**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-Q / A**

**(AMENDMENT NO. 1)**

 

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

 

**For the quarterly period ended March 31,2003**

 

**Commission File Number 000-22371**

 

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**DECRANE AIRCRAFT HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

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Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  ý** **Yes   o No

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).  o Yes   ý No

 

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The number ofshares of Registrant’s Common Stock, $.01 par value, outstanding as ofMay 15, 2003 was 100 shares.

 

 

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**Table of Contents**

 
| **Part I  – Financial Information** |
|------------------------------------------|
|                                     |   |   |
| **Explanatory Note**                     |
|                                     |   |   |
| **Item 1.**                              |   | **Financial Statements (Unaudited)** |
|                                     |   |   |
|                                     |   | Consolidated  Balance Sheets as of March 31, 2003 and December 31, 2002 |
|                                     |   |   |
|                                     |   | Consolidated Statements of Operations for the three months ended  March 31, 2003 and 2002 |
|                                     |   |   |
|                                     |   | Consolidated Statements of Stockholder’s Equity for the three months  ended March 31, 2003 |
|                                     |   |   |
|                                     |   | Consolidated Statements of Cash Flows for  the three months ended March 31, 2003 and 2002 |
|                                     |   |   |
|                                     |   | Condensed Notes to Consolidated Financial  Statements |
|                                     |   |   |
| **Item 2.**                              |   | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations** |
|                                     |   |   |
|                                     |   | Recent Developments |
|                                     |   |   |
|                                     |   | Industry Overview and Trends |
|                                     |   |   |
|                                     |   | Results of Operations |
|                                     |   |   |
|                                     |   | Performance Measures |
|                                     |   |   |
|                                     |   | Three months ended March 31, 2003 |
|                                     |   |   |
|                                     |   | Restructuring,  Asset Impairment and Other Related Charges |
|                                     |   |   |
|                                     |   | Goodwill Impairment Charges |
|                                     |   |   |
|                                     |   | Liquidity and Capital Resources |
|                                     |   |   |
|                                     |   | Disclosure of Contractual Obligations and  Commitments |
|                                     |   |   |
|                                     |   | Disclosure About Off-Balance Sheet  Commitments and Indemnities |
|                                     |   |   |
|                                     |   | Recent Accounting Pronouncements |
|                                     |   |   |
|                                     |   | Special Note Regarding Forward Looking  Statements and Risk Factors |
|                                     |   |   |
| **Item 3.**                              |   | **Quantitative and Qualitative Disclosure About Market Risk** |
|                                     |   |   |
| **Item 4.**                              |   | **Controls and Procedures** |
|                                     |   |   |
| **Part II  – Other Information**    |
|                                     |   |   |
| **Item 1.**                              |   | **Legal Proceedings** |
|                                     |   |   |
| **Item 6.**                              |   | **Exhibits and Reports on Form 8-K** |
|                                     |   |   |
|                                     |   | Exhibits |
|                                     |   |   |
|                                     |   | Reports on Form 8-K |
|                                     |   |   |
| **Signatures**                           |

 

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**Explanatory Note**

 

DeCraneAircraft Holdings, Inc. is filing this Amendment No. 1 on Form 10-Q/A for thequarterly period ended March 31, 2003 to amend and restate, in itsentirety, its Quarterly Report on Form 10-Q originally filed with theSecurities and Exchange Commission on May 20, 2003 (referred to herein asthe “Original Report” and the “Amended Report”).  Except for the reclassifications described below, no changes havebeen made in this Amended Report to the consolidated financial position,results of operations or cash flows we reported in our Original Report.  This Amended Report only modifies andupdates our disclosures for events occurring subsequent to the filing of ourOriginal Report, as described below, which resulted in our independentaccountants revising and reissuing their report accompanying our financialstatements included in Amendment No. 1 on Form 10-K/A filed concurrentlyherewith but otherwise does not otherwise reflect events occurring after theMay 20, 2003 filing of our Original Report or modify or update thedisclosures set forth in that Original Report in any way to reflect any changesin our business or our consolidated financial position, results of operationsor cash flows subsequent to the filing date of the Original Report.  For the convenience of the reader, we deemedit desirable to amend and restate our Original Report in its entirety to provideclarity as to the events that have occurred.

 

As describedin our Original Report, during the fourth quarter of fiscal 2002 we embarked ona plan to sell the Specialty Avionics Group and entered into a definitiveagreement to sell the group on March 14, 2003.  The sale was consummated on May 23, 2003, subsequent tothe filing of our Original Report.  Inaddition, at the time of filing our Original Report, our failure to consummatethe sale by June 30, 2003 would have been an event of default under our amendedsenior credit facility.  As a result,our independent accountants qualified their report on our audited financialstatements with respect to our ability to continue as a going concern.  Consummation of the sale alleviated ourindependent accountants’ doubt about our ability to continue as a goingconcern.  As a result, our independentaccountants issued a revised, unqualified report on our financial statements.

 

In thisAmended Report, we are reclassifying our consolidated statements of financialposition, results of operations and cash flows to reflect the SpecialtyAvionics Group as a discontinued operation for all periods presented.  In addition, we are also making similarconforming changes to other parts of the Original Report as well.

 

This AmendedReport should be read in conjunction with our Amendment No. 1 on Form 10-Q/Afor the quarterly period ended June 30, 2003 as well as our Amendment No.1 on Form 10-K/A for the fiscal year ended December 31, 2002 filedconcurrently with this Amended Report. As required by Rule 12b-15 of the Securities Exchange Act of 1934, ourChief Executive Officer and Chief Financial Officer are providing updatedcertifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002and updated written statements pursuant to Title 18 United States CodeSection 1350, as adopted pursuant to Section 906 of the Act.

 

i

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**PART I****– FINANCIALINFORMATION**

** **

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

** **

**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

** **

**ConsolidatedBalance Sheets**

** **
| **(In thousands, except share data)**                                                                                                           |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                                                                                                                            |   | **(Unaudited)**          |    |                        |   |
| **Assets**                                                                                                                                      |   |                     |    |                        |   |
| Current assets:                                                                                                                                 |   |                     |    |                        |   |
| Cash and cash equivalents                                                                                                                       |   | $                        | 14,637  |                        | $      | 12,421 |   |
| Accounts receivable, net                                                                                                                        |   | 26,568                   |    | 26,354                      |   |
| Inventories                                                                                                                                     |   | 70,736                   |    | 59,300                      |   |
| Deferred income taxes                                                                                                                           |   | 17,412                   |    | 16,430                      |   |
| Prepaid expenses and other current assets                                                                                                       |   | 2,399                    |    | 1,724                       |   |
| Current assets of discontinued operations                                                                                                       |   | 152,003                  |    | 160,741                     |   |
| Total current assets                                                                                                                            |   | 283,755                  |    | 276,970                     |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Property and equipment, net                                                                                                                     |   | 35,460                   |    | 36,139                      |   |
| Goodwill                                                                                                                                        |   | 196,430                  |    | 196,430                     |   |
| Other assets, principally intangibles, net                                                                                                      |   | 40,394                   |    | 39,428                      |   |
| Total assets                                                                                                                                    |   | $                        | 556,039 |                        | $      | 548,967 |   |
|                                                                                                                                            |   |                     |    |                        |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**                                                          |   |                     |    |                        |   |
| Current liabilities:                                                                                                                            |   |                     |    |                        |   |
| Current portion of long-term debt                                                                                                               |   | $                        | 17,492  |                        | $      | 16,317 |   |
| Accounts payable                                                                                                                                |   | 15,571                   |    | 13,055                      |   |
| Accrued liabilities                                                                                                                             |   | 23,016                   |    | 31,494                      |   |
| Income taxes payable                                                                                                                            |   | 46                       |    | —                      |   |
| Current liabilities of discontinued operations                                                                                                  |   | 20,909                   |    | 19,928                      |   |
| Total current liabilities                                                                                                                       |   | 77,034                   |    | 80,794                      |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Long-term debt, less current portion                                                                                                            |   | 386,520                  |    | 364,700                     |   |
| Deferred income taxes                                                                                                                           |   | 26,414                   |    | 27,077                      |   |
| Other long-term liabilities                                                                                                                     |   | 6,239                    |    | 7,364                       |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Commitments and contingencies (Note 11)                                                                                                         |   |                     |    |                        |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Mandatorily redeemable preferred stock                                                                                                          |   | 35,678                   |    | 34,081                      |   |
|                                                                                                                                            |   |                     |    |                        |   |
| Stockholder’s equity:                                                                                                                      |   |                     |    |                        |   |
| Common stock, $.01 par value, 1,000 shares  authorized; 100 shares issued and outstanding as of March 31, 2003 and  December 31, 2002 |   | —                   |    | —                      |   |
| Additional paid-in capital                                                                                                                      |   | 119,615                  |    | 121,212                     |   |
| Notes receivable for shares sold                                                                                                                |   | (2,628                   | )       | (2,591                      | )      |
| Accumulated deficit                                                                                                                             |   | (92,469                  | )       | (83,309                     | )      |
| Accumulated other comprehensive loss                                                                                                            |   | (364                     | )       | (361                        | )      |
| Total stockholder’s equity                                                                                                                 |   | 24,154                   |    | 34,951                      |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity                                                        |   | $                        | 556,039 |                        | $      | 548,967 |   |

 

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

 

1

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

 

**ConsolidatedStatements of Operations**

 
|                                                              |   | **Three Months Ended  March 31,** |    |
|-------------------------------------------------------------------|--------|----------------------------------------|---------|
| **(In thousands)**                                                |   | **2003**                               |    | **2002** |   |
|                                                              |   | **(Unaudited)**                        |    |
| Revenues                                                          |   | $                                      | 41,900  |   | $ | 60,819 |   |
| Cost of sales                                                     |   | 30,903                                 |    | 44,381 |   |
|                                                              |   |                                   |    |   |   |
| Gross profit                                                      |   | 10,997                                 |    | 16,438 |   |
|                                                              |   |                                   |    |   |   |
| Operating expenses:                                               |   |                                   |    |   |   |
| Selling, general and administrative  expenses                     |   | 7,905                                  |    | 12,159 |   |
| Amortization of intangible assets                                 |   | 912                                    |    | 843 |   |
| Total operating expenses                                          |   | 8,817                                  |    | 13,002 |   |
|                                                              |   |                                   |    |   |   |
| Income from operations                                            |   | 2,180                                  |    | 3,436 |   |
|                                                              |   |                                   |    |   |   |
| Other expenses:                                                   |   |                                   |    |   |   |
| Interest expense                                                  |   | 5,869                                  |    | 5,948 |   |
| Other expenses, net                                               |   | 339                                    |    | 113 |   |
|                                                              |   |                                   |    |   |   |
| Loss from continuing operation before  provision for income taxes |   | (4,028                                 | )       | (2,625 | ) |
| Income tax benefit                                                |   | 1,265                                  |    | 1,141 |   |
|                                                              |   |                                   |    |   |   |
| Loss from continuing operations                                   |   | (2,763                                 | )       | (1,484 | ) |
|                                                              |   |                                   |    |   |   |
| Discontinued operations and change in  accounting principle:      |   |                                   |    |   |   |
| Loss from discontinued operations, net of  tax                    |   | (6,397                                 | )       | (37,440 | ) |
| Cumulative effect of change in accounting  principle              |   | —                                 |    | (17,828 | ) |
|                                                              |   |                                   |    |   |   |
| Net loss                                                          |   | (9,160                                 | )       | (56,752 | ) |
|                                                              |   |                                   |    |   |   |
| Accrued preferred stock dividends                                 |   | (1,480                                 | )       | (1,265 | ) |
| Preferred stock redemption value accretion                        |   | (117                                   | )       | (117 | ) |
|                                                              |   |                                   |    |   |   |
| Net loss applicable to common stockholder                         |   | $                                      | (10,757 | ) | $ | (58,134 | ) |

 

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

 

2

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

** **

**ConsolidatedStatement of Stockholder’s Equity**

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

 

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

 

3

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

** **

**ConsolidatedStatements of Cash Flows**

** **
|                                                                               |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**                                                                 |   | **2003**                               |   | **2002** |   |
|                                                                               |   | **(Unaudited)**                        |   |
|                                                                               |   |                                   |   |
| **Cash flows from operating activities:**                                          |   |                                   |   |   |   |
| Net loss                                                                           |   | $                                      | (9,160 | ) | $ | (56,752 | ) |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                   |   |   |   |
| Loss from discontinued operations                                                  |   | 6,397                                  |   | 37,440 |   |
| Cumulative effect of change in accounting  principle                               |   | —                                 |   | 17,828 |   |
| Depreciation and amortization                                                      |   | 3,211                                  |   | 3,356 |   |
| Noncash portion of restructuring, asset  impairment and other related charges      |   | —                                 |   | 3,145 |   |
| Deferred income taxes                                                              |   | (1,869                                 | )      | 186 |   |
| Other, net                                                                         |   | 404                                    |   | 146 |   |
| Changes in assets and liabilities:                                                 |   |                                   |   |   |   |
| Accounts receivable                                                                |   | (233                                   | )      | 2,758 |   |
| Inventories                                                                        |   | (11,434                                | )      | (2,751 | ) |
| Prepaid expenses and other assets                                                  |   | (3,248                                 | )      | (1,128 | ) |
| Accounts payable                                                                   |   | 2,521                                  |   | 646 |   |
| Accrued liabilities                                                                |   | (7,877                                 | )      | (4,275 | ) |
| Income taxes payable                                                               |   | 46                                     |   | 174 |   |
| Other long-term liabilities                                                        |   | (1,125                                 | )      | 222 |   |
| Net cash provided by (used for) operating  activities                              |   | (22,367                                | )      | 995 |   |
|                                                                               |   |                                   |   |   |   |
| **Cash flows from investing activities:**                                          |   |                                   |   |   |   |
| Cash paid for acquisition contingent  consideration                                |   | (600                                   | )      | (707 | ) |
| Capital expenditures                                                               |   | (1,098                                 | )      | (419 | ) |
| Net cash used for investing activities                                             |   | (1,698                                 | )      | (1,126 | ) |
|                                                                               |   |                                   |   |   |   |
| **Cash flows from financing activities:**                                          |   |                                   |   |   |   |
| Net borrowings under senior credit facility                                        |   | 27,150                                 |   | — |   |
| Principal payments on term debt,  capitalized leases and other debt                |   | (4,210                                 | )      | (396 | ) |
| Deferred financing costs                                                           |   | —                                 |   | (1,629 | ) |
| Other, net                                                                         |   | —                                 |   | (71 | ) |
| Net cash provided by (used for) financing  activities                              |   | 22,940                                 |   | (2,096 | ) |
|                                                                               |   |                                   |   |   |   |
| Net cash provided by discontinued  operations                                      |   | 3,341                                  |   | 3,961 |   |
|                                                                               |   |                                   |   |   |   |
| Net increase in cash and cash equivalents                                          |   | 2,216                                  |   | 1,734 |   |
| Cash and cash equivalents at beginning of  period                                  |   | 12,421                                 |   | 9,478 |   |
| Cash and cash equivalents at end of period                                         |   | $                                      | 14,637 |   | $ | 11,212 |   |

 

The accompanying notes are an integral part of the consolidated financialstatements.

 

4

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**DECRANE AIRCRAFTHOLDINGS, INC. AND SUBSIDIARIES**

** **

**CondensedNotes to Consolidated Financial Statements**

**(Unaudited)**

 

 

**Note 1.****                    Summary ofSignificant Accounting Policies**

 

**Basisof Presentation**

 

Theseconsolidated interim financial statements are unaudited.  The Company believes the interim financialstatements are presented on a basis consistent with the audited financialstatements and include all adjustments necessary for a fair presentation of thefinancial condition, results of operations and cash flows for such interimperiods.  All of these adjustments arenormal recurring adjustments.

 

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

 

The results ofoperations for interim periods do not necessarily predict the operating resultsfor any other interim period or for the full year.  The consolidated balance sheet as of December 31, 2002 hasbeen derived from audited financial statements but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America as permitted by interim reporting requirements.  These consolidated interim financialstatements should be read in conjunction with Management’s Discussion andAnalysis of Financial Condition and Results of Operations and the auditedfinancial statements and related notes included in the Company’s 2002 Form 10-K/ Amendment No. 1, as described below.

 

As the Companyoriginally described in its Form 10-K for the year ended December 31,2002, its failure to consummate the sale of the Specialty Avionics Group byJune 30, 2003 would have been an event of default under the amended seniorcredit facility.  As a result, theCompany’s independent accountants qualified their report on its auditedfinancial statements for the year ended December 31, 2002 with respect toits ability to continue as a going concern. The sale was consummated on May 23, 2003 and repayment of $130.0million of borrowings alleviated the independent accountants’ doubt about theCompany’s ability to continue as a going concern.  As a result, the Company’s independent accountants issued arevised, unqualified report on its financial statements, which the Companyincluded in Amendment No. 1 to its Form 10-K for the year endedDecember 31, 2002.

 

Reclassificationshave also been made to the financial statements for all periods presented,principally to reflect the disposition of the Specialty Avionics Group as adiscontinued operation (Note 2).

 

5

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**StockOption Plan**

 

The Companyhas one stock-based employee compensation plan, which is more fully describedin Note 15.  As permitted under SFAS No.123, “Accounting for Stock-Based Compensation,” the Company measurescompensation expense related to the employee stock option plan utilizing theintrinsic value method as prescribed by Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  No stock-basedemployee compensation cost is reflected in net income (loss), as all optionsgranted under the plan had an exercise price equal to the value of the underlyingcommon stock on the date of grant.

 

The followingtable illustrates the effect on net income if the Company had applied the fairvalue recognition provisions of SFAS No. 123 to stock-based employeecompensation.

** **
|                                                                                                                                           |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**                                                                                                                             |   | **2003**                               |   | **2002** |   |
|                                                                                                                                           |   | **(Unaudited)**                        |   |
| Net loss, as reported                                                                                                                          |   | $                                      | (9,160 | ) | $ | (56,752 | ) |
| Less total stock-based employee  compensation expense determined under the fair value based method for all awards,  net of related tax effects |   | (94                                    | )      | (94 | ) |
| Pro forma net loss                                                                                                                             |   | $                                      | (9,254 | ) | $ | (56,846 | ) |

 

The effect ofapplying SFAS No. 123 may not be representative of the pro forma effect infuture years since additional options may be granted during those future years.

 

**AccountingPronouncements Adopted January 1, 2003**

 

EffectiveJanuary 1, 2003 the Company adopted the following accountingpronouncements.

 

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

 

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

 

6

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

 

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

 

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

 

FIN No. 45elaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees thatit has issued.  The interpretation alsoclarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The initialrecognition and initial measurement provisions of FIN No. 45 are applicable tothe Company on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  However, thedisclosure requirements in FIN No. 45 are effective for the Company’s financialstatements for periods ending after December 15, 2002.

 

The Company isnot a party to any agreement in which it is a guarantor of indebtedness ofothers therefore the adoption of interpretation did not have an impact on theCompany’s financial position, results of operations or cash flows.  The disclosure requirements of thisinterpretation were adopted by the Company as of December 31, 2002.

 

**RecentlyIssued Accounting Pronouncement**

 

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

 

Issued inMay 2003, SFAS No. 150 establishes standards for the classification andmeasurement of certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150requires classification of financial instruments within its scope as a liability,including financial instruments issued in the form of shares that aremandatorily redeemable, because those financial instruments are deemed to be,in essence, obligations of the issuer. The Company is currently evaluating the impact this new standard willhave on its financial position, results of operations and cash flows.  However, the Company

 

7

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believes it will be required toreclassify its mandatorily redeemable preferred stock as a liability commencingJuly 1, 2003 and reflect subsequent changes in the redemption obligationas a charge against pre-tax income.

 

 

**Note 2.****               Disposition ofSpecialty Avionics Group**

 

During thefourth quarter of fiscal 2002 the Company assessed its long-term businessstrategies in light of current aerospace industry conditions.  The Company believes that as the aerospaceindustry recovers, the demand for its Cabin Management and Systems IntegrationGroups’ products and services for business, VIP and head-of-state aircraft willreturn to historical levels and, accordingly, the Company decided to focus itsresources in these market segments.  Toaccomplish this objective, the Company embarked on a plan to sell its SpecialtyAvionics Group, which is highly dependent on the commercial airline industry.

 

OnMarch 14, 2003, the Company entered into a definitive agreement to sellits equity interests in the subsidiaries comprising its Specialty AvionicsGroup to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners,LLC, for $140,000,000 in cash.  The salewas consummated on May 23, 2003. The selling price is subject to a post-closing adjustment related to theamount of working capital at closing. Proceeds of $130,000,000 from the sale were used to repay senior creditfacility borrowings (Note 8).  The saleof the Specialty Avionics Group is not expected to affect the operations of theremaining operating groups.

 

Based upon thefair value of the group implied in the definitive agreement, the Company determinedthat the carrying value of the group’s net assets was not fullyrecoverable.  As required by SFAS No.142, the Company recorded a goodwill impairment charge of $7,500,000 during thethree months ended March 31, 2003 to reduce the carrying value to theestimated net realizable value established by the definitive agreement.  The Company expects to record a modest$689,000 gain, net of tax, on the sale during the second quarter of fiscal2003, based on the actual financial position of the group on the date ofsale.  The ultimate gain or loss on thesale is subject to finalizing the post-closing adjustment, which is notexpected to be material, if any.

 

As a result ofthe sale, the Specialty Avionics Group is presented as a discontinued operationin the accompanying consolidated financial statements.  The financial statements for prior periodshave been reclassified to segregate the group’s assets and liabilities, resultsof operations and cash flows for all periods.

 

In accordancewith the Financial Accounting Standards Board’s Emerging Issues Task Force IssueNo. 87-24, “Allocation of Interest to Discontinued Operations,” as amended,interest expense includes interest on debt that is to be assumed by the buyeras well as interest on the $130,000,000 of debt that was required to be repaidas a result of the sale.  Interestexpense was based on the historical interest rates charged during each of theperiods.  In addition, and also inaccordance with EITF 87-24, costs and expenses exclude the allocation ofgeneral corporate overhead.

 

The followingtables summarize the financial position, results operations and cash flows ofthe Specialty Avionics Group.

 

8

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

 
|                                                 |   | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|--------|----------------------------------------|------------|
| **(In thousands)**                                   |   | **2003**                               |       | **2002** |   |
|                                                 |   | **(Unaudited)**                        |       |
| Results of Operations:                               |   |                                   |       |   |   |
| Revenues                                             |   | $                                      | 23,470     |   | $ | 25,344 |   |
|                                                 |   |                                   |       |   |   |
| Operating expenses:                                  |   |                                   |       |   |   |
| Costs and expenses                                   |   | 18,992                                 |       | 19,405 |   |
| Impairment of goodwill                               |   | 7,500                                  |       | — |   |
| Amortization of intangible assets                    |   | 557                                    |       | 557 |   |
| Total operating expenses                             |   | 27,049                                 |       | 19,962 |   |
|                                                 |   |                                   |       |   |   |
| Income (loss) from operations                        |   | (3,579                                 | )          | 5,382 |   |
|                                                 |   |                                   |       |   |   |
| Other expenses:                                      |   |                                   |       |   |   |
| Interest expense:                                    |   |                                   |       |   |   |
| Debt required to be repaid with proceeds  from sale  |   | 1,806                                  |       | 1,811 |   |
| Debt obligations assumed by the buyer                |   | 202                                    |       | 204 |   |
| Other expenses, net                                  |   | 101                                    |       | 33 |   |
|                                                 |   |                                   |       |   |   |
| Pre-tax income (loss)                                |   | (5,688                                 | )          | 3,334 |   |
| Provision for income taxes                           |   | (709                                   | )          | (1,452 | ) |
|                                                 |   |                                   |       |   |   |
| Income (loss) before change in accounting  principle |   | (6,397                                 | )          | 1,882 |   |
| Cumulative effect of change in accounting  principle |   | —                                 |       | (39,322 | ) |
| Net loss from discontinued operations                |   | $                                      | (6,397     | ) | $ | (37,440 | ) |

 

9

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|                                                  |   | **Three Months Ended  March 31,** |   |
|-------------------------------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**                                    |   | **2003**                               |   | **2002** |   |
|                                                  |   | **(Unaudited)**                        |   |
| Cash Flows Provided By (Used For):                    |   |                                   |   |   |   |
| Operating activities                                  |   | $                                      | 4,138  |   | $ | 4,587 |   |
| Investing activities                                  |   | (269                                   | )      | (204 | ) |
| Financing activities                                  |   | (587                                   | )      | (104 | ) |
| Net (increase) decrease in cash and cash  equivalents |   | 57                                     |   | (315 | ) |
| Effect of foreign currency translation on  cash       |   | 2                                      |   | (3 | ) |
| Net cash provided by discontinued  operations         |   | $                                      | 3,341  |   | $ | 3,961 |   |

 

 

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

 

During thethree months ended March 31, 2003 and the year ended December 31,2002, the Company recorded restructuring, asset impairment and other relatedcharges as follows:

** **
|                                          |   | **Charges Recorded During** |   |
|-----------------------------------------------|--------|-----------------------------|--------|
|                                          |   | **2003**                    |   | **Year Ended December 31, 2002** |   |
| **(In thousands)**                            |   | **1st  Quarter**            |   | **1st  Quarter** |   | **2nd, 3rd & 4th  Quarters** |   | **Total** |   |
|                                          |   | **(Unaudited)**             |   |
| Nature of charges:                            |   |                        |   |   |   |   |   |   |   |
| Asset Realignment Restructuring               |   | $                           | — |   | $ | — |   | $ | 6,901 |   | $ | 6,901 |   |
| Seat Manufacturing Facilities Restructuring   |   | —                      |   | 4,043 |   | 2,251 |   | 6,294 |   |
| Other asset impairment related charges        |   | 7,500                       |   | — |   | 12,048 |   | 12,048 |   |
| Total pre-tax charges                         |   | $                           | 7,500  |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |
|                                          |   |                        |   |   |   |   |   |   |   |
| Business segment recording the charges:       |   |                        |   |   |   |   |   |   |   |
| Cabin Management                              |   | $                           | — |   | $ | 4,043 |   | $ | 9,152 |   | $ | 13,195 |   |
| Systems Integration                           |   | —                      |   | — |   | 4,060 |   | 4,060 |   |
| Total continuing operations                   |   | —                      |   | 4,043 |   | 13,212 |   | 17,255 |   |
| Discontinued operations (Specialty  Avionics) |   | 7,500                       |   | — |   | 7,988 |   | 7,988 |   |
| Total pre-tax charges                         |   | $                           | 7,500  |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |
|                                          |   |                        |   |   |   |   |   |   |   |
| Charged to operations:                        |   |                        |   |   |   |   |   |   |   |
| Cost of sales                                 |   | $                           | — |   | $ | 1,214 |   | $ | 9,462 |   | $ | 10,676 |   |
| Selling, general and administrative  expenses |   | —                      |   | 2,829 |   | 3,750 |   | 6,579 |   |
| Discontinued operations (Specialty  Avionics) |   | 7,500                       |   | — |   | 7,988 |   | 7,988 |   |
| Total pre-tax charges                         |   | $                           | 7,500  |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |
|                                          |   |                        |   |   |   |   |   |   |   |
| Components of charges:                        |   |                        |   |   |   |   |   |   |   |
| Continuing operations:                        |   |                        |   |   |   |   |   |   |   |
| Noncash charges                               |   | $                           | — |   | $ | 3,145 |   | $ | 8,311 |   | $ | 11,456 |   |
| Cash charges                                  |   | —                      |   | 898 |   | 4,901 |   | 5,799 |   |
| Total continuing operations pre-tax charges   |   | —                      |   | 4,043 |   | 13,212 |   | 17,255 |   |
| Discontinued operations noncash charges       |   | 7,500                       |   | — |   | 7,988 |   | 7,988 |   |
| Total pre-tax charges                         |   | $                           | 7,500  |   | $ | 4,043 |   | $ | 21,200 |   | $ | 25,243 |   |

 

10

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**AssetRealignment Restructuring**

 

During thesecond quarter of fiscal 2001, the Company’s Cabin Management Group adopted a restructuringprogram to realign production programs between its manufacturingfacilities.  In response to the adverseimpact on the aerospace industry resulting from the September 11thterrorist attack and its aftermath, as well as the weakening of global economicconditions, the Company announced and implemented a further restructuringprogram in December 2001 designed to reduce costs and conserve workingcapital.  This program includedpermanently closing one manufacturing facility and idling a second facility foran indefinite period, curtailing several product development programs andinstituting workforce reductions.  Dueto the ongoing weakness of the business, VIP and head-of-state aircraft market,the Company decided during the second quarter of fiscal 2002 to permanentlyclose the temporarily idled manufacturing facility.  The restructuring, asset impairment and other related chargesrecorded during fiscal 2002 were comprised of the following:

 

•                  *Impairment of Long-Lived Assets.*  The decision to permanently close theadditional manufacturing facility resulted in an additional impairment ofproperty and equipment and, accordingly, these assets were written down totheir estimated net realizable value in 2002. Net realizable values are based on estimated current market values andthe actual losses could exceed these estimates.

 

•                  *Excess Inventory Write-Downs. *Inventory was written down to netrealizable value for quantities on hand exceeding current and forecast orderbacklog requirements.

 

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

 

The componentsof the amounts incurred were as follows:

** **
|                                 |   | **Charges Recorded During the  Year Ended December 31, 2002** |   |
|--------------------------------------|--------|--------------------------------------------------------------------|--------|
| **(In thousands)**                   |   | **1st**

**Quarter**                                               |   | **2nd, 3rd & 4th  Quarters** |   | **Total** |   |
|                                 |   | **(Unaudited)**                                                    |   |   |   |
| Impairment of long-lived assets      |   | $                                                                  | — |   | $ | 2,557 |   | $ | 2,557 |   |
| Excess inventory write-downs         |   | —                                                             |   | 1,265 |   | 1,265 |   |
| Other restructuring-related expenses |   | —                                                             |   | 3,079 |   | 3,079 |   |
| Total pre-tax charges                |   | $                                                                  | — |   | $ | 6,901 |   | $ | 6,901 |   |

 

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

 

11

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**SeatManufacturing Facilities Restructuring**

 

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

 

•                  *Inventory and Accounts Receivable Write-Downs.*  Inconnection with the consolidation of all production, the Company discontinuedmanufacturing certain products, principally those which overlap.  Inventory and certain receivables related tothe discontinued products were written down to net realizable value.

 

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

 

•                  *Severance and Other Compensation Costs.*  Approximately 115 employees were terminatedin connection with the permanent closure of the manufacturing facilities.

 

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

 

•                  *Other Asset Impairment Related Expenses.*  Other expenses pertain to FAA retesting andrecertification of products manufactured at a different facility, moving,transportation and travel costs and shutdown / startup costs.  Such costs were charged to expense as incurred.

 

The componentsof the amounts incurred were as follows:

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

 

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

 

12

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**OtherAsset Impairment Related Charges**

 

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

 

As describedin Note 2, on March 14, 2003, the Company entered into a definitiveagreement to sell its equity interests in the subsidiaries comprising itsSpecialty Avionics Group for $140,000,000 in cash.  Based upon the fair value of the group implied in the definitiveagreement, the Company determined that the carrying value of the group’s netassets was not fully recoverable.  As aresult, the Company recorded a goodwill impairment charge of $7,500,000 duringthe three months ended March 31, 2003 to reduce the carrying value toestimated net realizable value.

 

 

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

** **

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

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

 

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

 

13

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

** **
| **(In thousands)**                                                            |   | **March 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                                          |   | **(Unaudited)**          |   |                        |   |
| Costs incurred on uncompleted contracts                                       |   | $                        | 50,122 |                        | $      | 49,572 |   |
| Estimated earnings recognized                                                 |   | 66,965                   |   | 63,699                      |   |
| Total costs and estimated earnings                                            |   | 117,087                  |   | 113,271                     |   |
| Less billings to date                                                         |   | (107,600                 | )      | (109,880                    | )      |
| Net                                                                           |   | $                        | 9,487  |                        | $      | 3,391 |   |
|                                                                          |   |                     |   |                        |   |
| Balance sheet classification:                                                 |   |                     |   |                        |   |
| Asset – Costs and estimated earnings in  excess of billings              |   | $                        | 9,579  |                        | $      | 4,004 |   |
| Liability – Billings in excess of costs and  estimated earnings (Note 7) |   | (92                      | )      | (613                        | )      |
| Net                                                                           |   | $                        | 9,487  |                        | $      | 3,391 |   |

 

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

 

 

**Note5.****          Goodwill**

 

Goodwill was$196,430,000 as of March 31, 2003 and December 31, 2002.

 

EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” and the provisions of SFAS No. 141, “Business Combinations,”which were required to be adopted concurrent with the adoption of SFAS No.142.  During 2002, the Company completedthe transitional impairment testing of goodwill recorded as of January 1,2002 as required under SFAS No. 142. Fair value of each reporting unit was determined using a discounted cashflow approach taking into consideration projections based on the individualcharacteristics of the reporting units, historical trends, market multiples forcomparable businesses and independent appraisals.  Unallocated goodwill was allocated to the reporting units forimpairment testing purposes.

 

The resultsindicated that the carrying value of goodwill was impaired.  The resulting impairment was primarilyattributable to a change in the evaluation criteria for goodwill utilized underprevious accounting guidance to the fair value approach stipulated in SFAS No.142.  In accordance with the transitionalprovision of SFAS No. 142, the Company recorded a $17,828,000 noncashwrite-down of goodwill (net of $878,000 income tax benefit) as ofJanuary 1, 2002 as a cumulative effect of a change in accountingprinciple.  An additional $39,322,000noncash write-down of goodwill pertained to the Specialty Avionics Group and isincluded in the loss from discontinued operations.

 

14

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**Note 6.****               Other Assets,Principally Intangibles**

 

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

 
| **(In thousands)**                                       |   | **March 31,  2003** |   | **December 31,  2002** |   |
|----------------------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                                     |   | **(Unaudited)**          |   |                        |   |
| Identifiable intangible assets with finite  useful lives |   | $                        | 28,193 |                        | $      | 29,105 |   |
| Deferred financing costs                                 |   | 8,433                    |   | 9,168                       |   |
| Other non-amortizable assets                             |   | 3,768                    |   | 1,155                       |   |
| Total other assets                                       |   | $                        | 40,394 |                        | $      | 39,428 |   |

 

**IdentifiableIntangible Assets with Finite Useful Lives**

 

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

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

 

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

 

 

**Note7.****          AccruedLiabilities**

 

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

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

 

15

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**Note 8.****               Long-Term Debt**

 

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

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

 

OnMarch 28, 2003 the Company received requisite lender approval to amend itssenior credit facility to permit the sale of its Specialty Avionics Group,provided that net proceeds of at least $130,000,000 from the sale are used torepay senior credit facility borrowings. Upon consummation of the sale on May 23, 2003, the Company repaid$130,000,000 of senior credit borrowings with the estimated net proceeds fromthe sale.  The Company may be requiredto repay additional borrowings upon final determination of the net proceedsfrom the sale.

 

The amendmentalso revised various financial covenants (which the Company would otherwisehave not been able to meet as of March 31, 2003), decreases by$10,000,000 the maximum permitted revolving line of credit borrowings to$40,000,000, increases the prime rate and LIBOR interest margins by 1.5% andpermits the issuance of specified types of additional indebtedness and therepurchase of a portion of the Company’s 12% senior subordinated notes with theproceeds from the sale of junior securities.

 

 

**Note9.****          IncomeTaxes**

 

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

 

16

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**Note 10.****        Capital Structure**

 

**MandatorilyRedeemable Preferred Stock**

 

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

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

 

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

 

 

**Note11.****   Commitmentsand Contingencies**

 

**Litigation**

 

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

 

The Companywas a defendant in most, but not all, of the actions brought by the estates ofthe 229 victims of the crash.  Theactions, which sought damages and costs in unstated amounts, claimed negligence,strict liability, and breach of warranty. Virtually all of the cases have been settled by Boeing and Swissair’sinsurers and both assignment of the claims against, and releases in favor of,the Company have been obtained by the Boeing and Swissair insurers.

 

Boeing andSwissair have made a claim (but have not commenced litigation) against theCompany to contribute to the amounts paid to settle the cases.  As there is no litigation pending, nodiscovery has been taken by either side as to liability for the crash.  The Company believes that it is notresponsible for the crash and, in any event, it maintains insurance for suchmatters.  The Company further believesthat any loss it may sustain upon the ultimate resolution of this matter, ifany, will not exceed the amount of insurance coverage maintained.  Accordingly, no accrual for loss has beenrecorded.

 

17

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

** **

**Fundingof DeCrane Holdings Preferred Stock Obligations**

 

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

 

DeCraneHoldings’ preferred stock dividends are payable quarterly at a rate of 14% perannum.  Prior to September 30,2005, dividends are not paid in cash but instead accrete to the liquidationvalue of the preferred stock, which, in turn, increases the redemptionobligation.  On or afterSeptember 30, 2005, preferred stock dividends are required to be paid incash, if declared, and the preferred stock is mandatorily redeemable onSeptember 30, 2009.  The DeCraneHoldings preferred stock has a total redemption value of $64,400,000 as ofMarch 31, 2003, including accumulated dividends.

 

 

**Note12.****   BusinessSegment Information**

 

The Companysupplies products and services to the business, VIP and head-of-state aircraftmarket within the aerospace industry. The Company’s subsidiaries are organized into two groups, each of whichis a strategic business that develops, manufactures and sells distinct productsand services.  The groups and adescription of their businesses are as follows:

 

•                  *Cabin Management –* manufactures interiorcabin components, including cabin interior furnishings, cabin managementsystems, seating and composite components;

 

•                  *Systems Integration –* manufacturesauxiliary fuel systems and auxiliary power units, provides system integrationservices, provides aircraft completion and refurbishment services and is aBoeing Business Jet authorized service center.

 

In priorperiods, the Company’s Specialty Avionics Group was a third strategic businessfor which segment information was provided. As a result of the sale of the Specialty Avionics Group, this group isreflected as a discontinued operation and segment information for prior periodshas been restated.

 

18

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Managementutilizes more than one measurement to evaluate group performance and allocate resources;however, management considers Adjusted EBITDA, as defined, to be the primarymeasurement of a group’s overall core economic performance and return oninvested capital.  Management also usesAdjusted EBITDA in the Company’s annual budget and planning process for futureperiods, as one of the decision-making criteria for funding discretionarycapital expenditures and product development programs and as the measure indetermining the value of acquisitions and dispositions.  The board of directors uses Adjusted EBITDAas one of the performance metrics for determining the amount of bonuses awardedto pursuant to the Company’s cash incentive bonus plan and as an indicator ofenterprise value used in determining the exercise price of stock optionsgranted and the acceleration of stock option vesting pursuant to the Company’sincentive stock option plan.

 

Managementdefines Adjusted EBITDA as earnings before interest, income taxes, depreciationand amortization, restructuring, asset impairment and other related charges,acquisition related charges not capitalized and other noncash and nonoperatingcharges.  Management believes thepresentation of this measure is relevant and useful to investors because itallows investors and analysts to view group performance in a manner similar tothe method used by management, helps improve their ability to understand theCompany’s core segment performance, adjusted for items management believes areunusual, and makes it easier to compare the Company’s results with othercompanies that have different financing, capital structures and tax rates.  In addition, management believes thesemeasures are consistent with the manner in which its lenders and investorsmeasure the Company’s overall performance and liquidity, including its abilityto service debt and fund discretionary capital expenditure and productdevelopment programs.

 

The financialmeasure Adjusted EBITDA, as defined, excludes certain charges reflected in theCompany’s financial statements which are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).  However, the Company’s presentation ofAdjusted EBITDA is in accordance with the GAAP requirements of SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information,” whichrequires the Company to report the primary measure of segment performance usedby management to evaluate and manage its businesses.  The Company’s method of calculating Adjusted EBITDA may not beconsistent with that of other companies and should be viewed in conjunctionwith measurements that are computed in accordance GAAP, such as net income(loss), the nearest comparable GAAP financial measure.  A reconciliation of Adjusted EBITDA to netincome (loss) is included herein to clarify the differences between thesefinancial measures.

 

The accountingpolicies of the groups are substantially the same as those described in thesummary of significant accounting policies (Note 1) to the audited financialstatements.  Some transactions are recordedat the Company’s corporate headquarters and are not allocated to the groups,such as most of the Company’s cash and cash equivalents, debt and related netinterest expense, corporate headquarters costs and income taxes.

 

19

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The tablesbelow summarize selected financial data by business segment.

** **
|                          |   | **Three Months Ended  March 31,** |   |
|-------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**            |   | **2003**                               |   | **2002** |   |
|                          |   | **(Unaudited)**                        |   |
| Revenues:                     |   |                                   |   |   |   |
| Cabin Management              |   | $                                      | 30,620 |   | $ | 45,867 |   |
| Systems Integration           |   | 12,132                                 |   | 15,077 |   |
| Inter-group elimination (1)   |   | (852                                   | )      | (125 | ) |
| Consolidated totals           |   | $                                      | 41,900 |   | $ | 60,819 |   |
|                          |   |                                   |   |   |   |
| Adjusted EBITDA (as defined): |   |                                   |   |   |   |
| Cabin Management              |   | $                                      | 4,550  |   | $ | 7,461 |   |
| Systems Integration           |   | 2,157                                  |   | 4,296 |   |
| Corporate (2)                 |   | (2,112                                 | )      | (1,558 | ) |
| Inter-group elimination (3)   |   | 110                                    |   | 111 |   |
| Consolidated totals (4)       |   | $                                      | 4,705  |   | $ | 10,310 |   |

 
| **(In thousands)**                            |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                                          |   | **(Unaudited)**          |    |                        |   |
| Total assets (as of period end):              |   |                     |    |                        |   |
| Cabin Management                              |   | $                        | 284,258 |                        | $      | 281,655 |   |
| Systems Integration                           |   | 70,226                   |    | 62,437                      |   |
| Corporate (5)                                 |   | 49,555                   |    | 44,247                      |   |
| Inter-group elimination (6)                   |   | (3                       | )       | (113                        | )      |
| Continuing operations                         |   | 404,036                  |    | 388,226                     |   |
| Discontinued operations (Specialty  Avionics) |   | 152,003                  |    | 160,741                     |   |
| Consolidated totals                           |   | $                        | 556,039 |                        | $      | 548,967 |   |

 

----

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

 

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

 

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

 

20

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(4)                      The table below reconciles thefinancial measure Adjusted EBITDA, as defined, to net income (loss).

** **
|                                                       |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------|--------|----------------------------------------|--------|
| **(In thousands)**                                         |   | **2003**                               |   | **2002** |   |
|                                                       |   | **(Unaudited)**                        |   |
| Consolidated Adjusted EBITDA (as defined)                  |   | $                                      | 4,705  |   | $ | 10,310 |   |
| Restructuring, asset impairment and other  related charges |   | —                                 |   | (4,043 | ) |
| Depreciation and amortization of long-lived  assets (a)    |   | (2,516                                 | )      | (2,767 | ) |
| Acquisition related charges not capitalized                |   | (9                                     | )      | (10 | ) |
| Other noncash charges                                      |   | —                                 |   | (54 | ) |
| Interest expense                                           |   | (5,869                                 | )      | (5,948 | ) |
| Other expenses, net                                        |   | (339                                   | )      | (113 | ) |
| Provision for income tax benefit                           |   | 1,265                                  |   | 1,141 |   |
| Loss from discontinued operations, net of  tax             |   | (6,397                                 | )      | (37,440 | ) |
| Cumulative effect of change in accounting  principle       |   | —                                 |   | (17,828 | ) |
| Net loss                                                   |   | $                                      | (9,160 | ) | $ | (56,752 | ) |

 

----

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

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

 

(5)                      Reflects the Company’s corporateheadquarters assets, excluding investments in and notes receivable fromsubsidiaries.

 

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

 

21

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**Note 13.****        Supplemental CondensedConsolidating Financial Information**

 

In conjunctionwith the 12% senior subordinated notes described in Note 8, the followingcondensed consolidating financial information is presented segregating theCompany, as the issuer, and guarantor and non-guarantor subsidiaries.  The accompanying financial information inthe guarantor subsidiaries column reflects the financial position, results ofoperations and cash flows for those subsidiaries guaranteeing the senior creditfacility and the notes.

 

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

 

(1)                      Eliminationof investments in subsidiaries.

 

(2)                      Eliminationof intercompany accounts.

 

(3)                      Eliminationof equity in earnings of subsidiaries.

 

22

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**BalanceSheets**

 
|                                                                                     |   | **March 31, 2003 (Unaudited)** |    |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
| **(In thousands)**                                                                       |   | **Issuer**                          |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                                |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                                |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                                   | 14,551  |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 14,637 |   |
| Accounts receivable, net                                                                 |   | —                              |    | 26,568 |   | — |   | — |   | 26,568 |   |
| Inventories                                                                              |   | —                              |    | 70,736 |   | — |   | — |   | 70,736 |   |
| Other current assets                                                                     |   | 19,129                              |    | 682 |   | — |   | — |   | 19,811 |   |
| Assets of discontinued operations                                                        |   | —                              |    | 157,983 |   | 4,844 |   | (10,824 | )(1) | 152,003 |   |
| Total current assets                                                                     |   | 33,680                              |    | 256,055 |   | 4,844 |   | (10,824 | ) | 283,755 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 2,281                               |    | 33,179 |   | — |   | — |   | 35,460 |   |
| Other assets, principally intangibles, net                                               |   | 13,594                              |    | 223,230 |   | — |   | — |   | 236,824 |   |
| Investments in subsidiaries                                                              |   | 347,091                             |    | — |   | — |   | (347,091 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 271,905                             |    | 164,269 |   | 5,834 |   | (442,008 | )(2) | — |   |
| Total assets                                                                             |   | $                                   | 668,551 |   | $ | 676,733 |   | $ | 10,678 |   | $ | (799,923 | ) | $ | 556,039 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**   |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                                   | 16,360  |   | $ | 1,132 |   | $ | — |   | $ | — |   | $ | 17,492 |   |
| Other current liabilities                                                                |   | 10,895                              |    | 27,738 |   | — |   | — |   | 38,633 |   |
| Liabilities of discontinued operations                                                   |   | —                              |    | 21,055 |   | (146 | ) | — |   | 20,909 |   |
| Total current liabilities                                                                |   | 27,255                              |    | 49,925 |   | (146 | ) | — |   | 77,034 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 377,822                             |    | 8,698 |   | — |   | — |   | 386,520 |   |
| Intercompany payables                                                                    |   | 171,139                             |    | 270,869 |   | — |   | (442,008 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 32,139                              |    | 514 |   | — |   | — |   | 32,653 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock                                                   |   | 35,678                              |    | — |   | — |   | — |   | 35,678 |   |
|                                                                                     |   |                                |    |   |   |   |   |   |   |   |   |
| Stockholder’s equity:                                                               |   |                                |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 116,987                             |    | 337,592 |   | 15,440 |   | (353,032 | )(1) | 116,987 |   |
| Retained earnings (deficit)                                                              |   | (92,469                             | )       | 9,499 |   | (4,616 | ) | (4,883 | )(1) | (92,469 | ) |
| Accumulated other comprehensive loss                                                     |   | —                              |    | (364 | ) | — |   | — |   | (364 | ) |
| Total stockholder’s equity                                                          |   | 24,518                              |    | 346,727 |   | 10,824 |   | (357,915 | ) | 24,154 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity |   | $                                   | 668,551 |   | $ | 676,733 |   | $ | 10,678 |   | $ | (799,923 | ) | $ | 556,039 |   |

 

23

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|                                                                                     |   | **December 31, 2002** |    |
|------------------------------------------------------------------------------------------|--------|----------------------------|---------|
| **(In thousands)**                                                                       |   | **Issuer**                 |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                       |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |   | $                          | 12,343  |   | $ | 78 |   | $ | — |   | $ | — |   | $ | 12,421 |   |
| Accounts receivable, net                                                                 |   | —                     |    | 26,354 |   | — |   | — |   | 26,354 |   |
| Inventories                                                                              |   | —                     |    | 59,300 |   | — |   | — |   | 59,300 |   |
| Other current assets                                                                     |   | 17,711                     |    | 443 |   | — |   | — |   | 18,154 |   |
| Assets of discontinued operations                                                        |   | —                     |    | 166,507 |   | 5,197 |   | (10,963 | )(1) | 160,741 |   |
| Total current assets                                                                     |   | 30,054                     |    | 252,682 |   | 5,197 |   | (10,963 | ) | 276,970 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                              |   | 2,485                      |    | 33,654 |   | — |   | — |   | 36,139 |   |
| Other assets, principally intangibles, net                                               |   | 11,708                     |    | 224,150 |   | — |   | — |   | 235,858 |   |
| Investments in subsidiaries                                                              |   | 348,559                    |    | — |   | — |   | (348,559 | )(1) | — |   |
| Intercompany receivables                                                                 |   | 276,121                    |    | 172,389 |   | 5,740 |   | (454,250 | )(2) | — |   |
| Total assets                                                                             |   | $                          | 668,927 |   | $ | 682,875 |   | $ | 10,937 |   | $ | (813,772 | ) | $ | 548,967 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s  Equity**   |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |   | $                          | 15,337  |   | $ | 980 |   | $ | — |   | $ | — |   | $ | 16,317 |   |
| Other current liabilities                                                                |   | 16,786                     |    | 27,763 |   | — |   | — |   | 44,549 |   |
| Liabilities of discontinued operations                                                   |   | —                     |    | 19,954 |   | (26 | ) | — |   | 19,928 |   |
| Total current liabilities                                                                |   | 32,123                     |    | 48,697 |   | (26 | ) | — |   | 80,794 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                     |   | 355,568                    |    | 9,132 |   | — |   | — |   | 364,700 |   |
| Intercompany payables                                                                    |   | 178,242                    |    | 276,008 |   | — |   | (454,250 | )(2) | — |   |
| Other long-term liabilities                                                              |   | 33,601                     |    | 840 |   | — |   | — |   | 34,441 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Mandatorily redeemable preferred stock                                                   |   | 34,081                     |    | — |   | — |   | — |   | 34,081 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Stockholder’s equity:                                                               |   |                       |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 118,621                    |    | 337,592 |   | 15,440 |   | (353,032 | )(1) | 118,621 |   |
| Retained earnings (deficit)                                                              |   | (83,309                    | )       | 10,967 |   | (4,477 | ) | (6,490 | )(1) | (83,309 | ) |
| Accumulated other comprehensive loss                                                     |   | —                     |    | (361 | ) | — |   | — |   | (361 | ) |
| Total stockholder’s equity                                                          |   | 35,312                     |    | 348,198 |   | 10,963 |   | (359,522 | ) | 34,951 |   |
| Total liabilities, mandatorily redeemable  preferred stock and stockholder’s equity |   | $                          | 668,927 |   | $ | 682,875 |   | $ | 10,937 |   | $ | (813,772 | ) | $ | 548,967 |   |

 

24

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**Statementsof Operations**

** **
|                                          |   | **Three Months Ended March 31, 2003 (Unaudited)** |   |
|-----------------------------------------------|--------|--------------------------------------------------------|--------|
| **(In thousands)**                            |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Revenues                                      |   | $                                                      | — |   | $ | 41,900 |   | $ | — |   | $ | — |   | $ | 41,900 |   |
| Cost of sales                                 |   | —                                                 |   | 30,903 |   | — |   | — |   | 30,903 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                                                 |   | 10,997 |   | — |   | — |   | 10,997 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses |   | 3,036                                                  |   | 4,869 |   | — |   | — |   | 7,905 |   |
| Amortization of intangible assets             |   | —                                                 |   | 912 |   | — |   | — |   | 912 |   |
| Interest expense                              |   | 5,820                                                  |   | 49 |   | — |   | — |   | 5,869 |   |
| Intercompany charges                          |   | (6,523                                                 | )      | 6,523 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                |   | 4,411                                                  |   | 69 |   | — |   | (4,480 | )(3) | — |   |
| Other expenses, net                           |   | 174                                                    |   | 165 |   | — |   | — |   | 339 |   |
| Provision for income taxes (benefit)          |   | 2,242                                                  |   | (3,507 | ) | — |   | — |   | (1,265 | ) |
| Loss from discontinued operations             |   | —                                                 |   | 6,328 |   | 69 |   | — |   | 6,397 |   |
|                                          |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net loss                                      |   | $                                                      | (9,160 | ) | $ | (4,411 | ) | $ | (69 | ) | $ | 4,480 |   | $ | (9,160 | ) |

 
|                                                 |   | **Three Months Ended March 31, 2002 (Unaudited)** |    |
|------------------------------------------------------|--------|--------------------------------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                                             |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Revenues                                             |   | $                                                      | —  |   | $ | 60,819 |   | $ | — |   | $ | — |   | $ | 60,819 |   |
| Cost of sales                                        |   | —                                                 |    | 44,381 |   | — |   | — |   | 44,381 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Gross profit                                         |   | —                                                 |    | 16,438 |   | — |   | — |   | 16,438 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses        |   | 3,180                                                  |    | 8,979 |   | — |   | — |   | 12,159 |   |
| Amortization of intangible assets                    |   | —                                                 |    | 843 |   | — |   | — |   | 843 |   |
| Interest expense                                     |   | 5,873                                                  |    | 75 |   | — |   | — |   | 5,948 |   |
| Intercompany charges                                 |   | (7,150                                                 | )       | 7,150 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                       |   | 53,802                                                 |    | 9,523 |   | — |   | (63,325 | )(3) | — |   |
| Other expenses, net                                  |   | 91                                                     |    | 22 |   | — |   | — |   | 113 |   |
| Provision for income tax benefit                     |   | (528                                                   | )       | (613 | ) | — |   | — |   | (1,141 | ) |
| Loss from discontinued operations                    |   | —                                                 |    | 27,917 |   | 9,523 |   | — |   | 37,440 |   |
| Cumulative effect of change in accounting  principle |   | 1,484                                                  |    | 16,344 |   | — |   | — |   | 17,828 |   |
|                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                                      | (56,752 | ) | $ | (53,802 | ) | $ | (9,523 | ) | $ | 63,325 |   | $ | (56,752 | ) |

 

25

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**Statementsof Cash Flows**

 
|                                                  |   | **Three Months Ended March 31, 2003 (Unaudited)** |   |
|-------------------------------------------------------|--------|--------------------------------------------------------|--------|
| **(In thousands)**                                    |   | **Issuer**                                             |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**             |   |                                                   |   |   |   |   |   |   |   |   |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net loss                                              |   | $                                                      | (9,160 | ) | $ | (4,411 | ) | $ | (69 | ) | $ | 4,480 | (3) | $ | (9,160 | ) |
| Loss from discontinued operations                     |   | —                                                 |   | 6,328 |   | 69 |   | — |   | 6,397 |   |
| Noncash adjustments:                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                        |   | 4,411                                                  |   | 69 |   | — |   | (4,480 | )(3) | — |   |
| Other noncash adjustments                             |   | 237                                                    |   | 1,509 |   | — |   | — |   | 1,746 |   |
| Changes in working capital                            |   | (16,438                                                | )      | (4,912 | ) | — |   | — |   | (21,350 | ) |
| Net cash used for operating activities                |   | (20,950                                                | )      | (1,417 | ) | — |   | — |   | (22,367 | ) |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**             |   |                                                   |   |   |   |   |   |   |   |   |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired     |   | (600                                                   | )      | — |   | — |   | — |   | (600 | ) |
| Capital expenditures                                  |   | (3                                                     | )      | (1,095 | ) | — |   | — |   | (1,098 | ) |
| Net cash used for investing activities                |   | (603                                                   | )      | (1,095 | ) | — |   | — |   | (1,698 | ) |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**             |   |                                                   |   |   |   |   |   |   |   |   |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                 |   | 27,150                                                 |   | — |   | — |   | — |   | 27,150 |   |
| Principal payments on long-term debt and  leases      |   | (3,389                                                 | )      | (821 | ) | — |   | — |   | (4,210 | ) |
| Net cash provided by (used for) financing  activities |   | 23,761                                                 |   | (821 | ) | — |   | — |   | 22,940 |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued  operations         |   | —                                                 |   | 3,341 |   | — |   | — |   | 3,341 |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents                  |   | 2,208                                                  |   | 8 |   | — |   | — |   | 2,216 |   |
| Cash and equivalents at beginning of period           |   | 12,343                                                 |   | 78 |   | — |   | — |   | 12,421 |   |
|                                                  |   |                                                   |   |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                 |   | $                                                      | 14,551 |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 14,637 |   |

 

26

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|                                                  |   | **Three Months Ended March 31, 2002 (Unaudited)** |    |
|-------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                  |   | **Issuer**                                             |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
| **(In thousands)**                                    |   |                                                   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**             |   |                                                   |    |   |   |   |   |   |   |   |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net loss                                              |   | $                                                      | (56,752 | ) | $ | (53,802 | ) | $ | (9,523 | ) | $ | 63,325 | (3)  | $ | (56,752 | ) |
| Loss from discontinued operations                     |   | —                                                 |    | 27,917 |   | 9,523 |   | — |   | 37,440 |   |
| Noncash adjustments:                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Equity in loss of subsidiaries                        |   | 53,802                                                 |    | 9,523 |   | — |   | (63,325 | )(3) | — |   |
| Other noncash adjustments                             |   | 2,516                                                  |    | 22,145 |   | — |   | — |   | 24,661 |   |
| Changes in working capital                            |   | 4,724                                                  |    | (9,078 | ) | — |   | — |   | (4,354 | ) |
| Net cash provided by (used for) operating  activities |   | 4,290                                                  |    | (3,295 | ) | — |   | — |   | 995 |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**             |   |                                                   |    |   |   |   |   |   |   |   |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired     |   | (707                                                   | )       | — |   | — |   | — |   | (707 | ) |
| Capital expenditures                                  |   | (4                                                     | )       | (415 | ) | — |   | — |   | (419 | ) |
| Net cash used for investing activities                |   | (711                                                   | )       | (415 | ) | — |   | — |   | (1,126 | ) |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**             |   |                                                   |    |   |   |   |   |   |   |   |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Deferred financing costs                              |   | (1,629                                                 | )       | — |   | — |   | — |   | (1,629 | ) |
| Principal payments on long-term debt and  leases      |   | (97                                                    | )       | (299 | ) | — |   | — |   | (396 | ) |
| Other, net                                            |   | (368                                                   | )       | 297 |   | — |   | — |   | (71 | ) |
| Net cash used for financing activities                |   | (2,094                                                 | )       | (2 | ) | — |   | — |   | (2,096 | ) |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued  operations         |   | —                                                 |    | 3,961 |   | — |   | — |   | 3,961 |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents                  |   | 1,485                                                  |    | 249 |   | — |   | — |   | 1,734 |   |
| Cash and equivalents at beginning of period           |   | 9,641                                                  |    | (163 | ) | — |   | — |   | 9,478 |   |
|                                                  |   |                                                   |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                 |   | $                                                      | 11,126  |   | $ | 86 |   | $ | — |   | $ | — |   | $ | 11,212 |   |

 

27

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

 

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

 

**Recent Developments**

 

OnMay 23, 2003, we consummated the sale of our equity interests in thesubsidiaries comprising the Specialty Avionics Group to Wings Holdings, Inc.,an affiliate of Odyssey Investment Partners, LLC, for $140.0 million incash.  Proceeds of $130.0 million fromthe sale were used to repay senior credit facility borrowings, in accordancewith the facility’s terms which were amended to permit the sale.

 

As weoriginally described in our Form 10-K for the year ended December 31,2002, our failure to consummate the sale of the Specialty Avionics Group byJune 30, 2003 would have been an event of default under the amended seniorcredit facility.  As a result, ourindependent accountants qualified their report on our audited financialstatements for the year ended December 31, 2002 with respect to our abilityto continue as a going concern. Consummation of the sale and repayment of $130.0 million of borrowingsalleviated our independent accountants’ doubt about our ability to continue asa going concern.  As a result, ourindependent accountants issued a revised, unqualified report on our financialstatements, which we included in Amendment No. 1 to our Form 10-K for the yearended December 31, 2002.  See“—Liquidity and Capital Resources–Recent Developments Affecting FinancialCondition and Liquidity” below for additional information.

 

The sale ofthe Specialty Avionics Group is not expected to affect the operations of theremaining operating groups.  As a resultof the sale, the Specialty Avionics Group is presented as a discontinued operationin our consolidated financial statements and our discussion below of ourresults of operations reflects only continuing operations for all periods.

 

**Industry Overview and Trends**

 

We compete inthe aircraft products and services market of the aerospace industry.  The market for our products and services islargely driven by demand in the three civil aircraft markets: business, VIP andhead-of-state aircraft and, to a lesser extent, commercial and regionalaircraft.  The September 11, 2001terrorist attack on the United States, ongoing concerns about global terrorism,the current Middle-Eastern military conflicts, the SevereAcute Respiratory Syndrome(SARS) epidemic and weak global economic conditions are all adverselyimpacting the aerospace industry.

 

In response tocertain of these adverse conditions, we announced and implemented arestructuring program in December 2001 designed to reduce expenses andconserve working capital.  This programincluded permanently closing one manufacturing facility and idling a secondfacility for an indefinite period, curtailing several product developmentprograms and instituting workforce reductions. During the first quarter of fiscal 2002, we also announced we wouldconsolidate the production of four Cabin Management manufacturing facilitiesinto two facilities, resulting in the permanent closure of two additionalfacilities.  During the second quarterof fiscal 2002, we also announced we would permanently close the temporarilyidled manufacturing facility.  See“—Restructuring, Asset Impairment and Other Related Charges” below foradditional information.

 

The business,VIP and head-of-state aircraft portion of our business experienced weaknessduring 2002 and will continue to experience weakness throughout 2003 asevidenced by various manufacturers’ announced plans to temporarily suspendproduction at various times throughout the year in response to the weak demandfor new aircraft.  However, we believebusiness, VIP and head-of-state aircraft deliveries may experience a modestrecovery in 2004 and continuing recovery thereafter.  The

 

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commercial aircraft portion ofour business, which subsequent to the sale of the Specialty Avionics Groupaccounts for less than 5% of consolidated revenues, also experiencedsignificant weakness in 2002 and the first half of 2003 and we believe thiscondition will continue through 2003 and into 2004, with potential recovery notexpected to occur until at least 2005. Our beliefs are based on the assumptions that we will experienceeconomic recovery and there are no further negative geo-political developmentsaffecting our industry.

 

**Results of Operations**

 

### **Performance Measures**

### ** **

The followingdiscussion of our results of operations includes discussions of financialmeasures and operating statistics we use to evaluate the performance of, andtrends in, our businesses.  We believethe presentation of these measures and statistics are relevant and useful toinvestors because it allows them to view performance and trends in a mannersimilar to the methods we use.  Thesemeasures and statistics, and why they are important to us and could be ofinterest to you, are described below.

 

**Adjusted EBITDA.**  Our discussion of the results of operationsincludes discussions of financial measures determined in accordance withaccounting principles generally accepted in the United States of America(“GAAP”) as well as the financial measure Adjusted EBITDA, which excludescertain charges reflected in our GAAP basis financial statements.  Our presentation of Adjusted EBITDA is inaccordance with the GAAP requirements of SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” which requires us to reportthe primary measure of segment performance we use to evaluate and manage ourbusinesses.

 

We utilizemore than one measurement to evaluate segment performance and allocateresources among our operating segments; however, we consider Adjusted EBITDA,as defined below, to be the primary measurement of overall operating segmentcore economic performance and return on invested capital.  We also use Adjusted EBITDA in the annualbudgeting and planning for future periods, as one of the decision-makingcriteria for funding discretionary capital expenditure and product developmentprograms and as the measure for determining the value of acquisitions anddispositions.  Our board of directorsuses Adjusted EBITDA as one of the performance metrics for determining theamount of bonuses awarded to pursuant to the cash incentive bonus plan and asan indicator of enterprise value used in determining the exercise price ofstock options granted and the acceleration of stock option vesting pursuant theincentive stock option plan.

 

We defineAdjusted EBITDA as earnings before interest, income taxes, depreciation andamortization, restructuring, asset impairment and other related charges,acquisition related charges not capitalized and other noncash and nonoperatingcharges.  We believe the presentation ofthis measure is relevant and useful to investors because it allows investorsand analysts to view segment performance in a manner similar to the method weuse, helps improve their ability to understand our core segment performance,adjusted for items we believe are unusual, and makes it easier to compare ourresults with other companies that have different financing, capital structuresand tax rates.  In addition, we believethese measures are consistent with the manner in which our lenders andinvestors measure our overall performance and liquidity, including our abilityto service debt and fund discretionary capital expenditure and product developmentprograms.

 

Our method ofcalculating Adjusted EBITDA may not be consistent with that of other companiesand should be viewed in conjunction with measurements that are computed inaccordance GAAP, such as net income (loss), the nearest comparable GAAPfinancial measure.  Adjusted EBITDAshould not be viewed as substitutes for or superior to net income (loss), cashflow from operations or other data prepared in accordance with GAAP as ameasure of our profitability or liquidity. The notes to our financial statements include information about ouroperating segments, including Adjusted EBITDA, and

 

29

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should be read in conjunctionwith the discussions presented herein. The notes to our financial statements also include a reconciliation ofAdjusted EBITDA to net income (loss) to clarify the differences between thesefinancial measures.

 

**Bookings and Backlog.**  Bookings and backlog are operatingstatistics we use as leading trend indicators of future demand for our productsand services.  Bookings and backlog arebased upon the value of purchase orders received from our customers, which willresult in revenues, if and when such orders are filled.

 

Bookingsrepresent the total invoice value of purchase orders received during the periodand backlog represents the total invoice value of unfilled purchase orders asof the end of a period.  Orders may besubject to change or cancellation by the customer prior to shipment.  The level of unfilled orders at any givendate during the year will be materially affected by the timing of our receiptof orders and the speed with which those orders are filled.

 

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

### ** **

Our results ofoperations have been affected by restructuring, asset impairment and otherrelated charges relating to our 2002 restructuring program and goodwillimpairment charges.  These charges,which affect the comparability of our reported results of operations betweenperiods, are more fully described in “—Restructuring, Asset Impairment andOther Related Charges” and “—Goodwill Impairment Charges” below.

 

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

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

 

*Cabin Management. *Revenues decreased by $15.2 million, or33.2% compared to the prior year.  Thedecrease, which is across all of our product and services categories, is causedby the ongoing adverse impact of weak global economic conditions which reducesthe affordability of business, VIP and head-of-state aircraft and thereforedemand for the products and services we provide.  The 2003 decrease consists of:

 

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

 

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

 

•             a $1.6 milliondecrease in seating products revenues; and

 

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

 

The revenuedecrease was caused by lower order volume from our customers as opposed to aloss of customers or price reductions. The decrease in order volume is attributable to weak global economicconditions and the impact these conditions are having on manufacturers ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide to them.  Weakglobal economic conditions have reduced the amount of discretionary incomeavailable to purchase and operate 

 

30

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these types of aircraft.  As a result, the manufacturers of theseaircraft have experienced a decrease in orders for new aircraft which, in turn,reduces the orders our customers place with us.

 

Revenues from Textron and Bombardier, our principal customers,decreased $10.6 million compared to the prior year as a result of the decreasein orders and resulting production of aircraft they are experiencing due to theeconomic downturn.  Bombardiertemporarily suspended production of various models of aircraft for several weeksduring the first quarter of fiscal 2003 in response to their low orderbacklog.  Textron has announced plansfor a similar planned shut down during the second and third quarters of fiscal2003 as well.  We also experiencedsimilar volume decreases from our other customers during the period.

 

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

 

•             a $2.3 milliondecrease resulting from reduced demand for our business, VIP and head-of-stateaircraft products and services due to the adverse impact weak global economicconditions are having on the demand for those types of aircraft as follows:

 

•             a $1.7 milliondecrease in our aircraft completion and modification revenues; and

 

•             a $0.6 milliondecrease in BBJ auxiliary fuel systems revenues; and

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

•             a $2.4 milliondecrease resulting from lower revenues and unfavorable overhead absorption as aresult of lower production and delivery of business/VIP aircraft auxiliary fueltank systems; and

 

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

 

31

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**Selling, general and administrative expenses.**  Selling, general and administrative expensesdecreased $4.3 million, or 35.0%, to $7.9 million for the three months endedDecember 31, 2003, from $12.2 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                |   | **Increase (Decrease)****From 2002** |   |
|---------------------|--------|--------------------------------------|--------|
| **(In millions)**   |   | **Amount**                           |   | **Percent** |   |
|                |   |                                 |   |   |   |
| Cabin Management    |   | $                                    | (3.4   | ) | (81.6 | )% |
| Systems Integration |   | (0.7                                 | )      | (64.2 | ) |
| Corporate           |   | (0.2                                 | )      |   |   |
| Total               |   | $                                    | (4.3   | ) |   |   |

 

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

 

•             a $2.8 millionreduction resulting from restructuring charges recorded in 2002 related to theconsolidation of our seating and related manufacturing operations; and

 

•             a $0.6 milliondecrease in expenses resulting from cost reduction measures implemented in responseto lower sales volume resulting from the weak global economic conditions.

 

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

 

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

 
|                                        |   | **Increase (Decrease)****From 2002** |   |
|---------------------------------------------|--------|--------------------------------------|--------|
| **(In millions)**                           |   | **Amount**                           |   | **Percent** |   |
|                                        |   |                                 |   |   |   |
| Depreciation charged to:                    |   |                                 |   |   |   |
| Cost of sales                               |   | $                                    | (0.2   | ) | (15.3 | )% |
| Selling, general and administrative expense |   | (0.2                                 | )      | (19.0 | ) |
| Amortization of intangible assets           |   | 0.1                                  |   | 8.2 |   |
| Total                                       |   | $                                    | (0.3   | ) |   |   |

 

**Adjusted EBITDA.**  As described above in “—PerformanceMeasures-Adjusted EBITDA,” we use this financial measure to evaluate the coreeconomic performance of our operating segments.  The notes to our financial statements include additionalinformation about Adjusted EBITDA, and should be read in conjunction with thediscussions presented herein.  The notesto our financial statements also include a reconciliation of Adjusted EBITDA tonet income (loss), a GAAP financial measure, to clarify the differences betweenthese two measures.

 

*Cabin Management. *Adjusted EBITDA decreased by $2.9 million, or 39.0% compared to the prior yearprimarily due to:

 

•             a $3.3 milliondecrease in gross profit related to lower volume in our business/VIP aircraftfurniture and seating operations;

 

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

 

•             a $0.2 millionincrease in gross profit related to other products and services; and

 

•             a $0.6 milliondecrease in SG&A spending.

 

32

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*Systems Integration. *Adjusted EBITDAdecreased by $2.1 million, or 49.8% over the prior year, due to lower salesvolume partially offset by reduced SG&A spending resulting from workforcereductions.

 

**Operating income.**  Operating income decreased $1.3 million or36.5%, to $2.2 million for the three months ended March 31, 2003, from$3.5 million for the same period last year. Operating income changed as follows:

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

* *

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

 

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

 

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

 

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

 

**Interest expense.**  Interest expense decreased $0.1 million, or1.3%, to $5.9 million for the three months ended March 31, 2003 comparedto $6.0 million for the same period last year. We expect interest expense to increase in 2003 as a result of a 1.5%increase in interest rates charged by our lenders as a result of the amendmentto our senior credit facility, partially offset by lower principal balances outstanding.

 

**Provision for income taxes.**  The provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate tothe income before income taxes primarily due to the effects of state andforeign income taxes.

 

**Loss from continuingoperations.** The loss from continuing operations increased $1.3 million to $2.8million for the three months ended March 31, 2003 compared to $1.5 millionfor the same period last year, primarily due to:

 

•             a $5.3 million lossincrease, principally related to lower revenues; offset by

 

•             a $4.0 million lossdecrease resulting from restructuring charges recorded in 2002 related to theconsolidation of our seating and related manufacturing operations.

 

**Loss fromdiscontinued operations.**  Loss from discontinued operations decreased $31.1 million, to aloss of $6.4 million for the three months ended March 31, 2003 compared toa loss of $37.5 million for the same period last year.  The decrease is primarily due to:

 

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

 

33

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•             a $7.5 million chargein 2003 for the impairment of goodwill to reduce the carrying value of theassets sold to their estimated net realizable value based upon the $140.0million fair value implied in definitive agreement to sell the SpecialtyAvionics Group.

 

The 2002 and2003 charges are attributable to the goodwill impairment of one of the threereporting units within the Specialty Avionics Group.  Aggregate goodwill was $80.7 million as of December 31, 2002and $73.2 million as of March 31, 2003, after the $7.5 million 2003impairment charge.  See “—GoodwillImpairment Charges” below for additional information.

 

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

 

**Net loss.**  Net loss decreased $47.6 million to a netloss of $9.2 million for the three months ended March 31, 2003 compared toa net loss of $56.8 million for the same period last year.  The decrease is primarily due to the $57.2million charge in 2002 to reflect the cumulative effect of the change in accountingprinciple offset by a $7.5 million charge in 2003 for the impairment ofgoodwill related to discontinued operations.

 

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

 

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

 

•             a $7.5 million chargein 2003 for the impairment of goodwill related to discontinued operations;

 

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

 

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

 

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

 

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

 

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

 

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

 

34

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**Restructurin****g, Asset Impairment and Other Related Charges**

 

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

 

During thethree months ended March 31, 2003 and the year ended December 31,2002, we recorded restructuring, asset impairment and other related pre-taxcharges, principally related to our restructuring activities.  These charges are summarized in the tablebelow.

 
|                                          |   | **Charges Recorded During** |       |
|-----------------------------------------------|--------|-----------------------------|------------|
|                                          |   | **2003**                    |       | **Year Ended December 31, 2002** |   |
| **(In millions)**                             |   | **1st  Quarter**            | ** ** | **1st  Quarter** |   | **2nd, 3rd & 4th  Quarters** |   | **Total** |   |
|                                          |   |                        |       |   |   |   |   |   |   |
| Nature of charges:                            |   |                        |       |   |   |   |   |   |   |
| Asset Realignment Restructuring               |   | $                           | —     |   | $ | — |   | $ | 6.9 |   | $ | 6.9 |   |
| Seat Manufacturing Facilities Restructuring   |   | —                      |       | 4.0 |   | 2.3 |   | 6.3 |   |
| Goodwill impairment charges                   |   | 7.5                         |       | — |   | 7.7 |   | 7.7 |   |
| Other asset impairment related charges        |   | —                      |       | — |   | 4.3 |   | 4.3 |   |
| Total pre-tax charges                         |   | $                           | 7.5        |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |
|                                          |   |                        |       |   |   |   |   |   |   |
| Business segment recording the charges:       |   |                        |       |   |   |   |   |   |   |
| Cabin Management                              |   | $                           | —     |   | $ | 4.0 |   | $ | 9.2 |   | $ | 13.2 |   |
| Systems Integration                           |   | —                      |       | — |   | 4.0 |   | 4.0 |   |
| Total continuing operations                   |   | —                      |       | 4.0 |   | 13.2 |   | 17.2 |   |
| Discontinued operations (Specialty  Avionics) |   | 7.5                         |       | — |   | 8.0 |   | 8.0 |   |
| Total pre-tax charges                         |   | $                           | 7.5        |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |
|                                          |   |                        |       |   |   |   |   |   |   |
| Charged to operations:                        |   |                        |       |   |   |   |   |   |   |
| Cost of sales                                 |   | $                           | —     |   | $ | 1.2 |   | $ | 9.4 |   | $ | 10.6 |   |
| Selling, general and administrative  expenses |   | —                      |       | 2.8 |   | 3.8 |   | 6.6 |   |
| Discontinued operations (Specialty  Avionics) |   | 7.5                         |       | — |   | 8.0 |   | 8.0 |   |
| Total pre-tax charges                         |   | $                           | 7.5        |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |
|                                          |   |                        |       |   |   |   |   |   |   |
| Components of charges:                        |   |                        |       |   |   |   |   |   |   |
| Continuing operations:                        |   |                        |       |   |   |   |   |   |   |
| Noncash charges                               |   | $                           | —     |   | $ | 3.1 |   | $ | 8.3 |   | $ | 11.4 |   |
| Cash charges                                  |   | —                      |       | 0.9 |   | 4.9 |   | 5.8 |   |
| Total continuing operations pre-tax charges   |   | —                      |       | 4.0 |   | 13.2 |   | 17.2 |   |
| Discontinued operations noncash charges       |   | 7.5                         |       | — |   | 8.0 |   | 8.0 |   |
| Total pre-tax charges                         |   | $                           | 7.5        |   | $ | 4.0 |   | $ | 21.2 |   | $ | 25.2 |   |

 

### **Asset Realignment Restructuring**

### ** **

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

 

Due to theongoing weakness of the business, VIP and head-of-state aircraft market, wedecided during the second quarter of fiscal 2002 to permanently close thetemporarily idled manufacturing facility. In connection with this decision, we recorded additional pre-tax chargesto operations totaling

 

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$6.9 million during the year ended December 31, 2002, of which$3.8 million were noncash charges, for restructuring, asset impairment chargesand other related expenses.

 

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

 

### **Seat Manufacturing Facilities Restructuring**

### ** **

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

 

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

 

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

 

Nominal futuremonthly cash payments will be required during the remainder of 2003 due tolease payments on the vacated facilities and the incurrence of other facilityexit costs related to both restructuring programs.  The future cash payments will be funded from existing cashbalances and internally generated cash from operations.

 

### **Goodwill Impairment Charges**

### ** **

During thefirst quarter of fiscal 2003, we entered into a definitive agreement to sellthe Specialty Avionics Group.  Basedupon the fair value of the group implied in the definitive agreement, we determinedthat the carrying value of one of the reporting unit’s net assets was not fullyrecoverable.  As a result, we recorded agoodwill impairment charge of $7.5 million during the three months endedMarch 31, 2003 to reduce the carrying value to the estimated netrealizable value established by the definitive agreement.

 

Due tocontinued weakness in the commercial aircraft portion of our business, in thefourth quarter of fiscal 2002 we recorded a pre-tax charge of $7.7 millionrelated to our annual goodwill impairment testing pursuant to SFAS No.142.  The impairment charge pertained tothe Specialty Avionics Group.

 

See “—GoodwillImpairment Charges” below for additional information.

 

### **Other Asset Impairment Related Charges**

### ** **

Due tocontinued weakness in the commercial aircraft portion of our business, in thefourth quarter of fiscal 2002 we recorded a pre-tax charge of $4.3 related toinventories and was charged to cost of goods sold.  Charges totaling $0.3 million pertained to the Specialty AvionicsGroup.

 

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**Goodwill****ImpairmentCharges**

 

The followingdiscussion should be read in conjunction with Notes 2, 3 and 5 accompanying ourunaudited financial statements included in this report.

 

Our results ofoperations for the three months ended March 31, 2003 and 2002 have beenaffected by the adoption of SFAS No. 142, “Goodwill and Other IntangibleAssets,” and goodwill impairment charges.

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill and Other IntangibleAssets” and the provisions of SFAS No. 141, “Business Combinations,” which wererequired to be adopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncementsresulted in the following:

 

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

 

•*             Discontinuanceof Goodwill Amortization.*  Goodwillis deemed to be an indefinite-lived asset. As a result, and in accordance with SFAS No. 142, the recording ofperiodic goodwill amortization charges was discontinued effectiveJanuary 1, 2002.

 

•*             AnnualTesting for Goodwill Impairment.*  Inlieu of periodic goodwill amortization charges, SFAS No. 142 requires goodwillto be tested annual for impairment, or when events or changes in circumstancesindicate the carrying value may not be recoverable.

 

During 2002,we completed the transitional impairment testing of goodwill recorded as ofJanuary 1, 2002 as required under SFAS No. 142.  Fair value of each reporting unit was determined using adiscounted cash flow approach taking into consideration projections based on theindividual characteristics of the reporting units, historical trends, marketmultiples for comparable businesses and independent appraisals.  Our Cabin Management Group consists of threereporting units, our Systems Integration Group consists of two and theSpecialty Avionics consists of three. Unallocated goodwill was allocated to the reporting units for impairmenttesting purposes.  The results indicatedthat the carrying value of goodwill was impaired at one of the reporting unitswithin each of our operating groups. The resulting impairment was primarily attributable to a change in theevaluation criteria for goodwill utilized under previous accounting guidance tothe fair value approach stipulated in SFAS No. 142.  In accordance with the transitional provision of SFAS No. 142, werecorded a $17.8 million noncash write-down of goodwill (net of $0.9 millionincome tax benefit) as of January 1, 2002 as a cumulative effect of achange in accounting principle.  Anadditional $39.4 million noncash write-down of goodwill pertained to the SpecialtyAvionics Group and is included in the loss from discontinued operations.

 

Changes in thecarrying amount of goodwill, by business segment, for the three months endedMarch 31, 2003 are as follows:

 
|                            |   | **Continuing Operations**    |   | **Discontinued  Operations**    |   |
|---------------------------------|--------|------------------------------|--------|---------------------------------|--------|
| **(In millions)**               |   | **Cabin  Management  Group** |   | **Systems  Integration  Group** |   | **Corporate** |   | **Total** |   | **Specialty  Avionics  Group** |   |
|                            |   |                         |   |                            |   |   |   |   |   |   |   |
| Balance, December 31, 2002 |   | $                            | 173.9  |                            | $      | 20.8 |   | $ | 1.7 |   | $ | 196.4 |   | $ | 80.7 |   |
| Impairment charge               |   | —                       |   | —                          |   | — |   | — |   | (7.5 | ) |
| Balance, March 31, 2003    |   | $                            | 173.9  |                            | $      | 20.8 |   | $ | 1.7 |   | $ | 196.4 |   | $ | 73.2 |   |

 

During thefirst quarter of fiscal 2003, we entered into a definitive agreement to sellthe Specialty Avionics Group.  Basedupon the fair value of the group implied in the definitive agreement, we

 

37

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determined that the carrying value of the group’s net assets was notfully recoverable.  As required by SFASNo. 142, we recorded a goodwill impairment charge of $7.5 million during thethree months ended March 31, 2003 to reduce the carrying value to theestimated net realizable value established by the definitive agreement.  We recorded a modest $0.7 million gain onthe sale during the second quarter of fiscal 2003, based on the actualfinancial position of the group on the date of sale.  However, the ultimate gain or loss on the sale is subject tofinalizing the post-closing adjustment, which is not expected to be material,if any.

 

**Liquidity and Capital Resources**

 

Our principalcash needs are for debt service, working capital, capital expenditures andpossible strategic acquisitions, as well as to provide DeCrane Holdings withcash to finance its needs, which consists primarily of cash dividends on itspreferred stock beginning in 2005.  Ourprincipal sources of liquidity are expected to be cash flow from operations,potential capital market transactions, and third party borrowings, principallyunder our senior credit facility.

 

### **Cash Flows During the Three Months EndedMarch 31, 2003**

### ** **

Net cash usedby operating activities was $22.4 million for the three months endedMarch 31, 2003 and consisted of $1.1 million of cash used by operationsafter adding back depreciation, amortization, the noncash portion of our restructuringand asset impairment charges and other noncash items, $20.2 million used forworking capital and $1.1 million to reduce other liabilities.  The following factors contributed to the$20.2 million working capital increase:

 

•             an $11.5 million inventoryincrease principally related to long-term contracts;

 

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

 

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

 

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

 

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

 

•             $1.1 million forcapital expenditures; and

 

•             $0.6 million ofcontingent acquisition consideration paid during 2003.

 

We anticipatespending approximately $4.0 to $4.5 million for capital expenditures in2003.  As of March 31, 2003, thereare no remaining acquisition contingent consideration payment obligations.

 

Net cashprovided by financing activities was $22.9 million for the three months endedMarch 31, 2003.  Cash of $27.1million was provided by revolving line of credit borrowings under our seniorcredit facility.  Cash of $4.2 millionwas used for principal payments on our term debt, capitalized lease obligationsand other debt.

 

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### **Capital Resources and Debt Obligations as ofMarch 31, 2003**

### ** **

As ofMarch 31, 2003, we had $75.6 million of working capital, excluding theassets and liabilities of our discontinued operations, compared to $55.4million as of December 31, 2002. As of March 31, 2003, we also had $6.5 million of borrowingsavailable under our revolving line of credit, as amended in March 2003 anddescribed below, compared to $43.6 million available as of December 31,2002.  Our revolving line of creditexpires in September 2004.  We maynot be able to replace it on commercially acceptable terms, or at all.  As of March 31, 2003, our senior creditfacility borrowings totaling $294.1 million are at variable interest ratesbased on defined margins over the current prime rate or LIBOR, compared to$270.2 million as of December 31, 2002. We also had $100.0 million of 12% senior subordinated notes as ofMarch 31, 2003 and December 31, 2002 and other indebtedness totaling$9.9 million outstanding as of March 31, 2003 compared to $10.8 million asof December 31, 2002.

 

The increasein working capital is principally attributable to spending $11.5 million forinventory pursuant to long-term contracts and reducing accounts payable andaccrued expenses by $5.4 million between the periods.  These expenditures were funded through borrowings under ourrevolving line credit, which is part of our senior credit facility.  In addition, the March 2003 seniorcredit facility amendment reduced by $10.0 million the maximum permittedborrowings under the revolving line of credit.

 

The seniorcredit facility and senior subordinated notes indenture impose restrictive andfinancial covenants on us.  InMarch 2003, terms and financial covenants contained in our senior creditfacility were amended to, among other things, permit the sale of the SpecialtyAvionics Group which was consummated on May 23, 2003.  As required by the amendment, we repaid$130.0 million of senior credit facility borrowings with the proceeds from thesale.  See “-Recent DevelopmentsAffecting Financial Condition and Liquidity” below for additional information.

 

### **Recent Developments Affecting FinancialCondition and Liquidity**

### ** **

As more fullydescribed in “—Industry Overview and Trends,” the acts and ongoing threats ofglobal terrorism, the current military conflicts, SARS epidemic and weak globaleconomic conditions are all adversely impacting our business.  In response, we implemented restructuringprograms in 2001 and 2002, as described in “—Restructuring, Asset Impairmentand Other Related Charges,” designed to reduce costs and conserve workingcapital.

 

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

 

OnMarch 14, 2003, we entered into a definitive agreement to sell our equityinterests in the subsidiaries comprising the Specialty Avionics Group for$140.0 million in cash and received requisite lender approval on March 28,2003 to amend the senior credit facility to permit the sale.  We consummated the sale on May 23, 2003and, as required by the senior credit facility amendment, used $130.0 millionof the proceeds from the sale to repay senior credit facility borrowings.  The senior credit facility amendment alsorelaxes various financial covenants for 2003 and beyond, decreases by $10.0million the maximum permitted revolving line of credit borrowings to $40.0million, increases the prime rate and LIBOR interest margins by 1.5% andpermits the issuance of specified types of additional indebtedness and therepurchase of up to $20.0 million aggregate principal amount of our 12% senior

 

39

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subordinated notes with theproceeds from the sale of junior securities. Junior securities means: (i) senior subordinated notes issued by us thatare unsecured and do not provide for any scheduled redemptions or prepaymentsor any sinking fund installment payments or maturities prior to the terminationof the senior credit facility, or other indebtedness subordinated in right ofpayment to our obligations under the senior credit facility, and whose materialterms are satisfactory to the lenders; and (ii) equity securities issued by us.

 

The tablebelow reflects senior credit facility borrowings as of March 31, 2003,adjusted to reflect the $130.0 million repayment with the proceeds from thesale and the adjustment of the future maturities pursuant to the amendment.

 
|                                      |   | **Senior Credit Facility Borrowings****As of March 31, 2003** |   |
|-------------------------------------------|--------|--------------------------------------------------------------------|--------|
| **(In millions)**                         |   | **Historical**                                                     |   | **Repayment** |   | **As****Adjusted** |   |
|                                      |   |                                                               |   |   |   |   |   |
| Total maturities during the:              |   |                                                               |   |   |   |   |   |
| Nine months ending December 31, 2003 |   | $                                                                  | 11.4   |   | $ | (11.4 | ) | $ | — |   |
| Year ending December 31, 2004        |   | 79.9                                                               |   | (39.2 | ) | 40.7 |   |
| Year ending December 31, 2005        |   | 96.6                                                               |   | (29.7 | ) | 66.9 |   |
| Year ending December 31, 2006        |   | 106.2                                                              |   | (49.7 | ) | 56.5 |   |
| Total senior credit facility borrowings   |   | $                                                                  | 294.1  |   | $ | (130.0 | ) | $ | 164.1 |   |

 

We believe ourexpected operating cash flows, together with borrowings under our senior creditfacility ($6.5 million of which was available as of March 31, 2003 ($10.5million on a pro forma basis), the commitment for which expires inSeptember 2004), will be sufficient to meet our future short- andlong-term operating expenses, working capital requirements, capitalexpenditures and debt service obligations for the next twelve months.  However, our ability to comply with our debtfinancial covenants, pay principal or interest and satisfy our other debtobligations will depend on our future operating performance as well ascompetitive, legislative, regulatory, business and other factors beyond ourcontrol.  Although we cannot be certain,we expect to be in compliance with the revised financial covenants through theend of the year based on our current operating plan.

 

In addition,we are continually considering acquisitions that complement or expand ourexisting businesses or that may enable us to expand into new markets, some ofwhich may be material.  Futureacquisitions may require additional debt, equity financing or both.  We may not be able to obtain any additionalfinancing on acceptable terms.  We arenot currently party to any definitive acquisition agreements.

 

**Disclosure of Contractual Obligations andCommitments**

 

The followingtable summarizes our known contractual obligations to make future cash paymentsas of March 31, 2003, as well an estimate of the periods during whichthese payments are expected to be made. The obligations have also been adjusted to reflect the repayment of$130.0 million of senior credit facility borrowings with the proceeds from theMay 23, 2003 sale of the Specialty Avionics Group, assuming the sale wasconsummated on March 31, 2003 and the repayment had occurred on that date.

 

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|                                                              |   |      |       | **Years Ending December 31,** |   |
|-------------------------------------------------------------------|--------|-----------|------------|------------------------------------|--------|
| **(In millions)**                                                 |   | **Total** |       | **2003**                           |   | **2004  and  2005** |   | **2006  and  2007** |   | **2008  and  Beyond** |   |
|                                                              |   |      | ** ** |                               |   |   |   |   |   |   |   |
| Obligations as of March 31, 2003:                            |   |      |       |                               |   |   |   |   |   |   |   |
| Long-term debt (a):                                               |   |      |       |                               |   |   |   |   |   |   |   |
| Senior credit facility                                            |   | $         | 294.1      |                               | $      | 11.4 |   | $ | 176.5 |   | $ | 106.2 |   | $ | — |   |
| 12% senior subordinated notes                                     |   | 100.0     |       | —                             |   | — |   | — |   | 100.0 |   |
| Capital lease obligations and other  indebtedness                 |   | 9.9       |       | 0.7                                |   | 2.3 |   | 0.2 |   | 6.7 |   |
| Total long-term debt                                              |   | 404.0     |       | 12.1                               |   | 178.8 |   | 106.4 |   | 106.7 |   |
|                                                              |   |      |       |                               |   |   |   |   |   |   |   |
| Operating lease obligations                                       |   | 14.9      |       | 1.3                                |   | 3.2 |   | 3.9 |   | 6.5 |   |
| Mandatorily redeemable preferred stock  redemption obligation (b) |   | 38.5      |       | —                             |   | — |   | — |   | 38.5 |   |
| Total obligations as of March 31, 2003                       |   | 457.4     |       | 13.4                               |   | 182.0 |   | 110.3 |   | 151.7 |   |
|                                                              |   |      |       |                               |   |   |   |   |   |   |   |
| Senior credit facility repayment with  proceeds from the sale     |   | (130.0    | )          | (11.4                              | )      | (68.9 | ) | (49.7 | ) | — |   |
| Total obligations, as adjusted                                    |   | $         | 327.4      |                               | $      | 2.0 |   | $ | 113.1 |   | $ | 60.6 |   | $ | 151.7 |   |

 

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(a)                      Excludes interest payments.  Interest on the 12% senior subordinatednotes is payable semiannually.  Thesenior credit facility bears interest at a variable rate and therefore theamount of future interest payments are uncertain.

 

(b)                     Dividends accrue quarterly at theannual rate of 16% and are payable, at our option, either in cash or by theissuance of additional shares of preferred stock.  Since the issuance of the preferred stock in June 2000, wehave elected to issue additional shares in lieu of cash dividend payments andmay continue to do so until June 2005, after which time we are required topay quarterly dividends in cash.  If weelect to continue issuing additional shares until June 2005, our mandatoryredemption obligation on March 31, 2009, the mandatory redemption date,will be $54.8 million and our annual cash dividend payment obligation will be$8.8 million, payable quarterly, commencing September 2005.

 

**Disclosure About Off-Balance SheetCommitments and Indemnities**

 

We are awholly-owned subsidiary of DeCrane Holdings, whose capital structure alsoincludes mandatorily redeemable preferred stock.  Since we are DeCrane Holdings’ only operating subsidiary andsource of cash, we may be required to fund DeCrane Holdings’ redemptionobligation in the future, subject to limitations contained in our senior creditagreement and the senior subordinated notes indenture.  The DeCrane Holdings preferred stock has atotal redemption value of $64.4 million as of March 31, 2003 and $62.2million as of December 31, 2002, the increase reflecting an increase inits redemption value in lieu of cash dividend payments.  DeCrane Holdings’ preferred stock ismandatorily redeemable on September 30, 2009.

 

During ournormal course of business, we have entered into agreements containingindemnities pursuant to which we may be required to make payments in thefuture.  These indemnities are inconnection with facility leases and liabilities for specified claims arisingfrom investment banking services our financial advisors provide to us.  The duration of these indemnities,commitments and guarantees varies, and in certain cases, is indefinite.  Substantially all of these indemnitiesprovide no limitation on the maximum potential future payments we could beobligated to make and is not quantifiable. We have not recorded any liability for these indemnities since no claimshave been asserted to date.

 

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In connectionwith the sale of the Specialty Avionics Group, we made indemnities to the buyerwith respect to a number of customary, and certain other specific,representations and warranties.  Ourindemnities with respect to some of these matters are limited in terms ofduration with the maximum of potential future payments capped at $14.0 millionand our indemnities with respect to specified environmental matters will expirenot later than October 2010 and provides for a maximum liability of $5.0million, while others will have no limitations.  In addition, the $140.0 million selling price is subject to apotential post-closing adjustment related to the amount of working capital atclosing.  Although we cannot be certain,we believe the potential adjustment will not be material.  The post-closing adjustment, if any, wouldbe payable by us in cash upon its final determination.

 

As ofMarch 31, 2003 and December 31, 2002, we also had an irrevocablestandby letter of credit in the amount of $0.4 million issued and outstandingunder our senior credit facility.

 

**Recent Accounting Pronouncements**

 

**AccountingPronouncements Adopted January 1, 2003**

 

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

 

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

 

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

 

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

 

•             FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Other.”

 

**Recently Issued Accounting Pronouncement**

 

*SFAS No. 150 – Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity*

 

Issued inMay 2003, SFAS No. 150 establishes standards for the classification andmeasurement of certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150requires classification of financial instruments within its scope as aliability, including financial instruments issued in the form of shares thatare mandatorily redeemable, because those financial instruments are deemed tobe, in essence, obligations of the issuer. We are currently evaluating the impact this new standard will have onour financial position, results of operations and cash flows.  However, we believe we will be required toreclassify our mandatorily redeemable preferred stock as a liability commencingJuly 1, 2003 and reflect subsequent changes in the redemption obligationas a charge against pre-tax income.

 

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

 

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

 

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

 

•             acts, and ongoingthreats, of global terrorism, military conflicts and health epidemics thataffect demand for aircraft and air travel, which in turn affect demand for ourproducts and services;

 

•             our reliance on keycustomers and the adverse effect a significant decline in business from any oneof them would have on our business;

 

•             changes in prevailinginterest rates and the availability of financing to fund our plans for continuedgrowth;

 

•             competition from largercompanies;

 

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

 

•             inflation, and othergeneral changes in costs of goods and services;

 

•             price and availabilityof raw materials, component parts and electrical energy;

 

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

 

•             the ability toattract and retain qualified personnel;

 

•             labor disturbances;and

 

•             changes in operatingstrategy, or our acquisition and capital expenditure plans.

 

Some of themore significant factors listed above are further described in our AnnualReport on Form 10-K (Amendment No. 1) and should be read in conjunction withthis report.  Changes in such factorscould cause our actual results to differ materially from those contemplated insuch forward-looking statements. Although we believe that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that such expectationswill prove to be correct.  We undertakeno obligation to release publicly any revisions to these forward-lookingstatements to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.  You should not rely on our forward-looking statements as if theywere certainties.

 

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

 

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

 

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

 

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

 

To limit aportion of our exposure related to rising interest rates, we have entered intoan interest rate swap contract to effectively convert $4.5 million ofvariable-rate industrial revenue bonds to 4.2% fixed-rate debt until maturityin 2008.  The contract is considered tobe a hedge against changes in the amount of future cash flows associated withinterest payments on this portion of our variable-rate debt.  Market risk related to this interest rateswap contract is estimated as the potential higher interest expense we willincur if the variable interest rate decreases below the 4.2% fixed rate.  Based on the $3.3 million of variable-ratedebt converted to fixed-rate debt outstanding as of March 31, 2003, ahypothetical one percent decrease in the variable interest rate to 3.2%, wouldreduce our pre-tax earnings by less than $0.1 million annually.

 

The estimatedfair value of our $100.0 million fixed-rate long-term debt increased $11.0million, or 27.5%, to approximately $51.0 million as of March 31, 2003from $40.0 million as of December 31, 2002.  Although we cannot be certain, we believe the increase may havebeen a result of our announcement that we had entered into a definitiveagreement to sell the Specialty Avionics Group.  Market risk related to our fixed-rate debt is deemed to be thepotential increase in fair value resulting from a decrease in interestrates.  For example, a hypothetical tenpercent decrease in the interest rates, from 12.0% to 10.8%, would increase thefair value of our fixed-rate debt by approximately $7.0 million.

 

**Foreign CurrencyExchange Rate Risk.** Our foreign customers are located in various parts of the world,primarily Canada, the Far and Middle East and Western Europe, and we havesubsidiaries with manufacturing facilities in Mexico.  To limit our foreign currency exchange rate risk related to salesto our customers, orders are almost always valued and sold in U.S.dollars.  We have entered into forwardforeign exchange contracts in the past, primarily to limit the SpecialtyAvionics Group’s exposure related to foreign inventory procurement andoperating costs.  While we have notentered into any such contracts since 1998, we may do so in the futuredepending on the volume of non-U.S. dollar denominated transactions and ourassessment of future foreign exchange rate trends.

 

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

 

**Evaluation ofdisclosure controls and procedures.**  Our Chief Executive Officer and Chief FinancialOfficer have evaluated our disclosure controls and procedures within 90 days ofthe initial filing of this report on May 20, 3003.  These controls and procedures are designedto ensure that all of the information required to be disclosed by us in ourperiodic reports filed with the Securities and Exchange Commission (the “Commission”)is recorded, processed, summarized and reported within the time periods specifiedby the Commission and that the information is communicated to the ChiefExecutive Officer and Chief Financial Officer on a timely basis.  Based on their evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were suitable and effective.

 

**Changes in internalcontrols.** Subsequent to the date of their evaluation and prior to the date of theinitial filing on May 20, 3003, there have been no significant changes inour internal controls or in other factors that could significantly affect theinternal controls, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

**PARTII****– OTHERINFORMATION**

 

**ITEM1.****                             LEGAL PROCEEDINGS**

 

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

 

We were adefendant in most, but not all, of the actions brought by the estates of the229 victims of the crash.  The actions,which sought damages and costs in unstated amounts, claimed negligence, strictliability, and breach of warranty. Virtually all of the cases have been settled by Boeing and Swissair’sinsurers and both assignment of the claims against, and releases in favor, ofus have been obtained by the Boeing and Swissair insurers.

 

Boeing andSwissair have made a claim (but have not commenced litigation) against us tocontribute to the amounts paid to settle the cases.  As there is no litigation pending, no discovery has been taken byeither side as to liability for the crash. We believe that our subsidiary is not responsible for the crash and, inany event, we maintain insurance for such matters.  We further believe that any loss we may sustain upon the ultimateresolution of this matter, if any, will not exceed the amount of insurancecoverage maintained.  Accordingly, noaccrual for loss has been recorded in our financial statements.

 

We are alsoinvolved in other routine legal and administrative proceedings incident to thenormal conduct of business.  We believethe ultimate disposition of all such matters will not have a material adverseeffect on our business, consolidated financial position, results of operationsor cash flows.

 

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**ITEM6.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 

a.                                      Exhibits

 

31.1                                       Chief ExecutiveOfficer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of2002 *

 

31.2                                       Chief FinancialOfficer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of2002 *

 

32                                                ChiefExecutive Officer and Chief Financial Officer Certifications Pursuant toPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

 

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*                                                     Filedherewith

 

b.                                     Reports on Form 8-K

 

OnMarch 17, 2003, we filed a Form 8-K Current Report regarding DeCraneAircraft entering into a definitive agreement to sell its Specialty AvionicsGroup.  The text of the press release iscontained in the filing.

 

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**SIGNATURES**

 

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

 

 
|                 |   | **DECRANE AIRCRAFT HOLDINGS, INC. (Registrant)** |
|----------------------|--------|--------------------------------------------------|
|                 |   |                                             |
|                 |   |                                             |
| October 9, 2003 |   | By:                                              |   | /s/  RICHARD J. KAPLAN |   |
|                 |   | Name:                                            | Richard J. Kaplan |
|                 |   | Title:                                           | Senior Vice President, Chief Financial Officer,  Secretary, Treasurer and Director |

 

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