**UNITED STATESSECURITIES 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, 2003**

 

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

 

**ý**Yes    **o** No

 

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The number ofshares of Registrant’s Common Stock, $.01 par value, outstanding as ofMay 15, 2003 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, 2003 and December 31, 2002                         |
|                                  |
|                                  | Consolidated Statements of Operations for  the three months ended March 31, 2003 and 2002       |
|                                  |
|                                  | Consolidated Statements of Stockholder’s  Equity for the three months ended March 31, 2003 |
|                                  |
|                                  | Consolidated Statements of Cash Flows for  the three months ended March 31, 2003 and 2002       |
|                                  |
|                                  | Condensed Notes to Consolidated Financial  Statements                                           |
|                                  |
| **Item 2.**                           | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations** |
|                                  |
|                                  | Recent Developments                                                                             |
|                                  |
|                                  | Industry Overview and Trends                                                                    |
|                                  |
|                                  | Results of Operations                                                                           |
|                                  |
|                                  | Restructuring,  Asset Impairment and Other Related Charges                                      |
|                                  |
|                                  | Liquidity and Capital Resources                                                                 |
|                                  |
|                                  | Disclosure of Contractual Obligations and  Commitments                                          |
|                                  |
|                                  | Disclosure of Off-Balance Sheet Commitments  and Indemnities                                    |
|                                  |
|                                  | Recent Accounting Pronouncements                                                                |
|                                  |
|                                  | Special Note Regarding Forward Looking  Statements and Risk Factors                             |
|                                  |
| **Item 3.**                           | **Quantitative and Qualitative Disclosure About Market Risk**                                   |
|                                  |
| **Item 4.**                           | **Controls and Procedures**                                                                     |
|                                  |
| **Part  II – Other Information** |
|                                  |
| **Item 1.**                           | **Legal Proceedings**                                                                           |
|                                  |
| **Item 6.**                           | **Exhibits and Reports on Form 8-K**                                                            |
|                                  |
|                                  | Exhibits                                                                                        |
|                                  |
|                                  | Reports on Form 8-K                                                                             |
|                                  |
| **Signatures**                        |
|                                  |
| **Certifications**                    |

 

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**PART I****– FINANCIALINFORMATION**

 

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

 

**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**ConsolidatedBalance Sheets**

** **
| **(In thousands, except share data)**                                                                                                 |   | **March 31,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                                                  |   | **(Unaudited)**          |    |                        |   |
| **Assets**                                                                                                                            |   |                     |    |                        |   |
| Current assets:                                                                                                                       |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                             |   | $                        | 14,637  |                        | $      | 12,421 |   |
| Accounts receivable, net                                                                                                              |   | 26,568                   |    | 26,354                      |   |
| Inventories                                                                                                                           |   | 70,736                   |    | 59,300                      |   |
| Deferred income taxes                                                                                                                 |   | 17,412                   |    | 16,430                      |   |
| Prepaid expenses and other current assets                                                                                             |   | 2,399                    |    | 1,724                       |   |
| Assets of discontinued operations                                                                                                     |   | 152,003                  |    | 160,741                     |   |
| Total current assets                                                                                                                  |   | 283,755                  |    | 276,970                     |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Property and equipment, net                                                                                                           |   | 35,460                   |    | 36,139                      |   |
| Other assets, principally intangibles, net                                                                                            |   | 236,824                  |    | 235,858                     |   |
| Total assets                                                                                                                          |   | $                        | 556,039 |                        | $      | 548,967 |   |
|                                                                                                                                  |   |                     |    |                        |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**                                                |   |                     |    |                        |   |
| Current liabilities:                                                                                                                  |   |                     |    |                        |   |
| Current portion of long-term debt                                                                                                     |   | $                        | 17,492  |                        | $      | 16,317 |   |
| Accounts payable                                                                                                                      |   | 15,571                   |    | 13,055                      |   |
| Accrued liabilities                                                                                                                   |   | 23,016                   |    | 31,494                      |   |
| Income taxes payable                                                                                                                  |   | 46                       |    | —                      |   |
| Liabilities of discontinued operations                                                                                                |   | 20,909                   |    | 19,928                      |   |
| Total current liabilities                                                                                                             |   | 77,034                   |    | 80,794                      |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Long-term debt, less current portion                                                                                                  |   | 386,520                  |    | 364,700                     |   |
| Deferred income taxes                                                                                                                 |   | 26,414                   |    | 27,077                      |   |
| Other long-term liabilities                                                                                                           |   | 6,239                    |    | 7,364                       |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Commitments and contingencies (Note 10)                                                                                               |   |                     |    |                        |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Mandatorily redeemable preferred stock                                                                                                |   | 35,678                   |    | 34,081                      |   |
|                                                                                                                                  |   |                     |    |                        |   |
| Stockholder’s equity:                                                                                                            |   |                     |    |                        |   |
| Common stock, $.01 par value, 1,000 shares  authorized; 100 shares issued and outstanding as of March 31, 2003 and  December 31, 2002 |   | —                   |    | —                      |   |
| Additional paid-in capital                                                                                                            |   | 119,615                  |    | 121,212                     |   |
| Notes receivable for shares sold                                                                                                      |   | (2,628                   | )       | (2,591                      | )      |
| Accumulated deficit                                                                                                                   |   | (92,469                  | )       | (83,309                     | )      |
| Accumulated other comprehensive loss                                                                                                  |   | (364                     | )       | (361                        | )      |
| Total stockholder’s equity                                                                                                       |   | 24,154                   |    | 34,951                      |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity                                              |   | $                        | 556,039 |                        | $      | 548,967 |   |

 

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

 

1

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**ConsolidatedStatements of Operations**

** **
|                                                              |   | **Three Months Ended  March 31,** |    |
|-------------------------------------------------------------------|--------|----------------------------------------|---------|
| **(In thousands)**                                                |   | **2003**                               |    | **2002** |   |
|                                                              |   | **(Unaudited)**                        |    |
| Revenues                                                          |   | $                                      | 41,900  |   | $ | 60,819 |   |
| Cost of sales                                                     |   | 30,903                                 |    | 44,381 |   |
|                                                              |   |                                   |    |   |   |
| Gross profit                                                      |   | 10,997                                 |    | 16,438 |   |
|                                                              |   |                                   |    |   |   |
| Operating expenses:                                               |   |                                   |    |   |   |
| Selling, general and administrative  expenses                     |   | 7,198                                  |    | 11,396 |   |
| Amortization of intangible assets                                 |   | 912                                    |    | 843 |   |
| Total operating expenses                                          |   | 8,110                                  |    | 12,239 |   |
|                                                              |   |                                   |    |   |   |
| Income from operations                                            |   | 2,887                                  |    | 4,199 |   |
|                                                              |   |                                   |    |   |   |
| Other expenses:                                                   |   |                                   |    |   |   |
| Interest expense                                                  |   | 7,675                                  |    | 7,759 |   |
| Other expenses, net                                               |   | 339                                    |    | 113 |   |
|                                                              |   |                                   |    |   |   |
| Loss from continuing operation before  provision for income taxes |   | (5,127                                 | )       | (3,673 | ) |
| Provision for income tax benefit                                  |   | (1,697                                 | )       | (1,553 | ) |
|                                                              |   |                                   |    |   |   |
| Loss from continuing operations                                   |   | (3,430                                 | )       | (2,120 | ) |
|                                                              |   |                                   |    |   |   |
| Discontinued operations and change in  accounting principle:      |   |                                   |    |   |   |
| Loss from discontinued operations, net of  tax                    |   | (5,730                                 | )       | (36,804 | ) |
| Cumulative effect of change in accounting  principle              |   | —                                 |    | (17,828 | ) |
|                                                              |   |                                   |    |   |   |
| Net loss                                                          |   | (9,160                                 | )       | (56,752 | ) |
|                                                              |   |                                   |    |   |   |
| Accrued preferred stock dividends                                 |   | (1,480                                 | )       | (1,265 | ) |
| Preferred stock redemption value accretion                        |   | (117                                   | )       | (117 | ) |
|                                                              |   |                                   |    |   |   |
| Net loss applicable to common stockholder                         |   | $                                      | (10,757 | ) | $ | (58,134 | ) |

 

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**

 
|                                            |   | **Common Stock** |   | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|-------------------------------------------------|--------|------------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
|                                            |   |             |   |                             |   |                                    |   |
|                                            |   |             |   |                             |   |                                    |   |
| **(In thousands, except share data)**           |   | **Shares**       |   | **Amount**                       |   |                                    |   |                     |   |                                        |
|                                            |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, December 31, 2002                 |   | 100              |   | $                                | — |                                    | $      | 121,212                  |   | $                                           | (2,591 | )         | $      | (83,309 | ) | $ | (361 | ) | $ | 34,951 |   |
|                                            |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive income (loss):                    |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                        |   | —           |   | —                           |   | —                                  |   | —                   |   | (9,160                                      | )      | —    |   | (9,160 | ) |
| Unrealized loss on interest rate swap  contract |   | —           |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (3        | )      | (3 | ) |
|                                            |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   | (9,163 | ) |
|                                            |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Accrued preferred stock dividends               |   | —           |   | —                           |   | (1,480                                  | )      | —                   |   | —                                      |   | —    |   | (1,480 | ) |
|                                            |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Preferred stock redemption value accretion      |   | —           |   | —                           |   | (117                                    | )      | —                   |   | —                                      |   | —    |   | (117 | ) |
|                                            |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Notes receivable interest accrued               |   | —           |   | —                           |   | —                                  |   | (37                      | )      | —                                      |   | —    |   | (37 | ) |
|                                            |   |             |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, March 31, 2003 (Unaudited)             |   | 100              |   | $                                | — |                                    | $      | 119,615                  |   | $                                           | (2,628 | )         | $      | (92,469 | ) | $ | (364 | ) | $ | 24,154 |   |

 

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

 

3

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**ConsolidatedStatements of Cash Flows**

 
|                                                                               |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands)**                                                                 |   | **2003**                          |   | **2002** |   |
|                                                                               |   | **(Unaudited)**                   |   |
| **Cash flows from operating activities:**                                          |   |                              |   |   |   |
| Net loss                                                                           |   | $                                 | (9,160 | ) | $ | (56,752 | ) |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                              |   |   |   |
| Loss from discontinued operations                                                  |   | 5,730                             |   | 36,804 |   |
| Cumulative effect of change in accounting  principle                               |   | —                            |   | 17,828 |   |
| Depreciation and amortization                                                      |   | 3,211                             |   | 3,356 |   |
| Noncash portion of restructuring, asset  impairment and other related charges      |   | —                            |   | 3,145 |   |
| Deferred income taxes                                                              |   | (852                              | )      | 186 |   |
| Other, net                                                                         |   | 404                               |   | 146 |   |
| Changes in assets and liabilities:                                                 |   |                              |   |   |   |
| Accounts receivable                                                                |   | (233                              | )      | 2,758 |   |
| Inventories                                                                        |   | (11,434                           | )      | (2,751 | ) |
| Prepaid expenses and other assets                                                  |   | (3,248                            | )      | (1,128 | ) |
| Accounts payable                                                                   |   | 2,521                             |   | 646 |   |
| Accrued liabilities                                                                |   | (7,877                            | )      | (4,275 | ) |
| Income taxes payable                                                               |   | 46                                |   | 174 |   |
| Other long-term liabilities                                                        |   | (1,125                            | )      | 222 |   |
| Net cash provided by (used for) operating  activities                              |   | (22,017                           | )      | 359 |   |
|                                                                               |   |                              |   |   |   |
| **Cash flows from investing activities:**                                          |   |                              |   |   |   |
| Cash paid for acquisition contingent  consideration                                |   | (600                              | )      | (707 | ) |
| Capital expenditures                                                               |   | (1,098                            | )      | (419 | ) |
| Net cash used for investing activities                                             |   | (1,698                            | )      | (1,126 | ) |
|                                                                               |   |                              |   |   |   |
| **Cash flows from financing activities:**                                          |   |                              |   |   |   |
| Net borrowings under senior credit facility                                        |   | 27,150                            |   | — |   |
| Principal payments on term debt,  capitalized leases and other debt                |   | (4,210                            | )      | (396 | ) |
| Deferred financing costs                                                           |   | —                            |   | (1,629 | ) |
| Other, net                                                                         |   | —                            |   | (71 | ) |
| Net cash provided by (used for) financing  activities                              |   | 22,940                            |   | (2,096 | ) |
|                                                                               |   |                              |   |   |   |
| Net cash provided by discontinued  operations                                      |   | 2,991                             |   | 4,597 |   |
|                                                                               |   |                              |   |   |   |
| Net increase in cash and cash equivalents                                          |   | 2,216                             |   | 1,734 |   |
| Cash and cash equivalents at beginning of  period                                  |   | 12,421                            |   | 9,478 |   |
| Cash and cash equivalents at end of period                                         |   | $                                 | 14,637 |   | $ | 11,212 |   |

 

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

 

4

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**Condensed Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**Note 1.****                             Summaryof Significant Accounting Policies**

 

**Basisof Presentation**

 

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

 

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

 

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

 

Reclassificationshave been made to prior periods’ financial statements to conform to the 2003presentation, principally to reflect the pending disposition of the SpecialtyAvionics Group as a discontinued operation (Note 2).

 

**AccountingPronouncements Adopted January 1, 2003**

 

EffectiveJanuary 1, 2003 the Company adopted the following accounting pronouncements.

 

*SFAS No. 145 – Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFASNo. 13, and Technical Corrections*

 

Among otherthings, SFAS No. 145 rescinds various pronouncements regarding earlyextinguishment of debt and allows extraordinary accounting treatment for earlyextinguishment only when the provisions of Accounting Principles Board OpinionNo. 30, “Reporting the Results of Operations–Reporting the Effects of Disposalof a Segment of a Business, and Extraordinary, Unusual and InfrequentlyOccurring Events and Transactions” are met. Adoption of this new standard did not have an impact on the Company’sconsolidated financial position, results of operations or cash flow.

 

5

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*SFAS No. 146 – Accounting for Costs Associated with Exit or DisposalActivities*

 

SFAS No. 146supersedes previous accounting guidance, principally Emerging Issues Task ForceIssue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  SFAS No. 146requires that the liability for costs associated with an exit or disposalactivity be initially measured at fair value and recognized when the liabilityis incurred.  In periods subsequent toinitial measurement, changes to the liability are measured using thecredit-adjusted risk-free rate that was used in the initial measurement of theliability recorded.  The cumulativeeffect of a change resulting from revisions to either the timing or the amountof estimated cash flows is recognized as an adjustment to the liability in theperiod of the change and charged to the same line items in the statement ofoperations used when the related costs were initially recognized.  Under EITF No. 94-3, a liability for an exitcost was recognized at the date of a company’s commitment to an exit plan.  The provisions of SFAS No. 146 are requiredto be applied prospectively to exit or disposal activities initiated afterDecember 31, 2002.  Since the Companyhas not initiated any disposal activities within the scope of SFAS No. 146during 2003 therefore adoption of this new standard did not have an impact onthe Company’s consolidated financial position, results of operations or cashflow.  However, the Company believesSFAS No. 146 may affect the timing of recognizing future restructuring costs,as well as the amounts recognized, depending on the nature of the exit ordisposal activity and the timing of the related estimated cash flows.

 

*SFAS No. 148 – Accounting for Stock-Based Compensation—Transition andDisclosure*

 

SFAS No. 148provides alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation,”to require disclosure in both interim and annual financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.

 

Fornon-compensatory stock options, the Company has elected to continue to accountfor its stock-based compensation plan under APB Opinion No. 25, “Accounting forStock Issued to Employees,” and disclose pro forma effect of the plan on netincome as provided by SFAS No. 123, “Accounting for Stock-Based Compensation.”  Therefore, at this time, adoption of thisstatement will not have a material impact on the Company’s financial position,results of operations or cash flows.

 

Since the fairmarket value of all options on the date of grant was equal to the exerciseprice, the Company did not recognize any compensation expense.  Had compensation expense for the plan beendetermined based on the fair value at the grant dates during the first quartersof 2003 and 2002 under the plan consistent with the method of SFAS No. 123, thepro forma net loss and loss per share would have been as follows:

 

6

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|               |   | **Three Months Ended  March 31,** |   |
|--------------------|--------|----------------------------------------|--------|
| **(In thousands)** |   | **2003**                               |   | **2002** | ** ** |
|               |   | **(Unaudited)**                        |   |
| Net loss:          |   |                                   |   |   |   |
| As reported        |   | $                                      | (9,160 | ) | $ | (56,752 | ) |
| Pro forma          |   | (9,254                                 | )      | (56,846 | ) |
|                    |        |                                        |        |  |  |  |  |

 

For thepurposes of the pro forma disclosure, the estimated fair value of the optionsis amortized over the options’ vesting period. The effect of applying SFAS No. 123 may not be representative ofthe pro forma effect in future years since additional options may be grantedduring those future years.

 

*FASB Interpretation No. 45 – Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers*

 

FIN No. 45elaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees thatit has issued.  The interpretation alsoclarifies that a guarantor is required to recognize, at the inception of a guarantee,a liability for the fair value of the obligation undertaken in issuing theguarantee.  The initial recognition andinitial measurement provisions of FIN No. 45 are applicable to the Company on aprospective basis to guarantees issued or modified after December 31,2002.  However, the disclosurerequirements in FIN No. 45 are effective for the Company’s financial statementsfor periods ending after December 15, 2002. The Company is not a party to any agreement in which it is a guarantorof indebtedness of others therefore the adoption of interpretation did not havean impact on the Company’s financial position, results of operations or cashflows.  The disclosure requirements ofthis interpretation were adopted by the Company as of December 31, 2002.

 

**RecentlyIssued Accounting Pronouncement**

** **

*SFAS No. 150 – Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*

* *

                Issued in May 2003, SFAS No. 150 establishesstandards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification offinancial instruments within its scope as a liability, including financialinstruments issued in the form of shares that are mandatorily redeemable,because those financial instruments are deemed to be, in essence, obligationsof the issuer.  The Company is currentlyevaluating the impact this new standard will have on its financial position, resultsof operations and cash flows.  However,the Company believes it may be required to reclassify its mandatorilyredeemable preferred stock as a liability commencing July 1, 2003 and reflectsubsequent changes in the redemption obligation as a charge against pre-taxincome.

 

**Note 2.****                             PendingDisposition of Specialty Avionics Group**

 

As describedin the Company’s Form 10-K for the year ended December 31, 2002, during thefourth quarter of fiscal 2002 the Company assessed its long-term businessstrategies in light of current aerospace industry conditions.  The Company believes that as the aerospaceindustry recovers, the demand for its Cabin Management and Systems IntegrationGroups’ products and services for corporate, VIP and head-of-state aircraftwill return to historical levels and, accordingly, the Company decided to focusits resources in these market segments. To accomplish this objective, the Company embarked on a plan to sell itsSpecialty Avionics Group, which is highly dependent on the commercial airlineindustry.

 

The Companyentered into a definitive agreement to sell its Specialty Avionics Group for$140,000,000 in cash on March 14, 2003. Based upon the fair value of the Group implied in the definitiveagreement, net of an estimated potential sale price adjustment and transactioncosts and expenses, the Company determined that the carrying value of theGroup’s net assets was not fully recoverable. As a result, the Company recorded a goodwill impairment charge of$7,500,000 during the three months ended March 31, 2003 to reduce the carryingvalue to estimated net realizable value. The resulting carrying value is an estimate and a loss on the sale maybe realized upon final determination of the net proceeds from the sale (net ofa potential post-closing sale price adjustment related to the amount of workingcapital at closing, transaction expenses and income taxes).

 

7

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As a result ofthe pending sale, the Specialty Avionics Group is presented as a discontinuedoperation in the accompanying consolidated financial statements.  The financial statements have beenreclassified to segregate the Group’s assets and liabilities, results ofoperations and cash flows for all periods presented in this report.  The following tables summarize the reclassifications.

 
| **(In thousands)**                         |   | **March 31,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                       |   | **(Unaudited)**          |    |                        |   |
|                                       |   |                     |    |                        |   |
| Assets:                                    |   |                     |    |                        |   |
| Current assets                             |   | $                        | 41,523  |                        | $      | 41,614 |   |
| Property and equipment, net                |   | 15,153                   |    | 15,744                      |   |
| Other assets, principally intangibles, net |   | 95,327                   |    | 103,383                     |   |
| Total assets                               |   | 152,003                  |    | 160,741                     |   |
|                                       |   |                     |    |                        |   |
| Liabilities:                               |   |                     |    |                        |   |
| Current liabilities                        |   | 8,728                    |    | 8,288                       |   |
| Long-term liabilities                      |   | 12,181                   |    | 11,640                      |   |
| Total liabilities                          |   | 20,909                   |    | 19,928                      |   |
|                                       |   |                     |    |                        |   |
| Net assets of the Specialty Avionics Group |   | $                        | 131,094 |                        | $      | 140,813 |   |

 
|                                                  |   | **Three Months Ended  March 31,** |       |
|-------------------------------------------------------|--------|----------------------------------------|------------|
| **(In thousands)**                                    |   | **2003**                               |       | **2002** | ** ** |
|                                                  |   | **(Unaudited)**                        | ** ** |
|                                                  |   |                                   |       |   |   |
| Results of Operations:                                |   |                                   |       |   |   |
| Revenues                                              |   | $                                      | 23,470     |   | $ | 25,344 |   |
|                                                  |   |                                   |       |   |   |
| Operating expenses:                                   |   |                                   |       |   |   |
| Costs and expenses                                    |   | 20,559                                 |       | 20,962 |   |
| Impairment of goodwill                                |   | 7,500                                  |       | — |   |
| Total operating expenses                              |   | 28,059                                 |       | 20,962 |   |
|                                                  |   |                                   |       |   |   |
| Pre-tax income (loss)                                 |   | (4,589                                 | )          | 4,382 |   |
| Provision for income taxes                            |   | 1,141                                  |       | 1,864 |   |
| Income (loss) before change in accounting  principle  |   | (5,730                                 | )          | 2,518 |   |
| Cumulative effect of change in accounting  principle  |   | —                                 |       | (39,322 | ) |
| Net loss from discontinued operations                 |   | $                                      | (5,730     | ) | $ | (36,804 | ) |
|                                                  |   |                                   |       |   |   |
| Cash Flows Provided By (Used For):                    |   |                                   |       |   |   |
| Operating activities                                  |   | $                                      | 3,788      |   | $ | 5,223 |   |
| Investing activities                                  |   | (269                                   | )          | (204 | ) |
| Financing activities                                  |   | (587                                   | )          | (104 | ) |
| Net (increase) decrease in cash and cash  equivalents |   | 57                                     |       | (315 | ) |
| Effect of foreign currency translation on  cash       |   | 2                                      |       | (3 | ) |
| Net cash provided by discontinued  operations         |   | $                                      | 2,991      |   | $ | 4,597 |   |

 

8

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

 

During theyear ended December 31, 2002, the Company recorded restructuring, assetimpairment and other related charges as follows:

 
|                                              |   | **Charges Recorded During the  Year Ended December 31, 2002** |       |
|---------------------------------------------------|--------|---------------------------------------------------------------|------------|
| **(In thousands)**                                |   | **1st  Quarter**                                              | ** ** | **2nd, 3rd & 4th  Quarters** | ** ** | **Total** | ** ** |
|                                              |   | **(Unaudited)**                                               |       |   |   |
|                                              |   |                                                          |       |   |   |   |   |
| Nature of charges:                                |   |                                                          |       |   |   |   |   |
| 2001 Asset Realignment Restructuring              |   | $                                                             | —     |   | $ | 6,901 |   | $ | 6,901 |   |
| 2002 Seat Manufacturing Facilities  Restructuring |   | 4,043                                                         |       | 2,251 |   | 6,294 |   |
| Other asset impairment related charges            |   | —                                                        |       | 12,048 |   | 12,048 |   |
| Total pre-tax charges                             |   | $                                                             | 4,043      |   | $ | 21,200 |   | $ | 25,243 |   |
|                                              |   |                                                          |       |   |   |   |   |
| Charged to operations:                            |   |                                                          |       |   |   |   |   |
| Cost of sales                                     |   | $                                                             | 1,214      |   | $ | 9,462 |   | $ | 10,676 |   |
| Selling, general and administrative  expenses     |   | 2,829                                                         |       | 3,750 |   | 6,579 |   |
| Discontinued operations                           |   | —                                                        |       | 7,988 |   | 7,988 |   |
| Total pre-tax charges                             |   | $                                                             | 4,043      |   | $ | 21,200 |   | $ | 25,243 |   |
|                                              |   |                                                          |       |   |   |   |   |
| Components of charges:                            |   |                                                          |       |   |   |   |   |
| Continuing operations:                            |   |                                                          |       |   |   |   |   |
| Noncash charges                                   |   | $                                                             | 3,145      |   | $ | 8,311 |   | $ | 11,456 |   |
| Cash charges                                      |   | 898                                                           |       | 4,901 |   | 5,799 |   |
| Total continuing operations pre-tax charges       |   | 4,043                                                         |       | 13,212 |   | 17,255 |   |
| Discontinued operations noncash charges           |   | —                                                        |       | 7,988 |   | 7,988 |   |
| Total pre-tax charges                             |   | $                                                             | 4,043      |   | $ | 21,200 |   | $ | 25,243 |   |

 

**2001Asset Realignment Restructuring**

 

During thesecond quarter of fiscal 2001, the Company’s Cabin Management Group adopted arestructuring plan to realign production programs between its manufacturingfacilities.  In response to the adverseimpact on the aerospace industry resulting from the September 11thterrorist attack and its aftermath, as well as the weakening of global economicconditions, 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.  Due to the ongoing weaknessof the corporate, VIP and head-of-state aircraft market, the Company decidedduring the second quarter of fiscal 2002 to permanently close the temporarilyidled manufacturing facility.  Therestructuring, asset impairment and other related charges recorded duringfiscal 2002 were comprised of the following:

 

*•**                       Impairmentof Long-Lived Assets.*  The decisionto permanently close the additional manufacturing facility resulted in anadditional impairment of property and equipment and, accordingly, these assetswere written down to their estimated net realizable value in 2002.  Net realizable values are based on estimatedcurrent market values and the actual losses could exceed these estimates.

 

*•**                       ExcessInventory Write-Downs. *Inventorywas written down to net realizable value for quantities on hand exceedingcurrent and forecast order backlog requirements.

 

*•**                       OtherAsset Impairment Related Charges.* Other expenses pertain to provisions for estimated losses on uncompletedlong-term contracts aggregating $2,577,000 and other related charges expensedas incurred.

 

9

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The componentsof the amounts incurred were as follows:

 
|                                 |   | **Charges Recorded During the  Year Ended December 31, 2002** |   |
|--------------------------------------|--------|---------------------------------------------------------------|--------|
| **(In thousands)**                   |   | **1st  Quarter**                                              |   | **2nd, 3rd & 4th  Quarters** |   | **Total** | ** ** |
|                                 |   | **(Unaudited)**                                               |   |   |   |
| Impairment of long-lived assets      |   | $                                                             | — |   | $ | 2,557 |   | $ | 2,557 |   |
| Excess inventory write-downs         |   | —                                                        |   | 1,265 |   | 1,265 |   |
| Other restructuring-related expenses |   | —                                                        |   | 3,079 |   | 3,079 |   |
| Total pre-tax charges                |   | $                                                             | — |   | $ | 6,901 |   | $ | 6,901 |   |

 

Thisrestructuring plan was completed during the fourth quarter of fiscal 2002.

 

**2002Seat Manufacturing Facilities Restructuring**

 

During thefirst quarter of fiscal 2002, the Company announced it would consolidate theproduction of four seating and related manufacturing facilities into two,resulting in the permanent closure of two facilities.  This plan was designed to improve manufacturing efficiencies andto further reduce costs and conserve working capital.  In connection with this restructuring plan, the Company recordedpre-tax charges to operations totaling $6,294,000 during 2002 forrestructuring, asset impairment and other related charges.  The charges were comprised of the following:

 

*•**                                          Inventoryand Accounts Receivable Write-Downs.*  In connection with the consolidationof all production, the Company discontinued manufacturing certain products,principally those which overlap. Inventory and certain receivables related to the discontinued productswere written down to net realizable value.

 

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

 

*•**                                          Severanceand Other Compensation Costs.* Approximately 115 employees were terminated in connection with thepermanent closure of the manufacturing facilities.

 

*•**                                          LeaseTermination and Other Related Costs.* Lease termination and other related costs are comprised of the netlosses expected to be incurred under existing long-term lease agreements forthe facilities being 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.

 

*•**                                          OtherAsset Impairment Related Expenses.* Other expenses pertain to FAA retesting and recertification of productsmanufactured at a different facility, moving, transportation and travel costsand shutdown / startup costs.  Suchcosts were charged to expense as incurred.

 

10

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The componentsof the amounts incurred were as follows:

 
|                                           |   | **Charges Recorded During the  Year Ended December 31, 2002** |   |
|------------------------------------------------|--------|---------------------------------------------------------------|--------|
| **(In thousands)**                             |   | **1st  Quarter**                                              |   | **2nd, 3rd & 4th  Quarters** |   | **Total** |   |
|                                           |   | **(Unaudited)**                                               |   |   |   |
| Inventory and accounts receivable  write-downs |   | $                                                             | 1,445  |   | $ | 755 |   | $ | 2,200 |   |
| Impairment of long-lived assets                |   | 1,700                                                         |   | (326 | ) | 1,374 |   |
| Severance and other compensation costs         |   | 450                                                           |   | — |   | 450 |   |
| Lease termination and other related costs      |   | 300                                                           |   | — |   | 300 |   |
| Other restructuring-related expenses           |   | 148                                                           |   | 1,822 |   | 1,970 |   |
| Total pre-tax charges                          |   | $                                                             | 4,043  |   | $ | 2,251 |   | $ | 6,294 |   |

 

Thisrestructuring plan was completed during the second quarter of fiscal 2002.

 

**OtherAsset Impairment Related Charges**

 

Due tocontinued weakness in the commercial aircraft portion of the business, in thefourth quarter of fiscal 2002 the Company recorded a pre-tax charge of$12,048,000 for additional asset impairments. Of this amount, $7,672,000 related to the Company’s annual goodwillimpairment testing pursuant to SFAS No. 142 and $4,376,000 related toinventories and was charged to cost of goods sold.  Charges totaling $7,988,000 pertained to discontinued operations.

 

**Note 4.****                             Inventories**

 

Inventoriesare comprised of the following as of March 31, 2003 and December 31,2002:

 
| **(In thousands)**                                                           |   | **March 31,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|---------------------|--------|------------------------|--------|
|                                                                         |   | **(Unaudited)**     |   |                   |   |
| Raw materials                                                                |   | $                   | 33,179 |                   | $      | 28,911 |   |
| Work-in-process:                                                             |   |                |   |                   |   |
| Direct and indirect manufacturing costs                                      |   | 10,696              |   | 6,843                  |   |
| Program costs, principally engineering                                       |   | 16,095              |   | 14,769                 |   |
| Finished goods                                                               |   | 1,187               |   | 4,773                  |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | 9,579               |   | 4,004                  |   |
| Total inventories                                                            |   | $                   | 70,736 |                   | $      | 59,300 |   |

 

Periodicassessments are performed to ensure recoverability of the program costs andadjustments are made, if necessary, to reduce inventoried costs to estimatedrealizable value.  No adjustments wererequired during the year ended December 31, 2002 or the first three months offiscal 2003.

 

11

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Total costsand estimated earnings on all uncompleted contracts as of March 31, 2003and December 31, 2002 are comprised of the following:

 
| **(In thousands)**                                                            |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                          |   | **(Unaudited)**          |   |                        |   |
| Costs incurred on uncompleted contracts                                       |   | $                        | 50,122 |                        | $      | 49,572 |   |
| Estimated earnings recognized                                                 |   | 66,965                   |   | 63,699                      |   |
| Total costs and estimated earnings                                            |   | 117,087                  |   | 113,271                     |   |
| Less billings to date                                                         |   | (107,600                 | )      | (109,880                    | )      |
| Net                                                                           |   | $                        | 9,487  |                        | $      | 3,391 |   |
|                                                                          |   |                     |   |                        |   |
| Balance sheet classification:                                                 |   |                     |   |                        |   |
| Asset – Costs and estimated earnings in  excess of billings              |   | $                        | 9,579  |                        | $      | 4,004 |   |
| Liability – Billings in excess of costs and  estimated earnings (Note 6) |   | (92                      | )      | (613                        | )      |
| Net                                                                           |   | $                        | 9,487  |                        | $      | 3,391 |   |

 

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

 

**Note 5.****                             OtherAssets**

 

Other assetsare comprised of the following as of March 31, 2003 and December 31, 2002:

 
| **(In thousands)**                                       |   | **March 31,  2003** |    | **December 31,  2002** |   |
|----------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                     |   | **(Unaudited)**          |    |                        |   |
| Goodwill                                                 |   | $                        | 196,430 |                        | $      | 196,430 |   |
| Identifiable intangible assets with finite  useful lives |   | 28,193                   |    | 29,105                      |   |
| Deferred financing costs                                 |   | 8,433                    |    | 9,168                       |   |
| Other non-amortizable assets                             |   | 3,768                    |    | 1,155                       |   |
| Total other assets                                       |   | $                        | 236,824 |                        | $      | 235,858 |   |

 

**Goodwill**

 

EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” and the provisions of SFAS No. 141, “Business Combinations,”which were required to be adopted concurrent with the adoption of SFAS No.142.  During 2002, the Company completedthe transitional impairment testing of goodwill recorded as of January 1, 2002as required under SFAS No. 142.  Fairvalue of each reporting unit was determined using a discounted cash flowapproach taking into consideration projections based on the individualcharacteristics of the reporting units, historical trends, market multiples forcomparable businesses and independent appraisals.  Unallocated goodwill was allocated to the reporting units forimpairment testing purposes.  Theresults indicated that the carrying value of goodwill was impaired.  The resulting impairment was primarilyattributable to a change in the evaluation criteria for goodwill utilized underprevious accounting guidance to the fair value approach stipulated in SFAS No.142.

 

12

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In accordancewith the transitional provision of SFAS No. 142, the Company recorded a$17,828,000 noncash write-down of goodwill (net of $878,000 income tax benefit)as of January 1, 2002 as a cumulative effect of a change in accountingprinciple.  An additional $39,322,000noncash write-down of goodwill pertains to the Specialty Avionics Group and isincluded in the loss from discontinued operations.

 

There were nochanges in goodwill during the three months ended March 31, 2003.

 

**IdentifiableIntangible Assets with Finite Useful Lives**

 

Identifiableintangible assets with finite useful lives are comprised of the following as ofMarch 31, 2003 and December 31, 2002:

 
|                           |   | **March 31, 2003 (Unaudited)** |   | **December 31, 2002**    |   |
|--------------------------------|--------|-------------------------------------|--------|-------------------------------|--------|
| **(In thousands)**             |   | **Cost**                            |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                           |   |                                |   |                          |   |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                                   | 22,272 |                          | $      | (5,110 | ) | $ | 17,162 |   | $ | 22,272 |   | $ | (4,738 | ) | $ | 17,534 |   |
| Customer contracts             |   | 8,390                               |   | (4,995                        | )      | 3,395 |   | 8,390 |   | (4,695 | ) | 3,695 |   |
| Engineering drawings           |   | 7,645                               |   | (1,903                        | )      | 5,742 |   | 7,645 |   | (1,776 | ) | 5,869 |   |
| Other identifiable intangibles |   | 2,955                               |   | (1,061                        | )      | 1,894 |   | 2,955 |   | (948 | ) | 2,007 |   |
| Total identifiable intangibles |   | $                                   | 41,262 |                          | $      | (13,069 | ) | $ | 28,193 |   | $ | 41,262 |   | $ | (12,157 | ) | $ | 29,105 |   |

 

Estimatedannual amortization expense for all identifiable intangible assets with finiteuseful lives for the five-year period ending December 31, 2007 is asfollows: 2003 – $3,644,000; 2004 – $3,644,000; 2005 – $3,477,000; 2006 –$2,275,000; and 2007 – $2,175,000.

 

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

 

Accruedliabilities are comprised of the following as of March 31, 2003 andDecember 31, 2002:

 
| **(In thousands)**                                                           |   | **March 31,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                         |   | **(Unaudited)**          |   |                        |   |
| Salaries, wages, compensated absences and  payroll related taxes             |   | $                        | 6,115  |                        | $      | 9,212 |   |
| Customer advances and deposits                                               |   | 4,205                    |   | 4,662                       |   |
| Accrued interest                                                             |   | 4,042                    |   | 7,465                       |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |   | 92                       |   | 613                         |   |
| Acquisition related contingent  consideration                                |   | —                   |   | 600                         |   |
| Other accrued liabilities                                                    |   | 8,562                    |   | 8,942                       |   |
| Total accrued liabilities                                                    |   | $                        | 23,016 |                        | $      | 31,494 |   |

 

13

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**Note 7.****                             Long-TermDebt**

 

Long-term debtincludes the following amounts as of March 31, 2003 and December 31,2002:

 
| **(In thousands)**                                                                    |   | **March 31,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                  |   | **(Unaudited)**          |    |                        |   |
| Senior credit facility:                                                               |   |                     |    |                        |   |
| Term loans                                                                            |   | $                        | 260,925 |                        | $      | 264,200 |   |
| Revolving line of credit                                                              |   | 33,150                   |    | 6,000                       |   |
| 12% senior subordinated notes                                                         |   | 100,000                  |    | 100,000                     |   |
| Capital lease obligations and term debt  financing, secured by property and equipment |   | 9,937                    |    | 10,331                      |   |
| Other indebtedness                                                                    |   | —                   |    | 486                         |   |
| Total long-term debt                                                                  |   | 404,012                  |    | 381,017                     |   |
| Less current portion                                                                  |   | (17,492                  | )       | (16,317                     | )      |
| Long-term debt, less current portion                                                  |   | $                        | 386,520 |                        | $      | 364,700 |   |

 

On March 28,2003 the Company received requisite lender approval to amend its senior creditfacility to permit the sale of its Specialty Avionics Group, provided that netproceeds of at least $130,000,000 from the sale are used to repay senior creditfacility borrowings prior to June 30, 2003. The amendment also revised various financial covenants (which theCompany would otherwise have not been able to meet as ofMarch 31, 2003), decreases by $10,000,000 the maximum permittedrevolving line of credit borrowings to $40,000,000, increases the prime rateand LIBOR interest margins by 1.5% and permits the issuance of additionalindebtedness and the repurchase of a portion of the Company’s 12% seniorsubordinated notes.

 

                The amendment also provides that an event ofdefault will occur if the sale is not consummated by or is terminated for anyreason prior to June 30, 2003.  If anevent of default occurs, the credit agreement provides that the lenders may, atthat date, cease to provide additional revolving credit facility borrowings andmay accelerate repayment of all borrowings then outstanding.  If the lenders took such action, that wouldbe an event of default under the Company’s other debt agreements, permittingthose lenders to accelerate repayment of all such debt, as well.  The Company is working diligently to closethe sale, which is subject to customary closing conditions.

 

**Note 8.****                             IncomeTaxes**

 

For the threemonths ended March 31, 2003 and 2002, the provision for income taxesdiffers from the amount determined by applying the applicable U.S. statutoryfederal rate to income before income taxes primarily due to the effects ofstate and foreign income taxes.

 

14

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

 

**MandatorilyRedeemable Preferred Stock**

 

The tablebelow summarizes the increase in mandatorily redeemable preferred stock duringthe three months ended March 31, 2003.

 
| **(In thousands, except share and per share data)**                |   | **Number  of  Shares** |   | **Mandatory  Redemption  Value** |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   |
|--------------------------------------------------------------------|--------|------------------------|--------|----------------------------------|--------|-------------------------------------|--------|----------------------|--------|
|                                                               |   |                   |   |                             |   |                                |   |                 |   |
| Balance, December 31, 2002                                    |   | 370,061                |   | $                                | 37,006 |                                | $      | (2,925               | )      | $ | 34,081 |   |
| Accrued dividends and redemption value  accretion                  |   | 14,803                 |   | 1,480                            |   | 117                                 |   | 1,597                |   |
| Balance, March 31, 2003 (Unaudited)                           |   | 384,864                |   | $                                | 38,486 |                                | $      | (2,808               | )      | $ | 35,678 |   |
|                                                               |   |                   |   |                             |   |                                |   |                 |   |
| Per share liquidation value as of  March 31, 2003 (Unaudited) |   |                   |   | $                                | 100.00 |                                |   |                 |   |   |

 

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

 

**Note 10.****                      Commitmentsand Contingencies**

 

**Litigation**

 

As part of itsinvestigation of the crash of Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the“CTSB”) initially notified the Company that it recovered burned wire that wasattached to the in-flight entertainment system installed on some of Swissair’saircraft by one of the Company’s subsidiaries. The Company’s subsidiary has worked vigorously over the last four yearswith the CTSB investigators in the fact-finding investigation of thiscatastrophic incident.  On March 27,2003, the CTSB released its final report on its investigation.  This report indicated that the CTSB wasunable to conclusively determine the cause of the fire which led to the crashof the aircraft.

 

Families ofmost of the 229 persons who died aboard the flight have filed actions infederal and state courts against the subsidiary, the Company, and many otherunaffiliated parties, including Swissair and Boeing (“Passenger Actions”).  The Passenger Actions claim negligence,strict liability, and breach of warranty relating to the installation andtesting of the in-flight entertainment system. The Passenger Actions seek damages and costs in an unstated amount.  All of the Passenger Actions have been transferredto the United States District Court for the Eastern District of Pennsylvaniaand assigned under MDL Case No. 1269 for coordinated or consolidated pre-trialproceedings.  Most of the PassengerActions have been settled by Boeing and Swissair.  Boeing and Swissair have advised the Company that they intend toseek contribution from the Company’s subsidiary.  The Company, based in part on information received fromindependent fire and safety experts retained by it, does not believe that theinstallation of the equipment installed by its subsidiary impacted theoperation or safety of the aircraft. Accordingly, the Company continues to defend the claims.

 

15

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

 

**Fundingof DeCrane Holdings Preferred Stock Obligations**

 

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

 

DeCraneHoldings’ preferred stock dividends are payable quarterly at a rate of 14% perannum.  Prior to September 30, 2005,dividends are not paid in cash but instead accrete to the liquidation value ofthe preferred stock, which, in turn, increases the redemption obligation.  On or after September 30, 2005, preferredstock dividends are required to be paid in cash, if declared.  The DeCrane Holdings preferred stock has atotal redemption value of $64,400,000 as of March 31, 2003, includingaccumulated dividends.

 

**Note 11.****                      BusinessSegment Information**

 

The Company suppliesproducts and services to the corporate, VIP and head-of-state aircraft marketwithin the aerospace industry.  TheCompany’s subsidiaries are organized into two groups, each of which is astrategic business that develops, manufactures and sells distinct products andservices.  The groups and a descriptionof their businesses are as follows:

 

*•**                       CabinManagement –* manufactures interior cabin components, including cabininterior furnishings, cabin management systems, seating and compositecomponents;

 

*•**                       SystemsIntegration –* manufactures auxiliary fuel systems and auxiliary powerunits, provides system integration services, provides aircraft completion andrefurbishment services and is a Boeing Business Jet authorized service center.

 

In priorperiods, the Company’s Specialty Avionics Group was a third strategic businessfor which segment information was provided. As a result of the pending sale of the Specialty Avionics Group, thisgroup is reflected as a discontinued operation and segment information forprior periods has been restated.

 

Managementutilizes more than one measurement to evaluate group performance and allocateresources; however, management considers Adjusted EBITDA, as defined, to be theprimary measurement of overall economic returns and cash flows.  Management also uses Adjusted EBITDA in theCompany’s annual budget and planning process, as the measure in determining thevalue of acquisitions and dispositions and as the performance metric for determinationof the amount of bonuses awarded to pursuant to the Company’s cash incentivebonus plan.  Management defines AdjustedEBITDA as earnings before interest, income taxes, depreciation andamortization, restructuring, asset impairment and other related charges,acquisition related charges not capitalized and other noncash and nonoperatingcharges.  This is consistent with themanner in which the Company’s lenders and ultimate investors measure itsoverall performance and liquidity, including its ability to service debt andfund discretionary capital expenditure and product development programs.

 

16

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AdjustedEBITDA is a financial measure that is not in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) becauseit excludes certain charges reflected in the Company’s GAAP-basis financialstatements.  However, the Company’spresentation of Adjusted EBITDA, a non-GAAP financial measure, is in accordancewith the GAAP requirements of SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information,” which requires the Company to report theprimary measure of segment performance used by management to evaluate andmanage its businesses.  The Company’smethod of calculating Adjusted EBITDA may or may not be consistent with that ofother companies and should be viewed in conjunction with measurements that arecomputed in accordance GAAP, such as operating income, net income and cashflows from operations.  Operating incomeby segment, the nearest comparable GAAP financial measure, is presented hereinfor comparability, along with a reconciliation of Adjusted EBITDA to operatingincome, net income and cash flows from operations, to clarify the differencesbetween these financial measures.

 

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

 

The tablesbelow summarize selected financial data by business segment.

 
|                          |   | **Three Months Ended  March 31,** |   |
|-------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**            |   | **2003**                               |   | **2002** |   |
|                          |   | **(Unaudited)**                        |   |
| Revenues:                     |   |                                   |   |   |   |
| Cabin Management              |   | $                                      | 30,620 |   | $ | 45,867 |   |
| Systems Integration           |   | 12,132                                 |   | 15,077 |   |
| Inter-group elimination (1)   |   | (852                                   | )      | (125 | ) |
| Consolidated totals           |   | $                                      | 41,900 |   | $ | 60,819 |   |
|                          |   |                                   |   |   |   |
| Adjusted EBITDA (as defined): |   |                                   |   |   |   |
| Cabin Management              |   | $                                      | 4,550  |   | $ | 7,461 |   |
| Systems Integration           |   | 2,157                                  |   | 5,059 |   |
| Corporate (2)                 |   | (1,405                                 | )      | (1,558 | ) |
| Inter-group elimination (3)   |   | 110                                    |   | 111 |   |
| Consolidated totals (4)       |   | $                                      | 5,412  |   | $ | 11,073 |   |
|                          |   |                                   |   |   |   |
| Operating income:             |   |                                   |   |   |   |
| Cabin Management              |   | $                                      | 2,920  |   | $ | 2,202 |   |
| Systems Integration           |   | 1,478                                  |   | 3,541 |   |
| Corporate (2)                 |   | (1,621                                 | )      | (1,655 | ) |
| Inter-group elimination (3)   |   | 110                                    |   | 111 |   |
| Consolidated totals (4)       |   | $                                      | 2,887  |   | $ | 4,199 |   |

 

17

----

 
|                                          |   | **March 31,** |    |
|-----------------------------------------------|--------|--------------------|---------|
| **(In thousands)**                            |   | **2003**           |    | **2002** |   |
|                                          |   | **(Unaudited)**    |    |
|                                          |   |               |    |   |   |
| Total assets (as of period end):              |   |               |    |   |   |
| Cabin Management                              |   | $                  | 284,258 |   | $ | 296,584 |   |
| Systems Integration                           |   | 70,226             |    | 69,672 |   |
| Corporate (5)                                 |   | 49,555             |    | 44,248 |   |
| Inter-group elimination (6)                   |   | (3                 | )       | (867 | ) |
| Continuing operations                         |   | 404,036            |    | 409,637 |   |
| Discontinued operations (Specialty  Avionics) |   | 152,003            |    | 171,811 |   |
| Consolidated totals                           |   | $                  | 556,039 |   | $ | 581,448 |   |

 

----

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

 

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

 

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

 

(4)                      The table below reconciles thenon-GAAP financial measure Adjusted EBITDA, as defined, to operating income,loss from continuing operations and cash flows from continuing operations.

 
|                                                                          |   | **Three Months Ended  March 31,** |    |
|-------------------------------------------------------------------------------|--------|----------------------------------------|---------|
| **(In thousands)**                                                            |   | **2003**                               |    | **2002** |   |
|                                                                          |   | **(Unaudited)**                        |    |
| Consolidated Adjusted EBITDA (as defined)                                     |   | $                                      | 5,412   |   | $ | 11,073 |   |
| Restructuring, asset impairment and other  related charges                    |   | —                                 |    | (4,043 | ) |
| Depreciation and amortization of long-lived  assets (a)                       |   | (2,516                                 | )       | (2,767 | ) |
| Acquisition related charges not capitalized                                   |   | (9                                     | )       | (10 | ) |
| Other noncash charges                                                         |   | —                                 |    | (54 | ) |
| Consolidated operating income                                                 |   | 2,887                                  |    | 4,199 |   |
|                                                                          |   |                                   |    |   |   |
| Interest expense                                                              |   | (7,675                                 | )       | (7,759 | ) |
| Other expenses, net                                                           |   | (339                                   | )       | (113 | ) |
| Provision for income tax benefit                                              |   | 1,697                                  |    | 1,553 |   |
| Loss from continuing operations                                               |   | (3,430                                 | )       | (2,120 | ) |
|                                                                          |   |                                   |    |   |   |
| Noncash adjustments:                                                          |   |                                   |    |   |   |
| Depreciation and amortization (a)                                             |   | 3,211                                  |    | 3,356 |   |
| Noncash portion of restructuring, asset  impairment and other related charges |   | —                                 |    | 3,145 |   |
| Other noncash adjustments                                                     |   | (448                                   | )       | 332 |   |
| Changes in assets and liabilities                                             |   | (21,350                                | )       | (4,354 | ) |
| Net cash provided by (used for) continuing  operations                        |   | $                                      | (22,017 | ) | $ | 359 |   |

 
|                                                                                                                                                                                                                                                                                                                                                                                             |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)                                  Reflects  depreciation and amortization of long-lived assets and amortization of  deferred financing costs, which are classified as a component of interest  expense, as follows: |

 

18

----

 
|                                                |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**                                  |   | **2003**                               |   | **2002** |   |
|                                                |   | **(Unaudited)**                        |   |
| Depreciation and amortization of long-lived  assets |   | $                                      | 2,516  |   | $ | 2,767 |   |
| Amortization of deferred financing costs            |   | 695                                    |   | 589 |   |
| Consolidated depreciation and amortization          |   | $                                      | 3,211  |   | $ | 3,356 |   |

 

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

 

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

 

**Note 12.****                      SupplementalCondensed Consolidating Financial Information**

 

In conjunctionwith the senior credit facility and 12% senior subordinated notes described inNote 7, the following condensed consolidating financial information ispresented segregating the Company, as the issuer, and guarantor andnon-guarantor subsidiaries.  Theaccompanying financial information in the guarantor subsidiaries columnreflects the financial position, results of operations and cash flows for thosesubsidiaries guaranteeing the senior credit facility and the notes.

 

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

 

(1)                       Elimination of investments insubsidiaries.

 

(2)                      Eliminationof intercompany accounts.

 

(3)                      Eliminationof equity in earnings of subsidiarie

 

19

----

 

**BalanceSheets**

 
|                                                                                     |   | **March 31, 2003 (Unaudited)** |    |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
| **(In thousands)**                                                                       |   | **Issuer**                          |    | **Guarantor Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                                |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                                   | 14,551  |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 14,637 |   |
| Accounts receivable, net                                                                 |   | —                              |    | 26,568 |   | — |   | — |   | 26,568 |   |
| Inventories                                                                              |   | —                              |    | 70,736 |   | — |   | — |   | 70,736 |   |
| Other current assets                                                                     |   | 19,129                              |    | 682 |   | — |   | — |   | 19,811 |   |
| Assets of discontinued operations                                                        |   | —                              |    | 157,983 |   | 4,844 |   | (10,824 | )(1) | 152,003 |   |
| Total current assets                                                                     |   | 33,680                              |    | 256,055 |   | 4,844 |   | (10,824 | ) | 283,755 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 2,281                               |    | 33,179 |   | — |   | — |   | 35,460 |   |
| Other assets, principally intangibles, net                                               |   | 13,594                              |    | 223,230 |   | — |   | — |   | 236,824 |   |
| Investments in subsidiaries                                                              |   | 347,758                             |    | — |   | — |   | (347,758 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 271,238                             |    | 164,269 |   | 5,834 |   | (441,341 | )(2) | — |   |
| Total assets                                                                             |   | $                                   | 668,551 |   | $ | 676,733 |   | $ | 10,678 |   | $ | (799,923 | ) | $ | 556,039 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholder’s Equity**   |   |                                |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                                   | 16,360  |   | $ | 1,132 |   | $ | — |   | $ | — |   | $ | 17,492 |   |
| Other current liabilities                                                                |   | 10,895                              |    | 27,738 |   | — |   | — |   | 38,633 |   |
| Liabilities of discontinued operations                                                   |   | —                              |    | 21,055 |   | (146 | ) | — |   | 20,909 |   |
| Total current liabilities                                                                |   | 27,255                              |    | 49,925 |   | (146 | ) | — |   | 77,034 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 377,822                             |    | 8,698 |   | — |   | — |   | 386,520 |   |
| Intercompany payables                                                                    |   | 171,139                             |    | 270,202 |   | — |   | (441,341 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 32,139                              |    | 514 |   | — |   | — |   | 32,653 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock                                                   |   | 35,678                              |    | — |   | — |   | — |   | 35,678 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Stockholder’s equity:                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 116,987                             |    | 337,592 |   | 15,440 |   | (353,032 | )(1) | 116,987 |   |
| Retained earnings (deficit)                                                              |   | (92,469                             | )       | 10,166 |   | (4,616 | ) | (5,550 | )(1) | (92,469 | ) |
| Accumulated other comprehensive loss                                                     |   | —                              |    | (364 | ) | — |   | — |   | (364 | ) |
| Total stockholder’s equity                                                          |   | 24,518                              |    | 347,394 |   | 10,824 |   | (358,582 | ) | 24,154 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity |   | $                                   | 668,551 |   | $ | 676,733 |   | $ | 10,678 |   | $ | (799,923 | ) | $ | 556,039 |   |

 

20

----

 
|                                                                                     |   | **December 31, 2002** |    |
|------------------------------------------------------------------------------------------|--------|----------------------------|---------|
| **(In thousands)**                                                                       |   | **Issuer**                 |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                       |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                          | 12,343  |   | $ | 78 |   | $ | — |   | $ | — |   | $ | 12,421 |   |
| Accounts receivable, net                                                                 |   | —                     |    | 26,354 |   | — |   | — |   | 26,354 |   |
| Inventories                                                                              |   | —                     |    | 59,300 |   | — |   | — |   | 59,300 |   |
| Other current assets                                                                     |   | 17,711                     |    | 443 |   | — |   | — |   | 18,154 |   |
| Assets of discontinued operations                                                        |   | —                     |    | 166,507 |   | 5,197 |   | (10,963 | )(1) | 160,741 |   |
| Total current assets                                                                     |   | 30,054                     |    | 252,682 |   | 5,197 |   | (10,963 | ) | 276,970 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 2,485                      |    | 33,654 |   | — |   | — |   | 36,139 |   |
| Other assets, principall intangibles, net                                                |   | 11,708                     |    | 224,150 |   | — |   | — |   | 235,858 |   |
| Investments in subsidiaries                                                              |   | 351,502                    |    | — |   | — |   | (351,502 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 273,178                    |    | 172,389 |   | 5,740 |   | (451,307 | )(2) | — |   |
| Total assets                                                                             |   | $                          | 668,927 |   | $ | 682,875 |   | $ | 10,937 |   | $ | (813,772 | ) | $ | 548,967 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholder’s Equity**   |   |                       |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                          | 15,337  |   | $ | 980 |   | $ | — |   | $ | — |   | $ | 16,317 |   |
| Other current liabilities                                                                |   | 16,786                     |    | 27,763 |   | — |   | — |   | 44,549 |   |
| Liabilities of discontinued operations                                                   |   | —                     |    | 19,954 |   | (26 | ) | — |   | 19,928 |   |
| Total current liabilities                                                                |   | 32,123                     |    | 48,697 |   | (26 | ) | — |   | 80,794 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 355,568                    |    | 9,132 |   | — |   | — |   | 364,700 |   |
| Intercompany payables                                                                    |   | 178,242                    |    | 273,065 |   | — |   | (451,307 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 33,601                     |    | 840 |   | — |   | — |   | 34,441 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock                                                   |   | 34,081                     |    | — |   | — |   | — |   | 34,081 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Stockholder’s equity:                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 118,621                    |    | 337,592 |   | 15,440 |   | (353,032 | )(1) | 118,621 |   |
| Retained earnings (deficit)                                                              |   | (83,309                    | )       | 13,910 |   | (4,477 | ) | (9,433 | )(1) | (83,309 | ) |
| Accumulated other comprehensive loss                                                     |   | —                     |    | (361 | ) | — |   | — |   | (361 | ) |
| Total stockholder’s equity                                                          |   | 35,312                     |    | 351,141 |   | 10,963 |   | (362,465 | ) | 34,951 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity |   | $                          | 668,927 |   | $ | 682,875 |   | $ | 10,937 |   | $ | (813,772 | ) | $ | 548,967 |   |

 

21

----

 

**Statementsof Operations**

 
|                                          |   | **Three Months Ended March 31, 2003 (Unaudited)** |   |
|-----------------------------------------------|--------|--------------------------------------------------------|--------|
| **(In thousands)**                            |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Revenues                                      |   | $                                                      | — |   | $ | 41,900 |   | $ | — |   | $ | — |   | $ | 41,900 |   |
| Cost of sales                                 |   | —                                                 |   | 30,903 |   | — |   | — |   | 30,903 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                                                 |   | 10,997 |   | — |   | — |   | 10,997 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses |   | 2,329                                                  |   | 4,869 |   | — |   | — |   | 7,198 |   |
| Amortization of intangible assets             |   | —                                                 |   | 912 |   | — |   | — |   | 912 |   |
| Interest expense                              |   | 7,626                                                  |   | 49 |   | — |   | — |   | 7,675 |   |
| Intercompany charges                          |   | (6,523                                                 | )      | 6,523 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                |   | 3,744                                                  |   | 69 |   | — |   | (3,813 | )(3) | — |   |
| Other expenses (income), net                  |   | 174                                                    |   | 165 |   | — |   | — |   | 339 |   |
| Provision for income taxes (benefit)          |   | 1,810                                                  |   | (3,507 | ) | — |   | — |   | (1,697 | ) |
| Loss from discontinued operations             |   | —                                                 |   | 5,661 |   | 69 |   | — |   | 5,730 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net income                                    |   | $                                                      | (9,160 | ) | $ | (3,744 | ) | $ | (69 | ) | $ | 3,813 |   | $ | (9,160 | ) |

 
|                                                 |   | **Three Months Ended March 31, 2002 (Unaudited)** |    |
|------------------------------------------------------|--------|--------------------------------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                                             |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Revenues                                             |   | $                                                      | —  |   | $ | 60,819 |   | $ | — |   | $ | — |   | $ | 60,819 |   |
| Cost of sales                                        |   | —                                                 |    | 44,381 |   | — |   | — |   | 44,381 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Gross profit                                         |   | —                                                 |    | 16,438 |   | — |   | — |   | 16,438 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses        |   | 2,417                                                  |    | 8,979 |   | — |   | — |   | 11,396 |   |
| Amortization of intangible assets                    |   | —                                                 |    | 843 |   | — |   | — |   | 843 |   |
| Interest expense                                     |   | 7,684                                                  |    | 75 |   | — |   | — |   | 7,759 |   |
| Intercompany charges                                 |   | (7,150                                                 | )       | 7,150 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                       |   | 53,166                                                 |    | 9,523 |   | — |   | (62,689 | )(3) | — |   |
| Other expenses, net                                  |   | 91                                                     |    | 22 |   | — |   | — |   | 113 |   |
| Provision for income tax benefit                     |   | (940                                                   | )       | (613 | ) | — |   | — |   | (1,553 | ) |
| Loss from discontinued operations                    |   | —                                                 |    | 27,281 |   | 9,523 |   | — |   | 36,804 |   |
| Cumulative effect of change in accounting  principle |   | 1,484                                                  |    | 16,344 |   | — |   | — |   | 17,828 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                                      | (56,752 | ) | $ | (53,166 | ) | $ | (9,523 | ) | $ | 62,689 |   | $ | (56,752 | ) |

 

22

----

 

**Statementsof Cash Flows**

 
|                                                  |   | **Three Months Ended March 31, 2003 (Unaudited)** |   |
|-------------------------------------------------------|--------|--------------------------------------------------------|--------|
| **(In thousands)**                                    |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**             |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net loss                                              |   | $                                                      | (9,160 | ) | $ | (3,744 | ) | $ | (69 | ) | $ | 3,813 | (3) | $ | (9,160 | ) |
| Loss from discontinued operations                     |   | —                                                 |   | 5,661 |   | 69 |   | — |   | 5,730 |   |
| Noncash adjustments:                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                    |   | 3,744                                                  |   | 69 |   | — |   | (3,813 | )(3) | — |   |
| Other noncash adjustments                             |   | 237                                                    |   | 2,526 |   | — |   | — |   | 2,763 |   |
| Changes in working capital                            |   | (15,771                                                | )      | (5,579 | ) | — |   | — |   | (21,350 | ) |
| Net cash used for operating activities                |   | (20,950                                                | )      | (1,067 | ) | — |   | — |   | (22,017 | ) |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**             |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired     |   | (600                                                   | )      | — |   | — |   | — |   | (600 | ) |
| Capital expenditures                                  |   | (3                                                     | )      | (1,095 | ) | — |   | — |   | (1,098 | ) |
| Net cash used for investing activities                |   | (603                                                   | )      | (1,095 | ) | — |   | — |   | (1,698 | ) |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**             |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                 |   | 27,150                                                 |   | — |   | — |   | — |   | 27,150 |   |
| Principal payments on long-term debt and  leases      |   | (3,389                                                 | )      | (821 | ) | — |   | — |   | (4,210 | ) |
| Net cash provided by (used for) financing  activities |   | 23,761                                                 |   | (821 | ) | — |   | — |   | 22,940 |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued  operations         |   | —                                                 |   | 2,991 |   | — |   | — |   | 2,991 |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents                  |   | 2,208                                                  |   | 8 |   | — |   | — |   | 2,216 |   |
| Cash and equivalents at beginning of period           |   | 12,343                                                 |   | 78 |   | — |   | — |   | 12,421 |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                 |   | $                                                      | 14,551 |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 14,637 |   |
|                                                       |        |                                                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

23

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|                                                  |   | **Three Months Ended March 31, 2002 (Unaudited)** |    |
|-------------------------------------------------------|--------|--------------------------------------------------------|---------|
| **(In thousands)**                                    |   | **Issuer**                                             |    | **GuarantorSubsidiaries** |   | **Non-GuarantorSubsidiaries** |   | **ConsolidatingAdjustments** |   | **ConsolidatedTotal** |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from  operating activities:**            |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net loss                                              |   | $                                                      | (56,752 | ) | $ | (53,166 | ) | $ | (9,523 | ) | $ | 62,689 | (3) | $ | (56,752 | ) |
| Loss from discontinued operations                     |   | —                                                 |    | 27,281 |   | 9,523 |   | — |   | 36,804 |   |
| Noncash adjustments:                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                        |   | 53,166                                                 |    | 9,523 |   | — |   | (62,689 | )(3) | — |   |
| Other noncash adjustments                             |   | 2,516                                                  |    | 22,145 |   | — |   | — |   | 24,661 |   |
| Changes in working capital                            |   | 5,360                                                  |    | (9,714 | ) | — |   | — |   | (4,354 | ) |
| Net cash provided by (used for) operating  activities |   | 4,290                                                  |    | (3,931 | ) | — |   | — |   | 359 |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from  investing activities:**            |   |                                                   |    |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired     |   | (707                                                   | )       | — |   | — |   | — |   | (707 | ) |
| Capital expenditures                                  |   | (4                                                     | )       | (415 | ) | — |   | — |   | (419 | ) |
| Net cash used for investing activities                |   | (711                                                   | )       | (415 | ) | — |   | — |   | (1,126 | ) |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from  financing activities:**            |   |                                                   |    |   |   |   |   |   |   |   |   |
| Deferred financing costs                              |   | (1,629                                                 | )       | — |   | — |   | — |   | (1,629 | ) |
| Principal payments on long-term debt and  leases      |   | (97                                                    | )       | (299 | ) | — |   | — |   | (396 | ) |
| Other, net                                            |   | (368                                                   | )       | 297 |   | — |   | — |   | (71 | ) |
| Net cash used for financing activities                |   | (2,094                                                 | )       | (2 | ) | — |   | — |   | (2,096 | ) |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued  operations         |   | —                                                 |    | 4,597 |   | — |   | — |   | 4,597 |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents                  |   | 1,485                                                  |    | 249 |   | — |   | — |   | 1,734 |   |
| Cash and equivalents at beginning of period           |   | 9,641                                                  |    | (163 | ) | — |   | — |   | 9,478 |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                 |   | $                                                      | 11,126  |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 11,212 |   |

 

24

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

 

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

 

**Recent Developments**

 

                Our historical financial statements includethe financial position and results of operations of our Specialty AvionicsGroup.  On March 14, 2003, we enteredinto a definitive agreement to sell this Group for $140.0 million in cash, withthe net proceeds from the sale going to repay borrowings under our seniorcredit facility.  The sale of ourSpecialty Avionics Group is not expected to affect the operations of our remainingoperating groups.  See “—Liquidity andCapital Resources” below for additional information.

 

As a result ofthe pending sale, the Specialty Avionics Group is presented as a discontinuedoperation in our consolidated financial statements.  The financial statements have been reclassified to segregate theGroup’s assets and liabilities, results of operations and cash flows for allperiods presented in this report.

 

**Industry Overview 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: corporate, VIPand head-of-state aircraft and, to a lesser extent, commercial and regionalaircraft.  The September 11, 2001 terroristattack on the United States, ongoing concerns about global terrorism, thecurrent Middle-Eastern military conflicts, the SevereAcute Respiratory Syndrome(SARS) epidemic and weak global economic conditions are all adverselyimpacting air travel and, in turn, the aerospace industry and our business.

 

In response tocertain of these adverse conditions, we announced and implemented arestructuring plan in December 2001 designed to reduce expenses and conserveworking capital.  This plan included permanentlyclosing one manufacturing facility and idling a second facility for anindefinite period, curtailing several product development programs andinstituting workforce reductions. During the first quarter of fiscal 2002, we also announced we would consolidatethe production of four Cabin Management manufacturing facilities into twofacilities, resulting in the permanent closure of two additionalfacilities.  During the second quarterof fiscal 2002, we also announced we would permanently close the temporarilyidled manufacturing facility.  See“—Restructuring, Asset Impairment and Other Related Charges” below foradditional information.

 

The corporate,VIP and head-of-state aircraft portion of our business experienced growingweakness during 2002 and this trend is likely to worsen in 2003.  However, we believe the potential exists forcorporate, VIP and head-of-state aircraft deliveries to recover modestly in2004 and reflect growing strength in 2005. The commercial aircraft portion of our business also experiencedsignificant weakness in 2002 and we believe this condition will continue into2003 and 2004, with potential recovery not expected to occur until at least2005.

 

**Results of Operations**

 

Our results ofoperations for the three months ended March 31, 2002 have been affected byrestructuring, asset impairment and other related charges relating to our 2001and 2002 restructuring plans.  Theserestructuring charges, which affect the comparability of our reported resultsof operations between periods, are more fully described in “—Restructuring,Asset Impairment and Other Nonrecurring Charges” below.

 

25

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**Three Months Ended March 31, 2003Compared to Three Months Ended March 31, 2002**

 

**Revenues.* ***Revenuesdecreased $18.9 million, or 31.1%, to $41.9 million for the three months endedMarch 31, 2003 from $60.8 million for the three months ended March 31,2002.  By segment, revenues changed asfollows:

** **
|                    |   | **Increase (Decrease)  From 2002** |   |
|-------------------------|--------|------------------------------------|--------|
| **(In millions)**       |   | **Amount**                         |   | **Percent** |   |
|                    |   |                               |   |   |   |
| Cabin Management        |   | $                                  | (15.2  | ) | (33.2 | )% |
| Systems Integration     |   | (2.9                               | )      | (19.5 | ) |
| Inter-group elimination |   | (0.8                               | )      |   |   |
| Total                   |   | $                                  | (18.9  | ) |   |   |

 

*Cabin Management. *Revenues decreased by $15.2 million, or33.2% compared to the prior year.  Thedecrease, which is across most of our product and services categories, iscaused by the ongoing adverse impact of weak global economic conditions on thecorporate, VIP and head-of-state aircraft market in 2003 as follows:

 

•                  a $11.5 milliondecrease in aircraft furniture and related products revenues;

 

•                  a $1.6 milliondecrease in cabin management and entertainment systems revenues;

 

•                  a $1.6 milliondecrease in seating products revenues; and

 

•                  a $0.5 milliondecrease in other product and services revenues.

* *

*Systems Integration.*  Revenues decreased by $2.9 million, or 19.5%compared to the prior year, due to:

 

•                  a $2.3 milliondecrease resulting from reduced production and delivery of corporate, VIP andhead-of-state aircraft auxiliary fuel systems due to the adverse impact of weakglobal economic conditions on the demand for those types of aircraft; and

 

•                  a $0.6 milliondecrease in the commercial aircraft systems integration engineering services weprovide in the aftermath of September 11th.

 

**Gross profit.**  Gross profit decreased $5.4 million, or33.1%, to $11.0 million for the three months ended March 31, 2003 from $16.4million for the same period last year. By segment, gross profit changed as follows:

** **
|                |   | **Increase (Decrease)  From 2002** |   |
|---------------------|--------|------------------------------------|--------|
| **(In millions)**   |   | **Amount**                         |   | **Percent** |   |
|                |   |                               |   |   |   |
| Cabin Management    |   | $                                  | (2.6   | ) | (25.4 | )% |
| Systems Integration |   | (2.8                               | )      | (46.7 | ) |
| Total               |   | $                                  | (5.4   | ) |   |   |

* *

*Cabin Management.*  Gross profit decreased by $2.6 million, or25.4% compared to the prior year, primarily due to:

 

•                  a $3.4 milliondecrease in profit margins due to lower volume for our corporate, VIP andhead-of-state aircraft furniture and seating products; and

 

•                  a $0.4 milliondecrease in gross profit related to lower volume for our cabin management andentertainment systems; offset by

 

•                  a $1.2 millionincrease caused by restructuring charges incurred in 2002 related to theconsolidation of our seating and related manufacturing operations.

 

26

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*Systems Integration.*  Gross profit decreased by $2.8 million, or46.7% compared to the prior year, primarily due to:

 

•                  a $2.4 milliondecrease resulting from lower revenues and unfavorable overhead absorption as aresult of lower production and delivery of corporate / VIP aircraft auxiliaryfuel tank systems; and

 

•                  a $0.4 milliondecrease in the commercial aircraft systems integration engineering servicesprovided.

 

**Selling, general and administrative expenses.**  Selling, general and administrative expensesdecreased $4.2 million, or 36.8%, to $7.2 million for the three months endedDecember 31, 2003, from $11.4 million for the same period last year.  By segment, SG&A expenses changed asfollows:

** **
|                |   | **Increase (Decrease)  From 2002** |   |
|---------------------|--------|------------------------------------|--------|
| **(In millions)**   |   | **Amount**                         |   | **Percent** |   |
|                |   |                               |   |   |   |
| Cabin Management    |   | $                                  | (3.4   | ) | (81.6 | )% |
| Systems Integration |   | (0.7                               | )      | (64.2 | ) |
| Corporate           |   | (0.1                               | )      |   |   |
| Total               |   | $                                  | (4.2   | ) |   |   |

* *

*Cabin Management. *SG&A expenses decreased by $3.4million, or 81.6% compared to the prior year, due to:

 

**•**                  a$2.8 million reduction resulting from restructuring charges recorded in 2002related to the consolidation of our seating and related manufacturingoperations; and

 

•                  a $0.6 milliondecrease in expenses resulting from cost reduction measures implemented inresponse to lower sales volume resulting from the weak global economicconditions.

* *

*Systems Integration. *SG&A expensesdecreased by $0.7 million, or 64.2% compared to the prior year, due to lowerlabor and employee benefit costs resulting from workforce reductions in 2003.

 

**Depreciation and amortization of intangibles.**  Depreciation and amortization expensedecreased $0.3 million to $2.5 million for the three months ended March 31,2003 from $2.8 million for the same period last year, primarily resulting fromreduced capital expenditures and a lower depreciable base resulting fromimpairment charges recorded during 2002.

 

**Operating income.**  Operating income decreased $1.3 million or31.2%, to $2.9 million for the three months ended March 31, 2003, from$4.2 million for the same period last year. Operating income changed as follows:

** **
|                   |   | **Increase (Decrease)  From 2002** |   |
|------------------------|--------|------------------------------------|--------|
| **(In millions)**      |   | **Amount**                         |   | **Percent** |   |
|                   |   |                               |   |   |   |
| Operating income:      |   |                               |   |   |   |
| Cabin Management       |   | $                                  | 0.7    |   | 32.6 | % |
| Systems Integration    |   | (2.1                               | )      | (58.3 | ) |
| Corporate              |   | 0.1                                |   |   |   |
| Total Operating income |   | $                                  | (1.3   | ) |   |   |

 

27

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*Cabin Management.*  Operating income increased by $0.7 million,or 32.6% compared to the prior year, primarily due to:

 

•                  a $4.0 millionincrease resulting from restructuring charges recorded in 2002 related to theconsolidation of our seating and related manufacturing operations; offset by

 

•                  $3.3 milliondecrease in gross profit, principally related to lower revenues in ourcorporate, VIP and head-of-state aircraft furniture and seating operations.

* *

*Systems Integration. *Operating incomedecreased by $2.1 million, or 58.3% compared to the prior year, primarily theresult of lower sales volume, partially offset by reduced SG&A spendingresulting from workforce reductions.

* *

*Corporate. *Operating income increased $0.1 million due toreduced SG&A spending.

 

**Interest expense.**  Interest expense decreased $0.1 million, or1.1%, to $7.7 million for the three months ended March 31, 2003 compared to$7.8 million for the same period last year.

 

**Provision for income taxes.** The provision for income taxes differsfrom the amount determined by applying the applicable U.S. statutory federalrate to the income before income taxes primarily due to the effects of stateand foreign income taxes.

 

**Loss from continuingoperations.**  Theloss from continuing operations increased $1.3 million to $3.4 million for thethree months ended March 31, 2003 compared to $2.1 million for the same periodlast year, primarily due to:

 

•                  a $5.3 millionloss increase, principally related to lower revenues; offset by

 

•                  a $4.0 millionloss decrease resulting from restructuring charges recorded in 2002 related tothe consolidation of our seating and related manufacturing operations.

 

**Loss fromdiscontinued operations.**  Loss from discontinued operations decreased $31.1 million, to aloss of $5.7 million for the three months ended March 31, 2003 compared to aloss of $36.8 million for the same period last year.  The decrease is primarily due to:

 

•                  a $39.4 millioncharge in 2002 to reflect the cumulative effect on discontinued operations ofthe change in accounting principle associated with initial adoption of SFAS No.142, “Goodwill and Other Intangible Assets” as described below; offset by

 

•                  a $7.5 millioncharge in 2003 to the impairment of goodwill to reduce the carrying value ofassets sold to their estimated net realizable value.

 

**Cumulative effect ofchange in accounting principle.**  The$17.8 million charge in 2002 to reflect the cumulative effect on continuingoperations of the change in accounting principle was a result of transitionalgoodwill impairment charges recognized upon initial adoption of SFAS No. 142,“Goodwill and Other Intangible Assets.” Including the $39.4 charged to discontinued operations, the total chargeto reflect the cumulative effect of the change in accounting principle was$57.2 million.

 

**Net loss.**  Net loss decreased $47.2 million to a netloss of $9.6 million for the three months ended March 31, 2003 compared to anet loss of $56.8 million for the same period last year.  The decrease is primarily due to the $57.2million charge in 2002 to reflect the cumulative effect of the change inaccounting principle offset by a $7.5 million charge in 2003 for the impairmentof goodwill related to discontinued operations.

 

28

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**Net income (loss) applicable to commonstockholder.** Net loss applicable to DeCrane Holdings, our common stockholder,decreased $47.3 million to a net loss of $10.8 million for the three monthsended March 31, 2003 compared to a net loss of $58.1 million for the sameperiod last year.  The decrease in thenet loss applicable to our common stockholder is attributable to:

 

•                  a $57.2 millioncharge in 2002 to reflect the cumulative effect of the change in accountingprinciple; offset by

 

•                  a $7.5 millioncharge in 2003 for the impairment of goodwill related to discontinuedoperations;

 

•                  a $1.3 millionincrease in our loss from continuing operations and a $0.9 million decrease inincome from discontinued operations, before the cumulative effect of the changein accounting principle; and

 

•                  a $0.2 millionincrease in accrued 16% mandatorily redeemable preferred stock dividendsresulting from the quarterly compounding of accrued dividends.

 

**Bookings. **Bookings decreased $15.7 million, or 27.5%, to$41.4 million for the three months ended March 31, 2003 compared to $57.1million for the same period last year. The decrease in bookings for 2003 is due to decreases in orders for allof our business segments.

 

**Backlog at end of period.**  Backlog decreased $0.5 million to $66.3million as of March 31, 2003 compared to $66.8 million as of December 31,2002.

 

As describedin “—Industry Overview and Trends,” the acts, and ongoing threats, of globalterrorism and the current military conflicts, SARS epidemic and weak globaleconomic conditions are having an adverse impact on our business, resulting inthe decrease in bookings during 2003 and related backlog at the end of theperiod.  In addition, we believe thatsome of our customers have substantially reduced their order lead times whichmay have adversely affected bookings during the period.

 

We are notable to predict the continuing impact these events will have on bookings andbacklog in future periods.  However,given the magnitude of these events, the adverse impact could be material.

 

29

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

 

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

 

During thethree months ended March 31, 2002 and the year ended December 31, 2002, werecorded restructuring, asset impairment and other related pre-tax charges,principally related to two restructuring plans.  These charges, and the effect these charges had on our reportedresults of operations for the three months ended March 31, 2002, are summarizedbelow, along with comparative information for 2003.

** **
|                                              |   | **Charges Recorded During the  Year Ended December 31, 2002** |   |
|---------------------------------------------------|--------|---------------------------------------------------------------|--------|
| **(In millions)**                                 |   | **1stQuarter**                                                |   | **2nd, 3rd & 4th  Quarters** |   | **Total** |   |
|                                              |   |                                                          |   |   |   |   |   |
| Nature of charges:                                |   |                                                          |   |   |   |   |   |
| 2001 Asset Realignment Restructuring              |   | $                                                             | — |   | $ | 6.9 |   | $ | 6.9 |   |
| 2002 Seat Manufacturing Facilities  Restructuring |   | 4.0                                                           |   | 2.3 |   | 6.3 |   |
| Other asset impairment related charges            |   | —                                                        |   | 12.0 |   | 12.0 |   |
| Total pre-tax charges                             |   | $                                                             | 4.0    |   | $ | 21.2 |   | $ | 25.2 |   |
|                                              |   |                                                          |   |   |   |   |   |
| Charged to operations:                            |   |                                                          |   |   |   |   |   |
| Cost of sales                                     |   | $                                                             | 1.2    |   | $ | 9.5 |   | $ | 10.7 |   |
| Selling, general and administrative  expenses     |   | 2.8                                                           |   | 3.7 |   | 6.5 |   |
| Discontinued operations                           |   | —                                                        |   | 8.0 |   | 8.0 |   |
| Total pre-tax charges                             |   | $                                                             | 4.0    |   | $ | 21.2 |   | $ | 25.2 |   |
|                                              |   |                                                          |   |   |   |   |   |
| Components of charges:                            |   |                                                          |   |   |   |   |   |
| Continuing operations:                            |   |                                                          |   |   |   |   |   |
| Noncash charges                                   |   | $                                                             | 3.1    |   | $ | 8.3 |   | $ | 11.4 |   |
| Cash charges                                      |   | 0.9                                                           |   | 4.9 |   | 5.8 |   |
| Total continuing operations                       |   | 4.0                                                           |   | 13.2 |   | 17.2 |   |
| Discontinued operations noncash charges           |   | —                                                        |   | 8.0 |   | 8.0 |   |
| Total pre-tax charges                             |   | $                                                             | 4.0    |   | $ | 21.2 |   | $ | 25.2 |   |

** **
|                                          |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------|--------|-----------------------------------|--------|
| **(In millions)**                             |   | **2003**                          |   | **2002** |   |
|                                          |   |                              |   |   |   |
| As reported:                                  |   |                              |   |   |   |
| Gross profit                                  |   | $                                 | 11.0   |   | $ | 16.4 |   |
| Selling, general and administrative  expenses |   | 7.2                               |   | 11.4 |   |
| Operating income                              |   | 2.9                               |   | 4.2 |   |
| Loss from continuing operations               |   | (3.4                              | )      | (2.1 | ) |
|                                          |   |                              |   |   |   |
| As adjusted, excluding the charges:           |   |                              |   |   |   |
| Gross profit                                  |   | $                                 | 11.0   |   | $ | 17.6 |   |
| Selling, general and administrative  expenses |   | 7.2                               |   | 8.6 |   |
| Operating income                              |   | 2.9                               |   | 8.2 |   |
| Loss from continuing operations               |   | (3.4                              | )      | 1.9 |   |

 

30

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**2001 Asset Realignment Restructuring**

 

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

 

Due to theongoing weakness of the corporate, VIP and head-of-state aircraft market, wedecided during the second quarter of fiscal 2002 to permanently close thetemporarily idled manufacturing facility. In connection with this decision, we recorded additional pre-tax chargesto operations totaling $6.9 million during the year ended December 31, 2002, ofwhich $3.8 million were noncash charges, for additional impairment oflong-lived assets, current asset write-downs and other related expenses.

 

Thisrestructuring plan was completed during the fourth quarter of fiscal 2002.

 

**2002 Seat Manufacturing FacilitiesRestructuring**

 

During thefirst quarter of fiscal 2002, we announced we would consolidate the productionof four seating and related manufacturing facilities into two, resulting in thepermanent closure of two facilities. This plan was designed to improve manufacturing efficiencies and tofurther reduce costs and conserve working capital.  In connection with this restructuring plan, we recorded pre-taxcharges to operations totaling $6.3 million during the year ended December 31,2002, of which $3.6 million were noncash charges, for restructuring, assetimpairment and other related restructuring charges.

 

Therestructuring, asset impairment and other related expenses are comprised ofcharges for current asset write-downs, the impairment of long-lived assets,severance and lease termination costs and other restructuring-related expensespertaining to FAA retesting and recertification, moving, transportation andtravel costs and shutdown and startup costs.

 

Thisrestructuring plan was completed during the second quarter of fiscal 2002.

 

**Other Asset Impairment Related Charges**

 

Due tocontinued weakness in the commercial aircraft portion of the business, in thefourth quarter of fiscal 2002 we recorded a pre-tax charge of $12.0 million foradditional asset impairments.  Of thisamount, $7.7 million related to our annual goodwill impairment testing pursuantto SFAS No. 142 and $4.3 million related to inventories and was charged to costof goods sold.  Charges totaling $8.0million pertained to discontinued operations.

 

31

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**Liquidity and Capital Resources**

 

Our principalcash needs are for debt service, working capital, capital expenditures andstrategic acquisitions, as well as to provide DeCrane Holdings with cash tofinance its needs, which consists primarily of cash dividends on its preferredstock beginning in 2005.  Our principalsources of liquidity are expected to be cash flow from operations and thirdparty borrowings, principally under our senior credit facility.

 

Net cash usedfor operating activities was $22.0 million for the three months ended March 31,2003 and consisted of $0.7 million of cash used by continuing operations afteradding back depreciation, amortization and other noncash items, $20.2 millionused for working capital, and $1.1 million used for other liabilities.  The following factors contributed to the$20.2 million working capital increase:

 

•                  a $11.5 millioninventory increase principally related to long-term contracts;

 

•                  a $5.4 milliondecrease in accounts payable and accrued expenses, primarily resulting fromreduced purchasing commensurate with lower revenues; and

 

•                  a $3.3 millionincrease in prepaid expenses and other assets, consisting principally ofexpense associated with the pending sale of our Specialty Avionics Group.

 

We expectworking capital increases, if any, to moderate during the remainder of 2003.

 

Net cash usedfor investing activities was $1.7 million for the three months ended March 31,2003 and consisted of:

 

•                  $1.1 million forcapital expenditures; and

 

•                  $0.6 million ofcontingent acquisition consideration paid during 2003.

 

We anticipatespending approximately $4.0 to $4.5 million for capital expenditures in2003.  As of March 31, 2003, there areno remaining acquisition contingent consideration payment obligations.

 

Net cashprovided by financing activities was $22.9 million for the three months endedMarch 31, 2003.  Cash of $27.1 millionwas provided by revolving line of credit borrowings under our senior creditfacility.  Cash of $4.2 million was usedfor principal payments on our term debt, capitalized lease obligations andother debt.

 

At March 31,2003, our senior credit facility borrowings totaling $294.1 million are atvariable interest rates based on defined margins over the current prime rate orLIBOR.  We also had $100.0 million of12% senior subordinated notes and other indebtedness totaling $9.9 millionoutstanding as of March 31, 2003.  Thesenior credit facility and senior subordinated notes indenture imposerestrictive and financial covenants on us.

 

At March 31,2003, we had $75.6 million of working capital, excluding the assets andliabilities of our discontinued operations, and had $6.9 million of borrowingsavailable under our revolving line of credit, as amended.  In March 2003, terms and financial covenantscontained in our senior credit facility were amended as described below.

 

As describedin “—Industry Overview and Trends,” the acts, and ongoing threats, of globalterrorism and the current military conflicts, SARS epidemic and weak globaleconomic conditions are all adversely impacting our business.  In response, we implemented restructuringplans in 2001 and 2002, as described in “—Restructuring, Asset Impairment andOther Related Charges,” designed to reduce costs and conserve working capital.

 

32

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During thefourth quarter of fiscal 2002, we further assessed our long-term businessstrategies in light of current aerospace industry conditions.  In addition, we subsequently determined wewould likely not be in compliance with our senior credit facility's financialcovenants in 2003.  We believe that asthe aerospace industry recovers, the demand for our Cabin Management andSystems Integration groups’ products and services for corporate, VIP andhead-of-state aircraft will return to historical levels and, accordingly, wedecided to focus our resources in these market segments.  To accomplish this objective, we embarked ona plan to sell our Specialty Avionics Group, which is highly dependent on thecommercial airline industry.

 

                On March 14, 2003, we entered into adefinitive agreement to sell our Specialty Avionics Group and receivedrequisite lender approval on March 28, 2003 to amend the senior credit facilityto permit the sale, provided that net proceeds of at least $130.0 million fromthe sale are used to repay senior credit facility borrowings prior to June 30,2003.  The amendment also relaxesvarious financial covenants for 2003 and beyond, decreases by $10.0 million themaximum permitted revolving line of credit borrowings to $40.0 million,increases the prime rate and LIBOR interest margins by 1.5% and permits theissuance of additional indebtedness and the repurchase of a portion of our 12%senior subordinated notes.  We expect tobe in compliance with the revised financial covenants through 2003 based on ourcurrent operating plan and our ability to respond to further adverse changes inour business through additional cost reduction measures.  We expect to continue conducting ourremaining operations in the ordinary course of business.

 

                The amended senior credit facility alsoprovides that an event of default will occur if the sale is not consummated byor is terminated for any reason prior to June 30, 2003.  If an event of default should occur, thelenders may, at that date, cease to provide additional borrowings and mayaccelerate repayment of all borrowings then outstanding.  If the lenders took such action, that wouldbe an event of default under our other debt agreements, permitting thoselenders to accelerate repayment of all such debt, as well.  In such event, we would require alternatesources of capital, which we may not be able to obtain.  As a result, there are doubts about ourability to continue as a going concern.

 

                The purchaser’s obligation to close the saleis subject to various customary conditions, including a financingcondition.  The purchaser has informedus that, in their judgment, certain closing conditions, including the financingcondition, have not been satisfied. Although this has resulted in a delay of the closing, the purchaser hasinformed us that it has been using, and will continue to use, commerciallyreasonable efforts to cause all closing conditions to be satisfied and toconsummate the transaction and will be prepared to schedule a closing as soonas possible thereafter.

 

                Although we cannot be certain and providedthat the sale of the Specialty Avionics Group is consummated prior to June 30,2003, we believe our operating cash flows, together with borrowings under oursenior credit facility, will be sufficient to meet our future short- andlong-term operating expenses, working capital requirements, capitalexpenditures and debt service obligations for the next twelve months.  However, our ability to pay principal orinterest, to comply with our debt financial covenants and to satisfy our otherdebt obligations will depend on our future operating performance as well ascompetitive, legislative, regulatory, business and other factors beyond ourcontrol.

 

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.

 

**Disclosure of Contractual Obligations andCommitments**

 

                The following table summarizes our knownobligations to make future cash payments as of March 31, 2003, as well anestimate of the periods during which these payments are expected to bemade.  The payment obligations excludeapproximately $10.0 million of capital and operating lease obligations andother indebtedness pertaining to our Specialty Avionics Group which will beassumed by the buyer upon consummation of the sale of the Group.  The Specialty Avionics Group is presented asa discontinued operation in this report. The obligations have also been adjusted to reflect the repayment of$130.0 of senior credit facility borrowings with the net proceeds from the saleassuming the sale was consummated and repayment had occurred on March 31, 2003.

 

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|                                                              |   |      |   | **Years Ending December 31,** |   |
|-------------------------------------------------------------------|--------|-----------|--------|-------------------------------|--------|
| **(In millions)**                                                 |   | **Total** |   | **2003**                      |   | **2004  and  2005** |   | **2006  and  2007** |   | **2008  and  Beyond** |   |
|                                                              |   |      |   |                          |   |   |   |   |   |   |   |
| Long-term debt:                                                   |   |      |   |                          |   |   |   |   |   |   |   |
| Senior credit facility                                            |   | $         | 294.1  |                          | $      | 11.4 |   | $ | 176.6 |   | $ | 106.1 |   | $ | — |   |
| 12% senior subordinated notes                                     |   | 100.0     |   | —                        |   | — |   | — |   | 100.0 |   |
| Capital lease obligations and other  indebtedness                 |   | 9.9       |   | 0.7                           |   | 2.3 |   | 1.6 |   | 5.3 |   |
| Total long-term debt                                              |   | 404.0     |   | 12.1                          |   | 178.9 |   | 107.7 |   | 105.3 |   |
|                                                              |   |      |   |                          |   |   |   |   |   |   |   |
| Operating lease obligations                                       |   | 14.9      |   | 1.3                           |   | 3.2 |   | 3.9 |   | 6.5 |   |
| Mandatorily redeemable preferred stock  redemption obligation     |   | 38.5      |   | —                        |   | — |   | — |   | 38.5 |   |
| Total obligations at March 31, 2003                               |   | 457.4     |   | 13.4                          |   | 182.1 |   | 111.6 |   | 150.3 |   |
|                                                              |   |      |   |                          |   |   |   |   |   |   |   |
| Senior credit facility repayment with net  proceeds from the sale |   | (130.0    | )      | (11.4                         | )      | (68.9 | ) | (49.7 | ) | — |   |
| Total obligations at March 31, 2003, as  adjusted                 |   | $         | 327.4  |                          | $      | 2.0 |   | $ | 113.2 |   | $ | 61.9 |   | $ | 150.3 |   |

 

**Disclosure of Off-Balance Sheet Commitmentsand Indemnities**

 

We are awholly-owned subsidiary of DeCrane Holdings, whose capital structure alsoincludes mandatorily redeemable preferred stock.  Since we are DeCrane Holdings’ only operating subsidiary andsource of cash, we may be required to fund DeCrane Holdings’ redemptionobligation in the future.  The DeCraneHoldings preferred stock has a total redemption value of $64.4 million as ofMarch 31, 2003 and is mandatorily redeemable on September 30, 2009.

 

Our report onForm 10-K for the year ended December 31, 2002 contains additional disclosuresabout our off-balance sheet commitments and indemnities.  Other than described above, there have beenno other material changes in the matters disclosed or new matters requiringdisclosure during the three months ended March 31, 2003.

 

**Recent Accounting Pronouncements**

 

**AccountingPronouncements Adopted January 1, 2003**

 

As more fullydescribed in Note 1 accompanying our financial statements included in thisreport, we adopted the provisions of the following accounting pronouncementseffective January 1, 2003:

 

•                  SFAS No. 145,“Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and TechnicalCorrections;”

 

•                  SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities;”

 

•                  SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure;” and

 

•                  FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Other.”

 

**RecentlyIssued Accounting Pronouncement**

** **

*SFAS No. 150 – Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*

 

                Issued in May 2003, SFAS No. 150 establishesstandards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification offinancial instruments within its scope as a liability, including financialinstruments issued in the form of shares that are mandatorily redeemable,because those financial instruments are deemed to be, in essence, obligationsof the issuer.  We are currentlyevaluating the impact this new standard will have on our financial position,results of operations and cash flows. However, we believe we may be required to reclassify our mandatorilyredeemable preferred stock as a liability commencing July 1, 2003 and reflectsubsequent changes in the redemption obligation as a charge against pre-taxincome.

 

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**Special Note Regarding Forward-LookingStatements and Risk Factors**

 

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:

 

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

 

•                  acts, andongoing threats, of global terrorism, military conflicts and health epidemicsthat affect demand for aircraft and air travel, which in turn affect demand forour products and services;

 

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

 

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

 

•                  competition fromlarger companies;

 

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

 

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

 

•                  price andavailability of raw materials, component parts and electrical energy;

 

•                  liability and otherclaims asserted against us that exceeds our insurance coverage;

 

•                  the ability toattract and retain qualified personnel;

 

•                  labordisturbances; and

 

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

 

Some of themore significant factors listed above are further described in our AnnualReport of Form 10-K and should be read in conjunction with this report.  Changes in such factors could cause ouractual results to differ materially from those contemplated in such forward-lookingstatements.  Although we believe thatthe expectations reflected in such forward-looking statements are reasonable,we can give no assurance that such expectations will prove to be correct.  We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.  You should notrely on our forward-looking statements as if they were certainties.

 

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

 

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

 

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

 

Market riskrelated to our variable-rate debt is estimated as the potential decrease inpre-tax earnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime rate or LIBOR.  At March31, 2003, the current prime rate was 4.25% and the current LIBOR was1.38%.  Based on $294.1 million ofvariable-rate debt outstanding as of March 31, 2003, a hypothetical one percentrise in interest rates, to 5.25% for prime rate borrowings and 2.38% for LIBORborrowings, would reduce our pre-tax earnings by $2.9 million annually.

 

To limit aportion of our exposure related to rising interest rates, we have entered intoan interest rate swap contract to effectively convert $4.5 million ofvariable-rate industrial revenue bonds to 4.2% fixed-rate debt until maturity in2008.  The contract is considered to bea hedge against changes in the amount of future cash flows associated withinterest payments on this portion of our variable-rate debt.  Market risk related to this interest rateswap contract is estimated as the potential higher interest expense we willincur if the variable interest rate decreases below the 4.2% fixed rate.  Based on the $4.5 million of variable-ratedebt converted to fixed-rate debt outstanding as of March 31, 2003, ahypothetical one percent decrease in the variable interest rate to 3.2%, wouldreduce our pre-tax earnings by less than $0.1 million annually.

 

The estimatedfair value of our $100.0 million fixed-rate long-term debt increased $11.0million, or 27.5%, to approximately $51.0 million at March 31, 2003 from $40.0million at December 31, 2002.  Althoughwe cannot be certain, we believe the increase may have been a result of ourannouncement that we had entered into a definitive agreement to sell ourSpecialty Avionics Group.  Market riskrelated to our fixed-rate debt is deemed to be the potential increase in fairvalue resulting from a decrease in interest rates.  For example, a hypothetical ten percent decrease in the interestrates, from 12.0% to 10.8%, would increase the fair value of our fixed-ratedebt by approximately $7.0 million.

 

**Foreign CurrencyExchange Rate Risk.** Our foreign customers are located in various parts of the world,primarily Western Europe, the Far East and Canada, and we have subsidiarieswith manufacturing facilities in Mexico. To limit our foreign currency exchange rate risk related to sales to ourcustomers, orders are primarily valued and sold in U.S. dollars.

 

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

 

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

 

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

 

**PARTII****– OTHERINFORMATION**

 

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

 

As part of itsinvestigation of the crash of Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the“CTSB”) initially notified us that it recovered burned wire that was attachedto the in-flight entertainment system installed on some of Swissair’s aircraftby one of our subsidiaries.  Oursubsidiary has worked vigorously over the last four years with the CTSBinvestigators in the fact-finding investigation of this catastrophicincident.  On March 27, 2003, the CTSBreleased its final report on its investigation.  This report indicated that the CTSB was unable to conclusivelydetermine the cause of the fire which led to the crash of the aircraft.

 

Families ofmost of the 229 persons who died aboard the flight have filed actions infederal and state courts against us, our subsidiary, and many otherunaffiliated parties, including Swissair and Boeing (“Passenger Actions”).  The Passenger Actions claim negligence,strict liability, and breach of warranty relating to the installation andtesting of the in-flight entertainment system. The Passenger Actions seek damages and costs in an unstated amount.  All of the Passenger Actions have beentransferred to the United States District Court for the Eastern District ofPennsylvania and assigned under MDL Case No. 1269 for coordinated or consolidatedpre-trial proceedings.  Most of the PassengerActions have been settled by Boeing and Swissair.  Boeing and Swissair have advised us that they intend to seekcontribution from our subsidiary.  We donot believe, based, in part, on information received from independent fire andsafety experts retained by us, that the installation of the equipment installedby our subsidiary impacted the operation or safety of the aircraft.  Accordingly, we continue to defend theclaims.

 

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

 

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

 

a.                           Exhibits

 

99.1                                       Chief ExecutiveOfficer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002 *

 

99.2                                       Chief FinancialOfficer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantto Section 906 of the Sarbanes-Oxley Act of 2002 *

 

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*                                                     Filedherewith

 

b.                          Reportson Form 8-K

 

On March 17,2003, we filed a Form 8-K Current Report regarding DeCrane Aircraft enteringinto a definitive agreement to sell its Specialty Avionics Group.  The text of the press release is containedin the filing.

 

**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 20,2003 |   | By:                                               | /s/ Richard J. Kaplan |   |
|        |   | Name:                                             | Richard J. Kaplan |
|        |   | Title:                                            | Senior Vice President, Chief Financial Officer,  Secretary, Treasurer and Director |

 

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**CERTIFICATIONS**

 

**Chief ExecutiveOfficer Certification**

 

I, R. Jack DeCrane, certify that:

 

1.                           I have reviewed thisquarterly report on Form 10-Q of DeCrane Aircraft Holdings, Inc.;

 

2.                           Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                           Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                           The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

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

 

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

 

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

 

5.                           The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

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

 

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

 

6.                           The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 20,2003 |                    |
|-------------------|-------------------------|
|              |                    |
|              | /s/ R. Jack DeCrane     |
|              | R. Jack DeCrane         |
|              | Chief Executive Officer |

 

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**Chief FinancialOfficer Certification**

 

I, Richard J. Kaplan, certify that:

 

1.                           I have reviewed thisquarterly report on Form 10-Q of DeCrane Aircraft Holdings Inc.;

 

2.                           Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3.                           Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.                           The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

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

 

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

 

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

 

5.                           The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

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

 

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

 

6.                           The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 20,2003 |                                                                     |
|-------------------|--------------------------------------------------------------------------|
|              |                                                                     |
|              | /s/ Richard J. Kaplan                                                    |
|              | Richard J. Kaplan                                                        |
|              | Senior Vice President, Chief Financial Officer,  Secretary and Treasurer |

 

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