**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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

 

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

 

**Commission File Number 333-70363**

 

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**DECRANEHOLDINGS CO.**

(Exact name of registrant as specified in itscharter)

 

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

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

ýYes     oNo

 

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The number of shares of Registrant’s Common Stock, $.01 par value, outstandingas of November 11, 2002 was 4,116,627 shares.

 

 

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**Table of Contents**

 
| **Part I – Financial Information** |
|-----------------------------------------|
|                                    |
| **Item 1.**                             | **Financial Statements (Unaudited)** |
|                                    |   |
|                                    | Consolidated Balance Sheets as of September 30, 2002 and December 31,  2001 |
|                                    |   |
|                                    | Consolidated Statements of Operations for  the three months and nine months ended September 30, 2002 and 2001 |
|                                    |   |
|                                    | Consolidated Statements of Stockholders’  Equity for the nine months ended September 30, 2002 |
|                                    |   |
|                                    | Consolidated Statements of Cash Flows for  the nine months ended September 30, 2002 and 2001 |
|                                    |   |
|                                    | Condensed Notes to Consolidated Financial  Statements |
|                                    |   |
| **Item 2.**                             | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |
|                                    |   |
|                                    | Industry Overview and Trends |
|                                    |   |
|                                    | Results of Operations |
|                                    |   |
|                                    | Three months ended September 30, 2002 |
|                                    |   |
|                                    | Nine months ended September 30, 2002 |
|                                    |   |
|                                    | Restructuring,  Asset Impairment and Other Nonrecurring Charges |
|                                    |   |
|                                    | Liquidity and Capital Resources |
|                                    |   |
|                                    | Recent Accounting Pronouncements |
|                                    |   |
| **Item 3.**                             | **Quantitative and Qualitative Disclosure  About Market Risk** |
|                                    |   |
| **Item 4.**                             | **Controls and Procedures** |
|                                    |   |
| **Part II – Other Information**    |
|                                    |   |
| **Item 1.**                             | **Legal Proceedings** |
|                                    |   |
| **Item 2.**                             | **Changes in Securities and Use of Proceeds** |
|                                    |   |
| **Item 6.**                             | **Exhibits and Reports on Form 8-K** |
|                                    |   |
|                                    | Exhibits |
|                                    |   |
|                                    | Reports on Form 8-K |
|                                    |
| **Signatures**                          |
|                                    |
| **Certifications**                      |

 

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.          FINANCIALSTATEMENTS**

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**Consolidated Balance Sheets**

 
| ***(In thousands, except share data)***                                                                                                                                          |   | **September 30,  2002** |    | **December 31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                                                                                                             |   | **(Unaudited)**              |    |                        |   |
| **Assets**                                                                                                                                                                       |   |                         |    |                        |   |
| Current assets:                                                                                                                                                                  |   |                         |    |                        |   |
| Cash and cash equivalents                                                                                                                                                        |   | $                            | 24,679  |                        | $      | 9,794 |   |
| Accounts receivable, net                                                                                                                                                         |   | 40,671                       |    | 58,451                      |   |
| Inventories                                                                                                                                                                      |   | 82,454                       |    | 86,498                      |   |
| Deferred income taxes                                                                                                                                                            |   | 9,691                        |    | 14,063                      |   |
| Prepaid expenses and other current assets                                                                                                                                        |   | 3,551                        |    | 2,559                       |   |
| Total current assets                                                                                                                                                             |   | 161,046                      |    | 171,365                     |   |
|                                                                                                                                                                             |   |                         |    |                        |   |
| Property and equipment, net                                                                                                                                                      |   | 52,818                       |    | 61,073                      |   |
| Other assets, principally intangibles, net                                                                                                                                       |   | 407,680                      |    | 413,273                     |   |
| Total assets                                                                                                                                                                     |   | $                            | 621,544 |                        | $      | 645,711 |   |
|                                                                                                                                                                             |   |                         |    |                        |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’  Equity**                                                                                           |   |                         |    |                        |   |
| Current liabilities:                                                                                                                                                             |   |                         |    |                        |   |
| Current portion of long-term debt                                                                                                                                                |   | $                            | 15,422  |                        | $      | 13,899 |   |
| Accounts payable                                                                                                                                                                 |   | 18,199                       |    | 19,051                      |   |
| Accrued liabilities                                                                                                                                                              |   | 32,378                       |    | 56,626                      |   |
| Income taxes payable                                                                                                                                                             |   | 623                          |    | 133                         |   |
| Total current liabilities                                                                                                                                                        |   | 66,622                       |    | 89,709                      |   |
|                                                                                                                                                                             |   |                         |    |                        |   |
| Long-term debt, less current portion                                                                                                                                             |   | 384,862                      |    | 386,351                     |   |
| Deferred income taxes                                                                                                                                                            |   | 26,782                       |    | 33,597                      |   |
| Other long-term liabilities                                                                                                                                                      |   | 7,522                        |    | 7,438                       |   |
|                                                                                                                                                                             |   |                         |    |                        |   |
| Commitments and contingencies (Note 10)                                                                                                                                          |   |                         |    |                        |   |
|                                                                                                                                                                             |   |                         |    |                        |   |
| Minority interest in preferred stock of  subsidiary                                                                                                                              |   | 32,541                       |    | 28,240                      |   |
| Mandatorily redeemable preferred stock                                                                                                                                           |   | 60,118                       |    | 54,223                      |   |
|                                                                                                                                                                             |   |                         |    |                        |   |
| Stockholders’ equity:                                                                                                                                                       |   |                         |    |                        |   |
| Undesignated preferred stock, $.01 par  value, 1,140,000 shares authorized; none issued and outstanding as of  September 30, 2002 and December 31, 2001                          |   | —                       |    | —                      |   |
| Common stock, $.01 par value, 10,000,000  shares authorized; 4,116,627 and 3,914,274 shares issued and outstanding as  of September 30, 2002 and December 31, 2001, respectively |   | 41                           |    | 39                          |   |
| Additional paid-in capital                                                                                                                                                       |   | 74,229                       |    | 75,542                      |   |
| Notes receivable for shares sold                                                                                                                                                 |   | (2,552                       | )       | (2,668                      | )      |
| Accumulated deficit                                                                                                                                                              |   | (27,963                      | )       | (24,658                     | )      |
| Accumulated other comprehensive loss                                                                                                                                             |   | (658                         | )       | (2,102                      | )      |
| Total stockholders’ equity                                                                                                                                                  |   | 43,097                       |    | 46,153                      |   |
| Total liabilities and stockholders’ equity                                                                                                                                  |   | $                            | 621,544 |                        | $      | 645,711 |   |

 

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

 

1

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**ConsolidatedStatements of Operations**

 
|                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                                |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                |   | **(Unaudited)**                       |   |
| Revenues                                            |   | $                                     | 79,621 |                                      | $      | 102,928 |   | $ | 252,116 |   | $ | 304,859 |   |
| Cost of sales                                       |   | 54,038                                |   | 70,152                                    |   | 178,980 |   | 204,462 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Gross profit                                        |   | 25,583                                |   | 32,776                                    |   | 73,136 |   | 100,397 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Operating expenses:                                 |   |                                  |   |                                      |   |   |   |   |   |
| Selling, general and administrative  expenses       |   | 11,412                                |   | 13,963                                    |   | 41,703 |   | 42,059 |   |
| Amortization of intangible assets                   |   | 1,467                                 |   | 4,936                                     |   | 4,298 |   | 14,857 |   |
| Total operating expenses                            |   | 12,879                                |   | 18,899                                    |   | 46,001 |   | 56,916 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Income from operations                              |   | 12,704                                |   | 13,877                                    |   | 27,135 |   | 43,481 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Other expenses:                                     |   |                                  |   |                                      |   |   |   |   |   |
| Interest expense                                    |   | 8,685                                 |   | 9,654                                     |   | 24,843 |   | 29,984 |   |
| Minority interest in preferred stock of  subsidiary |   | 1,486                                 |   | 1,287                                     |   | 4,301 |   | 3,727 |   |
| Other expenses (income), net                        |   | 193                                   |   | (25                                       | )      | 578 |   | 92 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Income (loss) before provision for income  taxes    |   | 2,340                                 |   | 2,961                                     |   | (2,587 | ) | 9,678 |   |
| Provision for income taxes                          |   | 1,296                                 |   | 3,386                                     |   | 718 |   | 7,960 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Net income (loss)                                   |   | 1,044                                 |   | (425                                      | )      | (3,305 | ) | 1,718 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Noncash preferred stock dividend accretion          |   | (2,033                                | )      | (1,772                                    | )      | (5,895 | ) | (5,138 | ) |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Net loss applicable to common stockholders          |   | $                                     | (989   | )                                         | $      | (2,197 | ) | $ | (9,200 | ) | $ | (3,420 | ) |

 

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

 

2

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatement of Stockholders’ Equity**

 
| ***(In thousands, except share data)***                                                             |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
| **Shares**                                                                                          |   | **Amount**        |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, December 31, 2001                                                                     |   | 3,914,274         |   | $                                | 39     |                                    | $      | 75,542                   |   | $                                           | (2,668 | )         | $      | (24,658 | ) | $ | (2,102 | ) | $ | 46,153 |   |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive income (loss):                                                                        |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                                                                            |   | —            |   | —                           |   | —                                  |   | —                   |   | (3,305                                      | )      | —    |   | (3,305 | ) |
| Translation adjustment                                                                              |   | —            |   | —                           |   | —                                  |   | —                   |   | —                                      |   | 1,527     |   | 1,527 |   |
| Unrealized loss on interest rate swap  contract                                                     |   | —            |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (83       | )      | (83 | ) |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   | (1,861 | ) |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Sale of common stock                                                                                |   | 221,096           |   | 2                                |   | 4,998                                   |   | —                   |   | —                                      |   | —    |   | 5,000 |   |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| 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                                                       |   | —            |   | —                           |   | (5,895                                  | )      | —                   |   | —                                      |   | —    |   | (5,895 | ) |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Compensatory stock option expense                                                                   |   | —            |   | —                           |   | 138                                     |   | —                   |   | —                                      |   | —    |   | 138 |   |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Notes receivable interest accrued                                                                   |   | —            |   | —                           |   | —                                  |   | (84                      | )      | —                                      |   | —    |   | (84 | ) |
|                                                                                                |   |              |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, September 30, 2002  (Unaudited)                                                       |   | 4,116,627         |   | $                                | 41     |                                    | $      | 74,229                   |   | $                                           | (2,552 | )         | $      | (27,963 | ) | $ | (658 | ) | $ | 43,097 |   |

 

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**

 
|                                                                               |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                                                               |   | **2002**                                  |   | **2001** |   |
|                                                                               |   | **(Unaudited)**                           |   |
| **Cash flows from operating activities:**                                          |   |                                      |   |   |   |
| Net income (loss)                                                                  |   | $                                         | (3,305 | ) | $ | 1,718 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                      |   |   |   |
| Depreciation and amortization                                                      |   | 14,863                                    |   | 25,561 |   |
| Noncash portion of restructuring and asset  impairment charges                     |   | 7,396                                     |   | — |   |
| Minority interest in preferred stock of  subsidiary                                |   | 4,301                                     |   | 3,727 |   |
| Deferred income taxes                                                              |   | (273                                      | )      | 6,801 |   |
| Other, net                                                                         |   | 371                                       |   | 605 |   |
| Changes in assets and liabilities, net of  effect from acquisitions:               |   |                                      |   |   |   |
| Accounts receivable                                                                |   | 17,349                                    |   | (12,243 | ) |
| Inventories                                                                        |   | 1,311                                     |   | (14,174 | ) |
| Prepaid expenses and other assets                                                  |   | (1,104                                    | )      | (2,684 | ) |
| Accounts payable                                                                   |   | (900                                      | )      | 3,832 |   |
| Accrued liabilities                                                                |   | (18,464                                   | )      | (6,809 | ) |
| Income taxes payable                                                               |   | 459                                       |   | 11 |   |
| Other long-term liabilities                                                        |   | 80                                        |   | (143 | ) |
| Net cash provided by operating activities                                          |   | 22,084                                    |   | 6,202 |   |
|                                                                               |   |                                      |   |   |   |
| **Cash flows from investing activities:**                                          |   |                                      |   |   |   |
| Cash paid for acquisitions                                                         |   | (5,890                                    | )      | (13,529 | ) |
| Capital expenditures                                                               |   | (3,804                                    | )      | (9,794 | ) |
| Other, net                                                                         |   | —                                    |   | 635 |   |
| Net cash used for investing activities                                             |   | (9,694                                    | )      | (22,688 | ) |
|                                                                               |   |                                      |   |   |   |
| **Cash flows from financing activities:**                                          |   |                                      |   |   |   |
| Net borrowings under senior credit facility                                        |   | 9,000                                     |   | 19,600 |   |
| Other long-term borrowings                                                         |   | 1,145                                     |   | 1,989 |   |
| Proceeds from the sale of common stock                                             |   | 5,000                                     |   | — |   |
| Principal payments on term debt,  capitalized leases and other debt                |   | (10,505                                   | )      | (5,198 | ) |
| Deferred financing costs                                                           |   | (1,663                                    | )      | (580 | ) |
| Repurchase of common stock and options                                             |   | (368                                      | )      | — |   |
| Other, net                                                                         |   | (149                                      | )      | (118 | ) |
| Net cash provided by financing activities                                          |   | 2,460                                     |   | 15,693 |   |
|                                                                               |   |                                      |   |   |   |
| Effect of foreign currency translation on  cash                                    |   | 35                                        |   | 39 |   |
|                                                                               |   |                                      |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | 14,885                                    |   | (754 | ) |
| Cash and cash equivalents at beginning of  period                                  |   | 9,794                                     |   | 8,199 |   |
| Cash and cash equivalents at end of period                                         |   | $                                         | 24,679 |   | $ | 7,445 |   |

 

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**

 

**Basisof Presentation**

 

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 has beenderived from audited financial statements but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica as permitted by interim reporting requirements.  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 financial statementsand 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 and OtherIntangible Assets” and the provisions of SFAS No. 141, “Business Combinations,”which were required to be adopted concurrent with the adoption of SFAS No.142.  Adoption of these accountingpronouncements 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 offiscal 2002.  The remaining useful liveswere deemed appropriate.

 

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

 

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

 

5

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

 

Areconciliation of reported net income (loss) to net income (loss) adjusted toreflect the discontinuance of periodic goodwill and assembled workforceamortization charges is as follows:
|                                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                                                |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                                |   | **(Unaudited)**                       |   |
| Reported net income (loss)                                          |   | $                                     | 1,044  |                                      | $      | (425 | ) | $ | (3,305 | ) | $ | 1,718 |   |
| Add back goodwill and assembled workforce  amortization, net of tax |   | —                                |   | 2,851                                     |   | — |   | 8,602 |   |
| Adjusted net income (loss)                                          |   | $                                     | 1,044  |                                      | $      | 2,426 |   | $ | (3,305 | ) | $ | 10,320 |   |

 

*SFAS No. 143*

 

EffectiveJanuary 1, 2002, the Company also adopted SFAS No. 143, “Accounting for AssetRetirement Obligations,” which requires recognition of the fair value ofliabilities 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 of SFAS No. 143 isrequired for the Company’s fiscal year beginning January 1, 2003 although earlyapplication is permitted.  Adoption ofSFAS No. 143 did not have an impact on the Company’s business, consolidatedfinancial position, results of operations or cash flows.

 

*SFAS No. 144*

 

EffectiveJanuary 1, 2002, the Company also adopted SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which addresses the accountingand reporting for the impairment or disposal of long-lived assets.  Adoption of SFAS No. 144 did not have animpact on the Company’s business, consolidated financial position, results ofoperations or cash flows.

 

6

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**RecentlyIssued Accounting Pronouncements**

 

*SFAS No. 145*

 

In May 2002,the Financial Accounting Standards Board issued SFAS No. 145, “Rescission ofSFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and TechnicalCorrections.”  Among other things, SFASNo. 145 rescinds various pronouncements regarding early extinguishment of debtand allows extraordinary accounting treatment for early extinguishment onlywhen the provisions of Accounting Principles Board Opinion No. 30, “Reportingthe Results of Operations–Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met.  SFAS No. 145provisions regarding early extinguishment of debt are generally effective forfiscal years beginning after May 15, 2002. The Company believes this new standard will not have an impact on itsbusiness, consolidated financial position, results of operations or cash flow.

 

*SFAS No. 146*

 

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

 

SFAS No. 146requires that the liability for costs associated with an exit or disposalactivity be initially measured at fair value and recognized when the liabilityis incurred.  In periods subsequent toinitial measurement, changes to the liability are measured using the credit-adjustedrisk-free rate that was used in the initial measurement of the liabilityrecorded.  The cumulative effect of achange resulting from revisions to either the timing or the amount of estimatedcash flows is recognized as an adjustment to the liability in the period of thechange and charged to the same line items in the statement of operations usedwhen the related costs were initially recognized.  Under EITF No. 94-3, a liability for an exit cost was recognizedat the date of a company’s commitment to an exit plan.

 

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

 

7

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

 

During thethree months and nine months ended September 30, 2002 and 2001, the Companyrecorded restructuring, asset impairment and other nonrecurring pre-tax chargesrelated to two restructuring plans as follows:

 

 
|                                              |   | **Three  Months Ended September 30,** |   | **Nine  Months Ended September 30,** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                              |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                              |   | **(Unaudited)**                       |
| Restructuring plan:                               |   |                                  |   |                                      |   |   |   |   |   |
| 2002 Seat Manufacturing Facilities  Restructuring |   | $                                     | — |                                      | $      | — |   | $ | 6,294 |   | $ | — |   |
| 2001 Restructuring and Asset Impairment  Charges  |   | 1,486                                 |   | —                                    |   | 6,901 |   | 3,902 |   |
| Total pre-tax charges                             |   | $                                     | 1,486  |                                      | $      | — |   | $ | 13,195 |   | $ | 3,902 |   |
|                                              |   |                                  |   |                                      |   |   |   |   |   |
| Charged to operations:                            |   |                                  |   |                                      |   |   |   |   |   |
| Cost of sales                                     |   | $                                     | 670    |                                      | $      | — |   | $ | 6,616 |   | $ | 3,902 |   |
| Selling, general and administrative  expenses     |   | 816                                   |   | —                                    |   | 6,579 |   | — |   |
| Total pre-tax charges                             |   | $                                     | 1,486  |                                      | $      | — |   | $ | 13,195 |   | $ | 3,902 |   |
|                                              |   |                                  |   |                                      |   |   |   |   |   |
| Components of charges:                            |   |                                  |   |                                      |   |   |   |   |   |
| Cash charges                                      |   | $                                     | — |                                      | $      | — |   | $ | 5,799 |   | $ | 3,902 |   |
| Noncash charges                                   |   | 1,486                                 |   | —                                    |   | 7,396 |   | — |   |
| Total pre-tax charges                             |   | $                                     | 1,486  |                                      | $      | — |   | $ | 13,195 |   | $ | 3,902 |   |
|                                                   |        |                                       |        |                                           |        |  |  |  |  |  |  |  |  |  |  |

 

 

**2002Seat Manufacturing Facilities Restructuring**

 

In firstquarter of fiscal 2002, the Company announced it would consolidate theproduction of four seating and related manufacturing facilities into two,resulting in the permanent closure of two facilities.  In connection with this restructuring plan, the Company recordednonrecurring pre-tax charges to operations totaling $6,294,000 during 2002 forrestructuring and asset impairment charges and other related expenses.  The restructuring and asset impairmentcharges and other related expenses are comprised of the following:

 

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

 

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

 

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

 

•                  *Lease Termination and Other Related Costs.*  Lease termination and other related costsare comprised of the net losses expected to be incurred under 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.  If market-ratesdecrease or should it take longer than expected to sublease these facilities,the actual loss could exceed these estimates.

 

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

 

8

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The Companysubstantially completed the restructuring during the second quarter of fiscal2002.  The components of therestructuring, assets impairment and other nonrecurring charges are as follows:

 
| ***(In thousands)***                               |   | **Total  Charges** |   | **Amounts Incurred** |   | **Balance at  September 30,  2002** |   |
|----------------------------------------------------|--------|--------------------|--------|----------------------|--------|------------------------------------------|--------|
| **Noncash**                                        |   | **Cash**           |
|                                               |   | **(Unaudited)**    |   |
| Restructuring and assets impairment  charges:      |   |               |   |                 |   |                                     |   |   |   |
| Inventory and accounts receivable  write-downs     |   | $                  | 2,200  |                 | $      | (2,200                                   | )      | $ | — |   | $ | — |   |
| Impairment of property and equipment               |   | 1,374              |   | (1,374               | )      | —                                   |   | — |   |
| Severance and other compensation costs             |   | 450                |   | —               |   | (450                                     | )      | — |   |
| Lease termination and other related costs          |   | 300                |   | —               |   | (197                                     | )      | 103 |   |
| Total restructuring and asset impairment  charges  |   | 4,324              |   | $                    | (3,574 | )                                        | $      | (647 | ) | $ | 103 |   |
|                                               |   |               |   |                 |   |                                     |   |   |   |
| Other nonrecurring restructuring-related  expenses |   | 1,970              |   |                 |   |                                     |   |   |   |
| Total pre-tax charges                              |   | $                  | 6,294  |                 |   |                                     |   |   |   |   |

 

The remainingbalance of restructuring costs includes lease termination and other exitcosts.  The manufacturing facilitieswere closed during June 2002; however, future cash payments will extend beyondthis date due to future lease payments on the vacated facilities and theincurrence of other exit costs.  Futurecash payments will be funded from existing cash balances and internallygenerated cash from operations.

 

**2001Restructuring and Asset Impairment Charges**

 

During thesecond quarter of fiscal 2001, the Company adopted a restructuring plan torealign aircraft furniture production programs among its manufacturingfacilities.  In addition, and inresponse to the adverse impact on the aerospace industry resulting from theSeptember 11th terrorist attack and its aftermath, as well as theweakening of global economic conditions, the Company announced and implementeda further restructuring plan in December 2001 designed to reduce costs andconserve working capital.  This planincluded permanently closing one manufacturing facility and idling a secondfacility for an indefinite period, curtailing several product developmentprograms and instituting workforce reductions. These plans primarily affected the Company’s Cabin Management andSpecialty Avionics Groups.

 

In connectionwith these restructuring plans, the Company recorded nonrecurring pre-taxcharges to operations of $28,658,000 in fiscal 2001 ($3,902,000 million duringthe nine months ended September 30, 2001), of which $22,058,000 werenoncash charges, for the impairment of long-lived assets and restructuring costsrelated to write-downs and write-offs of inventoried costs, costs associatedwith the realignment of aircraft furniture production programs amongfacilities, severance, lease termination and other related costs.  As of December 31, 2001, $27,049,000 hadbeen incurred and the remaining $1,609,000 was reflected as an accruedliability.

 

Due to theongoing weakness of the corporate/VIP aircraft market, the Company decidedduring the second quarter of fiscal 2002 to permanently close the temporarilyidled manufacturing facility.  Inconnection with this decision, the Company recorded additional nonrecurringpre-tax charges to operations totaling $6,901,000 during 2002 ($5,415,000during the second quarter of 2002 and $1,486,000 during the third quarter of2002) for restructuring and asset impairment charges and other relatedexpenses.

 

9

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Therestructuring and asset impairment charges and other related expenses arecomprised of the following:

 

•                  *Impairment of Long-Lived Assets.*  The permanent closure of the manufacturingfacility resulted in the impairment of property and equipment and, accordingly,these assets were written down to their estimated net realizable value.  Net realizable values were based onestimated current market values and the actual losses could exceed theseestimates.

 

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

 

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

 

The additionalnonrecurring charge of $1,486,000 recorded during the third quarter of 2002 iscomprised of a $801,000 charge to reflect the additional impairment oflong-lived assets and a $685,000 charge for additional excess inventorywrite-downs.  The components of thecharges and amounts incurred during the nine months ended September 30,2002 are as follows:

** **
| ***(In thousands)***                               |   | **Balance at  December 31,  2001** |   | **Total  Charges** |   | **Amounts Incurred** |   | **Balance at  September 30,  2002** |   |
|----------------------------------------------------|--------|------------------------------------|--------|--------------------|--------|----------------------|--------|-------------------------------------|--------|
| **Noncash**                                        |   | **Cash**                           |
|                                               |   |                               |   | **(Unaudited)**    |   |
|                                               |   |                               |   |               |   |                 |   |                                |   |   |   |
| Severance and other compensation costs             |   | $                                  | 1,185  |               | $      | —               |   | $                                   | — |   | $ | (1,068 | ) | $ | 117 |   |
| Lease termination and other related costs          |   | 424                                |   | —             |   | —               |   | (377                                | )      | 47 |   |
| Impairment of property and equipment               |   | —                             |   | 2,557              |   | (2,557               | )      | —                              |   | — |   |
| Excess inventory write-downs                       |   | —                             |   | 1,265              |   | (1,265               | )      | —                              |   | — |   |
| Total restructuring and assets impairment  charges |   | $                                  | 1,609  |               | 3,822  |                 | $      | (3,822                              | )      | $ | (1,445 | ) | $ | 164 |   |
|                                               |   |                               |   |               |   |                 |   |                                |   |   |   |
| Other nonrecurring restructuring-related  charges  |   |                               |   | 3,079              |   |                 |   |                                |   |   |   |
| Total pre-tax charges                              |   |                               |   | $                  | 6,901  |                 |   |                                |   |   |   |   |

 

From January1, 2002 through September 30, 2002, severance and other compensation costsof approximately $1,068,000 have been paid and the remaining $117,000 will beincurred during the fourth quarter of fiscal 2002 when the remaining personnelare terminated.  The amounts paid todate have been to manufacturing and administrative employees terminated at themanufacturing facilities being closed. Since the September 11th terrorist attack, the Company has,in addition to the positions eliminated as a result of the 2002 plant closuresdescribed above, reduced its total workforce by approximately 500 employees, or18.5%, as of September 2002, of which approximately 260 employees had separatedas of December 31, 2001.

 

The remainingbalance of restructuring costs includes lease termination and other exitcosts.  The restructuring plan relatedto leased facilities was completed during the second quarter of fiscal 2002;however, future cash payments will extend beyond this date due to future leasepayments on the vacated facility and the incurrence of other exit costs.

 

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

 

10

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**Note 4.       Inventories**

 

Inventoriesare comprised of the following as of September 30, 2002 andDecember 31, 2001:

 
| ***(In thousands)***                                                         |   | **September 30,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**              |   |                        |   |
| Raw materials                                                                |   |                         |   |                        |   |
| Work-in-process:                                                             |   | $                            | 44,446 |                        | $      | 50,503 |   |
| Direct and indirect manufacturing costs                                      |   | 16,278                       |   | 16,260                      |   |
| Program costs, principally engineering  costs                                |   | 13,153                       |   | 10,974                      |   |
| Finished goods                                                               |   | 6,233                        |   | 3,089                       |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | 2,344                        |   | 5,672                       |   |
| Total inventories                                                            |   | $                            | 82,454 |                        | $      | 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 nine months of fiscal2002.

 

Total costsand estimated earnings on all uncompleted contracts as of September 30,2002 and December 31, 2001 are comprised of the following:
| ***(In thousands)***                                                          |   | **September 30,  2002** |   | **December 31,  2001** |   |
|-------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                          |   | **(Unaudited)**              |   |                        |   |
| Costs incurred on uncompleted contracts                                       |   | $                            | 47,590 |                        | $      | 46,757 |   |
| Estimated earnings recognized                                                 |   | 58,244                       |   | 50,413                      |   |
| Total costs and estimated earnings                                            |   | 105,834                      |   | 97,170                      |   |
| Less billings to date                                                         |   | (104,542                     | )      | (102,653                    | )      |
| Net                                                                           |   | $                            | 1,292  |                        | $      | (5,483 | ) |
|                                                                          |   |                         |   |                        |   |
| Balance sheet classification:                                                 |   |                         |   |                        |   |
| Asset – Costs and estimated earnings in  excess of billings              |   | $                            | 2,344  |                        | $      | 5,672 |   |
| Liability – Billings in excess of costs and  estimated earnings (Note 6) |   | (1,052                       | )      | (11,155                     | )      |
| Net                                                                           |   | $                            | 1,292  |                        | $      | (5,483 | ) |

 

Revenues andearnings for products manufactured under long-term contracts are recognizedunder the percentage-of-completion method using total contract price, actualcosts incurred to date and an estimate of the completion costs for eachcontract.  Provisions for estimatedlosses on uncompleted contracts are made in the period in which such losses aredetermined.  The Company recorded aprovision for estimated losses totaling $2,577,000 during the nine months endedSeptember 30, 2002 relating to uncompleted contracts at the furnituremanufacturing facility being permanently closed (Note 3).

 

11

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**Note 5.       OtherAssets**

 

Other assetsare comprised of the following as of September 30, 2002 andDecember 31, 2001:

 
| ***(In thousands)***                                     |   | **September 30,  2002** |    | **December 31,  2001** |   |
|----------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                     |   | **(Unaudited)**              |    |                        |   |
| Goodwill                                                 |   | $                            | 343,309 |                        | $      | 337,443 |   |
| Identifiable intangible assets with finite  useful lives |   | 53,181                       |    | 63,648                      |   |
| Deferred financing costs                                 |   | 9,870                        |    | 10,204                      |   |
| Other non-amortizable assets                             |   | 1,320                        |    | 1,978                       |   |
| Total other assets                                       |   | $                            | 407,680 |                        | $      | 413,273 |   |

 

**Goodwill**

 

Changes in thecarrying amount of goodwill, by business segment (Note 12), for the year endedDecember 31, 2001 and the nine months ended September 30, 2002 are asfollows:

 
| ***(In thousands)***                                                                                                       |   | **Cabin  Management  Group** |    | **Specialty  Avionics  Group** |   | **Systems  Integration  Group** |   | **Corporate** |   | **Consolidated  Total** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|--------------------------------|--------|---------------------------------|--------|---------------|--------|-------------------------|--------|
|                                                                                                                       |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Year ended December 31, 2001:                                                                                         |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Balance, December 31, 2000                                                                                            |   | $                            | 187,797 |                           | $      | 131,472                         |   | $             | 32,982 |                    | $      | 4,105 |   | $ | 356,356 |   |
| Amortization during the period                                                                                             |   | (6,640                       | )       | (4,709                         | )      | (1,180                          | )      | (149          | )      | (12,678                 | )      |
| Impairment losses recognized                                                                                               |   | (5,058                       | )       | —                         |   | (3,525                          | )      | —        |   | (8,583                  | )      |
| Contingent consideration earned, including  acquisition related expenses                                                   |   | 3,832                        |    | —                         |   | —                          |   | —        |   | 3,832                   |   |
| Cash received from sellers, net of  additional liabilities recorded, upon settlement of asserted claims                    |   | (1,216                       | )       | —                         |   | —                          |   | —        |   | (1,216                  | )      |
| Foreign currency translation                                                                                               |   | —                       |    | (268                           | )      | —                          |   | —        |   | (268                    | )      |
| Balance, December 31, 2001                                                                                            |   | 178,715                      |    | 126,495                        |   | 28,277                          |   | 3,956         |   | 337,443                 |   |
|                                                                                                                       |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Nine months ended September 30, 2002:                                                                                 |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Reclassification of intangible assets  relating to assembled workforce, net of tax, upon adoption of SFAS No. 141  and 142 |   | 3,076                        |    | 1,221                          |   | 386                             |   | 120           |   | 4,803                   |   |
| Foreign currency translation                                                                                               |   | —                       |    | 1,063                          |   | —                          |   | —        |   | 1,063                   |   |
| Balance, September 30, 2002  (Unaudited)                                                                              |   | $                            | 181,791 |                           | $      | 128,779                         |   | $             | 28,663 |                    | $      | 4,076 |   | $ | 343,309 |   |

 

12

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**IdentifiableIntangible Assets with Finite Useful Lives**

 

Identifiableintangible assets with finite useful lives are comprised of the following as ofSeptember 30, 2002 and December 31, 2001:

 
|                           |   | **September 30, 2002 (Unaudited)** |   | **December 31, 2001**    |   |
|--------------------------------|--------|-----------------------------------------|--------|-------------------------------|--------|
| ***(In thousands)***           |   | **Cost**                                |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                           |   |                                    |   |                          |   |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                                       | 45,816 |                          | $      | (10,776 | ) | $ | 35,040 |   | $ | 45,816 |   | $ | (8,485 | ) | $ | 37,331 |   |
| Engineering drawings           |   | 14,619                                  |   | (3,547                        | )      | 11,072 |   | 14,617 |   | (2,816 | ) | 11,801 |   |
| Assembled workforce            |   | —                                  |   | —                        |   | — |   | 11,499 |   | (4,535 | ) | 6,964 |   |
| Other identifiable intangibles |   | 13,086                                  |   | (6,017                        | )      | 7,069 |   | 12,293 |   | (4,741 | ) | 7,552 |   |
| Total identifiable intangibles |   | $                                       | 73,521 |                          | $      | (20,340 | ) | $ | 53,181 |   | $ | 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 September 30, 2002 andDecember 31, 2001:

 
| ***(In thousands)***                                                         |   | **September 30,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**              |   |                        |   |
| Salaries, wages, compensated absences and  payroll related taxes             |   | $                            | 10,951 |                        | $      | 17,179 |   |
| Accrued interest                                                             |   | 4,265                        |   | 4,692                       |   |
| Accrued warranty costs                                                       |   | 3,370                        |   | 4,227                       |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |   | 1,052                        |   | 11,155                      |   |
| Customer advances and deposits                                               |   | 4,909                        |   | 3,260                       |   |
| Acquisition related contingent  consideration                                |   | —                       |   | 6,904                       |   |
| Other accrued liabilities                                                    |   | 7,831                        |   | 9,209                       |   |
| Total accrued liabilities                                                    |   | $                            | 32,378 |                        | $      | 56,626 |   |

 

13

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**Note 7.       Long-TermDebt**

 

Long-term debtincludes the following amounts as of September 30, 2002 andDecember 31, 2001:

 
| ***(In thousands)***                                                                  |   | **September 30,  2002** |    | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                  |   | **(Unaudited)**              |    |                        |   |
| Senior credit facility:                                                               |   |                         |    |                        |   |
| Revolving line of credit                                                              |   | $                            | 21,000  |                        | $      | 12,000 |   |
| Term loans                                                                            |   | 267,475                      |    | 275,706                     |   |
|                                                                                  |   |                         |    |                        |   |
| 12% senior subordinated notes                                                         |   | 100,000                      |    | 100,000                     |   |
|                                                                                  |   |                         |    |                        |   |
| Capital lease obligations and term debt  financing, secured by property and equipment |   | 10,841                       |    | 10,745                      |   |
|                                                                                  |   |                         |    |                        |   |
| Other indebtedness                                                                    |   | 968                          |    | 1,799                       |   |
| Total long-term debt                                                                  |   | 400,284                      |    | 400,250                     |   |
| Less current portion                                                                  |   | (15,422                      | )       | (13,899                     | )      |
| Long-term debt, less current portion                                                  |   | $                            | 384,862 |                        | $      | 386,351 |   |

 

On March 19,2002, the Company amended certain of the terms of its senior creditfacility.  The amendment combined two$25,000,000 working capital and acquisitions lines of credit into a single$50,000,000 working capital line of credit, increased 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 amendedcertain financial covenants, principally through December 31, 2003.

 

**Note 8.       IncomeTaxes**

 

For the threemonths and nine months ended September 30, 2002, the provision for incometaxes differs from the amount determined by applying the applicable U.S.statutory federal rate to income before income taxes primarily due to theeffects of state and foreign income taxes and minority interest in preferredstock of subsidiary which is not deductible for income tax purposes.

 

For the threemonths and nine months ended September 30, 2001, the provision for incometaxes differs from the amount determined by applying the applicable U.S.statutory federal rate to income before income taxes primarily due to theeffects of state and foreign income taxes and non-deductible expenses,principally goodwill amortization and minority interest in preferred stock ofsubsidiary.  Prior to the January 1,2002 adoption of SFAS No. 142, goodwill was amortized for financialreporting purposes.

 

During thenine months ended September 30, 2002, the Company reclassified to long-termapproximately $4,000,000 of loss carryforwards classified as current atDecember 31, 2001 to reflect the portion of the carryforwards the Company doesnot expect to utilize during the 2002 fiscal year.

 

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**Note 9.       CapitalStructure**

 

**MandatorilyRedeemable Preferred Stock**

 

The tablebelow summarizes the increase in mandatorily redeemable preferred stock duringthe nine months ended September 30, 2002.

 
|                                                                   |   | **DeCrane Aircraft  16% Preferred Stock** |   | **DeCrane Holdings  14% Preferred Stock** |
|------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|
| ***(In thousands, except share and per share data)***                  |   | **Number  of  Shares**                    |   |                                      | **Mandatory  Redemption  Value** |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   | **Number  of  Shares** |   | **Mandatory  Redemption  Value** |
|                                                                   |   |                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2001                                        |   | 316,330                                   |   |                                      | $ | 31,633 |   | $ | (3,393 | ) | $ | 28,240 |   | 342,417 |   | $ | 54,223 |
| Accrued dividends and redemption value  accretion                      |   | 39,498                                    |   |                                      | 3,950 |   | 351 |   | 4,301 |   | — |   | — |
| Noncash dividend accretion                                             |   | —                                    |   |                                      | — |   | — |   | — |   | — |   | 5,895 |
| Balance, September 30, 2002  (Unaudited)                          |   | 355,828                                   |   |                                      | $ | 35,583 |   | $ | (3,042 | ) | $ | 32,541 |   | 342,417 |   | $ | 60,118 |
|                                                                   |   |                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Per share liquidation value as of  September 30, 2002 (Unaudited) |   |                                      |   |                                      | $ | 100.00 |   |   |   |   |   |   |   | $ | 175.57 |

 

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 incash or by the issuance of additional shares of preferred stock.  Since the preferred stock issuance date onJune 30, 2000, DeCrane Aircraft has elected to issue additional shares in lieuof cash dividends; such shares are reflected as a component of minorityinterest in preferred stock of subsidiary.

 

*DeCrane Holdings 14% Mandatorily Redeemable Preferred Stock*

 

Holders of 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 the redemptionobligation.

 

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

 

During thenine months ended September 30, 2002, DeCrane Holdings sold 221,096common shares to DLJ and affiliated entities and a director for$5,100,000.  Expenses related to thesale totaled $100,000 and were charged to additional paid–in capital.

 

Also duringthe nine months ended September 30, 2002, DeCrane Holdings repurchased andcanceled 18,743 common shares from former members of DeCrane Aircraftmanagement.  The former managementmembers also elected to exercise 9,252 vested stock options on a cashlessbasis.  The $14,000 income tax benefitassociated with the stock options exercised was also credited to additionalpaid-in capital.  In connection with therepurchase, a note receivable collateralized by the repurchased common stockwas repaid.

 

15

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**Note 10.     Commitmentsand Contingencies**

 

**Litigation**

 

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

 

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

 

**ContingentAcquisition Consideration**

 

The Company’sremaining maximum contingent acquisition consideration payment obligation is$600,000 as of September 30, 2002. The contingent consideration is payable based upon an acquired company’slevel of attainment 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 fiscal 2003.

 

16

----

 

**Note 11.     ConsolidatedStatements of Cash Flows**

 

The followinginformation supplements the Company’s consolidated statements of cash flows.

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

 

During thenine months ended September 30, 2001, the Company received cash of $3,718,000in settlement of claims asserted against the sellers for breach ofrepresentation and warranty provisions contained in the purchase agreements oftwo companies acquired in 2000.  Thesettlement agreement also clarified the calculation of the contingent considerationprovisions of the purchase agreement and further provided that the Company payin 2002 a minimum of $2,750,000 of previously contingent consideration for theyear ending December 31, 2001.  The$2,750,000 minimum contingent consideration was paid during the nine monthsended September 30, 2002.

 

**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:

 

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

 

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

 

•                  *Systems Integration –* provides auxiliaryfuel tank systems, auxiliary power units and 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 noncash,nonoperating and nonrecurring charges. This is consistent with the manner in which lenders and ultimateinvestors measure the Company’s 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 and relatednet interest expense, corporate headquarters costs and income taxes.

 

17

----

 

The tablesbelow summarize selected financial data by business segment.

 
|                       |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|----------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***       |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                       |   | **(Unaudited)**                       |   |
| Revenues:                  |   |                                  |   |                                      |   |   |   |   |   |
| Cabin Management           |   | $                                     | 41,197 |                                      | $      | 53,462 |   | $ | 135,296 |   | $ | 158,753 |   |
| Specialty Avionics         |   | 23,410                                |   | 31,902                                    |   | 73,793 |   | 94,999 |   |
| Systems Integration        |   | 15,252                                |   | 18,528                                    |   | 43,552 |   | 53,023 |   |
| Inter-group elimination(1) |   | (238                                  | )      | (964                                      | )      | (525 | ) | (1,916 | ) |
| Consolidated totals        |   | $                                     | 79,621 |                                      | $      | 102,928 |   | $ | 252,116 |   | $ | 304,859 |   |
|                       |   |                                  |   |                                      |   |   |   |   |   |
| EBITDA:                    |   |                                  |   |                                      |   |   |   |   |   |
| Cabin Management           |   | $                                     | 7,509  |                                      | $      | 10,703 |   | $ | 12,303 |   | $ | 33,791 |   |
| Specialty Avionics         |   | 6,405                                 |   | 9,014                                     |   | 20,107 |   | 26,243 |   |
| Systems Integration        |   | 4,798                                 |   | 4,407                                     |   | 13,190 |   | 13,281 |   |
| Corporate(2)               |   | (1,360                                | )      | (1,845                                    | )      | (4,547 | ) | (5,146 | ) |
| Inter-group elimination(3) |   | 11                                    |   | (281                                      | )      | 11 |   | (380 | ) |
| Consolidated totals(4)     |   | $                                     | 17,363 |                                      | $      | 21,998 |   | $ | 41,064 |   | $ | 67,789 |   |
|                       |   |                                  |   |                                      |   |   |   |   |   |
| Adjusted EBITDA(5):        |   |                                  |   |                                      |   |   |   |   |   |
| Cabin Management           |   | $                                     | 8,995  |                                      | $      | 10,703 |   | $ | 25,498 |   | $ | 37,693 |   |
| Specialty Avionics         |   | 6,405                                 |   | 9,014                                     |   | 20,107 |   | 26,243 |   |
| Systems Integration        |   | 4,798                                 |   | 4,407                                     |   | 13,190 |   | 13,281 |   |
| Corporate                  |   | (1,360                                | )      | (1,845                                    | )      | (4,547 | ) | (5,146 | ) |
| Inter-group elimination    |   | 11                                    |   | (281                                      | )      | 11 |   | (380 | ) |
| Consolidated totals        |   | $                                     | 18,849 |                                      | $      | 21,998 |   | $ | 54,259 |   | $ | 71,691 |   |

 
|                             |   | **September 30,** |    |
|----------------------------------|--------|------------------------|---------|
| ***(In thousands)***             |   | **2002**               |    | **2001** |   |
|                             |   | **(Unaudited)**        |    |
| Total assets (as of period end): |   |                   |    |   |   |
| Cabin Management                 |   | $                      | 288,503 |   | $ | 329,356 |   |
| Specialty Avionics               |   | 205,505                |    | 225,462 |   |
| Systems Integration              |   | 74,284                 |    | 77,642 |   |
| Corporate(6)                     |   | 53,363                 |    | 42,520 |   |
| Inter-group elimination(7)       |   | (111                   | )       | (316 | ) |
| Consolidated totals              |   | $                      | 621,544 |   | $ | 674,664 |   |

 

----

(1)                        Inter-group sales are accountedfor at prices comparable to sales to unaffiliated customers, and are eliminatedin consolidation.

 

(2)                        Reflects the Company’scorporate headquarters costs and expenses not allocated to the groups.

 

(3)                        Reflects elimination of theeffect of inter-group profits in inventory.

 

18

----

 

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

** **
|                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                                |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                |   | **(Unaudited)**                       |   |
| Consolidated EBITDA                                 |   | $                                     | 17,363 |                                      | $      | 21,998 |   | $ | 41,064 |   | $ | 67,789 |   |
| Depreciation and amortization(a)                    |   | (4,212                                | )      | (8,066                                    | )      | (12,866 | ) | (23,914 | ) |
| Acquisition related charges not capitalized         |   | (447                                  | )      | (14                                       | )      | (925 | ) | (117 | ) |
| Other noncash charges                               |   | —                                |   | (41                                       | )      | (138 | ) | (277 | ) |
| Consolidated income from operations                 |   | 12,704                                |   | 13,877                                    |   | 27,135 |   | 43,481 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Interest expense                                    |   | (8,685                                | )      | (9,654                                    | )      | (24,843 | ) | (29,984 | ) |
| Minority interest in preferred stock of  subsidiary |   | (1,486                                | )      | (1,287                                    | )      | (4,301 | ) | (3,727 | ) |
| Other (expenses) income, net                        |   | (193                                  | )      | 25                                        |   | (578 | ) | (92 | ) |
| Consolidated income (loss) before income  taxes     |   | $                                     | 2,340  |                                      | $      | 2,961 |   | $ | (2,587 | ) | $ | 9,678 |   |

----

(a)          Reflects depreciation and amortization oflong-lived assets, goodwill (for periods prior to the January 1, 2002 adoptionof SFAS No. 142) and other intangible assets.  Excludes amortization of deferred financingcosts, which are classified as a component of interest expense.  The table below reconciles depreciation andamortization of long-lived assets to consolidated depreciation andamortization.

 
|                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                                |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                |   | **(Unaudited)**                       |   |
| Depreciation and amortization of long-lived  assets |   | $                                     | 4,212  |                                      | $      | 8,066 |   | $ | 12,866 |   | $ | 23,914 |   |
| Amortization of deferred financing costs            |   | 701                                   |   | 570                                       |   | 1,997 |   | 1,647 |   |
| Consolidated depreciation and amortization          |   | $                                     | 4,913  |                                      | $      | 8,636 |   | $ | 14,863 |   | $ | 25,561 |   |

 

(5)                        Reflects EBITDA before CabinManagement’s restructuring, asset impairment and other nonrecurring charges(Note 3) of:

 

•                  $1,486,000and $13,195,000 for the three months and nine months ended September 30, 2002,respectively, and

 

•                  $3,902,000for the nine months ended September 30, 2001.

 

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

 

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

 

19

----

 

**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 andnon-guarantor subsidiaries.  Theaccompanying financial information in the guarantor subsidiaries columnreflects the financial position, results of operations and cash flows for thosesubsidiaries guaranteeing the senior credit facility and the notes.  DeCrane Holdings in not a guarantor ofeither the senior credit facility or the notes and is therefore reflected inthe non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantorsubsidiaries.

 

The guarantorsubsidiaries are wholly-owned subsidiaries of 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 investments in subsidiaries.

 

(2)          Elimination of intercompany accounts.

 

(3)          Elimination of intercompany sales betweenguarantor and non-guarantor subsidiaries.

 

(4)          Elimination of equity in earnings ofsubsidiaries.

 

20

----

 

**BalanceSheets**

 
|                                                                                     |   | **September 30, 2002 (Unaudited)** |    |
|------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
| ***(In thousands)***                                                                     |   | **Issuer**                              |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                                    |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                                       | 24,431  |   | $ | 170 |   | $ | 78 |   | $ | — |   | $ | 24,679 |   |
| Accounts receivable, net                                                                 |   | —                                  |    | 39,239 |   | 1,432 |   | — |   | 40,671 |   |
| Inventories                                                                              |   | —                                  |    | 81,064 |   | 1,390 |   | — |   | 82,454 |   |
| Other current assets                                                                     |   | 11,462                                  |    | 1,490 |   | 290 |   | — |   | 13,242 |   |
| Total current assets                                                                     |   | 35,893                                  |    | 121,963 |   | 3,190 |   | — |   | 161,046 |   |
|                                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 2,696                                   |    | 47,868 |   | 2,254 |   | — |   | 52,818 |   |
| Other assets, principally intangibles, net                                               |   | 14,774                                  |    | 382,277 |   | 10,629 |   | — |   | 407,680 |   |
| Investments in subsidiaries                                                              |   | 409,057                                 |    | 20,743 |   | 106,425 |   | (536,225 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 270,962                                 |    | 160,889 |   | 5,544 |   | (437,395 | )(2) | — |   |
| Total assets                                                                             |   | $                                       | 733,382 |   | $ | 733,740 |   | $ | 128,042 |   | $ | (973,620 | ) | $ | 621,544 |   |
|                                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity**   |   |                                    |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                                       | 13,465  |   | $ | 1,950 |   | $ | 7 |   | $ | — |   | $ | 15,422 |   |
| Other current liabilities                                                                |   | 14,762                                  |    | 35,154 |   | 1,284 |   | — |   | 51,200 |   |
| Total current liabilities                                                                |   | 28,227                                  |    | 37,104 |   | 1,291 |   | — |   | 66,622 |   |
|                                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 375,326                                 |    | 9,536 |   | — |   | — |   | 384,862 |   |
| Intercompany payables                                                                    |   | 160,889                                 |    | 276,506 |   | — |   | (437,395 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 32,526                                  |    | 1,708 |   | 70 |   | — |   | 34,304 |   |
|                                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                       |   | 32,541                                  |    | — |   | — |   | — |   | 32,541 |   |
| Mandatorily redeemable preferred stock                                                   |   | —                                  |    | — |   | 60,118 |   | — |   | 60,118 |   |
|                                                                                     |   |                                    |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                                               |   |                                    |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 120,200                                 |    | 336,986 |   | 89,710 |   | (475,178 | )(1) | 71,718 |   |
| Retained earnings (deficit)                                                              |   | (16,327                                 | )       | 72,071 |   | (22,660 | ) | (61,047 | )(1) | (27,963 | ) |
| Accumulated other comprehensive loss                                                     |   | —                                  |    | (171 | ) | (487 | ) | — |   | (658 | ) |
| Total stockholders’ equity                                                          |   | 103,873                                 |    | 408,886 |   | 66,563 |   | (536,225 | ) | 43,097 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholders’ equity |   | $                                       | 733,382 |   | $ | 733,740 |   | $ | 128,042 |   | $ | (973,620 | ) | $ | 621,544 |   |

 

21

----

 
|                                                                                     |   | **December 31, 2001** |       |
|------------------------------------------------------------------------------------------|--------|----------------------------|------------|
| ***(In thousands)***                                                                     |   | **Issuer**                 |       | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Current assets:                                                                          |   |                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                          | 9,641      |   | $ | (92 | ) | $ | 245 |   | $ | — |   | $ | 9,794 |   |
| Accounts receivable, net                                                                 |   | —                     |       | 56,973 |   | 1,478 |   | — |   | 58,451 |   |
| Inventories                                                                              |   | —                     |       | 84,864 |   | 1,634 |   | — |   | 86,498 |   |
| Other current assets                                                                     |   | 15,153                     |       | 1,138 |   | 331 |   | — |   | 16,622 |   |
| Total current assets                                                                     |   | 24,794                     |       | 142,883 |   | 3,688 |   | — |   | 171,365 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 3,355                      |       | 55,152 |   | 2,566 |   | — |   | 61,073 |   |
| Other assets, principally intangibles, net                                               |   | 15,348                     |       | 388,269 |   | 9,656 |   | — |   | 413,273 |   |
| Investments in subsidiaries                                                              |   | 403,786                    |       | 20,697 |   | 105,146 |   | (529,629 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 256,360                    |       | 121,030 |   | 4,300 |   | (381,690 | )(2) | — |   |
| Total assets                                                                             |   | $                          | 703,643    |   | $ | 728,031 |   | $ | 125,356 |   | $ | (911,319 | ) | $ | 645,711 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity**   |   |                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Current liabilities:                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                          | 11,839     |   | $ | 2,054 |   | $ | 6 |   | $ | — |   | $ | 13,899 |   |
| Other current liabilities                                                                |   | 24,849                     |       | 49,854 |   | 1,107 |   | — |   | 75,810 |   |
| Total current liabilities                                                                |   | 36,688                     |       | 51,908 |   | 1,113 |   | — |   | 89,709 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 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 |   |

 

22

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**Statementsof Operations**

** **
|                                               |   | **Nine Months Ended September 30, 2002 (Unaudited)** |   |
|----------------------------------------------------|--------|-----------------------------------------------------------|--------|
| ***(In thousands)***                               |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Revenues                                           |   | $                                                         | — |   | $ | 248,877 |   | $ | 7,222 |   | $ | (3,983 | )(3) | $ | 252,116 |   |
| Cost of sales                                      |   | —                                                    |   | 176,943 |   | 6,020 |   | (3,983 | )(3) | 178,980 |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Gross profit                                       |   | —                                                    |   | 71,934 |   | 1,202 |   | — |   | 73,136 |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses       |   | 6,116                                                     |   | 34,629 |   | 958 |   | — |   | 41,703 |   |
| Amortization of intangible assets                  |   | —                                                    |   | 4,297 |   | 1 |   | — |   | 4,298 |   |
| Interest expense                                   |   | 24,092                                                    |   | 747 |   | 4 |   | — |   | 24,843 |   |
| Minority interest in preferred stock of subsidiary |   | —                                                    |   | — |   | 4,301 |   | — |   | 4,301 |   |
| Intercompany charges                               |   | (21,269                                                   | )      | 21,269 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                 |   | (5,271                                                    | )      | (195 | ) | (996 | ) | 6,462 | (4) | — |   |
| Other expenses, net                                |   | 251                                                       |   | 83 |   | 244 |   | — |   | 578 |   |
| Provision for income taxes (benefit)               |   | (4,915                                                    | )      | 5,833 |   | (200 | ) | — |   | 718 |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                  |   | $                                                         | 996    |   | $ | 5,271 |   | $ | (3,110 | ) | $ | (6,462 | ) | $ | (3,305 | ) |

 

 
|                                               |   | **Nine Months Ended September 30, 2001 (Unaudited)** |   |
|----------------------------------------------------|--------|-----------------------------------------------------------|--------|
| ***(In thousands)***                               |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Revenues                                           |   | $                                                         | — |   | $ | 302,182 |   | $ | 8,594 |   | $ | (5,917 | )(3) | $ | 304,859 |   |
| Cost of sales                                      |   | —                                                    |   | 203,145 |   | 7,234 |   | (5,917 | )(3) | 204,462 |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Gross profit                                       |   | —                                                    |   | 99,037 |   | 1,360 |   | — |   | 100,397 |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses       |   | 6,790                                                     |   | 34,658 |   | 611 |   | — |   | 42,059 |   |
| Amortization of intangible assets                  |   | 152                                                       |   | 14,405 |   | 300 |   | — |   | 14,857 |   |
| Interest expense                                   |   | 29,082                                                    |   | 887 |   | 15 |   | — |   | 29,984 |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary |   | —                                                    |   | — |   | 3,727 |   | — |   | 3,727 |   |
| Intercompany charges                               |   | (18,055                                                   | )      | 18,055 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                 |   | (13,898                                                   | )      | (593 | ) | (5,445 | ) | 19,936 | (4) | — |   |
| Other expenses (income), net                       |   | 248                                                       |   | 151 |   | (307 | ) | — |   | 92 |   |
| Provision for income taxes (benefit)               |   | (9,764                                                    | )      | 17,576 |   | 148 |   | — |   | 7,960 |   |
|                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net income                                         |   | $                                                         | 5,445  |   | $ | 13,898 |   | $ | 2,311 |   | $ | (19,936 | ) | $ | 1,718 |   |

 

23

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**Statementof Cash Flows**

 
|                                                                          |   | **Nine Months Ended September 30, 2002 (Unaudited)** |   |
|-------------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| ***(In thousands)***                                                          |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities:**                                    |   |                                                      |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                             |   | $                                                         | 996    |   | $ | 5,271 |   | $ | (3,110 | ) | $ | (6,462 | )(4) | $ | (3,305 | ) |
| Noncash adjustments:                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                            |   | (5,271                                                    | )      | (195 | ) | (996 | ) | 6,462 | (4) | — |   |
| Other noncash adjustments                                                     |   | 2,704                                                     |   | 19,214 |   | 4,740 |   | — |   | 26,658 |   |
| Changes in working capital                                                    |   | 18,788                                                    |   | (19,330 | ) | (727 | ) | — |   | (1,269 | ) |
| Net cash provided by (used for) operating activities                          |   | 17,217                                                    |   | 4,960 |   | (93 | ) | — |   | 22,084 |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities:**                                    |   |                                                      |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired                              |   | (5,890                                                    | )      | — |   | — |   | — |   | (5,890 | ) |
| Investment in subsidiary                                                      |   | —                                                    |   | — |   | (4,632 | ) | 4,632 | (1) | — |   |
| Capital expenditures                                                          |   | (46                                                       | )      | (3,649 | ) | (109 | ) | — |   | (3,804 | ) |
| Net cash used for investing activities                                        |   | (5,936                                                    | )      | (3,649 | ) | (4,741 | ) | 4,632 |   | (9,694 | ) |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities:**                                    |   |                                                      |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                                         |   | 9,000                                                     |   | — |   | — |   | — |   | 9,000 |   |
| Capital contribution to subsidiary of net proceeds from sale of  common stock |   | 4,632                                                     |   | — |   | 4,632 |   | (4,632 | )(1) | 4,632 |   |
| Other long-term borrowings                                                    |   | —                                                    |   | 1,145 |   | — |   | — |   | 1,145 |   |
| Principal payments on long-term debt, capitalized leases and other  debt      |   | (8,460                                                    | )      | (2,045 | ) | — |   | — |   | (10,505 | ) |
| Deferred financing costs                                                      |   | (1,663                                                    | )      | — |   | — |   | — |   | (1,663 | ) |
| Other, net                                                                    |   | —                                                    |   | (149 | ) | — |   | — |   | (149 | ) |
| Net cash provided by (used for) financing activities                          |   | 3,509                                                     |   | (1,049 | ) | 4,632 |   | (4,632 | ) | 2,460 |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on cash                                |   | —                                                    |   | — |   | 35 |   | — |   | 35 |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and equivalents                               |   | 14,790                                                    |   | 262 |   | (167 | ) | — |   | 14,885 |   |
| Cash and equivalents at beginning of period                                   |   | 9,641                                                     |   | (92 | ) | 245 |   | — |   | 9,794 |   |
|                                                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                                         |   | $                                                         | 24,431 |   | $ | 170 |   | $ | 78 |   | $ | — |   | $ | 24,679 |   |

 

24

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|                                                               |   | **Nine Months Ended September 30, 2001 (Unaudited)** |   |
|--------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| ***(In thousands)***                                               |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating  activities**                          |   |                                                      |   |   |   |   |   |   |   |   |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net income                                                         |   | $                                                         | 5,445  |   | $ | 13,898 |   | $ | 2,311 |   | $ | (19,936 | )(4) | $ | 1,718 |   |
| Noncash adjustments                                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                 |   | (13,898                                                   | )      | (593 | ) | (5,445 | ) | 19,936 | (4) | — |   |
| Other noncash adjustments                                          |   | 9,639                                                     |   | 22,393 |   | 4,662 |   | — |   | 36,694 |   |
| Changes in working capital                                         |   | (3,766                                                    | )      | (27,573 | ) | (871 | ) | — |   | (32,210 | ) |
| Net cash provided by (used for) operating activities               |   | (2,580                                                    | )      | 8,125 |   | 657 |   | — |   | 6,202 |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities**                          |   |                                                      |   |   |   |   |   |   |   |   |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired                   |   | (13,529                                                   | )      | — |   | — |   | — |   | (13,529 | ) |
| Capital expenditures and other                                     |   | (125                                                      | )      | (8,438 | ) | (596 | ) | — |   | (9,159 | ) |
| Net cash used for investing activities                             |   | (13,654                                                   | )      | (8,438 | ) | (596 | ) | — |   | (22,688 | ) |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities**                          |   |                                                      |   |   |   |   |   |   |   |   |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                              |   | 19,600                                                    |   | — |   | — |   | — |   | 19,600 |   |
| Other long-term borrowings                                         |   | —                                                    |   | 1,989 |   | — |   | — |   | 1,989 |   |
| Principal payments on term debt, capitalized leases and other debt |   | (3,611                                                    | )      | (1,568 | ) | (19 | ) | — |   | (5,198 | ) |
| Deferred financing costs                                           |   | (580                                                      | )      | — |   | — |   | — |   | (580 | ) |
| Other, net                                                         |   | —                                                    |   | (118 | ) | — |   | — |   | (118 | ) |
| Net cash provided by (used for) financing activities               |   | 15,409                                                    |   | 303 |   | (19 | ) | — |   | 15,693 |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on cash                     |   | —                                                    |   | — |   | 39 |   | — |   | 39 |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and equivalents                    |   | (825                                                      | )      | (10 | ) | 81 |   | — |   | (754 | ) |
| Cash and equivalents at beginning of period                        |   | 7,553                                                     |   | 233 |   | 413 |   | — |   | 8,199 |   |
|                                                               |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                              |   | $                                                         | 6,728  |   | $ | 223 |   | $ | 494 |   | $ | — |   | $ | 7,445 |   |

 

25

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

 

The following discussions should be read in conjunctionwith our financial statements and accompanying notes included in this report.

** **

**Industry Overviewand Trends**

 

We compete in the aircraft products and servicesmarket of the aerospace industry.  Themarket for our products and services is largely driven by demand in the threecivil aircraft markets: commercial, regional and corporate/VIP aircraft.  Currently, we provide a minimal amount ofproducts and services to the military aircraft market and are therefore relativelyunaffected by defense spending and other factors affecting that market.

 

The September 11, 2001 terrorist attack on the UnitedStates and weak global economic conditions are adversely impacting thecommercial airline industry and, in turn, are having an unfavorable impact uponthat portion of our business.  Thecommercial and regional original equipment and aftermarket/retrofit portions ofour business are currently estimated at approximately 31% of our revenues.

 

In addition, an estimated 60% of our revenues arecurrently derived from the corporate/VIP aircraft original equipment andaftermarket/retrofit business.  The weakglobal economic conditions have negatively impacted this portion of ourbusiness, as well.  The remaining 9% ofour revenues are derived from the military aircraft and other markets.

 

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

 

The commercial aircraft portion of our business isexperiencing significant weakness in 2002 and this condition will continue into2003, with potential recovery occurring during 2004 or 2005.  We believe the corporate/VIP aircraftportion of our business is experiencing growing weakness during the currentyear and this trend is likely to worsen in 2003.  However, we believe the potential exists for corporate/VIP aircraftdeliveries to recover in 2004.

** **

**Results of Operations**

 

Our results of operations for the three months andnine months ended September 30, 2002 and 2001 have been affected byrestructuring, asset impairment and other nonrecurring charges relating to our2001 and 2002 restructuring plans. These restructuring charges, which affect the comparability of ourreported results of operations between periods, are more fully described in“—Restructuring, Asset Impairment and Other Nonrecurring Charges” below.

** **

**26**

----

** **

**Three Months EndedSeptember **30, 2002 Compared to Three Months EndedSeptember 30, 2001

 

**Revenues.* ***Revenuesdecreased $23.3 million, or 22.6%, to $79.6 million for the three months endedSeptember 30, 2002 from $102.9 million for the three months ended September 30,2001.  By segment, revenues changed asfollows:

 
|                    |   | **Increase  (Decrease)  From 2001** |   |
|-------------------------|--------|-------------------------------------|--------|
| ***(In millions)***     |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | (12.3  | ) | (22.9 | )% |
| Specialty Avionics      |   | (8.4                                | )      | (26.6 | ) |
| Systems Integration     |   | (3.3                                | )      | (17.7 | ) |
| Inter-group elimination |   | 0.7                                 |   |   |   |
| Total                   |   | $                                   | (23.3  | ) |   |   |

* *

*CabinManagement. *Revenuesdecreased by $12.3 million, or 22.9% compared to the prior year.  This decrease is spread across most of ourproduct lines and services, and is caused by the adverse impact the weak globaleconomic conditions are having on the corporate/VIP aircraft market in 2002versus 2001 as follows:

 

•                  a$10.0 million decrease in aircraft furniture and related products revenues;

 

•                  a$1.5 million decrease in seating product revenues;

 

•                  a$1.8 million decrease in cabin management and entertainment systems revenues;offset by

 

•                  a$1.0 million increase in other product and services revenues.

* *

*SpecialtyAvionics.*  Revenuesdecreased by $8.4 million, or 26.6% compared to the prior year, due todecreases in commercial aircraft production affecting the following productlines:

 

•                  a$5.1 million volume decrease in interconnect products; and

 

•                  a$3.3 million decrease in cockpit audio, communications, lighting and power andcontrol devices revenues.

* *

*SystemsIntegration.*  Revenuesdecreased by $3.3 million, or 17.7% compared to the prior year, due to:

 

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

 

•                  a$1.0 million decrease resulting from reduced production and delivery ofcorporate/VIP aircraft auxiliary fuel tank systems.

 

27

----

 

**Grossprofit.**  Gross profitdecreased $7.2 million, or 21.9%, to $25.6 million for the three months endedSeptember 30, 2002 from $32.8 million for the same period last year.  By segment, gross profit changed as follows:

** **
|                    |   | **Increase  (Decrease)  From 2001** |   |
|-------------------------|--------|-------------------------------------|--------|
| ***(In millions)***     |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | (3.0   | ) | (20.0 | )% |
| Specialty Avionics      |   | (3.9                                | )      | (33.8 | ) |
| Systems Integration     |   | (0.6                                | )      | (9.1 | ) |
| Inter-group elimination |   | 0.3                                 |   |   |   |
| Total                   |   | $                                   | (7.2   | ) |   |   |

 

Gross profit is reduced by restructuring chargespertaining to our Cabin Management group’s 2001 and 2002 restructuring planstotaling $0.7 million for the three months endedSeptember 30, 2002.  Excludingthese charges, gross profit decreased $6.5 million, or 19.8%, to $26.3 millionfor the three months ended September 30, 2002 compared to $32.8million for the same period last year and gross profit as a percent of revenueswas 33.0% for the three months ended September 30, 2002 compared to31.8% for the same period last year.

 

*CabinManagement.*  Grossprofit decreased by $3.0 million, or 20.0% compared to the prior year,primarily due to:

 

•                  a$2.3 million decrease in profit margins for our corporate/VIP aircraftfurniture and seating product line associated with lower volume for ourproduct; and

 

•                  a$0.7 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans.

* *

*SpecialtyAvionics.*  Grossprofit decreased by $3.9 million, or 33.8% compared to the prior year, due to:

 

•                  a$1.5 million decrease related to lower volume for our cockpit audio,communications, lighting and power and control devices products; and

 

•                  a$2.4 million decrease caused by lower volume for our interconnect products.

* *

*SystemsIntegration.*  Grossprofit decreased by $0.6 million, or 9.1% compared to the prior year, due tolower sales volume.

 

28

----

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $2.6 million, or 18.3%, to $11.4 million for the three months endedSeptember 30, 2002, from $14.0 million for the same period last year.  By segment, SG&A expenses changed asfollows:

** **
|                |   | **Increase  (Decrease)  From 2001** |   |
|---------------------|--------|-------------------------------------|--------|
| ***(In millions)*** |   | **Amount**                          |   | **Percent** |   |
|                |   |                                |   |   |   |
| Cabin Management    |   | $                                   | — |   | — | % |
| Specialty Avionics  |   | (1.4                                | )      | (39.0 | ) |
| Systems Integration |   | (1.0                                | )      | (40.9 | ) |
| Corporate           |   | (0.2                                | )      |   |   |
| Total               |   | $                                   | (2.6   | ) |   |   |

 

SG&A expenses includes restructuring chargespertaining to our Cabin Management group’s 2001 and 2002 restructuring planstotaling $0.8 million for the three months ended September 30, 2002.  Excluding these charges, SG&A expensesdecreased $3.4 million, or 24.3%, to $10.6 million for the three months endedSeptember 30, 2002 compared to $14.0 million for the same period lastyear and SG&A expenses as a percent of revenues was 13.3% for the threemonths ended September 30, 2002 compared to 13.6% for the same periodlast year.

 

*CabinManagement. *SG&Aexpenses were consistent with the prior year, due to:

 

•                  a$0.8 million increase caused by restructuring charges relating to our 2001 and2002 restructuring plans; offset by

 

•                  a$0.8 million decrease in expenses resulting from cost reduction measuresimplemented in 2001 and 2002 in response to lower sales volume resulting fromthe weak global economic conditions.

* *

*SpecialtyAvionics.*  SG&Aexpenses decreased by $1.4 million, or 39.0% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

* *

*SystemsIntegration. *SG&Aexpenses decreased by $1.0 million, or 40.9% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

* *

*Corporate. *SG&A expensesdecreased by $0.2 million compared to the prior year, due to lower labor andemployee benefit costs.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortizationexpense decreased $3.9 million to $4.2 million for the three months endedSeptember 30, 2002 compared to $8.1 million for the same period last year,primarily resulting from the adoption of new accounting standards.

 

Effective January 1, 2002, we adoptedSFAS 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 discontinued effectiveJanuary 1, 2002.  In addition, SFAS No.141 requires that intangible assets relating to acquired assembled workforceintangibles not meeting the criteria for recognition apart from goodwill bereclassified to goodwill.  Goodwillamortization was $3.5 million for the three months ended September 30,2001, which includes $0.4 million of assembled workforce amortization, nowdeemed part of goodwill.

 

29

----

 

Excluding the effect of the accounting change, depreciationand amortization decreased $0.4 million as a result of lower depreciable costsresulting from the impairment of long-lived assets recorded during the fourthquarter of fiscal 2001 and 2002, partially offset by additional depreciationresulting from capital expenditures during the period.

 

**EBITDAand Operating income.** EBITDA decreased $4.6 million, or 21.1%, to $17.4 million for the threemonths ended September 30, 2002, from $22.0 million for the same period lastyear.  Operating income decreased $1.2million to $12.7 million for the three months ended September 30, 2002, from$13.9 million for the same period last year. EBITDA and operating income changed as follows:

 
|                                           |   | **Increase  (Decrease)  From 2001** |   |
|------------------------------------------------|--------|-------------------------------------|--------|
| ***(In millions)***                            |   | **Amount**                          |   | **Percent** |   |
|                                           |   |                                |   |   |   |
| EBITDA:                                        |   |                                |   |   |   |
| Cabin Management                               |   | $                                   | (3.2   | ) | (29.8 | )% |
| Specialty Avionics                             |   | (2.6                                | )      | (28.9 | ) |
| Systems Integration                            |   | 0.4                                 |   | 8.9 |   |
| Corporate                                      |   | 0.5                                 |   | 26.3 |   |
| Inter-group elimination                        |   | 0.3                                 |   |   |   |
| Total EBITDA                                   |   | (4.6                                | )      |   |   |
|                                           |   |                                |   |   |   |
| Depreciation and amortization                  |   | 3.9                                 |   |   |   |
| Other noncash and acquisition related  charges |   | (0.5                                | )      |   |   |
| Total operating income                         |   | $                                   | (1.2   | ) |   |   |

 

EBITDA and operating income are reduced byrestructuring charges pertaining to our Cabin Management group’s 2001 and 2002restructuring plans totaling $1.5 million for the three months endedSeptember 30, 2002.  Excludingthese charges, EBITDA decreased $3.1 million, or 14.1%, to $18.9 million forthe three months ended September 30, 2002 compared to $22.0 millionfor the same period last year and EBITDA as a percent of revenues was 23.7% forthe three months ended September 30, 2002 compared to 21.4% for thesame period last year.  Excluding thesecharges, operating income increased $0.3 million, or 2.2%, to $14.2 million forthe three months ended September 30, 2002 compared to $13.9 millionfor the same period last year.

* *

*CabinManagement.*  EBITDAdecreased by $3.2 million, or 29.8% compared to the prior year, primarily dueto:

 

•                  a$1.5 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans;

 

•                  a$1.0 million decrease resulting from lower sales volume for our cabinmanagement and entertainment systems; and

 

•                  a$0.7 million decrease resulting from lower sales volume for our corporate/VIPaircraft furniture seating.

* *

*SpecialtyAvionics.*  EBITDAdecreased by $2.6 million, or 28.9% compared to the prior year, as a result oflower demand for our commercial aircraft products offset by the effect of costreduction programs implemented in 2001 and a favorable shift in product mix.

* *

*SystemsIntegration. *EBITDAincreased by $0.4 million, or 8.9% compared to the prior year, due to lowersales volume partially offset by reduced operating costs and SG&A spendingreductions resulting from workforce reductions.

 

30

----

 

*Corporate. *EBITDA increased $0.5million, or 26.3% compared to the prior year, due to principally to reducedSG&A spending.

** **

** **

**Interestexpense.**  Interestexpense decreased $1.0 million, or 10.3%, to $8.7 million for the three monthsended September 30, 2002 compared to $9.7 million for the same period last yeardue almost entirely to lower average interest rates charged by our lendersduring 2002.

 

**Minorityinterest in preferred stock of subsidiary.**  Minority interest increased $0.2 million to$1.5 million for the three months ended September 30, 2002 compared to$1.3 million for the same period last year. Minority interest reflects the accrued dividends, which are compoundedquarterly, and redemption value accretion during the periods on DeCraneAircrafts’ 16% preferred stock.

 

**Provisionfor income taxes.**  Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to the income before income taxesprimarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization for periods prior tothe January 1, 2002 adoption of SFAS No. 142 and minority interest inpreferred stock of subsidiary.  Thedifference in the effective tax rates between periods is mostly the result ofthe adoption of SFAS No. 142.

 

**Netincome (loss).**  Netincome increased $1.4 million to $1.0 million for the three months endedSeptember 30, 2002 compared to a net loss of $0.4 million for thesame period last year.

 

**Net lossapplicable to common stockholders.**  Net loss applicable to common stockholders decreased $1.2 millionto a net loss of $1.0 million for the three months ended September 30,2002 compared to a net loss of $2.2 million for the same period last year.  The decrease in the net loss applicable toour common stockholders is attributable to:

 

•                  a$1.5 million increase in net income, which is net of a $0.2 million increase inthe charge for minority interest in preferred stock of subsidiary; offset by

 

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

 

**Bookings. **Bookings decreased $25.5million, or 29.5%, to $61.0 million for the three months ended September 30,2002 compared to $86.5 million for the same period last year.  The decrease in bookings for 2002 is due todecreases in orders for all three of our business segments.

 

**Backlogat end of period.**  Backlogdecreased $36.9 million to $113.0 million as of September 30, 2002 compared to$149.9 million as of December 31, 2001.

 

The decrease in bookings and resulting backlog in 2002primarily results from the continuing adverse impact on our businesses of theaftermath of the events of September 11th and weak global economicconditions.  In addition, we believethat some of our customers have substantially reduced their order lead timeswhich may have adversely affected bookings during the period and the resultingbacklog at the end of the period.

 

As described in “—Industry Overview and Trends,” theSeptember 11th terrorist attack and its aftermath are having anadverse impact on the aerospace industry and, in turn, are having anunfavorable impact on the commercial airline portion of our business.  In addition, weak global economic conditionshave negatively impacted other portions of our business as well.  We are not currently able to determine thecontinuing impact these events will have on our bookings and resulting backlogfor future periods.  However, given themagnitude of these events, the adverse impact could be material.

 

31

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**Nine Months Ended**September 30, 2002 Compared to Nine Months Ended September 30, 2001

 

**Revenues.* ***Revenuesdecreased $52.8 million, or 17.3%, to $252.1 million for the nine months endedSeptember 30, 2002 from $304.9 million for the nine months ended September 30,2001.  By segment, revenues changed asfollows:

 
|                    |   | **Increase  (Decrease)  From 2001** |   |
|-------------------------|--------|-------------------------------------|--------|
| ***(In millions)***     |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | (23.5  | ) | (14.8 | )% |
| Specialty Avionics      |   | (21.2                               | )      | (22.3 | ) |
| Systems Integration     |   | (9.5                                | )      | (17.9 | ) |
| Inter-group elimination |   | 1.4                                 |   |   |   |
| Total                   |   | $                                   | (52.8  | ) |   |   |

 

*CabinManagement. *Revenuesdecreased by $23.5 million, or 14.8% compared to the prior year.  The decrease, which is across most of ourproduct and services categories, is caused by the adverse impact the weakglobal economic conditions are having on the corporate/VIP aircraft market in2002 versus 2001 as follows:

 

•                  a$14.5 million decrease in aircraft furniture and related products revenues;

 

•                  a$8.0 million decrease in cabin management and entertainment systems revenues;and

 

•                  a$5.2 million decrease in seating products revenues; offset by

 

•                  a$4.2 million increase in other product and services revenues.

* *

*SpecialtyAvionics.*  Revenuesdecreased by $21.2 million, or 22.3% compared to the prior year, due todecreases in commercial aircraft production affecting the following productlines:

 

•                  a$12.9 million volume decrease in interconnect products; and

 

•                  a$8.3 million decrease in cockpit audio, communications, lighting and power andcontrol devices revenues.

* *

*SystemsIntegration.*  Revenuesdecreased by $9.5 million, or 17.9% compared to the prior year, due to:

 

•                  a$6.4 million decrease in the commercial aircraft systems integrationengineering services we provide in the aftermath of September 11th;and

 

•                  a$3.1 million decrease resulting from reduced production and delivery of corporate/VIPaircraft auxiliary fuel tank systems.

 

32

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**Grossprofit.**  Gross profitdecreased $27.3 million, or 27.2%, to $73.1 million for the nine months endedSeptember 30, 2002 from $100.4 million for the same period last year.  By segment, gross profit changed as follows:

 
|                    |   | **Increase  (Decrease)  From 2001** |   |
|-------------------------|--------|-------------------------------------|--------|
| ***(In millions)***     |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | (16.9  | ) | (36.1 | )% |
| Specialty Avionics      |   | (8.7                                | )      | (25.5 | ) |
| Systems Integration     |   | (2.1                                | )      | (10.7 | ) |
| Inter-group elimination |   | 0.4                                 |   |   |   |
| Total                   |   | $                                   | (27.3  | ) |   |   |

 

Gross profit is reduced by restructuring chargespertaining to our Cabin Management group’s 2001 and 2002 restructuring planstotaling $6.6 million for the nine months ended September 30, 2002and $3.9 million for the same period last year.  Excluding these charges, gross profit decreased $24.6 million, or23.6%, to $79.7 million for the nine months ended September 30, 2002compared to $104.3 million for the same period last year and gross profit as apercent of revenues was 31.6% for the nine months endedSeptember 30, 2002 compared to 34.2% for the same period last year.

* *

*CabinManagement.*  Grossprofit decreased by $16.9 million, or 36.1% compared to the prior year,primarily due to:

 

•                  a$10.0 million decrease in profit margins due to lower volume for ourcorporate/VIP aircraft furniture and seating products,

 

•                  a$4.2 million decrease in gross profit related to lower volume for our cabinmanagement and entertainment systems; and

 

•                  a$2.7 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans.

* *

*SpecialtyAvionics.*  Grossprofit decreased by $8.7 million, or 25.5% compared to the prior year, due to:

 

•                  a$4.5 million decrease related to lower volume for our cockpit audio,communications, lighting and power and control devices products; and

 

•                  a$4.2 million decrease caused by lower volume for our interconnect products.

 

*SystemsIntegration.*  Grossprofit decreased by $2.1 million, or 10.7% compared to the prior year, due tolower sales volume.

 

33

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**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $0.4 million, or 0.8%, to $41.7 million for the nine months endedSeptember 30, 2002, from $42.1 million for the same period last year.  By segment, SG&A expenses changed asfollows:

** **
|                |   | **Increase  (Decrease)  From 2001** |   |
|---------------------|--------|-------------------------------------|--------|
| ***(In millions)*** |   | **Amount**                          |   | **Percent** |   |
|                |   |                                |   |   |   |
| Cabin Management    |   | $                                   | 4.8    |   | 28.2 | % |
| Specialty Avionics  |   | (2.8                                | )      | (25.5 | ) |
| Systems Integration |   | (2.1                                | )      | (26.8 | ) |
| Corporate           |   | (0.3                                | )      |   |   |
| Total               |   | $                                   | (0.4   | ) |   |   |

 

SG&A expenses includes restructuring chargespertaining to our Cabin Management group’s 2001 and 2002 restructuring planstotaling $6.6 million for the nine months endedSeptember 30, 2002.  Excludingthese charges, SG&A expenses decreased $7.0 million, or 16.6%, to $35.1million for the nine months ended September 30, 2002 compared to$42.1 million for the same period last year and SG&A expenses as a percentof revenues were 13.9% for the nine months ended September 30, 2002compared to 13.8% for the same period last year.

* *

*CabinManagement. *SG&Aexpenses increased by $4.8 million, or 28.2% compared to the prior year, dueto:

 

•                  a$6.6 million increase caused by restructuring charges relating to our 2001 and2002 restructuring plans; offset by

 

•                  a$1.8 million decrease in expenses as a result of cost reduction measuresimplemented in 2001 and 2002 in response to lower sales volume resulting fromthe weak global economic conditions.

* *

*SpecialtyAvionics.*  SG&Aexpenses decreased by $2.8 million, or 25.5% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

* *

*SystemsIntegration. *SG&Aexpenses decreased by $2.1 million, or 26.8% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

* *

*Corporate. *SG&A expensesdecreased by $0.3 million compared to the prior year, primarily due toworkforce and travel expense reductions offset by increases in insurance andemployee benefit costs.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $11.0 million to$12.9 million for the nine months ended September 30, 2002 compared to $23.9million for the same period last year, primarily resulting from the adoption ofnew accounting standards.

 

Effective January 1, 2002, we adoptedSFAS No. 142, “Goodwill and Other Intangible Assets” and theprovisions of SFAS No. 141, “Business Combinations,” which wererequired to be adopted concurrent with the adoption of SFAS No. 142.  Under these new standards, goodwill isdeemed to be an indefinite-lived asset and, as a result, the recording ofperiodic goodwill amortization charges was discontinued effective January 1,2002.  In addition, SFAS No. 141requires that intangible assets relating to acquired assembled workforceintangibles not meeting the criteria for recognition apart from goodwill bereclassified to goodwill.  Goodwillamortization was $10.7 million for the nine months ended September 30,2001, which includes $1.2 million of assembled workforce amortization, nowdeemed part of goodwill.

 

34

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Excluding the effect of the accounting change,depreciation and amortization decreased $0.3 million as a result of lowerdepreciable costs resulting from the impairment of long-lived assets recordedduring the fourth quarter of fiscal 2001 and 2002, partially offset byadditional depreciation resulting from capital expenditures during the period.

 

**EBITDAand Operating income.** EBITDA decreased $26.7 million, or 39.4%, to $41.1 million for the ninemonths ended September 30, 2002, from $67.8 million for the same period lastyear.  Operating income decreased $16.4million to $27.1 million for the nine months ended September 30, 2002, from$43.5 million for the same period last year. EBITDA and operating income changed as follows:

 
|                                           |   | **Increase  (Decrease)  From 2001** |   |
|------------------------------------------------|--------|-------------------------------------|--------|
| ***(In millions)***                            |   | **Amount**                          |   | **Percent** |   |
|                                           |   |                                |   |   |   |
| EBITDA:                                        |   |                                |   |   |   |
| Cabin Management                               |   | $                                   | (21.5  | ) | (63.6 | )% |
| Specialty Avionics                             |   | (6.1                                | )      | (23.4 | ) |
| Systems Integration                            |   | (0.1                                | )      | (0.7 | ) |
| Corporate                                      |   | 0.6                                 |   | 11.6 |   |
| Inter-group elimination                        |   | 0.4                                 |   |   |   |
| Total EBITDA                                   |   | (26.7                               | )      |   |   |
|                                           |   |                                |   |   |   |
| Depreciation and amortization                  |   | 11.0                                |   |   |   |
| Other noncash and acquisition related  charges |   | (0.7                                | )      |   |   |
| Total operating income                         |   | $                                   | (16.4  | ) |   |   |

 

EBITDA and operating income are reduced byrestructuring charges pertaining to our Cabin Management group’s 2001 and 2002restructuring plans totaling $13.2 million for the nine months endedSeptember 30, 2002 and $3.9 million for the same period last year.  Excluding these charges, EBITDA decreased$17.4 million, or 24.3%, to $54.3 million for the nine months endedSeptember 30, 2002 compared to $71.7 million for the same period lastyear and EBITDA as a percent of revenues was 21.5% for the nine months endedSeptember 30, 2002 compared to 23.5% for the same period lastyear.  Excluding these charges,operating income decreased $7.1 million, or 14.9%, to $40.3 million for thenine months ended September 30, 2002 compared to $47.4 million forthe same period last year.

* *

*CabinManagement.*  EBITDA decreasedby $21.5 million, or 63.6% compared to the prior year, primarily due to:

 

•                  a$9.4 million decrease related principally to lower revenues in ourcorporate/VIP aircraft furniture and seating operations;

 

•                  a$9.3 million net decrease caused by restructuring charges related to our 2001and 2002 restructuring plans; and

 

•                  a$2.8 million decrease resulting from lower sales volume for our cabinmanagement and entertainment systems.

* *

*SpecialtyAvionics.*  EBITDAdecreased by $6.1 million, or 23.4% compared to the prior year, as a result oflower demand for our commercial aircraft products offset by the effect of costreduction programs implemented in 2001 and 2002 and a favorable shift inproduct mix.

* *

*SystemsIntegration. *EBITDAdecreased by $0.1 million, or 0.7% compared to the prior year, due to lowersales volume partially offset by reduced SG&A spending resulting fromworkforce reductions.

 

35

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*Corporate. *EBITDAincreased $0.6 million, or 11.6% compared to the prior year, due to principallyto reduced SG&A spending.

 

**Interestexpense.**  Interestexpense decreased $5.2 million, or 17.2%, to $24.8 million for the nine monthsended September 30, 2002 compared to $30.0 million for the same period lastyear due almost entirely to lower average interest rates charged by our lendersduring 2002.

 

**Minorityinterest in preferred stock of subsidiary.** Minority interest increased $0.6 million to $4.3 million for the ninemonths ended September 30, 2002 compared to $3.7 million for the sameperiod last year.  Minority interestreflects the accrued dividends, which are compounded quarterly, and redemptionvalue accretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

 

**Provisionfor income taxes.**  Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to the income before income taxesprimarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization for periods prior tothe January 1, 2002 adoption of SFAS No. 142 and minority interest inpreferred stock of subsidiary.  Thedifference in the effective tax rates between periods is mostly the result ofthe adoption of SFAS No. 142.

 

**Netincome (loss).**  Netincome decreased $5.0 million to a net loss of $3.3 million for the nine monthsended September 30, 2002 compared to net income of $1.7 million forthe same period last year.

 

**Net lossapplicable to common stockholders.**  Net loss applicable to common stockholders increased $5.8 millionto a net loss of $9.2 million for the nine months ended September 30, 2002compared to a net loss of $3.4 million for the same period last year.  The increase in the net loss applicable toour common stockholders is attributable to:

 

•                  a$5.0 million net loss increase, which is net of a $0.6 million increase in thecharge for minority interest in preferred stock of subsidiary; and

 

•                  a$0.8 million increase in noncash preferred stock dividend accretion on our 14%mandatorily redeemable preferred stock resulting from the quarterly compoundingof the dividends accreted.

 

**Bookings. **Bookings decreased $91.7million, or 30.0%, to $215.2 million for the nine months ended September 30,2002 compared to $306.9 million for the same period last year.  The decrease in bookings for 2002 is due todecreases in orders for all three of our business segments.

 

The decrease in bookings in 2002 primarily resultsfrom the continuing adverse impact on our businesses of the aftermath of theevents of September 11th and weak global economic conditions.  In addition, we believe that some of ourcustomers have substantially reduced their order lead times which may haveadversely affected bookings during the period.

 

As described in “—Industry Overview and Trends,” theSeptember 11th terrorist attack and its aftermath are having anadverse impact on the aerospace industry and, in turn, are having anunfavorable impact on the commercial airline portion of our business.  In addition, weak global economic conditionshave negatively impacted other portions of our business as well.  We are not currently able to determine thecontinuing impact these events will have on our bookings for future periods.  However, given the magnitude of theseevents, the adverse impact could be material.

 

36

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

** **

The following discussion should be read in conjunctionwith Note 3 accompanying our financial statements included in this report.

 

During the three months and nine months endedSeptember 30, 2002 and 2001, we recorded restructuring, assetimpairment and other nonrecurring pre-tax charges related to two restructuringplans.  These charges, and the effectthese charges had on our reported results of operations for the periods, aresummarized below.

 
|                                              |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In millions)***                               |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                              |   |                                  |   |                                      |   |   |   |   |   |
| Restructuring plan:                               |   |                                  |   |                                      |   |   |   |   |   |
| 2002 Seat Manufacturing  Facilities Restructuring |   | $                                     | — |                                      | $      | — |   | $ | 6.3 |   | $ | — |   |
| 2001 Restructuring and Asset  Impairment Charges  |   | 1.5                                   |   | —                                    |   | 6.9 |   | 3.9 |   |
| Total pre-tax charges                             |   | $                                     | 1.5    |                                      | $      | — |   | $ | 13.2 |   | $ | 3.9 |   |
|                                              |   |                                  |   |                                      |   |   |   |   |   |
| Charged to operations:                            |   |                                  |   |                                      |   |   |   |   |   |
| Cost of sales                                     |   | $                                     | 0.7    |                                      | $      | — |   | $ | 6.6 |   | $ | 3.9 |   |
| Selling, general and  administrative expenses     |   | 0.8                                   |   | —                                    |   | 6.6 |   | — |   |
| Total pre-tax charges                             |   | $                                     | 1.5    |                                      | $      | — |   | $ | 13.2 |   | $ | 3.9 |   |
|                                              |   |                                  |   |                                      |   |   |   |   |   |
| Components of charges:                            |   |                                  |   |                                      |   |   |   |   |   |
| Cash charges                                      |   | $                                     | — |                                      | $      | — |   | $ | 5.8 |   | $ | 3.9 |   |
| Noncash charges                                   |   | 1.5                                   |   | —                                    |   | 7.4 |   | — |   |
| Total pre-tax charges                             |   | $                                     | 1.5    |                                      | $      | — |   | $ | 13.2 |   | $ | 3.9 |   |
|                                              |   |                                  |   |                                      |   |   |   |   |   |
| As reported:                                      |   |                                  |   |                                      |   |   |   |   |   |
| Gross profit                                      |   | $                                     | 25.6   |                                      | $      | 32.8 |   | $ | 73.1 |   | $ | 100.4 |   |
| Selling, general and  administrative expenses     |   | 11.4                                  |   | 14.0                                      |   | 41.7 |   | 42.1 |   |
| EBITDA                                            |   | 17.4                                  |   | 22.0                                      |   | 41.1 |   | 67.8 |   |
| Operating income                                  |   | 12.7                                  |   | 13.9                                      |   | 27.1 |   | 43.5 |   |
| Pre-tax income (loss)                             |   | 2.3                                   |   | 3.0                                       |   | (2.6 | ) | 9.7 |   |
|                                              |   |                                  |   |                                      |   |   |   |   |   |
| As adjusted:                                      |   |                                  |   |                                      |   |   |   |   |   |
| Gross profit                                      |   | $                                     | 26.3   |                                      | $      | 32.8 |   | $ | 79.7 |   | $ | 104.3 |   |
| Selling, general and  administrative expenses     |   | 10.6                                  |   | 14.0                                      |   | 35.1 |   | 42.1 |   |
| EBITDA                                            |   | 18.9                                  |   | 22.0                                      |   | 54.3 |   | 71.7 |   |
| Operating income                                  |   | 14.2                                  |   | 13.9                                      |   | 40.3 |   | 47.4 |   |
| Pre-tax income                                    |   | 3.8                                   |   | 3.0                                       |   | 10.6 |   | 13.6 |   |

** **

**2002 Seat ManufacturingFacilities Restructuring**

 

In 2002, we announced we would consolidate theproduction of four seating and related manufacturing facilities into two,resulting in the permanent closure of two facilities.  In connection with this restructuring plan, we recordednonrecurring pre-tax charges to operations totaling $6.3 million during thenine months ended September 30, 2002 for restructuring, asset impairment andother related restructuring expenses.

 

The restructuring and asset impairment charges andother related expenses are comprised of charges for inventory and accountsreceivable write-downs, the impairment of long-lived assets, severance andlease termination costs and other restructuring-related expenses pertaining toFAA retesting and recertification, moving, transportation and travel costs andshutdown and startup costs.

 

37

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The restructuring plan was substantially completedduring the second quarter of fiscal 2002. A $0.1 million restructuring reserve remains at September 30, 2002for lease termination and other related costs. The manufacturing facilities were closed during June 2002; however,future cash payments will extend beyond this date due to future lease paymentson the vacated facilities and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

** **

**2001 Restructuring andAsset Impairment Charges**

 

During the second quarter of fiscal 2001, we adopted arestructuring plan to realign aircraft furniture production programs among ourmanufacturing facilities.  In addition,and in response to the adverse impact on the aerospace industry resulting fromthe September 11th terrorist attack and its aftermath, as well asthe weakening of global economic conditions, we announced and implemented afurther restructuring plan in December 2001 designed to reduce costs andconserve working capital.  This planincluded permanently closing one manufacturing facility and idling a secondfacility for an indefinite period, curtailing several product developmentprograms and instituting workforce reductions. These plans primarily affected our Cabin Management and SpecialtyAvionics Groups.

 

In connection with these restructuring plans, werecorded nonrecurring pre-tax charges to operations of $28.7 million in fiscal2001 ($3.9 million during the three months and nine months ended September 30,2001), of which $22.1 million were noncash charges, for the impairment oflong-lived assets and restructuring costs related to write-downs and write-offsof inventoried costs, costs associated with the realignment of aircraftfurniture production programs among facilities, severance, lease terminationand other related costs.  As of December31, 2001, $27.1 million had been incurred and the remaining $1.6 million wasreflected as an accrued liability.

 

Due to the ongoing weakness of the corporate/VIPaircraft market, we decided during the second quarter of fiscal 2002 topermanently close the temporarily idled manufacturing facility.  In connection with this decision, werecorded additional nonrecurring pre-tax charges to operations totaling $6.9million during the nine months ended September 30, 2002 ($1.5 million duringthe third fiscal quarter of 2002) for restructuring and asset impairmentcharges and other related expenses.

 

At December 31, 2001, the remaining $1.6 millionrestructuring reserve was for severance, lease termination and other relatedcosts.  During the nine months endedSeptember 30, 2002, we paid $1.4 million of these costs resulting ina $0.2 million restructuring reserve remaining at September 30, 2002.  We expect to incur the remaining severancecosts during the fourth quarter of fiscal 2002 when the remaining personnel areterminated.  The restructuring planrelated to leased facilities was completed during the second quarter of fiscal2002; however, future cash payments will extend beyond this date due to futurelease payments on the vacated facility and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

38

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**Liquidity andCapital Resources**

 

We have required cash primarily to fund acquisitionsand capital expenditures and for working capital.  Historically, our principal sources of liquidity have been cashflow from operations, third party borrowings and the issuance of common andpreferred stock.

 

Net cash provided by operating activities was $22.1million for the nine months ended September 30, 2002 and consisted of $23.4million of cash provided by operations after adding back depreciation,amortization, the noncash portion of our restructuring and asset impairmentcharges and other noncash items, $1.4 million used for working capital, and$0.1 million provided by an increase in other liabilities.  The following factors contributed to the$1.4 million working capital increase:

 

•                  a $19.4 millionnet decrease in accounts payable and accrued expenses; and

 

•                  a $1.1 million increasein prepaid expenses and other current assets; offset by

 

•                  a $17.3 millionaccounts receivable decrease resulting from decreased revenues as well astiming differences relating to progress and final billings on long-termcontracts; and further offset by

 

•                  a $1.3 millioninventory decrease; and

 

•                  a $0.5 millionincrease in income taxes payable.

 

Net cash used for investing activities was $9.7 million for the ninemonths ended September 30, 2002 and consisted of:

 

•                  $5.9 million ofcontingent acquisition consideration paid during 2002; and

 

•                  $3.8 million forcapital expenditures.

 

We anticipate spending approximately $6.0 to $7.0million for capital expenditures in 2002, which includes approximately $2.0million for improvements to the seat manufacturing facilities that will housethe combined operations of the facilities being closed in 2002.

 

Net cash provided by financing activities was $2.5million for the nine months ended September 30, 2002.  Cash was provided by $9.0 million of netrevolving line of credit borrowings under our senior credit facility, $1.1million of additional long-term borrowings and $5.0 million from the sale ofcommon stock.  Cash of $12.6 million wasused for principal payments on our term debt, capitalized lease obligations andother debt, financing costs associated with amending our senior credit facilityand the repurchase of stock and options from former management employees.

 

At September 30, 2002, senior credit facilityborrowings totaling $288.5 million are at variable interest rates based ondefined margins over the current prime or LIBOR rates.  At September 30, 2002, we also had $94.4million of working capital and had $29.0 million of borrowings available underour revolving line of credit.

 

We are being affected by economic, financial,competitive, legislative, regulatory, business and other factors beyond ourcontrol.  As described in “—IndustryOverview and Trends,” the September 11th terrorist attack and itsaftermath are having a severe adverse impact on the aerospace industry and, inturn, are having an unfavorable impact on the commercial aircraft portion ofour business.  In addition, the weakglobal economic conditions are adversely impacting other portions of our businessas well.  As described in “—Restructuring,Asset Impairment and Other Nonrecurring Charges,” we are taking measures toreduce costs and conserve working capital.

 

39

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Although we cannot be certain, we believe ouroperating cash flows, together with borrowings under our bank credit facility,will be sufficient to meet our future short- and long-term operating expenses,working capital requirements, capital expenditures and debt service obligationsfor the next twelve months.  However,our ability to pay principal or interest, to refinance our debt and to satisfyour other debt obligations will depend on our future operating performance.

 

In addition, we are continually consideringacquisitions that complement or expand our existing businesses or that mayenable us to expand into new markets. Future acquisitions may require additional debt, equity financing orboth.  We may not be able to obtain anyadditional financing on acceptable terms.

** **

**Recent AccountingPronouncements**

 

**Accounting Pronouncements AdoptedJanuary 1, 2002**

 

As more fully described in Note 2 accompanying ourfinancial statements included in this report, we adopted the provisions of thefollowing accounting pronouncements effective 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 AccountingPronouncements**

* *

*SFAS No. 145*

 

In May 2002, the Financial Accounting Standards Boardissued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145rescinds various pronouncements regarding early extinguishment of debt andallows extraordinary accounting treatment for early extinguishment only whenthe provisions of Accounting Principles Board Opinion No. 30, “Reportingthe Results of Operations–Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met. SFAS No. 145 provisions regarding early extinguishment of debtare generally effective for fiscal years beginning after May 15, 2002.  We believe this new standard will not havean impact on our business, consolidated financial position, results ofoperations or cash flow.

* *

*SFAS No. 146*

 

In June 2002, the Financial Accounting Standards Boardissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 supersedesprevious accounting guidance, principally Emerging Issues Task Force Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”

 

SFAS No. 146 requires that the liability for costsassociated with an exit or disposal activity be initially measured at fairvalue and recognized when the liability is incurred.  In periods subsequent to initial measurement, changes to theliability are measured using the credit-adjusted risk-free rate that was usedin the initial measurement of the liability recorded.  The cumulative effect of a change resulting from revisions toeither the timing or the amount of estimated cash flows is recognized as anadjustment to the liability in the period of the change and charged to the sameline items in the statement of operations used

 

40

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when the related costswere initially recognized.  Under EITFNo. 94-3, a liability for an exit cost was recognized at the date of acompany’s commitment to an exit plan.

 

The provisions of SFAS No. 146 are required to beapplied prospectively to exit or disposal activities initiated afterDecember 31, 2002.  We believeSFAS No. 146 may affect the timing of recognizing future restructuring costs,as well as the amounts recognized, depending on the nature of the exit ordisposal activity and the timing of the related estimated cash flows.

** **

**CommonEuropean Currency**

 

We have evaluated, and will continue to evaluate, theeffects on our operations of the European Economic Monetary Union conversion tothe Euro.  We do not expect theintroduction and use of the Euro, including our costs to adapt our informationsystems for this conversion, to be material to our business, financialposition, results of operations or cash flows.

** **

**SpecialNote Regarding Forward-Looking Statements**

 

All statements other than statements of historicalfacts included in this report are considered forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subjectto known and unknown risks, uncertainties and other factors, which aredifficult to predict.  We are vulnerableto a variety of factors that affect many businesses, such as:

 

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

 

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

 

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

 

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

 

•                  competitionfrom larger companies;

 

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

 

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

 

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

 

•                  theability to attract and retain qualified personnel;

 

•                  labordisturbances; and

 

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

 

Changes in such factors could cause our actual resultsto differ materially from those contemplated in such forward-lookingstatements.  Although we believe thatthe expectations reflected in such forward-looking statements are reasonable,we can give no assurance that such expectations will prove to be correct.  We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.  You should notrely on our forward-looking statements as if they were certainties.

 

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**ITEM3.**                                         QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to various market risks, includinginterest rates and changes in foreign currency exchange rates.  Market risk is the potential loss arisingfrom adverse changes in prevailing market rates and prices.  From time to time, we use derivativefinancial instruments to manage and reduce risks associated with thesefactors.  We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

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

 

Market risk related to our variable-rate debt isestimated as the potential decrease in pre-tax earnings resulting from anincrease in interest rates.  Theinterest rates applicable to variable-rate debt are, at our option, based ondefined margins over the current prime or LIBOR rates.  At September 30, 2002, the current primerate was 4.75% and the current LIBOR rate was 1.95%.  Based on $288.5 million of variable-rate debt outstanding as ofSeptember 30, 2002, a hypothetical one percent rise in interest rates, to 5.75%for prime rate borrowings and 2.95% for LIBOR borrowings, would reduce ourpre-tax earnings by $2.9 million annually.

 

To limit our exposure related to rising interestrates, we have entered into an interest rate swap contract to effectively convert$4.5 million of variable-rate industrial revenue bonds to 4.2% fixed-rate debtuntil maturity in 2008.  The contract isconsidered to be a hedge against changes in the amount of future cash flowsassociated with interest payments on this portion of our variable-ratedebt.  Market risk related to thisinterest rate swap contract is estimated as the potential higher interestexpense we will incur if the variable interest rate decreases below the 4.2%fixed rate.  Based on the $4.5 millionof variable-rate debt converted to fixed-rate debt outstanding as of September30, 2002, a hypothetical one percent decrease in the variable interest rate to3.2%, would reduce our pre-tax earnings by less than $0.1 million annually.

 

The estimated fair value of our $100.0 millionfixed-rate long-term debt decreased $12.5 million, or 13.4%, toapproximately $81.0 million at September 30, 2002 from $93.5 million atDecember 31, 2001.  Subsequent toSeptember 30, 2002, the estimated fair value decreased an additional $41.0 millionto approximately $40.0 million as of October 31, 2002.  Market risk related to our fixed-rate debtis deemed to be the potential increase in fair value resulting from a decreasein interest rates.  For example, ahypothetical ten percent decrease in the interest rates, from 12.0% to 10.8%,would increase the fair value of our fixed-rate debt by approximately $7.0million.

 

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

 

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**ITEM 4.**                                         CONTROLS ANDPROCEDURES

 

        **Evaluationof disclosure controls and procedures.**  Our Chief Executive Officer and Chief Financial Officer have evaluatedour disclosure controls and procedures within 90 days of the filing of thisreport.  These controls and proceduresare designed to ensure that all of the information required to be disclosed byus in our periodic reports filed with the Securities and Exchange Commission(the “Commission”) is recorded, processed, summarized and reported within thetime periods specified by the Commission and that the information iscommunicated to the Chief Executive Officer and Chief Financial Officer on atimely basis.  Based on theirevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were suitable and effective.

        **Changes ininternal controls.** Subsequent to the date of their evaluation, there have been nosignificant changes in our internal controls or in other factors that couldsignificantly affect the internal controls, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

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**PARTII – OTHER INFORMATION**

 

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

 

As part of its investigation of the crash off theCanadian coast on September 2, 1998 of Swissair Flight 111, the CanadianTransportation Safety Board (“TSB”) notified us that they recovered burned wirethat was attached to the in-flight entertainment system installed on some ofSwissair’s aircraft by one of our subsidiaries.  We are fully cooperating with the CTSB and have been advised thatthe CTSB intends to issue a final report on its investigation in February,2003.  We believe that no evidenceexists that would indicate the equipment installed by our subsidiarymalfunctioned or failed during the flight. Families of the 229 persons who died aboard the flight have filed actionsin federal and state courts against us, and many other parties unaffiliatedwith us, including Swissair and Boeing. The actions claim negligence, strict liability and breach of warrantyrelating to the installation and testing of the in-flight entertainmentsystem.  The actions seek compensatoryand punitive damages and costs in an unstated amount.  All of the actions have been transferred to the United StatesDistrict Court for the Eastern District of Pennsylvania and assigned under MDLCase No. 1269 for coordinated or consolidated pretrial proceedings.  We intend to defend the claims vigorously.

 

We are party to other litigation incident to thenormal course of business.  We do notbelieve that the outcome of all such matters in which we are currently involvedwill have a material adverse effect on our business, financial position,results of operations or cash flows.

**ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

During the nine months ended September 30, 2002, DeCrane Holdings soldunregistered shares of its common stock ($.01 par value) in two separate cashtransactions:

•     Sold 3,704 shares to adirector for $0.1 million, or $27.00 per share, on June 18, 2002; and

•     Sold 217,392 shares to DLJMerchant Banking Partners II, L.P. and affiliated entities for $5.0 million, or$23.00 per share, on September 27, 2002.

The issuances of shares were exempt from the registration requirementsof the Securities Act of 1933 under Section 4(2) as transactions by an issuernot involving any public offering.

 

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

 
| a.     |   | Exhibits |
|--------|--------|----------|
|   |   |     |   |   |
|   |   | 3.26.1.1 |   | Articles of Amendment  amending the Restated Articles of Incorporation of ERDA, Inc. (changing its  name to DeCrane Aircraft Seating Company, Inc.) ** |
|   |   |     |   |   |
|   |   | 3.30.1   |   | Certificate of  Formation of DeCrane Cabin Interiors, LLC ** |
|   |   |     |   |   |
|   |   | 3.30.2   |   | Limited Liability  Company Agreement of DeCrane Cabin Interiors, LLC ** |
|   |   |     |   |   |
|   |   | 21.1     |   | List of Subsidiaries of  Registrant ** |
|   |   |     |   |   |
|   |   | 99.1     |   | Chief Executive Officer  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 * |
|   |   |     |   |   |
|   |   | 99.2     |   | Chief Financial Officer  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 * |

----

|   |   | *                   |   | Filed herewith   |
|--------|--------|---------------------|--------|------------------|
|   |   |                |   |             |
|   |   | **                  |   | Previously filed |
|   |   |                |   |             |
| b.     |   | Reports on Form 8-K |
|   |   |                |   |             |
|   |   | None                |
|        |        |                     |        |                  |  |

 

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

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

 

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**CERTIFICATIONS**

 

**Chief Executive Officer Certification**

 

I, R. Jack DeCrane,certify that:

 

1.                           I havereviewed this quarterly report on Form 10-Q of DeCrane Holdings Co.;

 

2.                           Basedon my knowledge, this quarterly  reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                           Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                           Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                          designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)                         evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                          presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                          all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)                         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 12, 2002 |                      |
|-------------------------|---------------------------|
|                    |                      |
|                    | /s/  R. Jack DeCrane |
|                    | R. Jack DeCrane           |
|                    | Chief Executive Officer   |

 

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**Chief Financial Officer Certification**

 

I, Richard J. Kaplan,certify that:

 

1.                           I havereviewed this quarterly report on Form 10-Q of DeCrane Holdings Co.;

 

2.                           Basedon my knowledge, this quarterly  reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                           Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                           Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                          designed such disclosurecontrols and procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                         evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                          presented in this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                          all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)                         any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: November 12, 2002 |                                                                      |
|-------------------------|---------------------------------------------------------------------------|
|                    |                                                                      |
|                    | /s/  Richard J. Kaplan                                               |
|                    | Richard J. Kaplan                                                         |
|                    | Senior Vice President,  Chief Financial Officer,  Secretary and Treasurer |

 

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