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

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**FORM 10-Q**

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

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

**Commission File Number 333-70365**

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**DECRANE AIRCRAFT HOLDINGS, INC.******(Exact name of registrant as specified inits charter)

 
| **Delaware**                     | **34-1645569**      |
|----------------------------------|---------------------|
| (State or other  jurisdiction of | (I.R.S. Employer    |
| incorporation or  organization)  | 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, includingarea code)

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**(Not Applicable)**

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

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             Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  ýYes     o No

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             Thenumber of shares of Registrant's Common Stock, $.01 par value, outstanding asof August 10, 2001 was 100 shares.

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**Table of ContentsPart I – Financial Information**

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

 

**PART I – FINANCIAL INFORMATION**

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

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

**ConsolidatedBalance Sheets****(Inthousands, except share data)**

** **

|                                                                                   | **June 30,** **2001**                                                                                                                                                                    |       | **December 31,  2000** |       |
|----------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
|                                                                                   | **(Unaudited)**                                                                                                                                                                               |       |                   |       |
| **Assets**                                                                             |                                                                                                                                                                                          |       |                   |       |
| Current assets                                                                         |                                                                                                                                                                                          |       |                   |       |
|                                                                                   | Cash and cash  equivalents                                                                                                                                                                    | $          | 7,536                  |       | $ | 8,199 |   |
|                                                                                   | Accounts receivable,  net                                                                                                                                                                     | 61,473     |                   | 53,131     |   |
|                                                                                   | Inventories                                                                                                                                                                                   | 90,081     |                   | 83,677     |   |
|                                                                                   | Deferred income taxes                                                                                                                                                                         | 13,756     |                   | 15,090     |   |
|                                                                                   | Prepaid expenses and  other current assets                                                                                                                                                    | 1,813      |                   | 987        |   |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
|                                                                                   | Total current assets                                                                                                                                                                          | 174,659    |                   | 161,084    |   |
| Property and equipment,  net                                                           | 61,299                                                                                                                                                                                        |       | 59,491                 |       |
| Other assets,  principally intangibles, net                                            | 428,146                                                                                                                                                                                       |       | 439,582                |       |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
|                                                                                   | Total assets                                                                                                                                                                                  | $          | 664,104                |       | $ | 660,157 |   |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
| **Liabilities, Mandatorily  Redeemable Preferred Stock and Stockholder’s Equity** |                                                                                                                                                                                          | ** ** |                   | ** ** |
| Current liabilities                                                                    |                                                                                                                                                                                          |       |                   |       |
|                                                                                   | Current portion of  long-term debt                                                                                                                                                            | $          | 13,168                 |       | $ | 9,289 |   |
|                                                                                   | Accounts payable                                                                                                                                                                              | 23,994     |                   | 20,304     |   |
|                                                                                   | Accrued liabilities                                                                                                                                                                           | 44,060     |                   | 70,472     |   |
|                                                                                   | Income taxes payable                                                                                                                                                                          | 4,229      |                   | 3,505      |   |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
|                                                                                   | Total current  liabilities                                                                                                                                                                    | 85,451     |                   | 103,570    |   |
| Long-term debt                                                                         | 391,097                                                                                                                                                                                       |       | 373,990                |       |
| Deferred income taxes                                                                  | 38,475                                                                                                                                                                                        |       | 37,013                 |       |
| Other long-term  liabilities                                                           | 2,694                                                                                                                                                                                         |       | 2,650                  |       |
| Commitments and  contingencies (Note 8)                                                |                                                                                                                                                                                          |       |                   |       |
| Mandatorily redeemable  preferred stock                                                | 25,619                                                                                                                                                                                        |       | 23,179                 |       |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
| Stockholder’s equity                                                              |                                                                                                                                                                                          |       |                   |       |
|                                                                                   | Cumulative convertible  preferred stock, $.01 par value, 8,314,018 shares authorized; none issued and  outstanding as of June 30, 2001 and December 31, 2000                                  | —     |         | —     |       |
|                                                                                   | Undesignated preferred  stock, $.01 par value, 9,300,000 shares authorized as of June 30, 2001 and December  31, 2000; none issued and outstanding as of June 30, 2001 and December 31,  2000 | —     |         | —     |       |
|                                                                                   | Common stock, $.01 par  value, 35,000,000 shares authorized; 100 shares issued and outstanding as of  June 30, 2001 and December 31, 2000                                                     | —     |              | —     |     |
|                                                                                   | Additional paid-in  capital                                                                                                                                                                   | 126,373    |                   | 127,315    |   |
|                                                                                   | Notes receivable for  shares sold                                                                                                                                                             | (2,622     | )                      | (2,552     | ) |
|                                                                                   | Accumulated deficit                                                                                                                                                                           | —     |                   | (3,321     | ) |
|                                                                                   | Accumulated other  comprehensive loss                                                                                                                                                         | (2,983     | )                      | (1,687     | ) |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
|                                                                                   | Total stockholder’s  equity                                                                                                                                                              | 120,768    |                   | 119,755    |   |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
|                                                                                   | Total liabilities and  stockholder’s equity                                                                                                                                              | $          | 664,104                |       | $ | 660,157 |   |
|                                                                                   |                                                                                                                                                                                               |       |                        |       |
|                                                                                        |                                                                                                                                                                                               |            |                        |            |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**Consolidated Statements of Operations****(Inthousands)**

 

|                                         | **Three Months Ended** **June 30,**      | **Six Months Ended****June 30,** |
|----------------------------------------------|-----------------------------------------------|----------------------------------|
|                                         | ****                                          | ****                             |
|                                         | **2001**                                      | ** **                       | **2000** | ** ** | **2001** |   | **2000** |   |
|                                         | ****                                          |                             | **** |   | **** |   | **** |   |
|                                         | **(Unaudited)**                               |
|                                         |                                          |
| Revenues                                     | $                                             | 102,360                          |   | $ | 82,094 |   | $ | 201,511 |   | $ | 161,272 |   |
| Cost of sales                                | 69,784                                        |                             | 54,483 |   | 133,890 |   | 107,509 |   |
|                                         |                                               |                             |  |   |  |   |  |   |
|                                         | Gross profit                                  | 32,576                           |   | 27,611 |   | 67,621 |   | 53,763 |   |
|                                         |                                               |                             |  |   |  |   |  |   |
| Operating expenses                           |                                          |                             |   |   |   |   |   |   |
|                                         | Selling, general and  administrative expenses | 13,436                           |   | 9,893 |   | 28,096 |   | 20,939 |   |
|                                         | Amortization of  intangible assets            | 4,955                            |   | 4,037 |   | 9,921 |   | 8,250 |   |
|                                         |                                               |                             |  |   |  |   |  |   |
|                                         | Total operating  expenses                     | 18,391                           |   | 13,930 |   | 38,017 |   | 29,189 |   |
|                                         |                                               |                             |  |   |  |   |  |   |
|                                         | Income from operations                        | 14,185                           |   | 13,681 |   | 29,604 |   | 24,574 |   |
| Other expenses                               |                                          |                             |   |   |   |   |   |   |
|                                         | Interest expense                              | 9,875                            |   | 10,037 |   | 20,330 |   | 18,713 |   |
|                                         | Other expenses, net                           | 12                               |   | 109 |   | 117 |   | 173 |   |
|                                         |                                               |                             |  |   |  |   |  |   |
| Income before  provision for income taxes    | 4,298                                         |                             | 3,535 |   | 9,157 |   | 5,688 |   |
| Provision for income  taxes                  | 2,187                                         |                             | 1,548 |   | 4,574 |   | 2,946 |   |
|                                         |                                               |                             |  |   |  |   |  |   |
| Net income                                   | 2,111                                         |                             | 1,987 |   | 4,583 |   | 2,742 |   |
| Accrued preferred  stock dividends           | (1,124                                        | )                                | — |   | (2,206 | ) | — |   |
| Preferred stock  redemption value accretion  | (117                                          | )                                | — |   | (234 | ) | — |   |
|                                         |                                               |                             |  |   |  |   |  |   |
| Net income applicable  to common stockholder | $                                             | 870                              |   | $ | 1,987 |   | $ | 2,143 |   | $ | 2,742 |   |
|                                         |                                               |                             |  |   |  |   |  |   |
|                                              |                                               |                                  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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

 

|                                        |                   |       |   |       |                           |       |                |       |                                     |       |                                     |   |
|---------------------------------------------|------------------------|------------|--------|------------|--------------------------------|------------|---------------------|------------|------------------------------------------|------------|------------------------------------------|--------|
|                                        |                   |       |   |       |                           |       |                |       |                                     |       |                                     |   |
|                                        |                   | ** ** |   | ** ** | **Additional Paid-in Capital** | ** ** | **For Shares Sold** | ** ** | **Notes Receivable Accumulated Deficit** | ** ** | **Accumulated Other Comprehensive Loss** |   | **Total** |   |
|                                        |                   |       |
| **Common Stock**                            |
| ****                                        |
| **Shares**                                  |                   | **Amount** |
|                                        | ****                   |       | ****   |       | ****                           |       | ****                |       | ****                                     |       | ****                                     |   | **** |   |
| Balance, December 31,  2000                 | 100                    |       | $      | —     |                           | $          | 127,315             |       | $                                        | (2,552     | )                                        | $      | (3,321 | ) | $ | (1,687 | ) | $ | 119,755 |   |
| Comprehensive income                        |                   |       |   |       |                           |       |                |       |                                     |       |                                     |   |   |   |
|                                        | Net income             | —     |   | —     |                           | —     |                | —     |                                     | 4,583      |                                     | — |   | 4,583 |   |
|                                        | Translation adjustment | —     |   | —     |                           | —     |                | —     |                                     | —     |                                     | (1,296 | ) | (1,296 | ) |
|                                        |                   |       |   |       |                           |       |                |       |                                     |       |                                     |   |  |   |
|                                        |                   |       |   |       |                           |       |                |       |                                     |       |                                     |   | 3,287 |   |
|                                        |                   |       |   |       |                           |       |                |       |                                     |       |                                     |   |  |   |
| Accrued preferred  stock dividends          | —                 |       | — |       | (944                           | )          | —              |       | (1,262                                   | )          | —                                   |   | (2,206 | ) |
| Preferred stock  redemption value accretion | —                 |       | — |       | (234                           | )          | —              |       | —                                   |       | —                                   |   | (234 | ) |
| Compensatory stock  option expense          | —                 |       | — |       | 236                            |       | —              |       | —                                   |       | —                                   |   | 236 |   |
| Notes receivable  interest accrued          | —                 |       | — |       | —                         |       | (70                 | )          | —                                   |       | —                                   |   | (70 | ) |
|                                        |                        |       |        |       |                                |       |                     |       |                                          |       |                                          |   |  |   |
| Balance, June 30, 2001  (Unaudited)         | 100                    |       | $      | —     |                           | $          | 126,373             |       | $                                        | (2,622     | )                                        | $      | — |   | $ | (2,983 | ) | $ | 120,768 |   |
|                                        |                        |       |        |       |                                |       |                     |       |                                          |       |                                          |   |  |   |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

**ConsolidatedStatements of Cash Flows****(In thousands)**

** **

|                                              | **Six Months Ended**                                                |    |
|---------------------------------------------------|---------------------------------------------------------------------|---------|
|                                              | **June 30,**                                                        |    |
|                                              | ****                                                                |    |
|                                              | **2001**                                                            |    | **2000** |   |
|                                              | ****                                                                |    | **** |   |
|                                              | **(Unaudited)**                                                     |    |
| **Cash flows from operating activities**          |                                                                |    |   |   |
|                                              | Net income                                                          | $       | 4,583 |   | $ | 2,742 |   |
|                                              | Adjustments to  reconcile net income to net cash                    |    |   |   |   |
|                                              | provided by operating  activities                                   |    |   |   |   |
|                                              | Depreciation and  amortization                                      | 16,925  |   | 13,474 |   |
|                                              | Deferred income taxes                                               | 1,406   |   | 1,407 |   |
|                                              | Other, net                                                          | 597     |   | 522 |   |
|                                              | Changes in assets and  liabilities, net of effect from acquisitions |    |   |   |   |
|                                              | Accounts receivable                                                 | (9,002  | ) | (11,684 | ) |
|                                              | Inventories                                                         | (6,538  | ) | (7,661 | ) |
|                                              | Prepaid expenses and  other assets                                  | (1,299  | ) | (316 | ) |
|                                              | Accounts payable                                                    | 3,828   |   | (768 | ) |
|                                              | Accrued liabilities                                                 | (11,908 | ) | (1,827 | ) |
|                                              | Income taxes payable                                                | 2,223   |   | 1,199 |   |
|                                              | Other long-term  liabilities                                        | 80      |   | (195 | ) |
|                                              |                                                                     |    |  |   |
|                                              | Net cash provided by  (used for) operating activities               | 895     |   | (3,107 | ) |
|                                              |                                                                     |    |  |   |
| **Cash flows from investing  activities**         |                                                                |    |   |   |
|                                              | Cash paid for  acquisitions, net of cash acquired                   | (13,529 | ) | (76,861 | ) |
|                                              | Capital expenditures                                                | (6,365  | ) | (12,635 | ) |
|                                              | Other, net                                                          | 635     |   | 75 |   |
|                                              |                                                                     |    |  |   |
|                                              | Net cash used for  investing activities                             | (19,259 | ) | (89,421 | ) |
|                                              |                                                                     |    |  |   |
| **Cash flows from financing  activities**         |                                                                |    |   |   |
|                                              | Net senior credit  facility borrowings                              | 21,400  |   | 65,000 |   |
|                                              | Proceeds from the sale  of preferred stock                          | —  |   | 25,000 |   |
|                                              | Capital contribution                                                | —  |   | 7,500 |   |
|                                              | Principal payments on  term debt, capitalized leases and other debt | (3,035  | ) | (2,611 | ) |
|                                              | Deferred financing  costs                                           | (580    | ) | (2,170 | ) |
|                                              | Other, net                                                          | (93     | ) | (187 | ) |
|                                              |                                                                     |    |  |   |
|                                              | Net cash provided by  financing activities                          | 17,692  |   | 92,532 |   |
|                                              |                                                                     |    |  |   |
| Effect of foreign  currency translation on cash   | 9                                                                   |    | (5 | ) |
|                                              |                                                                     |    |  |   |
| Net decrease in cash  and cash equivalents        | (663                                                                | )       | (1 | ) |
| Cash and cash  equivalents at beginning of period | 8,199                                                               |    | 7,918 |   |
|                                              |                                                                     |    |  |   |
| Cash and cash  equivalents at end of period       | $                                                                   | 7,536   |   | $ | 7,917 |   |
|                                              |                                                                     |    |  |   |
|                                                   |                                                                     |         |  |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

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

**Note 1.              ConsolidatedFinancial Statements**

             Theconsolidated interim financial statements included in this report areunaudited. The Company believes the interim financial statements are presentedon a basis consistent with the audited financial statements. The Company alsobelieves that the interim financial statements contain all adjustmentsnecessary for a fair statement of the results for such interim periods. All ofthese adjustments are normal recurring adjustments. The results of operationsfor interim periods do not necessarily predict the operating results for thefull year. The consolidated balance sheet as of December 31, 2000 has beenderived from audited financial statements but does not include all disclosuresrequired by generally accepted accounting principles as permitted by interimreporting requirements. The information included in this report should be readin conjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the audited financial statements and relatednotes included in the Company’s 2000 Form 10-K. Some reclassifications havebeen made to prior periods’ financial statements to conform to the 2001presentation.

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

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

 

|                          | **Six Months Ended June 30,** |    |
|-------------------------------|------------------------------------|---------|
|                          | ****                               |    |
|                          | **2001   Historical**              |    | **2000   Pro Forma** |   |
|                          |                                    |    |  |   |
|                          | **(Unaudited)**                    |    |
| Revenues                      | $                                  | 201,511 |   | $ | 183,582 |
| EBITDA, as defined  (Note 10) | 45,791                             |    | 43,898 |
| Net income                    | 4,583                              |    | 3,119 |
|                               |                                    |         |  |  |  |  |  |

 

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

 

 

**Note 3.              Inventories**

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

 

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

 

             Inventoriedcosts are not in excess of estimated realizable value and include directengineering, production and tooling costs, and applicable manufacturingoverhead. In accordance with industry practice, inventoried costs includeamounts relating to programs and contracts with long production cycles.Included above are program costs, principally engineering, of $13,391,000 atJune 30, 2001 and $8,603,000 at December 31, 2000 related to long-term contractsthat will be recoverable based on future sales. Periodic assessments areperformed to ensure recoverability of program costs and adjustments are made,if necessary, to reduce inventoried costs to estimated realizable value. Noadjustments were required in 2001 and 2000.

**Note 4.              AccruedLiabilities**

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

 

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

 

 

**Note 5.              Long-TermDebt**

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

 

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

 

 

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

**Note 6.              IncomeTaxes**

             Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to income before income taxes primarilydue to the effects of state and foreign income taxes and non-deductibleexpenses, principally goodwill amortization. The difference in the effectivetax rates between periods is mostly a result of the relationship ofnon-deductible expenses to income before income taxes.

**Note 7.              CapitalStructure**

**Mandatorily Redeemable Preferred Stock**

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

 

|                                                              | **Number of Shares**                                |       | **Mandatory Redemption Value** |       | **Unamortized Issuance Discount** |   | **Net Book Value** |   |
|-------------------------------------------------------------------|-----------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|--------|--------------------|--------|
|                                                              |                                                     | ** ** |                                | ** ** |                                   |   |                    |   |
|                                                              | **(in thousands, except share and per share data)** |       |
| Balance, December 31,  2000                                       | 270,400                                             |       | $                              | 27,040     |                              | $      | (3,861             | )      | $ | 23,179 |   |
| Accrued dividends and  redemption value accretion                 | 22,065                                              |       | 2,206                          |       | 234                               |   | 2,440              |   |
|                                                              |                                                     |       |                                |       |                                   |   |                    |   |
| Balance, June 30, 2001  (Unaudited)                               | 292,465                                             |       | $                              | 29,246     |                              | $      | (3,627             | )      | $ | 25,619 |   |
|                                                              |                                                     |       |                                |       |                                   |   |                    |   |
|                                                              |                                                |       |                           |       |                              |   |               |   |
| Per share liquidation  value as of June 30, 2001 (Unaudited) |                                                |       | $                              | 100.00     |                              |   |               |   |   |
|                                                              |                                                |       |                                |       |                              |   |               |   |

 

             Holdersof the preferred stock are entitled to receive, when, as and if declared,dividends at a rate equal to 16% per annum. Prior to June 30, 2005, the Companymay, at its option, pay dividends either in cash or by the issuance of additionalshares of preferred stock. For the six months ended June 30, 2001, the Companyelected to issue 22,065 additional shares in lieu of cash dividend payments.Accrued dividends totaling $1,262,000 were charged to retained earnings,eliminating the Company’s cumulative earnings to date. The remaining accrueddividends and the redemption value accretion were charged to additional paid-incapital.

**Note 8.              Commitmentsand Contingencies**

**Contingent Acquisition Consideration**

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

 

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

 

 

 

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

**Funding of DeCrane Holdings Preferred Stock Obligations**

             TheCompany is a wholly owned subsidiary of DeCrane Holdings whose capitalstructure also includes mandatorily redeemable preferred stock. Since theCompany is DeCrane Holdings’ only operating subsidiary and source of cash, theCompany may be required to fund DeCrane Holdings’ preferred stock dividend andredemption 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 insteadaccrete to the liquidation value of the 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 DeCraneHoldings preferred stock has a total redemption value of $50,618,000 as of June30, 2001, including accumulated dividends.

**Note 9.              ConsolidatedStatements of Cash Flows**

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

 

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

 

 

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

**Note 10.            BusinessSegment Information**

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

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

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

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

 

|                             | **Three Months Ended   June 30,** |    | **Six Months Ended   June 30,** |    |
|----------------------------------|-----------------------------------|---------|---------------------------------|---------|
|                             |                                   |    |                                 |    |
|                             | **2001**                          |    | **2000**                        |    | **2001** |   | **2000** |   |
|                             | ****                              |    | ****                            |    | **** |   | **** |   |
|                             | **(Unaudited)**                   |    |
| Revenues                         |                              |    |                            |    |   |   |   |   |
|                             | Cabin Management                  | $       | 53,512                          |    | $ | 40,554 |   | $ | 104,871 |   | $ | 76,778 |   |
|                             | Specialty Avionics                | 31,824  |                            | 26,045  |   | 63,097 |   | 52,842 |   |
|                             | Systems Integration               | 17,761  |                            | 15,783  |   | 34,495 |   | 32,392 |   |
|                             | Inter-group  elimination (1)      | (737    | )                               | (288    | ) | (952 | ) | (740 | ) |
|                             |                                   |    |                                 |    |  |   |  |   |
|                             | Consolidated totals               | $       | 102,360                         |    | $ | 82,094 |   | $ | 201,511 |   | $ | 161,272 |   |
|                             |                                   |    |                                 |    |  |   |  |   |
|                             |                              |    |                            |    |   |   |   |   |
| EBITDA (2)                       |                              |    |                            |    |   |   |   |   |
|                             | Cabin Management                  | $       | 9,690                           |    | $ | 11,840 |   | $ | 23,088 |   | $ | 21,381 |   |
|                             | Specialty Avionics                | 9,402   |                            | 5,998   |   | 17,229 |   | 12,131 |   |
|                             | Systems Integration               | 4,778   |                            | 3,514   |   | 8,874 |   | 6,956 |   |
|                             | Corporate (3)                     | (1,365  | )                               | (1,542  | ) | (3,301 | ) | (3,345 | ) |
|                             | Inter-group  elimination (4)      | (99     | )                               | 131     |   | (99 | ) | — |   |
|                             |                                   |    |                                 |    |  |   |  |   |
|                             | Consolidated totals               | $       | 22,406                          |    | $ | 19,941 |   | $ | 45,791 |   | $ | 37,123 |   |
|                             |                                   |    |                                 |    |  |   |  |   |
| Total assets (as of  period end) |                              |    |                            |    |
|                             | Cabin Management                  | $       | 319,590                         |    | $ | 269,537 |   |
|                             | Specialty Avionics                | 225,199 |                            | 221,427 |   |
|                             | Systems Integration               | 78,498  |                            | 85,014  |   |
|                             | Corporate (5)                     | 41,014  |                            | 36,680  |   |
|                             | Inter-group  elimination (6)      | (197    | )                               | (723    | ) |
|                             |                                   |    |                                 |    |
|                             | Consolidated totals               | $       | 664,104                         |    | $ | 611,935 |   |
|                             |                                   |    |                                 |    |
|                                  |                                   |         |                                 |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

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

 

 

|                                         | **Three Months Ended June 30,**          |   | **Six Months Ended June 30,** |   |
|----------------------------------------------|------------------------------------------|--------|-------------------------------|--------|
|                                         |                                          |   |                               |   |
|                                         | **2001**                                 |   | **2000**                      |   | **2001** |   | **2000** |   |
|                                         | ****                                     |   | ****                          |   | **** |   | **** |   |
|                                         | **(Unaudited)**                          |   |
| Consolidated EBITDA                          | $                                        | 22,406 |                          | $      | 19,941 |   | $ | 45,791 |   | $ | 37,123 |   |
| Depreciation and  amortization (a)           | (8,153                                   | )      | (6,171                        | )      | (15,848 | ) | (12,371 | ) |
| Acquisition related  charges not capitalized | (22                                      | )      | (3                            | )      | (103 | ) | (7 | ) |
| Other noncash charges                        | (46                                      | )      | (86                           | )      | (236 | ) | (171 | ) |
|                                         |                                          |   |                               |   |  |   |  |   |
|                                         | Consolidated income  from operations     | 14,185 |                          | 13,681 |   | 29,604 |   | 24,574 |   |
| Interest expense                             | (9,875                                   | )      | (10,037                       | )      | (20,330 | ) | (18,713 | ) |
| Other expenses, net                          | (12                                      | )      | (109                          | )      | (117 | ) | (173 | ) |
|                                         |                                          |   |                               |   |  |   |  |   |
|                                         | Consolidated income  before income taxes | $      | 4,298                         |   | $ | 3,535 |   | $ | 9,157 |   | $ | 5,688 |   |
|                                         |                                          |   |                               |   |  |   |  |   |

 

----

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

**Note 11.            RecentlyIssued Accounting Pronouncements**

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

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

             SFASNo. 142 establishes accounting and reporting standards for goodwill and otherintangible assets subsequent to their acquisition. SFAS No. 142 eliminatesthe current requirement to amortize goodwill and other indefinite-livedintangible assets requiring instead periodic impairment testing with a losscharged to the results of operation in the periods in which impairment occurs.Finite-lived intangible assets are amortized and are also subject to periodicimpairment testing. Adoption of SFAS No. 142 is required for the Company’sfiscal year beginning January 1, 2002.

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

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

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

**Note 12.            SupplementalCondensed Consolidating Financial Information**

             Inconjunction with the senior credit facility and 12% senior subordinated notesdescribed in Note 5, the following condensed consolidating financialinformation is presented segregating the Company, as the issuer, and guarantorand non-guarantor subsidiaries. The accompanying financial information in theguarantor subsidiaries column reflects the financial position, results ofoperations and cash flows for those subsidiaries guaranteeing the senior creditfacility and the notes.

             Theguarantor subsidiaries are wholly-owned subsidiaries of the Company and theirguarantees are full and unconditional on a joint and several basis. There areno restrictions on the ability of the guarantor subsidiaries to transfer fundsto the issuer in the form of cash dividends, loans or advances. Separate financialstatements of the guarantor subsidiaries are not presented because managementbelieves that such financial statements would not be material to investors.Investments in subsidiaries in the following condensed consolidating financialinformation are accounted for under the equity method of accounting.Consolidating adjustments include the following:

(1)         Elimination of investments insubsidiaries.

(2)         Elimination of intercompany accounts.

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

(4)         Elimination of equity in earnings ofsubsidiaries.

 

**BalanceSheets**

 

|                                                                                   | **June 30, 2001 (Unaudited)**                                                            |    |
|----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|---------|
|                                                                                   |                                                                                          |    |
|                                                                                   | **Issuer**                                                                               |    | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated Total** |   |
|                                                                                   | ****                                                                                     |    | **** |   | **** |   | **** |   | **** |   |
|                                                                                   | **(in thousands)**                                                                       |    |
| **Assets**                                                                             |                                                                                     |    |   |   |   |   |   |   |   |   |
| Current assets                                                                         |                                                                                     |    |   |   |   |   |   |   |   |   |
|                                                                                   | Cash and cash  equivalents                                                               | $       | 7,289 |   | $ | 176 |   | $ | 71 |   | $ | — |   | $ | 7,536 |   |
|                                                                                   | Accounts receivable,  net                                                                | —  |   | 60,358 |   | 1,115 |   | — |   | 61,473 |   |
|                                                                                   | Inventories                                                                              | —  |   | 88,387 |   | 1,694 |   | — |   | 90,081 |   |
|                                                                                   | Other current assets                                                                     | 13,774  |   | 1,636 |   | 159 |   | — |   | 15,569 |   |
|                                                                                   |                                                                                     |         |   |  |   |  |   |  |   |  |   |
|                                                                                   | Total current assets                                                                     | 21,063  |   | 150,557 |   | 3,039 |   | — |   | 174,659 |   |
| Property and  equipment, net                                                           | 3,745                                                                                    |    | 54,913 |   | 2,641 |   | — |   | 61,299 |   |
| Other assets,  principally intangibles, net                                            | 16,206                                                                                   |    | 402,750 |   | 9,190 |   | — |   | 428,146 |   |
| Investments in  subsidiaries                                                           | 406,347                                                                                  |    | 20,860 |   | — |   | (427,207) | (1) | — |   |
| Intercompany  receivables                                                              | 252,088                                                                                  |    | 91,830 |   | 4,889 |   | (348,807) | (2) | — |   |
|                                                                                   |                                                                                          |    |  |   |  |   |  |   |  |   |
|                                                                                   | Total assets                                                                             | $       | 699,449 |   | $ | 720,910 |   | $ | 19,759 |   | $ | (776,014) |   | $ | 664,104 |   |
|                                                                                   |                                                                                          |    |  |   |  |   |  |   |  |   |
|                                                                                   |                                                                                     |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily  Redeemable Preferred Stock and Stockholder’s Equity** | ** **                                                                               |
| Current liabilities                                                                    |                                                                                     |    |   |   |   |   |   |   |   |   |
|                                                                                   | Current portion of  long-term debt                                                       | $       | 12,003 |   | $ | 1,147 |   | $ | 18 |   | $ | — |   | $ | 13,168 |   |
|                                                                                   | Other current liabilities                                                                | 23,270  |   | 47,664 |   | 1,349 |   | — |   | 72,283 |   |
|                                                                                   |                                                                                          |    |  |   |  |   |  |   |  |   |
|                                                                                   | Total current  liabilities                                                               | 35,273  |   | 48,811 |   | 1,367 |   | — |   | 85,451 |   |
| Long-term debt                                                                         | 384,404                                                                                  |    | 6,693 |   | — |   | — |   | 391,097 |   |
| Intercompany payables                                                                  | 91,830                                                                                   |    | 256,977 |   | — |   | (348,807) | (2) | — |   |
| Other long-term  liabilities                                                           | 38,572                                                                                   |    | 2,082 |   | 515 |   | — |   | 41,169 |   |
| Mandatorily redeemable  preferred stock                                                | 25,619                                                                                   |    | — |   | — |   | — |   | 25,619 |   |
|                                                                                   |                                                                                          |    |  |   |  |   |  |   |  |   |
| Stockholder’s equity                                                              |                                                                                     |    |   |   |   |   |   |   |   |   |
|                                                                                   | Paid-in capital                                                                          | 123,751 |   | 338,309 |   | 15,440 |   | (353,749) | (1) | 123,751 |   |
|                                                                                   | Retained earnings  (deficit)                                                             | —  |   | 68,038 |   | 5,420 |   | (73,458) | (1) | — |   |
|                                                                                   | Accumulated other  comprehensive loss                                                    | —  |   | — |   | (2,983 | ) | — |   | (2,983 | ) |
|                                                                                   |                                                                                          |    |  |   |  |   |  |   |  |   |
|                                                                                   | Total stockholder’s  equity                                                         | 123,751 |   | 406,347 |   | 17,877 |   | (427,207) |   | 120,768 |   |
|                                                                                   |                                                                                          |    |  |   |  |   |  |   |  |   |
|                                                                                   | Total liabilities,  mandatorily redeemable preferred stock and stockholder’s equity | $       | 699,449 |   | $ | 720,910 |   | $ | 19,759 |   | $ | (776,014) |   | $ | 664,104 |   |
|                                                                                   |                                                                                          |    |  |   |  |   |  |   |  |   |
|                                                                                        |                                                                                          |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

|                                                                                     | **December 31, 2000**              |       |
|------------------------------------------------------------------------------------------|------------------------------------|------------|
|                                                                                     | ****                               |       |
|                                                                                     | **Issuer**                         |       | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |
|                                                                                     |                                    | ** ** |  | ** ** |  | ** ** |  |   |  |   |
|                                                                                     | **(in thousands)**                 |       |
| **Assets**                                                                               |                               |       |   |   |   |   |   |   |   |   |
| Current assets                                                                           |                               |       |   |   |   |   |   |   |   |   |
|                                                                                     | Cash and cash  equivalents         | $          | 7,553 |   | $ | 233 |   | $ | 413 |   | $ | — |   | $ | 8,199 |   |
|                                                                                     | Accounts receivable,  net          | —     |   | 51,396 |   | 1,735 |   | — |   | 53,131 |   |
|                                                                                     | Inventories                        | —     |   | 82,013 |   | 1,664 |   | — |   | 83,677 |   |
|                                                                                     | Other current assets               | 14,814     |   | 1,118 |   | 145 |   | — |   | 16,077 |   |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
|                                                                                     | Total current assets               | 22,367     |   | 134,760 |   | 3,957 |   | — |   | 161,084 |   |
| Property and  equipment, net                                                             | 4,423                              |       | 52,303 |   | 2,765 |   | — |   | 59,491 |   |
| Other assets,  principally intangibles, net                                              | 16,514                             |       | 412,730 |   | 10,338 |   | — |   | 439,582 |   |
| Investments in  subsidiaries                                                             | 394,794                            |       | 20,739 |   | — |   | (415,533) | (1) | — |   |
| Intercompany  receivables                                                                | 251,725                            |       | 92,991 |   | 3,863 |   | (348,579) | (2) | — |   |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
|                                                                                     | Total assets                       | $          | 689,823 |   | $ | 713,523 |   | $ | 20,923 |   | $ | (764,112) |   | $ | 660,157 |   |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
|                                                                                     |                               |       |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily  Redeemable Preferred Stock and Stockholder’s Equity**   | ** **                         |
| Current liabilities                                                                      |                               |       |   |   |   |   |   |   |   |   |
|                                                                                     | Current portion of  long-term debt | $          | 7,997 |   | $ | 1,266 |   | $ | 26 |   | $ | — |   | $ | 9,289 |   |
|                                                                                     | Other current  liabilities         | 38,635     |   | 54,384 |   | 1,262 |   | — |   | 94,281 |   |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
|                                                                                     | Total current  liabilities         | 46,632     |   | 55,650 |   | 1,288 |   | — |   | 103,570 |   |
| Long-term debt                                                                           | 368,837                            |       | 5,147 |   | 6 |   | — |   | 373,990 |   |
| Intercompany payables                                                                    | 92,991                             |       | 255,588 |   | — |   | (348,579) | (2) | — |   |
| Other long-term  liabilities                                                             | 36,742                             |       | 2,344 |   | 577 |   | — |   | 39,663 |   |
| Mandatorily redeemable  preferred stock                                                  | 23,179                             |       | — |   | — |   | — |   | 23,179 |   |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
| Stockholder’s equity                                                                |                               |       |   |   |   |   |   |   |   |   |
|                                                                                     | Paid-in capital                    | 124,763    |   | 338,729 |   | 15,440 |   | (354,169) | (1) | 124,763 |   |
|                                                                                     | Retained earnings  (deficit)       | (3,321     | ) | 56,065 |   | 5,299 |   | (61,364) | (1) | (3,321 | ) |
|                                                                                     |                               |       |   |   |   |   |   |   |   |   |
| Accumulated other  comprehensive loss                                                    | —                             |       | — |   | (1,687 | ) | — |   | (1,687 | ) |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
|                                                                                     | Total stockholder’s  equity   | 121,442    |   | 394,794 |   | 19,052 |   | (415,533) |   | 119,755 |   |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
| Total liabilities,  mandatorily redeemable preferred stock and stockholder’s equity | $                                  | 689,823    |   | $ | 713,523 |   | $ | 20,923 |   | $ | (764,112) |   | $ | 660,157 |   |
|                                                                                     |                                    |       |  |   |  |   |  |   |  |   |
|                                                                                          |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

| **Statements of Operations**                  |                                           |       |
|-----------------------------------------------|------------------------------------------------|------------|
|                                          | **Six Months Ended June 30, 2001 (Unaudited)** |       |
|                                          | ****                                           |       |
|                                          | **Issuer**                                     |       | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |
|                                          | ****                                           |       | **** |   | **** |   | **** |   | **** |   |
|                                          |                                           |       | **(in thousands)** |   |   |   |
|                                          |                                           |       |   |   |   |   |   |   |   |   |
| Revenues                                      | $                                              | **—** |   | $ | 199,741 |   | $ | 5,810 |   | $ | (4,040) | (3) | $ | 201,511 |   |
| Cost of sales                                 | —                                         |       | 132,914 |   | 5,016 |   | (4,040) | (3) | 133,890 |   |
|                                          | ****                                           |       | **** |   | **** |   | **** |   | **** |   |
|                                          | Gross profit                                   | —     |   | 66,827 |   | 794 |   | — |   | 67,621 |   |
|                                          |                                           |       |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses | 4,361                                          |       | 23,293 |   | 442 |   | — |   | 28,096 |   |
| Amortization of  intangible assets            | 101                                            |       | 9,618 |   | 202 |   | — |   | 9,921 |   |
| Interest expense                              | 19,786                                         |       | 531 |   | 13 |   | — |   | 20,330 |   |
| Intercompany charges                          | (10,581                                        | )          | 10,581 |   | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries           | (11,973                                        | )          | (214 | ) | — |   | 12,187 | (4) | — |   |
| Other expenses  (income), net                 | 161                                            |       | 81 |   | (125 | ) | — |   | 117 |   |
| Provision for income  taxes (benefit)         | (6,438                                         | )          | 10,964 |   | 48 |   | — |   | 4,574 |   |
|                                          |                                                | ** ** |  | ** ** |  | ** ** |  |   |  |   |
|                                          | Net income                                     | $          | 4,583 |   | $ | 11,973 |   | $ | 214 |   | $ | (12,187 | ) | $ | 4,583 |   |
|                                          |                                                |       |  |   |  |   |  |   |  |   |
|                                          |                                           |       |   |   |   |   |   |   |   |   |
|                                          |                                           |       |
|                                          |                                           |       |
|                                          | **Six Months Ended June 30, 2000 (Unaudited)** |       |
|                                          | ****                                           |       |
|                                          | **Issuer**                                     |       | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |
|                                          | ****                                           |       | **** |   | **** |   | **** |   | **** |   |
|                                          |                                           |       | **(in thousands)** |   |   |   |
|                                          |                                           |       |   |   |   |   |   |   |   |   |
| Revenues                                      | $                                              | —     |   | $ | 160,097 |   | $ | 6,261 |   | $ | (5,086) | (3) | $ | 161,272 |   |
| Cost of sales                                 | —                                         |       | 107,707 |   | 4,888 |   | (5,086) | (3) | 107,509 |   |
|                                          | ****                                           |       | **** |   | **** |   | **** |   | **** |   |
|                                          | Gross profit                                   | —     |   | 52,390 |   | 1,373 |   | — |   | 53,763 |   |
|                                          |                                           |       |   |   |   |   |   |   |   |   |
| Selling, general and  administrative expenses | 3,745                                          |       | 16,537 |   | 657 |   | — |   | 20,939 |   |
| Amortization of  intangible assets            | 101                                            |       | 7,932 |   | 217 |   | — |   | 8,250 |   |
| Interest expense                              | 18,524                                         |       | 178 |   | 11 |   | — |   | 18,713 |   |
| Intercompany charges                          | (6,822                                         | )          | 6,822 |   | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries           | (11,822                                        | )          | (391 | ) | — |   | 12,213 | (4) | — |   |
| Other expenses  (income), net                 | 114                                            |       | 30 |   | 29 |   | — |   | 173 |   |
| Provision for income  taxes (benefit)         | (6,582                                         | )          | 9,460 |   | 68 |   | — |   | 2,946 |   |
|                                          |                                                | ** ** |  | ** ** |  | ** ** |  |   |  |   |
|                                          | Net income                                     | $          | 2,742 |   | $ | 11,822 |   | $ | 391 |   | $ | (12,213) |   | $ | 2,742 |   |
|                                          |                                                |       |  |   |  |   |  |   |  |   |
|                                               |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

| **Statements of Cash Flows**              |                                           |    |                       |
|-------------------------------------------|------------------------------------------------|---------|----------------------------|
|                                      | **Six Months Ended June 30, 2001 (Unaudited)** |    |                       |
|                                      | ****                                           |    |                       |
|                                      | **Issuer**                                     |    | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |   |
|                                      | ****                                           |    | ****                       |   | **** |   | **** |   | **** |   |   |
|                                      |                                           |    | **(in thousands)**         |   |   |   |   |
|                                      |                                           |    |                       |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities**  |                                           |    |                       |   |   |   |   |   |   |   |   |
| Net income                                | $                                              | 4,583   |                       | $ | 11,973 |   | $ | 214 |   | $ | (12,187 | )(4) | $ | 4,583 |   |   |
| Noncash adjustments                       |                                           |    |                       |   |   |   |   |   |   |   |   |
|                                      | Equity in earnings of  subsidiaries            | (11,973 | )                          | (214 | ) | — |   | 12,187 | (4) | — |   |   |
|                                      | Other noncash  adjustments                     | 3,457   |                       | 14,902 |   | 569 |   | — |   | 18,928 |   |   |
| Changes in working  capital               | (1,686                                         | )       | (20,293                    | ) | (637 | ) | — |   | (22,616 | ) |   |
|                                      |                                                |    |                            |   |  |   |  |   |  |   |   |
|                                      | Net cash provided by  (used for)               |    |                       |   |   |   |   |   |   |   |   |   |
|                                      | operating activities                           | (5,619  | )                          | 6,368 |   | 146 |   | — |   | 895 |   |   |
|                                      |                                                |    |                            |   |  |   |  |   |  |   |   |
|                                      |                                           |    |                       |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities** |                                           |    |                       |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net           |                                           |    |                       |   |   |   |   |   |   |   |   |
| of cash acquired                          | (13,529                                        | )       | —                     |   | — |   | — |   | (13,529 | ) |   |
| Capital expenditures  and other           | (109                                           | )       | (5,135                     | ) | (486 | ) | — |   | (5,730 | ) |   |
|                                      |                                                |    |                            |   |  |   |  |   |  |   |   |
|                                      | Net cash used for                              |    |                       |   |   |   |   |   |   |   |   |   |
|                                      | investing activities                           | (13,638 | )                          | (5,135 | ) | (486 | ) | — |   | (19,259 | ) |   |
|                                      |                                           |         |                       |  |   |  |   |  |   |  |   |   |
|                                      |                                           |    |                       |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities** |                                           |    |                       |   |   |   |   |   |   |   |   |
| Net senior credit  facility borrowings    | 21,400                                         |    | —                     |   | — |   | — |   | 21,400 |   |   |
| Principal payments on  term debt,         |                                           |    |                       |   |   |   |   |   |   |   |   |
| capitalized leases and  other debt        | (1,827                                         | )       | (1,197                     | ) | (11 | ) | — |   | (3,035 | ) |   |
| Deferred financing  costs                 | (580                                           | )       | —                     |   | — |   | — |   | (580 | ) |   |
| Other, net                                | —                                         |    | (93                        | ) | — |   | — |   | (93 | ) |   |
|                                      |                                                |    |                            |   |  |   |  |   |  |   |   |
|                                      | Net cash provided by  (used for)               |    |                       |   |   |   |   |   |   |   |   |   |
|                                      | financing activities                           | 18,993  |                       | (1,290 | ) | (11 | ) | — |   | 17,692 |   |   |
|                                      |                                           |         |                       |  |   |  |   |  |   |  |   |   |
|                                      |                                           |    |                       |   |   |   |   |   |   |   |   |
| Effect of foreign  currency               |                                           |    |                       |   |   |   |   |   |   |   |   |
| translation on cash                       | —                                         |    | —                     |   | 9 |   | — |   | 9 |   |   |
|                                      |                                                |    |                            |   |  |   |  |   |  |   |   |
| Net decrease in cash  and equivalents     | (264                                           | )       | (57                        | ) | (342 | ) | — |   | (663 | ) |   |
| Cash and equivalents  at beginning        |                                           |    |                       |   |   |   |   |   |   |   |   |
| of period                                 | 7,553                                          |    | 233                        |   | 413 |   | — |   | 8,199 |   |   |
|                                      |                                                |    |                            |   |  |   |  |   |  |   |   |
| Cash and equivalents  at end of period    | $                                              | 7,289   |                       | $ | 176 |   | $ | 71 |   | $ | — |   | $ | 7,536 |   |
|                                      |                                                |    |                            |   |  |   |  |   |  |   |   |
|                                           |                                                |         |                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

|                                      | **Six Months Ended June 30, 2000 (Unaudited)** |    |
|-------------------------------------------|------------------------------------------------|---------|
|                                      | ****                                           |    |
|                                      | **Issuer**                                     |    | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |
|                                      | ****                                           |    | **** |   | **** |   | **** |   | **** |   |
|                                      |                                           |    | **(in thousands)** |   |   |   |
|                                      |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities**  |                                           |    |   |   |   |   |   |   |   |   |
| Net income                                | $                                              | 2,742   |   | $ | 11,822 |   | $ | 391 |   | $ | (12,213 | )(4) | $ | 2,742 |   |
| Noncash adjustments                       |                                           |    |   |   |   |   |   |   |   |   |
|                                      | Equity in earnings of  subsidiaries            | (11,822 | ) | (391 | ) | — |   | 12,213 | (4) | — |   |
|                                      | Other noncash  adjustments                     | 2,936   |   | 11,985 |   | 482 |   | — |   | 15,403 |   |
| Changes in working  capital               | (6,141                                         | )       | (14,489 | ) | (622 | ) | — |   | (21,252 | ) |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
|                                      | Net cash provided by  (used for)               |    |   |   |   |   |   |   |   |   |   |
|                                      | operating activities                           | (12,285 | ) | 8,927 |   | 251 |   | — |   | (3,107 | ) |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
|                                      |                                           |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing  activities** |                                           |    |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions                | (77,034                                        | )       | 173 |   | — |   | — |   | (76,861 | ) |
| Capital expenditures  and other           | (3,626                                         | )       | (8,572 | ) | (362 | ) | — |   | (12,560 | ) |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
|                                      | Net cash used for                              |    |   |   |   |   |   |   |   |   |   |
|                                      | investing activities                           | (80,660 | ) | (8,399 | ) | (362 | ) | — |   | (89,421 | ) |
|                                      |                                           |         |   |  |   |  |   |  |   |  |   |
|                                      |                                           |    |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing  activities** |                                           |    |   |   |   |   |   |   |   |   |
| Net senior credit  facility borrowings    | 65,000                                         |    | — |   | — |   | — |   | 65,000 |   |
| Proceeds from saleof  preferred stock     | 25,000                                         |    | — |   | — |   | — |   | 25,000 |   |
| Capital contribution                      | 7,500                                          |    | — |   | — |   | — |   | 7,500 |   |
| Principle payments on  term debt          |                                           |    |   |   |   |   |   |   |   |   |
| capitalized leases and  other debt        | (2,266                                         | )       | (332 | ) | (13 | ) | — |   | (2,611 | ) |
| Deferred financing  costs                 | (2,170                                         | )       |   |   | — |   | — |   | (2,170 | ) |
| Other, net                                | (50                                            | )       | (137 | ) | — |   | — |   | (187 | ) |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
|                                      | Net cash provided by  (used for)               |    |   |   |   |   |   | — |   |   |   |
|                                      | financing activities                           | 93,014  |   | (469 | ) | (13 | ) | — |   | 92,532 |   |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
| Effect of foreign  currency               |                                           |    |   |   |   |   |   |   |   |   |
| translation on cash                       | —                                         |    | — |   | (5 | ) | — |   | (5 | ) |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
| Net increase  (decrease) in cash and      |                                           |    |   |   |   |   | — |   |   |   |
| equivalents                               | 69                                             |    | 59 |   | (129 | ) | — |   | (1 | ) |
| Cash and equivalents  at beginning        |                                           |    |   |   |   |   |   |   |   |   |
| of period                                 | 7,839                                          |    | (323 | ) | 402 |   | — |   | 7,918 |   |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
| Cash and equivalents  at end of period    | $                                              | 7,908   |   | $ | (264 | ) | $ | 273 |   | $ | — |   | $ | 7,917 |   |
|                                      |                                                |    |  |   |  |   |  |   |  |   |
|                                           |                                                |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| **ITEM  2****.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS** |
|------------------|-------------------------------------------------------------------------------------------------|

 

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

**Overview**

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

             Ourhistorical financial statements reflect the financial position, results ofoperations and cash flows of the acquired businesses subsequent to theirrespective acquisition dates.

**Results of Operations**

**Three Months Ended June 30, 2001 Compared to Three MonthsEnded June 30, 2000**

**             Revenues. **Revenues increased $20.3 million, or 24.7%, to$102.4 million for the three months ended June 30, 2001 from $82.1 million forthe three months ended June 30, 2000. By segment, revenues changed as follows:

 

|                     |   | **Increase (Decrease)  From 2000** |   |
|--------------------------|--------|------------------------------------|--------|
|                     |   |                                    |   |
|                     |   | **Amount**                         |   |   | **Percent** |   |
|                     |   | ****                               |   |   | **** |   |
|                     |   | **(in millions)**                  |   |   |   |   |
| Cabin Management         | $      | 13.0                               |   |   | 32.0 | % |
| Specialty Avionics       | 5.8    |                               |   | 22.2 |   |
| Systems Integration      | 2.0    |                               |   | 12.5 |   |
| Inter-group  elimination | (0.5   | )                                  |   |   |   |
|                     |        |                               |   |   |   |
|                     | Total  | $                                  | 20.3   |   |   |   |   |
|                     |   |                                    |   |   |   |   |
|                     |   |                               |   |   |   |   |

*             Cabin Management. *Revenues increased by $13.0 million, or 32.0% overthe prior year, due to:

| • | the  inclusion of $9.0 million of revenues resulting from our acquisitions of Carl  F. Booth & Co. and ERDA in 2000; and                                                |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                        |
| • | a  $4.0 million increase in cabin furniture and related products revenues  reflecting primarily a higher volume of corporate jet production by the  aircraft manufacturers. |

*Specialty Avionics.*  Revenuesincreased by $5.8 million, or 22.2% over the prior year, due to:

 

| • | a  $4.1 million increase in cockpit audio, communications, lighting and power  and control devices revenues; and |
|--------|------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                             |
| • | a  $1.7 million revenue increase resulting from higher volume for our  interconnect products.                    |

*             Systems Integration.*  Revenuesincreased by $2.0 million, or 12.5% over the prior year, due to:

| • | a  $2.1 million increase in auxiliary fuel tank system and power unit revenues;  offset by |
|--------|--------------------------------------------------------------------------------------------|
|   |                                                                                       |
| • | a  $0.1 million decrease in cabin and flight deck systems integration revenues.            |

**             Gross profit.**** **Gross profit increased $5.0 million, or 18.0%, to$32.6 million for the three months ended June 30, 2001. Gross profit as apercent of revenues decreased to 31.8% for the three months ended June 30, 2001from 33.6% for the same period last year primarily as a result of reducedprofit margins in our Cabin Management group. By segment, gross profit changedas follows:

 

|                     | **Increase (Decrease)  From 2000** |   |
|--------------------------|------------------------------------|--------|
|                     |                                    |   |
|                     | **Amount**                         |   |   | **Percent** |   |
|                     | ****                               |   |   | **** |   |
|                     | **(in millions)**                  |   |   |   |   |
| Cabin Management         | $                                  | (1.3   | ) |   | (8.8 | )% |
| Specialty Avionics       | 4.7                                |   |   | 63.2 |   |
| Systems Integration      | 1.7                                |   |   | 31.0 |   |
| Inter-group  elimination | (0.1                               | )      |   |   |   |
|                     |                                    |   |   |   |   |
|                     | Total                              | $      | 5.0 |   |   |   |   |
|                     |                                    |   |   |   |   |
|                          |                                    |        |  |  |  |  |  |

*             Cabin Management.* Grossprofit decreased by $1.3 million, or 8.8% from the prior year, primarily dueto:

| • | a  $2.2 million increase in gross profit resulting from our 2000 acquisitions;  offset by                                                                                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                            |
| • | a  $3.9 million decrease resulting from nonrecurring start up costs associated  with four new programs and the rationalization of production between  manufacturing facilities. |

*             Specialty Avionics.* Grossprofit increased by $4.7 million, or 63.2% over the prior year, due to:

| • | a  $2.9 million increase related to a shift in product mix to items with higher  margins;                                                      |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                           |
| • | a  $1.6 million increase related to higher volume for our cockpit audio,  communications, lighting and power and control devices products; and |
|   |                                                                                                                                           |
| • | a  $0.3 million increase related to higher volume for our interconnect products;  offset by                                                    |
|   |                                                                                                                                           |
| • | a  $0.1 million decrease related to labor inefficiencies caused higher  electrical energy costs at our California-based facilities.            |

*             Systems Integration.** *Gross profit increased by $1.7 million, or 31.0%over the prior year, due to:

| • | a  $1.0 million increase due to higher auxiliary fuel tank systems volume; and                                                     |
|--------|------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                               |
| • | a  $0.7 million increase resulting, in part, from improved operating results  subsequent to our fourth quarter 1999 restructuring. |

**             
**             Selling, general and administrativeexpenses.**** **Selling, general and administrative expensesincreased $3.5 million, or 35.8%, to $13.4 million for the three months endedJune 30, 2001, from $9.9 million for the same period last year. SG&Aexpenses as a percent of revenues increased to 13.1% for the three months endedJune 30, 2001 compared to 12.1% for the same period last year. By segment,SG&A expenses changed as follows:
 **Increase (Decrease)  From 2000**    **Amount**  **Percent**      **(in millions)**    Cabin Management$1.9  56.2%Specialty Avionics1.2  48.3 Systems Integration0.3  12.5 Corporate0.1  9.3       Total$3.5         
*             Cabin Management.* SG&Aexpenses increased by $1.9 million, or 56.2% over the prior year, due to:
•a  $1.0 million increase in expenses resulting from our 2000 acquisitions; and  •a  $0.9 million increase in expenses to support increased production and new  programs.
*             Specialty Avionics.* SG&Aexpenses increased by $1.2 million, or 48.3% over the prior year, due to:
•a  $0.5 million increase in research and developments costs; and  •a  $0.7 million increase in labor and employee benefit costs.
*             Systems Integration.** *SG&A expenses increased by $0.3 million, or12.5% over the prior year, due to refocusing our cabin and flight deck systemsintegration services to product offerings requiring higher levels of sales andmarketing, program management and customer service.

*             Corporate.* SG&Aexpenses increased by $0.1 million, or 9.3% over the prior year, primarily dueto an increase in depreciation expense*.*

**             Depreciation and amortization ofintangibles.**** **Depreciation and amortization expense, whichincludes amortization of goodwill and identifiable intangible assets, increased$1.9 million, or 32.1%, for the three months ended June 30, 2001. The increaseresults from the inclusion of $1.0 million of depreciation and amortizationexpense in 2001 from companies we acquired during 2000 and additionaldepreciation reflecting our capital expenditures during the period.

**             EBITDA and Operating income.**** **EBITDA increased $2.5 million to $22.4 million, or12.4%, for the three months ended June 30, 2001, from $19.9 million for thesame period last year. EBITDA as a percent of revenues decreased to 21.9% forthe three months ended June 30, 2001, from 24.3% for the same period last year.Operating income increased $0.5 million to $14.2 million, or 3.7%, for thethree months ended June 30, 2001, from $13.7 million for the same period lastyear. By segment, EBITDA changed as follows:

 
   **Increase (Decrease)  From 2000**      **Amount**  **Percent**   ****  ********   **(in millions)**    EBITDA      Cabin Management$(2.2) (18.2)% Specialty Avionics3.4  56.8  Systems Integration1.3  36.0  Corporate0.2  11.5  Inter-group  elimination(0.2)           Total EBITDA2.5            Depreciation and  amortization(1.9)   Other noncash and  acquisition related charges(0.1)          Total operating income$0.5           
 

*             Cabin Management.** *EBITDA decreased by $2.2 million, or 18.2% from theprior year, primarily due to:
•a  $1.7 million increase resulting from our 2000 acquisitions; offset by  •a  $3.9 million decrease resulting from nonrecurring startup costs associated  with four new programs and the rationalization of production between  manufacturing facilities.
*             Specialty Avionics.** *EBITDA increased by $3.4 million, or 56.8% over theprior year, due to higher demand for our commercial aircraft products.

*             Systems Integration.* EBITDAincreased by $1.3 million, or 36.0% over the prior year, due to higherauxiliary fuel tank systems revenues and favorable manufacturing efficiencies.

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

**             Interest expense.**** **Interest expense decreased $0.2 million to $9.8million for the three months ended June 30, 2000, from $10.0 million for thesame period last year, due to:
•a  $1.3 million increase resulting from higher debt levels; offset by  •a  $1.5 million decrease resulting from lower average interest rates charged by  our lenders during 2001.
**             Provision for income taxes.**** **The provision for income taxes differs from theamount determined by applying the applicable U.S. statutory federal rate to theincome before income taxes primarily due to the effects of state and foreignincome taxes and non-deductible expenses, principally goodwill amortization.The difference in the effective tax rates between periods is mostly a result ofthe relationship of non-deductible expenses to income before income taxes.

 

**             Net income.**** **Net income increased $0.1 million to $2.1 millionfor the three months ended June 30, 2001 compared to $2.0 million forthe same period in 2000.

**             Net income applicable to commonstockholder.** Net income applicable to DeCraneHoldings, our common stockholder, decreased $1.1 million to $0.9 million forthe three months ended June 30, 2001 compared to $2.0 million for the sameperiod in 2000. The net decrease is attributable to:
•a  $0.1 million increase in net income; offset by  •a  $1.2 million increase in accrued dividends and redemption value accretion  resulting from the issuance of 16% mandatorily redeemable preferred stock on  June 30, 2000.
**             Bookings.**** **Bookings increased $22.0 million, or 24.8%, to$110.7 million for the three months ended June 30, 2001 compared to $88.7million for the same period in 2000. The increase in bookings for 2001 resultsfrom:
•a  $9.8 million increase associated with companies we acquired in 2000; and  •a  $12.2 million increase related to business growth, principally related to our  Cabin Management and Specialty Avionics product lines.
**             Backlog at end of period.**** **Backlog increased $18.9 million to $197.2 million asof June 30, 2001 compared to $178.3 million as of December 31, 2000. Theincrease in backlog for 2001 primarily relates to our Specialty Avionics andCabin Management groups.

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

**             Revenues. **Revenues increased $40.2 million, or 25.0%, to$201.5 million for the six months ended June 30, 2001 from $161.3 million forthe six months ended June 30, 2000. By segment, revenues changed as follows:
 **Increase (Decrease)  From 2000**    **Amount**  **Percent**      **(in millions)**    Cabin Management$28.1  36.6%Specialty Avionics10.2  19.4 Systems Integration2.1  6.5 Inter-group  elimination(0.2)         Total$40.2         
*             Cabin Management.* Revenuesincreased by $28.1 million, or 36.6% over the prior year, due to:
* 
•the  inclusion of $23.8 million of revenues resulting from our acquisitions of  Carl F. Booth & Co. and ERDA in 2000; and  •a  $4.3 million increase in cabin furniture and related products revenues reflecting  primarily a higher volume of corporate jet production by the aircraft  manufacturers.
*Specialty Avionics.** *Revenuesincreased by $10.2 million, or 19.4% over the prior year, due to:
•a  $8.3 million increase in cockpit audio, communications, lighting and power  and control devices revenues; and  •a  $1.9 million revenue increase resulting from higher volume for our  interconnect products.
*             Systems Integration.* Revenuesincreased by $2.1 million, or 6.5% over the prior year, due to:
•a  $3.8 million increase in auxiliary fuel tank system and power unit revenues;  offset by  •a  $1.7 million decrease in cabin and flight deck systems integration revenues  resulting from reducing the number of product offerings to focus on our core  product lines.
**             Gross profit.**** **Gross profit increased $13.9 million, or 25.8%, to$67.6 million for the six months ended June 30, 2001. Gross profit as a percentof revenues increased to 33.6% for the six months ended June 30, 2001 from33.3% for the same period last year. By segment, gross profit changed asfollows:
 **Increase (Decrease)  From 2000** ****  **Amount**  **Percent**  ****  ****  **(in millions)**    Cabin Management$3.8  13.6%Specialty Avionics6.9  44.4 Systems Integration3.0  27.9 Inter-group elimination0.2          Total$13.9          
*             Cabin Management.* Grossprofit increased by $3.8 million, or 13.6% over the prior year, primarily dueto:
 •a  $7.1 million increase in gross profit resulting from our 2000 acquisitions;  offset by    •a  $3.9 million decrease resulting from nonrecurring startup costs associated  with four new programs and the rationalization of production between  manufacturing facilities.
*             Specialty Avionics.*  Grossprofit increased by $6.9 million, or 44.4% over the prior year, due to:
 •a  $3.4 million increase related to higher volume for our cockpit audio,  communications, lighting and power and control devices products;    •a  $3.5 million increase related to a shift in product mix to items with higher  margins; and    •a  $0.4 million increase related to higher volume for our interconnect products;  offset by    •a  $0.4 million decrease related to labor inefficiencies caused by rolling  blackouts and higher electrical energy costs at our California-based facilities.
*             Systems Integration*.  Gross profit increased by $3.0 million, or27.9% over the prior year, due to:

 
 •a  $1.5 million increase due to higher auxiliary fuel tank systems volume;    •a  $0.6 million increase in gross profit resulting from improved auxiliary fuel  tank manufacturing and installation efficiencies; and    •a  $0.9 million increase resulting, in part, from improved operating results  subsequent to our fourth quarter 1999 restructuring.
**             Selling, general and administrativeexpenses.**** **Selling, general and administrative expensesincreased $7.2 million, or 34.2%, to $28.1 million for the six months endedJune 30, 2001, from $20.9 million for the same period last year. SG&Aexpenses as a percent of revenues increased to 13.9% for the six months endedJune 30, 2001 compared to 13.0% for the same period last year. By segment,SG&A expenses changed as follows:
 **Increase (Decrease)  From 2000**    **Amount**  **Percent**  ****  ****  **(in millions)**    Cabin Management$4.0  56.8%Specialty Avionics1.8  31.7 Systems Integration0.8  17.0 Corporate0.6  16.2       Total$7.2         
*             Cabin Management. *SG&A expenses increased by $4.0 million, or56.8% over the prior year, due to:
 •a  $3.1 million increase in expenses resulting from our 2000 acquisitions; and    •a  $0.9 million increase in expenses to support increased production and new  programs.
*             Specialty Avionics.** *SG&A expenses increased by $1.8 million, or31.7% over the prior year, due to:
 •a  $0.5 million increase in research and development costs; and    •a  $1.3 million increase in labor and employee benefit costs in support of  revenue growth.
*             Systems Integration. *SG&A expenses increased by $0.8 million, or17.0% over the prior year, due to refocusing our cabin and flight deck systemsintegration services to product offerings requiring higher levels of sales andmarketing, program management and customer service.

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

 

**             Depreciation and amortization ofintangibles.** Depreciation and amortizationexpense, which includes amortization of goodwill and identifiable intangibleassets, increased $3.5 million, or 28.1%, for the six months ended June 30,2001. The increase results from the inclusion of $2.2 million of depreciationand amortization expense in 2001 from companies we acquired during 2000 andadditional depreciation reflecting our capital expenditures during the period.

 

**             EBITDA and Operating income.**** **EBITDA increased $8.7 million to $45.8 million, or23.3%, for the six months ended June 30, 2001, from $37.1 million for the sameperiod last year. EBITDA as a percent of revenues decreased to 22.7% for thesix months ended June 30, 2001, from 23.0% for the same period last year.Operating income increased $5.0 million to $29.6 million, or 20.5%, for the sixmonths ended June 30, 2001, from $24.6 million for the same period last year.By segment, EBITDA changed as follows:
 **Increase (Decrease)  From 2000**      **Amount**  **Percent**   ****  ****   **(in millions)**** **  ** ** EBITDA       Cabin Management$1.7  8.0% Specialty Avionics5.1  42.0   Systems Integration1.9  27.6   Corporate0.1  1.3   Inter-group elimination(0.1)            Total EBITDA8.7             Depreciation and  amortization(3.5)   Other noncash and  acquisition related charges(0.2)         Total operating income$5.0           
 

*             Cabin Management.*  EBITDAincreased by $1.7 million, or 8.0% over the prior year, primarily due to:
 •a  $5.0 million increase resulting from our 2000 acquisitions; offset by    •a  $3.9 million decrease resulting from nonrecurring startup costs associated  with four new programs and the rationalization of production between  manufacturing facilities.
*             Specialty Avionics*.  EBITDA increased by $5.1 million, or 42.0%over the prior year, due to higher demand for our commercial aircraft products.

*             Systems Integration.*  EBITDAincreased by $1.9 million, or 27.6% over the prior year, due principally tohigher auxiliary fuel tank systems revenues and favorable manufacturingefficiencies.

 

**             Interest expense.**  Interestexpense increased $1.6 million to $20.3 million for the six months ended June30, 2000, from $18.7 million for the same period last year, due to:
 •a  $3.1 million increase resulting from higher debt levels associated with our  acquisition of companies during 2000; offset by    •a  $1.5 million decrease resulting from lower average interest rates charged by  our lenders during 2001.
             **Provision for income taxes.**  Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to the income before income taxesprimarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization. The difference inthe effective tax rates between periods is mostly a result of the relationshipof non-deductible expenses to income before income taxes.

**             Net income.**** **Net income increased $1.9 million to $4.6 millionfor the six months ended June 30, 2001 compared to $2.7 million forthe same period in 2000.

**             Net income applicable to commonstockholder.**  Net income applicable to DeCraneHoldings, our common stockholder, decreased $0.6 million to $2.1 million forthe six months ended June 30, 2001 compared to $2.7 million for the sameperiod in 2000. The net decrease is attributable to:
 •a  $1.9 million increase in net income; offset by    •a  $2.5 million increase in accrued dividends and redemption value accretion  resulting from the issuance of 16% mandatorily redeemable preferred stock on  June 30, 2000.
** **

**             Bookings.**  Bookingsincreased $59.1 million, or 36.6%, to $220.4 million for the six months endedJune 30, 2001 compared to $161.3 million for the same period in 2000. Theincrease in bookings for 2001 results from:
 •a  $22.5 million increase associated with companies we acquired in 2000; and    •a  $36.6 million increase related to business growth, principally related to our  Cabin Management and Specialty Avionics product lines.
** **

**Liquidity and Capital Resources**

             Wehave required cash primarily to fund acquisitions and, to a lesser extent, tofund capital expenditures and for working capital. Our principal sources ofliquidity have been cash flow from operations, third party borrowings, capitalcontributions from DeCrane Holdings and the issuance of preferred stock.

             Cashprovided by operating activities was $0.9 million for the six months ended June30, 2001, which is the net of $23.5 million of cash provided by operationsafter adding back depreciation, amortization and other noncash items, $22.7million used for working capital offset by $0.1 million resulting from anincrease in other liabilities. The following factors contributed to the $22.7million working capital increase:

 
 •a  $9.0 million accounts receivable increase resulting from higher revenues,  timing differences relating to completion of projects versus the associated  collection and the timing of other collections;    •a  $6.5 million inventory increase resulting from longer production lead times  and inventory level increases to meet current and projected revenue growth;    •a  $1.3 million increase in prepaid and other assets; and    •a  $8.1 million net decrease in accounts payable and accrued expenses; offset by    •a  $2.2 million increase in income taxes payable due to higher current taxable  income.
             Cashused for investing activities was $19.3 million for the six months ended June30, 2001, and consisted of:
 •$17.1  million of contingent acquisition consideration paid during 2001; and    •$6.4  million for capital expenditures; offset by    •$3.6  million cash purchase price reductions received for previously completed  acquisitions; and further offset by    •$0.6  million of proceeds from the sale of property and equipment, principally an  owned manufacturing facility replaced with a larger leased facility.
             Weanticipate spending approximately $15.0 million for capital expenditures in2001.

             Cashprovided by financing activities was $17.7 million for the six months endedJune 30, 2001 and was primarily used to fund the payment of contingentacquisition consideration and capital expenditures. We obtained these funds byborrowing $21.4 million under our senior credit facility. We used $3.0 millionto make principal payments on our senior term debt, capitalized leases andother debt.

             AtJune 30, 2001, senior credit facility borrowings totaling $295.6 million are atvariable interest rates based on defined margins over the current prime orEurodollar rates. At June 30, 2001 we had $89.2 million of working capital andhad $23.2 million of borrowings available under our working capital creditfacility and $13.0 available under our acquisition credit facility. Although wecannot be certain, we believe that operating cash flow, together withborrowings under our bank credit facility, will be sufficient to meet ourfuture short- and long-term operating expenses, working capital requirements,capital expenditures and debt service obligations for the next twelve months.However, our ability to pay principal or interest, to refinance our debt and tosatisfy our other debt obligations will depend on our future operatingperformance. We will be affected by economic, financial, competitive,legislative, regulatory, business and other factors beyond our control. Inaddition, we are continually considering acquisitions that complement or expandour existing businesses or that may enable us to expand into new markets.Future acquisitions may require additional debt, equity financing or both. Wemay not be able to obtain any additional financing on acceptable terms.

 

**Recently Issued AccountingPronouncements**

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

 

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

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

             Weare currently evaluating the impact the new accounting standards will have onour financial position and results of operations upon adoption on January 1,2002; there will be no impact on cash flows. While the full, net of tax, impacthas yet to be determined, adoption of the new standards will result in thefollowing:
•Under  the criteria established in SFAS No. 141, the values ascribed to the  assembled workforces acquired are not recognized as an intangible asset apart  from goodwill. As a result, the net book value ascribed to the assembled  workforces, net of deferred income tax liabilities, will be reclassified to  goodwill as of January 1, 2002.  •Adoption  of SFAS No. 142 on January 1, 2002 will reduce amortization expense in  future periods. If SFAS No. 142 had been effective as of the  beginning of 2001, goodwill and assembled workforces amortization totaling  $7,121,000 for the six months ended June 30, 2001 would have been eliminated.
             Wehave until June 30, 2002 to complete our transitional impairment testingassociated with adopting SFAS No. 142. The amount of impairmentlosses recognizable upon adoption, if any, is not known at this time.

 

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

             Weare exposed to various market risks, including interest rates and changes inforeign currency exchange rates. Market risk is the potential loss arising fromadverse changes in market rates and prices, such as interest rates and foreigncurrency exchange rates. From time to time we use derivative financialinstruments to manage and reduce risks associated with these factors. We do notenter into derivatives or other financial instruments for trading orspeculative purposes.

**             Interest Rate Risk.**  Asignificant portion of our capital structure is comprised of long-term variable-and fixed-rate debt.

 

             Marketrisk related to our variable-rate debt is estimated as the potential decreasein pre-tax earnings resulting from an increase in interest rates. The interestrates applicable to variable-rate debt are, at our option, based on definedmargins over the current prime or Eurodollar rates. At June 30, 2001, thecurrent prime rate was 6.75% and the current Eurodollar rate was 3.99%. Basedon $295.6 million of variable-rate debt outstanding as of June 30, 2001, ahypothetical one percent rise in interest rates, to 7.75% for prime rateborrowings and 4.99% for Eurodollar borrowings, would reduce our pre-taxearnings by $3.0 million annually. We have, during periods prior to 1998,purchased interest rate cap contracts to limit our exposure related to risinginterest rates on our variable-rate debt. While we have not entered intosimilar contracts during the last three years, we may do so in the futuredepending on our assessment of future interest rate trends.

             Theestimated fair value of our $100.0 million fixed-rate long-term debt isapproximately $95.0 million at June 30, 2001. Market risk related to ourfixed-rate debt is deemed to be the potential increase in fair value resultingfrom a decrease in interest rates. For example, a hypothetical ten percentdecrease in the interest rates, from 12.0% to 10.8%, would increase the fairvalue of our fixed-rate debt by approximately $7.0 million.

**             Foreign Currency Exchange Rate Risk.**  Our foreigncustomers are located in various parts of the world, primarily Western Europe,the Far East and Canada, and one of our subsidiaries operates in Western Europeand one has a manufacturing facility in Mexico. To limit our foreign currencyexchange rate risk related to sales to our customers, orders are primarilyvalued and sold in U.S. dollars. From time to time we have entered into forwardforeign exchange contracts to limit our exposure related to foreign inventoryprocurement and operating costs. While we have not entered into any suchcontracts since 1998 and no such contracts are open as of June 30, 2001, we maydo so in the future depending on our assessment of future foreign exchange ratetrends.

 

**Special Note RegardingForward-Looking Statements**

             Allstatements other than statements of historical facts included in this reportare considered forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements aresubject to known and unknown risks, uncertainties and other factors, which aredifficult to predict. We are vulnerable to a variety of factors that affectmany businesses, such as:
 •fuel  prices and general economic conditions that affect demand for aircraft and  air travel, which in turn affect demand for our products and services;    •our  reliance on key customers and the adverse effect a significant decline in  business from any one of them would have on our business;    •changes  in prevailing interest rates and the availability of financing to fund our  plans for continued growth;    •competition  from larger companies;    •Federal  Aviation Administration prescribed standards and licensing requirements,  which apply many of the products and services we provide;    •inflation,  and other general changes in costs of goods and services;    •liability  and other claims asserted against us that exceeds our insurance coverage;
 
 •the  ability to attract and retain qualified personnel;    •labor  disturbances; and    •changes  in operating strategy, or our acquisition and capital expenditure plans.
             Changesin such factors could cause our actual results to differ materially from thosecontemplated in such forward-looking statements. Although we believe that theexpectations reflected in such forward-looking statements are reasonable, wecan give no assurance that such expectations will prove to be correct. Weundertake no obligation to release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events. You should notrely on our forward-looking statements as if they were certainties.

 

**Incorporation of Documents byReference**

             Wehave filed with the Securities and Exchange Commission, and are includingwithin this report by referring to it here, our Form 10-K for the year endedDecember 31, 2000. The Form 10-K includes our audited financial statements,which we refer to in this report.

             Youmay read and copy any reports, statements or other information we file at theSEC’s reference room in Washington D.C. Please call the SEC at (202) 942-8090for further information on the operation of the reference rooms. You can alsorequest copies of these documents, upon payment of a duplicating fee, bywriting to the SEC, or review our SEC filings on the SEC’s EDGAR web site,which can be found at http://www.sec.gov. You may also write or call us at ourcorporate office or visit our web site at http://decraneaircraft.com. Ourcorporate offices are located at 2361 Rosecrans Avenue, Suite 180, El Segundo,California 90245. Our telephone number is (310) 725–9123.

 

**PART II– OTHER INFORMATION**

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

             Referto the legal proceedings described in Item 3 of our Form 10-K for the yearended December 31, 2000.

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

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
 **DECRANE AIRCRAFT HOLDINGS, INC. (Registrant)**               August  10, 2001By:/s/  Richard J. Kaplan   Name:Richard  J. Kaplan Title:Senior  Vice President, Chief Financial Officer,  Secretary,  Treasurer and Director
 ***