**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 quarterly period ended March 31,2002**

 

**Commission File Number 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 by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

ýYes    oNo

 

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The number of shares of Registrant’s Common Stock,$.01 par value, outstanding as of May 10, 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 March 31, 2002 and  December 31, 2001 |   |
|                                     |   |   |
|                                     | Consolidated Statements of Operations for  the three months ended March 31, 2002 and 2001 |   |
|                                     |   |   |
|                                     | Consolidated Statements of Stockholder’s  Equity for the three months ended March 31, 2002 |   |
|                                     |   |   |
|                                     | Consolidated Statements of Cash Flows for  the three months ended March 31, 2002 and 2001 |   |
|                                     |   |   |
|                                     | Condensed Notes to Consolidated Financial  Statements |   |
|                                     |   |   |
| **Item 2.**                              | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |   |
|                                     |   |   |
|                                     | Industry Overview and Trends |   |
|                                     |   |   |
|                                     | Results of Operations |   |
|                                     |   |   |
|                                     | Restructuring and Asset Impairment Charges |   |
|                                     |   |   |
|                                     | Liquidity and Capital Resources |   |
|                                     |   |   |
|                                     | Recent Accounting Pronouncements |   |
|                                     |   |   |
| **Item 3.**                              | **Quantitative and Qualitative Disclosure  About Market Risk** |   |
|                                     |   |   |
|                                     | Interest Rate Risk |   |
|                                     |   |   |
|                                     | Foreign Currency Exchange Risk |   |
|                                     |   |   |
| **Part II – Other Information**     |
|                                     |   |   |
| **Item 1.**                              | **Legal Proceedings** |   |
|                                     |   |   |
| **Item 6.**                              | **Exhibits and Reports on Form 8-K** |   |
|                                     |   |   |
|                                     | Exhibits |   |
|                                     |   |   |
|                                     | Reports on Form 8-K |   |
|                                     |   |   |
| **Signatures**                           |   |

 

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.        FINANCIALSTATEMENTS**

 

**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**(In thousands, exceptshare data)**

 
|                                                                                                                                            |   | **March 31,  2002** |    | **December 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                                                            |   | **(Unaudited)**          |    |                        |   |
|                                                                                                                                            |   |                     |    |                        |   |
| **Assets**                                                                                                                                      |   |                     |    |                        |   |
| Current assets:                                                                                                                                 |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                                       |   | $                        | 11,843  |                        | $      | 9,794 |   |
| Accounts receivable, net                                                                                                                        |   | 54,285                   |    | 58,451                      |   |
| Inventories                                                                                                                                     |   | 87,862                   |    | 86,498                      |   |
| Deferred income taxes                                                                                                                           |   | 13,820                   |    | 14,063                      |   |
| Prepaid expenses and other current assets                                                                                                       |   | 3,122                    |    | 2,559                       |   |
| Total current assets                                                                                                                            |   | 170,932                  |    | 171,365                     |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Property and equipment, net                                                                                                                     |   | 57,182                   |    | 61,073                      |   |
| Other assets, principally intangibles, net                                                                                                      |   | 411,249                  |    | 413,273                     |   |
| Total assets                                                                                                                                    |   | $                        | 639,363 |                        | $      | 645,711 |   |
|                                                                                                                                            |   |                     |    |                        |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**                                                          |   |                     |    |                        |   |
| Current liabilities:                                                                                                                            |   |                     |    |                        |   |
| Current portion of long-term debt                                                                                                               |   | $                        | 17,074  |                        | $      | 13,899 |   |
| Accounts payable                                                                                                                                |   | 19,187                   |    | 19,051                      |   |
| Accrued liabilities                                                                                                                             |   | 52,359                   |    | 56,626                      |   |
| Income taxes payable                                                                                                                            |   | 232                      |    | 133                         |   |
| Total current liabilities                                                                                                                       |   | 88,852                   |    | 89,709                      |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Long-term debt                                                                                                                                  |   | 383,075                  |    | 386,351                     |   |
| Deferred income taxes                                                                                                                           |   | 31,345                   |    | 33,597                      |   |
| Other long-term liabilities                                                                                                                     |   | 7,575                    |    | 7,438                       |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Commitments and contingencies (Note 10)                                                                                                         |   |                     |    |                        |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Mandatorily redeemable preferred stock                                                                                                          |   | 29,622                   |    | 28,240                      |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Stockholder’s equity:                                                                                                                      |   |                     |    |                        |   |
| Common stock, $.01 par value, 1,000 shares  authorized; 100 shares issued and outstanding as of March 31, 2002 and  December 31, 2001 |   | —                   |    | —                      |   |
| Additional paid-in capital                                                                                                                      |   | 120,587                  |    | 122,469                     |   |
| Notes receivable for shares sold                                                                                                                |   | (2,500                   | )       | (2,668                      | )      |
| Accumulated deficit                                                                                                                             |   | (16,925                  | )       | (17,323                     | )      |
| Accumulated other comprehensive loss                                                                                                            |   | (2,268                   | )       | (2,102                      | )      |
| Total stockholder’s equity                                                                                                                 |   | 98,894                   |    | 100,376                     |   |
| Total liabilities and stockholder’s equity                                                                                                 |   | $                        | 639,363 |                        | $      | 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**

**(In thousands)**

 
|                                                |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------|--------|----------------------------------------|--------|
|                                                |   | **2002**                               |   | **2001** |   |
|                                                |   | **(Unaudited)**                        |   |
| Revenues                                            |   | $                                      | 86,163 |   | $ | 99,151 |   |
| Cost of sales                                       |   | 60,448                                 |   | 64,106 |   |
|                                                |   |                                   |   |   |   |
| Gross profit                                        |   | 25,715                                 |   | 35,045 |   |
|                                                |   |                                   |   |   |   |
| Operating expenses:                                 |   |                                   |   |   |   |
| Selling, general and administrative  expenses       |   | 15,497                                 |   | 14,660 |   |
| Amortization of intangible assets                   |   | 1,400                                  |   | 4,966 |   |
| Total operating expenses                            |   | 16,897                                 |   | 19,626 |   |
|                                                |   |                                   |   |   |   |
| Income from operations                              |   | 8,818                                  |   | 15,419 |   |
|                                                |   |                                   |   |   |   |
| Other expenses:                                     |   |                                   |   |   |   |
| Interest expense                                    |   | 7,963                                  |   | 10,455 |   |
| Other expenses, net                                 |   | 146                                    |   | 105 |   |
|                                                |   |                                   |   |   |   |
| Income before provision for income taxes            |   | 709                                    |   | 4,859 |   |
| Provision for income taxes                          |   | 311                                    |   | 2,387 |   |
|                                                |   |                                   |   |   |   |
| Net income                                          |   | 398                                    |   | 2,472 |   |
|                                                |   |                                   |   |   |   |
| Accrued preferred stock dividends                   |   | (1,265                                 | )      | (1,082 | ) |
| Preferred stock redemption value accretion          |   | (117                                   | )      | (117 | ) |
|                                                |   |                                   |   |   |   |
| Net income (loss) applicable to common  stockholder |   | $                                      | (984   | ) | $ | 1,273 |   |

 

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, exceptshare data)**

 
|                                                                                                                                          |   | **Common Stock** |   | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
| **Shares**                                                                                                                                    |   | **Amount**       |   |                             |
|                                                                                                                                          |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |
| Balance,  December 31, 2001                                                                                                              |   | 100              |   | $                                | — |                                    | $      | 122,469                  |   | $                                           | (2,668 | )         | $      | (17,323 | ) | $ | (2,102 | ) | $ | 100,376 |   |
|                                                                                                                                          |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive  income (loss):                                                                                                                 |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                                                                                                                      |   | —           |   | —                           |   | —                                  |   | —                   |   | 398                                         |   | —    |   | 398 |   |
| Translation  adjustment                                                                                                                       |   | —           |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (163      | )      | (163 | ) |
| Unrealized loss  on interest rate swap contract                                                                                               |   | —           |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (3        | )      | (3 | ) |
|                                                                                                                                          |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   | 232 |   |
|                                                                                                                                          |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| 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                                                                                                            |   | —           |   | —                           |   | (1,265                                  | )      | —                   |   | —                                      |   | —    |   | (1,265 | ) |
|                                                                                                                                          |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Preferred stock  redemption value accretion                                                                                                   |   | —           |   | —                           |   | (117                                    | )      | —                   |   | —                                      |   | —    |   | (117 | ) |
|                                                                                                                                          |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Compensatory  stock option expense                                                                                                            |   | —           |   | —                           |   | 54                                      |   | —                   |   | —                                      |   | —    |   | 54 |   |
|                                                                                                                                          |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Notes receivable  interest accrued                                                                                                            |   | —           |   | —                           |   | —                                  |   | (32                      | )      | —                                      |   | —    |   | (32 | ) |
| Balance,  March 31, 2002 (Unaudited)                                                                                                     |   | 100              |   | $                                | — |                                    | $      | 120,587                  |   | $                                           | (2,500 | )         | $      | (16,925 | ) | $ | (2,268 | ) | $ | 98,894 |   |

 

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

 

3

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**DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(In thousands)**

 
|                                                                               |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                               |   | **2002**                               |   | **2001** |   |
|                                                                               |   | **(Unaudited)**                        |   |
|                                                                               |   |                                   |   |   |   |
| **Cash flows from operating activities:**                                          |   |                                   |   |   |   |
| Net income                                                                         |   | $                                      | 398    |   | $ | 2,472 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                   |   |   |   |
| Depreciation and amortization                                                      |   | 4,985                                  |   | 8,248 |   |
| Noncash portion of restructuring and asset  impairment charges                     |   | 3,145                                  |   | — |   |
| Deferred income taxes                                                              |   | 128                                    |   | 746 |   |
| Other, net                                                                         |   | 215                                    |   | 359 |   |
| Changes in assets and liabilities, net of  effect from acquisitions:               |   |                                   |   |   |   |
| Accounts receivable                                                                |   | 3,547                                  |   | (8,799 | ) |
| Inventories                                                                        |   | (2,480                                 | )      | (4,086 | ) |
| Prepaid expenses and other assets                                                  |   | (1,177                                 | )      | (838 | ) |
| Accounts payable                                                                   |   | 152                                    |   | 5,302 |   |
| Accrued liabilities                                                                |   | (3,557                                 | )      | (10,675 | ) |
| Income taxes payable                                                               |   | 114                                    |   | 1,505 |   |
| Other long-term liabilities                                                        |   | 112                                    |   | 155 |   |
| Net cash provided by (used for) operating  activities                              |   | 5,582                                  |   | (5,611 | ) |
|                                                                               |   |                                   |   |   |   |
| **Cash flows from investing activities:**                                          |   |                                   |   |   |   |
| Cash paid for acquisitions                                                         |   | (707                                   | )      | (17,247 | ) |
| Capital expenditures                                                               |   | (623                                   | )      | (2,604 | ) |
| Other, net                                                                         |   | —                                 |   | 55 |   |
| Net cash used for investing activities                                             |   | (1,330                                 | )      | (19,796 | ) |
|                                                                               |   |                                   |   |   |   |
| **Cash flows from financing activities:**                                          |   |                                   |   |   |   |
| Net borrowings under senior credit facility                                        |   | —                                 |   | 23,300 |   |
| Other long-term borrowings                                                         |   | 297                                    |   | — |   |
| Deferred financing costs                                                           |   | (1,629                                 | )      | — |   |
| Principal payments on term debt,  capitalized leases and other debt                |   | (451                                   | )      | (1,001 | ) |
| Return of capital in connection with shares  repurchased                           |   | (368                                   | )      | — |   |
| Other, net                                                                         |   | (49                                    | )      | (58 | ) |
| Net cash provided by (used for) financing  activities                              |   | (2,200                                 | )      | 22,241 |   |
|                                                                               |   |                                   |   |   |   |
| Effect of foreign currency translation on  cash                                    |   | (3                                     | )      | 71 |   |
|                                                                               |   |                                   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |   | 2,049                                  |   | (3,095 | ) |
| Cash and cash equivalents at beginning of  period                                  |   | 9,794                                  |   | 8,199 |   |
| Cash and cash equivalents at end of period                                         |   | $                                      | 11,843 |   | $ | 5,104 |   |

 

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

 

4

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**DECRANE AIRCRAFT HOLDINGS, INC. ANDSUBSIDIARIES**

 

**Condensed Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**Note 1.           Consolidated Financial Statements**

 

The consolidated interim financial statements includedin this report are unaudited.  TheCompany believes the interim financial statements are presented on a basisconsistent with the audited financial statements and include all adjustmentsnecessary for a fair presentation of the financial condition, results ofoperations and cash flows for such interim periods.  All of these adjustments are normal recurring adjustments.

 

Preparation of these consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities and disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenues and expenses during the reportingperiods.  Actual results could differfrom those estimates.

 

The results of operations for interim periods do notnecessarily predict the operating results for any other interim period or forthe full year.  The consolidated balancesheet as of December 31, 2001 has been derived from audited financial statementsbut does not include all disclosures required by accounting principlesgenerally accepted in the United States of America as permitted by interimreporting requirements.  The informationincluded in this report should be read in conjunction with Management’sDiscussion and Analysis of Financial Condition and Results of Operations andthe audited financial statements and related notes included in the Company’s2001 Form 10-K.  Some reclassificationshave been made to prior periods’ financial statements to conform to the 2002presentation.

 

**Note 2.           Accounting Pronouncements**

** **

**Accounting PronouncementsAdopted January 1, 2002**

** **

*SFASNo. 141 and 142*

 

Effective January 1, 2002, the Company adoptedSFAS No. 142, “Goodwill and Other Intangible Assets” and the provisionsof SFAS No. 141, “Business Combinations,” which were required to beadopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncementsresulted in the following:

 

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

 

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

 

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

 

5

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The Company has until June 30, 2002 to complete thefirst step of the transitional impairment testing of goodwill associated withadopting SFAS No. 142 and until December 31, 2002 to completethe second step, if needed.  The amountof impairment losses recognizable upon adoption, if any, is not known at thistime.  The transitional impairmentlosses, if any, will be reflected as a cumulative effect of a change inaccounting principle as of January 1, 2002.

 

A reconciliation of reported net income to net incomeadjusted to reflect the impact of the discontinuance of the amortization ofgoodwill and other intangible assets is as follows (amounts in thousands):

 
|                                                                |   | **Three Months Ended  March 31,** |   |
|---------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                |   | **2002**                               |   | **2001** |   |
|                                                                |   | **(Unaudited)**                        |   |
| Reported net income                                                 |   | $                                      | 398    |   | $ | 2,472 |   |
| Add back goodwill and assembled workforce  amortization, net of tax |   | —                                 |   | 2,881 |   |
| Adjusted net income                                                 |   | $                                      | 398    |   | $ | 5,353 |   |

* *

*SFASNo. 143*

 

Effective January 1, 2002, the Company also adoptedSFAS No. 143, “Accounting for Asset Retirement Obligations,” whichrequires recognition of the fair value of liabilities associated with theretirement of long-lived assets when a legal obligation to incur such costsarises as a result of the acquisition, construction, development and/or thenormal operation of a long-lived asset. Adoption of SFAS No. 143 is required for the Company’s fiscalyear beginning January 1, 2003 although early application is permitted.  Adoption of SFAS No. 143 did nothave an impact on the Company’s business, consolidated financial position,results of operations or cash flows.

 

*SFASNo. 144*

 

Effective January 1, 2002, the Company also adoptedSFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” which addresses the accounting and reporting for theimpairment or disposal of long-lived assets. Adoption of SFAS No. 144 did not have an impact on theCompany’s business, consolidated financial position, results of operations orcash flows.

** **

**Recently IssuedAccounting Pronouncement**

** **

***SFAS No. 145***

** **

In May 2002, the Financial Accounting Standards Boardissued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145rescinds various pronouncements regarding early extinguishment of debt andallows extraordinary accounting treatment for early extinguishment only whenthe provisions of Accounting Principles Board Opinion No. 30, “Reportingthe Results of Operations—Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met. SFAS No. 145 provisions regarding early extinguishment of debtare generally effective for fiscal years beginning after May 15, 2002.  The Company is currently evaluating theimpact this new standard will have on its business, consolidated financialposition, results of operations and cash flow.

 

6

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**Note 3.           Restructuring and Asset ImpairmentCharges**

** **

**2002 Restructuring ofSeat Manufacturing Facilities**

** **

In 2002, the Company announced it would consolidatethe production of four seating and related manufacturing facilities into twofacilities, resulting in the permanent closure of two facilities.  In connection with the restructuring plan,the Company expects to record nonrecurring pre-tax charges to operationstotaling $5,145,000 during 2002 for restructuring and asset impairment chargesand other related expenses.  Of thisamount, $4,043,000 was charged to operations during the three months endedMarch 31, 2002 as follows (amounts in thousands):

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

 

Of the $4,043,000 incurred during the three monthsended March 31, 2002, $1,214,000 is included in cost of sales and theremaining $2,829,000 is included in selling, general and administrativeexpenses.  The restructuring and assetimpairment charges and other related expenses are comprised of the following:

 

•                  *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.

 

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

 

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

 

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

 

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

 

7

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The Company has commenced with the restructuring planand expects it to be completed during the third quarter of fiscal 2002.  The components of the restructuring, assetsimpairment and other nonrecurring charges are as follows (amounts inthousands):

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

 

----

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

 

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

 

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

 

Future cash payments will be funded from existing cashbalances and internally generated cash from operations.

 

**2001 Restructuring andAsset Impairment Charges**

** **

During the second quarter of 2001, the Company adopteda restructuring plan to realign aircraft furniture production programs amongits manufacturing facilities.  Inresponse to the adverse impact on the aerospace industry resulting from theSeptember 11thterrorist attack and its aftermath, as well as the weakening of global economicconditions, the Company announced and implemented a further restructuring planin December 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  This plan primarily affectedthe Company’s Cabin Management and Specialty Avionics Groups.

 

In 2001, the Company recorded nonrecurring pre-taxcharges to operations of $28,658,000 for restructuring costs and assetimpairment charges in connection with these restructuring plans.  The restructuring costs and asset impairmentcharges were comprised of the following:

 

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

 

8

----

 

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

 

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

 

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

 

•                  *Severanceand Other Compensation Costs.* Since the September 11thterrorist attack, the Company has reduced its total workforce by approximately400 employees, or 14%, as of March 2002, of which approximately 260 employeeshad separated as of December 31, 2001.

 

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

 

As of December 31, 2001, $27,049,000 had beenincurred, $22,058,000 of which represented a noncash write-down of assets, andthe remaining $1,609,000 was reflected as an accrued liability.  Components of the amounts incurred throughMarch 31, 2002 are as follows (amounts in thousands):

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

 

Through March 31, 2002, severance and othercompensation costs of approximately $1,460,000 have been paid, of which$621,000 was incurred during the three months ended March 31, 2002.  The amounts paid to date have been tomanufacturing and administrative employees terminated at the manufacturingfacilities either permanently closed or being temporarily idled.  The Company expects to incur the remainingcosts during the second quarter of 2002 when the manufacturing facility beingtemporarily idled ceases operations and the remaining personnel are terminated.

 

The remaining balance of restructuring costs includeslease termination and other exit costs. Most of the restructuring plan will be completed by the second quarterof 2002; however, future cash payments will extend beyond this date due tofuture lease payments on the vacated facility and the incurrence of other exitcosts.

 

No significant adjustments have been made to theoriginal estimates.  Future cashpayments will be funded from existing cash balances and internally generatedcash from operations.

 

9

----

 

**Note 4.           Inventories**

 

Inventories are comprised of the following as ofMarch 31, 2002 and December 31, 2001 (amounts in thousands):

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

 

Inventoried costs are not in excess of estimated realizablevalue and include direct engineering, production and tooling costs, andapplicable manufacturing overhead.  Inaccordance with industry practice, inventoried costs include amounts relatingto programs and contracts with long production cycles that will be recoveredfrom future sales.  Periodic assessmentsare performed to ensure recoverability of the program costs and adjustments aremade, if necessary, to reduce inventoried costs to estimated realizable value.  In connection with the 2001 restructuring,$7,908,000 of previously inventoried program costs were determined to beunrecoverable and were charged to cost of sales during the fourth quarter offiscal 2001; no adjustments were required during the first quarter of fiscal2002.

 

Total costs and estimated earnings on all uncompletedcontracts as of March 31, 2002 and December 31, 2001 are comprised ofthe following (amounts in thousands):

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

 

10

----

 

**Note 5.           Other Assets**

 

Other assets are comprised of the following as ofMarch 31, 2002 and December 31, 2001 (amounts in thousands):

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

** **

**Goodwill**

 

Changes in the carrying amount of goodwill, bybusiness segment (Note 12), for the three months ended March 31, 2002 andthe year ended December 31, 2001 are as follows (amounts in thousands):

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

 

Corporate reflects the portion of goodwill that hasnot been allocated to a business segment. The corporate goodwill will be allocated in connection with thetransitional impairment testing of goodwill associated with adoptingSFAS No. 142.

 

11

----

 

**Identifiable IntangibleAssets with Finite Useful Lives**

** **

Identifiable intangible assets with finite usefullives are comprised of the following as of March 31, 2002 andDecember 31, 2001 (amounts in thousands):

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

 

Estimated annual amortization expense for allidentifiable intangible assets with finite useful lives for the five-yearperiod ending December 31, 2006 is as follows: 2002 — $5,601,000; 2003 —$5,574,000; 2004 — $5,521,000; 2005 — $5,521,000; and 2006 — $4,423,000.

 

**Note 6.           Accrued Liabilities**

** **

Accrued liabilities are comprised of the following asof March 31, 2002 and December 31, 2001 (amounts in thousands):

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

 

12

----

 

**Note 7.           Long-Term Debt**

** **

Long-term debt includes the following amounts as ofMarch 31, 2002 and December 31, 2001 (amounts in thousands):

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

 

On March 19, 2002, the Company amended certain of theterms of its senior credit facility. The amendment combines two $25,000,000 working capital and acquisitionslines of credit into a single $50,000,000 working capital line of credit,increases the prime rate and LIBOR rate margins by 50 basis points, resultingin a range of 2.00% to 3.25% for prime rate borrowings and 3.25% to 4.50% forLIBOR rate borrowings, and amends certain financial covenants, principallythrough December 31, 2003.

 

**Note 8.           Income Taxes**

 

For the three months ended March 31, 2002, theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to income before income taxes primarilydue to the effects of state and foreign income taxes.

 

For the three months ended March 31, 2001, theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to income before income taxes primarilydue to the effects of state and foreign income taxes and non-deductibleexpenses, principally goodwill amortization. Prior to the January 1, 2002 adoption of SFAS No. 142,goodwill was amortized for financial reporting purposes.

 

13

----

 

**Note 9.           Capital Structure**

** **

**Mandatorily RedeemablePreferred Stock**

 

The table below summarizes the increase in mandatorilyredeemable preferred stock during the three months ended March 31, 2002.

 
|                                                               |   | **Number  of  Shares**                              |   | **Mandatory  Redemption  Value** |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   |
|--------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------|--------|-------------------------------------|--------|----------------------|--------|
|                                                               |   |                                                |   |                             |   |
|                                                               |   |                                                |   |                             |   |
|                                                               |   | **(in thousands, except share and per share data)** |   |
| Balance,  December 31, 2001                                   |   | 316,330                                             |   | $                                | 31,633 |                                | $      | (3,393               | )      | $ | 28,240 |   |
| Accrued  dividends and redemption value accretion                  |   | 12,653                                              |   | 1,265                            |   | 117                                 |   | 1,382                |   |
| Balance,  March 31, 2002 (Unaudited)                          |   | 328,983                                             |   | $                                | 32,898 |                                | $      | (3,276               | )      | $ | 29,622 |   |
|                                                               |   |                                                |   |                             |   |                                |   |                 |   |
| Per share  liquidation value as of March 31, 2002 (Unaudited) |   |                                                |   | $                                | 100.00 |                                |   |                 |   |   |

 

Holders of the preferred stock are entitled toreceive, when, as and if declared, dividends at a rate equal to 16% perannum.  Prior to June 30, 2005, theCompany may, at its option, pay dividends either in cash or by the issuance ofadditional shares of preferred stock. Since the preferred stock issuance date on June 30, 2000, the Companyhas elected to issue additional shares in lieu of cash dividends payments.

 

**Common Stock, StockOptions Exercised and Notes Receivable for Shares Sold**

** **

During the three months ended March 31, 2002,DeCrane Holdings repurchased and canceled 18,743 common shares from formermembers of DeCrane Aircraft management. The former management members also elected to exercise 9,252 vestedstock options on a cashless basis.  The$14,000 income tax benefit associated with the stock options exercised was alsocredited to additional paid-in capital. In connection with the repurchase, a note receivable collateralized bythe repurchased common stock was repaid.

 

**Note 10.         Commitments and Contingencies**

** **

**Contingent AcquisitionConsideration**

 

The Company’s remaining maximum contingent acquisitionconsideration payment obligation is $600,000 as of March 31, 2002.  The contingent consideration is payablebased upon an acquired company’s level of attainment of its defined performancecriteria for the year ending December 31, 2002 and excludes amounts earnedand recorded through December 31, 2001. The contingent consideration, if any, is payable during the firstquarter of 2003.

** **

**Funding of DeCraneHoldings Preferred Stock Obligations**

 

The Company is a wholly owned subsidiary of DeCraneHoldings whose capital structure also includes mandatorily redeemable preferredstock.  Since the Company is DeCraneHoldings’ only operating subsidiary and source of cash, the Company may be requiredto fund DeCrane Holdings’ preferred stock dividend and redemption obligationsin the future.

** **

**14**

----

** **

DeCrane Holdings’ preferred stock dividends arepayable quarterly at a rate of 14% per annum. Prior to September 30, 2005, dividends are not paid in cash but insteadaccrete to the liquidation value of the preferred stock, which, in turn,increases the redemption obligation.  Onor after September 30, 2005, preferred stock dividends are required to be paidin cash, if declared.  The DeCrane Holdingspreferred stock has a total redemption value of $56,121,000 as ofMarch 31, 2002, including accumulated dividends.

 

**Note 11.         Consolidated Statements of Cash Flows**

 

The following information supplements the Company’sconsolidated statements of cash flows (amounts in thousands):

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

 

**Note 12.         Business Segment Information**

** **

The Company supplies products and services to theaerospace industry.  The Company’ssubsidiaries are organized into three groups, each of which are strategicbusinesses that develop, manufacture and sell distinct products andservices.  The groups and a descriptionof their businesses are as follows:

 

•                  *Cabin Management –* provides interior cabincomponents for the corporate aircraft market, including cabin interiorfurnishings, cabin management systems, seating and composite components;

 

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

 

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

 

Management utilizes more than one measurement toevaluate group performance and allocate resources, however, managementconsiders EBITDA to be the primary measurement of overall economic returns andcash flows.  Management defines EBITDAas earnings before interest, income taxes, depreciation and amortization,acquisition related charges and other noncash and nonoperating charges.  This is consistent with the manner in whichthe Company’s lenders and ultimate investors measure its overall performance.

 

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

 

15

----

 

The tables below summarize selected financial data bybusiness segment (amounts in thousands).

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

 

----

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

 

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

 

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

 

16

----

 

(4)                      The tablebelow reconciles consolidated EBITDA to income from operations and incomebefore income taxes (amounts in thousands).

 
|                                        |   | **Three Months Ended  March 31,** |   |
|---------------------------------------------|--------|----------------------------------------|--------|
|                                        |   | **2002**                               |   | **2001** |   |
|                                        |   | **(Unaudited)**                        |   |
| Consolidated EBITDA                         |   | $                                      | 13,278 |   | $ | 23,385 |   |
| Depreciation and amortization (a)           |   | (4,396                                 | )      | (7,695 | ) |
| Acquisition related charges not capitalized |   | (10                                    | )      | (81 | ) |
| Other noncash charges                       |   | (54                                    | )      | (190 | ) |
| Consolidated income from operations         |   | 8,818                                  |   | 15,419 |   |
|                                        |   |                                   |   |   |   |
| Interest expense                            |   | (7,963                                 | )      | (10,455 | ) |
| Other expenses, net                         |   | (146                                   | )      | (105 | ) |
| Consolidated income before income taxes     |   | $                                      | 709    |   | $ | 4,859 |   |

 

----

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

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

 

(5)                      ReflectsEBITDA before $4,043,000 of restructuring and asset impairment charges andother restructuring related expenses charged to operations during the threemonths ended March 31, 2002 pertaining to Cabin Management’s restructuringof its seating and related manufacturing facilities (Note 3).

 

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

 

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

 

17

----

 

**Note 13.         Supplemental Condensed ConsolidatingFinancial Information**

** **

In conjunction with the senior credit facility and 12%senior subordinated notes described in Note 7, the following condensedconsolidating financial information is presented segregating the Company, asthe issuer, and guarantor and non-guarantor subsidiaries.  The accompanying financial information inthe guarantor subsidiaries column reflects the financial position, results ofoperations and cash flows for those subsidiaries guaranteeing the senior creditfacility and the notes.

 

The guarantor subsidiaries are wholly-ownedsubsidiaries of the Company and their guarantees are full and unconditional ona joint and several basis.  There are norestrictions on the ability of the guarantor subsidiaries to transfer funds tothe issuer in the form of cash dividends, loans or advances.  Separate financial statements of theguarantor subsidiaries are not presented because management believes that suchfinancial statements would not be material to investors.  Investments in subsidiaries in the followingcondensed consolidating financial information are accounted for under theequity method of accounting. Consolidating adjustments include the following:

 

(1)          Elimination ofinvestments in subsidiaries.

 

(2)          Elimination ofintercompany accounts.

 

(3)          Elimination ofintercompany sales between guarantor and non-guarantor subsidiaries.

 

(4)          Elimination of equity inearnings of subsidiaries.

 

18

----

 

**BalanceSheets**

** **
|                                                                                                 |   | **March 31, 2002 (Unaudited)** |    |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                                 |   | **Issuer**                          |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                                 |   | **(in thousands)**                  |    |
|                                                                                                 |   |                                |    |
| **Assets**                                                                                           |   |                                |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                      |   |                                |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                            |   | $                                   | 11,126  |   | $ | 326 |   | $ | 391 |   | $ | — |   | $ | 11,843 |   |
| Accounts receivable, net                                                                             |   | —                              |    | 52,557 |   | 1,728 |   | — |   | 54,285 |   |
| Inventories                                                                                          |   | —                              |    | 86,217 |   | 1,645 |   | — |   | 87,862 |   |
| Other current assets                                                                                 |   | 15,279                              |    | 1,399 |   | 264 |   | — |   | 16,942 |   |
| Total current assets                                                                                 |   | 26,405                              |    | 140,499 |   | 4,028 |   | — |   | 170,932 |   |
|                                                                                                 |   |                                |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                          |   | 3,124                               |    | 51,764 |   | 2,294 |   | — |   | 57,182 |   |
| Other assets, principally intangibles, net                                                           |   | 16,655                              |    | 385,141 |   | 9,453 |   | — |   | 411,249 |   |
| Investments in subsidiaries                                                                          |   | 406,286                             |    | 20,678 |   | — |   | (426,964 | )(1) | — |   |
| Intercompany receivables                                                                             |   | 260,759                             |    | 133,290 |   | 4,324 |   | (398,373 | )(2) | — |   |
| Total assets                                                                                         |   | $                                   | 713,229 |   | $ | 731,372 |   | $ | 20,099 |   | $ | (825,337 | ) | $ | 639,363 |   |
|                                                                                                 |   |                                |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholder’s Equity**               |   |                                |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                                 |   |                                |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                    |   | $                                   | 15,128  |   | $ | 1,940 |   | $ | 6 |   | $ | — |   | $ | 17,074 |   |
| Other current liabilities                                                                            |   | 24,209                              |    | 46,324 |   | 1,245 |   | — |   | 71,778 |   |
| Total current liabilities                                                                            |   | 39,337                              |    | 48,264 |   | 1,251 |   | — |   | 88,852 |   |
|                                                                                                 |   |                                |    |   |   |   |   |   |   |   |   |
| Long-term debt                                                                                       |   | 373,006                             |    | 10,069 |   | — |   | — |   | 383,075 |   |
| Intercompany payables                                                                                |   | 133,218                             |    | 265,083 |   | 72 |   | (398,373 | )(2) | — |   |
| Other long-term liabilities                                                                          |   | 36,884                              |    | 1,761 |   | 275 |   | — |   | 38,920 |   |
|                                                                                                 |   |                                |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock                                                               |   | 29,622                              |    | — |   | — |   | — |   | 29,622 |   |
|                                                                                                 |   |                                |    |   |   |   |   |   |   |   |   |
| Stockholder’s equity:                                                                           |   |                                |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                      |   | 118,087                             |    | 336,986 |   | 15,440 |   | (352,426 | )(1) | 118,087 |   |
| Retained earnings (deficit)                                                                          |   | (16,925                             | )       | 69,300 |   | 5,238 |   | (74,538 | )(1) | (16,925 | ) |
| Accumulated other comprehensive loss                                                                 |   | —                              |    | (91 | ) | (2,177 | ) | — |   | (2,268 | ) |
| Total stockholder’s equity                                                                      |   | 101,162                             |    | 406,195 |   | 18,501 |   | (426,964 | ) | 98,894 |   |
| Total liabilities, mandatorily   redeemable preferred stock and  stockholder’s equity |   | $                                   | 713,229 |   | $ | 731,372 |   | $ | 20,099 |   | $ | (825,337 | ) | $ | 639,363 |   |

 

19

----

 
|                                                                                                 |   | **December 31, 2001** |    |
|------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|
|                                                                                                 |   | **Issuer**                 |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                                 |   | **(in thousands)**         |    |
|                                                                                                 |   |                       |    |
| **Assets**                                                                                           |   |                       |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                      |   |                       |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                            |   | $                          | 9,641   |   | $ | (92 | )  | $ | 245 |   | $ | — |   | $ | 9,794 |   |
| Accounts receivable, net                                                                             |   | —                     |    | 56,973 |   | 1,478 |   | — |   | 58,451 |   |
| Inventories                                                                                          |   | —                     |    | 84,864 |   | 1,634 |   | — |   | 86,498 |   |
| Other current assets                                                                                 |   | 15,153                     |    | 1,138 |   | 331 |   | — |   | 16,622 |   |
| Total current assets                                                                                 |   | 24,794                     |    | 142,883 |   | 3,688 |   | — |   | 171,365 |   |
|                                                                                                 |   |                       |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                          |   | 3,355                      |    | 55,152 |   | 2,566 |   | — |   | 61,073 |   |
| Other assets, principally intangibles, net                                                           |   | 15,348                     |    | 388,269 |   | 9,656 |   | — |   | 413,273 |   |
| Investments in subsidiaries                                                                          |   | 403,786                    |    | 20,697 |   | — |   | (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                                                                                       |   | 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 |   | $ | (806,176 | ) | $ | 645,711 |   |

 

20

----

 

**Statementsof Operations**

 
|                                          |   | **Three Months Ended March 31, 2002 (Unaudited)** |   |
|-----------------------------------------------|--------|--------------------------------------------------------|--------|
|                                          |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   | **(in thousands)**                                     |   |
| Revenues                                      |   | $                                                      | — |   | $ | 85,205 |   | $ | 2,482 |   | $ | (1,524 | )(3) | $ | 86,163 |   |
| Cost of sales                                 |   | —                                                 |   | 59,873 |   | 2,099 |   | (1,524 | )(3) | 60,448 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                                                 |   | 25,332 |   | 383 |   | — |   | 25,715 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses |   | 2,417                                                  |   | 12,668 |   | 412 |   | — |   | 15,497 |   |
| Amortization of intangible assets             |   | —                                                 |   | 1,400 |   | — |   | — |   | 1,400 |   |
| Interest expense                              |   | 7,684                                                  |   | 277 |   | 2 |   | — |   | 7,963 |   |
| Intercompany charges                          |   | (7,150                                                 | )      | 7,150 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries            |   | (2,500                                                 | )      | (30 | ) | — |   | 2,530 | (4) | — |   |
| Other expenses (income), net                  |   | 91                                                     |   | 58 |   | (3 | ) | — |   | 146 |   |
| Provision for income taxes (benefit)          |   | (940                                                   | )      | 1,309 |   | (58 | ) | — |   | 311 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net income                                    |   | $                                                      | 398    |   | $ | 2,500 |   | $ | 30 |   | $ | (2,530 | ) | $ | 398 |   |

 
|                                          |   | **Three Months Ended March 31, 2001 (Unaudited)** |   |
|-----------------------------------------------|--------|--------------------------------------------------------|--------|
|                                          |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   | **(in thousands)**                                     |   |
| Revenues                                      |   | $                                                      | — |   | $ | 98,193 |   | $ | 2,712 |   | $ | (1,754 | )(3) | $ | 99,151 |   |
| Cost of sales                                 |   | —                                                 |   | 63,502 |   | 2,358 |   | (1,754 | )(3) | 64,106 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                                                 |   | 34,691 |   | 354 |   | — |   | 35,045 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses |   | 2,422                                                  |   | 11,987 |   | 251 |   | — |   | 14,660 |   |
| Amortization of intangible assets             |   | 76                                                     |   | 4,787 |   | 103 |   | — |   | 4,966 |   |
| Interest expense                              |   | 10,194                                                 |   | 251 |   | 10 |   | — |   | 10,455 |   |
| Intercompany charges                          |   | (5,239                                                 | )      | 5,239 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries            |   | (6,398                                                 | )      | (4 | ) | — |   | 6,402 | (4) | — |   |
| Other expenses (income), net                  |   | 75                                                     |   | 72 |   | (42 | ) | — |   | 105 |   |
| Provision for income taxes (benefit)          |   | (3,602                                                 | )      | 5,961 |   | 28 |   | — |   | 2,387 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net income                                    |   | $                                                      | 2,472  |   | $ | 6,398 |   | $ | 4 |   | $ | (6,402 | ) | $ | 2,472 |   |

 

21

----

 

**Statementsof Cash Flows**

 
|                                              |   | **Three Months Ended March 31, 2002 (Unaudited)** |   |
|---------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                              |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                              |   | **(in thousands)**                                     |   |
|                                              |   |                                                   |   |
| **Cash flows from operating activities:**         |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net income                                        |   | $                                                      | 398    |   | $ | 2,500 |   | $ | 30 |   | $ | (2,530 | )(4) | $ | 398 |   |
| Noncash adjustments:                              |   |                                                   |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                |   | (2,500                                                 | )      | (30 | ) | — |   | 2,530 | (4) | — |   |
| Other noncash adjustments                         |   | 1,032                                                  |   | 7,192 |   | 249 |   | — |   | 8,473 |   |
| Changes in working capital                        |   | 5,360                                                  |   | (8,558 | ) | (91 | ) | — |   | (3,289 | ) |
| Net cash provided by operating activities         |   | 4,290                                                  |   | 1,104 |   | 188 |   | — |   | 5,582 |   |
|                                              |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**         |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired |   | (707                                                   | )      | — |   | — |   | — |   | (707 | ) |
| Capital expenditures                              |   | (4                                                     | )      | (580 | ) | (39 | ) | — |   | (623 | ) |
| Net cash used for investing activities            |   | (711                                                   | )      | (580 | ) | (39 | ) | — |   | (1,330 | ) |
|                                              |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**         |   |                                                   |   |   |   |   |   |   |   |   |   |
| Long-term borrowings                              |   | —                                                 |   | 297 |   | — |   | — |   | 297 |   |
| Deferred financing costs                          |   | (1,629                                                 | )      | — |   | — |   | — |   | (1,629 | ) |
| Principal payments on long-term debt and  leases  |   | (97                                                    | )      | (354 | ) | — |   | — |   | (451 | ) |
| Other, net                                        |   | (368                                                   | )      | (49 | ) | — |   | — |   | (417 | ) |
| Net cash used for financing activities            |   | (2,094                                                 | )      | (106 | ) | — |   | — |   | (2,200 | ) |
|                                              |   |                                                   |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on  cash   |   | —                                                 |   | — |   | (3 | ) | — |   | (3 | ) |
|                                              |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents              |   | 1,485                                                  |   | 418 |   | 146 |   | — |   | 2,049 |   |
| Cash and equivalents at beginning of period       |   | 9,641                                                  |   | (92 | ) | 245 |   | — |   | 9,794 |   |
|                                              |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period             |   | $                                                      | 11,126 |   | $ | 326 |   | $ | 391 |   | $ | — |   | $ | 11,843 |   |

 

22

----

 
|                                                                |   | **Three Months Ended March 31, 2001 (Unaudited)** |   |
|---------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated****Total** |   |
|                                                                |   |                                                   |   |   |   |   |
|                                                                |   | **(in thousands)**                                     |   |
|                                                                |   |                                                   |   |
| **Cash flows from operating activities:**                           |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net income                                                          |   | $                                                      | 2,472  |   | $ | 6,398 |   | $ | 4 |   | $ | (6,402 | )(4) | $ | 2,472 |   |
| Noncash adjustments:                                                |   |                                                   |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                  |   | (6,398                                                 | )      | (4 | ) | — |   | 6,402 |  (4) | — |   |
| Other noncash adjustments                                           |   | 2,309                                                  |   | 6,470 |   | 574 |   | — |   | 9,353 |   |
| Changes in working capital                                          |   | (7,077                                                 | )      | (9,601 | ) | (758 | ) | — |   | (17,436 | ) |
| Net cash provided by (used for) operating  activities               |   | (8,694                                                 | )      | 3,263 |   | (180 | ) | — |   | (5,611 | ) |
|                                                                |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**                           |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired                   |   | (17,247                                                | )      | — |   | — |   | — |   | (17,247 | ) |
| Capital expenditures and other                                      |   | (51                                                    | )      | (2,290 | ) | (208 | ) | — |   | (2,549 | ) |
| Net cash used for investing activities                              |   | (17,298                                                | )      | (2,290 | ) | (208 | ) | — |   | (19,796 | ) |
|                                                                |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**                           |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                               |   | 23,300                                                 |   | — |   | — |   | — |   | 23,300 |   |
| Principal payments on term debt,  capitalized leases and other debt |   | (98                                                    | )      | (896 | ) | (7 | ) | — |   | (1,001 | ) |
| Other, net                                                          |   | —                                                 |   | (58 | ) | — |   | — |   | (58 | ) |
| Net cash provided by (used for) financing  activities               |   | 23,202                                                 |   | (954 | ) | (7 | ) | — |   | 22,241 |   |
|                                                                |   |                                                   |   |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on  cash                     |   | —                                                 |   | — |   | 71 |   | — |   | 71 |   |
|                                                                |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and  equivalents                    |   | (2,790                                                 | )      | 19 |   | (324 | ) | — |   | (3,095 | ) |
| Cash and equivalents at beginning of period                         |   | 7,553                                                  |   | 233 |   | 413 |   | — |   | 8,199 |   |
|                                                                |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                               |   | $                                                      | 4,763  |   | $ | 252 |   | $ | 89 |   | $ | — |   | $ | 5,104 |   |

 

23

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

 

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

 

**IndustryOverview and Trends**

 

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

 

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

 

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

 

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

 

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

 

24

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**Resultsof Operations**

 

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

** **

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

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

 

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

 

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

 

•                      a$3.0 million decrease in audio and entertainment products revenues; and

 

•                      a$2.3 million decrease in seating products revenues; offset by

 

•                      a$2.3 million increase in other product and services revenues.

* *

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

 

•                      a$3.7 million decrease resulting from lower volume for our interconnectproducts; and

 

•                      a$2.2 million decrease in cockpit audio, communications, lighting and power andcontrol devices revenues resulting from a slowdown in the commercial airlineproduction.

* *

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

 

25

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

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

 

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

 

•                      a$4.7 million decrease in profit margins associated with lower volume for ourcorporate aircraft furniture products;

 

•                      a$1.2 million decrease caused by 2002 restructuring charges related to theconsolidation of our seating and related manufacturing operations; and

 

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

* *

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

 

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

 

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

 

•                      a$0.5 million increase related to a shift in product mix to items with highermargins.

* *

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

 

26

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

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

 

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

 

•                      a$2.8 million increase caused by 2002 restructuring charges relating to theconsolidation of our seating and related manufacturing operations, offset by

 

•                      a$0.7 million decrease in expenses as a result of cost reduction measuresimplemented in 2001 in response to lower sales volume resulting from the weakglobal economic conditions.

* *

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

* *

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

* *

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

** **

**Depreciation and amortization of intangibles.**  Depreciation and amortization expensedecreased $3.3 million to $4.4 million for the three months endedMarch 31, 2002 compared to $7.7 million for the same period in 2001,primarily resulting from the adoption of new accounting standards.  Effective January 1, 2002, weadopted SFAS No. 142, “Goodwill and Other Intangible Assets” and theprovisions of SFAS No. 141, “Business Combinations,” which wererequired to be adopted concurrent with the adoption of SFAS No. 142.  Under these new standards, goodwill isdeemed to be an indefinite-lived asset and, as a result, the recording ofperiodic goodwill amortization charges was discontinued effective January 1,2002.  In addition, SFAS No. 141requires that intangible assets relating to acquired assembled workforce intangiblesnot meeting the criteria for recognition apart from goodwill be reclassified togoodwill.  Goodwill amortization was$3.6 million for the three months ended March 31, 2001, which includes$0.4 million of assembled workforce amortization, now deemed part ofgoodwill.  Excluding the effect of theaccounting change, depreciation and amortization increased $0.3 million as aresult of capital expenditures during the period.

 

27

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

 

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

 

EBITDA andoperating income changed as follows:

 

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

 

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

 

•                      a$4.0 million restructuring and asset impairment charge relating to theconsolidation of our seating and related manufacturing facilities;

 

•                      a$4.0 million decrease related principally to lower revenues in our aircraftfurniture operations, and

 

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

* *

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

* *

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

 

28

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

** **

**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.**  Net income decreased $2.1 million to $0.4million for the three months ended March 31, 2002 compared to $2.5million for the same period last year.

** **

**Net income (loss) applicable to common stockholder.**  Net income applicable to DeCrane Holdings,our common stockholder, decreased $2.3 million to a net loss of $1.0 millionfor the three months ended March 31, 2002 compared to net income of$1.3 million for the same period last year. The increase is attributable to:

 

•                      a$2.1 million decrease in net income; and

 

•                      a$0.2 million increase in accrued 16% mandatorily redeemable preferred stockdividends; the accrued dividends are compounded quarterly.

 

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

 

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

 

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

 

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

 

29

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**Restructuring and Asset Impairment Charges**

 

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

 

**2002Restructuring of Seat Manufacturing Facilities**

 

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

 

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

 

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

 

**2001Restructuring and Asset Impairment Charges**

 

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

 

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

 

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

 

30

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**Liquidityand Capital Resources**

 

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

 

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

 

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

 

•                      a$2.5 million inventory increase resulting from longer production lead times andnew product development costs, 

primarily engineering costs, for new cabin interior products andcomponents; and

 

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

 

•                      a$3.6 million accounts receivable decrease resulting from timing differencesrelating to progress and final billings on long-term contracts versus theassociated collection and the timing of other collections; and further offsetby

 

•                      a$0.1 million increase in income taxes payable.

 

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

 

•                      $0.7million of contingent acquisition consideration paid during 2002; and

 

•                      $0.6million for capital expenditures.

 

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

 

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

 

AtMarch 31, 2002, senior credit facility borrowings totaling $287.7 millionare at variable interest rates based on defined margins over the current primeor LIBOR rates.  At March 31, 2002,we also had $82.1 million of working capital and had $38.0 million 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 is having a severe adverse impact on theaerospace industry and, in turn, is having an unfavorable impact on portions ofour business.  In addition, the weakglobal economic conditions are adversely impacting other portions of ourbusiness as well.  As described in“—Restructuring and Asset Impairment Charges,” we are taking measures to reducecosts and conserve working capital.

 

31

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

 

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

 

**RecentAccounting Pronouncements**

 

**Accounting Pronouncements Adopted January 1,2002**

 

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

 

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

 

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

 

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

 

**RecentlyIssued Accounting Pronouncement**

* *

*SFAS No. 145*

 

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

 

**Common European Currency**

 

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

 

32

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**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 PrivateSecurities Litigation Reform Act of 1995. These forward-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.

 

33

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

 

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

 

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

 

Market riskrelated to our variable-rate debt is estimated as the potential decrease inpre-tax earnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime or LIBOR rates.  At March 31,2002, the current prime rate was 4.75% and the current LIBOR rate was2.03%.  Based on $287.7 million ofvariable-rate debt outstanding as of March 31, 2002, a hypothetical onepercent rise in interest rates, to 5.75% for prime rate borrowings and 3.03%for LIBOR borrowings, would reduce our pre-tax earnings by $2.9 millionannually.

 

To limit ourexposure related to rising interest rates, we have entered into an interestrate swap contract to effectively convert an additional $4.5 million variable-ratedebt to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedge against changes in theamount of future cash flows associated with interest payments on this portionof our variable-rate debt.  Market riskrelated to this interest rate swap contract is estimated as the potentialhigher interest expense we will incur if the variable interest rate decreasesbelow the 4.2% fixed rate.  Based on the$4.5 million of variable-rate debt converted to fixed-rate debt outstanding asof March 31, 2002, a hypothetical one percent decrease in the variableinterest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1million annually.

 

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

 

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

 

34

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**PARTII — OTHER INFORMATION**

 

**ITEM1.****                             LEGALPROCEEDINGS**

 

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

 

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

** **
| a.     | Exhibits |                                                                                                                                                 |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                 |
|   | 3.26.1.1 | 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 *                                                                                                                |

 

----

*         Filed herewith

 

b.              Reports on Form 8-K

 

None

** **

**SIGNATURES**

 

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

 
|         | **DECRANE AIRCRAFT HOLDINGS, INC. (Registrant)** |
|--------------|--------------------------------------------------|
|         |                                             |   |
| May 13, 2002 | By:                                              | /s/  Richard J. Kaplan |   |
|         | Name:                                            | Richard J.  Kaplan |
|         | Title:                                           | Senior Vice  President, Chief Financial Officer,  Secretary, Treasurer and Director |

 

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