**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarterly period ended March 31, 2002**

 

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

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**(Not Applicable)**

 

(Former address and telephone number of principal executive offices, ifchanged since last report)

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

ýYes     oNo

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The number ofshares of Registrant’s Common Stock, $.01 par value, outstanding as ofMay 10, 2002 was 3,895,531 shares.

 

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**Table of Contents**

 
| **Part I – Financial Information** |
|-----------------------------------------|
|                                    |   |
| **Item 1.**                             | **Financial Statements (Unaudited)** |
|                                    |   |
|                                    | Consolidated Balance Sheets as of March 31, 2002 and  December 31, 2001 |
|                                    |   |
|                                    | Consolidated Statements of Operations for  the three months ended March 31, 2002 and 2001 |
|                                    |   |
|                                    | Consolidated Statements of Stockholders’  Equity for the three months ended March 31, 2002 |
|                                    |   |
|                                    | Consolidated Statements of Cash Flows for  the three months ended March 31, 2002 and 2001 |
|                                    |   |
|                                    | Condensed Notes to Consolidated Financial  Statements |
|                                    |   |
| **Item 2.**                             | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |
|                                    |   |
|                                    | Industry Overview and Trends |
|                                    |   |
|                                    | Results of Operations |
|                                    |   |
|                                    | Restructuring and Asset Impairment Charges |
|                                    |   |
|                                    | Liquidity and Capital Resources |
|                                    |   |
|                                    | Recent Accounting Pronouncements |
|                                    |   |
| **Item 3.**                             | **Quantitative and Qualitative Disclosure  About Market Risk** |
|                                    |   |
|                                    | Interest Rate Risk |
|                                    |   |
|                                    | Foreign Currency Exchange Risk |
|                                    |   |
| **Part  II – Other Information**   |
|                                    |   |
| **Item 1.**                             | **Legal Proceedings** |
|                                    |   |
| **Item 6.**                             | **Exhibits and Reports on Form 8-K** |
|                                    |   |
|                                    | Exhibits |
|                                    |   |
|                                    | Reports on Form 8-K |
|                                    |   |
| **Signatures**                          |

 

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.          FINANCIALSTATEMENTS**

 

**DECRANE HOLDINGS CO.AND SUBSIDIARY**

 

**Consolidated Balance Sheets**

**(In thousands, exceptshare data)**

 
|                                                                                                                                                                         |   | **March 31,  2002** |    | **December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                                                                                                         |   | **(Unaudited)**     |    |                   |   |
| **Assets**                                                                                                                                                                   |   |                |    |                   |   |
| Current assets:                                                                                                                                                              |   |                |    |                   |   |
| Cash and cash equivalents                                                                                                                                                    |   | $                   | 11,843  |                   | $      | 9,794 |   |
| Accounts receivable, net                                                                                                                                                     |   | 54,285              |    | 58,451                 |   |
| Inventories                                                                                                                                                                  |   | 87,862              |    | 86,498                 |   |
| Deferred income taxes                                                                                                                                                        |   | 13,820              |    | 14,063                 |   |
| Prepaid expenses and other current assets                                                                                                                                    |   | 3,122               |    | 2,559                  |   |
| Total current assets                                                                                                                                                         |   | 170,932             |    | 171,365                |   |
|                                                                                                                                                                         |   |                |    |                   |   |
| Property and equipment, net                                                                                                                                                  |   | 57,182              |    | 61,073                 |   |
| Other assets, principally intangibles, net                                                                                                                                   |   | 411,249             |    | 413,273                |   |
| Total assets                                                                                                                                                                 |   | $                   | 639,363 |                   | $      | 645,711 |   |
|                                                                                                                                                                         |   |                |    |                   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’  Equity**                                                                                       |   |                |    |                   |   |
| Current liabilities:                                                                                                                                                         |   |                |    |                   |   |
| Current portion of long-term debt                                                                                                                                            |   | $                   | 17,074  |                   | $      | 13,899 |   |
| Accounts payable                                                                                                                                                             |   | 19,187              |    | 19,051                 |   |
| Accrued liabilities                                                                                                                                                          |   | 52,359              |    | 56,626                 |   |
| Income taxes payable                                                                                                                                                         |   | 232                 |    | 133                    |   |
| Total current liabilities                                                                                                                                                    |   | 88,852              |    | 89,709                 |   |
|                                                                                                                                                                         |   |                |    |                   |   |
| Long-term debt                                                                                                                                                               |   | 383,075             |    | 386,351                |   |
| Deferred income taxes                                                                                                                                                        |   | 31,345              |    | 33,597                 |   |
| Other long-term liabilities                                                                                                                                                  |   | 7,575               |    | 7,438                  |   |
|                                                                                                                                                                         |   |                |    |                   |   |
| Commitments and contingencies (Note 10)                                                                                                                                      |   |                |    |                   |   |
|                                                                                                                                                                         |   |                |    |                   |   |
| Minority interest in preferred stock of  subsidiary                                                                                                                          |   | 29,622              |    | 28,240                 |   |
| Mandatorily redeemable preferred stock                                                                                                                                       |   | 56,121              |    | 54,223                 |   |
|                                                                                                                                                                         |   |                |    |                   |   |
| Stockholders’ equity:                                                                                                                                                   |   |                |    |                   |   |
| Undesignated preferred stock, $.01 par  value, 1,140,000 shares authorized; none issued and outstanding as of March  31, 2002 and December 31, 2001                          |   | —              |    | —                 |   |
| Common stock, $.01 par value, 10,000,000  shares authorized; 3,895,531 and 3,914,274 shares issued and outstanding as  of March 31, 2002 and December 31, 2001, respectively |   | 39                  |    | 39                     |   |
| Additional paid-in capital                                                                                                                                                   |   | 73,144              |    | 75,542                 |   |
| Notes receivable for shares sold                                                                                                                                             |   | (2,500              | )       | (2,668                 | )      |
| Accumulated deficit                                                                                                                                                          |   | (25,642             | )       | (24,658                | )      |
| Accumulated other comprehensive loss                                                                                                                                         |   | (2,268              | )       | (2,102                 | )      |
| Total stockholders’ equity                                                                                                                                              |   | 42,773              |    | 46,153                 |   |
| Total liabilities and stockholders’ equity                                                                                                                              |   | $                   | 639,363 |                   | $      | 645,711 |   |

 

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

 

1

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**DECRANE HOLDINGS CO.AND SUBSIDIARY**

 

**ConsolidatedStatements of Operations**

**(In thousands)**

 
|                                                |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------|
|                                                |   | **2002**                          |   | **2001** |   |
|                                                |   | **(Unaudited)**                   |   |
| Revenues                                            |   | $                                 | 86,163 |   | $ | 99,151 |   |
| Cost of sales                                       |   | 60,448                            |   | 64,106 |   |
|                                                |   |                              |   |   |   |
| Gross profit                                        |   | 25,715                            |   | 35,045 |   |
|                                                |   |                              |   |   |   |
| Operating expenses:                                 |   |                              |   |   |   |
| Selling, general and administrative  expenses       |   | 15,497                            |   | 14,660 |   |
| Amortization of intangible assets                   |   | 1,400                             |   | 4,966 |   |
| Total operating expenses                            |   | 16,897                            |   | 19,626 |   |
|                                                |   |                              |   |   |   |
| Income from operations                              |   | 8,818                             |   | 15,419 |   |
|                                                |   |                              |   |   |   |
| Other expenses:                                     |   |                              |   |   |   |
| Interest expense                                    |   | 7,963                             |   | 10,455 |   |
| Minority interest in preferred stock of  subsidiary |   | 1,382                             |   | 1,199 |   |
| Other expenses, net                                 |   | 146                               |   | 105 |   |
|                                                |   |                              |   |   |   |
| Income (loss) before provision for income  taxes    |   | (673                              | )      | 3,660 |   |
| Provision for income taxes                          |   | 311                               |   | 2,387 |   |
|                                                |   |                              |   |   |   |
| Net income (loss)                                   |   | (984                              | )      | 1,273 |   |
|                                                |   |                              |   |   |   |
| Noncash preferred stock dividend accretion          |   | (1,898                            | )      | (1,654 | ) |
|                                                |   |                              |   |   |   |
| Net loss applicable to common stockholders          |   | $                                 | (2,882 | ) | $ | (381 | ) |

 

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

 

2

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**DECRANE HOLDINGS CO.AND SUBSIDIARY**

 

**ConsolidatedStatement of Stockholders’ Equity**

**(In thousands, exceptshare data)**

 
|                                                                                                |   |       |   | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
|                                                                                                |
| **Common  Stock**                                                                                   |
| **Shares**                                                                                          |   | **Amount** |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, December 31, 2001                                                                          |   | 3,914,274  |   | $                                | 39     |                                    | $      | 75,542                   |   | $                                           | (2,668 | )         | $      | (24,658 | ) | $ | (2,102 | ) | $ | 46,153 |   |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive income (loss):                                                                        |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                                                                            |   | —     |   | —                           |   | —                                  |   | —                   |   | (984                                        | )      | —    |   | (984 | ) |
| Translation adjustment                                                                              |   | —     |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (163      | )      | (163 | ) |
| Unrealized loss on interest rate swap  contract                                                     |   | —     |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (3        | )      | (3 | ) |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   | (1,150 | ) |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Repurchase of common stock and cashless  exercise of options, net of related note receivable repaid |   | (18,743    | )      | —                           |   | (568                                    | )      | 200                      |   | —                                      |   | —    |   | (368 | ) |
| (tax benefit of options exercised)                                                                  |   | —     |   | —                           |   | 14                                      |   | —                   |   | —                                      |   | —    |   | 14 |   |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Noncash dividend accretion on preferred  stock                                                      |   | —     |   | —                           |   | (1,898                                  | )      | —                   |   | —                                      |   | —    |   | (1,898 | ) |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Compensatory stock option expense                                                                   |   | —     |   | —                           |   | 54                                      |   | —                   |   | —                                      |   | —    |   | 54 |   |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Notes receivable interest accrued                                                                   |   | —     |   | —                           |   | —                                  |   | (32                      | )      | —                                      |   | —    |   | (32 | ) |
|                                                                                                |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, March 31, 2002 (Unaudited)                                                                 |   | 3,895,531  |   | $                                | 39     |                                    | $      | 73,144                   |   | $                                           | (2,500 | )         | $      | (25,642 | ) | $ | (2,268 | ) | $ | 42,773 |   |
|                                                                                                     |        |            |        |                                  |        |                                         |        |                          |        |                                             |        |           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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

 

3

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Consolidated Statements of Cash Flows**

**(In thousands)**

 
|                                                                               |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                               |   | **2002**                          |   | **2001** |   |
|                                                                               |   | **(Unaudited)**                   |   |
| **Cash flows from operating activities:**                                          |   |                              |   |   |   |
| Net income (loss)                                                                  |   | $                                 | (984   | ) | $ | 1,273 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                              |   |   |   |
| Depreciation and amortization                                                      |   | 4,985                             |   | 8,248 |   |
| Noncash portion of restructuring and asset  impairment charges                     |   | 3,145                             |   | — |   |
| Minority interest in preferred stock of  subsidiary                                |   | 1,382                             |   | 1,199 |   |
| Deferred income taxes                                                              |   | 128                               |   | 746 |   |
| Other, net                                                                         |   | 215                               |   | 359 |   |
| Changes in assets and liabilities, net of  effect from acquisitions:               |   |                              |   |   |   |
| Accounts receivable                                                                |   | 3,547                             |   | (8,799 | ) |
| Inventories                                                                        |   | (2,480                            | )      | (4,086 | ) |
| Prepaid expenses and other assets                                                  |   | (1,177                            | )      | (838 | ) |
| Accounts payable                                                                   |   | 152                               |   | 5,302 |   |
| Accrued liabilities                                                                |   | (3,557                            | )      | (10,675 | ) |
| Income taxes payable                                                               |   | 114                               |   | 1,505 |   |
| Other long-term liabilities                                                        |   | 112                               |   | 155 |   |
| Net cash provided by (used for) operating  activities                              |   | 5,582                             |   | (5,611 | ) |
|                                                                               |   |                              |   |   |   |
| **Cash flows from investing activities:**                                          |   |                              |   |   |   |
| Cash paid for acquisitions                                                         |   | (707                              | )      | (17,247 | ) |
| Capital expenditures                                                               |   | (623                              | )      | (2,604 | ) |
| Other, net                                                                         |   | —                            |   | 55 |   |
| Net cash used for investing activities                                             |   | (1,330                            | )      | (19,796 | ) |
|                                                                               |   |                              |   |   |   |
| **Cash flows from financing activities:**                                          |   |                              |   |   |   |
| Net borrowings under senior credit facility                                        |   | —                            |   | 23,300 |   |
| Other long-term borrowings                                                         |   | 297                               |   | — |   |
| Deferred financing costs                                                           |   | (1,629                            | )      | — |   |
| Principal payments on term debt,  capitalized leases and other debt                |   | (451                              | )      | (1,001 | ) |
| Repurchase of common stock and options                                             |   | (368                              | )      | — |   |
| Other, net                                                                         |   | (49                               | )      | (58 | ) |
| Net cash provided by (used for) financing  activities                              |   | (2,200                            | )      | 22,241 |   |
|                                                                               |   |                              |   |   |   |
| Effect of foreign currency translation on  cash                                    |   | (3                                | )      | 71 |   |
|                                                                               |   |                              |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | 2,049                             |   | (3,095 | ) |
| Cash and cash equivalents at beginning of  period                                  |   | 9,794                             |   | 8,199 |   |
| Cash and cash equivalents at end of period                                         |   | $                                 | 11,843 |   | $ | 5,104 |   |

 

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

 

4

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Condensed Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**Note 1.           ConsolidatedFinancial Statements**

 

Theconsolidated interim financial statements included in this report areunaudited.  The Company believes theinterim financial statements are presented on a basis consistent with theaudited financial statements and include all adjustments necessary for a fairpresentation of the financial condition, results of operations and cash flowsfor such interim periods.  All of theseadjustments are normal recurring adjustments.

 

Preparation ofthese consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities and disclosure of contingent assets and liabilities at thedate of the consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting periods.  Actual results could differ from those estimates.

 

The results ofoperations for interim periods do not necessarily predict the operating resultsfor any other interim period or for the full year.  The consolidated balance sheet as of December 31, 2001 hasbeen derived from audited financial statements but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America as permitted by interim reporting requirements.  The information included in this reportshould be read in conjunction with Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and the audited financialstatements and related notes included in the Company’s 2001 Form 10-K.  Some reclassifications have been made toprior periods’ financial statements to conform to the 2002 presentation.

 

**Note 2.           AccountingPronouncements**

 

**AccountingPronouncements Adopted January 1, 2002**

 

*SFAS No. 141 and 142*

 

EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142, “Goodwill andOther Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142. Adoption of these accounting pronouncements resulted in the following:

 

•                  *Reassessmentof Useful Lives of Intangible Assets.*  The reassessment of the useful lives of intangible assetsacquired on or before June 30, 2001 was completed during the first quarter of2002.  The remaining useful lives weredeemed appropriate.

 

•                  *Reclassificationof Intangible Assets. *Intangibleassets relating to acquired assembled workforce intangibles not meeting thecriteria for recognition apart from goodwill were reclassified to goodwill.

 

•                  *Discontinuanceof Goodwill Amortization*. Goodwill is deemed to be an indefinite-lived asset.  As a result, the recording of periodicgoodwill amortization charges was discontinued effective January 1, 2002.

 

5

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The Companyhas until June 30, 2002 to complete the first step of the transitionalimpairment testing of goodwill associated with adopting SFAS No. 142and until December 31, 2002 to complete the second step, if needed.  The amount of impairment losses recognizableupon adoption, if any, is not known at this time.  The transitional impairment losses, if any, will be reflected asa cumulative effect of a change in accounting principle as of January 1, 2002.

 

Areconciliation of reported net income (loss) to net income (loss) adjusted toreflect the impact of the discontinuance of the amortization of goodwill andother intangible assets is as follows (amounts in thousands):

 
|                                                                |   | **Three Months Ended  March 31,** |       |
|---------------------------------------------------------------------|--------|----------------------------------------|------------|
|                                                                |   | **2002**                               |       | **2001** | ** ** |
|                                                                |   | **(Unaudited)**                        | ** ** |
| Reported net income (loss)                                          |   | $                                      | (984       | ) | $ | 1,273 |   |
| Add back goodwill and assembled workforce  amortization, net of tax |   | —                                 |       | 2,881 |   |
| Adjusted net income (loss)                                          |   | $                                      | (984       | ) | $ | 4,154 |   |

 

*SFAS No. 143*

 

EffectiveJanuary 1, 2002, the Company also adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations,” which requires recognition of the fair valueof liabilities associated with the retirement of long-lived assets when a legalobligation to incur such costs arises as a result of the acquisition,construction, development and/or the normal operation of a long-livedasset.  Adoption ofSFAS No. 143 is required for the Company’s fiscal year beginningJanuary 1, 2003 although early application is permitted.  Adoption of SFAS No. 143 did nothave an impact on the Company’s business, consolidated financial position,results of operations or cash flows.

 

*SFAS No. 144*

 

EffectiveJanuary 1, 2002, the Company also adopted SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” which addresses theaccounting and reporting for the impairment or disposal of long-livedassets.  Adoption ofSFAS No. 144 did not have an impact on the Company’s business,consolidated financial position, results of operations or cash flows.

 

**RecentlyIssued Accounting Pronouncement**

* *

*SFAS No. 145*

 

In May 2002,the Financial Accounting Standards Board issued SFAS No. 145,“Rescission of SFAS Nos. 4, 44, and 64, Amendment ofSFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds variouspronouncements regarding early extinguishment of debt and allows extraordinaryaccounting treatment for early extinguishment only when the provisions ofAccounting Principles Board Opinion No. 30, “Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions” aremet.  SFAS No. 145 provisionsregarding early extinguishment of debt are generally effective for fiscal yearsbeginning after May 15, 2002.  TheCompany is currently evaluating the impact this new standard will have on itsbusiness, consolidated financial position, results of operations and cash flow.

 

6

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**Note 3.           Restructuringand Asset Impairment Charges**

 

**2002Restructuring of Seat Manufacturing Facilities**

 

In 2002, theCompany announced it would consolidate the production of four seating andrelated manufacturing facilities into two facilities, resulting in thepermanent closure of two facilities.  Inconnection with the restructuring plan, the Company expects to recordnonrecurring pre-tax charges to operations totaling $5,145,000 during 2002 forrestructuring and asset impairment charges and other related expenses.  Of this amount, $4,043,000 was charged tooperations during the three months ended March 31, 2002 as follows(amounts in thousands):

 
|                                                               |   | **Total  Expected  Charges** |   | **Charges  Recorded  to Date** |   | **Remaining  Charges  to be  Incurred** |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|--------------------------------|--------|-----------------------------------------|--------|
|                                                               |   | **(Unaudited)**              |   |
| Restructuring and asset impairment charges  recorded               |   | $                            | 3,895  |                           | $      | (3,895                                  | )      | $ | — |   |
| Other restructuring related expenses to be  recognized as incurred |   | 1,250                        |   | (148                           | )      | 1,102                                   |   |
| Total                                                              |   | $                            | 5,145  |                           | $      | (4,043                                  | )      | $ | 1,102 |   |

 

 

Of the$4,043,000 incurred during the three months ended March 31, 2002,$1,214,000 is included in cost of sales and the remaining $2,829,000 isincluded in selling, general and administrative expenses.  The restructuring and asset impairmentcharges and other related expenses are comprised of the following:

 

•                  *Impairment of Long-Lived Assets.*  The restructuring plan resulted in the impairmentof property and equipment and, accordingly, these assets were written down totheir net realizable value.

 

•                  *Inventory and Accounts Receivable Write-Downs.*  Inconnection with the production consolidation, the Company will discontinuemanufacturing certain products. Inventory and certain receivables related to the discontinued productswere written down to net realizable value.

 

•                  *Severance and Other Compensation Costs.*  Approximately 100 employees will beterminated as soon as the operations are consolidated and the facilities arepermanently closed; none have been terminated as of March 31, 2002.

 

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

 

7

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The Companyhas commenced with the restructuring plan and expects it to be completed duringthe third quarter of fiscal 2002.  Thecomponents of the restructuring, assets impairment and other nonrecurringcharges are as follows (amounts in thousands):

 
|                                                   |   | **Total  Charges**                   |        |   |     |   |   |   |   |
|--------------------------------------------------------|--------|--------------------------------------|-------------|--------|----------|--------|--------|--------|--------|
| **Amounts Incurred**                                   |   | **Balance at  March 31,  2002** |        |
|                                                   |   |                                 | **Noncash** |   | **Cash** |   |   |
|                                                   |   | **(Unaudited)**                      |        |
| Restructuring and assets impairment charges  (1):      |   |                                 |        |   |     |   |   |   |   |
| Impairment of property and equipment                   |   | $                                    | 1,445       |   | $        | (1,445 | )      | $      | — |   | $ | — |   |
| Inventory and accounts receivable write-downs          |   | 1,700                                |        | (1,700 | )        | — |   | — |   |
| Severance and other compensation costs                 |   | 450                                  |        | — |     | — |   | 450    |   |
| Lease termination and other related costs              |   | 300                                  |        | — |     | — |   | 300    |   |
| Total restructuring and asset impairment  charges (2)  |   | 3,895                                |        | (3,145 | )        | — |   | 750    |   |
|                                                   |   |                                 |        |   |     |   |   |   |   |
| Other nonrecurring restructuring-related  expenses (3) |   | 1,250                                |        | — |     | (148   | )      | 1,102  |   |
| Total                                                  |   | $                                    | 5,145       |   | $        | (3,145 | )      | $      | (148   | ) | $ | 1,852 |   |
|                                                   |   |                                 |        |   |     |   |   |   |   |
| Components of charges:                                 |   |                                 |        |   |     |   |   |   |   |
| Noncash charges                                        |   | $                                    | 3,145       |   | $        | (3,145 | )      | $      | — |   | $ | — |   |
| Cash charges                                           |   | 2,000                                |        | — |     | (148   | )      | 1,852  |   |
| Total                                                  |   | $                                    | 5,145       |   | $        | (3,145 | )      | $      | (148   | ) | $ | 1,852 |   |

 

----

 

(1)                                 Reflectscharges to operations during the three months ended March 31, 2002.

 

(2)                                 Balanceat March 31, 2002 reflects the remaining accrued liability recorded.

 

(3)                                 Reflectsexpenses to be charged to operations as incurred.  Balance at March 31, 2002 reflects an estimate of the coststhat will be charged to operations during the remainder of 2002; these costsare not accrued as of March 31, 2002.

 

Future cashpayments will be funded from existing cash balances and internally generatedcash from operations.

 

**2001Restructuring and Asset Impairment Charges**

 

During thesecond quarter of 2001, the Company adopted a restructuring plan to realignaircraft furniture production programs among its manufacturing facilities.  In response to the adverse impact on theaerospace industry resulting from the September 11th terroristattack and its aftermath, as well as the weakening of global economicconditions, the Company announced and implemented a further restructuring planin December 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  This plan primarilyaffected the Company’s Cabin Management and Specialty Avionics Groups.

 

In 2001, theCompany recorded nonrecurring pre-tax charges to operations of $28,658,000 forrestructuring costs and asset impairment charges in connection with theserestructuring plans.  The restructuringcosts and asset impairment charges were comprised of the following:

 

•                  *Impairmentof Long-Lived Assets. *Therestructuring plan resulted in the impairment of property, equipment andgoodwill and, accordingly, these assets were written down to their netrealizable value.

 

8

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•                  *Write-off ofProduct Development Costs.* The curtailment of several product development programs in 2001resulting in the write-off of inventoried costs related to these programs.

 

•                  *ExcessInventory Write-Downs.* Inventory was written down to net realizable value for quantities onhand exceeding current and forecast order backlog requirements.  Inventory at the closed and temporarilyidled manufacturing facilities was also written down to net realizable value.

 

•                  *Realignmentof Production Programs Among Facilities.*  Costs associated with this realignment were incurred during thefiscal second quarter of 2001.

 

•                  *Severanceand Other Compensation Costs.* Since the September 11th terrorist attack, the Company hasreduced its total workforce by approximately 400 employees, or 14%, as of March2002, of which approximately 260 employees had separated as ofDecember 31, 2001.

 

•                  *LeaseTermination and Other Related Costs.*  Lease termination and other related costs are comprised of thenet losses expected to be incurred under the existing long-term leaseagreements for facilities permanently vacated. The losses have been reduced by the expected sublease income.  These expected losses were based onestimated current market rates and anticipated dates that these facilities aresubleased.  If market-rates decrease orshould it take longer than expected to sublease these facilities, the actualloss could exceed these estimates.

 

As ofDecember 31, 2001, $27,049,000 had been incurred, $22,058,000 of whichrepresented a noncash write-down of assets, and the remaining $1,609,000 wasreflected as an accrued liability. Components of the amounts incurred through March 31, 2002 are asfollows (amounts in thousands):

** **
|                                      |   | **Balance at  December 31,  2001** |   | **Amounts  Incurred** |   | **Balance at  March 31,  2002** |   |
|-------------------------------------------|--------|-----------------------------------------|--------|-----------------------|--------|--------------------------------------|--------|
|                                      |   |                                    |   | **(Unaudited)**       |   | **(Unaudited)**                      |   |
| Severance and other compensation costs    |   | $                                       | 1,185  |                  | $      | (621                                 | )      | $ | 564 |   |
| Lease termination and other related costs |   | 424                                     |   | (116                  | )      | 308                                  |   |
| Total                                     |   | $                                       | 1,609  |                  | $      | (737                                 | )      | $ | 872 |   |

 

 

ThroughMarch 31, 2002, severance and other compensation costs of approximately$1,460,000 have been paid, of which $621,000 was incurred during the threemonths ended March 31, 2002.  Theamounts paid to date have been to manufacturing and administrative employeesterminated at the manufacturing facilities either permanently closed or beingtemporarily idled.  The Company expectsto incur the remaining costs during the second quarter of 2002 when themanufacturing facility being temporarily idled ceases operations and theremaining personnel are terminated.

 

The remainingbalance of restructuring costs includes lease termination and other exitcosts.  Most of the restructuring planwill be completed by the second quarter of 2002; however, future cash paymentswill extend beyond this date due to future lease payments on the vacatedfacility and the incurrence of other exit costs.

 

No significantadjustments have been made to the original estimates.  Future cash payments will be funded from existing cash balancesand internally generated cash from operations.

 

9

----

 

**Note 4.           Inventories**

 

Inventoriesare comprised of the following as of March 31, 2002 and December 31,2001 (amounts in thousands):

 
|                                                                         |   | **March 31,  2002** |         | **December 31,  2001** |   |
|------------------------------------------------------------------------------|--------|--------------------------|--------------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**          |         |                        |   |
| Raw materials                                                                |   | $                        |  48,314 |                        | $      |  50,503 |   |
| Work-in-process:                                                             |   |                     |         |                        |   |
| Direct and indirect manufacturing costs                                      |   | 17,417                   |         | 16,260                      |   |
| Program costs, principally engineering  costs                                |   | 11,710                   |         | 10,974                      |   |
| Finished goods                                                               |   | 6,235                    |         | 3,089                       |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | 4,186                    |         | 5,672                       |   |
| Total inventories                                                            |   | $                        |  87,862 |                        | $      |  86,498 |   |

 

 

Inventoriedcosts are not in excess of estimated realizable value and include directengineering, production and tooling costs, and applicable manufacturingoverhead.  In accordance with industrypractice, inventoried costs include amounts relating to programs and contractswith long production cycles that will be recovered from future sales.  Periodic assessments are performed to ensurerecoverability of the program costs and adjustments are made, if necessary, toreduce inventoried costs to estimated realizable value.  In connection with the 2001 restructuring,$7,908,000 of previously inventoried program costs were determined to beunrecoverable and were charged to cost of sales during the fourth quarter offiscal 2001; no adjustments were required during the first quarter of fiscal2002.

 

Total costsand estimated earnings on all uncompleted contracts as of March 31, 2002and December 31, 2001 are comprised of the following (amounts inthousands):

 
|                                                                          |   | **March 31,  2002** |         | **December 31,  2001** |   |
|-------------------------------------------------------------------------------|--------|--------------------------|--------------|-----------------------------|--------|
|                                                                          |   | **(Unaudited)**          |         |                        |   |
| Costs incurred on uncompleted contracts                                       |   | $                        |  60,899 |                        | $      |  46,757 |   |
| Estimated earnings recognized                                                 |   | 56,730                   |         | 50,413                      |   |
| Total costs and estimated earnings                                            |   | 117,629                  |         | 97,170                      |   |
| Less billings to date                                                         |   | (119,344                 | )            | (102,653                    | )      |
| Net                                                                           |   | $                        |  (1,715 | )                           | $      |  (5,483 | ) |
|                                                                          |   |                     |         |                        |   |
| Balance sheet classification:                                                 |   |                     |         |                        |   |
| Asset – Costs and estimated earnings in  excess of billings              |   | $                        |  4,186  |                        | $      |  5,672 |   |
| Liability – Billings in excess of costs and  estimated earnings (Note 6) |   | (5,901                   | )            | (11,155                     | )      |
| Net                                                                           |   | $                        |  (1,715 | )                           | $      |  (5,483 | ) |

 

10

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**Note 5.           OtherAssets**

 

Other assetsare comprised of the following as of March 31, 2002 and December 31,2001 (amounts in thousands):

 
|                                                     |   | **March 31,  2002** |    | **December 31,  2001** |   |
|----------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                     |   | **(Unaudited)**          |    |                        |   |
| Goodwill                                                 |   | $                        | 342,133 |                        | $      | 337,443 |   |
| Identifiable intangible assets with finite  useful lives |   | 55,284                   |    | 63,648                      |   |
| Deferred financing costs                                 |   | 11,243                   |    | 10,204                      |   |
| Other non-amortizable assets                             |   | 2,589                    |    | 1,978                       |   |
| Total other assets                                       |   | $                        | 411,249 |                        | $      | 413,273 |   |

 

**Goodwill**

 

Changes in thecarrying amount of goodwill, by business segment (Note 12), for the threemonths ended March 31, 2002 and the year ended December 31, 2001 areas follows (amounts in thousands):

 
|                                                                                                    |   | **Cabin Management Group** |    | **Specialty Avionics Group** |   | **Systems Integration Group** |   | **Corporate** |   | **Consolidated Total** | ** ** |
|---------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|------------------------------|--------|-------------------------------|--------|---------------|--------|------------------------|------------|
| Three months ended March 31, 2002:                                                                 |   |                       |    |                         |   |                          |   |          |   |                   |       |
| Balance, December 31, 2001                                                                         |   | $                          | 178,715 |                         | $      | 126,495                       |   | $             | 28,277 |                   | $          | 3,956 |   | $ | 337,443 |   |
| Reclassification of intangible assets  relating to assembled workforce, net of tax                      |   | 3,076                      |    | 1,221                        |   | 386                           |   | 120           |   | 4,803                  |       |
| Foreign currency translation                                                                            |   | —                     |    | (113                         | )      | —                        |   | —        |   | (113                   | )          |
| Balance, March 31, 2002 (Unaudited)                                                                |   | $                          | 181,791 |                         | $      | 127,603                       |   | $             | 28,663 |                   | $          | 4,076 |   | $ | 342,133 |   |
|                                                                                                    |   |                       |    |                         |   |                          |   |          |   |                   |       |
| Year ended December 31, 2001:                                                                      |   |                       |    |                         |   |                          |   |          |   |                   |       |
| Balance, December 31, 2000                                                                         |   | $                          | 187,797 |                         | $      | 131,472                       |   | $             | 32,982 |                   | $          | 4,105 |   | $ | 356,356 |   |
| Amortization during the period                                                                          |   | (1,641                     | )       | (1,180                       | )      | (295                          | )      | (37           | )      | (3,153                 | )          |
| Foreign currency translation                                                                            |   | —                     |    | (677                         | )      | —                        |   | —        |   | (677                   | )          |
| Balance, March 31, 2001 (Unaudited)                                                                |   | 186,156                    |    | 129,615                      |   | 32,687                        |   | 4,068         |   | 352,526                |       |
|                                                                                                    |   |                       |    |                         |   |                          |   |          |   |                   |       |
| Amortization during the period                                                                          |   | (4,999                     | )       | (3,529                       | )      | (885                          | )      | (112          | )      | (9,525                 | )          |
| Impairment losses recognized                                                                            |   | (5,058                     | )       | —                       |   | (3,525                        | )      | —        |   | (8,583                 | )          |
| Contingent consideration earned, including  acquisition related expenses                                |   | 3,832                      |    | —                       |   | —                        |   | —        |   | 3,832                  |       |
| Cash received from sellers, net of  additional liabilities recorded, upon settlement of asserted claims |   | (1,216                     | )       | —                       |   | —                        |   | —        |   | (1,216                 | )          |
| Foreign currency translation                                                                            |   | —                     |    | 409                          |   | —                        |   | —        |   | 409                    |       |
| Balance, December 31, 2001                                                                         |   | $                          | 178,715 |                         | $      | 126,495                       |   | $             | 28,277 |                   | $          | 3,956 |   | $ | 337,443 |   |

 

 

Corporatereflects the portion of goodwill that has not been allocated to a businesssegment.  The corporate goodwill will beallocated in connection with the transitional impairment testing of goodwillassociated with adopting SFAS No. 142.

 

11

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**IdentifiableIntangible Assets with Finite Useful Lives**

 

Identifiableintangible assets with finite useful lives are comprised of the following as ofMarch 31, 2002 and December 31, 2001 (amounts in thousands):

 
|                           |   | **March 31, 2002 (Unaudited)** |   | **December 31, 2001**    |   |
|--------------------------------|--------|-------------------------------------|--------|-------------------------------|--------|
|                           |   | **Cost**                            |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                           |   |                                |   |                          |   |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                                   | 45,816 |                          | $      | (9,249 | ) | $ | 36,567 |   | $ | 45,816 |   | $ | (8,485 | ) | $ | 37,331 |   |
| Engineering drawings           |   | 14,617                              |   | (3,059                        | )      | 11,558 |   | 14,617 |   | (2,816 | ) | 11,801 |   |
| Assembled workforce            |   | —                              |   | —                        |   | — |   | 11,499 |   | (4,535 | ) | 6,964 |   |
| Other identifiable intangibles |   | 12,293                              |   | (5,134                        | )      | 7,159 |   | 12,293 |   | (4,741 | ) | 7,552 |   |
| Total identifiable intangibles |   | $                                   | 72,726 |                          | $      | (17,442 | ) | $ | 55,284 |   | $ | 84,225 |   | $ | (20,577 | ) | $ | 63,648 |   |

 

 

Estimatedannual amortization expense for all identifiable intangible assets with finiteuseful lives for the five-year period ending December 31, 2006 is asfollows: 2002 – $5,601,000; 2003 – $5,574,000; 2004 – $5,521,000; 2005 –$5,521,000; and 2006 – $4,423,000.

 

**Note 6.           AccruedLiabilities**

 

Accruedliabilities are comprised of the following as of March 31, 2002 andDecember 31, 2001 (amounts in thousands):

 
|                                                                         |   | **March 31,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**          |   |                        |   |
| Salaries, wages, compensated absences and  payroll related taxes             |   | $                        | 12,829 |                        | $      | 17,179 |   |
| Accrued interest                                                             |   | 10,003                   |   | 4,692                       |   |
| Accrued warranty costs                                                       |   | 6,588                    |   | 4,227                       |   |
| Acquisition related contingent  consideration                                |   | 6,204                    |   | 6,904                       |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |   | 5,901                    |   | 11,155                      |   |
| Customer advances and deposits                                               |   | 3,352                    |   | 3,260                       |   |
| Other accrued liabilities                                                    |   | 7,482                    |   | 9,209                       |   |
| Total accrued liabilities                                                    |   | $                        | 52,359 |                        | $      | 56,626 |   |

 

12

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**Note 7.           Long-TermDebt**

 

Long-term debtincludes the following amounts as of March 31, 2002 and December 31,2001 (amounts in thousands):

 
|                                                                                  |   | **March 31,  2002** |    | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                  |   | **(Unaudited)**          |    |                        |   |
| Senior credit facility:                                                               |   |                     |    |                        |   |
| $ 50 million revolving line of credit                                                 |   | $                        | 12,000  |                        | $      | 12,000 |   |
| Term loans                                                                            |   | 275,706                  |    | 275,706                     |   |
|                                                                                  |   |                     |    |                        |   |
| 12% senior subordinated notes                                                         |   | 100,000                  |    | 100,000                     |   |
|                                                                                  |   |                     |    |                        |   |
| Capital lease obligations and term debt  financing, secured by property and equipment |   | 10,592                   |    | 10,745                      |   |
|                                                                                  |   |                     |    |                        |   |
| Other indebtedness                                                                    |   | 1,851                    |    | 1,799                       |   |
| Total long-term debt                                                                  |   | 400,149                  |    | 400,250                     |   |
| Less current portion                                                                  |   | (17,074                  | )       | (13,899                     | )      |
| Long-term debt, less current portion                                                  |   | $                        | 383,075 |                        | $      | 386,351 |   |

 

 

On March 19,2002, the Company amended certain of the terms of its senior creditfacility.  The amendment combines two$25,000,000 working capital and acquisitions lines of credit into a single$50,000,000 working capital line of credit, increases the prime rate and LIBORrate margins by 50 basis points, resulting in a range of 2.00% to 3.25% forprime rate borrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amendscertain financial covenants, principally through December 31, 2003.

 

**Note 8.           IncomeTaxes**

 

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

 

For the threemonths ended March 31, 2001, the provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate toincome before income taxes primarily due to the effects of state and foreignincome taxes and non-deductible expenses, principally goodwill amortization andminority interest in preferred stock of subsidiary.  Prior to the January 1, 2002 adoption of SFAS No. 142,goodwill was amortized for financial reporting purposes.

 

13

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**Note 9.           CapitalStructure**

 

**MandatorilyRedeemable Preferred Stock**

 

The tablebelow summarizes the increase in mandatorily redeemable preferred stock duringthe three months ended March 31, 2002.

** **
|                                                          |   | **DeCrane Aircraft  16% Preferred Stock**           |   | **DeCrane Holdings  14% Preferred Stock** |   |
|---------------------------------------------------------------|--------|-----------------------------------------------------|--------|-------------------------------------------|--------|
|                                                          |   | **Number  of  Shares**                              |   | **Mandatory  Redemption  Value**          |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   | **Number  of  Shares** |   | **Mandatory  Redemption  Value** |   |
|                                                          |   | **(in thousands, except share and per share data)** |   |
| Balance, December 31, 2001                                    |   | 316,330                                             |   | $                                         | 31,633 |   | $ | (3,393 | ) | $ | 28,240 |   | 342,417 |   | $ | 54,223 |   |
| Accrued dividends and redemption value accretion              |   | 12,653                                              |   | 1,265                                     |   | 117 |   | 1,382 |   | — |   | — |   |
| Noncash dividend accretion                                    |   | —                                              |   | —                                    |   | — |   | — |   | — |   | 1,898 |   |
| Balance, March 31, 2002 (Unaudited)                           |   | 328,983                                             |   | $                                         | 32,898 |   | $ | (3,276 | ) | $ | 29,622 |   | 342,417 |   | $ | 56,121 |   |
|                                                          |   |                                                |   |                                      |   |   |   |   |   |   |   |   |   |
| Per share liquidation value as of March 31,  2002 (Unaudited) |   |                                                |   | $                                         | 100.00 |   |   |   |   |   |   |   | $ | 163.90 |   |

 

 

DeCraneAircraft’s 16% preferred stock is reflected as minority interest in preferredstock of subsidiary in the consolidated financial statements.

 

*DeCrane Aircraft 16% Mandatorily Redeemable Preferred Stock*

 

Holders of thepreferred stock are entitled to receive, when, as and if declared, dividends ata rate equal to 16% per annum.  Prior toJune 30, 2005, DeCrane Aircraft may, at its option, pay dividends either in cashor 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 in lieuof cash dividends payments; such shares are reflected as a component ofminority interest in preferred stock of subsidiary.

*** ***

*DeCrane Holdings 14% Mandatorily Redeemable Preferred Stock*

 

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

 

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

 

During thethree months ended March 31, 2002, DeCrane Holdings repurchased and canceled18,743 common shares from former members of DeCrane Aircraft management.  The former management members also electedto exercise 9,252 vested stock options on a cashless basis.  The $14,000 income tax benefit associatedwith the stock options exercised was also credited to additional paid-incapital.  In connection with therepurchase, a note receivable collateralized by the repurchased common stockwas repaid.

 

14

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** **

**Note 10.         Commitmentsand Contingencies**

 

**ContingentAcquisition Consideration**

 

The Company’sremaining maximum contingent acquisition consideration payment obligation is$600,000 as of March 31, 2002.  Thecontingent consideration is payable based upon an acquired company’s level ofattainment of its defined performance criteria for the year endingDecember 31, 2002 and excludes amounts earned and recorded throughDecember 31, 2001.  The contingentconsideration, if any, is payable during the first quarter of 2003.

 

**Note 11.         ConsolidatedStatements of Cash Flows**

 

The followinginformation supplements the Company’s consolidated statements of cash flows(amounts in thousands):

** **
|                                                                 |   | **Three Months Ended**

**March 31,** |   |
|----------------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                                 |   | **2002**                                   |   | **2001** |   |
|                                                                 |   | **(Unaudited)**                            |   |
|                                                                 |   |                                       |   |
| Components of cash paid for acquisitions:                            |   |                                       |   |   |   |
| Contingent consideration paid for  previously completed acquisitions |   | $                                          | 700    |   | $ | 17,075 |   |
| Additional acquisition related expenses                              |   | 7                                          |   | 172 |   |
| Total cash paid for acquisitions                                     |   | $                                          | 707    |   | $ | 17,247 |   |

 

**Note 12.         BusinessSegment Information**

 

The Companysupplies products and services to the aerospace industry.  The Company’s subsidiaries are organizedinto three groups, each of which are strategic businesses that develop,manufacture and sell distinct products and services.  The groups and a description of their businesses are as follows:

 

•      *CabinManagement —* provides interior cabin components for the corporateaircraft market, including cabin interior furnishings, cabin managementsystems, seating and composite components;

 

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

 

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

 

Managementutilizes more than one measurement to evaluate group performance and allocateresources, however, management considers EBITDA to be the primary measurementof overall economic returns and cash flows. Management defines EBITDA as earnings before interest, income taxes,depreciation and amortization, acquisition related charges and other noncashand nonoperating charges.  This isconsistent with the manner in which the Company’s lenders and ultimateinvestors measure its overall performance.

 

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

 

15

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The tablesbelow summarize selected financial data by business segment (amounts inthousands).

** **
|                             |   | **Three Months Ended  March 31,** |    |
|----------------------------------|--------|----------------------------------------|---------|
|                             |   | **2002**                               |    | **2001** |   |
|                             |   | **(Unaudited)**                        |    |
| Revenues:                        |   |                                   |    |   |   |
| Cabin Management                 |   | $                                      | 45,867  |   | $ | 51,359 |   |
| Specialty Avionics               |   | 25,344                                 |    | 31,273 |   |
| Systems Integration              |   | 15,077                                 |    | 16,734 |   |
| Inter-group elimination (1)      |   | (125                                   | )       | (215 | ) |
| Consolidated totals              |   | $                                      | 86,163  |   | $ | 99,151 |   |
|                             |   |                                   |    |   |   |
| EBITDA:                          |   |                                   |    |   |   |
| Cabin Management                 |   | $                                      | 3,978   |   | $ | 13,398 |   |
| Specialty Avionics               |   | 7,011                                  |    | 7,827 |   |
| Systems Integration              |   | 4,296                                  |    | 4,096 |   |
| Corporate (2)                    |   | (2,118                                 | )       | (1,936 | ) |
| Inter-group elimination (3)      |   | 111                                    |    | — |   |
| Consolidated totals (4)          |   | $                                      | 13,278  |   | $ | 23,385 |   |
|                             |   |                                   |    |   |   |
| Adjusted EBITDA (5):             |   |                                   |    |   |   |
| Cabin Management                 |   | $                                      | 8,021   |   | $ | 13,398 |   |
| Specialty Avionics               |   | 7,011                                  |    | 7,827 |   |
| Systems Integration              |   | 4,296                                  |    | 4,096 |   |
| Corporate                        |   | (2,118                                 | )       | (1,936 | ) |
| Inter-group elimination          |   | 111                                    |    | — |   |
| Consolidated totals              |   | $                                      | 17,321  |   | $ | 23,385 |   |
|                             |   |                                   |    |   |   |
| Total assets (as of period end): |   |                                   |    |   |   |
| Cabin Management                 |   | $                                      | 305,047 |   | $ | 317,314 |   |
| Specialty Avionics               |   | 211,446                                |    | 228,044 |   |
| Systems Integration              |   | 77,553                                 |    | 83,971 |   |
| Corporate (6)                    |   | 46,184                                 |    | 39,449 |   |
| Inter-group elimination (7)      |   | (867                                   | )       | (339 | ) |
| Consolidated totals              |   | $                                      | 639,363 |   | $ | 668,439 |   |

 

----

 

(1)           Inter-group salesare accounted for at prices comparable to sales to unaffiliated customers, andare eliminated in consolidation.

 

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

 

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

 

16

----

 

(4)           The table belowreconciles consolidated EBITDA to income from operations and income beforeincome taxes (amounts in thousands).

 
| ** ** |                                                |   | **Three Months Ended**

**March 31,** |       |
|------------|-----------------------------------------------------|--------|--------------------------------------------|------------|
|       |                                                |   | **2002**                                   |       | **2001** | ** ** |
|       |                                                |   | **(Unaudited)**                            | ** ** |
|       |                                                |   |                                       | ** ** |   | ** ** |
|       | Consolidated EBITDA                                 |   | $                                          | 13,278     |   | $ | 3,385 |   |
|       | Depreciation and amortization (a)                   |   | (4,396                                     | )          | (7,695 | ) |
|       | Acquisition related charges not capitalized         |   | (10                                        | )          | (81 | ) |
|       | Other noncash charges                               |   | (54                                        | )          | (190 | ) |
|       | Consolidated income from operations                 |   | 8,818                                      |       | 15,419 |   |
|       |                                                |   |                                       |       |   |   |
|       | Interest expense                                    |   | (7,963                                     | )          | (10,455 | ) |
|       | Minority interest in preferred stock of  subsidiary |   | (1,382                                     | )          | (1,199 | ) |
|       | Other expenses, net                                 |   | (146                                       | )          | (105 | ) |
|       | Consolidated income (loss) before income  taxes     |   | $                                          | (673       | ) | $ | 3,660 |   |

 

----

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

 

 
| ** ** |                                                |   | **Three Months Ended**

**March 31,** |       |
|------------|-----------------------------------------------------|--------|--------------------------------------------|------------|
|       |                                                |   | **2002**                                   |       | **2001** | ** ** |
|       |                                                |   | **(Unaudited)**                            | ** ** |
|       | Depreciation and amortization of long-lived  assets |   | $                                          | 4,396      |   | $ | 7,695 |   |
|       | Amortization of deferred financing costs            |   | 589                                        |       | 553 |   |
|       | Consolidated depreciation and amortization          |   | $                                          | 4,985      |   | $ | 8,248 |   |

 

 

(5)           Reflects EBITDAbefore $4,043,000 of restructuring and asset impairment charges and otherrestructuring related expenses charged to operations during the three monthsended March 31, 2002 pertaining to Cabin Management’s restructuring of itsseating and related manufacturing facilities (Note 3).

 

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

 

(7)           Reflects eliminationof inter-group receivables and profits in inventory as of period end.

 

17

----

 

**Note 13.         SupplementalCondensed Consolidating Financial Information**

 

In conjunctionwith the senior credit facility and 12% senior subordinated notes described inNote 7, the following condensed consolidating financial information ispresented segregating DeCrane Aircraft, as the issuer, and guarantor and non-guarantorsubsidiaries.  The accompanyingfinancial information in the guarantor subsidiaries column reflects thefinancial position, results of operations and cash flows for those subsidiariesguaranteeing the senior credit facility and the notes.  DeCrane Holdings in not a guarantor ofeither the senior credit facility or the notes and is therefore reflected inthe non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantorsubsidiaries.

 

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

 

(1)   Elimination of investmentsin subsidiaries.

 

(2)   Elimination of intercompanyaccounts.

 

(3)   Elimination of intercompanysales between guarantor and non-guarantor subsidiaries.

 

(4)   Elimination of equity inearnings of subsidiaries.

 

18

----

 

**BalanceSheets**

** **
|                                                                                     |   | **March 31, 2002 (Unaudited)** |    |
|------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                     |   | **Issuer**                     |    | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |
|                                                                                     |   | **(in thousands)**             |    |
| **Assets**                                                                               |   |                           |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                           |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                              | 11,126  |   | $ | 326 |   | $ | 391 |   | $ | — |   | $ | 11,843 |   |
| Accounts receivable, net                                                                 |   | —                         |    | 52,557 |   | 1,728 |   | — |   | 54,285 |   |
| Inventories                                                                              |   | —                         |    | 86,217 |   | 1,645 |   | — |   | 87,862 |   |
| Other current assets                                                                     |   | 15,279                         |    | 1,399 |   | 264 |   | — |   | 16,942 |   |
| Total current assets                                                                     |   | 26,405                         |    | 140,499 |   | 4,028 |   | — |   | 170,932 |   |
|                                                                                     |   |                           |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 3,124                          |    | 51,764 |   | 2,294 |   | — |   | 57,182 |   |
| Other assets, principally intangibles, net                                               |   | 16,655                         |    | 385,141 |   | 9,453 |   | — |   | 411,249 |   |
| Investments in subsidiaries                                                              |   | 406,286                        |    | 20,678 |   | 103,662 |   | (530,626 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 260,759                        |    | 133,290 |   | 4,324 |   | (398,373 | )(2) | — |   |
| Total assets                                                                             |   | $                              | 713,229 |   | $ | 731,372 |   | $ | 123,761 |   | $ | (928,999 | ) | $ | 639,363 |   |
|                                                                                     |   |                           |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’  Equity**   |   |
| Current liabilities:                                                                     |   |                           |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                              | 15,128  |   | $ | 1,940 |   | $ | 6 |   | $ | — |   | $ | 17,074 |   |
| Other current liabilities                                                                |   | 24,209                         |    | 46,324 |   | 1,245 |   | — |   | 71,778 |   |
| Total current liabilities                                                                |   | 39,337                         |    | 48,264 |   | 1,251 |   | — |   | 88,852 |   |
|                                                                                     |   |                           |    |   |   |   |   |   |   |   |   |
| Long-term debt                                                                           |   | 373,006                        |    | 10,069 |   | — |   | — |   | 383,075 |   |
| Intercompany payables                                                                    |   | 133,218                        |    | 265,083 |   | 72 |   | (398,373 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 36,884                         |    | 1,761 |   | 275 |   | — |   | 38,920 |   |
|                                                                                     |   |                           |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of  subsidiary                                      |   | 29,622                         |    | — |   | — |   | — |   | 29,622 |   |
| Mandatorily redeemable preferred stock                                                   |   | —                         |    | — |   | 56,121 |   | — |   | 56,121 |   |
|                                                                                     |   |                           |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                                               |   |                           |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 118,087                        |    | 336,986 |   | 88,623 |   | (473,013 | )(1) | 70,683 |   |
| Retained earnings (deficit)                                                              |   | (16,925                        | )       | 69,300 |   | (20,404 | ) | (57,613 | )(1) | (25,642 | ) |
| Accumulated other comprehensive loss                                                     |   | —                         |    | (91 | ) | (2,177 | ) | — |   | (2,268 | ) |
| Total stockholders’ equity                                                          |   | 101,162                        |    | 406,195 |   | 66,042 |   | (530,626 | ) | 42,773 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholders’ equity |   | $                              | 713,229 |   | $ | 731,372 |   | $ | 123,761 |   | $ | (928,999 | ) | $ | 639,363 |   |

 

19

----

 

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

 

20

----

 

**Statementsof Operations**

 
|                                                |   | **Three Months Ended March 31, 2002 (Unaudited)** |   |
|-----------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                |   | **Issuer**                                        |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                |   | **(in thousands)**                                |   |
| Revenues                                            |   | $                                                 | — |   | $ | 85,205 |   | $ | 2,482 |   | $ | (1,524 | )(3) | $ | 86,163 |   |
| Cost of sales                                       |   | —                                            |   | 59,873 |   | 2,099 |   | (1,524 | )(3) | 60,448 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                            |   | 25,332 |   | 383 |   | — |   | 25,715 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses       |   | 2,417                                             |   | 12,668 |   | 412 |   | — |   | 15,497 |   |
| Amortization of intangible assets                   |   | —                                            |   | 1,400 |   | — |   | — |   | 1,400 |   |
| Interest expense                                    |   | 7,684                                             |   | 277 |   | 2 |   | — |   | 7,963 |   |
| Minority interest in preferred stock of  subsidiary |   | —                                            |   | — |   | 1,382 |   | — |   | 1,382 |   |
| Intercompany charges                                |   | (7,150                                            | )      | 7,150 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                  |   | (2,500                                            | )      | (30 | ) | (398 | ) | 2,928 |  (4) | — |   |
| Other expenses (income), net                        |   | 91                                                |   | 58 |   | (3 | ) | — |   | 146 |   |
| Provision for income taxes (benefit)                |   | (940                                              | )      | 1,309 |   | (58 | ) | — |   | 311 |   |
|                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                   |   | $                                                 | 398    |   | $ | 2,500 |   | $ | (954 | ) | $ | (2,928 | ) | $ | (984 | ) |
|                                                     |        |                                                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 
|                                                |   | **Three Months Ended March 31, 2001 (Unaudited)** |   |                        |
|-----------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------------|
|                                                |   | **Issuer**                                        |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |   |
|                                                |   | **(in thousands)**                                |   |                        |
| Revenues                                            |   | $                                                 | — |                        | $ | 98,193 |   | $ | 2,712 |   | $ | (1,754 | )(3) | $ | 99,151 |   |
| Cost of sales                                       |   | —                                            |   | 63,502                      |   | 2,358 |   | (1,754 | )(3) | 64,106 |   |
|                                                |   |                                              |   |                        |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                                            |   | 34,691                      |   | 354 |   | — |   | 35,045 |   |
|                                                |   |                                              |   |                        |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses       |   | 2,422                                             |   | 11,987                      |   | 251 |   | — |   | 14,660 |   |
| Amortization of intangible assets                   |   | 76                                                |   | 4,787                       |   | 103 |   | — |   | 4,966 |   |
| Interest expense                                    |   | 10,194                                            |   | 251                         |   | 10 |   | — |   | 10,455 |   |
| Minority interest in preferred stock of  subsidiary |   | —                                            |   | —                      |   | 1,199 |   | — |   | 1,199 |   |
| Intercompany charges                                |   | (5,239                                            | )      | 5,239                       |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                  |   | (6,398                                            | )      | (4                          | ) | (2,472 | ) | 8,874 | (4) | — |   |
| Other expenses (income), net                        |   | 75                                                |   | 72                          |   | (42 | ) | — |   | 105 |   |
| Provision for income taxes (benefit)                |   | (3,602                                            | )      | 5,961                       |   | 28 |   | — |   | 2,387 |   |
|                                                |   |                                              |   |                        |   |   |   |   |   |   |   |
| Net income                                          |   | $                                                 | 2,472  |                        | $ | 6,398 |   | $ | 1,277 |   | $ | (8,874 | ) | $ | 1,273 |   |
|                                                     |        |                                                   |        |                             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

21

----

 

**Statementsof Cash Flows**

** **
|                                              |   | **Three Months Ended March 31, 2002 (Unaudited)** |   |
|---------------------------------------------------|--------|---------------------------------------------------|--------|
|                                              |   | **Issuer**                                        |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                              |   | **(in thousands)**                                |   |
| **Cash flows from operating activities:**         |   |                                              |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                 |   | $                                                 | 398    |   | $ | 2,500 |   | $ | (954 | ) | $ | (2,928 | )(4) | $ | (984 | ) |
| Noncash adjustments:                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                |   | (2,500                                            | )      | (30 | ) | (398 | ) | 2,928 | (4) | — |   |
| Other noncash adjustments                         |   | 1,032                                             |   | 7,192 |   | 1,631 |   | — |   | 9,855 |   |
| Changes in working capital                        |   | 5,360                                             |   | (8,558 | ) | (91 | ) | — |   | (3,289 | ) |
| Net cash provided by operating activities         |   | 4,290                                             |   | 1,104 |   | 188 |   | — |   | 5,582 |   |
|                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**         |   |                                              |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired |   | (707                                              | )      | — |   | — |   | — |   | (707 | ) |
| Return of capital from subsidiary                 |   | —                                            |   | — |   | 368 |   | (368 | )(1) | — |   |
| Capital expenditures                              |   | (4                                                | )      | (580 | ) | (39 | ) | — |   | (623 | ) |
| Net cash used for investing activities            |   | (711                                              | )      | (580 | ) | 329 |   | (368 | )  | (1,330 | ) |
|                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**         |   |                                              |   |   |   |   |   |   |   |   |   |
| Long-term borrowings                              |   | —                                            |   | 297 |   | — |   | — |   | 297 |   |
| Deferred financing costs                          |   | (1,629                                            | )      | — |   | — |   | — |   | (1,629 | ) |
| Principal payments on long-term debt and  leases  |   | (97                                               | )      | (354 | ) | — |   | — |   | (451 | ) |
| Other, net                                        |   | (368                                              | )      | (49 | ) | (368 | )  | 368 | (1)  | (417 | ) |
| Net cash used for financing activities            |   | (2,094                                            | )      | (106 | ) | (368 | )  | 368 |   | (2,200 | ) |
|                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on  cash   |   | —                                            |   | — |   | (3 | ) | — |   | (3 | ) |
|                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents              |   | 1,485                                             |   | 418 |   | 146 |   | — |   | 2,049 |   |
| Cash and equivalents at beginning of period       |   | 9,641                                             |   | (92 | ) | 245 |   | — |   | 9,794 |   |
|                                              |   |                                              |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period             |   | $                                                 | 11,126 |   | $ | 326 |   | $ | 391 |   | $ | — |   | $ | 11,843 |   |

 

22

----

 
|                                                                |   | **Three Months Ended March 31, 2001 (Unaudited)** |   |
|---------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                |   | **Issuer**                                        |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                |   | **(in thousands)**                                |   |
| **Cash flows from operating activities:**                           |   |                                              |   |   |   |   |   |   |   |   |   |
| Net income                                                          |   | $                                                 | 2,472  |   | $ | 6,398 |   | $ | 1,277 |   | $ | (8,874 | )(4) | $ | 1,273 |   |
| Noncash adjustments:                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                  |   | (6,398                                            | )      | (4 | ) | (2,472 | ) | 8,874 |  (4) | — |   |
| Other noncash adjustments                                           |   | 2,309                                             |   | 6,470 |   | 1,773 |   | — |   | 10,552 |   |
| Changes in working capital                                          |   | (7,077                                            | )      | (9,601 | ) | (758 | ) | — |   | (17,436 | ) |
| Net cash provided by (used for) operating  activities               |   | (8,694                                            | )      | 3,263 |   | (180 | ) | — |   | (5,611 | ) |
|                                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**                           |   |                                              |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired                   |   | (17,247                                           | )      | — |   | — |   | — |   | (17,247 | ) |
| Capital expenditures and other                                      |   | (51                                               | )      | (2,290 | ) | (208 | ) | — |   | (2,549 | ) |
| Net cash used for investing activities                              |   | (17,298                                           | )      | (2,290 | ) | (208 | ) | — |   | (19,796 | ) |
|                                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**                           |   |                                              |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                               |   | 23,300                                            |   | — |   | — |   | — |   | 23,300 |   |
| Principal payments on term debt,  capitalized leases and other debt |   | (98                                               | )      | (896 | ) | (7 | ) | — |   | (1,001 | ) |
| Other, net                                                          |   | —                                            |   | (58 | ) | — |   | — |   | (58 | ) |
| Net cash provided by (used for) financing  activities               |   | 23,202                                            |   | (954 | ) | (7 | ) | — |   | 22,241 |   |
|                                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on  cash                     |   | —                                            |   | — |   | 71 |   | — |   | 71 |   |
|                                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and  equivalents                    |   | (2,790                                            | )      | 19 |   | (324 | ) | — |   | (3,095 | ) |
| Cash and equivalents at beginning of period                         |   | 7,553                                             |   | 233 |   | 413 |   | — |   | 8,199 |   |
|                                                                |   |                                              |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                               |   | $                                                 | 4,763  |   | $ | 252 |   | $ | 89 |   | $ | — |   | $ | 5,104 |   |

 

23

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

 

The followingdiscussions should be read in conjunction with our financial statements andaccompanying notes included in this report.

 

**IndustryOverview and Trends**

 

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

 

The September11, 2001 terrorist attack on the United States and weak global economicconditions are adversely impacting the commercial airline industry and, inturn, are having an unfavorable impact upon that portion of our business.  The commercial and regional originalequipment and aftermarket/retrofit portions of our business are currentlyestimated at approximately 31% of our revenues.

 

In addition,an estimated 60% of our revenues are currently derived from the corporateaircraft original equipment and aftermarket/retrofit business.  The weak global economic conditions havenegatively impacted this portion of our business as well, although not asseverely as the commercial market.  Theremaining 9% of our revenues are derived from the military aircraft and othermarkets.

 

In response tothese adverse conditions, we announced and implemented a restructuring plan inDecember 2001 designed to reduce expenses and conserve working capital.  This plan includes permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  During the first quarter of2002, we also announced we would consolidate the production of four CabinManagement manufacturing facilities into two facilities, resulting in thepermanent closure of two additional facilities.  See “—Restructuring and Asset Impairment Charges” below foradditional information.

 

We believe thecommercial aircraft portion of our business will experience significantweakness during 2002 and 2003, with potential recovery occurring during 2004and continuing into 2005.  We alsobelieve the corporate aircraft portion of our business will experience somewhatmore moderate weakness during 2002 and 2003 with aircraft deliveries recoveringin 2004 and continuing growth thereafter.

 

24

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**Resultsof Operations**

 

**ThreeMonths Ended March 31, 2002 Compared to Three Months Ended March 31,2001**

** **

**Revenues.* ***Revenuesdecreased $13.0 million, or 13.1%, to $86.2 million for the three months endedMarch 31, 2002 from $99.2 million for the three months endedMarch 31, 2001.  By segment, revenueschanged as follows:

** **
|                    |   | **Increase (Decrease)  From 2001** |   |
|-------------------------|--------|------------------------------------|--------|
|                    |   | **Amount**                         |   | **Percent** |   |
|                    |   | **(in millions)**                  |   |   |   |
| Cabin Management        |   | $                                  | (5.5   | ) | (10.7 | )% |
| Specialty Avionics      |   | (5.9                               | )      | (19.0 | ) |
| Systems Integration     |   | (1.7                               | )      | (9.9 | ) |
| Inter-group elimination |   | 0.1                                |   |   |   |
| Total                   |   | $                                  | (13.0  | ) |   |   |

* *

*Cabin Management. *Revenues decreased by $5.5 million, or10.7% compared to the prior year.  Thedecrease, which is across most of our product and services categories, iscaused by the adverse impact the weak global economic conditions are having onthe corporate aircraft market in 2002 versus 2001 as follows:

 

•                  a $2.5 milliondecrease in aircraft furniture and related products revenues;

 

•                  a $3.0 milliondecrease in audio and entertainment products revenues; and

 

•                  a $2.3 milliondecrease in seating products revenues; offset by

 

•                  a $2.3 millionincrease in other product and services revenues.

* *

Specialty*Avionics.*  Revenues decreased by $5.9 million, or 19.0% compared to theprior year, due to:

 

•                  a $3.7 milliondecrease resulting from lower volume for our interconnect products; and

 

•                  a $2.2 milliondecrease in cockpit audio, communications, lighting and power and controldevices revenues resulting from a slowdown in the commercial airlineproduction.

* *

*Systems Integration.*  Revenues decreased by $1.7 million, or 9.9%compared to the prior year, due to a decrease in our commercial airlinebusiness in the aftermath of September 11th.

 

25

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** **

**Gross profit.**  Gross profit decreased $9.3 million, or26.6%, to $25.7 million for the three months ended March 31, 2002.  Gross profit for the three months endedMarch 31, 2002 is reduced by $1.2 million of restructuring charges, ofwhich $1.1 million are noncash charges, relating to the closure of twomanufacturing facilities in our Cabin Management group.  Excluding these charges, gross profitdecreased $8.1 million compared to the prior year and gross profit as a percentof revenues was 31.3% for the three months ended March 31, 2002 comparedto 35.3% for the same period last year. By segment, gross profit changed as follows:

 
|                    |   | **Increase (Decrease)  From 2001** |   |
|-------------------------|--------|------------------------------------|--------|
|                    |   | **Amount**                         |   | **Percent** |   |
|                    |   | **(in millions)**                  |   |   |   |
| Cabin Management        |   | $                                  | (7.9   | ) | (43.5 | )% |
| Specialty Avionics      |   | (1.1                               | )      | (10.5 | ) |
| Systems Integration     |   | (0.4                               | )      | (6.9 | ) |
| Inter-group elimination |   | 0.1                                |   |   |   |
| Total                   |   | $                                  | (9.3   | ) |   |   |

 

* *

*Cabin Management.*  Gross profit decreased by $7.9 million, or43.5% compared to prior year, primarily due to:

 

•                  a $4.7 milliondecrease in profit margins associated with lower volume for our corporate aircraftfurniture products;

 

•                  a $1.2 milliondecrease caused by 2002 restructuring charges related to the consolidation ofour seating and related manufacturing operations; and

 

•                  a $1.7 milliondecrease in gross profit related to lower volume for our in-flightentertainment products.

* *

*Specialty Avionics.*  Gross profit decreased by $1.1 million, or10.5% compared to the prior year, due to:

 

•                  a $0.8 milliondecrease related to lower volume for our cockpit audio, communications,lighting and power and control devices products; and

 

•                  a $0.8 milliondecrease caused by lower volume for our interconnect products; offset by

 

•                  a $0.5 millionincrease related to a shift in product mix to items with higher margins.

* *

*Systems Integration.*  Gross profit decreased by $0.4 million, or6.9% compared to the prior year, due to lower sales volume.

 

26

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** **

**Selling, general and administrative expenses.**  Selling, general and administrative expensesincreased $0.8 million, or 5.7%, to $15.5 million for the three months endedMarch 31, 2002, from $14.7 million for the same period last year.  SG&A expenses for the three months endedMarch 31, 2002 includes $2.8 million of restructuring and asset impairmentcharges, of which $2.0 million are noncash charges.  Excluding these restructuring and asset impairment charges,SG&A expenses decreased $2.0 million compared to the prior year andSG&A expenses as a percent of revenues of 14.7% for the three months endedMarch 31, 2002 is comparable to 14.8% for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                |   | **Increase (Decrease)  From 2001** |   |        |
|---------------------|--------|------------------------------------|--------|-------------|
|                |   |
|                |   | **Amount**                         |   | **Percent** |   |   |
|                |   | **(in millions)**                  |   |        |   |   |
| Cabin Management    |   | $                                  | 2.1    |        | 30.6 | % |
| Specialty Avionics  |   | (0.2                               | )      | (4.7        | ) |   |
| Systems Integration |   | (0.5                               | )      | (16.7       | ) |   |
| Corporate           |   | (0.6                               | )      |        |   |   |
| Total               |   | $                                  | 0.8    |        |   |   |
|                     |        |                                    |        |             |  |  |  |  |

 

*Cabin Management. *SG&A expenses increased by $2.1million, or 30.6% over the prior year, due to:

 

•                  a $2.8 millionincrease caused by 2002 restructuring charges relating to the consolidation ofour seating and related manufacturing operations, offset by

 

•                  a $0.7 milliondecrease in expenses as a result of cost reduction measures implemented in 2001in response to lower sales volume resulting from the weak global economicconditions.

 

*Specialty Avionics.*  SG&A expenses decreased by $0.2 million,or 4.7% compared the prior year, due to lower labor and employee benefit costsresulting from workforce reductions implemented during the fourth quarter of2001.

* *

*Systems Integration. *SG&A expensesdecreased by $0.5 million, or 16.7% compared to the prior year, due to lowerlabor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of 2001.

* *

*Corporate. *SG&A expenses decreased by $0.6 millioncompared to the prior year, primarily due to workforce and travel expensereductions.

 

**Depreciation and amortization of intangibles.**  Depreciation and amortization expensedecreased $3.3 million to $4.4 million for the three months endedMarch 31, 2002 compared to $7.7 million for the same period in 2001,primarily resulting from the adoption of new accounting standards.  Effective January 1, 2002, weadopted SFAS No. 142, “Goodwill and Other Intangible Assets” and theprovisions of SFAS No. 141, “Business Combinations,” which wererequired to be adopted concurrent with the adoption ofSFAS No. 142.  Under these newstandards, goodwill is deemed to be an indefinite-lived asset and, as a result,the recording of periodic goodwill amortization charges was discontinuedeffective January 1, 2002.  In addition,SFAS No. 141 requires that intangible assets relating to acquired assembledworkforce intangibles not meeting the criteria for recognition apart fromgoodwill be reclassified to goodwill. Goodwill amortization was $3.6 million for the three months endedMarch 31, 2001, which includes $0.4 million of assembled workforceamortization, now deemed part of goodwill. Excluding the effect of the accounting change, depreciation and amortizationincreased $0.3 million as a result of capital expenditures during the period.

 

27

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**EBITDA and Operating income.**  EBITDA decreased $10.1 million, or 43.2%, to$13.3 million for the three months ended March 31, 2002, from $23.4million for the same period last year. Operating income decreased $6.6 million to $8.8 million for the threemonths ended March 31, 2002, from $15.4 million for the same period lastyear. EBITDA and operating income for the three months ended March 31,2002 are reduced by $4.0 million of restructuring and asset impairment charges,$3.1 million of which are noncash charges, relating to the consolidation of ourseating and related manufacturing facilities in our Cabin Management group.

 

Excludingthese charges, EBITDA decreased $6.1 million, or 25.9%, to $17.3 millioncompared to the same period last year and operating income decreased $2.6million, or 16.6%, compared to the prior year. EBITDA as a percent of revenues decreased to 20.1% for the three monthsended March 31, 2002 from 23.6% for the same period last year.

 

EBITDA andoperating income changed as follows:

** **
|                                           |   | **Increase (Decrease)  From 2001** |       |
|------------------------------------------------|--------|------------------------------------|------------|
|                                           |   | **Amount**                         |       | **Percent** |   |
|                                           |   | **(in millions)**                  |       |   |   |
| EBITDA                                         |   |                               |       |   |   |
| Cabin Management                               |   | $                                  |  (9.4 | ) | (70.3 | )% |
| Specialty Avionics                             |   | (0.8                               | )          | (10.4 | ) |
| Systems Integration                            |   | 0.2                                |       | 4.9 |   |
| Corporate                                      |   | (0.2                               | )          | (9.3 | ) |
| Inter-group elimination                        |   | 0.1                                |       |   |   |
| Total EBITDA                                   |   | (10.1                              | )          |   |   |
|                                           |   |                               |       |   |   |
| Depreciation and amortization                  |   | 3.3                                |       |   |   |
| Other noncash and acquisition related  charges |   | 0.2                                |       |   |   |
| Total operating income                         |   | $                                  |  (6.6 | ) |   |   |

* *

*Cabin Management.*  EBITDA decreased by $9.4 million, or 70.3%compared to the prior year, primarily due to:

 

•                  a $4.0 millionrestructuring and asset impairment charge relating to the consolidation of ourseating and related manufacturing facilities;

 

•                  a $4.0 milliondecrease related principally to lower revenues in our aircraft furnitureoperations, and

 

•                  a $1.4 milliondecrease resulting from lower sales volume for audio and in flightentertainment systems.

* *

*Specialty Avionics.*  EBITDA decreased by $0.8 million, or 10.4%compared to the prior year, as a result of lower demand for our commercialaircraft products offset by the effect of cost reduction programs implementedin 2001 and a favorable shift in product mix.

* *

*Systems Integration. *EBITDA increased by$0.2 million, or 4.9% over the prior year, due principally to cost reductionprograms implemented in 2001.

 

28

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**Interest expense.**  Interest expense decreased $2.5 million, or23.8%, to $8.0 million for the three months ended March 31, 2002 comparedto $10.5 million for the same period last year due almost entirely to loweraverage interest rates charged by our lenders during 2002.

 

**Minority interest in preferred stock ofsubsidiary.** Minority interest increased $0.2 million to $1.4 million for the threemonths ended March 31, 2002 compared to $1.2 million for the same periodlast year.  Minority interest reflectsthe accrued dividends, which are compounded quarterly, and redemption valueaccretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

 

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

 

**Net income (loss).**  Net income decreased $2.3 million to a netloss of $1.0 million for the three months ended March 31, 2002compared to net income of $1.3 million for the same period last year.

 

**Net loss applicable to common stockholders.**  Net loss applicable to common stockholdersincreased $2.5 million to a net loss of $2.9 million for the three months endedMarch 31, 2002 compared to a net loss of $0.4 million for the same periodlast year.  The increase in the net lossapplicable to our common stockholders is attributable to:

 

•                  a $2.3 millionnet loss increase, which is net of a $0.2 million increase in the charge forminority interest in preferred stock of subsidiary; and

 

•                  a $0.2 millionincrease in noncash preferred stock dividend accretion on our 14% mandatorilyredeemable preferred stock.

 

**Bookings. **Bookings decreased $30.7 million, or 28.0%, to$79.0 million for the three months ended March 31, 2002 compared to $109.7million for the same period last year. The decrease in bookings for 2002 is due to decreases in orders for allthree of our business segments.

 

**Backlog at end of period.**  Backlog decreased $7.1 million to $142.8million as of March 31, 2002 compared to $149.9 million as ofDecember 31, 2001.

 

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

 

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

 

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**Restructuring and Asset Impairment Charges**

 

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

 

**2002Restructuring of Seat Manufacturing Facilities**

 

In 2002, theCompany announced it would consolidate the production of four seating andrelated manufacturing facilities into two facilities, resulting in thepermanent closure of two facilities.  Inconnection with the restructuring plan, the Company expects to recordnonrecurring pre-tax charges to operations totaling $5.1 million during 2002for restructuring and asset impairment charges and other related expenses.  Of this amount, $4.0 million was charged tooperations during the three months ended March 31, 2002, $3.1 million ofwhich were noncash charges.  Theremaining $1.1 million of other restructuring related expenses will be chargedto operations as incurred during the remainder of 2002.

 

Of the $4.0million incurred during the three months ended March 31, 2002, $1.2million is included in cost of sales and the remaining $2.8 million is includedin selling, general and administrative expenses.  The restructuring and asset impairment charges and other relatedexpenses are comprised of charges of the impairment of long-lived assets,inventory and accounts receivable write-downs, severance and lease terminationcosts and other restructuring-related expenses pertaining to FAA retesting andrecertification, moving and transportation costs and shutdown and startupcosts.

 

Cash costsincurred during the three months ended March 31, 2002 werenegligible.  A $0.8 millionrestructuring reserve remains at March 31, 2002 for severance and leasetermination costs.  We expect tocomplete this plan in the third quarter of 2002.  Future cash payments will be funded from existing cash balancesand internally generated cash from operations.

 

**2001Restructuring and Asset Impairment Charges**

 

During thesecond quarter of 2001, we adopted a restructuring plan to realign aircraftfurniture production programs among our 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, we announced and implemented a further restructuring plan inDecember 2001 designed to reduce costs and conserve working capital.  This plan includes permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  This plan primarily affectsour Cabin Management and Specialty Avionics Groups.

 

In connectionwith these restructuring plans, we recorded nonrecurring pre-tax charges tooperations of $28.7 million in 2001, of which $22.1 million were noncashcharges, for the impairment of long-lived assets and restructuring costsrelated to write-downs and write-offs of inventoried costs, costs associatedwith the realignment of aircraft furniture production programs amongfacilities, severance, lease termination and other related costs.  Of this amount, $16.1 million is included incost of sales and the remaining $12.6 million is included in selling, generaland administration expenses.

 

During 2001,we paid $5.0 million of costs related to this restructuring in cash and a $1.6million restructuring reserve remained at December 31, 2001 for severance,lease termination and other related costs. During the three months ended March 31, 2002, we paid an additional$0.7 million in severance and lease termination costs; a $0.9 millionrestructuring reserve remains at March 31, 2002.  We expect to complete this plan in the second quarter of 2002 andcosts have been within our expectations. As a result, no adjustments have been made to our original estimates.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

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**Liquidityand Capital Resources**

 

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

 

Net cashprovided by operating activities was $5.6 million for the three months endedMarch 31, 2002 and consisted of $8.9 million of cash provided byoperations after adding back depreciation, amortization, the noncash portion ofour restructuring and asset impairment charges and other noncash items, $3.4million used for working capital, and $0.1 million provided by an increase inother liabilities.  The followingfactors contributed to the $3.4 million working capital increase:

 

•                  a $3.4 millionnet decrease in accounts payable and accrued expenses;

 

•                  a $2.5 millioninventory increase resulting from longer production lead times and new productdevelopment costs, primarily engineering costs, for new cabin interior productsand components; and

 

•                  a $1.2 millionincrease in prepaid expenses and other current assets; offset by

 

•                  a $3.6 millionaccounts receivable decrease resulting from timing differences relating toprogress and final billings on long-term contracts versus the associatedcollection and the timing of other collections; and further offset by

 

•                  a $0.1 millionincrease in income taxes payable.

 

Net cash usedfor investing activities was $1.3 million for the three months endedMarch 31, 2002 and consisted of:

 

•                  $0.7 million ofcontingent acquisition consideration paid during 2002; and

 

•                  $0.6 million forcapital expenditures.

 

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

 

Net cash usedfor financing activities was $2.2 million for the three months endedMarch 31, 2002 and was provided by cash from operations and $0.3 millionof additional long-term borrowings. Cash of $2.5 million was used to pay financing costs associated withamending our senior credit facility, make principal payments on our term debt,capitalized leases and other debt and repurchase stock and options from formermanagement employees.

 

AtMarch 31, 2002, senior credit facility borrowings totaling $287.7 millionare at variable interest rates based on defined margins over the current primeor LIBOR rates.  At March 31, 2002,we also had $82.1 million of working capital and had $38.0 million ofborrowings available under our revolving line of credit.

 

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

 

31

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Although wecannot be certain, we believe our operating cash flows, together withborrowings under our bank credit facility, will be sufficient to meet ourfuture short- and long-term operating expenses, working capital requirements,capital expenditures and debt service obligations for the next twelvemonths.  However, our ability to payprincipal or interest, to refinance our debt and to satisfy our other debtobligations will depend on our future operating performance.

 

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

 

**RecentAccounting Pronouncements**

 

**Accounting Pronouncements Adopted January 1,2002**

 

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

 

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

 

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

 

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

** **

**Recently Issued Accounting Pronouncement**

* *

*SFAS No. 145*

 

In May 2002,the Financial Accounting Standards Board issued SFAS No. 145,“Rescission of SFAS Nos. 4, 44, and 64, Amendment ofSFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds variouspronouncements regarding early extinguishment of debt and allows extraordinaryaccounting treatment for early extinguishment only when the provisions ofAccounting Principles Board Opinion No. 30, “Reporting the Results ofOperations—Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions” aremet.  SFAS No. 145 provisionsregarding early extinguishment of debt are generally effective for fiscal yearsbeginning after May 15, 2002.  We arecurrently evaluating the impact this new standard will have on our business,consolidated financial position, results of operations and cash flow.

 

**Common European Currency**

 

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

 

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**Special Note Regarding Forward-LookingStatements**

 

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

 

•                  fuel prices andgeneral economic conditions that affect demand for aircraft and air travel,which in turn affect demand for our products and services;

 

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

 

•                  our reliance onkey customers and the adverse effect a significant decline in business from anyone of them would have on our business;

 

•                  changes inprevailing interest rates and the availability of financing to fund our plansfor continued growth;

 

•                  competition fromlarger companies;

 

•                  Federal AviationAdministration prescribed standards and licensing requirements, which apply tomany of the products and services we provide;

 

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

 

•                  liability andother claims asserted against us that exceeds our insurance coverage;

 

•                  the ability toattract and retain qualified personnel;

 

•                  labordisturbances; and

 

•                  changes inoperating strategy, or our acquisition and capital expenditure plans.

 

Changes insuch factors could cause our actual results to differ materially from thosecontemplated in such forward-looking statements.  Although we believe that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to be correct. We undertake no obligation to release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  You should not rely on our forward-lookingstatements as if they were certainties.

 

33

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

 

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

** **

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

 

Market riskrelated to our variable-rate debt is estimated as the potential decrease inpre-tax earnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime or LIBOR rates.  AtMarch 31, 2002, the current prime rate was 4.75% and the current LIBORrate was 2.03%.  Based on $287.7 millionof variable-rate debt outstanding as of March 31, 2002, a hypothetical onepercent rise in interest rates, to 5.75% for prime rate borrowings and 3.03%for LIBOR borrowings, would reduce our pre-tax earnings by $2.9 million annually.

 

To limit ourexposure related to rising interest rates, we have entered into an interestrate swap contract to effectively convert an additional $4.5 millionvariable-rate debt to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedgeagainst changes in the amount of future cash flows associated with interestpayments on this portion of our variable-rate debt.  Market risk related to this interest rate swap contract isestimated as the potential higher interest expense we will incur if thevariable interest rate decreases below the 4.2% fixed rate.  Based on the $4.5 million of variable-ratedebt converted to fixed-rate debt outstanding as of March 31, 2002, ahypothetical one percent decrease in the variable interest rate to 3.2%, wouldreduce our pre-tax earnings by less than $0.1 million annually.

 

The estimatedfair value of our $100.0 million fixed-rate long-term debt is approximately$92.0 million at March 31, 2002. Market risk related to our fixed-rate debt is deemed to be the potentialincrease in fair value resulting from a decrease in interest rates.  For example, a hypothetical ten percentdecrease in the interest rates, from 12.0% to 10.8%, would increase the fairvalue of our fixed-rate debt by approximately $7.0 million.

** **

**ForeignCurrency Exchange Rate Risk.**** **Ourforeign customers are located in various parts of the world, primarily WesternEurope, the Far East and Canada, and we have subsidiaries with manufacturingfacilities in Switzerland and Mexico. To limit our foreign currency exchange rate risk related to sales to ourcustomers, orders are primarily valued and sold in U.S. dollars.  From time to time we have entered intoforward foreign exchange contracts to limit our exposure related to foreigninventory procurement and operating costs. While we have not entered into any such contracts since 1998, we may doso in the future depending on our assessment of future foreign exchange ratetrends.

 

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**PARTII – OTHER INFORMATION**

** **

**ITEM1.****                             LEGALPROCEEDINGS**

 

Refer to thelegal proceedings described in Item 3 of our Form 10-K for the year endedDecember 31, 2001.

 

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

 

a.                                       Exhibits

 

3.26.1.1         Articlesof Amendment amending the Restated Articles of Incorporation of ERDA, Inc.(changing its name to DeCrane Aircraft Seating Company, Inc.*

 

3.30.1                  Certificateof Formation of DeCrane Cabin Interiors, LLC *

 

3.30.2                  LimitedLiability Company Agreement of DeCrane Cabin Interiors, LLC *

 

21.1                           Listof Subsidiaries of Registrant *

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*     Filed herewith

 

b.                                      Reports on Form 8-K

 

None

 

**SIGNATURES**

 

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

 
|         |                                  |                                                                     |
|--------------|---------------------------------------|--------------------------------------------------------------------------|
|         | **DECRANE HOLDINGS CO. (Registrant)** |                                                                     |
|         |                                  |                                                                     |
|         |                                  |                                                                     |
|         |                                  |                                                                     |
| May 13, 2002 | By:                                   | /s/  Richard J. Kaplan                                              |   |
|         | Name:                                 | Richard J.  Kaplan                                                       |   |
|         | Title:                                | Assistant  Secretary and Assistant Treasurer  (chief accounting officer) |   |

 

35

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