**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

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**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterlyperiod ended September 30, 2002**

 

**Commission FileNumber 000-22371**

 

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| **DECRANE  AIRCRAFT HOLDINGS, INC.**                                                                |
|-----------------------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                                              |
|                                                                                                |   |   |
| **Delaware**                                                                                        |   | **34-1645569** |
| (State or other jurisdiction of  incorporation or organization)                                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                                |   |   |
| **2361 Rosecrans Avenue, Suite 180, El Segundo, CA 90245**                                          |
| (Address, including zip code, of principal executive offices)                                       |
|                                                                                                |   |   |
| **(310) 725-9123**                                                                                  |
| (Registrant’s telephone number, including area code)                                           |
|                                                                                                |   |   |
| **(Not Applicable)**                                                                                |
| (Former address and telephone number of principal executive offices,  if changed since last report) |

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 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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The number ofshares of Registrant’s Common Stock, $.01 par value, outstanding as ofNovember 11, 2002 was 100 shares.

 

 

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**Table of Contents**

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

 

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**PART I****– FINANCIALINFORMATION**

 

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

 

**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

 
| ***(In thousands, except share data)***                                                                                                   |   | **September 30,  2002** |    | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
|                                                                                                                                      |   | **(Unaudited)**              |    |                        |   |
| **Assets**                                                                                                                                |   |                         |    |                        |   |
| Current assets:                                                                                                                           |   |                         |    |                        |   |
| Cash and cash equivalents                                                                                                                 |   | $                            | 24,679  |                        | $      | 9,794 |   |
| Accounts receivable, net                                                                                                                  |   | 40,671                       |    | 58,451                      |   |
| Inventories                                                                                                                               |   | 82,454                       |    | 86,498                      |   |
| Deferred income taxes                                                                                                                     |   | 9,691                        |    | 14,063                      |   |
| Prepaid expenses and other current assets                                                                                                 |   | 3,551                        |    | 2,559                       |   |
| Total current assets                                                                                                                      |   | 161,046                      |    | 171,365                     |   |
|                                                                                                                                      |   |                         |    |                        |   |
| Property and equipment, net                                                                                                               |   | 52,818                       |    | 61,073                      |   |
| Other assets, principally intangibles, net                                                                                                |   | 407,680                      |    | 413,273                     |   |
| Total assets                                                                                                                              |   | $                            | 621,544 |                        | $      | 645,711 |   |
|                                                                                                                                      |   |                         |    |                        |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**                                                    |   |                         |    |                        |   |
| Current liabilities:                                                                                                                      |   |                         |    |                        |   |
| Current portion of long-term debt                                                                                                         |   | $                            | 15,422  |                        | $      | 13,899 |   |
| Accounts payable                                                                                                                          |   | 18,199                       |    | 19,051                      |   |
| Accrued liabilities                                                                                                                       |   | 32,378                       |    | 56,626                      |   |
| Income taxes payable                                                                                                                      |   | 623                          |    | 133                         |   |
| Total current liabilities                                                                                                                 |   | 66,622                       |    | 89,709                      |   |
|                                                                                                                                      |   |                         |    |                        |   |
| Long-term debt, less current portion                                                                                                      |   | 384,862                      |    | 386,351                     |   |
| Deferred income taxes                                                                                                                     |   | 26,782                       |    | 33,597                      |   |
| Other long-term liabilities                                                                                                               |   | 7,522                        |    | 7,438                       |   |
|                                                                                                                                      |   |                         |    |                        |   |
| Commitments and contingencies (Note 10)                                                                                                   |   |                         |    |                        |   |
|                                                                                                                                      |   |                         |    |                        |   |
| Mandatorily redeemable preferred stock                                                                                                    |   | 32,541                       |    | 28,240                      |   |
|                                                                                                                                      |   |                         |    |                        |   |
| Stockholder’s equity:                                                                                                                |   |                         |    |                        |   |
| Common stock, $.01 par value, 1,000 shares  authorized; 100 shares issued and outstanding as of September 30, 2002 and  December 31, 2001 |   | —                       |    | —                      |   |
| Additional paid-in capital                                                                                                                |   | 122,752                      |    | 122,469                     |   |
| Notes receivable for shares sold                                                                                                          |   | (2,552                       | )       | (2,668                      | )      |
| Accumulated deficit                                                                                                                       |   | (16,327                      | )       | (17,323                     | )      |
| Accumulated other comprehensive loss                                                                                                      |   | (658                         | )       | (2,102                      | )      |
| Total stockholder’s equity                                                                                                           |   | 103,215                      |    | 100,376                     |   |
| Total liabilities and stockholder’s equity                                                                                           |   | $                            | 621,544 |                        | $      | 645,711 |   |

 

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

 

1

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**ConsolidatedStatements of Operations**

 
|                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                                |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                |   | **(Unaudited)**                       |   |
| Revenues                                            |   | $                                     | 79,621 |                                      | $      | 102,928 |   | $ | 252,116 |   | $ | 304,859 |   |
| Cost of sales                                       |   | 54,038                                |   | 70,152                                    |   | 178,980 |   | 204,462 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Gross profit                                        |   | 25,583                                |   | 32,776                                    |   | 73,136 |   | 100,397 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Operating expenses:                                 |   |                                  |   |                                      |   |   |   |   |   |
| Selling, general and administrative  expenses       |   | 11,412                                |   | 13,963                                    |   | 41,703 |   | 42,059 |   |
| Amortization of intangible assets                   |   | 1,467                                 |   | 4,936                                     |   | 4,298 |   | 14,857 |   |
| Total operating expenses                            |   | 12,879                                |   | 18,899                                    |   | 46,001 |   | 56,916 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Income from operations                              |   | 12,704                                |   | 13,877                                    |   | 27,135 |   | 43,481 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Other expenses:                                     |   |                                  |   |                                      |   |   |   |   |   |
| Interest expense                                    |   | 8,685                                 |   | 9,654                                     |   | 24,843 |   | 29,984 |   |
| Other expenses (income), net                        |   | 193                                   |   | (25                                       | )      | 578 |   | 92 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Income before provision for income taxes            |   | 3,826                                 |   | 4,248                                     |   | 1,714 |   | 13,405 |   |
| Provision for income taxes                          |   | 1,296                                 |   | 3,386                                     |   | 718 |   | 7,960 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Net income                                          |   | 2,530                                 |   | 862                                       |   | 996 |   | 5,445 |   |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Accrued preferred stock dividends                   |   | (1,369                                | )      | (1,170                                    | )      | (3,950 | ) | (3,376 | ) |
| Preferred stock redemption value accretion          |   | (117                                  | )      | (117                                      | )      | (351 | ) | (351 | ) |
|                                                |   |                                  |   |                                      |   |   |   |   |   |
| Net income (loss) applicable to common  stockholder |   | $                                     | 1,044  |                                      | $      | (425 | ) | $ | (3,305 | ) | $ | 1,718 |   |

 

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

 

2

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**ConsolidatedStatement of Stockholder’s Equity**

 
| ***(In thousands, except share data)***                                                                                                       |              |   |       | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|-------------------|--------|------------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
|                                                                                                                                          |              |   |
|                                                                                                                                          | **Common  Stock** |   |
|                                                                                                                                          | **Shares**        |   | **Amount** |                             |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, December 31, 2001                                                                                                               |              | 100    |       | $                                | — |                                    | $      | 122,469                  |   | $                                           | (2,668 | )         | $      | (17,323 | ) | $ | (2,102 | ) | $ | 100,376 |   |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive income:                                                                                                                         |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net income                                                                                                                                    |              | — |       | —                           |   | —                                  |   | —                   |   | 996                                         |   | —    |   | 996 |   |
| Translation adjustment                                                                                                                        |              | — |       | —                           |   | —                                  |   | —                   |   | —                                      |   | 1,527     |   | 1,527 |   |
| Unrealized loss on interest rate swap  contract                                                                                               |              | — |       | —                           |   | —                                  |   | —                   |   | —                                      |   | (83       | )      | (83 | ) |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   | 2,440 |   |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Capital contribution                                                                                                                          |              | — |       | —                           |   | 5,000                                   |   | —                   |   | —                                      |   | —    |   | 5,000 |   |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Return of capital in connection with the  repurchase of common stock and cashless exercise of options, net of related  note receivable repaid |              | — |       | —                           |   | (568                                    | )      | 200                      |   | —                                      |   | —    |   | (368 | ) |
| Tax benefit of options exercised                                                                                                              |              | — |       | —                           |   | 14                                      |   | —                   |   | —                                      |   | —    |   | 14 |   |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Accrued preferred stock dividends                                                                                                             |              | — |       | —                           |   | (3,950                                  | )      | —                   |   | —                                      |   | —    |   | (3,950 | ) |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Preferred stock redemption value accretion                                                                                                    |              | — |       | —                           |   | (351                                    | )      | —                   |   | —                                      |   | —    |   | (351 | ) |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Compensatory stock option expense                                                                                                             |              | — |       | —                           |   | 138                                     |   | —                   |   | —                                      |   | —    |   | 138 |   |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Notes receivable interest accrued                                                                                                             |              | — |       | —                           |   | —                                  |   | (84                      | )      | —                                      |   | —    |   | (84 | ) |
|                                                                                                                                          |              |   |       |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, September 30, 2002 (Unaudited)                                                                                                       |              | 100    |       | $                                | — |                                    | $      | 122,752                  |   | $                                           | (2,552 | )         | $      | (16,327 | ) | $ | (658 | ) | $ | 103,215 |   |

 

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

 

3

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**ConsolidatedStatements of Cash Flows**

 
|                                                                               |   | **Nine Months Ended  September 30,** |       |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
| ***(In thousands)***                                                               |   | **2002**                                  |       | **2001** |   |
|                                                                               |   | **(Unaudited)**                           |       |
|                                                                               |   |                                      | ** ** |   | ** ** |
| **Cash flows from operating activities:**                                          |   |                                      |       |   |   |
| Net income                                                                         |   | $                                         | 996        |   | $ | 5,445 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                      |       |   |   |
| Depreciation and amortization                                                      |   | 14,863                                    |       | 25,561 |   |
| Noncash portion of restructuring and asset  impairment charges                     |   | 7,396                                     |       | — |   |
| Deferred income taxes                                                              |   | (273                                      | )          | 6,801 |   |
| Other, net                                                                         |   | 371                                       |       | 605 |   |
| Changes in assets and liabilities, net of  effect from acquisitions:               |   |                                      |       |   |   |
| Accounts receivable                                                                |   | 17,349                                    |       | (12,243 | ) |
| Inventories                                                                        |   | 1,311                                     |       | (14,174 | ) |
| Prepaid expenses and other assets                                                  |   | (1,104                                    | )          | (2,684 | ) |
| Accounts payable                                                                   |   | (900                                      | )          | 3,832 |   |
| Accrued liabilities                                                                |   | (18,464                                   | )          | (6,809 | ) |
| Income taxes payable                                                               |   | 459                                       |       | 11 |   |
| Other long-term liabilities                                                        |   | 80                                        |       | (143 | ) |
| Net cash provided by operating activities                                          |   | 22,084                                    |       | 6,202 |   |
|                                                                               |   |                                      |       |   |   |
| **Cash flows from investing activities:**                                          |   |                                      |       |   |   |
| Cash paid for acquisitions                                                         |   | (5,890                                    | )          | (13,529 | ) |
| Capital expenditures                                                               |   | (3,804                                    | )          | (9,794 | ) |
| Other, net                                                                         |   | —                                    |       | 635 |   |
| Net cash used for investing activities                                             |   | (9,694                                    | )          | (22,688 | ) |
|                                                                               |   |                                      |       |   |   |
| **Cash flows from financing activities:**                                          |   |                                      |       |   |   |
| Net borrowings under senior credit facility                                        |   | 9,000                                     |       | 19,600 |   |
| Other long-term borrowings                                                         |   | 1,145                                     |       | 1,989 |   |
| Capital contribution                                                               |   | 5,000                                     |       | — |   |
| Principal payments on term debt,  capitalized leases and other debt                |   | (10,505                                   | )          | (5,198 | ) |
| Deferred financing costs                                                           |   | (1,663                                    | )          | (580 | ) |
| Return of capital in connection with shares  repurchased                           |   | (368                                      | )          | — |   |
| Other, net                                                                         |   | (149                                      | )          | (118 | ) |
| Net cash provided by financing activities                                          |   | 2,460                                     |       | 15,693 |   |
|                                                                               |   |                                      |       |   |   |
| Effect of foreign currency translation on  cash                                    |   | 35                                        |       | 39 |   |
|                                                                               |   |                                      |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | 14,885                                    |       | (754 | ) |
| Cash and cash equivalents at beginning of  period                                  |   | 9,794                                     |       | 8,199 |   |
| Cash and cash equivalents at end of period                                         |   | $                                         | 24,679     |   | $ | 7,445 |   |

 

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

 

4

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**Condensed Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**Note 1.****                    ConsolidatedFinancial Statements**

 

**Basisof Presentation**

 

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

 

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

 

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

 

**Note 2.****                    AccountingPronouncements**

 

**AccountingPronouncements Adopted January 1, 2002**

 

*SFAS No. 141 and 142*

 

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

 

•                  *Reassessmentof Useful Lives of Intangible Assets.*  The reassessment of the useful lives of intangible assetsacquired on or before June 30, 2001 was completed during the first quarter offiscal 2002.  The remaining useful liveswere deemed appropriate.

 

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

 

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

 

5

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

 

Areconciliation of reported net income to net income (loss) adjusted to reflectthe discontinuance of periodic goodwill and assembled workforce amortizationcharges is as follows:

 
|                                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                                                |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                                |   | **(Unaudited)**                       |   |
| Reported net income                                                 |   | $                                     | 2,530  |                                      | $      | 862 |   | $ | 996 |   | $ | 5,445 |   |
| Add back goodwill and assembled workforce  amortization, net of tax |   | —                                |   | 2,851                                     |   | — |   | 8,602 |   |
| Adjusted net income (loss)                                          |   | $                                     | 2,530  |                                      | $      | 3,713 |   | $ | 996 |   | $ | 14,047 |   |

 

*SFAS No. 143*

 

EffectiveJanuary 1, 2002, the Company also adopted SFAS No. 143, “Accounting for AssetRetirement Obligations,” which requires recognition of the fair value of liabilitiesassociated with the retirement of long-lived assets when a legal obligation toincur such costs arises as a result of the acquisition, construction,development and/or the normal operation of a long-lived asset.  Adoption of SFAS No. 143 is required for theCompany’s fiscal year beginning January 1, 2003 although early application ispermitted.  Adoption of SFAS No. 143 didnot have an impact on the Company’s business, consolidated financial position,results of operations or cash flows.

 

*SFAS No. 144*

 

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

 

6

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**RecentlyIssued Accounting Pronouncements**

 

*SFAS No. 145*

 

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

 

*SFAS No. 146*

 

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

 

SFAS No. 146requires that the liability for costs associated with an exit or disposalactivity be initially measured at fair value and recognized when the liabilityis incurred.  In periods subsequent toinitial measurement, changes to the liability are measured using thecredit-adjusted risk-free rate that was used in the initial measurement of theliability recorded.  The cumulativeeffect of a change resulting from revisions to either the timing or the amountof estimated cash flows is recognized as an adjustment to the liability in theperiod of the change and charged to the same line items in the statement ofoperations used when the related costs were initially recognized.  Under EITF No. 94-3, a liability for an exitcost was recognized at the date of a company’s commitment to an exit plan.

 

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

 

7

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

 

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

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

 

**2002Seat Manufacturing Facilities Restructuring**

 

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

 

•                    *Inventory and Accounts Receivable Write-Downs*.  In connection with the consolidation of allproduction, the Company will discontinue manufacturing certain products,principally those which overlap. Inventory and certain receivables related to the discontinued productswere written down to net realizable value.

 

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

 

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

 

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

 

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

 

8

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

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

 

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

 

**2001Restructuring and Asset Impairment Charges**

 

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

 

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

 

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

 

9

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The restructuring and asset impairment charges and other relatedexpenses are comprised of the following:

 

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

 

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

 

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

 

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

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

 

From January1, 2002 through September 30, 2002, severance and other compensation costsof approximately $1,068,000 have been paid and the remaining $117,000 will beincurred during the fourth quarter of fiscal 2002 when the remaining personnelare terminated.  The amounts paid todate have been to manufacturing and administrative employees terminated at themanufacturing facilities being closed. Since the September 11th terrorist attack, the Company has, in additionto the positions eliminated as a result of the 2002 plant closures describedabove, reduced its total workforce by approximately 500 employees, or 18.5%, asof September 2002, of which approximately 260 employees had separated as ofDecember 31, 2001.

 

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

 

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

 

10

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**Note 4:****                   Inventories**

 

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

** **
| ***(In thousands)***                                                         |   | **September 30,  2002** |   | **December 31,  2001** |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**              |   |                        |   |
| Raw materials                                                                |   | $                            | 44,446 |                        | $      | 50,503 |   |
| Work-in-process:                                                             |   |                         |   |                        |   |
| Direct and indirect manufacturing costs                                      |   | 16,278                       |   | 16,260                      |   |
| Program costs, principally engineering  costs                                |   | 13,153                       |   | 10,974                      |   |
| Finished goods                                                               |   | 6,233                        |   | 3,089                       |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | 2,344                        |   | 5,672                       |   |
| Total inventories                                                            |   | $                            | 82,454 |                        | $      | 86,498 |   |

 

Inventoriedcosts are not in excess of estimated realizable value and include directengineering, production and tooling costs, and applicable manufacturingoverhead.  In accordance with industrypractice, inventoried costs include amounts relating to programs and contractswith long production cycles that will be recovered from future sales.  Periodic assessments are performed to ensurerecoverability of the program costs and adjustments are made, if necessary, toreduce inventoried costs to estimated realizable value.  In connection with the 2001 restructuring,$7,908,000 of previously inventoried program costs were determined to beunrecoverable and were charged to cost of sales during the fourth quarter offiscal 2001; no adjustments were required during the first nine months offiscal 2002.

 

Total costsand estimated earnings on all uncompleted contracts as of September 30,2002 and December 31, 2001 are comprised of the following:

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

 

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

 

11

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**Note 5.****                    Other Assets**

 

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

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

 

**Goodwill**

 

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

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

 

12

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**IdentifiableIntangible Assets with Finite Useful Lives**

 

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

 
|                           |   | **September 30, 2002 (Unaudited)** |   | **December 31, 2001**    |   |
|--------------------------------|--------|-----------------------------------------|--------|-------------------------------|--------|
| ***(In thousands)***           |   | **Cost**                                |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                           |   |                                    |   |                          |   |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                                       | 45,816 |                          | $      | (10,776 | ) | $ | 35,040 |   | $ | 45,816 |   | $ | (8,485 | ) | $ | 37,331 |   |
| Engineering drawings           |   | 14,619                                  |   | (3,547                        | )      | 11,072 |   | 14,617 |   | (2,816 | ) | 11,801 |   |
| Assembled workforce            |   | —                                  |   | —                        |   | — |   | 11,499 |   | (4,535 | ) | 6,964 |   |
| Other identifiable intangibles |   | 13,086                                  |   | (6,017                        | )      | 7,069 |   | 12,293 |   | (4,741 | ) | 7,552 |   |
| Total identifiable intangibles |   | $                                       | 73,521 |                          | $      | (20,340 | ) | $ | 53,181 |   | $ | 84,225 |   | $ | (20,577 | ) | $ | 63,648 |   |

 

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

 

**Note 6.****                    AccruedLiabilities**

 

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

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

 

13

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**Note 7.****                    Long-Term Debt**

 

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

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

 

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

 

**Note 8.****                    Income Taxes**

 

For the threemonths and nine months ended September 30, 2002, the provision for incometaxes differs from the amount determined by applying the applicable U.S. statutoryfederal rate to income before income taxes primarily due to the effects ofstate and foreign income taxes.

 

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

 

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

 

14

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**Note 9.****                    CapitalStructure**

 

**MandatorilyRedeemable Preferred Stock**

 

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

 
| ***(In thousands, except share and per share data)***                  |   | **Number  of  Shares** |   | **Mandatory  Redemption  Value** |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   |
|------------------------------------------------------------------------|--------|------------------------|--------|----------------------------------|--------|-------------------------------------|--------|----------------------|--------|
|                                                                   |   |                   |   |                             |   |                                |   |                 |   |
| Balance, December 31, 2001                                        |   | 316,330                |   | $                                | 31,633 |                                | $      | (3,393               | )      | $ | 28,240 |   |
| Accrued dividends and redemption value  accretion                      |   | 39,498                 |   | 3,950                            |   | 351                                 |   | 4,301                |   |
| Balance, September 30, 2002  (Unaudited)                          |   | 355,828                |   | $                                | 35,583 |                                | $      | (3,042               | )      | $ | 32,541 |   |
|                                                                   |   |                   |   |                             |   |                                |   |                 |   |
| Per share liquidation value as of  September 30, 2002 (Unaudited) |   |                   |   | $                                | 100.00 |                                |   |                 |   |   |

 

Holders of thepreferred stock are entitled to receive, when, as and if declared, dividends ata rate equal to 16% per annum.  Prior toJune 30, 2005, the Company may, at its option, pay dividends either in cash orby the issuance of additional shares of preferred stock.  Since the preferred stock issuance date onJune 30, 2000, the Company has elected to issue additional shares in lieu ofcash dividends.

 

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

 

During thenine months ended September 30, 2002, the Company received a $5,000,000 capitalcontribution from DeCrane Holdings resulting from DeCrane Holdings’ sale ofcommon stock.

 

Also duringthe nine months ended September 30, 2002, DeCrane Holdings repurchased andcanceled 18,743 common shares from former members of the Company'smanagement.  The former managementmembers also elected to exercise 9,252 vested stock options on a cashlessbasis.  The $14,000 income tax benefitassociated with the stock options exercised was also credited to additionalpaid-in capital.  In connection with therepurchase, a note receivable collateralized by the repurchased common stock wasrepaid.  The Company returned $368,000of paid-in capital to DeCrane Holdings to fund its cash requirements for thesetransactions.

 

15

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**Note 10.****             Commitments andContingencies**

 

**Litigation**

 

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

 

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

 

**ContingentAcquisition Consideration**

 

The Company’sremaining maximum contingent acquisition consideration payment obligation is$600,000 as of September 30, 2002. The contingent consideration is payable based upon an acquired company’slevel of attainment of its defined performance criteria for the year endingDecember 31, 2002 and excludes amounts earned and recorded throughDecember 31, 2001.  The contingentconsideration, if any, is payable during the first quarter of fiscal 2003.

 

**Fundingof DeCrane Holdings Preferred Stock Obligations**

 

The Company isa wholly owned subsidiary of DeCrane Holdings whose capital structure alsoincludes mandatorily redeemable preferred stock.  Since the Company is DeCrane Holdings’ only operating subsidiaryand source of cash, the Company may be required to fund DeCrane Holdings’preferred stock dividend and redemption obligations in the future.

 

DeCraneHoldings’ preferred stock dividends are payable quarterly at a rate of 14% perannum.  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.  On or after September 30, 2005, preferredstock dividends are required to be paid in cash, if declared.  The DeCrane Holdings preferred stock has atotal redemption value of $60,118,000 as of September 30, 2002, includingaccumulated dividends.

 

16

----

 

**Note 11.****             ConsolidatedStatements of Cash Flows**

 

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

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

 

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

 

**Note 12.****             Business SegmentInformation**

 

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

 

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

 

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

 

•                  *Systems Integration –* provides auxiliaryfuel tank systems, auxiliary power units and system integration services.

 

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

 

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

 

17

----

 

The tablesbelow summarize selected financial data by business segment.

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

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

 

----

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

 

(2)                      Reflectsthe Company’s corporate headquarters costs and expenses not allocated to thegroups.

 

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

 

18

----

 

(4)                      Thetable below reconciles consolidated EBITDA to income from operations and incomebefore income taxes.

** **
|                                        |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
| ***(In thousands)***                        |   | **2002**                              |   | **2001**                                  |   | **2002** |   | **2001** |   |
|                                        |   | **(Unaudited)**                       |   |
| Consolidated EBITDA                         |   | $                                     | 17,363 |                                      | $      | 21,998 |   | $ | 41,064 |   | $ | 67,789 |   |
| Depreciation and amortization (a)           |   | (4,212                                | )      | (8,066                                    | )      | (12,866 | ) | (23,914 | ) |
| Acquisition related charges not capitalized |   | (447                                  | )      | (14                                       | )      | (925 | ) | (117 | ) |
| Other noncash charges                       |   | —                                |   | (41                                       | )      | (138 | ) | (277 | ) |
| Consolidated income from operations         |   | 12,704                                |   | 13,877                                    |   | 27,135 |   | 43,481 |   |
|                                        |   |                                  |   |                                      |   |   |   |   |   |
| Interest expense                            |   | (8,685                                | )      | (9,654                                    | )      | (24,843 | ) | (29,984 | ) |
| Other (expenses) income, net                |   | (193                                  | )      | 25                                        |   | (578 | ) | (92 | ) |
| Consolidated income before income taxes     |   | $                                     | 3,826  |                                      | $      | 4,248 |   | $ | 1,714 |   | $ | 13,405 |   |

 

----

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

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

 

(5)                      ReflectsEBITDA before Cabin Management’s restructuring, asset impairment and othernonrecurring charges (Note 3) of:

 

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

 

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

 

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

 

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

 

19

----

 

**Note 13.****             SupplementalCondensed Consolidating Financial Information**

 

In conjunctionwith the senior credit facility and 12% senior subordinated notes described inNote 7, the following condensed consolidating financial information ispresented segregating the Company, as the issuer, and guarantor andnon-guarantor subsidiaries.  The accompanyingfinancial information in the guarantor subsidiaries column reflects thefinancial position, results of operations and cash flows for those subsidiariesguaranteeing the senior credit facility and the notes.

 

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

 

(1)                   Eliminationof investments in subsidiaries.

 

(2)                   Eliminationof intercompany accounts.

 

(3)                   Eliminationof intercompany sales between guarantor and non-guarantor subsidiaries.

 

(4)                   Eliminationof equity in earnings of subsidiaries.

 

20

----

 

**BalanceSheets**

 
|                                                                                     |   | **September 30, 2002 (Unaudited)** |    |
|------------------------------------------------------------------------------------------|--------|------------------------------------|---------|
| ***(In thousands)***                                                                     |   | **Issuer**                         |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                               |    |   |   |   |   |   |   |   |   |
| Current  assets:                                                                         |   |                               |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                                  | 24,431  |   | $ | 170 |   | $ | 78 |   | $ | — |   | $ | 24,679 |   |
| Accounts receivable, net                                                                 |   | —                             |    | 39,239 |   | 1,432 |   | — |   | 40,671 |   |
| Inventories                                                                              |   | —                             |    | 81,064 |   | 1,390 |   | — |   | 82,454 |   |
| Other current assets                                                                     |   | 11,462                             |    | 1,490 |   | 290 |   | — |   | 13,242 |   |
| Total current assets                                                                     |   | 35,893                             |    | 121,963 |   | 3,190 |   | — |   | 161,046 |   |
|                                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 2,696                              |    | 47,868 |   | 2,254 |   | — |   | 52,818 |   |
| Other assets, principally intangibles, net                                               |   | 14,774                             |    | 382,277 |   | 10,629 |   | — |   | 407,680 |   |
| Investments in subsidiaries                                                              |   | 409,057                            |    | 20,743 |   | — |   | (429,800 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 270,962                            |    | 160,889 |   | 5,544 |   | (437,395 | )(2) | — |   |
| Total assets                                                                             |   | $                                  | 733,382 |   | $ | 733,740 |   | $ | 21,617 |   | $ | (867,195 | ) | $ | 621,544 |   |
|                                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**   |   |
|                                                                                     |   |
| Current liabilities:                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                                  | 13,465  |   | $ | 1,950 |   | $ | 7 |   | $ | — |   | $ | 15,422 |   |
| Other current liabilities                                                                |   | 14,762                             |    | 35,154 |   | 1,284 |   | — |   | 51,200 |   |
| Total current liabilities                                                                |   | 28,227                             |    | 37,104 |   | 1,291 |   | — |   | 66,622 |   |
|                                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 375,326                            |    | 9,536 |   | — |   | — |   | 384,862 |   |
| Intercompany payables                                                                    |   | 160,889                            |    | 276,506 |   | — |   | (437,395 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 32,526                             |    | 1,708 |   | 70 |   | — |   | 34,304 |   |
|                                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock                                                   |   | 32,541                             |    | — |   | — |   | — |   | 32,541 |   |
|                                                                                     |   |                               |    |   |   |   |   |   |   |   |   |
| Stockholder’s equity:                                                               |   |                               |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 120,200                            |    | 336,986 |   | 15,440 |   | (352,426 | )(1) | 120,200 |   |
| Retained earnings (deficit)                                                              |   | (16,327                            | )       | 72,071 |   | 5,303 |   | (77,374 | )(1) | (16,327 | ) |
| Accumulated other comprehensive loss                                                     |   | —                             |    | (171 | ) | (487 | ) | — |   | (658 | ) |
| Total stockholder’s equity                                                          |   | 103,873                            |    | 408,886 |   | 20,256 |   | (429,800 | ) | 103,215 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity |   | $                                  | 733,382 |   | $ | 733,740 |   | $ | 21,617 |   | $ | (867,195 | ) | $ | 621,544 |   |

 

21

----

 
|                                                                                     |   | **December 31,2001** |    |
|------------------------------------------------------------------------------------------|--------|----------------------|---------|
| ***(In thousands)***                                                                     |   | **Issuer**           |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                 |    |   |   |   |   |   |   |   |   |
| Current  assets:                                                                         |   |                 |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                    | 9,641   |   | $ | (92 | ) | $ | 245 |   | $ | — |   | $ | 9,794 |   |
| Accounts receivable, net                                                                 |   | —               |    | 56,973 |   | 1,478 |   | — |   | 58,451 |   |
| Inventories                                                                              |   | —               |    | 84,864 |   | 1,634 |   | — |   | 86,498 |   |
| Other current assets                                                                     |   | 15,153               |    | 1,138 |   | 331 |   | — |   | 16,622 |   |
| Total current assets                                                                     |   | 24,794               |    | 142,883 |   | 3,688 |   | — |   | 171,365 |   |
|                                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 3,355                |    | 55,152 |   | 2,566 |   | — |   | 61,073 |   |
| Other assets, principally intangibles, net                                               |   | 15,348               |    | 388,269 |   | 9,656 |   | — |   | 413,273 |   |
| Investments in subsidiaries                                                              |   | 403,786              |    | 20,697 |   | — |   | (424,483 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 256,360              |    | 121,030 |   | 4,300 |   | (381,690 | )(2) | — |   |
| Total assets                                                                             |   | $                    | 703,643 |   | $ | 728,031 |   | $ | 20,210 |   | $ | (806,173 | ) | $ | 645,711 |   |
|                                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**   |   |
|                                                                                     |   |
| Current liabilities:                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                    | 11,839  |   | $ | 2,054 |   | $ | 6 |   | $ | — |   | $ | 13,899 |   |
| Other current liabilities                                                                |   | 24,849               |    | 49,854 |   | 1,107 |   | — |   | 75,810 |   |
| Total current liabilities                                                                |   | 36,688               |    | 51,908 |   | 1,113 |   | — |   | 89,709 |   |
|                                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 376,392              |    | 9,959 |   | — |   | — |   | 386,351 |   |
| Intercompany payables                                                                    |   | 120,998              |    | 260,660 |   | 32 |   | (381,690 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 38,847               |    | 1,806 |   | 382 |   | — |   | 41,035 |   |
|                                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock                                                   |   | 28,240               |    | — |   | — |   | — |   | 28,240 |   |
|                                                                                     |   |                 |    |   |   |   |   |   |   |   |   |
| Stockholder’s equity:                                                               |   |                 |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 119,801              |    | 336,986 |   | 15,440 |   | (352,426 | )(1) | 119,801 |   |
| Retained earnings (deficit)                                                              |   | (17,323              | )       | 66,800 |   | 5,257 |   | (72,057 | )(1) | (17,323 | ) |
| Accumulated other comprehensive loss                                                     |   | —               |    | (88 | ) | (2,014 | ) | — |   | (2,102 | ) |
| Total stockholder’s equity                                                          |   | 102,478              |    | 403,698 |   | 18,683 |   | (424,483 | ) | 100,376 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity |   | $                    | 703,643 |   | $ | 728,031 |   | $ | 20,210 |   | $ | (806,173 | ) | $ | 645,711 |   |
|                                                                                          |        |                      |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

22

----

 

**Statementsof Operations**

 
|                                          |   | **Nine Months Ended September 30, 2002 (Unaudited)** |
|-----------------------------------------------|--------|-----------------------------------------------------------|
| ***(In thousands)***                          |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Revenues                                      |   | $                                                         | — |   | $ | 248,877 |   | $ | 7,222 |   | $ | (3,983 | )(3) | $ | 252,116 |   |
| Cost of sales                                 |   | —                                                    |   | 176,943 |   | 6,020 |   | (3,983 | )(3) | 178,980 |   |
|                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                                                    |   | 71,934 |   | 1,202 |   | — |   | 73,136 |   |
|                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses |   | 6,116                                                     |   | 34,629 |   | 958 |   | — |   | 41,703 |   |
| Amortization of intangible assets             |   | —                                                    |   | 4,297 |   | 1 |   | — |   | 4,298 |   |
| Interest expense                              |   | 24,092                                                    |   | 747 |   | 4 |   | — |   | 24,843 |   |
| Intercompany charges                          |   | (21,269                                                   | ) | 21,269 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries            |   | (5,271                                                    | ) | (195 | ) | — |   | 5,466 | (4) | — |   |
| Other expenses, net                           |   | 251                                                       |   | 83 |   | 244 |   | — |   | 578 |   |
| Provision for income taxes (benefit)          |   | (4,915                                                    | ) | 5,833 |   | (200 | ) | — |   | 718 |   |
| Net income                                    |   | $                                                         | 996 |   | $ | 5,271 |   | $ | 195 |   | $ | (5,466 | ) | $ | 996 |   |
|                                               |        |                                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 
|                                          |   | **Nine Months Ended September 30, 2001 (Unaudited)** |
|-----------------------------------------------|--------|-----------------------------------------------------------|
| ***(In thousands)***                          |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Revenues                                      |   | $                                                         | — |   | $ | 302,182 |   | $ | 8,594 |   | $ | (5,917 | )(3) | $ | 304,859 |   |
| Cost of sales                                 |   | —                                                    |   | 203,145 |   | 7,234 |   | (5,917 | )(3) | 204,462 |   |
|                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                                                    |   | 99,037 |   | 1,360 |   | — |   | 100,397 |   |
|                                          |   |                                                      |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses |   | 6,790                                                     |   | 34,658 |   | 611 |   | — |   | 42,059 |   |
| Amortization of intangible assets             |   | 152                                                       |   | 14,405 |   | 300 |   | — |   | 14,857 |   |
| Interest expense                              |   | 29,082                                                    |   | 887 |   | 15 |   | — |   | 29,984 |   |
| Intercompany charges                          |   | (18,055                                                   | ) | 18,055 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries            |   | (13,898                                                   | ) | (593 | ) | — |   | 14,491 | (4) | — |   |
| Other expenses (income), net                  |   | 248                                                       |   | 151 |   | (307 | ) | — |   | 92 |   |
| Provision for income taxes (benefit)          |   | (9,764                                                    | ) | 17,576 |   | 148 |   | — |   | 7,960 |   |
| Net income                                    |   | $                                                         | 5,445 |   | $ | 13,898 |   | $ | 593 |   | $ | (14,491 | ) | $ | 5,445 |   |
|                                               |        |                                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

23

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**Statementsof Cash Flows**

 
|                                                                     |   | **Nine Months Ended September 30, 2002 (Unaudited)** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| ***(In thousands)***                                                     |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                     |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net income                                                               |   | $                                                         | 996    |   | $ | 5,271 |   | $ | 195 |   | $ | (5,466 | )(4) | $ | 996 |   |
| Noncash adjustments:                                                     |   |                                                      |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                       |   | (5,271                                                    | )      | (195 | ) | — |   | 5,466 | (4) | — |   |
| Other noncash adjustments                                                |   | 2,704                                                     |   | 19,214 |   | 439 |   | — |   | 22,357 |   |
| Changes in working capital                                               |   | 18,788                                                    |   | (19,330 | ) | (727 | ) | — |   | (1,269 | ) |
| Net cash provided by (used for) operating  activities                    |   | 17,217                                                    |   | 4,960 |   | (93 | ) | — |   | 22,084 |   |
|                                                                     |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired                        |   | (5,890                                                    | )      | — |   | — |   | — |   | (5,890 | ) |
| Capital expenditures                                                     |   | (46                                                       | )      | (3,649 | ) | (109 | ) | — |   | (3,804 | ) |
| Net cash used for investing activities                                   |   | (5,936                                                    | )      | (3,649 | ) | (109 | ) | — |   | (9,694 | ) |
|                                                                     |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                                    |   | 9,000                                                     |   | — |   | — |   | — |   | 9,000 |   |
| Capital contribution, net                                                |   | 4,632                                                     |   | — |   | — |   | — |   | 4,632 |   |
| Other long-term borrowings                                               |   | —                                                    |   | 1,145 |   | — |   | — |   | 1,145 |   |
| Principal payments on long-term debt,  capitalized leases and other debt |   | (8,460                                                    | )      | (2,045 | ) | — |   | — |   | (10,505 | ) |
| Deferred financing costs                                                 |   | (1,663                                                    | )      | — |   | — |   | — |   | (1,663 | ) |
| Other, net                                                               |   | —                                                    |   | (149 | ) | — |   | — |   | (149 | ) |
| Net cash provided by (used for) financing  activities                    |   | 3,509                                                     |   | (1,049 | ) | — |   | — |   | 2,460 |   |
|                                                                     |   |                                                      |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on  cash                          |   | —                                                    |   | — |   | 35 |   | — |   | 35 |   |
|                                                                     |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and  equivalents                         |   | 14,790                                                    |   | 262 |   | (167 | ) | — |   | 14,885 |   |
| Cash and equivalents at beginning of period                              |   | 9,641                                                     |   | (92 | ) | 245 |   | — |   | 9,794 |   |
|                                                                     |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                                    |   | $                                                         | 24,431 |   | $ | 170 |   | $ | 78 |   | $ | — |   | $ | 24,679 |   |

 

24

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** **
|                                                                |   | **Nine Months Ended September 30, 2001 (Unaudited)** |   |
|---------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|
| ***(In thousands)***                                                |   | **Issuer**                                                |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities**                            |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net income                                                          |   | $                                                         | 5,445  |   | $ | 13,898 |   | $ | 593 |   | $ | (14,491) | (4) | $ | 5,445 |   |
| Noncash adjustments                                                 |   |                                                      |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                  |   | (13,898                                                   | )      | (593 | ) | — |   | 14,491 | (4)  | — |   |
| Other noncash adjustments                                           |   | 9,639                                                     |   | 22,393 |   | 935 |   | — |   | 32,967 |   |
| Changes in working capital                                          |   | (3,766                                                    | )      | (27,573 | ) | (871 | ) | — |   | (32,210 | ) |
| Net cash provided by (used for) operating  activities               |   | (2,580                                                    | )      | 8,125 |   | 657 |   | — |   | 6,202 |   |
|                                                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities**                            |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired                   |   | (13,529                                                   | )      | — |   | — |   | — |   | (13,529 | ) |
| Capital expenditures and other                                      |   | (125                                                      | )      | (8,438 | ) | (596 | ) | — |   | (9,159 | ) |
| Net cash used for investing activities                              |   | (13,654                                                   | )      | (8,438 | ) | (596 | ) | — |   | (22,688 | ) |
|                                                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities**                            |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                               |   | 19,600                                                    |   | — |   | — |   | — |   | 19,600 |   |
| Other long-term borrowings                                          |   | —                                                    |   | 1,989 |   | — |   | — |   | 1,989 |   |
| Principal payments on term debt,  capitalized leases and other debt |   | (3,611                                                    | )      | (1,568 | ) | (19 | ) | — |   | (5,198 | ) |
| Deferred financing costs                                            |   | (580                                                      | )      | — |   | — |   | — |   | (580 | ) |
| Other, net                                                          |   | —                                                    |   | (118 | ) | — |   | — |   | (118 | ) |
| Net cash provided by (used for) financing  activities               |   | 15,409                                                    |   | 303 |   | (19 | ) | — |   | 15,693 |   |
|                                                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on  cash                     |   | —                                                    |   | — |   | 39 |   | — |   | 39 |   |
|                                                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and  equivalents                    |   | (825                                                      | )      | (10 | ) | 81 |   | — |   | (754 | ) |
| Cash and equivalents at beginning of period                         |   | 7,553                                                     |   | 233 |   | 413 |   | — |   | 8,199 |   |
|                                                                |   |                                                      |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                               |   | $                                                         | 6,728  |   | $ | 223 |   | $ | 494 |   | $ | — |   | $ | 7,445 |   |

 

25

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**ITEM 2.****                          MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**IndustryOverview and Trends**

 

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

 

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

 

In addition,an estimated 60% of our revenues are currently derived from the corporate/VIPaircraft original equipment and aftermarket/retrofit business.  The weak global economic conditions havenegatively impacted this portion of our business, as well.  The remaining 9% of our revenues are derivedfrom the military aircraft and other markets.

 

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

 

The commercialaircraft portion of our business is experiencing significant weakness in 2002and this condition will continue into 2003, with potential recovery occurringduring 2004 or 2005.  We believe thecorporate/VIP aircraft portion of our business is experiencing growing weaknessduring the current year and this trend is likely to worsen in 2003.  However, we believe the potential exists forcorporate/VIP aircraft deliveries to recover in 2004.

 

**Resultsof Operations**

** **

Our results ofoperations for the three months and nine months endedSeptember 30, 2002 and 2001 have been affected by restructuring,asset impairment and other nonrecurring charges relating to our 2001 and 2002restructuring plans.  Theserestructuring charges, which affect the comparability of our reported resultsof operations between periods, are more fully described in “—Restructuring,Asset Impairment and Other Nonrecurring Charges” below.

 

26

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

 

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

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

 

*Cabin Management. *Revenues decreased by $12.3 million, or22.9% compared to the prior year.  Thisdecrease is spread across most of our product lines and services, and is causedby the adverse impact the weak global economic conditions are having on thecorporate/VIP aircraft market in 2002 versus 2001 as follows:

 

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

 

•                           a $1.5million decrease in seating product revenues;

 

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

 

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

 

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

 

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

 

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

 

*Systems Integration.*  Revenues decreased by $3.3 million, or 17.7%compared to the prior year, due to:

 

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

 

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

 

27

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**Gross profit.**  Gross profit decreased $7.2 million, or21.9%, to $25.6 million for the three months ended September 30, 2002 from$32.8 million for the same period last year. By segment, gross profit changed as follows:

 

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

 

Gross profitis reduced by restructuring charges pertaining to our Cabin Management group’s2001 and 2002 restructuring plans totaling $0.7 million for the three monthsended September 30, 2002. Excluding these charges, gross profit decreased $6.5 million, or 19.8%,to $26.3 million for the three months ended September 30, 2002compared to $32.8 million for the same period last year and gross profit as apercent of revenues was 33.0% for the three months endedSeptember 30, 2002 compared to 31.8% for the same period last year.

 

*Cabin Management.*  Gross profit decreased by $3.0 million, or 20.0%compared to the prior year, primarily due to:

 

•                           a $2.3million decrease in profit margins for our corporate/VIP aircraft furniture andseating product line associated with lower volume for our product; and

 

•                           a $0.7million net decrease caused by restructuring charges related to our 2001 and2002 restructuring plans.

 

*Specialty Avionics.*  Gross profit decreased by $3.9 million, or33.8% compared to the prior year, due to:

 

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

 

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

 

*Systems Integration.*  Gross profit decreased by $0.6 million, or9.1% compared to the prior year, due to lower sales volume.

 

28

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

 

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

 

SG&Aexpenses includes restructuring charges pertaining to our Cabin Managementgroup’s 2001 and 2002 restructuring plans totaling $0.8 million for the threemonths ended September 30, 2002. Excluding these charges, SG&A expenses decreased $3.4 million, or24.3%, to $10.6 million for the three months ended September 30, 2002compared to $14.0 million for the same period last year and SG&A expensesas a percent of revenues was 13.3% for the three months endedSeptember 30, 2002 compared to 13.6% for the same period last year.

 

*Cabin Management. *SG&A expenses were consistent withthe prior year, due to:

 

•                           a $0.8million increase caused by restructuring charges relating to our 2001 and 2002restructuring plans; offset by

 

•                           a $0.8million decrease in expenses resulting from cost reduction measures implementedin 2001 and 2002 in response to lower sales volume resulting from the weakglobal economic conditions.

 

*Specialty Avionics.*  SG&A expenses decreased by $1.4 million,or 39.0% compared to the prior year, due to lower labor and employee benefitcosts resulting from workforce reductions implemented during the fourth quarterof fiscal 2001.

 

*Systems Integration. *SG&A expensesdecreased by $1.0 million, or 40.9% compared to the prior year, due to lowerlabor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

 

*Corporate. *SG&A expenses decreased by $0.2 millioncompared to the prior year, due to lower labor and employee benefit costs.

 

**Depreciation and amortization of intangibles.** Depreciation and amortization expense decreased $3.9 million to $4.2million for the three months ended September 30, 2002 compared to $8.1 millionfor the same period last year, primarily resulting from the adoption of newaccounting standards.

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill andOther Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-livedasset and, as a result, the recording of periodic goodwill amortization chargeswas discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating toacquired assembled workforce intangibles not meeting the criteria forrecognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $3.5 million forthe three months ended September 30, 2001, which includes $0.4 million ofassembled workforce amortization, now deemed part of goodwill.

 

29

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Excluding theeffect of the accounting change, depreciation and amortization decreased $0.4million as a result of lower depreciable costs resulting from the impairment oflong-lived assets recorded during the fourth quarter of fiscal 2001 and 2002,partially offset by additional depreciation resulting from capital expendituresduring the period.

 

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

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

 

EBITDA andoperating income are reduced by restructuring charges pertaining to our CabinManagement group’s 2001 and 2002 restructuring plans totaling $1.5 million forthe three months ended September 30, 2002.  Excluding these charges, EBITDA decreased $3.1 million, or 14.1%,to $18.9 million for the three months ended September 30, 2002compared to $22.0 million for the same period last year and EBITDA as a percentof revenues was 23.7% for the three months ended September 30, 2002compared to 21.4% for the same period last year.  Excluding these charges, operating income increased $0.3 million,or 2.2%, to $14.2 million for the three months endedSeptember 30, 2002 compared to $13.9 million for the same period lastyear.

 

*Cabin Management.*  EBITDA decreased by $3.2 million, or 29.8%compared to the prior year, primarily due to:

 

•                           a $1.5million net decrease caused by restructuring charges related to our 2001 and2002 restructuring plans;

 

•                           a $1.0million decrease resulting from lower sales volume for our cabin management andentertainment systems; and

 

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

 

*Specialty Avionics.*  EBITDA decreased by $2.6 million, or 28.9%compared to the prior year, as a result of lower demand for our commercialaircraft products offset by the effect of cost reduction programs implementedin 2001 and a favorable shift in product mix.

 

*Systems Integration. *EBITDA increased by$0.4 million, or 8.9% compared to the prior year, due to lower sales volumepartially offset by reduced operating costs and SG&A spending reductionsresulting from workforce reductions.

 

30

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

 

**Interest expense.**  Interest expense decreased $1.0 million, or10.3%, to $8.7 million for the three months ended September 30, 2002 comparedto $9.7 million for the same period last year due almost entirely to loweraverage interest rates charged by our lenders during 2002.

 

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

 

**Net income (loss).**  Net income increased $1.6 million to $2.5million for the three months ended September 30, 2002 compared to netincome of $0.9 million for the same period last year.

 

**Net income (loss) applicable to commonstockholder.** Net income applicable to DeCrane Holdings, our common stockholder,increased $1.4 million to $1.0 million for the three months endedSeptember 30, 2002 compared to a net loss of $0.4 million for thesame period last year.  The increase isattributable to:

 

•                           a $1.6million increase in net income, offset by;

 

•                           a $0.2million increase in accrued 16% mandatorily redeemable preferred stockdividends resulting from the quarterly compounding of accrued dividends.

 

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

 

**Backlog at end of period.**  Backlog decreased $36.9 million to $113.0million as of September 30, 2002 compared to $149.9 million as ofDecember 31, 2001.

 

The decreasein bookings and resulting backlog in 2002 primarily results from the continuingadverse impact on our businesses of the aftermath of the events of September 11thand weak global economic conditions.  Inaddition, we believe that some of our customers have substantially reducedtheir order lead times which may have adversely affected bookings during theperiod and the resulting backlog at the end of the period.

 

As describedin “—Industry Overview and Trends,” the September 11th terroristattack and its aftermath are having an adverse impact on the aerospace industryand, in turn, are having an unfavorable impact on the commercial airlineportion of our business.  In addition,weak global economic conditions have negatively impacted other portions of ourbusiness as well.  We are not currentlyable to determine the continuing impact these events will have on our bookingsand resulting backlog for future periods. However, given the magnitude of these events, the adverse impact couldbe material.

 

31

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

** **

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

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

 

*Cabin Management. *Revenues decreased by $23.5 million, or14.8% compared to the prior year.  Thedecrease, which is across most of our product and services categories, iscaused by the adverse impact the weak global economic conditions are having onthe corporate/VIP aircraft market in 2002 versus 2001 as follows:

 

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

 

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

 

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

 

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

 

*Specialty Avionics.*  Revenues decreased by $21.2 million, or22.3% compared to the prior year, due to decreases in commercial aircraftproduction affecting the following product lines:

 

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

 

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

 

*Systems Integration.*  Revenues decreased by $9.5 million, or 17.9%compared to the prior year, due to:

 

•                           a $6.4million decrease in the commercial aircraft systems integration engineering serviceswe provide in the aftermath of September 11th; and

 

•                           a $3.1million decrease resulting from reduced production and delivery ofcorporate/VIP aircraft auxiliary fuel tank systems.

 

32

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**Gross profit.**  Gross profit decreased $27.3 million, or27.2%, to $73.1 million for the nine months ended September 30, 2002 from$100.4 million for the same period last year. By segment, gross profit changed as follows:

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

 

Gross profitis reduced by restructuring charges pertaining to our Cabin Management group’s2001 and 2002 restructuring plans totaling $6.6 million for the nine monthsended September 30, 2002 and $3.9 million for the same period lastyear.  Excluding these charges, grossprofit decreased $24.6 million, or 23.6%, to $79.7 million for the nine monthsended September 30, 2002 compared to $104.3 million for the sameperiod last year and gross profit as a percent of revenues was 31.6% for thenine months ended September 30, 2002 compared to 34.2% for the sameperiod last year.

* *

*Cabin Management.*  Gross profit decreased by $16.9 million, or36.1% compared to the prior year, primarily due to:

 

•                           a $10.0million decrease in profit margins due to lower volume for our corporate/VIPaircraft furniture and seating products,

 

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

 

•                           a $2.7million net decrease caused by restructuring charges related to our 2001 and2002 restructuring plans.

 

*Specialty Avionics.*  Gross profit decreased by $8.7 million, or25.5% compared to the prior year, due to:

 

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

 

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

 

*Systems Integration.*  Gross profit decreased by $2.1 million, or10.7% compared to the prior year, due to lower sales volume.

 

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

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

 

SG&Aexpenses includes restructuring charges pertaining to our Cabin Managementgroup’s 2001 and 2002 restructuring plans totaling $6.6 million for the ninemonths ended September 30, 2002. Excluding these charges, SG&A expenses decreased $7.0 million, or16.6%, to $35.1 million for the nine months ended September 30, 2002compared to $42.1 million for the same period last year and SG&A expensesas a percent of revenues were 13.9% for the nine months endedSeptember 30, 2002 compared to 13.8% for the same period last year.

 

*Cabin Management. *SG&A expenses increased by $4.8million, or 28.2% compared to the prior year, due to:

 

•                           a $6.6million increase caused by restructuring charges relating to our 2001 and 2002restructuring plans; offset by

 

•                           a $1.8million decrease in expenses as a result of cost reduction measures implementedin 2001 and 2002 in response to lower sales volume resulting from the weakglobal economic conditions.

 

*Specialty Avionics.*  SG&A expenses decreased by $2.8 million,or 25.5% compared to the prior year, due to lower labor and employee benefitcosts resulting from workforce reductions implemented during the fourth quarterof fiscal 2001.

 

*Systems Integration. *SG&A expensesdecreased by $2.1 million, or 26.8% compared to the prior year, due to lowerlabor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

 

*Corporate. *SG&A expenses decreased by $0.3 millioncompared to the prior year, primarily due to workforce and travel expense reductionsoffset by increases in insurance and employee benefit costs.

 

**Depreciation and amortization of intangibles.**  Depreciation and amortization expensedecreased $11.0 million to $12.9 million for the nine months ended September30, 2002 compared to $23.9 million for the same period last year, primarilyresulting from the adoption of new accounting standards.

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill andOther Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-livedasset and, as a result, the recording of periodic goodwill amortization chargeswas discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating toacquired assembled workforce intangibles not meeting the criteria forrecognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $10.7 million forthe nine months ended September 30, 2001, which includes $1.2 million ofassembled workforce amortization, now deemed part of goodwill.

 

34

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Excluding theeffect of the accounting change, depreciation and amortization decreased $0.3million as a result of lower depreciable costs resulting from the impairment oflong-lived assets recorded during the fourth quarter of fiscal 2001 and 2002,partially offset by additional depreciation resulting from capital expendituresduring the period.

 

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

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

 

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

 

*Cabin Management.*  EBITDA decreased by $21.5 million, or 63.6%compared to the prior year, primarily due to:

 

•                           a $9.4million decrease related principally to lower revenues in our corporate/VIPaircraft furniture and seating operations;

 

•                           a $9.3million net decrease caused by restructuring charges related to our 2001 and2002 restructuring plans; and

 

•                           a $2.8million decrease resulting from lower sales volume for our cabin management andentertainment systems.

 

*Specialty Avionics.*  EBITDA decreased by $6.1 million, or 23.4%compared to the prior year, as a result of lower demand for our commercialaircraft products offset by the effect of cost reduction programs implementedin 2001 and 2002 and a favorable shift in product mix.

 

*Systems Integration. *EBITDA decreased by$0.1 million, or 0.7% compared to the prior year, due to lower sales volumepartially offset by reduced SG&A spending resulting from workforcereductions.

 

35

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*Corporate. *EBITDA increased$0.6 million, or 11.6% compared to the prior year, due to principally toreduced SG&A spending.

 

**Interest expense.**  Interest expense decreased $5.2 million, or17.2%, to $24.8 million for the nine months ended September 30, 2002 comparedto $30.0 million for the same period last year due almost entirely to loweraverage interest rates charged by our lenders during 2002.

 

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

 

**Net income (loss).**  Net income decreased $4.4 million to $1.0million for the nine months ended September 30, 2002 compared to netincome of $5.4 million for the same period last year.

 

**Net income (loss) applicable to commonstockholder.** Net income applicable to DeCrane Holdings, our common stockholder,decreased $5.0 million to a net loss of $3.3 million for the nine months endedSeptember 30, 2002 compared to net income of $1.7 million for the sameperiod last year.  The decrease isattributable to:

 

•                           a $4.4million decrease in net income; and

 

•                           a $0.6million increase in accrued 16% mandatorily redeemable preferred stockdividends resulting from the quarterly compounding of accrued dividends.

 

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

 

The decreasein bookings in 2002 primarily results from the continuing adverse impact on ourbusinesses of the aftermath of the events of September 11th and weakglobal economic conditions.  Inaddition, we believe that some of our customers have substantially reducedtheir order lead times which may have adversely affected bookings during theperiod.

 

As describedin “—Industry Overview and Trends,” the September 11th terroristattack and its aftermath are having an adverse impact on the aerospace industryand, in turn, are having an unfavorable impact on the commercial airline portionof our business.  In addition, weakglobal economic conditions have negatively impacted other portions of ourbusiness as well.  We are not currentlyable to determine the continuing impact these events will have on our bookingsfor future periods.  However, given themagnitude of these events, the adverse impact could be material.

 

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

** **

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

 

During thethree months and nine months ended September 30, 2002 and 2001, werecorded restructuring, asset impairment and other nonrecurring pre-tax chargesrelated to two restructuring plans. These charges, and the effect these charges had on our reported resultsof operations for the periods, are summarized below.

 
|                                              |   | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|---------------------------------------------------|--------|---------------------------------------|------------|--------------------------------------|------------|
| ***(In millions)***                               |   | **2002**                              | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                              |   |                                  |       |                                 |       |   |   |   |   |
| Restructuring plan:                               |   |                                  |       |                                 |       |   |   |   |   |
| 2002 Seat Manufacturing Facilities  Restructuring |   | $                                     | —     |                                 | $          | — |   | $ | 6.3 |   | $ | — |   |
| 2001 Restructuring and Asset Impairment  Charges  |   | 1.5                                   |       | —                               |       | 6.9 |   | 3.9 |   |
| Total pre-tax charges                             |   | $                                     | 1.5        |                                 | $          | — |   | $ | 13.2 |   | $ | 3.9 |   |
|                                              |   |                                  |       |                                 |       |   |   |   |   |
| Charged to operations:                            |   |                                  |       |                                 |       |   |   |   |   |
| Cost of sales                                     |   | $                                     | 0.7        |                                 | $          | — |   | $ | 6.6 |   | $ | 3.9 |   |
| Selling, general and administrative  expenses     |   | 0.8                                   |       | —                               |       | 6.6 |   | — |   |
| Total pre-tax charges                             |   | $                                     | 1.5        |                                 | $          | — |   | $ | 13.2 |   | $ | 3.9 |   |
|                                              |   |                                  |       |                                 |       |   |   |   |   |
| Components of charges:                            |   |                                  |       |                                 |       |   |   |   |   |
| Cash charges                                      |   | $                                     | —     |                                 | $          | — |   | $ | 5.8 |   | $ | 3.9 |   |
| Noncash charges                                   |   | 1.5                                   |       | —                               |       | 7.4 |   | — |   |
| Total pre-tax charges                             |   | $                                     | 1.5        |                                 | $          | — |   | $ | 13.2 |   | $ | 3.9 |   |
|                                              |   |                                  |       |                                 |       |   |   |   |   |
| As reported:                                      |   |                                  |       |                                 |       |   |   |   |   |
| Gross profit                                      |   | $                                     | 25.6       |                                 | $          | 32.8 |   | $ | 73.1 |   | $ | 100.4 |   |
| Selling, general and administrative  expenses     |   | 11.4                                  |       | 14.0                                 |       | 41.7 |   | 42.1 |   |
| EBITDA                                            |   | 17.4                                  |       | 22.0                                 |       | 41.1 |   | 67.8 |   |
| Operating income                                  |   | 12.7                                  |       | 13.9                                 |       | 27.1 |   | 43.5 |   |
| Pre-tax income                                    |   | 3.8                                   |       | 4.2                                  |       | 1.7 |   | 13.4 |   |
|                                              |   |                                  |       |                                 |       |   |   |   |   |
| As adjusted:                                      |   |                                  |       |                                 |       |   |   |   |   |
| Gross profit                                      |   | $                                     | 26.3       |                                 | $          | 32.8 |   | $ | 79.7 |   | $ | 104.3 |   |
| Selling, general and administrative  expenses     |   | 10.6                                  |       | 14.0                                 |       | 35.1 |   | 42.1 |   |
| EBITDA                                            |   | 18.9                                  |       | 22.0                                 |       | 54.3 |   | 71.7 |   |
| Operating income                                  |   | 14.2                                  |       | 13.9                                 |       | 40.3 |   | 47.4 |   |
| Pre-tax income                                    |   | 5.3                                   |       | 4.2                                  |       | 14.9 |   | 17.3 |   |

 

**2002Seat Manufacturing Facilities Restructuring**

** **

In 2002, weannounced we would consolidate the production of four seating and relatedmanufacturing facilities into two, resulting in the permanent closure of twofacilities.  In connection with thisrestructuring plan, we recorded nonrecurring pre-tax charges to operationstotaling $6.3 million during the nine months ended September 30, 2002 forrestructuring, asset impairment and other related restructuring expenses.

 

Therestructuring and asset impairment charges and other related expenses arecomprised of charges for inventory and accounts receivable write-downs, theimpairment of long-lived assets, severance and lease termination costs andother restructuring-related expenses pertaining to FAA retesting andrecertification, moving, transportation and travel costs and shutdown andstartup costs.

 

37

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Therestructuring plan was substantially completed during the second quarter offiscal 2002.  A $0.1 millionrestructuring reserve remains at September 30, 2002 for lease terminationand other related costs.  Themanufacturing facilities were closed during June 2002; however, future cashpayments will extend beyond this date due to future lease payments on thevacated facilities and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

**2001Restructuring and Asset Impairment Charges**

 

During thesecond quarter of fiscal 2001, we adopted a restructuring plan to realignaircraft furniture production programs among our manufacturing facilities.  In addition, and in response to the adverseimpact on the aerospace industry resulting from the September 11thterrorist attack and its aftermath, as well as the weakening of global economicconditions, we announced and implemented a further restructuring plan inDecember 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  These plans primarilyaffected our Cabin Management and Specialty Avionics Groups.

 

In connectionwith these restructuring plans, we recorded nonrecurring pre-tax charges tooperations of $28.7 million in fiscal 2001 ($3.9 million during the threemonths and nine months ended September 30, 2001), of which $22.1 million werenoncash charges, for the impairment of long-lived assets and restructuringcosts related to write-downs and write-offs of inventoried costs, costsassociated with the realignment of aircraft furniture production programs amongfacilities, severance, lease termination and other related costs.  As of December 31, 2001, $27.1 million hadbeen incurred and the remaining $1.6 million was reflected as an accruedliability.

 

Due to theongoing weakness of the corporate/VIP aircraft market, we decided during thesecond quarter of fiscal 2002 to permanently close the temporarily idledmanufacturing facility.  In connectionwith this decision, we recorded additional nonrecurring pre-tax charges tooperations totaling $6.9 million during the nine months ended September 30,2002 ($1.5 million during the third fiscal quarter of 2002) for restructuringand asset impairment charges and other related expenses.

 

At December31, 2001, the remaining $1.6 million restructuring reserve was for severance,lease termination and other related costs. During the nine months ended September 30, 2002, we paid$1.4 million of these costs resulting in a $0.2 million restructuringreserve remaining at September 30, 2002. We expect to incur the remaining severance costs during the fourthquarter of fiscal 2002 when the remaining personnel are terminated.  The restructuring plan related to leasedfacilities was completed during the second quarter of fiscal 2002; however,future cash payments will extend beyond this date due to future lease paymentson the vacated facility and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

38

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**Liquidityand Capital Resources**

** **

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

 

Net cashprovided by operating activities was $22.1 million for the nine months endedSeptember 30, 2002 and consisted of $23.4 million of cash provided byoperations after adding back depreciation, amortization, the noncash portion ofour restructuring and asset impairment charges and other noncash items, $1.4million used for working capital, and $0.1 million provided by an increase inother liabilities.  The followingfactors contributed to the $1.4 million working capital increase:

 

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

 

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

 

•                           a $17.3million accounts receivable decrease resulting from decreased revenues as wellas timing differences relating to progress and final billings on long-termcontracts; and further offset by

 

•                           a $1.3million inventory decrease; and

 

•                           a $0.5million increase in income taxes payable.

 

Net cash usedfor investing activities was $9.7 million for the nine months ended September30, 2002 and consisted of:

 

•                           $5.9million of contingent acquisition consideration paid during 2002; and

 

•                           $3.8million for capital expenditures.

 

We anticipatespending approximately $6.0 to $7.0 million for capital expenditures in 2002,which includes approximately $2.0 million for improvements to the seatmanufacturing facilities that will house the combined operations of thefacilities being closed in 2002.

 

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

 

At September30, 2002, senior credit facility borrowings totaling $288.5 million are atvariable interest rates based on defined margins over the current prime orLIBOR rates.  At September 30, 2002, wealso had $94.4 million of working capital and had $29.0 million of borrowingsavailable under our revolving line of credit.

 

We are beingaffected by economic, financial, competitive, legislative, regulatory, businessand other factors beyond our control. As described in “—Industry Overview and Trends,” the September 11thterrorist attack and its aftermath are having a severe adverse impact on theaerospace industry and, in turn, are having an unfavorable impact on thecommercial aircraft portion of our business. In addition, the weak global economic conditions are adversely impactingother portions of our business as well. As described in “—Restructuring, Asset Impairment and Other NonrecurringCharges,” we are taking measures to reduce costs and conserve working capital.

 

39

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

 

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

 

**RecentAccounting Pronouncements**

 

**Accounting Pronouncements Adopted January 1,2002**

 

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

 

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

 

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

 

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

 

**Recently Issued Accounting Pronouncements**

 

*SFAS No. 145*

 

In May 2002,the Financial Accounting Standards Board issued SFAS No. 145, “Rescissionof SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, andTechnical Corrections.”  Among otherthings, SFAS No. 145 rescinds various pronouncements regarding earlyextinguishment of debt and allows extraordinary accounting treatment for earlyextinguishment only when the provisions of Accounting Principles Board OpinionNo. 30, “Reporting the Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regardingearly extinguishment of debt are generally effective for fiscal years beginningafter May 15, 2002.  We believe this newstandard will not have an impact on our business, consolidated financialposition, results of operations or cash flow.

 

*SFAS No. 146*

 

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

 

SFAS No. 146requires that the liability for costs associated with an exit or disposalactivity be initially measured at fair value and recognized when the liabilityis incurred.  In periods subsequent toinitial measurement, changes to the liability are measured using thecredit-adjusted risk-free rate that was used in the initial measurement of theliability recorded.  The cumulativeeffect of a change resulting from revisions to either the timing or the amountof estimated cash flows is recognized as an adjustment to the liability in theperiod of the change and charged to the same line items in the statement ofoperations used

 

40

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when the related costs wereinitially recognized.  Under EITF No.94-3, a liability for an exit cost was recognized at the date of a company’scommitment to an exit plan.

 

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

 

**Common European Currency**

 

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

 

**Special Note Regarding Forward-LookingStatements**

 

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

 

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

 

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

 

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

 

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

 

•                           competitionfrom larger companies;

 

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

 

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

 

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

 

•                           theability to attract and retain qualified personnel;

 

•                           labordisturbances; and

 

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

 

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

 

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

 

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

 

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

 

Market riskrelated to our variable-rate debt is estimated as the potential decrease inpre-tax earnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime or LIBOR rates.  AtSeptember 30, 2002, the current prime rate was 4.75% and the current LIBOR ratewas 1.95%.  Based on $288.5 million ofvariable-rate debt outstanding as of September 30, 2002, a hypothetical onepercent rise in interest rates, to 5.75% for prime rate borrowings and 2.95%for LIBOR borrowings, would reduce our pre-tax earnings by $2.9 millionannually.

 

To limit ourexposure related to rising interest rates, we have entered into an interestrate swap contract to effectively convert $4.5 million of variable-rateindustrial revenue bonds to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedge againstchanges in the amount of future cash flows associated with interest payments onthis portion of our variable-rate debt. Market risk related to this interest rate swap contract is estimated asthe potential higher interest expense we will incur if the variable interestrate decreases below the 4.2% fixed rate. Based on the $4.5 million of variable-rate debt converted to fixed-ratedebt outstanding as of September 30, 2002, a hypothetical one percent decreasein the variable interest rate to 3.2%, would reduce our pre-tax earnings byless than $0.1 million annually.

 

The estimatedfair value of our $100.0 million fixed-rate long-term debt decreased$12.5 million, or 13.4%, to approximately $81.0 million at September 30,2002 from $93.5 million at December 31, 2001. Subsequent to September 30, 2002, the estimated fair value decreased anadditional $41.0 million to approximately $40.0 million as of October 31,2002.  Market risk related to ourfixed-rate debt is deemed to be the potential increase in fair value resultingfrom 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 CurrencyExchange Rate Risk.** Our foreign customers are located in various parts of the world,primarily Western Europe, the Far East and Canada, and we have subsidiarieswith manufacturing facilities in Switzerland and Mexico.  To limit our foreign currency exchange raterisk related to sales to our customers, orders are primarily valued and sold inU.S. dollars.  From time to time we haveentered into forward foreign exchange contracts to limit our exposure relatedto foreign inventory procurement and operating costs.  While we have not entered into any such contracts since 1998, wemay do so in the future depending on our assessment of future foreign exchangerate trends.

 

42

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**ITEM4.****                                         CONTROLSAND PROCEDURES**

 

**Evaluation of disclosure controlsand procedures.**  Our Chief Executive Officer and ChiefFinancial Officer have evaluated our disclosure controls and procedures within90 days of the filing of this report. These controls and procedures are designed to ensure that all of theinformation required to be disclosed by us in our periodic reports filed withthe Securities and Exchange Commission (the “Commission”) is recorded,processed, summarized and reported within the time periods specified by theCommission and that the information is communicated to the Chief ExecutiveOfficer and Chief Financial Officer on a timely basis.  Based on their evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were suitable and effective.

 

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

 

 

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**PARTII – OTHER INFORMATION**

**ITEM1.****                             LEGALPROCEEDINGS**

 

As part of itsinvestigation of the crash off the Canadian coast on September 2, 1998 ofSwissair Flight 111, the Canadian Transportation Safety Board (“TSB”) notifiedus that they recovered burned wire that was attached to the in-flightentertainment system installed on some of Swissair’s aircraft by one of oursubsidiaries.  We are fully cooperatingwith the CTSB and have been advised that the CTSB intends to issue a finalreport on its investigation in February, 2003. We believe that no evidence exists that would indicate the equipmentinstalled by our subsidiary malfunctioned or failed during the flight.  Families of the 229 persons who died aboardthe flight have filed actions in federal and state courts against us, and manyother parties unaffiliated with us, including Swissair and Boeing.  The actions claim negligence, strictliability and breach of warranty relating to the installation and testing ofthe in-flight entertainment system.  Theactions seek compensatory and punitive damages and costs in an unstatedamount.  All of the actions have beentransferred to the United States District Court for the Eastern District ofPennsylvania and assigned under MDL Case No. 1269 for coordinated orconsolidated pretrial proceedings.  Weintend to defend the claims vigorously.

 

We are partyto other litigation incident to the normal course of business.  We do not believe that the outcome of allsuch matters in which we are currently involved will have a material adverseeffect on our business, financial position, results of operations or cashflows.

 
| **ITEM 6.** |                | **EXHIBITS AND REPORTS ON FORM 8-K**                                                                                                                   |
|-------------|---------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                |                                                                                                                                                   |   |
| a.          | Exhibits            |                                                                                                                                                   |   |
|        |                |                                                                                                                                                   |   |
|        | 3.26.1.1            | Articles of  Amendment amending the Restated Articles of Incorporation of ERDA, Inc.  (changing its name to DeCrane Aircraft Seating Company, Inc.) ** |
|        |                |                                                                                                                                                   |   |
|        | 3.30.1              | Certificate  of Formation of DeCrane Cabin Interiors, LLC **                                                                                           |
|        |                |                                                                                                                                                   |   |
|        | 3.30.2              | Limited  Liability Company Agreement of DeCrane Cabin Interiors, LLC **                                                                                |
|        |                |                                                                                                                                                   |   |
|        | 21.1                | List of  Subsidiaries of Registrant **                                                                                                                 |
|        |                |                                                                                                                                                   |   |
|        | 99.1                | Chief  Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *     |
|        |                |                                                                                                                                                   |   |
|        | 99.2                | Chief  Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *     |
|        |                |                                                                                                                                                   |   |
|        |                     |
|        | *                   | Filed  herewith                                                                                                                                        |
|        |                |                                                                                                                                                   |   |
|        | **                  | Previously  filed                                                                                                                                      |
|        |                |                                                                                                                                                   |   |
|        |                |                                                                                                                                                   |   |
| b.          | Reports on Form 8-K |
|        |                |                                                                                                                                                   |   |
|        | None                |
|             |                     |                                                                                                                                                        |  |  |  |  |  |

 

44

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

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

 

45

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**CERTIFICATIONS**

 

**Chief Executive Officer Certification**

 
| I, R. Jack  DeCrane, certify that: |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
|------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
| 1.                                 | I have  reviewed this quarterly report on Form 10-Q of DeCrane Aircraft Holdings,  Inc.;                                                                                                                                                                                                                                                                                                            |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
| 2.                                 | Based on my  knowledge, this quarterly  report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                           |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
| 3.                                 | Based on my  knowledge, the financial statements, and other financial information included  in this quarterly report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this quarterly report;                                                                                     |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
| 4.                                 | The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                   |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
|                               | a)                                                                                                                                                                                                                                                                                                                                                                                                  | designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared;          |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
|                               | b)                                                                                                                                                                                                                                                                                                                                                                                                  | evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and                                                                                              |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
|                               | c)                                                                                                                                                                                                                                                                                                                                                                                                  | presented in  this quarterly report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date;                                                                                                                                   |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
| 5.                                 | The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |
|                               | a)                                                                                                                                                                                                                                                                                                                                                                                                  | all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
|                               | b)                                                                                                                                                                                                                                                                                                                                                                                                  | any fraud,  whether or not material, that involves management or other employees who have  a significant role in the registrant’s internal controls; and                                                                                                                                                |
|                               |                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                         |
| 6.                                 | The  registrant’s other certifying officers and I have indicated in this quarterly  report whether or not there were significant changes in internal controls or  in other factors that could significantly affect internal controls subsequent  to the date of our most recent evaluation, including any corrective actions  with regard to significant deficiencies and material weaknesses. |
|                                    |                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                              |  |  |  |

 

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

 

46

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**Chief Financial Officer Certification**

 
| I, Richard  J. Kaplan, certify that: |                                                                                                                                                                                                                                                                                                                                                                                                |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 1.                                   | I have  reviewed this quarterly report on Form 10-Q of DeCrane Aircraft Holdings,  Inc.;                                                                                                                                                                                                                                                                                                            |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 2.                                   | Based on my  knowledge, this quarterly  report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this quarterly report;                                                           |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 3.                                   | Based on my  knowledge, the financial statements, and other financial information included  in this quarterly report, fairly present in all material respects the  financial condition, results of operations and cash flows of the registrant  as of, and for, the periods presented in this quarterly report;                                                                                     |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 4.                                   | The  registrant’s other certifying officers and I are responsible for establishing  and maintaining disclosure controls and procedures (as defined in Exchange  Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                                                                   |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                 | a)                                                                                                                                                                                                                                                                                                                                                                                                  | designed  such disclosure controls and procedures to ensure that material information  relating to the registrant, including its consolidated subsidiaries, is made  known to us by others within those entities, particularly during the period  in which this quarterly report is being prepared; |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                 | b)                                                                                                                                                                                                                                                                                                                                                                                                  | evaluated  the effectiveness of the registrant’s disclosure controls and procedures as  of a date within 90 days prior to the filing date of this quarterly report  (the “Evaluation Date”); and |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                 | c)                                                                                                                                                                                                                                                                                                                                                                                                  | presented in  this quarterly report our conclusions about the effectiveness of the  disclosure controls and procedures based on our evaluation as of the  Evaluation Date; |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 5.                                   | The  registrant’s other certifying officers and I have disclosed, based on our  most recent evaluation, to the registrant’s auditors and the audit committee  of registrant’s board of directors (or persons performing the equivalent  function):                                                                                                                                   |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |
|                                 | a)                                                                                                                                                                                                                                                                                                                                                                                                  | all  significant deficiencies in the design or operation of internal controls  which could adversely affect the registrant’s ability to record, process,  summarize and report financial data and have identified for the registrant’s  auditors any material weaknesses in internal controls; and |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
|                                 | b)                                                                                                                                                                                                                                                                                                                                                                                                  | any fraud,  whether or not material, that involves management or other employees who have  a significant role in the registrant’s internal controls; and |
|                                 |                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 6.                                   | The  registrant’s other certifying officers and I have indicated in this quarterly  report whether or not there were significant changes in internal controls or  in other factors that could significantly affect internal controls subsequent  to the date of our most recent evaluation, including any corrective actions  with regard to significant deficiencies and material weaknesses. |
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                     |  |  |  |  |

 

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

 

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