**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedSeptember 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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  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 ofRegistrant’s Common Stock, $.01 par value, outstanding as ofNovember 3, 2003 was 4,116,627 shares.

 

 

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**Table of Contents**

 
| **Part I – Financial  Information** |
|------------------------------------------|
|                                     |   |
| **Item 1.**                              | **Financial Statements  (Unaudited)** |
|                                     |   |
|                                     | Consolidated Balance Sheets  as of September 30, 2003 and December 31, 2002 |
|                                     |   |
|                                     | Consolidated  Statements of Operations for the three months and nine months  ended September 30, 2003 and 2002 |
|                                     |   |
|                                     | Consolidated  Statements of Stockholders’ Equity (Deficit) for the nine months ended  September 30, 2003 |
|                                     |   |
|                                     | Consolidated  Statements of Cash Flows for the nine months ended  September 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 September 30, 2003 |
|                                     |   |
|                                     | Nine months ended  September 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  5.**                             | **Other  Information** |
|                                     |   |
| **Item 6.**                              | **Exhibits and  Reports on Form 8-K** |
|                                     |   |
|                                     | Exhibits |
|                                     |   |
|                                     | Reports on  Form 8-K |
|                                     |   |
| **Signatures**                           |
|                                          |  |  |

 

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**PART I – FINANCIAL INFORMATION**

 

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

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated Balance Sheets**

 
| **(In thousands, except share data)**                                                                                                                          |   | **September 30,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                           |   | **(Unaudited)**              |    |                        |   |
|                                                                                                                                                           |   |                         |    |                        |   |
| **Assets**                                                                                                                                                     |   |                         |    |                        |   |
| Current  assets:                                                                                                                                               |   |                         |    |                        |   |
| Cash and  cash equivalents                                                                                                                                     |   | $                            | 2,725   |                        | $      | 12,421 |   |
| Accounts  receivable, net                                                                                                                                      |   | 23,983                       |    | 26,354                      |   |
| Inventories                                                                                                                                                    |   | 64,443                       |    | 59,300                      |   |
| Deferred  income taxes                                                                                                                                         |   | 180                          |    | 16,430                      |   |
| Prepaid  expenses and other current assets                                                                                                                     |   | 1,396                        |    | 1,724                       |   |
| Current  assets of discontinued operations                                                                                                                     |   | —                       |    | 160,741                     |   |
| Total  current assets                                                                                                                                          |   | 92,727                       |    | 276,970                     |   |
|                                                                                                                                                           |   |                         |    |                        |   |
| Property and  equipment, net                                                                                                                                   |   | 34,327                       |    | 36,139                      |   |
| Goodwill                                                                                                                                                       |   | 162,430                      |    | 196,430                     |   |
| Other  assets, principally intangibles, net                                                                                                                    |   | 35,729                       |    | 39,428                      |   |
| Total assets                                                                                                                                                   |   | $                            | 325,213 |                        | $      | 548,967 |   |
|                                                                                                                                                           |   |                         |    |                        |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**                                                               |   |                         |    |                        |   |
| Current  liabilities:                                                                                                                                          |   |                         |    |                        |   |
| Current  portion of long-term debt                                                                                                                             |   | $                            | 36,162  |                        | $      | 16,317 |   |
| Accounts  payable                                                                                                                                              |   | 13,257                       |    | 13,055                      |   |
| Accrued  liabilities                                                                                                                                           |   | 16,428                       |    | 31,494                      |   |
| Income taxes  payable                                                                                                                                          |   | 23                           |    | —                      |   |
| Current  liabilities of discontinued operations                                                                                                                |   | —                       |    | 19,928                      |   |
| Total  current liabilities                                                                                                                                     |   | 65,870                       |    | 80,794                      |   |
|                                                                                                                                                           |   |                         |    |                        |   |
| Long-term  debt, less current portion                                                                                                                          |   | 231,420                      |    | 364,700                     |   |
| Deferred  income taxes                                                                                                                                         |   | 400                          |    | 27,077                      |   |
| Other  long-term liabilities                                                                                                                                   |   | 10,027                       |    | 7,364                       |   |
|                                                                                                                                                           |   |                         |    |                        |   |
| Commitments  and contingencies (Note 11)                                                                                                                       |   |                         |    |                        |   |
|                                                                                                                                                           |   |                         |    |                        |   |
| Mandatorily  redeemable preferred stock:                                                                                                                       |   |                         |    |                        |   |
| 14% preferred  stock                                                                                                                                           |   | 68,987                       |    | 62,222                      |   |
| Minority  interest in 16% preferred stock                                                                                                                      |   | 39,053                       |    | 34,081                      |   |
|                                                                                                                                                           |   |                         |    |                        |   |
| Stockholders’  equity (deficit):                                                                                                                          |   |                         |    |                        |   |
| Undesignated  preferred stock, $.01 par value, 1,140,000 shares authorized;                                                                                    |   |                         |    |                        |   |
| None issued  and outstanding as of September 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 September 30, 2003 and December 31, 2002 |   | 41                           |    | 41                          |   |
| Additional  paid-in capital                                                                                                                                    |   | 65,360                       |    | 72,125                      |   |
| Notes  receivable for shares sold                                                                                                                              |   | (2,702                       | )       | (2,591                      | )      |
| Accumulated  deficit                                                                                                                                           |   | (152,879                     | )       | (96,485                     | )      |
| Accumulated  other comprehensive loss                                                                                                                          |   | (364                         | )       | (361                        | )      |
| Total  stockholders’ equity (deficit)                                                                                                                     |   | (90,544                      | )       | (27,271                     | )      |
| Total  liabilities, mandatorily redeemable preferred stock and stockholders’ equity  (deficit)                                                            |   | $                            | 325,213 |                        | $      | 548,967 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

1

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated Statements of Operations**

 
|                                                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| **(In thousands)**                                                 |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                               |   | **(Unaudited)**                            |   |
| Revenues                                                           |   | $                                          | 44,273 |                                      | $      | 56,211 |   | $ | 130,286 |   | $ | 178,323 |   |
| Cost of  sales                                                     |   | 35,052                                     |   | 38,255                                    |   | 111,338 |   | 130,467 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Gross profit                                                       |   | 9,221                                      |   | 17,956                                    |   | 18,948 |   | 47,856 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Operating  expenses:                                               |   |                                       |   |                                      |   |   |   |   |   |
| Selling,  general and administrative expenses                      |   | 4,229                                      |   | 9,207                                     |   | 18,706 |   | 33,454 |   |
| Impairment  of goodwill                                            |   | —                                     |   | —                                    |   | 34,000 |   | — |   |
| Amortization  of intangible assets                                 |   | 912                                        |   | 910                                       |   | 2,738 |   | 2,627 |   |
| Total  operating expenses                                          |   | 5,141                                      |   | 10,117                                    |   | 55,444 |   | 36,081 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Income  (loss) from operations                                     |   | 4,080                                      |   | 7,839                                     |   | (36,496 | ) | 11,775 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Other  expenses:                                                   |   |                                       |   |                                      |   |   |   |   |   |
| Interest  expense                                                  |   | 6,546                                      |   | 6,459                                     |   | 18,883 |   | 18,541 |   |
| Minority  interest in preferred stock of subsidiary                |   | 1,718                                      |   | 1,486                                     |   | 4,972 |   | 4,301 |   |
| Other  expenses, net                                               |   | 134                                        |   | 37                                        |   | 880 |   | 236 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Loss from  continuing operations before provision for income taxes |   | (4,318                                     | )      | (143                                      | )      | (61,231 | ) | (11,303 | ) |
| Provision  for income (taxes) benefit                              |   | (143                                       | )      | (338                                      | )      | 10,487 |   | 2,853 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Loss from  continuing operations                                   |   | (4,461                                     | )      | (481                                      | )      | (50,744 | ) | (8,450 | ) |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Discontinued  operations and change in accounting principle:       |   |                                       |   |                                      |   |   |   |   |   |
| Income  (loss) from discontinued operations, net of tax            |   | —                                     |   | 1,525                                     |   | (5,650 | ) | (34,177 | ) |
| Cumulative  effect of change in accounting principle               |   | —                                     |   | —                                    |   | — |   | (17,828 | ) |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Net income  (loss)                                                 |   | (4,461                                     | )      | 1,044                                     |   | (56,394 | ) | (60,455 | ) |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Noncash  preferred stock dividend accretion                        |   | (2,333                                     | )      | (2,033                                    | )      | (6,765 | ) | (5,895 | ) |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Net loss  applicable to common stockholders                        |   | $                                          | (6,794 | )                                         | $      | (989 | ) | $ | (63,159 | ) | $ | (66,350 | ) |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

2

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated Statement ofStockholders’ Equity (Deficit)**

 
|                                           |   | **Common Stock** |   | **Additional  Paid-in** |   | **Notes  Receivable  For Shares** |   | **Accumulated** |   | **Accumulated  Other  Comprehensive** |   |     |   |
|------------------------------------------------|--------|------------------|--------|-------------------------|--------|-----------------------------------|--------|-----------------|--------|---------------------------------------|--------|----------|--------|
| **(In thousands, except share data)**          |   | **Shares**       |   | **Amount**              |   | **Capital**                       |   | **Sold**        |   | **Deficit**                           |   | **Loss** |   | **Total** |   |
|                                           |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Balance, December 31, 2002                |   | 4,116,627        |   | $                       | 41     |                              | $      | 72,125          |   | $                                     | (2,591 | )        | $      | (96,485 | ) | $ | (361 | ) | $ | (27,271 | ) |
|                                           |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Comprehensive income (loss):                   |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Net loss                                       |   | —           |   | —                  |   | —                            |   | —          |   | (56,394                               | )      | —   |   | (56,394 | ) |
| Unrealized loss on interest rate swap contract |   | —           |   | —                  |   | —                            |   | —          |   | —                                |   | (3       | )      | (3 | ) |
|                                           |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   | (56,397 | ) |
|                                           |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Noncash dividend accretion on preferred stock  |   | —           |   | —                  |   | (6,765                            | )      | —          |   | —                                |   | —   |   | (6,765 | ) |
|                                           |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Notes receivable interest accrued              |   | —           |   | —                  |   | —                            |   | (111            | )      | —                                |   | —   |   | (111 | ) |
|                                           |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Balance, September 30, 2003 (Unaudited)   |   | 4,116,627        |   | $                       | 41     |                              | $      | 65,360          |   | $                                     | (2,702 | )        | $      | (152,879 | ) | $ | (364 | ) | $ | (90,544 | ) |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

3

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated Statements of Cash Flows**

 
|                                                                               |   | **Nine Months Ended  September 30,** |    |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|
| **(In thousands)**                                                                 |   | **2003**                                  |    | **2002** |   |
|                                                                               |   | **(Unaudited)**                           |    |
|                                                                               |   |                                      |    |   |   |
| **Cash flows from operating activities:**                                          |   |                                      |    |   |   |
| Net loss                                                                           |   | $                                         | (56,394 | ) | $ | (60,455 | ) |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                                      |    |   |   |
| Loss from  discontinued operations                                                 |   | 5,650                                     |    | 34,177 |   |
| Cumulative  effect of change in accounting principle                               |   | —                                    |    | 17,828 |   |
| Minority  interest in preferred stock of subsidiaries                              |   | 4,972                                     |    | 4,301 |   |
| Depreciation  and amortization                                                     |   | 9,401                                     |    | 10,116 |   |
| Noncash  portion of restructuring, asset impairment and other related charges      |   | 43,926                                    |    | 7,396 |   |
| Deferred  income taxes                                                             |   | (11,654                                   | )       | (47 | ) |
| Other, net                                                                         |   | 228                                       |    | 170 |   |
| Changes in  assets and liabilities:                                                |   |                                      |    |   |   |
| Accounts  receivable                                                               |   | 950                                       |    | 14,455 |   |
| Inventories                                                                        |   | (14,023                                   | )       | (1,682 | ) |
| Prepaid  expenses and other assets                                                 |   | (734                                      | )       | (710 | ) |
| Accounts  payable                                                                  |   | 1,159                                     |    | 125 |   |
| Accrued  liabilities                                                               |   | (14,902                                   | )       | (18,452 | ) |
| Income taxes  payable                                                              |   | 276                                       |    | 431 |   |
| Other  long-term liabilities                                                       |   | 3,620                                     |    | 190 |   |
| Net cash  provided by (used for) operating activities                              |   | (27,525                                   | )       | 7,843 |   |
|                                                                               |   |                                      |    |   |   |
| **Cash flows from investing activities:**                                          |   |                                      |    |   |   |
| Net cash  proceeds from sale of Specialty Avionics Group                           |   | 132,800                                   |    | — |   |
| Capital  expenditures                                                              |   | (3,090                                    | )       | (3,045 | ) |
| Cash paid  for acquisition contingent consideration                                |   | (600                                      | )       | (5,890 | ) |
| Net cash  provided by (used for) investing activities                              |   | 129,110                                   |    | (8,935 | ) |
|                                                                               |   |                                      |    |   |   |
| **Cash flows from financing activities:**                                          |   |                                      |    |   |   |
| Principal  payments on term debt, capitalized leases and other debt                |   | (130,875                                  | )       | (9,907 | ) |
| Net borrowings  under senior revolving credit facility                             |   | 17,400                                    |    | 9,000 |   |
| Proceeds  from the sale of common stock                                            |   | —                                    |    | 5,000 |   |
| Other  long-term borrowings                                                        |   | —                                    |    | 1,145 |   |
| Deferred  financing costs                                                          |   | —                                    |    | (1,663 | ) |
| Other, net                                                                         |   | —                                    |    | (368 | ) |
| Net cash  provided by (used for) financing activities                              |   | (113,475                                  | )       | 3,207 |   |
|                                                                               |   |                                      |    |   |   |
| Net cash  provided by discontinued operations                                      |   | 2,194                                     |    | 12,960 |   |
|                                                                               |   |                                      |    |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | (9,696                                    | )       | 15,075 |   |
| Cash and  cash equivalents at beginning of period                                  |   | 12,421                                    |    | 9,478 |   |
| Cash and  cash equivalents at end of period                                        |   | $                                         | 2,725   |   | $ | 24,553 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

4

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Condensed Notes to ConsolidatedFinancial Statements(Unaudited)**

 

**Note 1.**                             Summaryof Significant Accounting Policies

** **

**Basis of Presentation**

** **

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

 

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

 

As the Company originallydescribed in its Form 10-K for the year ended December 31, 2002, itsfailure to consummate the sale of the Specialty Avionics Group by June 30,2003 would have been an event of default under the amended senior creditfacility.  As a result, the Company’s independentaccountants qualified their report on its audited financial statements for theyear ended December 31, 2002 with respect to its ability to continue as agoing concern.  Consummation of the saleand repayment of $130.0 million of borrowings on May 23, 2003 alleviatedthe independent accountants’ doubt about the Company’s ability to continue as agoing concern.  As a result, theCompany’s independent accountants issued a revised, unqualified report on itsfinancial statements, which the Company included in Amendment No. 1 to its Form10-K for the year ended 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  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| **(In thousands)**                                                                                                                             |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                                                                                           |   | **(Unaudited)**                            |   |
| Net income  (loss), as reported                                                                                                                |   | $                                          | (4,461 | )                                         | $      | 1,044 |   | $ | (56,394 | ) | $ | (60,455 | ) |
| Less total  stock-based employee compensation expense determined under the fair value  based method for all awards, net of related tax effects |   | (94                                        | )      | (94                                       | )      | (282 | ) | (282 | ) |
| Pro forma  net income (loss)                                                                                                                   |   | $                                          | (4,555 | )                                         | $      | 950 |   | $ | (56,676 | ) | $ | (60,737 | ) |

 

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

 

**Accounting Pronouncements Adopted January 1, 2003**

** **

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

 

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

* *

Among other things, SFASNo. 145 rescinds various pronouncements regarding early extinguishment of debtand allows extraordinary accounting treatment for early extinguishment onlywhen the provisions of Accounting Principles Board Opinion No. 30, “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 (Note3).

 

*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 also clarifiesthat a guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The initial recognition andinitial measurement provisions of FIN No. 45 are applicable to the Company on aprospective basis to guarantees issued or modified after December 31,2002.  However, the disclosurerequirements in FIN No. 45 are effective for the Company’s financial statementsfor periods ending after December 15, 2002.  The Company is not a party to any agreement in which it is aguarantor of indebtedness of others therefore the adoption of interpretationdid not have an impact on the Company’s financial position, results ofoperations or cash flows.  Thedisclosure requirements of this interpretation were adopted by the Company asof December 31, 2002.

 

**Recently Issued Accounting Pronouncement**

** **

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

* *

Issued in May 2003,SFAS No. 150 establishes standards for the classification and measurement ofcertain financial instruments with characteristics of both liabilities andequity.  SFAS No. 150 requiresclassification of financial instruments within its scope as a liability, includingfinancial instruments issued in the form of shares that are mandatorilyredeemable, because those financial instruments are deemed to be, in essence,obligations of the issuer.  The Companywill be required to reclassify all of its mandatorily redeemable preferredstock as a liability commencing January 1, 2004 and reflect quarterlydividend accretion on its 14% preferred stock as a charge against pre-taxincome in future periods.

 

7

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**Note 2.**                             Dispositionof 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,the Company entered into a definitive agreement to sell its equity interests inthe subsidiaries comprising its Specialty Avionics Group to Wings Holdings,Inc., an affiliate of Odyssey Investment Partners, LLC, for $140,000,000 incash.  The sale was consummated onMay 23, 2003.  The selling price issubject to a post-closing adjustment related to the amount of working capitalat closing.  The post-closing adjustmentis currently the subject of arbitration between the parties in which the buyeris asserting a claim for an approximate $3,200,000 purchase pricereduction.  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.

 

The following tablessummarize the financial position, results operations and cash flows of theSpecialty Avionics Group.

 

8

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| **(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  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| **(In thousands)**                                   |   | **2003**                                   |   | **2002**                                  |   | **2003 (1)** |   | **2002** |   |
|                                                 |   | **(Unaudited)**                            |   |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Results of  Operations:                              |   |                                       |   |                                      |   |   |   |   |   |
| Revenues                                             |   | $                                          | — |                                      | $      | 23,410 |   | $ | 36,595 |   | $ | 73,793 |   |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Operating  expenses:                                 |   |                                       |   |                                      |   |   |   |   |   |
| Costs and  expenses                                  |   | —                                     |   | 17,988                                    |   | 30,128 |   | 56,762 |   |
| Impairment  of goodwill                              |   | —                                     |   | —                                    |   | 7,500 |   | — |   |
| Amortization  of intangible assets                   |   | —                                     |   | 557                                       |   | 878 |   | 1,671 |   |
| Total  operating expenses                            |   | —                                     |   | 18,545                                    |   | 38,506 |   | 58,433 |   |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Income  (loss) from operations                       |   | —                                     |   | 4,865                                     |   | (1,911 | ) | 15,360 |   |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Other  expenses:                                     |   |                                       |   |                                      |   |   |   |   |   |
| Interest  expense:                                   |   |                                       |   |                                      |   |   |   |   |   |
| Debt  required to be repaid with proceeds from sale  |   | —                                     |   | 2,028                                     |   | 2,952 |   | 5,702 |   |
| Debt  obligations assumed by the buyer               |   | —                                     |   | 198                                       |   | 270 |   | 600 |   |
| Other  expenses, net                                 |   | —                                     |   | 156                                       |   | 153 |   | 342 |   |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Pre-tax  income (loss)                               |   | —                                     |   | 2,483                                     |   | (5,286 | ) | 8,716 |   |
| Provision  for income taxes                          |   | —                                     |   | 958                                       |   | 1,053 |   | 3,571 |   |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Income  (loss) before change in accounting principle |   | —                                     |   | 1,525                                     |   | (6,339 | ) | 5,145 |   |
| Cumulative  effect of change in accounting principle |   | —                                     |   | —                                    |   | — |   | (39,322 | ) |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Income  (loss) from operations                       |   | —                                     |   | 1,525                                     |   | (6,339 | ) | (34,177 | ) |
| Gain on  sale, net of tax                            |   | —                                     |   | —                                    |   | 689 |   | — |   |
|                                                 |   |                                       |   |                                      |   |   |   |   |   |
| Net income  (loss) from discontinued operations      |   | $                                          | — |                                      | $      | 1,525 |   | $ | (5,650 | ) | $ | (34,177 | ) |

 

----

(1)                      Reflects theresults of operations through May 23, 2003, the date of sale.

 

9

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|                                                  |   | **Nine Months Ended  September 30,** |   |
|-------------------------------------------------------|--------|-------------------------------------------|--------|
| **(In thousands)**                                    |   | **2003 (1)**                              |   | **2002** |   |
|                                                  |   | **(Unaudited)**                           |   |
|                                                  |   |                                      |   |   |   |
| Cash Flows  Provided By (Used For):                   |   |                                      |   |   |   |
| Operating  activities                                 |   | $                                         | 3,760  |   | $ | 14,241 |   |
| Investing  activities                                 |   | (902                                      | )      | (759 | ) |
| Financing  activities                                 |   | (649                                      | )      | (747 | ) |
| Net  (increase) decrease in cash and cash equivalents |   | (13                                       | )      | 190 |   |
| Effect of  foreign currency translation on cash       |   | (2                                        | )      | 35 |   |
| Net cash  provided by discontinued operations         |   | $                                         | 2,194  |   | $ | 12,960 |   |

 

----

 

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

 

**Note 3.**                             Restructuring,Asset Impairment and Other Related Charges

** **

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

 
|                                                                       |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| **(In thousands)**                                                         |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                       |   | **(Unaudited)**                            |   |
|                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Nature of  charges:                                                        |   |                                       |   |                                      |   |   |   |   |   |
| Seating  Product Line and Furniture Manufacturing Facilities Restructuring |   | $                                          | — |                                      | $      | — |   | $ | 13,394 |   | $ | — |   |
| Seat  Manufacturing Facilities Restructuring                               |   | —                                     |   | —                                    |   | — |   | 6,294 |   |
| Asset  Realignment Restructuring                                           |   | —                                     |   | 1,486                                     |   | — |   | 6,901 |   |
| Goodwill  impairment charges                                               |   | —                                     |   | —                                    |   | 41,500 |   | — |   |
| Total  pre-tax charges                                                     |   | $                                          | — |                                      | $      | — |   | $ | 54,894 |   | $ | 13,195 |   |
|                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Business  segment recording the charges:                                   |   |                                       |   |                                      |   |   |   |   |   |
| Cabin  Management                                                          |   | $                                          | — |                                      | $      | 1,486 |   | $ | 47,394 |   | $ | 13,195 |   |
| Systems  Integration                                                       |   | —                                     |   | —                                    |   | — |   | — |   |
| Total  continuing operations                                               |   | —                                     |   | 1,486                                     |   | 47,394 |   | 13,195 |   |
| Discontinued  operations (Specialty Avionics)                              |   | —                                     |   | —                                    |   | 7,500 |   | — |   |
| Total  pre-tax charges                                                     |   | $                                          | — |                                      | $      | 1,486 |   | $ | 54,894 |   | $ | 13,195 |   |
|                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Charged to  operations:                                                    |   |                                       |   |                                      |   |   |   |   |   |
| Cost of  sales                                                             |   | $                                          | — |                                      | $      | 670 |   | $ | 12,835 |   | $ | 6,616 |   |
| Selling,  general and administrative expenses                              |   | —                                     |   | 816                                       |   | 559 |   | 6,579 |   |
| Impairment  of goodwill                                                    |   | —                                     |   | —                                    |   | 34,000 |   | — |   |
| Discontinued  operations (Specialty Avionics)                              |   | —                                     |   | —                                    |   | 7,500 |   | — |   |
| Total  pre-tax charges                                                     |   | $                                          | — |                                      | $      | 1,486 |   | $ | 54,894 |   | $ | 13,195 |   |
|                                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Components  of charges:                                                    |   |                                       |   |                                      |   |   |   |   |   |
| Continuing  operations:                                                    |   |                                       |   |                                      |   |   |   |   |   |
| Noncash  charges                                                           |   | $                                          | — |                                      | $      | 1,486 |   | $ | 43,926 |   | $ | 7,396 |   |
| Cash charges                                                               |   | —                                     |   | —                                    |   | 3,468 |   | 5,799 |   |
| Total  continuing operations pre-tax charges                               |   | —                                     |   | 1,486                                     |   | 47,394 |   | 13,195 |   |
| Discontinued  operations (noncash charges)                                 |   | —                                     |   | —                                    |   | 7,500 |   | — |   |
| Total  pre-tax charges                                                     |   | $                                          | — |                                      | $      | 1,486 |   | $ | 54,894 |   | $ | 13,195 |   |

 

10

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**Seating Product Line and Furniture ManufacturingFacilities 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 Line Consolidation. *The curtailment**ofseveral seating product offerings and conversion of seat products whichincorporate a new single-design technology resulted in the write-off of$6,262,000 of inventoried costs related to the discontinued product offerings.

 

•                  *Lease Termination and Related Charges. *Lease termination costs related to future estimated rental paymentsunder existing long-term lease agreements for the facilities permanentlyvacated in connection with down-sizing a furniture manufacturing facility.  Future payments have been reduced by theexpected sublease income.  The netfuture payments are based on estimated current market rates and anticipateddates that these facilities will be subleased. If market-rates decrease or should it take longer than expected tosublease these facilities, the actual loss could exceed these estimates.  Other related charges include the write-offof leasehold improvements related to the vacated facilities.

 

•                  *Excess and Obsolete Inventory Write-Downs. *Inventory was written down by $3,073,000 to reflect its net realizablevalue for quantities on hand exceeding current and forecast order backlogrequirements and obsolete inventory related to the curtailed seatingproduct offerings.

 

•                  *Severance and Other Compensation Costs. *The Company reduced its total workforce at the down-sized facility by49 employees, or 37%, from December 31, 2002 levels.

 

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

 
|                                                     |   | **Total**       |   | **Amounts Incurred** |   | **Balance at  September 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 (1)          |   | 3,876           |   | (591                 | )      | (322                               | )      | 2,963 |   |
| Excess and obsolete inventory write-downs                |   | 3,073           |   | (3,073               | )      | —                             |   | — |   |
| Severance and other compensation costs                   |   | 183             |   | —               |   | (183                               | )      | — |   |
| Total                                                    |   | $               | 13,394 |                 | $      | (9,926                             | )      | $ | (505 | ) | $ | 2,963 |   |

 

----

 

(1)                      As requiredby SFAS No. 146, the charges recorded were discounted by $560,000 to initiallymeasure and reflect the liabilities incurred as a result of the restructuringplan at their fair value as of June 30, 2003.  Subsequent to September 30, 2003, the Company entered intoan agreement with lessor to terminate the Company’s remaining lease obligationon the facilities permanently vacated. As required by SFAS No. 146, the cumulative effect of a changesresulting from revisions to either the timing or the amount of estimated cashflows will be recognized as an adjustment to the liability in the period of thechange.

 

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

 

11

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**Seat Manufacturing Facilities Restructuring**

** **

During the first quarterof fiscal 2002, the Company announced it would consolidate the production offour seating and related manufacturing facilities into two, resulting in thepermanent closure of two facilities. This 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 Receivable Write-Downs.*  Inconnection with the consolidation of all production, the Company discontinuedmanufacturing certain products, principally those which overlap.  Inventory and certain receivables related tothe discontinued products were written down to net realizable value.

 

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

 

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

 

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

 

•                  *Other Asset Impairment Related Expenses.*  Other expenses pertain to FAA retesting andrecertification of products manufactured at a different facility, moving,transportation and travel costs and shutdown / startup costs.  Such costs were charged to expense as incurred.

 

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 Realignment Restructuring**

** **

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 workingcapital.  This plan included permanentlyclosing one manufacturing facility and idling a second facility for anindefinite period, curtailing several product development programs andinstituting workforce reductions.  Dueto the ongoing weakness of the business, VIP and head-of-state aircraft market,the Company decided during the second quarter of fiscal 2002 to permanentlyclose the temporarily idled manufacturing facility.  The restructuring, asset impairment and other related chargesrecorded during fiscal 2002 were comprised of the following:

 

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

 

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

 

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

 

The components of theamounts incurred were as follows:

 
|                                 |   | **Charges Recorded During the  Year Ended December 31, 2002** |   |
|--------------------------------------|--------|--------------------------------------------------------------------|--------|
| **(In thousands)**                   |   | **2nd  Quarter**                                                   |   | **3****rd****Quarter** |   | **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 sellits equity interests in the subsidiaries comprising its Specialty AvionicsGroup for $140,000,000 in cash.  Basedupon the fair value of the group implied in the definitive agreement, theCompany determined that the carrying value of the group’s net assets was notfully recoverable.  As a result, theCompany recorded a goodwill impairment charge of $7,500,000 during the threemonths ended March 31, 2003 to reduce the carrying value to estimatednet realizable value.

 

13

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**Note 4.**                             Inventories

** **

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

 
| **(In thousands)**                                                           |   | **September 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**              |   |                        |   |
| Raw  materials                                                               |   | $                            | 31,311 |                        | $      | 28,911 |   |
| Work-in-process:                                                             |   |                         |   |                        |   |
| Direct and  indirect manufacturing costs                                     |   | 9,289                        |   | 6,843                       |   |
| Program  costs, principally engineering                                      |   | 14,289                       |   | 14,769                      |   |
| Finished  goods                                                              |   | 1,376                        |   | 4,773                       |   |
| Costs and  estimated earnings in excess of billings on uncompleted contracts |   | 8,178                        |   | 4,004                       |   |
| Total  inventories                                                           |   | $                            | 64,443 |                        | $      | 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 andobsolete inventory associated with the curtailed seating product offerings anddown-sizing of a furniture manufacturing facility was also charged to cost ofsales during the three months ended June 30, 2003.

 

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

 
| **(In thousands)**                                                            |   | **September 30,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                          |   | **(Unaudited)**              |   |                        |   |
| Costs  incurred on uncompleted contracts                                      |   | $                            | 69,495 |                        | $      | 49,572 |   |
| Estimated  earnings recognized                                                |   | 76,727                       |   | 63,699                      |   |
| Total costs  and estimated earnings                                           |   | 146,222                      |   | 113,271                     |   |
| Less  billings to date                                                        |   | (138,103                     | )      | (109,880                    | )      |
| Net                                                                           |   | $                            | 8,119  |                        | $      | 3,391 |   |
|                                                                          |   |                         |   |                        |   |
| Balance  sheet classification:                                                |   |                         |   |                        |   |
| Asset –  Costs and estimated earnings in excess of billings              |   | $                            | 8,178  |                        | $      | 4,004 |   |
| Liability –  Billings in excess of costs and estimated earnings (Note 7) |   | (59                          | )      | (613                        | )      |
| Net                                                                           |   | $                            | 8,119  |                        | $      | 3,391 |   |

 

Revenues and earnings forproducts manufactured under long-term contracts are recognized under thepercentage-of-completion method using total contract price, actual costsincurred to date and an estimate of the completion costs for eachcontract.  Provisions for estimatedlosses on uncompleted contracts are made in the period in which such losses aredetermined.

 

14

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**Note 5.**                             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, 2002as required under SFAS No. 142.  Fairvalue of each reporting unit was determined using a discounted cash flowapproach taking into consideration projections based on the individualcharacteristics of the reporting units, historical trends, market multiples forcomparable businesses and independent appraisals.  Unallocated goodwill was allocated to the reporting units forimpairment testing purposes.

 

The results indicatedthat the carrying value of goodwill was impaired.  The resulting impairment was primarily attributable to a changein the evaluation criteria for goodwill utilized under previous accountingguidance to the fair value approach stipulated in SFAS No. 142.  In accordance with the transitionalprovision of SFAS No. 142, the Company recorded a $17,828,000 noncashwrite-down of goodwill (net of $878,000 income tax benefit) as ofJanuary 1, 2002 as a cumulative effect of a change in 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 nine months endedSeptember 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,  September 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 sellits equity 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 ended March 31, 2003to reduce the carrying value to estimated net realizable value.

 

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 value ofthe 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 fiscal 2003 upon completionof step two of the goodwill impairment model, which measures the amount ofimpairment.

 

**Note 6.**                             OtherAssets

** **

Other assets arecomprised of the following as of September 30, 2003 and December 31,2002:

 
| **(In thousands)**                                       |   | **September 30,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                     |   | **(Unaudited)**              |   |                        |   |
|                                                     |   |                         |   |                        |   |
| Identifiable  intangible assets with finite useful lives |   | $                            | 26,367 |                        | $      | 29,105 |   |
| Deferred  financing costs                                |   | 7,117                        |   | 9,168                       |   |
| Other  non-amortizable assets                            |   | 2,245                        |   | 1,155                       |   |
| Total other  assets                                      |   | $                            | 35,729 |                        | $      | 39,428 |   |

 

**Identifiable Intangible Assets with Finite UsefulLives**

** **

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

 
|                           |   | **September 30, 2003 (Unaudited)** |   | **December 31, 2002**    |   |
|--------------------------------|--------|-----------------------------------------|--------|-------------------------------|--------|
| **(In thousands)**             |   | **Cost**                                |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                           |   |                                    |   |                          |   |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                                       | 22,272 |                          | $      | (5,853 | ) | $ | 16,419 |   | $ | 22,272 |   | $ | (4,738 | ) | $ | 17,534 |   |
| Customer contracts             |   | 8,390                                   |   | (5,595                        | )      | 2,795 |   | 8,390 |   | (4,695 | ) | 3,695 |   |
| Engineering drawings           |   | 7,645                                   |   | (2,159                        | )      | 5,486 |   | 7,645 |   | (1,776 | ) | 5,869 |   |
| Other identifiable intangibles |   | 2,955                                   |   | (1,288                        | )      | 1,667 |   | 2,955 |   | (948 | ) | 2,007 |   |
| Total identifiable intangibles |   | $                                       | 41,262 |                          | $      | (14,895 | ) | $ | 26,367 |   | $ | 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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**Note 7.**                             AccruedLiabilities

** **

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

 
| **(In thousands)**                                                           |   | **September 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**              |   |                        |   |
| Salaries, wages, compensated absences and payroll  related taxes             |   | $                            | 7,297  |                        | $      | 9,212 |   |
| Customer advances and deposits                                               |   | 1,772                        |   | 4,662                       |   |
| Accrued interest                                                             |   | 2,397                        |   | 7,465                       |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |   | 59                           |   | 613                         |   |
| Acquisition related contingent consideration                                 |   | —                       |   | 600                         |   |
| Other accrued liabilities                                                    |   | 4,903                        |   | 8,942                       |   |
| Total accrued liabilities                                                    |   | $                            | 16,428 |                        | $      | 31,494 |   |

 

**Note 8.**                             Long-TermDebt

** **

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

 
| **(In thousands)**                                                                    |   | **September 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                  |   | **(Unaudited)**              |    |                        |   |
| Senior credit facility:                                                               |   |                         |    |                        |   |
| Term loans                                                                            |   | $                            | 134,925 |                        | $      | 264,200 |   |
| Revolving line of credit                                                              |   | 23,400                       |    | 6,000                       |   |
| 12% senior subordinated notes                                                         |   | 100,000                      |    | 100,000                     |   |
| Capital lease obligations and term debt financing,  secured by property and equipment |   | 9,257                        |    | 10,331                      |   |
| Other indebtedness                                                                    |   | —                       |    | 486                         |   |
| Total long-term debt                                                                  |   | 267,582                      |    | 381,017                     |   |
| Less current portion                                                                  |   | (36,162                      | )       | (16,317                     | )      |
| Long-term debt, less current portion                                                  |   | $                            | 231,420 |                        | $      | 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 borrowingswith the estimated net proceeds from the sale. The Company may be required to repay additional borrowings upon finaldetermination of the net proceeds from the sale (Note 2).

 

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.

 

As of September 30,2003, the Company reclassified its revolving line of credit borrowings underthe senior credit facility to current. The revolving line of credit commitment expires on September 30,2004.

 

17

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**Note 9.**                             IncomeTaxes

** **

The components of income(loss) before income taxes and cumulative effect of change in accountingprinciple and the provisions for income tax benefit are as follows:

 
|                                                       |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| **(In thousands)**                                         |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                       |   | **(Unaudited)**                            |   |
| Pre-tax  income (loss) reported by:                        |   |                                       |   |                                      |   |   |   |   |   |
| Continuing  operations                                     |   | $                                          | (4,318 | )                                         | $      | (143 | ) | $ | (61,231 | ) | $ | (11,303 | ) |
| Discontinued  operations                                   |   | —                                     |   | 2,483                                     |   | (5,286 | ) | 8,716 |   |
| Consolidated  pre-tax income (loss)                        |   | $                                          | (4,318 | )                                         | $      | 2,340 |   | $ | (66,517 | ) | $ | (2,587 | ) |
|                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Total  provision for income taxes (benefit):               |   |                                       |   |                                      |   |   |   |   |   |
| Income tax  benefit based on pre-tax loss                  |   | $                                          | (1,188 | )                                         | $      | 1,296 |   | $ | (23,821 | ) | $ | 718 |   |
| Net deferred  tax asset valuation allowance                |   | 1,331                                      |   | —                                    |   | 14,387 |   | — |   |
| Net income  tax benefit                                    |   | $                                          | 143    |                                      | $      | 1,296 |   | $ | (9,434 | ) | $ | 718 |   |
|                                                       |   |                                       |   |                                      |   |   |   |   |   |
| Allocation  of total provision for income taxes (benefit): |   |                                       |   |                                      |   |   |   |   |   |
| Continuing  operations                                     |   | $                                          | 143    |                                      | $      | 338 |   | $ | (10,487 | ) | $ | (2,853 | ) |
| Discontinued  operations                                   |   | —                                     |   | 958                                       |   | 1,053 |   | 3,571 |   |
| Net  provision for income tax benefit                      |   | $                                          | 143    |                                      | $      | 1,296 |   | $ | (9,434 | ) | $ | 718 |   |

 

For the three months andnine months ended September 30, 2003 and 2002, the provision for incometaxes, 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 andnon-deductible expenses, principally the non-deductible portion of goodwillimpairment charges and minority interest in preferred stock of subsidiary.

 

As of June 30, 2003,the Company had net deferred tax assets of $12,841,000, prior to recording avaluation allowance in June 2003, as opposed to net deferred taxliabilities in prior periods.  Thechange to a net asset position was primarily caused by the $34,000,000 goodwillimpairment charge 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 recoverability basedon 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. Based upon the results of operations for the three months endedSeptember 30, 2003, the Company determined that and additional $1,331,000valuation allowance was required as of September 30, 2003.

 

18

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For periods prior toJune 30, 2003, the Company had net deferred tax liabilities ($9,002,000 asof March 31, 2003 and $10,647,000 as of December 31, 2002).  The full realization of the deferred assetswas achieved through the reversal of the deferred tax liabilities in futureperiods.  As a result, a valuationallowance was not required for periods prior to June 30, 2003.

 

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

 
| **(In thousands)**                                            |   | **September 30,****2003** |       | **December 31,****2002** |       |
|---------------------------------------------------------------|--------|--------------------------------|------------|-------------------------------|------------|
|                                                          |   | **(Unaudited)**                | ** ** |                          | ** ** |
|                                                          |   |                           |       |                          |       |
| Gross deferred tax assets:                                    |   |                           |       |                          |       |
| Loss carryforwards                                            |   | $                              | 16,759     |                          | $          | 12,173 |   |
| Accrued liabilities                                           |   | 7,081                          |       | 6,797                         |       |
| Inventory                                                     |   | 3,389                          |       | 4,252                         |       |
| Other                                                         |   | 848                            |       | 832                           |       |
| Gross deferred tax assets                                     |   | 28,077                         |       | 24,054                        |       |
|                                                          |   |                           |       |                          |       |
| Gross deferred tax (liabilities):                             |   |                           |       |                          |       |
| Intangible assets                                             |   | (9,965                         | )          | (31,267                       | )          |
| Program costs                                                 |   | (3,707                         | )          | (6,168                        | )          |
| Property and equipment                                        |   | (238                           | )          | (3,119                        | )          |
| Other                                                         |   | —                         |       | (56                           | )          |
| Gross deferred tax (liabilities)                              |   | (13,910                        | )          | (40,610                       | )          |
|                                                          |   |                           |       |                          |       |
| Net deferred assets (liabilities) before valuation  allowance |   | 14,167                         |       | (16,556                       | )          |
| Net deferred tax asset valuation allowance                    |   | (14,387                        | )          | —                        |       |
| Net deferred tax liability                                    |   | $                              | (220       | )                             | $          | (16,556 | ) |
|                                                          |   |                           |       |                          |       |
| Balance sheet classification:                                 |   |                           |       |                          |       |
| Continuing operations:                                        |   |                           |       |                          |       |
| Current deferred tax asset                                    |   | $                              | 180        |                          | $          | 16,430 |   |
| Noncurrent deferred tax (liability)                           |   | (400                           | )          | (27,077                       | )          |
| Net continuing operations                                     |   | (220                           | )          | (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)                                  |   | $                              | (220       | )                             | $          | (16,556 | ) |

 

19

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**Note 10.**                      CapitalStructure

 

**MandatorilyRedeemable Preferred Stock**

 

The table belowsummarizes the increase in mandatorily redeemable preferred stock during thenine months ended September 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                       |   | 46,207                                       |   | 4,621                                      |   | 351 |   | 4,972 |   | — |   | — |   |
| Noncash dividend accretion                                             |   | —                                       |   | —                                     |   | — |   | — |   | — |   | 6,765 |   |
| Balance, September 30, 2003 (Unaudited)                           |   | 416,268                                      |   | $                                          | 41,627 |   | $ | (2,574 | ) | $ | 39,053 |   | 342,417 |   | $ | 68,987 |   |
|                                                                   |   |                                         |   |                                       |   |   |   |   |   |   |   |   |   |
| Per share liquidation value as of September 30,  2003 (Unaudited) |   |                                         |   | $                                          | 100.00 |   |   |   |   |   |   |   | $ | 201.47 |   |

 

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

 

***DeCrane Aircraft 16% Mandatorily RedeemablePreferred Stock***

** **

Holders of the preferredstock are entitled to receive, when, as and if declared, dividends at a rateequal to 16% per annum.  Prior toJune 30, 2005, DeCrane Aircraft may, at its option, pay dividends either incash or by the issuance of additional shares of preferred stock.  Since the preferred stock issuance date onJune 30, 2000, DeCrane Aircraft has elected to issue additional shares inlieu of cash dividend payments; such shares are reflected as a component ofminority interest in preferred stock of subsidiary.  The preferred stock is mandatorily redeemable in cash onMarch 31, 2009.

 

***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 tothe liquidation value of the preferred stock, which, in turn, increases theredemption obligation.  The preferredstock is mandatorily redeemable in cash on September 30, 2009.

 

20

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**Note 11.**                      Commitmentsand Contingencies

** **

**Litigation**

** **

As part of itsinvestigation of the crash of Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the “CTSB”)initially notified the Company that it recovered burned wire that was attachedto the in-flight entertainment system installed on some of Swissair’s aircraftby 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.

 

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

 

On September 22,2003, the Company and its insurers entered into an agreement with Boeing,Swissair and each of their respective insurers, in which the Company received arelease from those parties and an indemnification by Boeing and Swissair’sinsurers against claims asserted on behalf of passengers for compensatorydamage and by others for contribution and/or indemnity claims.  Company management believes the agreementadequately protects the Company from all existing litigation pending againstthe Company arising from this catastrophic incident.  Punitive damages are not subject to the indemnity; however, whilesome of the passenger actions originally asserted punitive damages, by virtueof a court order, claims for punitive damages may not be prosecuted.  The aforementioned agreement did not resultin the Company incurring a loss and, accordingly, no charge to operations wasrequired.

 

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.

 

**Note 12.**                      BusinessSegment 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 interiorcabin components, including cabin interior furnishings, cabin managementsystems, seating and composite components;

 

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

 

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

 

21

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

 

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

 

The financial measureAdjusted EBITDA, as defined, excludes certain charges reflected in theCompany’s financial statements which are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).  However, the Company’s presentation 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 be consistentwith that of other companies and should be viewed in conjunction withmeasurements that are computed in accordance GAAP, such as net income (loss),the nearest comparable GAAP financial measure. A reconciliation of Adjusted EBITDA to net income (loss) is includedherein to clarify the differences between these financial measures.

 

The accounting policiesof the groups are substantially the same as those described in the summary ofsignificant accounting policies Note 1 to the audited financial statements.  Some transactions are recorded at theCompany’s corporate headquarters and are not allocated to the groups, such asmost of the Company’s cash and cash equivalents, debt and related net interestexpense, corporate headquarters costs and income taxes.

 

22

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The tables belowsummarize selected financial data by business segment.

 
|                                          |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|-----------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                            |   | **2003**                                   |       | **2002**                                  |       | **2003** |   | **2002** |   |
|                                          |   |                                       | ** ** | **(Unaudited)**                           | ** ** |   | ** ** |
|                                          |   |                                       |       |                                      |       |   |   |   |   |
| Revenues:                                     |   |                                       |       |                                      |       |   |   |   |   |
| Cabin  Management                             |   | $                                          | 29,655     |                                      | $          | 41,197 |   | $ | 89,910 |   | $ | 135,296 |   |
| Systems  Integration                          |   | 13,807                                     |       | 15,252                                    |       | 40,657 |   | 43,552 |   |
| Inter-group  elimination (1)                  |   | 811                                        |       | (238                                      | )          | (281 | ) | (525 | ) |
| Consolidated  totals                          |   | $                                          | 44,273     |                                      | $          | 56,211 |   | $ | 130,286 |   | $ | 178,323 |   |
|                                          |   |                                       |       |                                      |       |   |   |   |   |
| Adjusted  EBITDA (as defined):                |   |                                       |       |                                      |       |   |   |   |   |
| Cabin  Management                             |   | $                                          | 3,909      |                                      | $          | 8,995 |   | $ | 12,769 |   | $ | 25,498 |   |
| Systems  Integration                          |   | 3,698                                      |       | 4,798                                     |       | 10,035 |   | 13,190 |   |
| Corporate  (2)                                |   | (1,133                                     | )          | (1,360                                    | )          | (4,640 | ) | (4,547 | ) |
| Inter-group  elimination (3)                  |   | (1                                         | )          | 11                                        |       | 111 |   | 11 |   |
| Consolidated  totals (4)                      |   | $                                          | 6,473      |                                      | $          | 12,444 |   | $ | 18,275 |   | $ | 34,152 |   |
|                                          |   |                                       |       |                                      |       |   |   |   |   |
| **(In thousands)**                            |   |                                       | ** ** |                                      | ** ** | **September 30,  2003** | ** ** | **December 31,  2002** | ** ** |
|                                          |   |                                       | ** ** |                                      | ** ** | **(Unaudited)** | ** ** |   | ** ** |
|                                          |   |                                       |       |                                      |       |   |   |   |   |
| Total assets  (as of period end):             |   |                                       |       |                                      |       |   |   |   |   |
| Cabin  Management                             |   |                                       |       |                                      |       | $ | 241,990 |   | $ | 281,655 |   |
| Systems  Integration                          |   |                                       |       |                                      |       | 68,186 |   | 62,437 |   |
| Corporate  (5)                                |   |                                       |       |                                      |       | 15,042 |   | 44,247 |   |
| Inter-group  elimination (6)                  |   |                                       |       |                                      |       | (5 | )  | (113 | ) |
| Continuing  operations                        |   |                                       |       |                                      |       | 325,213 |   | 388,226 |   |
| Discontinued  operations (Specialty Avionics) |   |                                       |       |                                      |       | — |   | 160,741 |   |
| Consolidated  totals                          |   |                                       |       |                                      |       | $ | 325,213 |   | $ | 548,967 |   |

 

----

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

 

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

 

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

 

23

----

 

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

 
|                                                       |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                         |   | **2003**                                   |       | **2002**                                  |       | **2003** |   | **2002** |   |
|                                                       |   |                                       | ** ** | **(Unaudited)**                           | ** ** |   | ** ** |
|                                                       |   |                                       |       |                                      |       |   |   |   |   |
| Consolidated  Adjusted EBITDA (as defined)                 |   | $                                          | 6,473      |                                      | $          | 12,444 |   | $ | 18,275 |   | $ | 34,152 |   |
| Restructuring,  asset impairment and other related charges |   | —                                     |       | (1,486                                    | )          | (47,394 | ) | (13,195 | ) |
| Depreciation  and amortization of long-lived assets (a)    |   | (2,383                                     | )          | (2,672                                    | )          | (7,350 | ) | (8,119 | ) |
| Acquisition  related charges not capitalized               |   | (10                                        | )          | (447                                      | )          | (27 | ) | (925 | ) |
| Other  noncash charges                                     |   | —                                     |       | —                                    |       | — |   | (138 | ) |
| Interest  expense                                          |   | (6,546                                     | )          | (6,459                                    | )          | (18,883 | ) | (18,541 | ) |
| Minority  interest in preferred stock of subsidiary        |   | (1,718                                     | )          | (1,486                                    | )          | (4,972 | ) | (4,301 | ) |
| Other  expenses, net                                       |   | (134                                       | )          | (37                                       | )          | (880 | ) | (236 | ) |
| Provision  for income (taxes) benefit                      |   | (143                                       | )          | (338                                      | )          | 10,487 |   | 2,853 |   |
| Income  (loss) from discontinued operations                |   | —                                     |       | 1,525                                     |       | (5,650 | ) | (34,177 | ) |
| Cumulative  effect of change in accounting principle       |   | —                                     |       | —                                    |       | — |   | (17,828 | ) |
| Net income  (loss)                                         |   | $                                          | (4,461     | )                                         | $          | 1,044 |   | $ | (56,394 | ) | $ | (60,455 | ) |

 

----

(a)          Reflects depreciationand amortization of long-lived assets and amortization of deferred financingcosts, which are classified as a component of interest expense, as follows:

 
|                                                |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|-----------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In thousands)**                                  |   | **2003**                                   |       | **2002**                                  |       | **2003** |   | **2002** |   |
|                                                |   |                                       | ** ** | **(Unaudited)**                           | ** ** |   | ** ** |
|                                                |   |                                       |       |                                      |       |   |   |   |   |
| Depreciation  and amortization of long-lived assets |   | $                                          | 2,383      |                                      | $          | 2,672 |   | $ | 7,350 |   | $ | 8,119 |   |
| Amortization  of deferred financing costs           |   | 676                                        |       | 701                                       |       | 2,051 |   | 1,997 |   |
| Consolidated  depreciation and amortization         |   | $                                          | 3,059      |                                      | $          | 3,373 |   | $ | 9,401 |   | $ | 10,116 |   |

 

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

 

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

 

24

----

 

**Note 13.**                      SupplementalCondensed Consolidating Financial 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)                      Eliminationof investments in subsidiaries.

 

(2)                      Eliminationof intercompany accounts.

 

(3)                      Eliminationof equity in earnings of subsidiaries.

 

25

----

 

**BalanceSheets**

 
|                                                                                               |   | **September 30, 2003 (Unaudited)** |    |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
| **(In thousands)**                                                                                 |   | **Issuer**                              |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                                         |   |                                    |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                    |   |                                    |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |   | $                                       | 2,533   |   | $ | 192 |   | $ | — |   | $ | — |   | $ | 2,725 |   |
| Accounts receivable, net                                                                           |   | —                                  |    | 23,983 |   | — |   | — |   | 23,983 |   |
| Inventories                                                                                        |   | —                                  |    | 64,443 |   | — |   | — |   | 64,443 |   |
| Other current assets                                                                               |   | 682                                     |    | 894 |   | — |   | — |   | 1,576 |   |
| Total current assets                                                                               |   | 3,215                                   |    | 89,512 |   | — |   | — |   | 92,727 |   |
| Property and equipment, net                                                                        |   | 1,962                                   |    | 32,365 |   | — |   | — |   | 34,327 |   |
| Other assets, principally goodwill and intangibles,  net                                           |   | 9,865                                   |    | 188,294 |   | — |   | — |   | 198,159 |   |
| Investments in subsidiaries                                                                        |   | 91,102                                  |    | — |   | (21,193 | ) | (69,909 | )(1) | — |   |
| Intercompany receivables                                                                           |   | 257,538                                 |    | 75,109 |   | — |   | (332,647 | )(2) | — |   |
| Total assets                                                                                       |   | $                                       | 363,682 |   | $ | 385,280 |   | $ | (21,193 | ) | $ | (402,556 | ) | $ | 325,213 |   |
|                                                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**   |   |                                    |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                  |   | $                                       | 34,991  |   | $ | 1,171 |   | $ | — |   | $ | — |   | $ | 36,162 |   |
| Other current liabilities                                                                          |   | 6,255                                   |    | 23,453 |   | — |   | — |   | 29,708 |   |
| Total current liabilities                                                                          |   | 41,246                                  |    | 24,624 |   | — |   | — |   | 65,870 |   |
| Long-term debt, less current portion                                                               |   | 223,421                                 |    | 7,999 |   | — |   | — |   | 231,420 |   |
| Intercompany payables                                                                              |   | 75,109                                  |    | 257,538 |   | — |   | (332,647 | )(2) | — |   |
| Other long-term liabilities                                                                        |   | 6,046                                   |    | 4,381 |   | — |   | — |   | 10,427 |   |
| Mandatorily redeemable preferred stock:                                                            |   |                                    |    |   |   |   |   |   |   |   |   |
| 14% preferred stock                                                                                |   | —                                  |    | — |   | 68,987 |   | — |   | 68,987 |   |
| Minority interest in 16% preferred stock of  subsidiary                                            |   | 39,053                                  |    | — |   | — |   | — |   | 39,053 |   |
|                                                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity (deficit):                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                    |   | 113,538                                 |    | 151,492 |   | 62,699 |   | (265,030 | )(1) | 62,699 |   |
| Accumulated deficit                                                                                |   | (134,731                                | )       | (60,390 | ) | (152,879 | ) | 195,121 | (1) | (152,879 | ) |
| Accumulated other comprehensive loss                                                               |   | —                                  |    | (364 | ) | — |   | — |   | (364 | ) |
| Total stockholders’ equity (deficit)                                                          |   | (21,193                                 | )       | 90,738 |   | (90,180 | ) | (69,909 | ) | (90,544 | ) |
| Total liabilities, mandatorily redeemable preferred  stock and stockholders’ equity (deficit) |   | $                                       | 363,682 |   | $ | 385,280 |   | $ | (21,193 | ) | $ | (402,556 | ) | $ | 325,213 |   |

 

26

----

 
|                                                                                               |   | **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 goodwill and 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 |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock:                                                            |   |                       |    |   |   |   |   |   |   |   |   |
| 14% preferred stock                                                                                |   | —                     |    | — |   | 62,222 |   | — |   | 62,222 |   |
| Minority interest in 16% preferred stock of  subsidiary                                            |   | 34,081                     |    | — |   | — |   | — |   | 34,081 |   |
|                                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| 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 |   |

 

27

----

 

**Statementsof Operations**

 
|                                               |   | **Nine Months Ended September 30, 2003  (Unaudited)** |       |
|----------------------------------------------------|--------|------------------------------------------------------------|------------|
| **(In thousands)**                                 |   | **Issuer**                                                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                               |   |                                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                           |   | $                                                          | —     |   | $ | 130,286 |   | $ | — |   | $ | — |   | $ | 130,286 |   |
| Cost of sales                                      |   | —                                                     |       | 111,338 |   | — |   | — |   | 111,338 |   |
|                                               |   |                                                       |       |   |   |   |   |   |   |   |   |
| Gross profit                                       |   | —                                                     |       | 18,948 |   | — |   | — |   | 18,948 |   |
|                                               |   |                                                       |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses       |   | 5,217                                                      |       | 13,489 |   | — |   | — |   | 18,706 |   |
| Impairment of goodwill                             |   | —                                                     |       | 34,000 |   | — |   | — |   | 34,000 |   |
| Amortization of intangible assets                  |   | —                                                     |       | 2,738 |   | — |   | — |   | 2,738 |   |
| Interest expense                                   |   | 18,535                                                     |       | 348 |   | — |   | — |   | 18,883 |   |
| Minority interest in preferred stock of subsidiary |   | —                                                     |       | — |   | 4,972 |   | — |   | 4,972 |   |
| Intercompany charges                               |   | (18,265                                                    | )          | 18,265 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                     |   | 36,449                                                     |       | 218 |   | 51,422 |   | (88,089 | )(3) | — |   |
| Other expenses, net                                |   | 33                                                         |       | 847 |   | — |   | — |   | 880 |   |
| Provision for income taxes (benefit)               |   | 9,453                                                      |       | (19,940 | ) | — |   | — |   | (10,487 | ) |
| Loss from discontinued operations                  |   | —                                                     |       | 5,432 |   | 218 |   | — |   | 5,650 |   |
|                                               |   |                                                       |       |   |   |   |   |   |   |   |   |
| Net loss                                           |   | $                                                          | (51,422    | ) | $ | (36,449 | ) | $ | (56,612 | ) | $ | 88,089 |   | $ | (56,394 | ) |

 
|                                                |   | **Nine  Months Ended September 30, 2002 (Unaudited)** |       |
|-----------------------------------------------------|--------|------------------------------------------------------------|------------|
| **(In thousands)**                                  |   | **Issuer**                                                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                                |   |                                                       |       |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                                          | —     |   | $ | 178,323 |   | $ | — |   | $ | — |   | $ | 178,323 |   |
| Cost of sales                                       |   | —                                                     |       | 130,467 |   | — |   | — |   | 130,467 |   |
|                                                |   |                                                       |       |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                                     |       | 47,856 |   | — |   | — |   | 47,856 |   |
|                                                |   |                                                       |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses        |   | 8,339                                                      |       | 25,115 |   | — |   | — |   | 33,454 |   |
| Amortization of intangible assets                   |   | —                                                     |       | 2,627 |   | — |   | — |   | 2,627 |   |
| Interest expense                                    |   | 18,390                                                     |       | 151 |   | — |   | — |   | 18,541 |   |
| Minority interest in preferred stock of subsidiary  |   | —                                                     |       | — |   | 4,301 |   | — |   | 4,301 |   |
| Intercompany charges                                |   | (17,790                                                    | )          | 17,790 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                      |   | 50,395                                                     |       | 9,358 |   | 56,154 |   | (115,907 | )(3) | — |   |
| Other expenses (income), net                        |   | 251                                                        |       | (15 | ) | — |   | — |   | 236 |   |
| Provision for income taxes (benefit)                |   | (4,915                                                     | )          | 2,062 |   | — |   | — |   | (2,853 | ) |
| Loss from discontinued operations                   |   | —                                                     |       | 24,819 |   | 9,358 |   | — |   | 34,177 |   |
| Cumulative effect of change in accounting principle |   | 1,484                                                      |       | 16,344 |   | — |   | — |   | 17,828 |   |
|                                                |   |                                                       |       |   |   |   |   |   |   |   |   |
| Net loss                                            |   | $                                                          | (56,154    | ) | $ | (50,395 | ) | $ | (69,813 | ) | $ | 115,907 |   | $ | (60,455 | ) |

 

28

----

 

**Statementsof Cash Flows**

 
|                                                         |   | **Nine Months Ended September 30, 2003 (Unaudited)** |       |
|--------------------------------------------------------------|--------|-----------------------------------------------------------|------------|
| **(In thousands)**                                           |   | **Issuer**                                                | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                                         |   |                                                      |       |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**                   |   |                                                      |       |   |   |   |   |   |   |   |   |
| Net loss                                                     |   | $                                                         | (51,422    | ) | $ | (36,449 | ) | $ | (56,612 | ) | $ | 88,089 | (3) | $ | (56,394 | ) |
| Loss from discontinued operations                            |   | —                                                    |       | 5,432 |   | 218 |   | — |   | 5,650 |   |
| Noncash adjustments:                                         |   |                                                      |       |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                               |   | 36,449                                                    |       | 218 |   | 51,422 |   | (88,089 | )(3) | — |   |
| Other noncash adjustments                                    |   | (9,168                                                    | )          | 51,069 |   | 4,972 |   | — |   | 46,873 |   |
| Changes in working capital                                   |   | (5,350                                                    | )          | (18,304 | ) | — |   | — |   | (23,654 | ) |
| Net cash provided by (used for) operating activities         |   | (29,491                                                   | )          | 1,966 |   | — |   | — |   | (27,525 | ) |
|                                                         |   |                                                      |       |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**                   |   |                                                      |       |   |   |   |   |   |   |   |   |
| Net proceeds from sale of Specialty Avionics Group           |   | 132,800                                                   |       | — |   | — |   | — |   | 132,800 |   |
| Capital expenditures                                         |   | (26                                                       | )          | (3,064 | ) | — |   | — |   | (3,090 | ) |
| Cash paid for acquisitions                                   |   | (600                                                      | )          | — |   | — |   | — |   | (600 | ) |
| Net cash provided by (used for) investing activities         |   | 132,174                                                   |       | (3,064 | ) | — |   | — |   | 129,110 |   |
|                                                         |   |                                                      |       |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities:**                   |   |                                                      |       |   |   |   |   |   |   |   |   |
| Principal payments on long-term debt, leases and  other debt |   | (129,893                                                  | )          | (982 | ) | — |   | — |   | (130,875 | ) |
| Net senior revolving credit facility borrowings              |   | 17,400                                                    |       | — |   | — |   | — |   | 17,400 |   |
| Net cash used for financing activities                       |   | (112,493                                                  | )          | (982 | ) | — |   | — |   | (113,475 | ) |
| Net cash provided by discontinued operations                 |   | —                                                    |       | 2,194 |   | — |   | — |   | 2,194 |   |
| Net increase (decrease) in cash and equivalents              |   | (9,810                                                    | )          | 114 |   | — |   | — |   | (9,696 | ) |
| Cash and equivalents at beginning of period                  |   | 12,343                                                    |       | 78 |   | — |   | — |   | 12,421 |   |
| Cash and equivalents at end of period                        |   | $                                                         | 2,533      |   | $ | 192 |   | $ | — |   | $ | — |   | $ | 2,725 |   |

 

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|                                                 |   | **Nine Months Ended September 30, 2002 (Unaudited)** |       |
|------------------------------------------------------|--------|-----------------------------------------------------------|------------|
| **(In thousands)**                                   |   | **Issuer**                                                | ** ** | **GuarantorSubsidiaries** | ** ** | **Non-GuarantorSubsidiaries** | ** ** | **ConsolidatingAdjustments** | ** ** | **ConsolidatedTotal** | ** ** |
|                                                 |   |                                                      |       |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**           |   |                                                      |       |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                                         | (56,154    | ) | $ | (50,395 | ) | $ | (69,813 | ) | $ | 115,907 | (3) | $ | (60,455 | ) |
| Loss from discontinued operations                    |   | —                                                    |       | 24,819 |   | 9,358 |   | — |   | 34,177 |   |
| Noncash adjustments:                                 |   |                                                      |       |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                       |   | 50,395                                                    |       | 9,358 |   | 56,154 |   | (115,907 | )(3) | — |   |
| Other noncash adjustments                            |   | 4,188                                                     |       | 31,275 |   | 4,301 |   | — |   | 39,764 |   |
| Changes in working capital                           |   | 18,788                                                    |       | (24,431 | ) | — |   | — |   | (5,643 | ) |
| Net cash provided by (used for) operating activities |   | 17,217                                                    |       | (9,374 | ) | — |   | — |   | 7,843 |   |
|                                                 |   |                                                      |       |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**           |   |                                                      |       |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions                           |   | (5,890                                                    | )          | — |   | — |   | — |   | (5,890 | ) |
| Capital expenditures                                 |   | (46                                                       | )          | (2,999 | ) | — |   | — |   | (3,045 | ) |
| Net cash used for investing activities               |   | (5,936                                                    | )          | (2,999 | ) | — |   | — |   | (8,935 | ) |
|                                                 |   |                                                      |       |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities:**           |   |                                                      |       |   |   |   |   |   |   |   |   |
| Net senior revolving credit facility borrowings      |   | 9,000                                                     |       | — |   | — |   | — |   | 9,000 |   |
| Proceeds from sale of common stock                   |   | 5,000                                                     |       | — |   | — |   | — |   | 5,000 |   |
| Other long-term borrowings                           |   | —                                                    |       | 1,145 |   | — |   | — |   | 1,145 |   |
| Principal payments on long-term debt and leases      |   | (8,460                                                    | )          | (1,447 | ) | — |   | — |   | (9,907 | ) |
| Deferred financing costs                             |   | (1,663                                                    | )          | — |   | — |   | — |   | (1,663 | ) |
| Other, net                                           |   | (368                                                      | )          | — |   | — |   | — |   | (368 | ) |
| Net cash provided by (used for) financing activities |   | 3,509                                                     |       | (302 | ) | — |   | — |   | 3,207 |   |
| Net cash provided by discontinued operations         |   | —                                                    |       | 12,960 |   | — |   | — |   | 12,960 |   |
| Net increase in cash and equivalents                 |   | 14,790                                                    |       | 285 |   | — |   | — |   | 15,075 |   |
| Cash and equivalents at beginning of period          |   | 9,641                                                     |       | (163 | ) | — |   | — |   | 9,478 |   |
| Cash and equivalents at end of period                |   | $                                                         | 24,431     |   | $ | 122 |   | $ | — |   | $ | — |   | $ | 24,553 |   |

 

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**ITEM2.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**RecentDevelopments**

** **

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

 

As we originallydescribed in our Form 10-K for the year ended December 31, 2002 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 wouldhave been 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 endedDecember 31, 2002.  See “—Liquidityand Capital Resources–Recent Developments Affecting Financial Condition andLiquidity” below for additional information.

 

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

 

**Industry Overviewand Trends**

** **

We compete in theaircraft products and services market of the aerospace industry.  The market for our products and services islargely driven by demand in the three civil aircraft markets: business, VIP andhead-of-state aircraft and, to a lesser extent, commercial and regionalaircraft.  Weak global economicconditions, which were exacerbated by the September 11, 2001 terroristattack on the United States, ongoing concerns about global terrorism, the currentMiddle Eastern military conflicts and the Severe Acute Respiratory Syndrome, orSARS, epidemic are all adversely impacting the aerospace industry and have ledto a decrease 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 strengthening 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

 

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we will experience economic recovery and there are no further negativegeo-political developments affecting our industry.

 

**Results ofOperations**

 

### **Performance Measures**

### ** **

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

 

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

 

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

 

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

 

Our method of calculatingAdjusted EBITDA may not be consistent with that of other companies and shouldbe viewed in conjunction with measurements that are computed in accordanceGAAP, such as net income (loss), the nearest comparable GAAP 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 ourprofitability or liquidity.  The notesto our financial 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.

 

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

 

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

 

### **ThreeMonths Ended September 30, 2003 Compared to Three Months EndedSeptember 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.* ***Revenuesdecreased $11.9 million, or 21.2%, to $44.3 million for the three months endedSeptember 30, 2003 from $56.2 million for the three months endedSeptember 30, 2002.  By segment,revenues changed as follows:

 
|                     |   | **Increase (Decrease)  From 2002** | ** ** |
|--------------------------|--------|------------------------------------|------------|
| **(In  millions)**       |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                     |   |                               |       |   |   |
| Cabin  Management        |   | $                                  | (11.5      | ) | (28.0 | )% |
| Systems  Integration     |   | (1.4                               | )          | (9.5 | ) |
| Inter-group  elimination |   | 1.0                                |       |   |   |
| Total                    |   | $                                  | (11.9      | ) |   |   |

 

*CabinManagement. *Revenuesdecreased by $11.5 million, or 28.0% compared to the prior year.  The decrease, which is across substantiallyall of our product and services categories, is caused by the ongoing adverseimpact of weak global economic conditions which reduces the affordability ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide.  The 2003decrease consists of:

 

•                  a$12.0 million decrease in aircraft furniture and related products revenues; and

 

•                  a$0.7 million decrease in cabin management and entertainment systems revenues;offset by,

 

•                  a$0.5 million increase in seating products revenues; and,

 

•                  a$0.7 million increase in other product and 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 income availableto purchase and operate these types of aircraft.  As a result, the manufacturers of these aircraft have experienceda decrease in orders for new aircraft which, in turn, reduces the orders ourcustomers place with us.

 

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Revenuesfrom Textron and Bombardier, our principal customers, decreased $7.3 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.  We also experienced similarvolume decreases from our other customers during the period.

 

*SystemsIntegration.*  Revenuesdecreased by $1.4 million, or 9.5% compared to the prior year, due to:

 

•                  a$1.8 million decrease resulting from reduced production and delivery ofbusiness, VIP, head-of-state aircraft products and services due to the weakglobal economic conditions; offset by,

 

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

 

**Gross profit. **Gross profit decreased $8.8 million to $9.2million for the three months ended September 30, 2003 from $18.0 millionfor the same period last year.  Bysegment, gross profit changed as follows:

 
|                 |   | **Increase (Decrease)  From 2002** | ** ** |
|----------------------|--------|------------------------------------|------------|
| **(In  millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                 |   |                               |       |   |   |
| Cabin  Management    |   | $                                  | (7.0       | ) | (58.0 | )% |
| Systems  Integration |   | (1.8                               | )          | (29.8 | ) |
| Total                |   | $                                  | (8.8       | ) |   |   |

 

*CabinManagement.*  Grossprofit decreased by $7.0 million, or 58.0% compared to the prior year,primarily due to:

 

•                  a$7.6 million decrease in profit margins due to lower volume for our business,VIP and head-of-state aircraft furniture and seating products; and

 

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

 

•                  a$0.7 million increase caused by restructuring charges incurred in 2002 relatedto our restructuring activities; and

 

•                  a$0.3 million increase in revenues for other products and services.

 

*SystemsIntegration.*  Grossprofit decreased by $1.8 million, or 29.8% compared to the prior year,primarily as a result of unfavorable overhead absorption caused by lowerproduction volume and a change in product delivery mix.

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $5.0 million, or 54.1%, to $4.2 million for the three months endedSeptember 30, 2003, from $9.2 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                 |   | **Increase (Decrease)  From 2002** | ** ** |
|----------------------|--------|------------------------------------|------------|
| **(In  millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                 |   |                               |       |   |   |
| Cabin  Management    |   | $                                  | (3.5       | ) | (60.7 | )% |
| Systems  Integration |   | (0.8                               | )          | (53.5 | ) |
| Corporate            |   | (0.7                               | )          |   |   |
| Total                |   | $                                  | (5.0       | ) |   |   |

 

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*CabinManagement. *SG&Aexpenses decreased by $3.5 million, or 60.7% compared to the prior year, dueto:

 

•                  a$2.7 million decrease in expenses resulting from cost reduction measuresimplemented in response to lower sales volume resulting from the weak globaleconomic conditions; and

 

•                  $0.8million of charges related to our restructuring activities in 2002.

 

*Systems Integration. *SG&A expenses decreased by $0.8 million, or 53.5%compared to the prior year, due to lower labor and employee benefit costsresulting from workforce reductions in 2003.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $0.3 million to$2.4 million for the three months ended September 30, 2003 from $2.7million for the same period last year, primarily resulting from reduced capitalexpenditures and a lower depreciable base resulting from impairment chargesrecorded during 2002.

 

**AdjustedEBITDA. **As described above in “—PerformanceMeasures–Adjusted EBITDA,” we use this financial measure to evaluate the coreeconomic performance of our operating segments.  The notes to our financial statements include additionalinformation about 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), a GAAP financial measure, to clarify the differences betweenthese two measures.

 

*Cabin Management. *Adjusted EBITDA decreased by $5.1 million, or 56.5%,to $3.9 million for the three months ended September 30, 2003 compared to$9.0 million for the same period last year primarily due to:

 

•                  a$4.5 million decrease in gross profit related to lower volume in ourbusiness/VIP aircraft furniture and seating operations;

 

•                  a$0.5 million decrease in gross profit related to lower volume in our cabinmanagement and entertainment systems; and

 

•                  a$0.1 million decrease in gross profit related to our other products andservices.

 

*Systems Integration. *Adjusted EBITDA decreased by $1.1 million, or 22.9%,to $3.7 million for the three months ended September 30, 2003 compared to$4.8 million for the same period last year due to unfavorable overheadabsorption caused by lower production volume.

 

**Operating income.**  Operating income decreased $3.8 million to $4.0 million for thethree months ended September 30, 2003, from income of $7.8 million for thesame period last year.  By segment,operating income changed as follows:

 
|                 |   | **Increase (Decrease)  From 2002** | ** ** |
|----------------------|--------|------------------------------------|------------|
| **(In  millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                 |   |                               |       |   |   |
| Cabin  Management    |   | $                                  | (3.5       | ) | (59.7 | )% |
| Systems  Integration |   | (1.0                               | )          | (24.9 | ) |
| Corporate            |   | 0.7                                |       |   |   |
| Total                |   | $                                  | (3.8       | ) |   |   |

 

35

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*CabinManagement. *Operatingincome decreased by $3.5 million, or 59.7% compared to the prior year, due to:

 

•                  a$5.0 million decrease in gross profit, principally related to lower revenues inour business, VIP and head-of-state aircraft furniture and seating operations;offset by

 

•                  a$1.5 million increase resulting from restructuring charges recorded in 2002related to the consolidation of our seating and related manufacturingoperations.

 

*SystemsIntegration.*Operatingincome decreased by $1.0 million, or 24.9% compared to the prior year, due tolower production volume and change in product delivery mix.

 

**Interestexpense.**  Interestexpense increased $0.1 million, or 1.4%, to $6.5 million for the three monthsended September 30, 2003.  Theincrease is attributable to a 1.5% increase in interest rate margins charged byour lenders pursuant to the March 28, 2003 senior bank credit facilityamendment, partially offset by lower principal balances outstanding.

 

**Minorityinterest in preferred stock of subsidiary. **Minority interest increased $0.2 million to $1.7million for the three months ended September 30, 2003 compared to $1.5million for the same period last year. Minority interest reflects the accrued dividends, which are compoundedquarterly, and redemption value accretion during the periods on DeCraneAircrafts’ 16% preferred stock.

 

**Provisionfor income tax benefit.** The provision for income taxes is comprised of the following:

 
|                                                            |   | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------|--------|--------------------------------------------|------------|
| **(In  millions)**                                              |   | **2003**                                   | ** ** | **2002** | ** ** |
|                                                            |   |                                       |       |   |   |
| Income  taxes (benefit) based on reported pre-tax income (loss) |   | $                                          | (1.2       | ) | $ | 0.3 |   |
| Net  deferred tax asset valuation allowance                     |   | 1.3                                        |       | — |   |
| Net provision  for income taxes                                 |   | $                                          | 0.1        |   | $ | 0.3 |   |

 

The provision for incometaxes, 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 andnon-deductible expenses, principally the non-deductible portion of goodwillimpairment charges and minority interest in preferred stock of subsidiary.

 

As of June 30, 2003,we had net deferred tax assets of $12.8 million, prior to recording a valuationallowance in June 2003, as opposed to net deferred tax liabilities inprior periods.  The change to a netasset position was primarily caused by the $34.0 million 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, 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 a $13.1 millionvaluation

 

36

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allowance, eliminating the net deferred asset, as of June 30,2003.  Based upon the results of operationsfor the three months ended September 30, 2003, we determined that andadditional $1.3 million valuation allowance was required as ofSeptember 30, 2003.

 

For periods prior toJune 30, 2003, we had net deferred tax liabilities ($9.0 million as ofMarch 31, 2003 and $10.6 million as of December 31, 2002).  The full realization of the deferred assetswas achieved through the reversal of the deferred tax liabilities in futureperiods.  As a result, a valuationallowance was not required for periods prior to June 30, 2003.

 

**Loss from continuing operations.**  Loss from continuing operations increased$4.0 million to a loss of $4.5 million for the three months endedSeptember 30, 2003 compared to a loss of $0.5 million for the same periodlast year, primarily due to:

 

•                  a$3.8 million decrease in operating income;

 

•                  a$0.2 million increase in interest and other expenses (net); and

 

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

 

•                  a$0.2 million decrease in the provision for income taxes.

 

**Income from discontinued operations.**  Income from discontinued operations was $1.5million for the three months ended September 30, 2002 and reflects theresults of operations of our Specialty Avionics Group which was sold onMay 23, 2003.

 

**Netincome (loss).**  Netincome decreased $5.5 million to a net loss of $4.5 million for the threemonths ended September 30, 2003 compared to net income of $1.0 million forthe same period last year.  The increaseis attributable to an increase in the loss from continuing operations of $4.0million and a decrease in the income from discontinued operations of $1.5million.

 

**Netloss applicable to common stockholders.**  Net loss applicable to our commonstockholders increased $5.8 million to a net loss of $6.8 million for the threemonths ended September 30, 2003 compared to a net loss of $1.0 million forthe same period last year.  The increasein the net loss applicable to our common stockholder is attributable to:

 

•                  a$5.5 million increase in our net loss; and

 

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

 

**Bookings. **Bookings decreased $7.9million, or 18.4%, to $34.9 million for the three months endedSeptember 30, 2003 compared to $42.8 million for the same period lastyear.  The decrease in bookings for 2003is due to decreases in orders for all of our business segments.

 

**Backlogat end of period.** Backlog decreased $2.1 million to $64.7 million as of September 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. In addition, we believe that some of our customers have substantiallyreduced their order lead times which may have adversely affected bookingsduring 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.

 

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### **Nine Months**EndedSeptember 30, 2003 Compared to Nine Months Ended September 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.* ***Revenuesdecreased $48.0 million, or 26.9%, to $130.3 million for the nine months endedSeptember 30, 2003 from $178.3 million for the nine months endedSeptember 30, 2002.  By segment,revenues changed as follows:

 
|                     |   | **Increase (Decrease)  From 2002** | ** ** |
|--------------------------|--------|------------------------------------|------------|
| **(In  millions)**       |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                     |   |                               |       |   |   |
| Cabin  Management        |   | $                                  | (45.4      | ) | (33.5 | )% |
| Systems  Integration     |   | (2.9                               | )          | (6.6 | ) |
| Inter-group  elimination |   | 0.3                                |       |   |   |
| Total                    |   | $                                  | (48.0      | ) |   |   |

 

*CabinManagement. *Revenuesdecreased by $45.4 million, or 33.5% compared to the prior year.  The decrease, which is across substantiallyall of our product and services categories, is caused by the ongoing adverseimpact of weak global economic conditions which reduces the affordability ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide.  The 2003decrease consists of:

 

•                  a$41.6 million decrease in aircraft furniture and related products revenues;

 

•                  a$3.5 million decrease in cabin management and entertainment systems revenues;and

 

•                  a$1.3 million decrease in seating products revenues; offset by,

 

•                  a$1.0 million increase in other product and 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.  Weak globaleconomic conditions have reduced the amount of discretionary income availableto purchase and operate these types of aircraft.  As a result, the manufacturers of these aircraft have experienceda decrease in orders for new aircraft which, in turn, reduces the orders ourcustomers place with us.

 

Revenuesfrom Textron and Bombardier, our principal customers, decreased $38.7 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 experiencedsimilar volume decreases from our other customers during the period.

 

38

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*SystemsIntegration.*  Revenuesdecreased by $2.9 million, or 6.6% compared to the prior year, due to:

 

•                  a$4.2 million decrease resulting from reduced production and delivery ofbusiness, 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; and

 

•                  a$0.8 million decrease in the commercial aircraft systems integrationengineering services provided in the aftermath of September 11thand resulting down-turn in the commercial airline industry; the airlineindustry’s corresponding reduction in the size of its operating fleet and thedelay or postponement of retrofit and refurbishment programs for the remainingoperational fleet reduced demand for our integration and engineering services;offset by

 

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

 

**Grossprofit.**  Gross profitdecreased $28.9 million, or 60.4%, to $19.0 million for the nine months endedSeptember 30, 2003 from $47.9 million for the same period last year.  By segment, gross profit changed as follows:

 
|                 |   | **Increase (Decrease)  From 2002** | ** ** |
|----------------------|--------|------------------------------------|------------|
| **(In  millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                 |   |                               |       |   |   |
| Cabin  Management    |   | $                                  | (23.3      | ) | (78.2 | )% |
| Systems  Integration |   | (5.6                               | )          | (31.5 | ) |
| Total                |   | $                                  | (28.9      | ) |   |   |

 

*CabinManagement.*  Grossprofit decreased by $23.3 million, or 78.2% compared to the prior year,primarily due to:

 

•                  a$17.5 million decrease resulting from lower volume for our business, VIP andhead-of-state aircraft furniture and seating products;

 

•                  a$6.2 million decrease caused by restructuring charges incurred in 2003 ascompared to those recorded in 2002 related to our restructuring activities; and

 

•                  a$1.4 million decrease in gross profit related to lower volume for our cabinmanagement and entertainment systems; offset by

 

•                  a$1.8 million increase from our other products and services, which is comprisedof:

 

•                  a$1.0 million increase resulting from an increase in revenues;

 

•                  a$2.5 million decrease in materials costs; offset by

 

•                  a$1.7 million increase in direct labor and overhead costs.

 

*SystemsIntegration.*  Grossprofit decreased by $5.6 million, or 31.5% compared to the prior year,primarily due to:

 

•                  a$4.9 million decrease resulting from lower revenues and unfavorable overheadabsorption as a result of lower production and a change in product deliverymix; and

 

•                  a$0.7 million decrease in the commercial aircraft systems integrationengineering services provided.

 

39

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**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $14.7 million, or 44.1%, to $18.7 million for the nine months endedSeptember 30, 2003, from $33.4 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                 |   | **Increase (Decrease)  From 2002** | ** ** |
|----------------------|--------|------------------------------------|------------|
| **(In  millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                 |   |                               |       |   |   |
| Cabin  Management    |   | $                                  | (10.9      | ) | (50.7 | )% |
| Systems  Integration |   | (2.7                               | )          | (48.8 | ) |
| Corporate            |   | (1.1                               | )          |   |   |
| Total                |   | $                                  | (14.7      | ) |   |   |

 

*CabinManagement. *SG&Aexpenses decreased by $10.9 million, or 50.7% compared to the prior year, dueto:

 

•                  a$6.0 million reduction caused by restructuring charges incurred in 2003 ascompared to those recorded in 2002 related to our restructuring activities; and

 

•                  a$4.9 million decrease in expenses resulting from cost reduction measuresimplemented in response to lower sales volume resulting from the weak globaleconomic conditions.

 

*Systems Integration. *SG&A expenses decreased by $2.7 million, or 48.8%compared to the prior year, due to lower labor and employee benefit costsresulting from workforce reductions in 2003.

 

**Impairment of goodwill. **During the nine monthsended September 30, 2003, a $34.0 million charge was recorded to reflectthe additional impairment of goodwill in connection with the impairment testingprovision of SFAS No. 142, “Goodwill and Other Intangible Assets.”  The additional impairment results fromcontinuing weak global economic conditions which reduces the affordability ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide.  The impairmentcharge pertains to our furniture manufacturing reporting unit within our CabinManagement Group.  See “—GoodwillImpairment Charges” below for additional information.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $0.8 million to$7.3 million for the nine months ended September 30, 2003 from $8.1million for the same period last year, primarily resulting from reduced capitalexpenditures and a lower depreciable base resulting from impairment chargesrecorded during 2002 as follows.

 
|                                         |   | **Increase (Decrease)  From 2002** | ** ** |
|----------------------------------------------|--------|------------------------------------|------------|
| **(In  millions)**                           |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                                         |   |                               |       |   |   |
| Depreciation  charged to:                    |   |                               |       |   |   |
| Cost  of sales                               |   | $                                  | (0.3       | ) | (8.9 | )% |
| Selling,  general and administrative expense |   | (0.6                               | )          | (26.5 | ) |
| Amortization  of intangible assets           |   | 0.1                                |       | 4.2 |   |
| Total                                        |   | $                                  | (0.8       | ) |   |   |

 

**AdjustedEBITDA. **As described above in “—PerformanceMeasures-Adjusted EBITDA,” we use this financial measure to evaluate the coreeconomic performance of our operating segments.  The notes to our financial statements include additionalinformation about 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), a GAAP financial measure, to clarify the differences betweenthese two measures.

 

40

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*Cabin Management. *Adjusted EBITDA decreased by $12.7 million, or 49.9%,to $12.8 million for the nine months ended September 30, 2003 compared to$25.5 million for the same period last year primarily due to:

 

•                  an$11.8 million decrease in gross profit related to ourbusiness/VIP/head-of-state aircraft furniture and seating operations; and

 

•                  a$1.5 million decrease in gross profit related our cabin management andentertainment systems; offset by,

 

•                  a$0.6 million increase in gross profit related to our other products andservices.

 

*Systems Integration. *Adjusted EBITDA decreased by $3.2 million, or 23.9%,to $10.0 million for the nine months ended September 30, 2003 compared to$13.2 million for the same period last year due to lower sales volume partiallyoffset by reduced SG&A spending resulting from workforce reductions.

 

**Operatingincome (loss).** Operating income decreased $48.3 million to a loss of $36.5 million forthe nine months ended September 30, 2003, from operating income of $11.8million for the same period last year. By segment, operating income changed as follows:

 
|                 |   | **Increase (Decrease)  From 2002** | ** ** |
|----------------------|--------|------------------------------------|------------|
| **(In  millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                 |   |                               |       |   |   |
| Cabin  Management    |   | $                                  | (46.6      | ) | (652.4 | )% |
| Systems  Integration |   | (2.9                               | )          | (26.7 | ) |
| Corporate            |   | 1.2                                |       |   |   |
| Total                |   | $                                  | (48.3      | ) |   |   |

 

*CabinManagement. *Operatingincome decreased by $46.6 million, or 652.4% compared to the prior year, dueto:

 

•                  a$34.0 million goodwill impairment charge in 2003;

 

•                  a$17.5 million decrease in gross profit, primarily due to lower revenues relatedto our furniture and seating operations; and

 

•                  a$0.2 million increase in restructuring charges incurred in 2003 as compared tothose recorded in 2002 related to our restructuring activities; offset by

 

•                  a$5.1 million decrease in expenses resulting from cost reduction measuresimplemented in response to lower sales volume resulting from the weak globaleconomic conditions.

 

*Systems Integration.*Operating incomedecreased by $2.9 million, or 26.7% compared to the prior year, due primarilyto lower revenues, offset by reduced SG&A spending.

 

**Interestexpense.**  Interestexpense increased $0.4 million, or 1.8%, to $18.9 million for the nine monthsended September 30, 2003 compared to $18.5 million for the same periodlast year.  The increase is attributableto a 1.5% increase in interest rate margins charged by our lenders pursuant tothe March 28, 2003 senior bank credit facility amendment, partially offsetby lower principal balances outstanding.

 

**Minorityinterest in preferred stock of subsidiary. **Minority interest increased $0.7 million to $5.0million for the nine months ended September 30, 2003 compared to $4.3million for the same period last year. Minority interest reflects the accrued dividends, which are compoundedquarterly, and redemption value accretion during the periods on DeCraneAircrafts’ 16% preferred stock.

 

41

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**Provisionfor income tax benefit.** The provision for income taxes is comprised of the following:

 
|                                               |   | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------|--------|-------------------------------------------|--------|
| **(In millions)**                                  |   | **2003**                                  |   | **2002** |   |
|                                               |   |                                      |   |   |   |
| Income  tax benefit based on reported pre-tax loss |   | $                                         | 24.9   |   | $ | 2.9 |   |
| Net  deferred tax asset valuation allowance        |   | (14.4                                     | )      | — |   |
| Net  provision for income tax benefit              |   | $                                         | 10.5   |   | $ | 2.9 |   |

 

The provision for incometaxes, 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 andnon-deductible expenses, principally the non-deductible portion of goodwillimpairment charges and minority interest in preferred stock of subsidiary.

 

As of June 30, 2003,we had net deferred tax assets of $12.8 million, prior to recording a valuationallowance in June 2003, as opposed to net deferred tax liabilities inprior periods.  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 a $13.1 millionvaluation allowance, eliminating the net deferred asset, as of June 30,2003.  Based upon the results of operationsfor the three months ended September 30, 2003, we determined that andadditional $1.3 million valuation allowance was required as ofSeptember 30, 2003.

 

For periods prior toJune 30, 2003, we had net deferred tax liabilities ($9.0 million as ofMarch 31, 2003 and $10.6 million as of December 31, 2002).  The full realization of the deferred assetswas achieved through the reversal of the deferred tax liabilities in futureperiods.  As a result, a valuationallowance was not required for periods prior to June 30, 2003.

 

**Loss from continuing operations.**  The loss from continuing operationsincreased $42.3 million to a loss of $50.7 million for the nine months endedSeptember 30, 2003 compared to a loss of $8.4 million for the same periodlast year, primarily due to:

 

•                  a$48.3 million decrease in operating income resulting, in part, from a $34.0million goodwill impairment charge;

 

•                  a$1.6 million net increase in interest expense, minority interest in preferredstock of subsidiary and other expenses; offset by

 

•                  a$7.6 million increase in the provision for income tax benefit.

 

42

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**Loss from discontinued operations.**  Loss from discontinued operations decreased$28.5 million, to a loss of $5.7 million for the nine months endedSeptember 30, 2003 compared to a loss of $34.2 million for the same periodlast year.  The decrease is primarilydue to:

 

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

 

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

 

•                  theresult of operations of the Specialty Avionics Group through May 22, 2003and the modest $0.7 million gain realized on the sale compared to a full ninemonths of operating results included in the prior year.

 

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

 

**Netloss.**  Net lossdecreased $4.0 million to a net loss of $56.4 million for the nine months endedSeptember 30, 2003 compared to a net loss of $60.4 million for the sameperiod last year.  The decrease isattributable to:

 

•                  anincrease in loss from continuing operations of $42.3 million; offset by

 

•                  adecrease in loss from discontinued operations of $28.5 million; and

 

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

 

**Netloss applicable to common stockholders.**  Net loss applicable to our commonstockholders decreased $3.1 million to a net loss of $63.2 million for the ninemonths ended September 30, 2003 compared to a net loss of $66.3 millionfor the same period last year.  Thedecrease in the net loss applicable to our common stockholder is attributableto:

 

•                  a$4.0 million decrease in our net loss; offset by

 

•                  a$0.9 million increase in noncash preferred stock dividend accretion on our 14%mandatorily redeemable preferred stock.

 

**Bookings. **Bookings decreased $22.4million, or 14.7%, to $129.6 million for the nine months endedSeptember 30, 2003 compared to $152.0 million for the same period lastyear.  The decrease in bookings for 2003is due to decreases in orders for all of our business segments.

 

43

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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 monthsended September 30, 2002 and the nine months ended September 30, 2003and 2002, we recorded restructuring, asset impairment and other related pre-taxcharges related to a series of restructuring activities.  These charges, and the effect these chargeshad on our reported results of operations, are summarized below.

 
|                                                                       |   | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(In  millions)**                                                         |   | **2003**                                   | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                       |   |                                       |       |                                      |       |   |   |   |   |
| Nature of charges:                                                         |   |                                       |       |                                      |       |   |   |   |   |
| Seating Product Line and Furniture Manufacturing Facilities  Restructuring |   | $                                          | —     |                                      | $          | — |   | $ | 13.4 |   | $ | — |   |
| Seat Manufacturing Facilities Restructuring                                |   | —                                     |       | —                                    |       | — |   | 6.3 |   |
| Asset Realignment Restructuring                                            |   | —                                     |       | 1.5                                       |       | — |   | 6.9 |   |
| Goodwill impairment charges                                                |   | —                                     |       | —                                    |       | 41.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                          | —     |                                      | $          | 1.5 |   | $ | 54.9 |   | $ | 13.2 |   |
|                                                                       |   |                                       |       |                                      |       |   |   |   |   |
| Business segment recording the charges:                                    |   |                                       |       |                                      |       |   |   |   |   |
| Cabin Management                                                           |   | $                                          | —     |                                      | $          | 1.5 |   | $ | 47.4 |   | $ | 13.2 |   |
| Systems Integration                                                        |   | —                                     |       | —                                    |       | — |   | — |   |
| Total charged to continuing operations                                     |   | —                                     |       | 1.5                                       |       | 47.4 |   | 13.2 |   |
| Specialty Avionics (discontinued operations)                               |   | —                                     |       | —                                    |       | 7.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                          | —     |                                      | $          | 1.5 |   | $ | 54.9 |   | $ | 13.2 |   |
|                                                                       |   |                                       |       |                                      |       |   |   |   |   |
| Charged to operations:                                                     |   |                                       |       |                                      |       |   |   |   |   |
| Cost of sales                                                              |   | $                                          | —     |                                      | $          | 0.7 |   | $ | 12.8 |   | $ | 6.6 |   |
| Selling, general and administrative expenses                               |   | —                                     |       | 0.8                                       |       | 0.6 |   | 6.6 |   |
| Impairment of goodwill                                                     |   | —                                     |       | —                                    |       | 34.0 |   | — |   |
| Total charged to continuing operations                                     |   | —                                     |       | 1.5                                       |       | 47.4 |   | 13.2 |   |
| Charged to discontinued operations                                         |   | —                                     |       | —                                    |       | 7.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                          | —     |                                      | $          | 1.5 |   | $ | 54.9 |   | $ | 13.2 |   |
|                                                                       |   |                                       |       |                                      |       |   |   |   |   |
| Components of charges:                                                     |   |                                       |       |                                      |       |   |   |   |   |
| Noncash charges                                                            |   | $                                          | —     |                                      | $          | 1.5 |   | $ | 43.9 |   | $ | 7.4 |   |
| Cash charges                                                               |   | —                                     |       | —                                    |       | 3.5 |   | 5.8 |   |
| Total charged to continuing operations                                     |   | —                                     |       | 1.5                                       |       | 47.4 |   | 13.2 |   |
| Charged to discontinued operations                                         |   | —                                     |       | —                                    |       | 7.5 |   | — |   |
| Total pre-tax charges                                                      |   | $                                          | —     |                                      | $          | 1.5 |   | $ | 54.9 |   | $ | 13.2 |   |

 

**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

 

44

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and other compensation costs. As required by SFAS No. 146, the charges recorded were discounted by$0.6 million to initially measure and reflect the liabilities incurred as aresult of the restructuring plan at their fair value as of June 30,2003.  A $3.0 million restructuringreserve remains as of September 30, 2003 for lease termination and relatedcosts.  Subsequent to September 30,2003, the Company entered into an agreement with lessor to terminate theCompany’s remaining lease obligation on the facilities permanentlyvacated.  As required by SFAS No. 146,the cumulative effect of a changes resulting from revisions to either thetiming or the amount of estimated cash flows will be recognized as anadjustment to the liability in the period of the change.

 

These restructuringactivities were substantially completed during the second quarter of fiscal2003.  The manufacturing facilities wereclosed during June 2003.  The futurecash payments will be funded from existing cash balances and internallygenerated cash from operations.

 

**Asset Realignment Restructuring**

** **

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,of which $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 Manufacturing Facilities Restructuring**

** **

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

 

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

 

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

 

**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

 

45

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of goodwill associated with our Cabin Management Group was written offand charged to operations during the second quarter of fiscal 2003.

 

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.

 

**GoodwillImpairment 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 nine months ended September 30, 2003 and 2002 have been affectedby the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” andgoodwill impairment charges.

 

Effective January 1,2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and theprovisions of SFAS No. 141, “Business Combinations,” which were required to beadopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncements resulted in thefollowing:

 

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

 

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

 

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

 

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

 

46

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Changes in the carryingamount of goodwill, by business segment, for the nine months endedSeptember 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, September 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 netrealizable value established by the definitive agreement.  We recorded a modest $0.7 million gain on thesale during the second quarter of fiscal 2003, based on the actual financialposition of the group on the date of sale. However, the ultimate gain or loss on the sale is subject to finalizingthe 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 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.

 

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 carrying valueof 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, 2003based on a comparison of the estimated book value of the net assets of thereporting unit to its fair value.  Thecharge was primarily a result of a decrease in fair value caused by using lowercash flow forecasts based on the most recently reduced industry estimates ofaircraft deliveries resulting from overall industry weakness.  The amount recorded is an estimate and maybe revised during fiscal 2003 upon completion of step two of the goodwillimpairment model, which measures the amount of impairment.

 

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**Liquidity andCapital Resources**

** **

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

 

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

 

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

 

**Cash Flows During the Nine MonthsEnded September 30, 2003**

 

Net cash used byoperating activities was $27.5 million for the nine months endedSeptember 30, 2003 and consisted of $3.8 million of cash used byoperations after adding back depreciation, amortization, the noncash portion ofour restructuring and asset impairment charges and other noncash items and$27.3 million used for working capital, offset by a $3.6 million increase inother liabilities.  The followingfactors contributed to the $27.3 million working capital increase:

 

•                  a$14.0 million inventory increase principally related to long-term contracts;

 

•                  a$13.6 million decrease in accounts payable and accrued expenses, primarilyresulting from reduced purchasing commensurate with lower revenues; and

 

•                  a$0.7 million increase in prepaid expenses and other assets; offset by

 

•                  a$1.0 million decrease in accounts receivables.

 

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

 

Net cash provided byinvesting activities was $129.1 million for the nine months endedSeptember 30, 2003 and consisted of:

 

•                  $132.8million of net proceeds from the sale of the Specialty Avionics Group; offsetby

 

•                  $3.1million used for capital expenditures; and

 

•                  $0.6million used for the payment of contingent acquisition consideration.

 

We anticipate spendingapproximately $4.0 to $4.5 million for capital expenditures in 2003.  As of September 30, 2003, there are noremaining acquisition contingent consideration payment obligations.

 

Net cash used byfinancing activities was $113.5 million for the nine months endedSeptember 30, 2003.  Cash of $17.4million was provided by revolving line of credit borrowings under our seniorcredit facility.  Cash of $130.9 millionwas used for principal payments on our senior term debt, capitalized leaseobligations and other debt.

 

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

 

As of September 30,2003, we had $26.9 million of working capital, compared to $55.4 million as ofDecember 31, 2002, excluding assets and liabilities of the discontinuedoperations we sold in 2003.  As ofSeptember 30, 2003, we also had $16.2 million of borrowings availableunder our revolving line of credit, as amended in March 2003 and describedbelow, compared to $43.6 million available as of December 31, 2002.  Our revolving line of credit expires inSeptember 2004 and, as a result, our $23.4 million of borrowings as ofSeptember 30, 2003 are classified as a current liability, which reducesour working capital as of September 30, 2003 when compared toDecember 31, 2002.  We intend toextend the maturity or replace our revolving line of credit prior to maturity,however we may not be able to do so on commercially acceptable terms, or atall.  As of September 30, 2003, oursenior credit facility borrowings totaling $158.3 million are at variableinterest rates based on defined margins over the current prime rate or LIBOR,compared to $270.2 million as of December 31, 2002.  We also had $100.0 million of 12% seniorsubordinated notes as of September 30, 2003 and December 31, 2002 andother indebtedness totaling $9.3 million outstanding as of September 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 thesenior credit facility amendment, used $130.0 million of the proceeds from thesale to repay senior credit facility borrowings.  The selling price is subject to a post-closing adjustment relatedto the amount of working capital at closing. The post-closing adjustment is currently the subject of arbitrationbetween the parties in which the buyer is asserting a claim for an approximate$3,200,000 purchase price reduction. The post-closing adjustment, if any, would be payable by us in cash uponits final determination.

 

The senior creditfacility amendment also relaxes various financial covenants for 2003 andbeyond, decreases by $10.0 million the maximum permitted revolving line ofcredit borrowings to $40.0 million, increases the prime rate and LIBOR interestmargins by 1.5% and permits the issuance of specified types of additionalindebtedness and the repurchase of up to $20.0 million aggregate principalamount of our

 

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12% senior subordinated notes with the proceeds from the sale of juniorsecurities.  Junior securities means:(i) senior subordinated notes issued by us that are unsecured and do notprovide for any scheduled redemptions or prepayments or any sinking fundinstallment payments or maturities prior to the termination of the senior creditfacility, 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($16.2 million of which was available as of September 30, 2003, thecommitment for which expires in September 2004), will be sufficient tomeet our future short- and long-term operating expenses, working capitalrequirements, capital expenditures and debt service obligations for the nexttwelve months.  However, our ability tocomply with our debt financial covenants, pay principal or interest and satisfyour other debt obligations will depend on our future operating performance aswell as competitive, legislative, regulatory, business and other factors beyondour control.  Although we cannot becertain, we expect to be in compliance with the revised financial covenantsthrough the end of the year based on our current operating plan.

 

In addition, we arecontinually considering acquisitions that complement or expand our existingbusinesses or that may enable us to expand into new markets, some of which maybe material.  Future acquisitions 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.

 

**Disclosureof Contractual Obligations and Commitments**

** **

The following tablesummarizes our known contractual obligations to make future cash payments as ofSeptember 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                                          |   | $         | 158.3      |                               | $          | — |   | $ | 101.9 |   | $ | 56.4 |   | $ | — |   |
| 12% senior subordinated notes                                   |   | 100.0     |       | —                             |       | — |   | — |   | 100.0 |   |
| Capital lease obligations and other indebtedness                |   | 9.3       |       | 0.1                                |       | 2.3 |   | 1.6 |   | 5.3 |   |
| Total long-term debt                                            |   | 267.6     |       | 0.1                                |       | 104.2 |   | 58.0 |   | 105.3 |   |
|                                                            |   |      |       |                               |       |   |   |   |   |   |   |
| Operating lease obligations                                     |   | 14.1      |       | 0.5                                |       | 3.2 |   | 2.5 |   | 7.9 |   |
| Mandatorily redeemable preferred stock redemption  obligations: |   |      |       |                               |       |   |   |   |   |   |   |
| DeCrane Aircraft preferred stock (b)                            |   | 41.6      |       | —                             |       | — |   | — |   | 41.6 |   |
| DeCrane Holdings preferred stock (c)                            |   | 69.0      |       | —                             |       | — |   | — |   | 69.0 |   |
| Total obligations as of September 30, 2003                 |   | $         | 392.3      |                               | $          | 0.6 |   | $ | 107.4 |   | $ | 60.5 |   | $ | 223.8 |   |

 

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(a)                      Excludesinterest payments.  Interest on the 12%senior subordinated notes is payable semiannually.  The senior credit facility bears interest at a variable rate andtherefore the amount of future interest payments are uncertain.

 

(b)                     Dividends accruequarterly at the annual rate of 16% and are payable, at our option, either incash or by the issuance of additional shares of preferred stock.  Since the issuance of the preferred stock

 

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in June 2000,we have elected to issue additional shares in lieu of cash dividend paymentsand may continue to do so until June 2005, after which time we arerequired to pay quarterly dividends in cash. If we elect to continue issuing additional shares until June 2005,our mandatory redemption obligation on March 31, 2009, the mandatoryredemption date, will be $54.8 million and our annual cash dividend paymentobligation will be $8.8 million, payable quarterly, commencingSeptember 2005.

 

(c)                      Dividendsaccrue quarterly at a 14% annual rate. Prior to September 30, 2005, dividends are not paid in cash butinstead accrete to the liquidation value of the preferred stock.  Our annual cash dividend payment obligationwill be $12.7 million, payable quarterly, commencing December 31, 2005 andour mandatory redemption obligation on September 30, 2009, the mandatoryredemption date, will be $90.8 million.

 

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

** **

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

 

In connection with thesale of the Specialty Avionics Group, we made indemnities to the buyer withrespect to a number of customary, and certain other specific, representationsand warranties.  Our indemnities withrespect to some of these matters are limited in terms of duration with themaximum of potential future payments capped at $14.0 million and ourindemnities with respect to specified environmental matters will expire notlater than October 2010 and provides for a maximum liability of $5.0million, while others will have no limitations.  In addition, the $140.0 million selling price is subject to apotential post-closing adjustment related to the amount of working capital atclosing.  The post-closing adjustment iscurrently the subject of arbitration between the parties in which the buyer isasserting a claim for an approximate $3.2 million purchase price reduction.  The post-closing adjustment, if any, would bepayable by us in cash upon its final determination.

 

As of September 30,2003, we also had an irrevocable standby letter of credit in the amount of $0.4million issued and outstanding under our senior credit facility.

 

**Recent AccountingPronouncements**

** **

**Accounting Pronouncements AdoptedJanuary 1, 2003**

 

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

 

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

 

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

 

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

 

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

 

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**Recently Issued Accounting Pronouncement**

** **

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

* *

Issued in May 2003,SFAS No. 150 establishes standards for the classification and measurement ofcertain financial instruments with characteristics of both liabilities andequity.  SFAS No. 150 requiresclassification of financial instruments within its scope as a liability,including financial instruments issued in the form of shares that aremandatorily redeemable, because those financial instruments are deemed to be,in essence, obligations of the issuer. We will be required to reclassify all of our mandatorily redeemablepreferred stock as a liability commencing January 1, 2004 and reflectquarterly dividend accretion on our 14% preferred stock as a charge againstpre-tax income in future periods.

 

**SpecialNote Regarding Forward-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:

 

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

 

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

 

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

 

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

 

•                  competitionfrom larger companies;

 

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

 

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

 

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

 

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

 

•                  theability to attract and retain qualified personnel;

 

•                  labordisturbances; and

 

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

 

Some of the moresignificant factors listed above are further described in our Annual Report onForm 10-K (Amendment No. 1) and should be read in conjunction with thisreport.  Changes in such factors couldcause our actual results to differ materially from those contemplated in suchforward-looking statements.  Although webelieve that the expectations reflected in such forward-looking statements arereasonable, we can give no assurance that such expectations will prove to becorrect.  We undertake no obligation torelease publicly any revisions to these forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.  You should not relyon our forward-looking statements as if they were certainties.

 

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

** **

We are exposed to variousmarket risks, including interest rates and changes in foreign currency exchangerates.  Market risk is the potentialloss arising from adverse changes in prevailing market rates and prices.  From time to time, we use derivativefinancial instruments to manage and reduce risks associated with thesefactors.  We do not enter into derivativesor other financial instruments for trading or speculative purposes.

 

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

 

Market risk related toour variable-rate debt is estimated as the potential decrease in pre-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 ofSeptember 30, 2003, the current prime rate was 4.00% and the current LIBORwas 1.12%.  Based on $158.3 million ofvariable-rate debt outstanding as of September 30, 2003, a hypotheticalone percent rise in interest rates, to 5.00% for prime rate borrowings and2.12% for LIBOR borrowings, would reduce our pre-tax earnings by $1.6 millionannually.

 

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-rate industrialrevenue bonds to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedgeagainst changes in the amount of future cash flows associated with interestpayments on this portion of our variable-rate debt.  Market risk related to this interest rate swap contract isestimated as the potential higher interest expense we will incur if thevariable interest rate decreases below the 4.2% fixed rate.  Based on the $3.1 million of variable-ratedebt converted to fixed-rate debt outstanding as of September 30, 2003, ahypothetical one percent decrease in the variable interest rate to 3.2%, wouldreduce our pre-tax earnings by less than $0.1 million annually.

 

The estimated fair valueof our $100.0 million fixed-rate long-term debt increased $5.0 million, or12.5%, to approximately $45.0 million as of September 30, 2003 from $40.0million as of December 31, 2002. Although we cannot be certain, we believe the increase may have been aresult of the sale of the Specialty Avionics Group.  Market risk related to our fixed-rate debt is deemed to be thepotential increase in fair value resulting from a decrease in interestrates.  For example, a hypothetical tenpercent decrease in the interest rates, from 12.0% to 10.8%, would increase thefair value of our fixed-rate debt by approximately $7.0 million.

 

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

 

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**ITEM4.**                             CONTROLSAND PROCEDURES

 

The management of DeCraneHoldings Co. (the “Company”), under the supervision and with the participationof the Company’s Chief Executive Officer and Chief Financial Officer, conductedan evaluation of the Company’s “disclosure controls and procedures” (as definedin Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the periodcovered by this report.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective as of theend of the period covered by this 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 thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PART II– OTHER INFORMATION**

 

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

 

See Note 11 to theconsolidated financial statements.

 

**ITEM 5.          OTHER INFORMATION**

The Company has engaged Credit Suisse First Boston toadvise it in connection with a potential refinancing of its creditfacility.  The Company is currentlyseeking to obtain commitments from financial institutions for a new creditfacility of up to $80 million, which facility would mature in June 2008,require little or no amortization prior to maturity, bear cash interest of upto 12% (plus additional pay-in-kind interest) and be secured on a second-lienbasis by the assets securing the Company’s existing credit facility.  The Company would use the proceeds to repaya portion of its outstanding revolving credit borrowings and term loanborrowings under its existing credit facility and may use a portion for generalcorporate purposes.  The Company willseek an amendment to its existing credit facility to permit the new creditfacility, amend certain financial covenants and extend the scheduled repaymentdates of the term loans and the revolving credit commitments by approximately12 to 18 months.  The Company has nocommitments for such financing and can provide no assurances that it will beable to accomplish such financing, or the credit facility amendment, on theterms described above or at all.

 

**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 Special Business Provisions between The Boeing Company  and PATS, Inc. dated April 16, 2003 (2) |
|   |   |     |   |
|   |   | 31.1     | Chief  Executive Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 * |
|   |   |     |   |
|   |   | 31.2     | Chief  Financial Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 * |
|   |   |     |   |
|   |   | 32       | Chief  Executive Officer and Chief Financial Officer Certifications Pursuant to Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 * |

 

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|   |   | *      | Filed  herewith                                                                                                                                                                                                                                 |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                            |
|   |   | (1)    | Filed  as an exhibit to the Registration Statement of DeCrane Aircraft Holdings,  Inc. (Registration No. 333-106381) of Form S-1 (Amendment No. 2) filed with  the Commission on September 18, 2003 and incorporated herein by  reference. |
|   |   |   |                                                                                                                                                                                                                                            |
|   |   | (2)    | Filed  as an exhibit to the Registration Statement of DeCrane Aircraft Holdings,  Inc. (Registration No. 333-106381) of Form S-1 (Amendment No. 1) filed with  the Commission on August 12, 2003 and incorporated herein by reference.     |

 

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b.                          Reports on Form 8-K

 

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

 

On May 23, 2003, wefiled a Form 8-K Current Report regarding DeCrane Aircraft consummating thesale of its Specialty Avionics Group.

 

On September 22,2003, we filed a Form 8-K Current Report regarding DeCrane Aircraft and itsinsurers entering into an agreement with Boeing, Swissair and each of theirrespective insurers regarding the litigation stemming from the crash ofSwissair Flight 111 off the Canadian coast on September 2, 1998.

 

**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)** |
|------------------------|---------------------------------------|
|                   |                                  |
|                   |                                  |   |
| November 6,  2003 | By:                                   | /s/  RICHARD J. KAPLAN |
|                   | Name:                                 | Richard  J. Kaplan |
|                   | Title:                                | Chief  Financial Officer and  Assistant Secretary |

 

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