionswhich reduces the affordability of business, VIP and head-of-state aircraft andtherefore demand for the products and services we provide.  The impairment charge pertains to ourfurniture manufacturing reporting unit within our Cabin Management Group.  See “—Goodwill Impairment Charges” below foradditional information.

** **

**Depreciationand amortization of intangibles.**  Depreciationand amortization expense decreased $0.2 million to $2.5 million for the threemonths ended June 30, 2003 from $2.7 million for the same period last year,primarily resulting from reduced capital expenditures and a lower depreciablebase resulting from impairment charges recorded during 2002 as follows:

** **
|                                        |   | **Increase (Decrease)  From 2002** |   |
|---------------------------------------------|--------|------------------------------------|--------|
| **(In millions)**                           |   | **Amount**                         |   | **Percent** |   |
|                                        |   |                               |   |   |   |
| Depreciation charged to:                    |   |                               |   |   |   |
| Cost of sales                               |   | $                                  | (0.1   | ) | (8.1 | )% |
| Selling, general and administrative expense |   | (0.2                               | )      | (25.1 | ) |
| Amortization of intangible assets           |   | 0.1                                |   | 8.2 |   |
| Total                                       |   | $                                  | (0.2   | ) |   |   |

 

**AdjustedEBITDA. **As described above in“—Performance Measures–Adjusted EBITDA,” we use this financial measure toevaluate 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 EBITDAdecreased by $4.7 million, or 52.3% compared to the prior year primarily dueto:

 

•                  a $5.3 million decrease in gross profitrelated to lower volume in our business/VIP aircraft furniture and seatingoperations; and

 

34

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•                  a $0.6 million decrease in gross profitrelated to lower volume in our cabin management and entertainment systems;offset by,

 

•                  a $1.2 million increase in gross profitrelated to our other products and services.

 

*Systems Integration. *AdjustedEBITDA increased by $0.1 million, or 2.1% over the prior year, due to reducedSG&A spending resulting from workforce reductions.

 

**Operating income.**  Operatingincome decreased $43.3 million to a loss of $42.8 million for the three monthsended June 30, 2003, from income of $0.5 million for the same period lastyear.  By segment, operating incomechanged as follows:

** **
|                |   | **Increase (Decrease)****From 2002** |   |
|---------------------|--------|--------------------------------------|--------|
|                |   |                                 |
| **(In  millions)**  |   | **Amount**                           |   | **Percent** |   |
|                |   |                                 |   |   |   |
| Cabin Management    |   | $                                    | (43.8  | ) | (4380.0 | )% |
| Systems Integration |   | 0.2                                  |   | 4.7 |   |
| Corporate           |   | 0.3                                  |   |   |   |
| Total               |   | $                                    | (43.3  | ) |   |   |

 

*CabinManagement. *Operating income decreased by $43.8million, or 4380.0% compared to the prior year, due to:

 

•                  a $4.1 million decrease in gross profit,principally related to lower revenues in our business, VIP and head-of-stateaircraft furniture and seating operations;

 

•                  a $34.0 million increase in goodwillimpairment charges; and

 

•                  a $5.7 million increase in restructuringcharges recorded in 2003 as compared to those recorded in 2002 related to theconsolidation of our seating and related manufacturing operations.

 

*SystemsIntegration.*Operating income increased by $0.2 million, or 4.7%compared to the prior year, due to reduced SG&A spending resulting fromworkforce reductions in 2003.

** **

**Interestexpense.**  Interest expense increased $0.3 million, or5.4%, to $6.5 million for the three months ended June 30, 2003 compared to $6.2million for the same period last year. The increase is attributable to a 1.5% increase in interest rate marginscharged by our lenders pursuant to the March 28, 2003 senior bank creditfacility amendment, partially offset by lower principal balances outstanding.

** **

**Minorityinterest in preferred stock of subsidiary. **Minorityinterest increased $0.2 million to $1.6 million for the three months ended June30, 2003 compared to $1.4 million for the same period last year.  Minority interest reflects the accrueddividends, which are compounded quarterly, and redemption value accretionduring the periods on DeCrane Aircrafts’ 16% preferred stock.

 

**Provisionfor income taxes.**  The provision for income taxes, based on thereported consolidated pre-tax loss, differs from the amount determined byapplying the applicable U.S. statutory federal rate to the pre-tax lossprimarily due to the effects of state and foreign income taxes, thenon-deductible portion of goodwill impairment charges, minority interest inpreferred stock of subsidiary, which is not deductible for income tax purposes,and a $13.1 million deferred tax asset valuation allowance established as ofJune 30, 2003.

 

As of June 30, 2003, wehad net deferred tax assets of $12.8 million, prior to recording the valuationallowance in June 2003, as opposed to net deferred tax liabilities in priorperiods.  The change to a net assetposition was primarily caused by the $34.0 million goodwill impairment charge recordedduring the second quarter of fiscal 2003. SFAS No. 109, “Accounting for Income Taxes,” requires the recognition ofa deferred tax asset for the future income tax benefit of the goodwilldeductions that will be

 

35

----

 

taken for income tax purposes(i.e. the goodwill that has been written off in the financial statements forbook purposes will continue to be amortized and deducted for tax purposes andaccordingly represents a new deferred tax asset).

 

As required by SFAS No.109, we evaluated our deferred assets for expected recoverability based on thenature of the item, the associated taxing jurisdictions, the applicableexpiration dates and future taxable income forecasts that would impactutilization.  Since there is no losscarry back potential and we do not have any tax planning strategies to assurerecoverability, the only possibility for recovery of the net deferred assets isfuture taxable income.  Since there havebeen prior year losses, we believe it was not prudent to rely on future incomeas the means to support the carrying value of the net assets.  As a result of our evaluation, we determinedthat recovery was not likely in certain taxing jurisdictions and applied ourjudgment in estimating the amount of valuation allowance necessary under thecircumstances to reduce the assets carrying value to realizable value.  Accordingly, we recorded the $13.1 millionvaluation allowance, eliminating the net deferred asset, as of June 30, 2003.

 

For periods prior to June30, 2003, we had net deferred tax liabilities ($9.0 million as of March 31,2003 and $10.6 million as of December 31, 2002).  The full realization of the deferred assets was achieved throughthe reversal of the deferred tax liabilities in future periods.  As a result, a valuation allowance was notrequired for periods prior to June 30, 2003.

** **

**Loss from continuing operations.** The loss from continuing operations increased $36.8 million to a loss of$41.9 million for the three months ended June 30, 2003 compared to a loss of$5.1 million for the same period last year, primarily due to:

 

•                  a $43.3 million decrease in operatingincome resulting, in part, from a $34.0 million goodwill impairment charge; and

 

•                  a $0.8 million net increase in interestexpense, minority interest in preferred stock of subsidiary and other expenses;offset by

 

•                  a $7.3 million increase in the provisionfor income tax benefit.

 

**Income from discontinued operations.** Income from discontinued operations decreased $1.0 million to $0.7million for the three months ended June 30, 2003 compared to $1.7 million forthe same period last year primarily the result of the disposition of theSpecialty Avionics Group on May 22, 2003 as compared to a full quarter ofresults included in the prior year. Income from discontinued operations for the three months ended June 30,2003 includes a modest $0.7 million gain, net of tax, on the sale of the group.

** **

**Netloss.**  Net loss increased $37.8 million to a netloss of $41.2 million for the three months ended June 30, 2003 compared to anet loss of $3.4 million for the same period last year.  The increase is attributable to an increasesin the loss from continuing operations of $36.8 million and a decrease in theincome from discontinued operations of $1.0 million.

** **

**Netloss applicable to common stockholders.**  Net lossapplicable to our common stockholders increased $38.1 million to a net loss of$43.4 million for the three months ended June 30, 2003 compared to a net lossof $5.3 million for the same period last year. The increase in the net loss applicable to our common stockholder isattributable to:

 

•                  a $37.8 million increase in our net loss;and

 

•                  a $0.3 million increase in noncashpreferred stock dividend accretion on our 14% mandatorily redeemable preferredstock.

 

36

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**Bookings. **Bookings decreased $23.4 million, or 31.1%, to $51.9million for the three months ended June 30, 2003 compared to $75.3 million forthe same period last year.  The decreasein bookings for 2003 is due to decreases in orders for all of our businesssegments.

 

**Backlogat end of period.**  Backlog increased $7.3 million to $74.1million as of June 30, 2003 compared to $66.8 million as of December 30, 2002.

 

As described in“—Industry Overview and Trends,” the acts and ongoing threats of globalterrorism, the current military conflicts, SARS epidemic and weak globaleconomic conditions are having an adverse impact on our business, resulting inthe decrease 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.

 

### **Six Months EndedJune 30**,2003 Compared to Six Months Ended June 30, 2002

 

Our results of operationshave been affected by restructuring, asset impairment and other related chargesrelating to a series of restructuring activities 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.* ***Revenues decreased $36.1 million, or29.6%, to $86.0 million for the six months ended June 30, 2003 from $122.1million for the six months ended June 30, 2002.  By segment, revenues changed as follows:

** **
|                    |   | **Increase (Decrease)  From 2002** |   |
|-------------------------|--------|------------------------------------|--------|
| **(In  millions)**      |   | **Amount**                         |   | **Percent** |   |
|                    |   |                               |   |   |   |
| Cabin Management        |   | $                                  | (33.8  | ) | (36.0 | )% |
| Systems Integration     |   | (1.5                               | )      | (5.1 | ) |
| Inter-group elimination |   | (0.8                               | )      |   |   |
| Total                   |   | $                                  | (36.1  | ) |   |   |

 

*CabinManagement. *Revenues decreased by $33.8 million, or36.0% compared to the prior year.  Thedecrease, which is across substantially all of our product and servicescategories, is caused by the ongoing adverse impact of weak global economicconditions which reduces the affordability of business, VIP and head-of-stateaircraft and therefore demand for the products and services we provide.  The 2003 decrease consists of:

 

•                  a $29.5 million decrease in aircraftfurniture and related products revenues;

 

•                  a $2.8 million decrease in cabinmanagement and entertainment systems revenues; and

 

•                  a $1.8 million decrease in seatingproducts revenues; offset by,

 

•                  a $0.3 million increase in other productand services revenues.

 

Therevenue decrease was caused by lower order volume from our customers as opposedto a loss of customers or price reductions. The decrease in order volume is attributable to weak global economicconditions and the impact these conditions are having on manufacturers of business,VIP and head-of-state aircraft and therefore demand for the products andservices we provide to them.  Weakglobal economic conditions have reduced the amount of discretionary incomeavailable to purchase and operate

 

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

 

Revenuesfrom Textron and Bombardier, our principal customers, decreased $24.4 millioncompared to the prior year as a result of the decrease in orders and resultinglower production of aircraft they are experiencing due to the economicdownturn.  Both companies temporarilysuspended production of various models of aircraft for several weeks duringfiscal 2003 in response to their low order backlog resulting from the weakdemand for new aircraft.  We also expecta further decline in revenues from Textron during the third quarter of fiscal2003 as a result of their additional planned shut downs.  We also experienced similar volume decreasesfrom our other customers during the period.

 

*SystemsIntegration.*  Revenues decreased by $1.5 million, or 5.1%compared to the prior year, due to:

 

•                  a $1.3 million decrease in the commercial aircraft systems integrationengineering services provided in the aftermath of September 11th andresulting down-turn in the commercial airline industry; the airline industry’scorresponding reduction in the size of its operating fleet and the delay orpostponement of retrofit and refurbishment programs for the remainingoperational fleet reduced demand for our integration and engineering services;and

 

•                  a $2.3 million decrease resulting from reduced production and deliveryof business, VIP and head-of-state aircraft products and services due to theadverse impact weak global economic conditions are having on the demand forthose types of aircraft; offset by

 

•                  a $2.1 million increase resulting from revenue pursuant to the“take-or-pay” provisions of a major supply contract.

 

**Grossprofit.**  Gross profit decreased $20.2 million, or67.5%, to $9.7 million for the six months ended June 30, 2003 from $29.9million for the same period last year. By segment, gross profit changed as follows:

 
|                |   | **Increase (Decrease)  From 2002** |       |
|---------------------|--------|------------------------------------|------------|
| **(In millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                |   |                               |       |   |   |
| Cabin Management    |   | $                                  | (16.3      | ) | (93.1 | )% |
| Systems Integration |   | (3.9                               | )          | (32.3 | ) |
| Total               |   | $                                  | (20.2      | ) |   |   |

 

*CabinManagement.*  Gross profit decreased by $16.3 million, or93.1% compared to the prior year, primarily due to:

 

•                  a $9.8 million decrease in profit margins due to lower volume for ourbusiness, VIP and head-of-state aircraft furniture and seating products; and

 

•                  a $1.0 million decrease in gross profit related to lower volume for ourcabin management and entertainment systems; and

 

•                  a $6.9 million increase caused by restructuring charges incurred in2003 as compared to those recorded in 2002 related to the consolidation of ourseating and related manufacturing operations; offset by

 

•                  a $1.4 million increase in other products and services.  $0.2 million of the increase is the resultof an increase in revenues and the remaining increase of $1.2 million is due toa $2.1 million decrease in materials costs, offset by a $0.9 million increasein direct labor and overhead costs.

 

*SystemsIntegration.*  Gross profit decreased by $3.9 million, or32.3% compared to the prior year, primarily due to:

 

38

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•                  a $3.0 million decrease resulting from lower revenues and unfavorableoverhead absorption as a result of lower production and a change in productdelivery mix; and

 

•                  a $0.9 million decrease in the commercial aircraft systems integrationengineering services provided.

 

**Selling,general and administrative expenses.**  Selling,general and administrative expenses decreased $9.8 million, or 40.3%, to $14.5million for the six months ended June 30, 2003, from $24.3 million for the sameperiod last year.  By segment, SG&Aexpenses changed as follows:

 
|                |   | **Increase (Decrease)  From 2002** |       |
|---------------------|--------|------------------------------------|------------|
| **(In millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                |   |                               |       |   |   |
| Cabin Management    |   | $                                  | (7.5       | ) | (47.5 | )% |
| Systems Integration |   | (2.0                               | )          | (47.2 | ) |
| Corporate           |   | (0.3                               | )          |   |   |
| Total               |   | $                                  | (9.8       | ) |   |   |

 

*CabinManagement. *SG&A expenses decreased by $7.5million, or 47.5% compared to the prior year, due to:

 

•                  a $5.3 million reduction caused by restructuring charges incurred in2003 as compared to those recorded in 2002 related to the consolidation of ourseating and related manufacturing operations; and

 

•                  a $2.2 million decrease in expenses resulting from cost reductionmeasures implemented in response to lower sales volume resulting from the weakglobal economic conditions.

 

*Systems Integration. *SG&Aexpenses decreased by $2.0 million, or 47.2% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductions in2003.

 

**Impairment of goodwill. **During the six months ended June 30, 2003, a $34.0million charge was recorded to reflect the additional impairment of goodwill inconnection with the impairment testing provision of SFAS No. 142, “Goodwill andOther Intangible Assets.”  Theadditional impairment results from continued weak global economic conditionswhich reduces the affordability of business, VIP and head-of-state aircraft andtherefore demand for the products and services we provide.  The impairment charge pertains to ourfurniture manufacturing reporting unit within our Cabin Management Group.  See “—Goodwill Impairment Charges” below foradditional information.

 

**Depreciationand amortization of intangibles.**  Depreciationand amortization expense decreased $0.5 million to $5.0 million for the sixmonths ended June 30, 2003 from $5.5 million for the same period last year,primarily resulting from reduced capital expenditures and a lower depreciablebase resulting from impairment charges recorded during 2002 as follows.

 
|                                        |   | **Increase (Decrease)  From 2002** |   |
|---------------------------------------------|--------|------------------------------------|--------|
| **(In millions)**                           |   | **Amount**                         |   | **Percent** |   |
|                                        |   |                               |   |   |   |
| Depreciation charged to:                    |   |                               |   |   |   |
| Cost of sales                               |   | $                                  | (0.3   | ) | (11.9 | )% |
| Selling, general and administrative expense |   | (0.3                               | )      | (21.4 | ) |
| Amortization of intangible assets           |   | 0.1                                |   | 6.3 |   |
| Total                                       |   | $                                  | (0.5)  |   |   |   |

 

**AdjustedEBITDA. **As described above in“—Performance Measures–Adjusted EBITDA,” we use this financial measure to evaluatethe core economic performance of our operating segments.  The notes to our financial statementsinclude additional information about Adjusted EBITDA, and should be

 

39

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read in conjunction with thediscussions presented herein.  The notesto our financial statements also include a reconciliation of Adjusted EBITDA tonet income (loss), a GAAP financial measure, to clarify the differences betweenthese two measures.

 

*Cabin Management. *AdjustedEBITDA decreased by $7.6 million, or 46.3% compared to the prior year primarilydue to:

 

•                  a $7.7 million decrease in gross profit related to our business/VIPaircraft furniture and seating operations; and

 

•                  a $1.0 million decrease in gross profit related our cabin managementand entertainment systems; offset by,

 

•                  a $1.4 million increase in gross profit related to our other productsand services.

 

*Systems Integration. *AdjustedEBITDA decreased by $2.1 million, or 24.5% over the prior year, due to lowersales volume partially offset by reduced SG&A spending resulting fromworkforce reductions.

 

**Operatingincome.**  Operating income decreased $44.5 million toa loss of $40.6 million for the six months ended June 30, 2003, from operatingincome of $3.9 million for the same period last year.  By segment, operating income changed as follows:

 
|                |   | **Increase (Decrease)  From 2002** |   |
|---------------------|--------|------------------------------------|--------|
| **(In millions)**   |   | **Amount**                         |   | **Percent** |   |
|                |   |                               |   |   |   |
| Cabin Management    |   | $                                  | (43.2  | ) | 792.5 | % |
| Systems Integration |   | (1.9                               | )      | (27.8 | ) |
| Corporate           |   | 0.6                                |   |   |   |
| Total               |   | $                                  | (44.5  | ) |   |   |

 

*CabinManagement. *Operating income decreased by $43.2million, or 792.5% compared to the prior year, due to:

 

•                  a $1.6 million increase in restructuring charges incurred in 2003 ascompared to those recorded in 2002 related to the consolidation of our seatingand related manufacturing operations; and

 

•                  a $34.0 million increase in goodwill impairment charges; and

 

•                  a $9.8 million decrease in gross profit, primarily due to lowerrevenues related to our furniture and seating operations; offset by

 

•                  a $2.2 million decrease in expenses resulting from cost reductionmeasures implemented in response to lower sales volume resulting from the weakglobal economic conditions;

 

*Systems Integration.*Operating income decreased by $1.9 million, or 27.8%compared to the prior year, due primarily to lower revenues, offset by reducedSG&A spending.

 

**Interestexpense.**  Interest expense increased $0.3 million, or2.1%, to $12.3 million for the six months ended June 30, 2003 compared to $12.0million for the same period last year. The increase is attributable to a 1.5% increase in interest rate marginscharged by our lenders pursuant to the March 28, 2003 senior bank creditfacility amendment, partially offset by lower principal balances outstanding.

 

**Minorityinterest in preferred stock of subsidiary. **Minorityinterest increased $0.4 million to $3.2 million for the six months ended June30, 2003 compared to $2.8 million for the same period last year.  Minority interest reflects the accrueddividends, which are compounded quarterly, and redemption value accretionduring the periods on DeCrane Aircrafts’ 16% preferred stock.

 

40

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**Provisionfor income taxes.**  The provision for income taxes, based on thereported consolidated pre-tax loss, differs from the amount determined byapplying the applicable U.S. statutory federal rate to the pre-tax lossprimarily due to the effects of state and foreign income taxes, thenon-deductible portion of goodwill impairment charges, minority interest inpreferred stock of subsidiary, which is not deductible for income tax purposes,and a $13.1 million deferred tax asset valuation allowance established as ofJune 30, 2003.

 

As of June 30, 2003, wehad net deferred tax assets of $12.8 million, prior to recording the valuationallowance in June 2003, as opposed to net deferred tax liabilities in priorperiods.  The change to a net assetposition was primarily caused by the $34.0 million goodwill impairment chargerecorded during the second quarter of fiscal 2003.  SFAS No. 109, “Accounting for Income Taxes,” requires therecognition of a deferred tax asset for the future income tax benefit of thegoodwill deductions that will be taken for income tax purposes (i.e. thegoodwill that has been written off in the financial statements for bookpurposes will continue to be amortized and deducted for tax purposes andaccordingly represents a new deferred tax asset).

 

As required by SFAS No.109, we evaluated our deferred assets for expected recoverability based on thenature of the item, the associated taxing jurisdictions, the applicableexpiration dates and future taxable income forecasts that would impactutilization.  Since there is no losscarry back potential and we do not have any tax planning strategies to assurerecoverability, the only possibility for recovery of the net deferred assets isfuture taxable income.  Since there havebeen prior year losses, we believe it was not prudent to rely on future incomeas the means to support the carrying value of the net assets.  As a result of our evaluation, we determinedthat recovery was not likely in certain taxing jurisdictions and applied ourjudgment in estimating the amount of valuation allowance necessary under thecircumstances to reduce the assets carrying value to realizable value.  Accordingly, we recorded the $13.1 millionvaluation allowance, eliminating the net deferred asset, as of June 30, 2003.

 

For periods prior to June30, 2003, we had net deferred tax liabilities ($9.0 million as of March 31,2003 and $10.6 million as of December 31, 2002).  The full realization of the deferred assets was achieved throughthe reversal of the deferred tax liabilities in future periods.  As a result, a valuation allowance was notrequired for periods prior to June 30, 2003.

 

**Loss from continuing operations.** The loss from continuing operations increased $38.3 million to a loss of$46.3 million for the six months ended June 30, 2003 compared to a loss of $8.0million for the same period last year, primarily due to:

 

•                  a $44.5 million decrease in operating income resulting, in part, from a$34.0 million goodwill impairment charge; and

 

•                  a $1.2 million net increase in interest expense, minority interest inpreferred stock of subsidiary and other expenses; offset by

 

•                  a $7.4 million increase in the provision for income tax benefit.

 

**Loss from discontinued operations.** Loss from discontinued operations decreased $30.0 million, to a loss of$5.7 million for the six months ended June 30, 2003 compared to a loss of $35.7million for the same period last year. The decrease is primarily due to:

 

•                  a $39.4 million charge in 2002 to reflect the cumulative effect ondiscontinued operations of the change in accounting principle associated withinitial adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” asdescribed below; offset by

 

•                  a $7.5 million charge in 2003 to the impairment of goodwill to reducethe carrying value of assets sold to their estimated net realizable value; and

 

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•                  the result of the disposition of the Specialty Avionics Group on May22, 2003 as compared to a full six months of results included in the prioryear.

 

The loss fromdiscontinued operations for the six months ended June 30, 2003 is net of amodest $0.7 million gain, net of tax, on the sale of the group.

 

**Cumulative effect of change inaccounting principle.**  The $17.8 million charge in 2002 to reflect the cumulative effect oncontinuing operations of the change in accounting principle was a result oftransitional goodwill impairment charges recognized upon initial adoption ofSFAS No. 142, “Goodwill and Other Intangible Assets.”  Including the $39.4 million charged to discontinued operations,the total charge to reflect the cumulative effect of the change in accountingprinciple was $57.2 million.

 

**Netloss.**  Net loss decreased $9.6 million to a netloss of $51.9 million for the six months ended June 30, 2003 compared to a netloss of $61.5 million for the same period last year.  The decrease is attributable to:

 

•                  an increase in loss from continuing operations of $38.3 million; offsetby

 

•                  a decrease in loss from discontinued operations of $30.0 million; and

 

•                  a decrease in cumulative effect of change in accounting principle of $17.8million.

 

**Netloss applicable to common stockholders.**  Net lossapplicable to our common stockholders, our common stockholder, decreased $9.0million to a net loss of $56.4 million for the six months ended June 30, 2003compared to a net loss of $65.4 million for the same period last year.  The decrease in the net loss applicable toour common stockholder is attributable to:

 

•                  a $9.6 million decrease in our net loss; offset by

 

•                  a $0.6 million increase in noncash preferred stock dividend accretionon our 14% mandatorily redeemable preferred stock.

 

**Bookings. **Bookings decreased $15.9 million, or 14.6 %, to $93.3million for the six months ended June 30, 2003 compared to $109.2 million forthe same period last year.  The decreasein bookings for 2003 is due to decreases in orders for all of our businesssegments.

 

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**Restructuring, AssetImpairment and Other Related Charges**

** **

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

 

During the three monthsand six months ended June 30, 2003, we recorded restructuring, asset impairmentand other related pre-tax charges related to a series of restructuringactivities.  These charges, and theeffect these charges had on our reported results of operations, are summarizedbelow.

 
|                                                                       |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|----------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In millions)**                                                          |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                       |   |                             |   |                           |   |   |   |   |   |
| Nature of charges:                                                         |   |                             |   |                           |   |   |   |   |   |
| Seating Product Line and Furniture Manufacturing  Facilities Restructuring |   | $                                | 13.4   |                           | $      | — |   | $ | 13.4 |   | $ | — |   |
| Seat Manufacturing Facilities Restructuring                                |   | —                           |   | 2.3                            |   | — |   | 6.3 |   |
| Asset Realignment Restructuring                                            |   | —                           |   | 5.4                            |   | — |   | 5.4 |   |
| Goodwill impairment charges                                                |   | 34.0                             |   | —                         |   | 41.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47.4   |                           | $      | 7.7 |   | $ | 54.9 |   | $ | 11.7 |   |
|                                                                       |   |                             |   |                           |   |   |   |   |   |
| Business segment recording the charges:                                    |   |                             |   |                           |   |   |   |   |   |
| Cabin Management                                                           |   | $                                | 47.4   |                           | $      | 7.7 |   | $ | 47.4 |   | $ | 11.7 |   |
| Systems Integration                                                        |   | —                           |   | —                         |   | — |   | — |   |
| Total charged to continuing operations                                     |   | 47.4                             |   | 7.7                            |   | 47.4 |   | 11.7 |   |
| Specialty Avionics (discontinued operations)                               |   | —                           |   | —                         |   | 7.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47.4   |                           | $      | 7.7 |   | $ | 54.9 |   | $ | 11.7 |   |
|                                                                       |   |                             |   |                           |   |   |   |   |   |
| Charged to operations:                                                     |   |                             |   |                           |   |   |   |   |   |
| Cost of sales                                                              |   | $                                | 12.8   |                           | $      | 4.7 |   | $ | 12.8 |   | $ | 5.9 |   |
| Selling, general and administrative expenses                               |   | 0.6                              |   | 3.0                            |   | 0.6 |   | 5.8 |   |
| Impairment of goodwill                                                     |   | 34.0                             |   | —                         |   | 34.0 |   | — |   |
| Total charged to continuing operations                                     |   | 47.4                             |   | 7.7                            |   | 47.4 |   | 11.7 |   |
| Charged to discontinued operations                                         |   | —                           |   | —                         |   | 7.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47.4   |                           | $      | 7.7 |   | $ | 54.9 |   | $ | 11.7 |   |
|                                                                       |   |                             |   |                           |   |   |   |   |   |
| Components of charges:                                                     |   |                             |   |                           |   |   |   |   |   |
| Noncash charges                                                            |   | $                                | 43.9   |                           | $      | 2.8 |   | $ | 43.9 |   | $ | 5.9 |   |
| Cash charges                                                               |   | 3.5                              |   | 4.9                            |   | 3.5 |   | 5.8 |   |
| Total charged to continuing operations                                     |   | 47.4                             |   | 7.7                            |   | 47.4 |   | 11.7 |   |
| Charged to discontinued operations                                         |   | —                           |   | —                         |   | 7.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                | 47.4   |                           | $      | 7.7 |   | $ | 54.9 |   | $ | 11.7 |   |

 

**Seating Product Line and FurnitureManufacturing Facilities Restructuring**

 

During the second quarterof fiscal 2003, we consolidated our seating product line offerings and adopteda restructuring plan to down-size a furniture manufacturing facility inresponse to continuing weakness in the business, VIP and head-of-state aircraftmarket.  These actions were designed toreduce engineering, production and inventory carrying costs by supporting fewerproduct offerings and achieve profitability at the furniture manufacturingfacility based on its lower production levels. In connection with these actions, we recorded pre-tax charges tooperations totaling $13.4 million during the second quarter of fiscal 2003, ofwhich $9.9 million were noncash charges.

 

The charges are comprisedof the write-off of inventoried costs related to discontinued productofferings, lease termination and related charges, excess and obsolete inventorywrite-downs and severance and other compensation costs.  As required by SFAS No. 146, the chargesrecorded were discounted by

 

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$0.6 million to initiallymeasure and reflect the liabilities incurred as a result of the restructuringplan at their fair value as of June 30, 2003.  The cumulative effect of a changes resulting from revisions toeither the timing or the amount of estimated cash flows will be recognized asan adjustment to the liability in the period of the change.

 

These restructuringactivities were substantially completed during the second quarter of fiscal2003.  A $3.3 million restructuringreserve remains as of June 30, 2003 for lease termination and related costs.  The manufacturing facilities were closedduring June 2003.  The future cashpayments will be funded from existing cash balances and internally generatedcash from operations.

 

**Asset RealignmentRestructuring**

** **

During the second quarterof fiscal 2001, we adopted a restructuring plan 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 aftermath, as well as the weakening of global economicconditions, we announced and implemented a further restructuring plan inDecember 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.

 

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, ofwhich $3.8 million were noncash charges, for additional impairment oflong-lived assets, current asset write-downs and other related expenses.

 

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

 

**Seat ManufacturingFacilities 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 ended December 31,2002, of which $3.6 million were noncash charges, for restructuring, assetimpairment 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 lease terminationcosts and other restructuring-related expenses pertaining to FAA retesting andrecertification, moving, transportation and travel costs and shutdown andstartup costs.

 

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

 

**Goodwill Impairment Charges**

 

As a result of thecontinuing weakness in the business, VIP and head-of-state aircraft market andthe decision to down-size a furniture manufacturing facility, the goodwillassociated with the furniture manufacturing reporting unit was tested forrecoverability and found to be impaired. As a result, $34.0 million of goodwill associated with our CabinManagement Group was written off and charged to operations during the secondquarter of fiscal 2003.

 

44

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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.

 

See “—Goodwill ImpairmentCharges” below for additional information.

 

**Goodwill Impairment Charges**

** **

The following discussionshould be read in conjunction with the Notes 3 and 5 accompanying our financialstatements included in this report.

 

Our results of operationsfor the three months and six months ended June 30, 2003 and 2002 have beenaffected by the adoption of SFAS No. 142, “Goodwill and Other IntangibleAssets,” and goodwill 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 required to beadopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncements resulted in thefollowing:

 

•                  *Reclassification ofIntangible Assets.*  Intangible assets relating to acquiredassembled workforce intangibles not meeting the criteria for recognition apartfrom goodwill were reclassified to goodwill, net of deferred income taxes.

 

•                  *Discontinuance ofGoodwill Amortization.*  Goodwill is deemed to be anindefinite-lived asset.  As a result,and in accordance with SFAS No. 142, the recording of periodic goodwillamortization charges was discontinued effective January 1, 2002.

 

•                  *Annual Testing forGoodwill Impairment.*  In lieu of periodic goodwill amortizationcharges, SFAS No. 142 requires goodwill to be tested annual for impairment, orwhen events or changes in circumstances 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.

 

45

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Changes in the carryingamount of goodwill, by business segment, for the six months ended June 30,2003 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 charges               |   | (34.0                        | )          | —                          |       | — |   | (34.0 | ) | (7.5 | ) |
| Sale of Specialty Avionics Group |   | —                       |       | —                          |       | — |   | — |   | (73.2 | ) |
| Balance, June 30, 2003           |   | $                            | 139.9      |                            | $          | 20.8 |   | $ | 1.7 |   | $ | 162.4 |   | $ | — |   |

 

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 net realizablevalue established by the definitive agreement. We recorded a modest $0.7 million gain on the sale during the secondquarter of fiscal 2003, based on the actual financial position of the group onthe date of sale.  However, the ultimategain or loss on the sale is subject to finalizing the post-closing adjustment,which is not expected to be material, if any.

 

As required by SFAS No.142, we test goodwill for impairment annually, on October 31st ofeach year, or when events or changes in circumstances indicate the carryingamount may not be recoverable.  Thegoodwill impairment model is a two-step process.  First, it requires a comparison of the book value of net assetsto the fair value of the related reporting units that have goodwill assigned tothem.  If the fair value is determinedto be less than book value, a second step is performed to compute the amount ofthe impairment.  In this process, a fairvalue for goodwill is estimated, based in part on the fair value of thereporting unit used in the first step, and is compared to its carrying value.  The amount by which carrying value exceedsfair value represents the amount of goodwill impairment.

 

As a result of thecontinuing weakness in the business, VIP and head-of-state aircraft market andour decision to down-size a furniture manufacturing facility in the secondquarter of fiscal 2003, we determined that we should reevaluate the carryingvalue of our goodwill prior to the annual October 31st testingdate.  Accordingly, we performed astep-one test of goodwill associated with our furniture manufacturing reportingunit for recoverability and found the goodwill to be impaired.  As a result, we recorded a pre-tax charge tooperations of $34.0 million during the three months ended June 30, 2003 basedon a comparison of the estimated book value of the net assets of the reportingunit to its fair value.  The charge wasprimarily a result of a decrease in fair value caused by using lower cash flowforecasts based on the most recently reduced industry estimates of aircraftdeliveries resulting from overall industry weakness.  The amount recorded is an estimate and may be revised during thethird quarter of fiscal 2003 upon completion of step two of the goodwillimpairment model, which measures the amount of impairment.

 

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**Liquidity and Capital 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 Six MonthsEnded June 30, 2003**

 

Net cash used byoperating activities was $19.9 million for the six months ended June 30, 2003and consisted of $4.1 million of cash used by operations after adding backdepreciation, amortization, the noncash portion of our restructuring and assetimpairment charges and other noncash items and $21.0 million used for workingcapital, offset by a $5.2 million increase in other liabilities.  The following factors contributed to the$21.0 million working capital increase:

 

•                  a $12.7 million inventory increase principallyrelated to long-term contracts;

 

•                  a $13.0 million decrease in accounts payable and accrued expenses,primarily resulting from reduced purchasing commensurate with lower revenues;offset by,

 

•                  a $0.5 million decrease in prepaid expenses and other assets; and

 

•                  a $4.2 million decrease in accounts receivables.

 

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

 

Net cash provided byinvesting activities was $130.2 million for the six months ended June 30, 2003and consisted of:

 

•                  $132.8 million of net proceeds from thesale of the Specialty Avionics Group; offset by,

 

•                  $2.0 million used for capital expenditures; and

 

•                  $0.6 million used for the payment of contingent acquisitionconsideration.

 

We anticipate spendingapproximately $4.0 to $4.5 million for capital expenditures in 2003.  As of June 30, 2003, there are no remainingacquisition contingent consideration payment obligations.

 

Net cash used byfinancing activities was $121.2 million for the six months ended June30, 2003.  Cash of $9.3 million wasprovided by revolving line of credit borrowings under our senior creditfacility.  Cash of $130.5 million wasused for principal payments on our senior term debt, capitalized leaseobligations and other debt.

 

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**Capital Resources and DebtObligations as of June 30, 2003**

 

As of June 30, 2003, wehad $50.2 million of working capital, compared to $55.4 million as of December31, 2002, excluding assets and liabilities of the discontinued operations wesold in 2003.  As of June 30, 2003, wealso had $24.4 million of borrowings available under our revolving line ofcredit, as amended in March 2003 and described below, compared to $43.6million available as of December 31, 2002. Our revolving line of credit expires in September 2004.  We not be able to replace it on commerciallyacceptable terms, or at all.  As of June30, 2003, our senior credit facility borrowings totaling $150.2 million are atvariable interest rates based on defined margins over the current prime rate orLIBOR, compared to $270.2 million as of December 31, 2002.  We also had $100.0 million of 12% seniorsubordinated notes as of June 30, 2003 and December 31, 2002 and otherindebtedness totaling $9.7 million outstanding as of June 30, 2003 compared to$10.8 million as of December 31, 2002.

 

The senior creditfacility and senior subordinated notes indenture impose restrictive andfinancial covenants on us.  In the firstquarter of fiscal 2003, terms and financial covenants contained in our seniorcredit facility were amended to, among other things, permit the sale of theSpecialty Avionics 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 AffectingFinancial Condition 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 have implemented a series ofrestructuring activities as described in “—Restructuring, Asset Impairment andOther Related Charges,” designed to reduce costs and conserve working capital.

 

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’products and services for business, VIP and head-of-state aircraft will returnto historical levels and, accordingly, we decided to focus our resources inthese market segments.  To accomplishthis objective, we embarked on a plan to sell the Specialty Avionics Group,which is highly dependent on the commercial airline industry.

 

We consummated the saleof the Specialty Avionics Group on May 23, 2003 and, as required by the seniorcredit facility amendment, used $130.0 million of the proceeds from the sale torepay senior credit facility borrowings. The senior credit facility amendment also relaxes various financialcovenants for 2003 and beyond, decreases by $10.0 million the maximum permittedrevolving line of credit borrowings to $40.0 million, increases the prime rateand LIBOR interest margins by 1.5% and permits the issuance of specified typesof additional indebtedness and the repurchase of up to $20.0 million aggregateprincipal amount of our 12% senior subordinated notes with the proceeds fromthe sale of junior securities.  Juniorsecurities means: (i) senior subordinated notes issued by us that are unsecuredand do not provide for any scheduled redemptions or prepayments or any sinkingfund installment 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.

 

We believe our expectedoperating cash flows, together with borrowings under our senior credit facility($24.4 million of which was available as of June 30, 2003, the commitment forwhich expires in September 2004), will be sufficient to meet our future short-and long-term operating expenses, working

 

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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 our control.  Although we cannot be certain, we expect tobe in compliance with the revised financial covenants through the end of theyear 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 mayrequire additional debt, equity financing or both.  We may not be able to obtain any additional financing onacceptable terms.  We are not currentlyparty to any definitive acquisition agreements.

 

**Disclosure of ContractualObligations and Commitments**

** **

The following tablesummarizes our known contractual obligations to make future cash payments as ofJune 30, 2003, as well an estimate of the periods during which thesepayments are expected to be made.

 
|                                                           |   |      |   | **Years Ending December 31,** |   |
|----------------------------------------------------------------|--------|-----------|--------|-------------------------------|--------|
| **(In millions)**                                              |   | **Total** |   | **2003**                      |   | **2004  and  2005** |   | **2006  and  2007** |   | **2008  and  Beyond** |   |
|                                                           |   |      |   |                          |   |   |   |   |   |   |   |
| Long-term debt (a):                                            |   |      |   |                          |   |   |   |   |   |   |   |
| Senior credit facility                                         |   | $         | 150.2  |                          | $      | — |   | $ | 93.8 |   | $ | 56.4 |   | $ | — |   |
| 12% senior subordinated notes                                  |   | 100.0     |   | —                        |   | — |   | — |   | 100.0 |   |
| Capital lease obligations and other indebtedness               |   | 9.7       |   | 0.5                           |   | 2.3 |   | 1.6 |   | 5.3 |   |
| Total long-term debt                                           |   | 259.9     |   | 0.5                           |   | 96.1 |   | 58.0 |   | 105.3 |   |
|                                                           |   |      |   |                          |   |   |   |   |   |   |   |
| Operating lease obligations                                    |   | 14.6      |   | 1.0                           |   | 3.2 |   | 2.5 |   | 7.9 |   |
| Mandatorily redeemable preferred stock redemption  obligations |   |      |   |                          |   |   |   |   |   |   |   |
| DeCrane Aircraft preferred stock (b)                           |   | 40.0      |   | —                        |   | — |   | — |   | 40.0 |   |
| DeCrane Holdings preferred stock (c)                           |   | 66.7      |   | —                        |   | — |   | — |   | 66.7 |   |
| Total obligations as of June 30, 2003                          |   | $         | 381.2  |                          | $      | 1.5 |   | $ | 99.3 |   | $ | 60.5 |   | $ | 219.9 |   |

 

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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 theamount of 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, we haveelected to issue additional shares in lieu of cash dividend payments and maycontinue to do so until June 2005, after which time we are required to payquarterly 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 $8.8million, payable quarterly, commencing September 2005.

 

(c)                      Dividends accrue quarterly at a14% annual rate.  Prior to September 30,2005, dividends are not paid in cash but instead accrete to the liquidationvalue of the preferred stock.  Ourannual cash dividend payment obligation will be $12.7 million, payablequarterly, commencing December 31,

 

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2005 and our mandatory redemption obligationon September 30, 2009, the mandatory redemption date, will be $90.8 million.

 

**Disclosure AboutOff-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 $5.0 million,while others will have no limitations. In addition, the $140.0 million selling price is subject to a potentialpost-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 June 30, 2003, wealso had an irrevocable standby letter of credit in the amount of $0.4 millionissued and outstanding under our senior credit facility.

 

**Recent Accounting Pronouncements**

** **

**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 effectiveJanuary 1, 2003:

 

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

 

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

 

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

 

•                  FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOther.”

 

**Recently IssuedAccounting Pronouncement**

** **

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

* *

Issued in May 2003, SFASNo. 150 establishes standards for the classification and measurement of certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification offinancial 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.  We are currentlyevaluating the impact this new standard will have on our financial position,results of operations and cash flows. However, we believe we will be

 

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required to reclassify ourmandatorily redeemable preferred stock as a liability commencing July 1, 2003and reflect subsequent changes in the redemption obligation as a charge againstpre-tax income.

 

**Special Note RegardingForward-Looking Statements and Risk Factors**

** **

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

 

•                  fuel prices and general economic conditions that affect demand foraircraft and air travel, which in turn affect demand for our products andservices;

 

•                  acts, and ongoing threats, of global terrorism, military conflicts andhealth epidemics that affect demand for aircraft and air travel, which in turnaffect demand for our products and services;

 

•                  our reliance on key customers and the adverse effect a significantdecline in business from any one of them would have on our business;

 

•                  changes in prevailing interest rates and the availability of financingto fund our plans for continued growth;

 

•                  competition from larger companies;

 

•                  Federal Aviation Administration prescribed standards and licensingrequirements, which apply to many of the products and services we provide;

 

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

 

•                  price and availability of raw materials, component parts and electricalenergy;

 

•                  liability and other claims asserted against us that exceeds ourinsurance coverage;

 

•                  the ability to attract and retain qualified personnel;

 

•                  labor disturbances; and

 

•                  changes in operating strategy, or our acquisition and capitalexpenditure 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 QUALITATIVE DISCLOSURES ABOUT MARKETRISK

** **

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 derivative financialinstruments to manage and reduce risks associated with these factors.  We do not enter into derivatives or otherfinancial instruments for trading or speculative purposes.

 

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

 

Market risk related toour variable-rate debt is estimated as the potential decrease in pre-taxearnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime rate or LIBOR.  As of June30, 2003, the current prime rate was 4.00% and the current LIBOR was1.12%.  Based on $150.2 million ofvariable-rate debt outstanding as of June 30, 2003, a hypothetical one percentrise in interest rates, to 5.00% for prime rate borrowings and 2.12% for LIBORborrowings, would reduce our pre-tax earnings by $1.5 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 the variableinterest rate decreases below the 4.2% fixed rate.  Based on the $3.3 million of variable-rate debt converted tofixed-rate debt outstanding as of June 30, 2003, a hypothetical one percentdecrease in the variable interest rate to 3.2%, would reduce our pre-taxearnings by less than $0.1 million annually.

 

The estimated fair valueof our $100.0 million fixed-rate long-term debt increased $7.0 million, or17.5%, to approximately $47.0 million as of June 30, 2003 from $40.0 million asof December 31, 2002.  Although we cannotbe certain, we believe the increase may have been a result of the sale of 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 various parts of the world, primarilyCanada, the Far and Middle East and Western Europe, and we have subsidiarieswith manufacturing facilities in Mexico. To limit our foreign currency exchange rate risk related to sales to ourcustomers, orders are almost always valued and sold in U.S. dollars.  We have entered into forward foreignexchange contracts in the past, primarily to limit the Specialty AvionicsGroup’s exposure related to foreign inventory procurement and operating costs.  While we have not entered into any suchcontracts since 1998, we may do so in the future depending on the volume ofnon-U.S. dollar denominated transactions and our assessment of future foreignexchange rate trends.

 

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**ITEM 4.**                             CONTROLS AND PROCEDURES

** **

The management of DeCraneAircraft Holdings, Inc. (the “Company”), under the supervision and with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, conducted an evaluation of the Company’s “disclosure controls andprocedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of theend of the period covered by the initial report filed on August 14, 2003.  Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the end of the periodcovered by the initial report.

 

There was no change inthe Company’s internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules13a-15 or 15d-15 that occurred during the Company’s last fiscal quarter andprior to the date of the initial filing on August 14, 2003 that has materiallyaffected, or is reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

**PART II – OTHER INFORMATION**

 

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

 

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 attached to thein-flight entertainment system installed on some of Swissair’s aircraft by oneof our subsidiaries.  Our subsidiary hasworked vigorously over the last five years with the CTSB investigators in thefact-finding investigation of this catastrophic incident.  On March 27, 2003, the CTSB released itsfinal report on its investigation.  Thisreport indicated that the CTSB was unable to conclusively determine the causeof 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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**ITEM6.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 

a.                           Exhibits

 

3.1.2                                    Bylaws of DeCrane Aircraft Holdings,Inc., as amended on July 9, 2003 (1)

 

10.11.3                        Addendum 6-5723-03-064 to the SpecialBusiness Provisions between The Boeing Company and PATS, Inc. dated April 16,2003 (2)

 

31.1                                       Chief Executive Officer CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

 

31.2                                       Chief Financial Officer CertificationPursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *

 

32                                                Chief Executive Officer and ChiefFinancial Officer Certifications Pursuant to Pursuant to Section 906 of theSarbanes-Oxley Act of 2002 *

 

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*                                                     Filed herewith

 

(1)                                              Filed as an exhibit to the RegistrationStatement of DeCrane Aircraft Holdings, Inc.(Registration No. 333-106381) of Form S-1 (Amendment No. 2) filedwith the Commission on September 18, 2003 and incorporated herein by reference.

 

(2)                                              Filed as an exhibit to the RegistrationStatement of DeCrane Aircraft Holdings, Inc.(Registration No. 333-106381) of Form S-1 (Amendment No. 1) filedwith the Commission on August 12, 2003 and incorporated herein by reference.

 

b.                          Reports on Form 8-K

 

On March 17, 2003, wefiled 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.

 

On May 23, 2003, we fileda Form 8-K Current Report regarding DeCrane Aircraft consummating the sale ofits Specialty Avionics Group.

 

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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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