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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

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**FORM 10-Q**

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended June 30, 2001**

**Commission File Number 333-70363**

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| **DECRANE HOLDINGS CO.**                                       |
|----------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)        |
|                                                           |
| **Delaware**                                                   | **13-4019703** |
| (State or other  jurisdiction of                               | (I.R.S. Employer |
| incorporation or  organization)                                | Identification No.) |
|                                                           |   |
| **c/o  DLJ Merchant Banking Partners II, L.P.**                |
| **277  Park Avenue, New York, NY 10172**                       |
| (Address, including  zip code, of principal executive offices) |
|                                                           |
| **(212)  892-3000**                                            |
| (Registrant's  telephone number, including area code)          |

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**(Not Applicable)**

(Formeraddress and telephone number of principal executive offices, if changed sincelast report)

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

ý Yes     o No

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             Thenumber of shares of Registrant's Common Stock, $.01 par value, outstanding asof August 10, 2001 was 3,914,274 shares.

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**Table of Contents**

**Part I – Financial Information**

| **Item 1.**                           | **Financial Statements  (Unaudited)**                                                                    |
|---------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                  |                                                                                                     |
|                                  | Consolidated Balance Sheets  as of June 30, 2001 and December 31, 2000                                   |
|                                  |                                                                                                     |
|                                  | Consolidated  Statements of Operations for the three months and six months ended June 30,  2001 and 2000 |
|                                  |                                                                                                     |
|                                  | Consolidated  Statements of Stockholders’ Equity for the six months ended June 30, 2001             |
|                                  |                                                                                                     |
|                                  | Consolidated  Statements of Cash Flows for the six months ended June 30, 2001 and 2000                   |
|                                  |                                                                                                     |
|                                  | Condensed  Notes to Consolidated Financial Statements                                                    |
|                                  |                                                                                                     |
| **Item  2.**                          | **Management’s  Discussion and Analysis of Financial Condition andResults of Operations**           |
|                                  |                                                                                                     |
|                                  | Overview                                                                                                 |
|                                  |                                                                                                     |
|                                  | Results  of Operations                                                                                   |
|                                  |                                                                                                     |
|                                  | Liquidity and Capital  Resources                                                                         |
|                                  |                                                                                                     |
|                                  | Recently  Issued Accounting Pronouncements                                                               |
|                                  |                                                                                                     |
| **Item  3.**                          | **Quantitative  and Qualitative Disclosure About Market Risk**                                           |
|                                  |                                                                                                     |
|                                  | Interest  Rate Risk                                                                                      |
|                                  |                                                                                                     |
|                                  | Foreign Currency  Exchange Risk                                                                          |
|                                  |                                                                                                     |
| **Part  II – Other Information** |
|                                  |                                                                                                     |
| **Item 1.**                           | **Legal Proceedings**                                                                                    |
|                                  |                                                                                                     |
| **Item  6.**                          | **Exhibits  and Reports on Form 8-K**                                                                    |
|                                  |                                                                                                     |
|                                  | Exhibits                                                                                                 |
|                                  |                                                                                                     |
|                                  | Reports on  Form 8-K                                                                                     |
|                                  |                                                                                                     |
| **Signatures**                        |

 

**PART I – FINANCIAL INFORMATION**

**ITEM 1.**           **FINANCIAL STATEMENTS**

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**ConsolidatedBalance Sheets****(In thousands, except share data)**

|                                                                                   | **June  30,  2001**                                                                                                                                |       | **December  31,  2000** |       |
|----------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
|                                                                                   |                                                                                                                                               |
|                                                                                   | ****                                                                                                                                               |       | ****                    |       |
|                                                                                   | **(Unaudited)**                                                                                                                                    |       |                    |       |
| **Assets**                                                                             |                                                                                                                                               |       |                    |       |
| Current assets                                                                         |                                                                                                                                               |       |                    |       |
|                                                                                   | Cash and cash  equivalents                                                                                                                         | $          | 7,536                   |       | $ | 8,199 |   |
|                                                                                   | Accounts receivable,  net                                                                                                                          | 61,473     |                    | 53,131     |   |
|                                                                                   | Inventories                                                                                                                                        | 90,081     |                    | 83,677     |   |
|                                                                                   | Deferred income taxes                                                                                                                              | 13,756     |                    | 15,090     |   |
|                                                                                   | Prepaid expenses and  other current assets                                                                                                         | 1,813      |                    | 987        |   |
|                                                                                   |                                                                                                                                               |            |                    |            |   |
|                                                                                   | Total current assets                                                                                                                               | 174,659    |                    | 161,084    |   |
|                                                                                   |                                                                                                                                               |       |                    |       |   |
| Property and  equipment, net                                                           | 61,299                                                                                                                                             |       | 59,491                  |       |
| Other assets,  principally intangibles, net                                            | 428,146                                                                                                                                            |       | 439,582                 |       |
|                                                                                   |                                                                                                                                                    |       |                         |       |
|                                                                                   | Total assets                                                                                                                                       | $          | 664,104                 |       | $ | 660,157 |   |
|                                                                                   |                                                                                                                                               |            |                    |            |   |
| **Liabilities, Mandatorily  Redeemable Preferred Stock and Stockholders’ Equity** |                                                                                                                                               | ** ** |                    | ** ** |
| Current liabilities                                                                    |                                                                                                                                               |       |                    |       |
|                                                                                   | Current portion of  long-term debt                                                                                                                 | $          | 13,168                  |       | $ | 9,289 |   |
|                                                                                   | Accounts payable                                                                                                                                   | 23,994     |                    | 20,304     |   |
|                                                                                   | Accrued liabilities                                                                                                                                | 44,060     |                    | 70,472     |   |
|                                                                                   | Income taxes payable                                                                                                                               | 4,229      |                    | 3,505      |   |
|                                                                                   |                                                                                                                                               |            |                    |            |   |
|                                                                                   | Total current  liabilities                                                                                                                         | 85,451     |                    | 103,570    |   |
|                                                                                   |                                                                                                                                               |       |                    |       |   |
| Long-term debt                                                                         | 391,097                                                                                                                                            |       | 373,990                 |       |
| Deferred income taxes                                                                  | 38,475                                                                                                                                             |       | 37,013                  |       |
| Other long-term  liabilities                                                           | 2,694                                                                                                                                              |       | 2,650                   |       |
|                                                                                   |                                                                                                                                               |       |                    |       |
| Commitments and  contingencies (Note 8)                                                |                                                                                                                                               |       |                    |       |
|                                                                                   |                                                                                                                                               |       |                    |       |
| Minority interest in  preferred stock of subsidiary                                    | 25,619                                                                                                                                             |       | 23,179                  |       |
| Mandatorily redeemable preferred stock                                                 | 50,618                                                                                                                                             |       | 47,252                  |       |
|                                                                                   |                                                                                                                                                    |       |                         |       |
| Stockholders’ equity                                                              |                                                                                                                                               |       |                    |       |
|                                                                                   | Undesignated preferred  stock, $.01 par value, 1,140,000 shares authorized; none issued and  outstanding as of June 30, 2001 and December 31, 2000 | —     |                    | —     |   |
|                                                                                   | Common stock, $.01 par  value, 10,000,000 shares authorized; 3,914,274 shares issued and outstanding  as of June 30, 2001 and December 31, 2000    | 39         |                    | 39         |   |
|                                                                                   | Additional paid-in  capital                                                                                                                        | 79,168     |                    | 82,298     |   |
|                                                                                   | Notes receivable for  shares sold                                                                                                                  | (2,622     | )                       | (2,552     | ) |
|                                                                                   | Accumulated deficit                                                                                                                                | (3,452     | )                       | (5,595     | ) |
|                                                                                   | Accumulated other  comprehensive loss                                                                                                              | (2,983     | )                       | (1,687     | ) |
|                                                                                   |                                                                                                                                               |            |                    |            |   |
|                                                                                   | Total stockholders’  equity                                                                                                                   | 70,150     |                    | 72,503     |   |
|                                                                                   |                                                                                                                                               |            |                    |            |   |
|                                                                                   | Total liabilities and  stockholders’ equity                                                                                                   | $          | 664,104                 |       | $ | 660,157 |   |
|                                                                                   |                                                                                                                                               |            |                    |            |   |
|                                                                                        |                                                                                                                                                    |            |                         |            |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Consolidated Statements of Operations****(In thousands)**

|                                                 | **Three Months Ended****June 30,**                  |    | **Six Months Ended****June 30,** |   |
|------------------------------------------------------|-----------------------------------------------------|---------|----------------------------------|--------|
|                                                 | ****                                                |    | ****                             |   |
|                                                 | **2001**                                            |    | **2000**                         |   | **2001** |   | **2000** |   |
|                                                 | ****                                                |    | ****                             |   | **** |   | **** |   |
|                                                 | **(Unaudited)**                                     |    |
|                                                 |                                                |    |
| Revenues                                             | $                                                   | 102,360 |                             | $      | 82,094 |   | $ | 201,511 |   | $ | 161,272 |   |
| Cost of sales                                        | 69,784                                              |    | 54,483                           |   | 133,890 |   | 107,509 |   |
|                                                 |                                                     |    |                                  |   |  |   |  |   |
|                                                 | Gross profit                                        | 32,576  |                             | 27,611 |   | 67,621 |   | 53,763 |   |
|                                                 |                                                     |    |                                  |   |  |   |  |   |
|                                                 |                                                |    |                             |   |   |   |   |   |
| Operating expenses                                   |                                                |    |                             |   |   |   |   |   |
|                                                 | Selling, general and  administrative expenses       | 13,436  |                             | 9,893  |   | 28,096 |   | 20,939 |   |
|                                                 | Amortization of  intangible assets                  | 4,955   |                             | 4,037  |   | 9,921 |   | 8,250 |   |
|                                                 |                                                |         |                             |        |   |  |   |  |   |
|                                                 | Total operating  expenses                           | 18,391  |                             | 13,930 |   | 38,017 |   | 29,189 |   |
|                                                 |                                                |         |                             |        |   |  |   |  |   |
|                                                 |                                                |    |                             |   |   |   |   |   |   |
|                                                 | Income from operations                              | 14,185  |                             | 13,681 |   | 29,604 |   | 24,574 |   |
|                                                 |                                                |    |                             |   |   |   |   |   |   |
| Other expenses                                       |                                                |    |                             |   |   |   |   |   |
|                                                 | Interest expense                                    | 9,875   |                             | 10,037 |   | 20,330 |   | 18,713 |   |
|                                                 | Minority interest in  preferred stock of subsidiary | 1,241   |                             | — |   | 2,440 |   | — |   |
|                                                 | Other expenses, net                                 | 12      |                             | 109    |   | 117 |   | 173 |   |
|                                                 |                                                |         |                             |        |   |  |   |  |   |
|                                                 |                                                |    |                             |   |   |   |   |   |
| Income before  provision for income taxes            | 3,057                                               |    | 3,535                            |   | 6,717 |   | 5,688 |   |
| Provision for income  taxes                          | 2,187                                               |    | 1,548                            |   | 4,574 |   | 2,946 |   |
|                                                 |                                                     |    |                                  |   |  |   |  |   |
|                                                 |                                                |    |                             |   |   |   |   |   |
| Net income                                           | 870                                                 |    | 1,987                            |   | 2,143 |   | 2,742 |   |
|                                                 |                                                |    |                             |   |   |   |   |   |
| Noncash preferred  stock dividend accretion          | (1,712                                              | )       | (1,492                           | )      | (3,366 | ) | (2,933 | ) |
|                                                 |                                                     |    |                                  |   |  |   |  |   |
|                                                 |                                                |    |                             |   |   |   |   |   |
| Net income (loss)  applicable to common stockholders | $                                                   | (842    | )                                | $      | 495 |   | $ | (1,223 | ) | $ | (191 | ) |
|                                                 |                                                     |    |                                  |   |  |   |  |   |
|                                                      |                                                     |         |                                  |        |  |  |  |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Consolidated Statements of Stockholders’ Equity****(Inthousands, except share data)**

|                                        | **Common Stock**        |   |       |   |                                             |   |                                                             |   |                             |   |                                                                |   |
|---------------------------------------------|-------------------------|--------|------------|--------|--------------------------------------------------|--------|------------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------------------------------------------|--------|
|                                        | ****                    |   |       |   |                                             |   |                                                             |   |                             |   |                                                                |   |
|                                        | **Shares**              |   | **Amount** |   | **Additional** **Paid-in** **Capital** |   | **Notes** **Receivable** **For  Shares** **Sold** |   | **Accumulated** **Deficit** |   | **Accumulated** **Other** **Comprehensive** **Loss** |   | **Total** |   |
|                                        | ****                    |   | ****       |   | ****                                             |   | ****                                                             |   | ****                             |   | ****                                                                |   | **** |   |
| Balance,  December 31, 2000                 | 3,914,274               |   | $          | 39     |                                             | $      | 82,298                                                           |   | $                                | (2,552 | )                                                                   | $      | (5,595 | ) | $ | (1,687 | ) | $ | 72,503 |   |
| Comprehensive  income                       |                    |   |       |   |                                             |   |                                                             |   |                             |   |                                                                |   |   |   |
|                                        | Net  income             | — |       | — |                                             | — |                                                             | — |                             | 2,143  |                                                                | — |   | 2,143 |   |
|                                        | Translation  adjustment | — |       | — |                                             | — |                                                             | — |                             | — |                                                                | (1,296 | ) | (1,296 | ) |
|                                        |                    |   |       |   |                                             |   |                                                             |   |                             |   |                                                                |   |  |   |
|                                        |                    |   |       |   |                                             |   |                                                             |   |                             |   |                                                                |   | 847 |   |
|                                        |                    |   |       |   |                                             |   |                                                             |   |                             |   |                                                                |   |  |   |
| Noncash  preferred stock dividend accretion | —                  |   | —     |   | (3,366                                           | )      | —                                                           |   | —                           |   | —                                                              |   | (3,366 | ) |
| Compensatory  stock option expense          | —                  |   | —     |   | 236                                              |   | —                                                           |   | —                           |   | —                                                              |   | 236 |   |
| Notes  receivable interest accrued          | —                  |   | —     |   | —                                           |   | (70                                                              | )      | —                           |   | —                                                              |   | (70 | ) |
|                                        |                         |   |            |   |                                                  |   |                                                                  |   |                                  |   |                                                                     |   |  |   |
| Balance,  June 30, 2001 (Unaudited)         | 3,914,274               |   | $          | 39     |                                             | $      | 79,168                                                           |   | $                                | (2,622 | )                                                                   | $      | (3,452 | ) | $ | (2,983 | ) | $ | 70,150 |   |
|                                        |                         |   |            |   |                                                  |   |                                                                  |   |                                  |   |                                                                     |   |  |   |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Consolidated Statements of Cash Flows****(Inthousands)**

|                                              | **Six Months Ended**                                                              |    |
|---------------------------------------------------|-----------------------------------------------------------------------------------|---------|
|                                              | **June 30,**                                                                      |    |
|                                              | ****                                                                              |    |
|                                              | **2001**                                                                          |    | **2000** |   |
|                                              | ****                                                                              |    | **** |   |
|                                              | **(Unaudited)**                                                                   |    |
|                                              |                                                                              |    |
| **Cash flows from operating activities**          |                                                                              |    |   |   |
|                                              | Net income                                                                        | $       | 2,143 |   | $ | 2,742 |   |
|                                              | Adjustments to  reconcile net income to net cash provided by operating activities |    |   |   |   |
|                                              | Depreciation and  amortization                                                    | 16,925  |   | 13,474 |   |
|                                              | Minority interest in  preferred stock of subsidiary                               | 2,440   |   | — |   |
|                                              | Deferred income taxes                                                             | 1,406   |   | 1,407 |   |
|                                              | Other, net                                                                        | 597     |   | 522 |   |
|                                              | Changes in assets and  liabilities, net of effect from acquisitions               |    |   |   |   |
|                                              | Accounts receivable                                                               | (9,002  | ) | (11,684 | ) |
|                                              | Inventories                                                                       | (6,538  | ) | (7,661 | ) |
|                                              | Prepaid expenses and  other assets                                                | (1,299  | ) | (316 | ) |
|                                              | Accounts payable                                                                  | 3,828   |   | (768 | ) |
|                                              | Accrued liabilities                                                               | (11,908 | ) | (1,827 | ) |
|                                              | Income taxes payable                                                              | 2,223   |   | 1,199 |   |
|                                              | Other long-term  liabilities                                                      | 80      |   | (195 | ) |
|                                              |                                                                              |         |   |  |   |
|                                              | Net cash provided by  (used for) operating activities                             | 895     |   | (3,107 | ) |
|                                              |                                                                              |         |   |  |   |
|                                              |                                                                              |    |   |   |   |
| **Cash flows from investing  activities**         |                                                                              |    |   |   |
|                                              | Cash paid for  acquisitions, net of cash acquired                                 | (13,529 | ) | (76,861 | ) |
|                                              | Capital expenditures                                                              | (6,365  | ) | (12,635 | ) |
|                                              | Other, net                                                                        | 635     |   | 75 |   |
|                                              |                                                                              |         |   |  |   |
|                                              | Net cash used for  investing activities                                           | (19,259 | ) | (89,421 | ) |
|                                              |                                                                              |         |   |  |   |
|                                              |                                                                              |    |   |   |   |
| **Cash flows from financing  activities**         |                                                                              |    |   |   |
|                                              | Net senior credit  facility borrowings                                            | 21,400  |   | 65,000 |   |
|                                              | Proceeds from the sale  of preferred stock of subsidiary                          | —  |   | 25,000 |   |
|                                              | Proceeds from the sale  of common stock                                           | —  |   | 7,500 |   |
|                                              | Principal payments on  term debt, capitalized leases and other debt               | (3,035  | ) | (2,611 | ) |
|                                              | Deferred financing  costs                                                         | (580    | ) | (2,170 | ) |
|                                              | Other, net                                                                        | (93     | ) | (187 | ) |
|                                              |                                                                              |         |   |  |   |
|                                              | Net cash provided by  financing activities                                        | 17,692  |   | 92,532 |   |
|                                              |                                                                              |         |   |  |   |
| Effect of foreign  currency translation on cash   | 9                                                                                 |    | (5 | ) |
|                                              |                                                                              |    |   |   |
| Net decrease in cash  and cash equivalents        | (663                                                                              | )       | (1 | ) |
| Cash and cash  equivalents at beginning of period | 8,199                                                                             |    | 7,918 |   |
|                                              |                                                                                   |    |  |   |
| Cash and cash  equivalents at end of period       | $                                                                                 | 7,536   |   | $ | 7,917 |   |
|                                              |                                                                                   |    |  |   |
|                                                   |                                                                                   |         |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Condensed Notes to Consolidated Financial Statements****(Unaudited)**

**Note 1.              ConsolidatedFinancial Statements**

             Theconsolidated interim financial statements included in this report areunaudited. The Company believes the interim financial statements are presentedon a basis consistent with the audited financial statements. The Company alsobelieves that the interim financial statements contain all adjustments necessaryfor a fair statement of the results for such interim periods. All of theseadjustments are normal recurring adjustments. The results of operations forinterim periods do not necessarily predict the operating results for the fullyear. The consolidated balance sheet as of December 31, 2000 has been derivedfrom audited financial statements but does not include all disclosures requiredby generally accepted accounting principles as permitted by interim reportingrequirements. The information included in this report should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the audited financial statements and relatednotes included in the Company’s 2000 Form 10-K. Some reclassifications have beenmade to prior periods’ financial statements to conform to the 2001presentation.

**Note 2.              UnauditedPro Forma Results of Operations for 2000 Acquisitions**

             Unauditedpro forma consolidated results of operations are presented in the table belowfor the six months ended June 30, 2000. The pro forma results of operationsreflects the companies acquired during 2000, which are not reflected in theJune 30, 2000 historical results, as if all of the acquisitions wereconsummated as of January 1, 2000. Historical results for 2001, which reflectsthe companies acquired during 2000, are presented for comparability. Amountsare in thousands.

|                          | **Six  Months Ended  June 30,** |    |
|-------------------------------|---------------------------------|---------|
|                          |
|                          | ****                            |    |
|                          | **2001  Historical**            |    | **2000  Pro Forma** |   |
|                          |                            |
|                          | ****                            |    | **** |   |
|                          | **(Unaudited)**                 |    |
| Revenues                      | $                               | 201,511 |   | $ | 183,582 |   |
| EBITDA, as defined  (Note 10) | 45,791                          |    | 43,898 |   |
| Net income                    | 2,143                           |    | 845 |   |
|                               |                                 |         |  |  |  |  |

             Thepro forma results of operations do not purport to represent what actual resultswould have been if the transactions described above occurred on such dates orto project the results of operations for any future period. The aboveinformation reflects adjustments for inventory, depreciation, amortization,general and administrative expenses and interest expense based on the new costbasis and debt and capital structure of the Company following the acquisitions.

**Note 3.              Inventories**

             Inventoriesare comprised of the following as of June 30, 2001 and December 31, 2000(amounts in thousands):

|            | **June  30,  2001** |   | **December  31,  2000** |   |   |
|-----------------|---------------------|--------|-------------------------|--------|--------|
|            |                |   |
|            | ****                |   | ****                    |   |   |
|            | **(Unaudited)**     |   |                    |
| Raw materials   | $                   | 48,187 |                    | $      | 49,235 |   |   |
| Work-in process | 33,952              |   | 26,749                  |   |   |
| Finished goods  | 7,942               |   | 7,693                   |   |   |
|            |                     |   |                         |   |   |
|            | Total inventories   | $      | 90,081                  |   | $      | 83,677 |   |   |
|            |                |        |                    |        |   |   |
|                 |                     |        |                         |        |        |  |  |  |  |  |

             Inventoriedcosts are not in excess of estimated realizable value and include directengineering, production and tooling costs, and applicable manufacturingoverhead. In accordance with industry practice, inventoried costs includeamounts relating to programs and contracts with long production cycles.Included above are program costs, principally engineering, of $13,391,000 atJune 30, 2001 and $8,603,000 at December 31, 2000 related to long-termcontracts that will be recoverable based on future sales. Periodic assessmentsare performed to ensure recoverability of program costs and adjustments aremade, if necessary, to reduce inventoried costs to estimated realizable value.No adjustments were required in 2001 and 2000.

**Note 4.              AccruedLiabilities**

             Accruedliabilities are comprised of the following as of June 30, 2001 and December 31,2000 (amounts in thousands):

|                                                             | **June 30,**               |            | **December 31,** |   |   |
|------------------------------------------------------------------|----------------------------|-----------------|------------------|--------|--------|
|                                                             | **2001**                   |            | **2000**         |   |   |
|                                                             | ****                       |            | ****             |   |   |
|                                                             |                       | **(Unaudited)** |             |   |
| Acquisition related  contingent consideration                    | $                          | 5,829           |             | $      | 20,154 |   |   |
| Customer advances and  deposits                                  | 9,519                      |            | 14,082           |   |   |
| Salaries, wages,  compensated absences and payroll related taxes | 12,492                     |            | 15,337           |   |   |
| Accrued interest                                                 | 5,125                      |            | 3,730            |   |   |
| Other accrued  liabilities                                       | 11,095                     |            | 17,169           |   |   |
|                                                             |                            |            |                  |   |   |
|                                                             | Total accrued  liabilities | $               | 44,060           |   | $      | 70,472 |   |   |
|                                                             |                       |                 |             |        |   |   |
|                                                                  |                            |                 |                  |        |        |  |  |  |  |  |  |

**Note 5.              Long-TermDebt**

             Long-termdebt includes the following amounts as of June 30, 2001 and December 31, 2000(amounts in thousands):

|                                                                                             | **June 30,**                                         |            | **December 31,** |    |   |
|--------------------------------------------------------------------------------------------------|------------------------------------------------------|-----------------|------------------|---------|--------|
|                                                                                             | **2001**                                             |            | **2000**         |    |   |
|                                                                                             | ****                                                 |            | ****             |    |   |
|                                                                                             |                                                 | **(Unaudited)** |             |    |
| Senior credit facility                                                                           |                                                 |            |             |    |   |
|                                                                                             | $25 million working capital revolving line of credit | $               | 1,800            |    | $      | — |   |   |
|                                                                                             | $25 million acquisition revolving line of credit     | 12,000          |             | 12,400  |   |   |
|                                                                                             | Term loans                                           | 281,813         |             | 263,443 |   |   |
|                                                                                             |                                                 |            |             |    |   |   |
| 12% senior  subordinated notes                                                                   | 100,000                                              |            | 100,000          |    |   |
|                                                                                             |                                                 |            |             |    |   |
| Capital lease  obligations and equipment term debt financing, secured by property and  equipment | 6,955                                                |            | 5,231            |    |   |
|                                                                                             |                                                 |            |             |    |   |
| Other indebtedness                                                                               | 1,697                                                |            | 2,205            |    |   |
|                                                                                             |                                                      |            |                  |    |   |
|                                                                                             | Total long-term debt                                 | 404,265         |             | 383,279 |   |   |
|                                                                                             | Less current portion                                 | (13,168         | )                | (9,289  | )      |   |
|                                                                                             |                                                 |                 |             |         |   |   |
|                                                                                             | Long-term debt, less  current portion                | $               | 391,097          |    | $      | 373,990 |   |   |
|                                                                                             |                                                 |                 |             |         |   |   |
|                                                                                                  |                                                      |                 |                  |         |        |  |  |  |  |  |  |  |

 

             InApril 2001, the Company amended its senior credit facility and borrowed theremaining $20,000,000 of funds committed under its term loan facility. The netproceeds were used to repay amounts then outstanding under the acquisitionrevolving line of credit. Principal payments for the additional term loan aredue in $50,000 quarterly installments through 2005 and $4,763,000 quarterlyinstallments through 2006. The term loan bears interest, at the Company’soption, based on a margin of either 2.75% over the prime rate or 4.00% over theEurodollar rate.

**Note 6.              IncomeTaxes**

             Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to income before income taxes primarilydue to the effects of state and foreign income taxes and non-deductibleexpenses, principally goodwill amortization and minority interest in preferredstock of subsidiary. The difference in the effective tax rates between periodsis mostly a result of the relationship of non-deductible expenses to incomebefore income taxes.

**Note 7.              CapitalStructure**

**Mandatorily Redeemable Preferred Stock**

             Thetable below summarizes the increase in mandatorily redeemable preferred stockduring the six months ended June 30, 2001.

|                                                         | **DeCrane Aircraft** **16% Preferred Stock**    |   | **DeCrane Holdings** **14%  Preferred Stock** |   |
|--------------------------------------------------------------|------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                         | ****                                                 |   | ****                                               |   |
|                                                         | **Number** **of** **Shares**               |   | **Mandatory** **Redemption** **Value**   |   | **Unamortized** **Issuance** **Discount** |   | **Net** **Book** **Value** |   | **Number** **of** **Shares** |   | **Mandatory** **Redemption** **Value** |   |
|                                                         |                                                 |   |                                               |   |   |   |
|                                                         |                                                 |   |                                               |   |   |   |
|                                                         | ****                                                 |   | ****                                               |   | **** |   | **** |   | **** |   | **** |   |
|                                                         | **(in thousands, except  share and per share data)** |   |
| Balance,  December 31, 2000                                  | 270,400                                              |   | $                                                  | 27,040 |   | $ | (3,861 | ) | $ | 23,179 |   | 342,417 |   | $ | 47,252 |   |
| Accrued  dividends and redemption value accretion            | 22,065                                               |   | 2,206                                              |   | 234 |   | 2,440 |   | — |   | — |   |
| Noncash  dividend accretion                                  | —                                               |   | —                                             |   | — |   | — |   | — |   | 3,366 |   |
|                                                         |                                                      |   |                                                    |   |  |   |  |   |  |   |  |   |
| Balance,  June 30, 2001 (Unaudited)                          | 292,465                                              |   | $                                                  | 29,246 |   | $ | (3,627 | ) | $ | 25,619 |   | 342,417 |   | $ | 50,618 |   |
|                                                         |                                                      |   |                                                    |   |  |   |  |   |  |   |  |   |
| Per  share liquidation value as of June 30, 2001 (Unaudited) |                                                 |   | $                                                  | 100.00 |   |   |   |   |   |   |   | $ | 147.83 |   |
|                                                         |                                                 |   |                                                    |   |   |   |   |   |   |   |  |   |

             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*

             Holdersof the preferred stock are entitled to receive, when, as and if declared, dividendsat a rate equal to 16% per annum. Prior to June 30, 2005, DeCrane Aircraft may,at its option, pay dividends either in cash or by the issuance of additionalshares of preferred stock. For the six months ended June 30, 2001, DeCraneAircraft elected to issue 22,065 additional shares in lieu of cash dividendpayments; such shares have been reflected as a component of minority interestin preferred stock of subsidiary.

*DeCrane Holdings 14% Mandatorily Redeemable Preferred Stock*

             Holdersof the preferred stock are entitled to receive, when, as and if declared,dividends at a rate equal to 14% per annum. Prior to September 30, 2005,dividends are not paid in cash but instead accrete to the liquidation value ofthe preferred stock, which, in turn increases the redemption obligation. Forthe six months ended June 30, 2001, the liquidation preference on the DeCraneHoldings preferred stock increased by $3,366,000 to reflect the noncashdividend accretion.

**Note 8.              Commitmentsand Contingencies**

**Contingent Acquisition Consideration**

             Thedeterminable amounts of the Company’s remaining maximum contingentconsideration payment obligations, as of June 30, 2001, are summarized below.The contingent consideration is payable based upon the acquired companies levelof attainment of their defined performance criteria in future periods andexcludes amounts earned and recorded through June 30, 2001 (Notes 4 and 9).Provided the defined performance criteria is attained for the future yearsending December 31, the Company’s determinable maximum contingent considerationpayment obligation will be (amounts in thousands):

|                              | **(Unaudited)**                        |   |
|-----------------------------------|----------------------------------------|--------|
| For the year ending  December 31, |                                   |   |
|                              | 2001                                   | $      | 1,450 |   |
|                              | 2002                                   | 600    |   |
|                              |                                   |        |   |
|                              | Total maximum  determinable obligation | $      | 2,050 |   |
|                              |                                   |        |   |
|                                   |                                        |        |  |  |  |

             Contingentconsideration, if any, is payable during the first quarter of the followingyear.

**Note 9.              ConsolidatedStatements of Cash Flows**

             Thefollowing information supplements the Company’s consolidated statements of cashflows (amounts in thousands):

|                                                                                  | **Six Months Ended****June 30,**                        |       |
|---------------------------------------------------------------------------------------|---------------------------------------------------------|------------|
|                                                                                  | ****                                                    |       |
|                                                                                  | **2001**                                                |       | **2000** |   |
|                                                                                  | ****                                                    |       | **** |   |
|                                                                                  | **(Unaudited)**                                         | ** ** |
| Components of cash  paid for acquisitions                                             |                                                    |       |   |   |
|                                                                                  | Fair value of assets  acquired                          | $          | — |   | $ | 62,381 |   |
|                                                                                  | Liabilities assumed                                     | —     |   | (14,951 | ) |
|                                                                                  |                                                    |            |   |  |   |
|                                                                                  | Cash paid                                               | —     |   | 47,430 |   |
|                                                                                  | Less cash acquired                                      | —     |   | (173 | ) |
|                                                                                  |                                                    |            |   |  |   |
|                                                                                  | Net cash paid for  companies acquired during the period |       |   | 47,257 |   |
|                                                                                  |                                                    |       |   |   |   |
| Contingent  consideration paid for previously completed acquisitions                  | 17,075                                                  |       | 29,325 |   |
| Cash purchase price  reductions received related to previously completed acquisitions | (3,718                                                  | )          | — |   |
| Additional acquisition  related expenses                                              | 172                                                     |       | 279 |   |
|                                                                                  |                                                         |       |  |   |
|                                                                                  | Total cash paid for  acquisitions                       | $          | 13,529 |   | $ | 76,861 |   |
|                                                                                  |                                                         |       |  |   |
|                                                                                       |                                                         |            |  |  |  |  |  |  |  |  |

             Duringthe six months ended June 30, 2001, the Company settled its asserted claimsagainst the sellers of two companies acquired in 2000 for breach ofrepresentation and warranty provisions contained in the purchase agreements.The Company received $3,718,000 from the sellers upon entering into thesettlement agreements, which also provided that the Company pay in 2002 aminimum of $2,750,000 of previously contingent consideration for the yearending December 31, 2001. The $2,750,000 minimum contingent considerationpayable is reflected as an accrued liability as of June 30, 2001.

**Note 10.            BusinessSegment Information**

             TheCompany supplies products and services to the general aviation industry. TheCompany’s subsidiaries are organized into three groups, each of which arestrategic businesses that are managed separately because each businessdevelops, manufactures and sells distinct products and services. The groups anda description of their businesses are as follows:

|   | • | *Cabin  Management* – provides interior  cabin components for the corporate aircraft market, including furniture,  cabinetry, seats and in-flight entertainment systems; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                          |
|   | • | *Specialty  Avionics* – designs, engineers  and manufactures electronic components, display devices and interconnect  components and assemblies; and                     |
|   |   |                                                                                                                                                                          |
|   | • | *Systems  Integration* – provides auxiliary  fuel tanks, auxiliary power units and system integration services.                                                          |

             Managementutilizes more than one measurement to evaluate group performance and allocateresources, however, EBITDA is considered to be the primary measurement ofoverall group economic returns and cash flows. Management defines EBITDA asearnings before interest, income taxes, depreciation and amortization,restructuring and asset impairment charges, acquisition related charges andother noncash and nonoperating charges. This is consistent with the manner inwhich the Company’s lenders and ultimate investors measure its overallperformance.

             Theaccounting policies of the groups are substantially the same as those describedin the summary of significant accounting policies in Note 1 to the auditedfinancial statements. Some transactions are recorded at the Company’s corporateheadquarters and are not allocated to the groups, such as, most of theCompany’s cash and cash equivalents, debt and related net interest expense,corporate headquarters costs and income taxes.

|       | **Three Months Ended****June 30,** |   | **Six Months Ended****June 30,** |   |
|------------|------------------------------------|--------|----------------------------------|--------|
|       | ****                               |   | ****                             |   |
|       | **2001**                           |   | **2000**                         |   | **2001** |   | **2000** |   |
|       | ****                               |   | ****                             |   | **** |   | **** |   |
|       | **(Unaudited)**                    |   |
| Revenues   |                               |   |                             |   |   |   |   |   |
|       | Cabin Management                   | $      | 53,512                           |   | $ | 40,554 |   | $ | 104,871 |   | $ | 76,778 |   |
|       | Specialty Avionics                 | 31,824 |                             | 26,045 |   | 63,097 |   | 52,842 |   |
|       | Systems Integration                | 17,761 |                             | 15,783 |   | 34,495 |   | 32,392 |   |
|       | Inter-group  elimination (1)       | (737   | )                                | (288   | ) | (952 | ) | (740 | ) |
|       |                               |        |                             |        |   |  |   |  |   |
|       | Consolidated totals                | $      | 102,360                          |   | $ | 82,094 |   | $ | 201,511 |   | $ | 161,272 |   |
|       |                               |        |                             |        |   |  |   |  |   |
|       |                               |   |                             |   |   |   |   |   |   |
| EBITDA (2) |                               |   |                             |   |   |   |   |   |
|       | Cabin Management                   | $      | 9,690                            |   | $ | 11,840 |   | $ | 23,088 |   | $ | 21,381 |   |
|       | Specialty Avionics                 | 9,402  |                             | 5,998  |   | 17,229 |   | 12,131 |   |
|       | Systems Integration                | 4,778  |                             | 3,514  |   | 8,874 |   | 6,956 |   |
|       | Corporate (3)                      | (1,365 | )                                | (1,542 | ) | (3,301 | ) | (3,345 | ) |
|       | Inter-group  elimination (4)       | (99    | )                                | 131    |   | (99 | ) | — |   |
|       |                               |        |                             |        |   |  |   |  |   |
|       | Consolidated totals                | $      | 22,406                           |   | $ | 19,941 |   | $ | 45,791 |   | $ | 37,123 |   |
|       |                               |        |                             |        |   |  |   |  |   |
|            |                                    |        |                                  |        |  |  |  |  |  |  |  |  |  |  |  |

 

| Total assets (as of  period end) |                         |    |    |    |
|----------------------------------|------------------------------|---------|---------|---------|
|                             | Cabin Management             | $       | 319,590 |    | $ | 269,537 |   |
|                             | Specialty Avionics           | 225,199 |    | 221,427 |   |
|                             | Systems Integration          | 78,498  |    | 85,014  |   |
|                             | Corporate (5)                | 41,014  |    | 36,680  |   |
|                             | Inter-group  elimination (6) | (197    | )       | (723    | ) |
|                             |                              |    |         |    |
|                             | Consolidated totals          | $       | 664,104 |    | $ | 611,935 |   |
|                             |                         |         |    |         |   |
|                                  |                              |         |         |         |  |  |  |  |

----

| (1)    | Inter-group  sales are accounted for at prices comparable to sales to unaffiliated  customers, and are eliminated in consolidation. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                |
| (2)    | The  table below reconciles EBITDA to consolidated income from operations and  income before income taxes (amounts in thousands).   |

 

|                                                | **Three Months Ended****June 30,**       |   | **Six Months Ended****June 30,** |   |
|-----------------------------------------------------|------------------------------------------|--------|----------------------------------|--------|
|                                                | ****                                     |   | ****                             |   |
|                                                | **2001**                                 |   | **2000**                         |   | **2001** |   | **2000** |   |
|                                                | ****                                     |   | ****                             |   | **** |   | **** |   |
|                                                | **(Unaudited)**                          |   |
| Consolidated EBITDA                                 | $                                        | 22,406 |                             | $      | 19,941 |   | $ | 45,791 |   | $ | 37,123 |   |
| Depreciation and  amortization (a)                  | (8,153                                   | )      | (6,171                           | )      | (15,848 | ) | (12,371 | ) |
| Acquisition related  charges not capitalized        | (22                                      | )      | (3                               | )      | (103 | ) | (7 | ) |
| Other noncash charges                               | (46                                      | )      | (86                              | )      | (236 | ) | (171 | ) |
|                                                |                                          |   |                                  |   |  |   |  |   |
|                                                | Consolidated income  from operations     | 14,185 |                             | 13,681 |   | 29,604 |   | 24,574 |   |
|                                                |                                     |   |                             |   |   |   |   |   |   |
|                                                |                                     |   |                             |   |   |   |   |   |   |
| Interest expense                                    | (9,875                                   | )      | (10,037                          | )      | (20,330 | ) | (18,713 | ) |
| Minority interest in  preferred stock of subsidiary | (1,241                                   | )      | —                           |   | (2,440 | ) | — |   |
| Other expenses, net                                 | (12                                      | )      | (109                             | )      | (117 | ) | (173 | ) |
|                                                |                                          |   |                                  |   |  |   |  |   |
|                                                | Consolidated income  before income taxes | $      | 3,057                            |   | $ | 3,535 |   | $ | 6,717 |   | $ | 5,688 |   |
|                                                |                                     |        |                             |        |   |  |   |  |   |
|                                                |                                     |   |                             |   |   |   |   |   |   |

 

|   |                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|-------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (a)                                                                                                                           | Reflects depreciation and  amortization of long-lived assets, goodwill and other intangible assets.  Excludes amortization of deferred financing costs, which are classified as a  component of interest expense, of $524,000 and $500,000 for the three months  ended June 30, 2001 and 2000, respectively, and $1,077,000 and  $1,103,000 for the six months ended June 30, 2001 and 2000,  respectively. |   |
|   |                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
| (3)    | Reflects  the Company’s corporate headquarters costs and expenses not allocated to the  groups.                          |
|   |                                                                                                                          |
| (4)    | Reflects  elimination of the effect of inter-group profits in inventory.                                                      |
|   |                                                                                                                          |
| (5)    | Reflects  the Company’s corporate headquarters assets, excluding investments in and  notes receivable from subsidiaries. |
|   |                                                                                                                          |
| (6)    | Reflects  elimination of inter-group receivables and profits in inventory as of period  end.                                  |
|        |                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |

 

**Note 11.            RecentlyIssued Accounting Pronouncements**

             InJune 2001, the Financial Accounting Standards Board issued SFAS No. 141,“Business Combinations” and SFAS No. 142, “Goodwill and Other IntangibleAssets.”

             SFASNo. 141 establishes accounting and reporting standards for businesscombinations. SFAS No. 141 requires that all business combinations beaccounted for using the purchase method of accounting and provides criteria forthe initial recognition and measurement of goodwill and other intangibleassets. SFAS No. 141 is effective for all business combinations initiatedor completed after June 30, 2001. For business combinations completed prior toJuly 1, 2001, SFAS No. 141 is effective concurrent with the adoption ofSFAS No. 142.

             SFASNo. 142 establishes accounting and reporting standards for goodwill andother intangible assets subsequent to their acquisition. SFAS No. 142eliminates the current requirement to amortize goodwill and otherindefinite-lived intangible assets requiring instead periodic impairment testingwith a loss charged to the results of operation in the periods in whichimpairment occurs. Finite-lived intangible assets are amortized and are alsosubject to periodic impairment testing. Adoption of SFAS No. 142 isrequired for the Company’s fiscal year beginning January 1, 2002.

             TheCompany is currently evaluating the impact the new accounting standards willhave on its financial position and results of operations upon adoption onJanuary 1, 2002; there will be no impact on cash flows. While the full, net oftax, impact has yet to be determined, adoption of the new standards will resultin the following:

|   | • | Under the  criteria established in SFAS No. 141, the values ascribed to the  assembled workforces acquired are not recognized as an intangible asset apart  from goodwill. As a result, the net book value ascribed to the assembled  workforces, net of deferred income tax liabilities, will be reclassified to  goodwill as of January 1, 2002. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | Adoption  of SFAS No. 142 on January 1, 2002 will reduce amortization expense in  future periods. If SFAS No. 142 had been effective as of the  beginning of 2001, goodwill and assembled workforces amortization totaling  $7,121,000 for the six months ended June 30, 2001 would have been eliminated.                                |

             TheCompany has until June 30, 2002 to complete its transitional impairment testingassociated with adopting SFAS No. 142. The amount of impairmentlosses recognizable upon adoption, if any, is not known at this time.

**Note 12.            SupplementalCondensed Consolidating Financial Information**

             Inconjunction with the senior credit facility and 12% senior subordinated notesdescribed in Note 5, the following condensed consolidating financialinformation is presented segregating DeCrane Aircraft, as the issuer, andguarantor and non-guarantor subsidiaries. The accompanying financialinformation in the guarantor subsidiaries column reflects the financialposition, results of operations and cash flows for those subsidiariesguaranteeing the senior credit facility and the notes. DeCrane Holdings in nota guarantor of either the senior credit facility or the notes and is thereforereflected in the non-guarantor subsidiary column.

             Theguarantor subsidiaries are wholly-owned subsidiaries of the DeCrane Aircraftand their guarantees are full and unconditional on a joint and several basis.There are no restrictions on the ability of the guarantor subsidiaries totransfer funds to the issuer in the form of cash dividends, loans or advances.Separate financial statements of the guarantor subsidiaries are not presentedbecause management believes that such financial statements would not bematerial to investors. Investments in subsidiaries in the following condensedconsolidating financial information are accounted for under the equity methodof accounting. Consolidating adjustments include the following:
(1)         Elimination of investments insubsidiaries.

(2)         Elimination of intercompany accounts.

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

(4)         Elimination of equity in earnings ofsubsidiaries.

**BalanceSheets**
 **June 30, 2001 (Unaudited)**  ****    **Guarantor** **Non-Guarantor** **Consolidating**  **Consolidated**  **Issuer** **Subsidiaries** **Subsidiaries** **Adjustments**  **Total**  **** **** **** ****  ****  **(in thousands)**    **Assets**           Current assets            Cash and cash  equivalents$7,289 $176 $71 $—  $7,536  Accounts receivable,  net— 60,358 1,115 —  61,473  Inventories— 88,387 1,694 —  90,081  Other current assets13,774 1,636 159 —  15,569          Total current assets21,063 150,557 3,039 —  174,659              Property and  equipment, net3,745 54,913 2,641 —  61,299 Other assets,  principally intangibles, net16,206 402,750 9,190 —  428,146 Investments in  subsidiaries406,347 20,860 126,373 (553,580)(1)— Intercompany  receivables252,088 91,830 4,889 (348,807)(2)—         Total assets$699,449 $720,910 $146,132 $(902,387) $664,104                       **Liabilities, Mandatorily  Redeemable Preferred Stock and Stockholders’ Equity**   Current liabilities             Current portion of  long-term debt$12,003 $1,147 $18 $—  $13,168   Other current  liabilities23,270 47,664 1,349 —  72,283           Total current  liabilities35,273 48,811 1,367 —  85,451               Long-term debt384,404 6,693 — —  391,097  Intercompany payables91,830 256,977 — (348,807)(2)—  Other long-term  liabilities38,572 2,082 515 —  41,169               Minority  interest in preferred stock of subsidiary25,619 — —  —  25,619  Mandatorily  redeemable preferred stock— — 50,618 —  50,618          Stockholders’ equity             Paid-in capital123,751 338,309 94,647 (480,122)(1)76,585   Retained earnings  (deficit)— 68,038 1,968 (73,458)(1)(3,452) Accumulated  other comprehensive loss— — (2,983)—  (2,983)           Total stockholders’  equity123,751 406,347 93,632 (553,580) 70,150            Total liabilities,  mandatorily redeemable preferred stock and stockholders’ equity$699,449 $720,910 $146,132 $(902,387) $664,104          
 

 
 **December 31, 2000**  ****    **Guarantor** **Non-Guarantor** **Consolidating** **Consolidated**  **Issuer** **Subsidiaries** **Subsidiaries** **Adjustments** **Total**  ****** ******** ******** ******** ******** ** **(in thousands)** **Assets**          Current assets           Cash and cash  equivalents$7,553 $233 $413 $— $  8,199  Accounts receivable,  net— 51,396 1,735 — 53,131  Inventories— 82,013 1,664 — 83,677  Other current assets14,814 1,118 145 — 16,077        Total current assets22,367 134,760 3,957 — 161,084 Property and  equipment, net4,423 52,303 2,765 — 59,491 Other assets,  principally intangibles, net16,514 412,730 10,338 — 439,582 Investments in  subsidiaries394,794 20,739 123,994 (539,527)(1)— Intercompany  receivables251,725 92,991 3,863 (348,579)(2)—        Total assets$689,823 $713,523 $144,917 $(888,106)$  660,157                 ** ****Liabilities, Mandatorily  Redeemable Preferred Stock and Stockholders’ Equity**** ** ** ** ** **Current liabilities           Current portion of  long-term debt$7,997 $1,266 $26 $— $  9,289  Other current  liabilities38,635 54,384 1,262 — 94,281        Total current  liabilities46,632 55,650 1,288 — 103,570            Long-term debt368,837 5,147 6 — 373,990 Intercompany payables92,991 255,588 — (348,579)(2)— Other long-term  liabilities36,742 2,344 577 — 39,663            Minority interest in  preferred stock of subsidiary23,179 — — — 23,179 Mandatorily redeemable  preferred stock— — 47,252 — 47,252                  Stockholders’ equity           Paid-in capital124,763 338,729 97,777 (481,484)(1)79,785  Retained earnings  (deficit)(3,321)56,065 (296)(58,043)(1)(5,595) Accumulated other  comprehensive loss— — (1,687)— (1,687)       Total stockholders’  equity121,442 394,794 95,794 (539,527)72,503         Total liabilities,  mandatorily redeemable preferred stock and stockholders’ equity$689,823 $713,523 $144,917 $(888,106)$  660,157        
 

 

**Statementsof Operations**
 **Six  Months Ended June 30, 2001 (Unaudited)**  ****  **Issuer** **Guarantor  Subsidiaries** **Non-Guarantor  Subsidiaries** **Consolidating  Adjustments** **Consolidated  Total**   **** **** **** ****  **(in  thousands)**Revenues$— $199,741 $5,810 $(4,040)(3)$201,511 Cost  of sales— 132,914 5,016 (4,040)(3)133,890        Gross  profit— 66,827 794 — 67,621 Selling,  general and administrative expenses4,361 23,293 442 — 28,096 Amortization  of intangible assets101 9,618 202 — 9,921 Interest  expense19,786 531 13 — 20,330 Minority  interest in preferred stock of subsidiary— — 2,440 — 2,440 Intercompany  charges(10,581)10,581 — — — Equity  in earnings of subsidiaries(11,973)(214)(4,583)16,770(4)— Other  expenses (income), net161 81 (125)— 117 Provision  for income taxes (benefit)(6,438)10,964 48 — 4,574        Net  income$4,583 $11,973 $2,357 $(16,770)$2,143       
 
 **Six Months Ended June 30, 2000 (Unaudited)**  ****     **Guarantor** **Non-Guarantor** **Consolidating** **Consolidated**  **Issuer** **Subsidiaries** **Subsidiaries** **Adjustments** **Total**  **** **** **** **** ****  **(in thousands)** Revenues$— $160,097 $6,261 $(5,086)(3)$161,272 Cost of sales— 107,707 4,888 (5,086)(3)107,509        Gross profit— 52,390 1,373 — 53,763 Selling, general and  administrative expenses3,745 16,537 657 — 20,939 Amortization of  intangible assets101 7,932 217 — 8,250 Interest expense18,524 178 11 — 18,713 Intercompany charges(6,822)6,822 — — — Equity in earnings of  subsidiaries(11,822)(391)(2,742)14,955(4)— Other expenses, net114 30 29 — 173 Provision for income  taxes (benefit)(6,582)9,460 68 — 2,946        Net income$2,742 $11,822 $3,133 $(14,955)$2,742       
 

 

**Statementsof Cash Flows**
 **Six Months Ended June 30, 2001 (Unaudited)**  ****    **Guarantor** **Non-Guarantor** **Consolidating** **Consolidated**  **Issuer** **Subsidiaries** **Subsidiaries** **Adjustments** **Total**  **** **** **** **** ****  **(in thousands)** **Cash flows from operating activities**          Net income$4,583 $11,973 $2,357 $(16,770)(4)$2,143 Noncash adjustments           Equity in earnings of  subsidiaries(11,973)(214)(4,583)16,770)(4)—  Other noncash  adjustments3,457 14,902 3,009 — 21,368 Changes in working  capital(1,686)(20,293)(637)— (22,616)       Net cash provided by  (used for) operating activities(5,619)6,368 146 — 895                  **Cash flows from investing  activities** ** ** ** ** ** ** ** ** ** **Cash paid for acquisitions, net of  cash acquired(13,529)— — — (13,529)Capital expenditures  and other(109)(5,135)(486)— (5,730)       Net cash used for  investing activities(13,638)(5,135)(486)— (19,259)                 **Cash flows from financing  activities**          Net senior credit  facility borrowings21,400 — — — 21,400 Principal payments on  term debt, capitalized leases and other debt(1,827)(1,197)(11)— (3,035)Deferred financing  costs(580)— — — (580)Other, net— (93)— — (93)       Net cash provided by  (used for) financing activities18,993 (1,290)(11)— 17,692       Effect of foreign  currency translation on cash— — 9 — 9       Net decrease in cash  and equivalents(264)(57)(342)— (663)Cash and equivalents  at beginning of period7,553 233 413 — 8,199       Cash and equivalents  at end of period$7,289 $176 $71 $— $7,536       
 
 **Six  Months Ended June 30, 2000 (Unaudited)**  ****  **Issuer** **Guarantor  Subsidiaries** **Non-Guarantor  Subsidiaries** **Consolidating  Adjustments** **Consolidated  Total**  **** **** **** **** ****  **(in  thousands)** **Cash flows from operating activities**          Net income$2,742 $11,822 $3,133 $(14,955)(4)$2,742 Noncash adjustments           Equity in earnings of subsidiaries(11,822)(391)(2,742)14,955)(4)—  Other  noncash adjustments2,936 11,985 482 — 15,403 Changes  in working capital(6,141)(14,489)(622)— (21,252)       Net  cash provided by (used for) operating activities(12,285)8,927 251 — (3,107)                 **Cash  flows from investing activities**          Cash  paid for acquisitions(77,034)173 — — (76,861)Investment  in subsidiary— — (7,500)7,500)(1)— Capital  expenditures and other(3,626)(8,572)(362)— (12,560)       Net  cash used for investing activities(80,660)(8,399)(7,862)7,500 (89,421)                 **Cash flows  from financing activities**          Net  senior credit facility borrowings65,000 — — — 65,000 Proceeds  from sale of preferred stock25,000 — — — 25,000 Capital  contribution to subsidiary of proceeds from sale of common stock7,500 — 7,500 (7,500)(1)7,500 Principal  payments on term debt, capitalized leases and other debt(2,266)(332)(13)— (2,611)Deferred  financing costs(2,170)— — — (2,170)Other,  net(50)(137)— — (187)       Net  cash provided by (used for) financing activities93,014 (469)7,487 (7,500)92,532       Effect  of foreign currency translation on cash— — (5)— (5)      Net  increase (decrease) in cash and equivalents69 59 (129)— (1)Cash  and equivalents at beginning of period7,839 (323)402 — 7,918       Cash  and equivalents at end of period$7,908 $(264)$273 $— $7,917       
**ITEM 2.**            **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

             Thefollowing discussions should be read in conjunction with our financialstatements and accompanying notes included in this report.

**Overview**

             Ourfinancial position and results of operations have been affected by our historyof acquisitions. As a result, our historical financial statements do notreflect the financial position and results of operations of our currentbusinesses. Our most recent acquisitions, which affect the comparability of thehistorical financial condition and results of operations described herein,consist of our Cabin Management Group’s acquisitions of Carl F. Booth & Co.on May 11, 2000 and ERDA on June 30, 2000.

             Ourhistorical financial statements reflect the financial position, results of operationsand cash flows of the acquired businesses subsequent to their respectiveacquisition dates.

**Results of Operations**
**Three Months Ended June 30, 2001 Compared to ThreeMonths Ended June 30, 2000**
**             Revenues. **Revenues increased $20.3 million, or 24.7%, to$102.4 million for the three months ended June 30, 2001 from $82.1 million forthe three months ended June 30, 2000. By segment, revenues changed as follows:
 **Increase  (Decrease)  From 2000**  ****  **Amount** **Percent**  **** ****  **(in millions)**   Cabin Management$13.0 32.0%Specialty Avionics5.8 22.2 Systems Integration2.0 12.5 Inter-group  elimination(0.5)        Total$20.3        **Cabin Management. *Revenues increased by $13.0 million, or 32.0% overthe prior year, due to:
•the  inclusion of $9.0 million of revenues resulting from our acquisitions of Carl  F. Booth & Co. and ERDA in 2000; and  •a  $4.0 million increase in cabin furniture and related products revenues  reflecting primarily a higher volume of corporate jet production by the  aircraft manufacturers.  *Specialty Avionics.** *Revenues increased by $5.8 million, or 22.2% over the prior year, due  to:    •a  $4.1 million increase in cockpit audio, communications, lighting and power  and control devices revenues; and    •a $1.7 million  revenue increase resulting from higher volume for our interconnect products.    *Systems Integration.** *Revenues increased by $2.0 million, or 12.5% over the prior year, due  to:    •a  $2.1 million increase in auxiliary fuel tank system and power unit revenues;  offset by    •a  $0.1 million decrease in cabin and flight deck systems integration revenues. 
**             Grossprofit.**** **Gross profit increased $5.0 million, or 18.0%, to$32.6 million for the three months ended June 30, 2001. Gross profit as apercent of revenues decreased to 31.8% for the three months ended June 30, 2001from 33.6% for the same period last year primarily as a result of reducedprofit margins in our Cabin Management group. By segment, gross profit changedas follows:
 **Increase  (Decrease)  From 2000**  ****  **Amount** **Percent**  **** ****  **(in  millions)**   Cabin Management$(1.3)(8.8)%Specialty Avionics4.7 63.2 Systems Integration1.7 31.0 Inter-group  elimination(0.1)       Total$5.0       
*Cabin Management.** *Grossprofit decreased by $1.3 million, or 8.8% from the prior year, primarily dueto:
•a  $2.2 million increase in gross profit resulting from our 2000 acquisitions;  offset by  •a $3.9 million  decrease resulting from nonrecurring start up costs associated with four new  programs and the rationalization of production between manufacturing  facilities.  *Specialty Avionics.** *Gross profit increased by $4.7 million, or 63.2% over the prior year,  due to:  •a  $2.9 million increase related to a shift in product mix to items with higher  margins;  •a  $1.6 million increase related to higher volume for our cockpit audio,  communications, lighting and power and control devices products; and  •a  $0.3 million increase related to higher volume for our interconnect products;  offset by  •a  $0.1 million decrease related to labor inefficiencies caused higher  electrical energy costs at our California-based facilities.
*SystemsIntegration.** *Gross profit increased by $1.7 million, or 31.0%over the prior year, due to:
•a  $1.0 million increase due to higher auxiliary fuel tank systems volume; and  •a $0.7 million  increase resulting, in part, from improved operating results subsequent to  our fourth quarter 1999 restructuring.
**             Selling,general and administrative expenses.**** **Selling, general and administrative expenses increased $3.5 million, or35.8%, to $13.4 million for the three months ended June 30, 2001, from $9.9million for the same period last year. SG&A expenses as a percent ofrevenues increased to 13.1% for the three months ended June 30, 2001 comparedto 12.1% for the same period last year. By segment, SG&A expenses changedas follows:
 **Increase  (Decrease)  From 2000**  ****  **Amount** **Percent**  **** ****  **(in millions)**   Cabin Management$1.9 56.2%Specialty Avionics1.2 48.3 Systems Integration0.3 12.5 Corporate0.1 9.3      Total$3.5        
*Cabin Management. *SG&A expenses increased by $1.9 million, or56.2% over the prior year, due to:
•a  $1.0 million increase in expenses resulting from our 2000 acquisitions; and  •a $0.9 million  increase in expenses to support increased production and new programs.  *Specialty Avionics.** *SG&A expenses increased by $1.2 million, or 48.3% over the prior  year, due to:    •a  $0.5 million increase in research and developments costs; and    •a $0.7 million  increase in labor and employee benefit costs. 
*             SystemsIntegration.** *SG&A expenses increased by $0.3 million, or12.5% over the prior year, due to refocusing our cabin and flight deck systemsintegration services to product offerings requiring higher levels of sales andmarketing, program management and customer service.

*             Corporate.** *SG&A expenses increased by $0.1 million, or9.3% over the prior year, primarily due to an increase in depreciation expense.

**             Depreciationand amortization of intangibles.**** **Depreciation and amortization expense, which includes amortization ofgoodwill and identifiable intangible assets, increased $1.9 million, or 32.1%,for the three months ended June 30, 2001. The increase results from theinclusion of $1.0 million of depreciation and amortization expense in 2001 fromcompanies we acquired during 2000 and additional depreciation reflecting ourcapital expenditures during the period.

             **EBITDA and Operating income.**** **EBITDA increased $2.5 million to $22.4 million, or12.4%, for the three months ended June 30, 2001, from $19.9 million for thesame period last year. EBITDA as a percent of revenues decreased to 21.9% forthe three months ended June 30, 2001, from 24.3% for the same period last year.Operating income increased $0.5 million to $14.2 million, or 3.7%, for thethree months ended June 30, 2001, from $13.7 million for the same period lastyear. By segment, EBITDA changed as follows:
 **Increase  (Decrease)  From 2000**  ****  **Amount** **Percent**  **** ****  **(in millions)**   EBITDA     Cabin Management$  (2.2)(18.2)% Specialty Avionics3.4 56.8  Systems Integration1.3 36.0  Corporate0.2 11.5  Inter-group  elimination(0.2)       Total EBITDA2.5        Depreciation and  amortization(1.9)  Other noncash and  acquisition related charges(0.1)       Total operating income$  0.5       
*Cabin Management.** *EBITDAdecreased by $2.2 million, or 18.2% from the prior year, primarily due to:
•a  $1.7 million increase resulting from our 2000 acquisitions; offset by  •a $3.9 million  decrease resulting from nonrecurring startup costs associated with four new  programs and the rationalization of production between manufacturing  facilities.
*             SpecialtyAvionics.** *EBITDA increased by $3.4 million, or 56.8% over theprior year, due to higher demand for our commercial aircraft products.

*             SystemsIntegration.** *EBITDA increased by $1.3 million, or 36.0% over theprior year, due to higher auxiliary fuel tank systems revenues and favorablemanufacturing efficiencies.

*             Corporate.** *Expenses decreased by $0.2 million, or 11.5% fromthe prior year, which contributed to the consolidated EBITDA increase.

**             Interestexpense.**** **Interest expense decreased $0.2 million to $9.8million for the three months ended June 30, 2000, from $10.0 million for thesame period last year, due to:
•a  $1.3 million increase resulting from higher debt levels; offset by  •a  $1.5 million decrease resulting from lower average interest rates charged by  our lenders during 2001.
             **Minority interest in preferred stock of subsidiary.**** **Minority interest was $1.2 million for the threemonths ended June 30, 2001 and reflects the accrued dividends and redemptionvalue accretion during the period on DeCrane Aircrafts’ 16% preferred stockissued on June 30, 2000.

**             Provisionfor income taxes.**** **The provision for income taxes differs from theamount determined by applying the applicable U.S. statutory federal rate to theincome before income taxes primarily due to the effects of state and foreignincome taxes and non-deductible expenses, principally goodwill amortization andminority interest in preferred stock of subsidiary. The difference in theeffective tax rates between periods is mostly a result of the relationship ofnon-deductible expenses to income before income taxes.

**             Net income.**** **Net income decreased $1.1 million to $0.9 millionfor the three months ended June 30, 2001 compared to $2.0 million forthe same period in 2000.

**             Net income(loss) applicable to common stockholders.**** **Net income (loss) applicable to common stockholders decreased $1.3million to a net loss of $0.8 million for the three months ended June 30,2001 compared to net income of $0.5 million for the same period in 2000. Thedecrease is attributable to:
•a  $1.1 million decrease in net income, which is net of a $1.2 million charge  for minority interest in preferred stock of subsidiary issued on June 30,  2000; and  •a $0.2 million  increase in noncash preferred stock dividend accretion on our 14% mandatorily  redeemable preferred stock.
**             Bookings.**** **Bookings increased $22.0 million, or 24.8%, to$110.7 million for the three months ended June 30, 2001 compared to $88.7million for the same period in 2000. The increase in bookings for 2001 resultsfrom:
•a  $9.8 million increase associated with companies we acquired in 2000; and  •a  $12.2 million increase related to business growth, principally related to our  Cabin Management and Specialty Avionics product lines.
**             Backlog at end of period. **Backlogincreased $18.9 million to $197.2 million as of June 30, 2001 compared to$178.3 million as of December 31, 2000. The increase in backlog for 2001primarily relates to our Specialty Avionics and Cabin Management groups.

**SixMonths Ended June 30, 2001 Compared to Six Months Ended June 30, 2000**

**             Revenues. **Revenues increased $40.2 million, or 25.0%, to$201.5 million for the six months ended June 30, 2001 from $161.3 million forthe six months ended June 30, 2000. By segment, revenues changed as follows:
 **Increase  (Decrease)  From 2000**    **Amount** **Percent**  ****   **(in  millions)**   Cabin Management$28.1 36.6%Specialty Avionics10.2 19.4 Systems Integration2.1 6.5 Inter-group  elimination(0.2)       Total$40.2       
*Cabin Management. *Revenues increased by $28.1 million, or 36.6% overthe prior year, due to:
•the  inclusion of $23.8 million of revenues resulting from our acquisitions of  Carl F. Booth & Co. and ERDA in 2000; and    •a $4.3 million  increase in cabin furniture and related products revenues reflecting  primarily a higher volume of corporate jet production by the aircraft  manufacturers. *Specialty Avionics.** *Revenues increased by $10.2 million, or 19.4% over the prior year,  due to:   •a  $8.3 million increase in cockpit audio, communications, lighting and power  and control devices revenues; and    •a $1.9 million  revenue increase resulting from higher volume for our interconnect products. *Systems Integration.** *Revenues increased by $2.1 million, or 6.5% over the prior year, due  to:  •a  $3.8 million increase in auxiliary fuel tank system and power unit revenues;  offset by  •a $1.7 million  decrease in cabin and flight deck systems integration revenues resulting from  reducing the number of product offerings to focus on our core product lines.
**             Grossprofit.**** **Gross profit increased $13.9 million, or 25.8%, to$67.6 million for the six months ended June 30, 2001. Gross profit as a percentof revenues increased to 33.6% for the six months ended June 30, 2001 from33.3% for the same period last year. By segment, gross profit changed asfollows:
 **Increase  (Decrease)  From 2000**  ****  **Amount** **Percent**  **** ****  **(in millions)**   Cabin Management$3.8 13.6%Specialty Avionics6.9 44.4 Systems Integration3.0 27.9 Inter-group elimination0.2        Total$13.9       
*Cabin Management.** *Grossprofit increased by $3.8 million, or 13.6% over the prior year, primarily due to:
•a  $7.1 million increase in gross profit resulting from our 2000 acquisitions;  offset by    •a  $3.9 million decrease resulting from nonrecurring startup costs associated  with four new programs and the rationalization of production between  manufacturing facilities. *Specialty Avionics.** *Gross profit increased by $6.9 million, or 44.4% over the prior year,  due to:  •a  $3.4 million increase related to higher volume for our cockpit audio,  communications, lighting and power and control devices products;  •a  $3.5 million increase related to a shift in product mix to items with higher  margins; and  •a  $0.4 million increase related to higher volume for our interconnect products;  offset by  •a $0.4 million  decrease related to labor inefficiencies caused by rolling blackouts and  higher electrical energy costs at our California-based facilities.  *Systems Integration.** *Gross profit increased by $3.0 million, or 27.9% over the prior year,  due to:  •a  $1.5 million increase due to higher auxiliary fuel tank systems volume;  •a  $0.6 million increase in gross profit resulting from improved auxiliary fuel  tank manufacturing and installation efficiencies; and  •a $0.9 million  increase resulting, in part, from improved operating results subsequent to  our fourth quarter 1999 restructuring.
**             Selling,general and administrative expenses.**** **Selling, general and administrative expenses increased $7.2 million, or34.2%, to $28.1 million for the six months ended June 30, 2001, from $20.9million for the same period last year. SG&A expenses as a percent ofrevenues increased to 13.9% for the six months ended June 30, 2001 compared to13.0% for the same period last year. By segment, SG&A expenses changed asfollows:
 **Increase  (Decrease)  From 2000**  ****  **Amount** **Percent**  **** ****  **(in millions)**   Cabin Management$4.0 56.8%Specialty Avionics1.8 31.7 Systems Integration0.8 17.0 Corporate0.6 16.2      Total$7.2       
*Cabin Management. *SG&A expenses increased by $4.0 million, or56.8% over the prior year, due to:
•a  $3.1 million increase in expenses resulting from our 2000 acquisitions; and  •a  $0.9 million increase in expenses to support increased production and new  programs.**Specialty Avionics.** *SG&Aexpenses increased by $1.8 million, or 31.7% over the prior year, due to:
•a  $0.5 million increase in research and development costs; and  •a $1.3 million  increase in labor and employee benefit costs in support of revenue growth.
*             SystemsIntegration. *SG&A expenses increased by $0.8 million, or17.0% over the prior year, due to refocusing our cabin and flight deck systemsintegration services to product offerings requiring higher levels of sales andmarketing, program management and customer service.

*             Corporate.** *SG&A expenses increased by $0.6 million, or16.2% over the prior year primarily due an increase in depreciation expense.

**             Depreciationand amortization of intangibles.**** **Depreciation and amortization expense, which includes amortization ofgoodwill and identifiable intangible assets, increased $3.5 million, or 28.1%,for the six months ended June 30, 2001. The increase results from the inclusionof $2.2 million of depreciation and amortization expense in 2001 from companieswe acquired during 2000 and additional depreciation reflecting our capitalexpenditures during the period.

**             EBITDA andOperating income.**** **EBITDA increased $8.7 million to $45.8 million, or23.3%, for the six months ended June 30, 2001, from $37.1 million for the sameperiod last year. EBITDA as a percent of revenues decreased to 22.7% for thesix months ended June 30, 2001, from 23.0% for the same period last year.Operating income increased $5.0 million to $29.6 million, or 20.5%, for the sixmonths ended June 30, 2001, from $24.6 million for the same period last year.By segment, EBITDA changed as follows:
 **Increase (Decrease)**  **From 2000**  ****  **Amount** **Percent**  **** ****  **(in millions)**   EBITDA     Cabin Management$1.7 8.0% Specialty Avionics5.1 42.0  Systems Integration1.9 27.6  Corporate0.1 1.3  Inter-group  elimination(0.1)       Total EBITDA8.7        Depreciation and  amortization(3.5)  Other noncash and  acquisition related charges(0.2)       Total operating income$5.0       **Cabin Management.** *EBITDAincreased by $1.7 million, or 8.0% over the prior year, primarily due to:
•a  $5.0 million increase resulting from our 2000 acquisitions; offset by  •a $3.9 million  decrease resulting from nonrecurring startup costs associated with four new  programs and the rationalization of production between manufacturing  facilities.
*             SpecialtyAvionics.** *EBITDA increased by $5.1 million, or 42.0% over theprior year, due to higher demand for our commercial aircraft products.

*             SystemsIntegration.* EBITDA increased by $1.9 million, or 27.6%over the prior year, due principally to higher auxiliary fuel tank systemsrevenues and favorable manufacturing efficiencies.

**             Interestexpense.**** **Interest expense increased $1.6 million to $20.3million for the six months ended June 30, 2000, from $18.7 million for the sameperiod last year, due to:
•a  $3.1 million increase resulting from higher debt levels associated with our  acquisition of companies during 2000; offset by  •a  $1.5 million decrease resulting from lower average interest rates charged by  our lenders during 2001.
**             Minorityinterest in preferred stock of subsidiary.**** **Minority interest was $2.4 million for the sixmonths ended June 30, 2001 and reflects the accrued dividends andredemption value accretion during the period on DeCrane Aircrafts’ 16%preferred stock issued on June 30, 2000.

**             Provisionfor income taxes.**** **The provision for income taxes differs from theamount determined by applying the applicable U.S. statutory federal rate to theincome before income taxes primarily due to the effects of state and foreignincome taxes and non-deductible expenses, principally goodwill amortization andminority interest in preferred stock of subsidiary. The difference in theeffective tax rates between periods is mostly a result of the relationship ofnon-deductible expenses to income before income taxes.

**             Net income.**** **Net income decreased $0.6 million to $2.1 millionfor the six months ended June 30, 2001 compared to $2.7 million for thesame period in 2000.

**             Net lossapplicable to common stockholders.**** **Net loss applicable to common stockholders increased $1.0 million to anet loss of $1.2 million for the six months ended June 30, 2001 comparedto a net loss of $0.2 million for the same period in 2000. The increase isattributable to:
•a  $0.6 million decrease in net income, which is net of a $2.4 million charge  for minority interest in preferred stock of subsidiary issued on June 30,  2000; and  •a  $0.4 million increase in noncash preferred stock dividend accretion on our  14% mandatorily redeemable preferred stock.
**             Bookings.**** **Bookings increased $59.1 million, or 36.6%, to$220.4 million for the six months ended June 30, 2001 compared to $161.3million for the same period in 2000. The increase in bookings for 2001 resultsfrom:
•a  $22.5 million increase associated with companies we acquired in 2000; and  •a  $36.6 million increase related to business growth, principally related to our  Cabin Management and Specialty Avionics product lines.
**Liquidity and Capital Resources**

             We have required cash primarily to fund acquisitionsand, to a lesser extent, to fund capital expenditures and for working capital.Our principal sources of liquidity have been cash flow from operations, third partyborrowings, capital contributions from DeCrane Holdings and the issuance ofpreferred stock.

             Cash provided by operating activities was $0.9 millionfor the six months ended June 30, 2001, which is the net of $23.5 million ofcash provided by operations after adding back depreciation, amortization andother noncash items, $22.7 million used for working capital offset by $0.1million resulting from an increase in other liabilities. The following factorscontributed to the $22.7 million working capital increase:
•a  $9.0 million accounts receivable increase resulting from higher revenues,  timing differences relating to completion of projects versus the associated  collection and the timing of other collections;  •a  $6.5 million inventory increase resulting from longer production lead times  and inventory level increases to meet current and projected revenue growth;  •a  $1.3 million increase in prepaid and other assets; and  •a  $8.1 million net decrease in accounts payable and accrued expenses; offset by  •a  $2.2 million increase in income taxes payable due to higher current taxable  income.
             Cash used for investing activities was $19.3 million forthe six months ended June 30, 2001, and consisted of:
•$17.1  million of contingent acquisition consideration paid during 2001; and  •$6.4  million for capital expenditures; offset by  •$3.6  million cash purchase price reductions received for previously completed  acquisitions; and further offset by  •$0.6  million of proceeds from the sale of property and equipment, principally an  owned manufacturing facility replaced with a larger leased facility.
             We anticipate spending approximately $15.0 million forcapital expenditures in 2001.             Cash provided by financingactivities was $17.7 million for the six months ended June 30, 2001 and wasprimarily used to fund the payment of contingent acquisition consideration andcapital expenditures. We obtained these funds by borrowing $21.4 million underour senior credit facility. We used $3.0 million to make principal payments onour senior term debt, capitalized leases and other debt.
             At June 30, 2001, senior credit facility borrowingstotaling $295.6 million are at variable interest rates based on defined marginsover the current prime or Eurodollar rates. At June 30, 2001 we had $89.2million of working capital and had $23.2 million of borrowings available underour working capital credit facility and $13.0 available under our acquisitioncredit facility. Although we cannot be certain, we believe that operating cashflow, together with borrowings under our bank credit facility, will besufficient to meet our future short- and long-term operating expenses, workingcapital requirements, capital expenditures and debt service obligations for thenext twelve months. However, our ability to pay principal or interest, torefinance our debt and to satisfy our other debt obligations will depend on ourfuture operating performance. We will be affected by economic, financial,competitive, legislative, regulatory, business and other factors beyond ourcontrol. In addition, we are continually considering acquisitions thatcomplement or expand our existing businesses or that may enable us to expandinto new markets. Future acquisitions may require additional debt, equityfinancing or both. We may not be able to obtain any additional financing onacceptable terms.

**Recently Issued AccountingPronouncements**

             In June 2001, the Financial Accounting Standards Boardissued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

             SFAS No. 141 establishes accounting and reportingstandards for business combinations. SFAS No. 141 requires that allbusiness combinations be accounted for using the purchase method of accountingand provides criteria for the initial recognition and measurement of goodwilland other intangible assets. SFAS No. 141 is effective for all businesscombinations initiated or completed after June 30, 2001. For businesscombinations completed prior to July 1, 2001, SFAS No. 141 is effectiveconcurrent with the adoption of SFAS No. 142.

             SFAS No. 142 establishes accounting and reportingstandards for goodwill and other intangible assets subsequent to theiracquisition. SFAS No. 142 eliminates the current requirement to amortizegoodwill and other indefinite-lived intangible assets requiring insteadperiodic impairment testing with a loss charged to the results of operation inthe periods in which impairment occurs. Finite-lived intangible assets areamortized and are also subject to periodic impairment testing. Adoption of SFASNo. 142 is required for our fiscal year beginning January 1, 2002.

             We are currently evaluating the impact the newaccounting standards will have on our financial position and results ofoperations upon adoption on January 1, 2002; there will be no impact on cashflows. While the full, net of tax, impact has yet to be determined, adoption ofthe new standards will result in the following:
•Under  the criteria established in SFAS No. 141, the values ascribed to the  assembled workforces acquired are not recognized as an intangible asset apart  from goodwill. As a result, the net book value ascribed to the assembled  workforces, net of deferred income tax liabilities, will be reclassified to  goodwill as of January 1, 2002.  •Adoption  of SFAS No. 142 on January 1, 2002 will reduce amortization expense in  future periods. If SFAS No. 142 had been effective as of the  beginning of 2001, goodwill and assembled workforces amortization totaling  $7,121,000 for the six months ended June 30, 2001 would have been eliminated.
             We have until June30, 2002 to complete our transitional impairment testing associated withadopting SFAS No. 142. The amount of impairment losses recognizableupon adoption, if any, is not known at this time.

**ITEM 3.**            **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

             We are exposed to various market risks, includinginterest rates and changes in foreign currency exchange rates. Market risk isthe potential loss arising from adverse changes in market rates and prices,such as interest rates and foreign currency exchange rates. From time to timewe use derivative financial instruments to manage and reduce risks associatedwith these factors. We do not enter into derivatives or other financialinstruments for trading or speculative purposes.

**             InterestRate Risk.**** **A significant portion of our capital structure iscomprised 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. The interest rates applicable to variable-rate debtare, at our option, based on defined margins over the current prime orEurodollar rates. At June 30, 2001, the current prime rate was 6.75% and thecurrent Eurodollar rate was 3.99%. Based on $295.6 million of variable-ratedebt outstanding as of June 30, 2001, a hypothetical one percent rise ininterest rates, to 7.75% for prime rate borrowings and 4.99% for Eurodollarborrowings, would reduce our pre-tax earnings by $3.0 million annually. Wehave, during periods prior to 1998, purchased interest rate cap contracts tolimit our exposure related to rising interest rates on our variable-rate debt.While we have not entered into similar contracts during the last three years,we may do so in the future depending on our assessment of future interest ratetrends.

             The estimated fair value of our $100.0 millionfixed-rate long-term debt is approximately $95.0 million at June 30, 2001.Market risk related to our fixed-rate debt is deemed to be the potentialincrease in fair value resulting from a decrease in interest rates. Forexample, a hypothetical 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$7.0 million.

**             Foreign Currency Exchange Rate Risk. **Our foreign customers are located in various partsof the world, primarily Western Europe, the Far East and Canada, and one of oursubsidiaries operates in Western Europe and one has a manufacturing facility inMexico. To limit our foreign currency exchange rate risk related to sales toour customers, orders are primarily valued and sold in U.S. dollars. From timeto time we have entered into forward foreign exchange contracts to limit ourexposure related to foreign inventory procurement and operating costs. While wehave not entered into any such contracts since 1998 and no such contracts areopen as of June 30, 2001, we may do so in the future depending on our assessmentof future foreign exchange rate trends.

**Special Note RegardingForward-Looking Statements**

             All statements other than statements of historical factsincluded in this report are considered forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are subject to known and unknown risks,uncertainties and other factors, which are difficult to predict. We arevulnerable to a variety of factors that affect many businesses, such as:
•fuel  prices and general economic conditions that affect demand for aircraft and  air travel, which in turn affect demand for our products and services;  •our  reliance on key customers and the adverse effect a significant decline in  business from any one of them would have on our business;  •changes  in prevailing interest rates and the availability of financing to fund our  plans for continued growth;  •competition  from larger companies;  •Federal  Aviation Administration prescribed standards and licensing requirements,  which apply many of the products and services we provide;  •inflation,  and other general changes in costs of goods and services;  •liability  and other claims asserted against us that exceeds our insurance coverage;  •the  ability to attract and retain qualified personnel;  •labor  disturbances; and  •changes  in 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 that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to be correct. We undertake no obligation to 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 not rely on our forward-looking statements asif they were certainties.

**Incorporation of Documents byReference**

             We have filed with the Securities and ExchangeCommission, and are including within this report by referring to it here, ourForm 10-K for the year ended December 31, 2000. The Form 10-K includes ouraudited financial statements, which we refer to in this report.

             You may read and copy any reports, statements or otherinformation we file at the SEC’s reference room in Washington D.C. Please callthe SEC at (202) 942-8090 for further information on the operation of thereference rooms. You can also request copies of these documents, upon paymentof a duplicating fee, by writing to the SEC, or review our SEC filings on theSEC’s EDGAR web site, which can be found at http://www.sec.gov. You may also writeor call us at our corporate office. Our corporate offices are located at 2361Rosecrans Avenue, Suite 180, El Segundo, California 90245. Our telephone numberis (310) 725–9123.

 

**PART II – OTHER INFORMATION**

**ITEM 1.**            **LEGAL PROCEEDINGS**

             Refer to the legal proceedings described in Item 3 ofour Form 10-K for the year ended December 31, 2000.

**ITEM 6.**            **EXHIBITS AND REPORTS ON FORM 8-K**
a.Exhibits     10.10.4Increased  Commitments Agreement, dated as of April 27, 2001, pursuant to Third Amended  and Restated Credit Agreement, dated as of May 11, 2000, as amended by the  First Amendment to the Third Amended and Restated Credit Agreement, dated as  of June 30, 2000 *     *Previously  filed    **Filed  herewith   b.Reports on Form 8-K   None 
 

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
 **DECRANE HOLDINGS CO. (Registrant)**      August  10, 2001By:/s/  Richard J. Kaplan   Name:Richard  J. Kaplan Title:Assistant  Secretary and Assistant Treasurer (chief accounting officer)
 

 

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