**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001**

 

**COMMISSIONFILE NUMBER 333-70363**

 

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**DECRANE HOLDINGS CO.**

(Exact name of registrantas specified in its charter)

 

 

 

| **Delaware**                     |   | **13-4019703**      |
|----------------------------------|--------|---------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer    |
| Incorporation or  Organization)  |   | Identification No.) |

** **

**c/oCredit Suisse First Boston / DLJ Merchant Banking Partners II, L.P.**

**ElevenMadison Avenue**

**NewYork, NY 10010**

**(212)325-2000**

(Address of PrincipalExecutive Offices)

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**

 

None

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:**

 

None

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.ý YES oNO

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

The number of shares ofCommon Stock outstanding on March 26, 2002 was 3,895,531.

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

None.

 

 

 

**Table ofContents**

** **
| **Part I**                                                                                                 |                                                                                        |
|------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                                                                                                    | Description of  Business                                                                    |
| Item 2.                                                                                                    | Properties                                                                                  |
| Item 3.                                                                                                    | Legal Proceedings                                                                           |
| Item  4.                                                                                                   | Submission  of Matters to a Vote of Security Holders                                        |
|                                                                                                       |                                                                                        |
| **Part II**                                                                                                |                                                                                        |
| Item  5.                                                                                                   | Market  for Registrant’s Common Equity and Related Stockholder Matters                 |
| Item 6.                                                                                                    | Selected Financial  Data                                                                    |
| Item  7.                                                                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  7A.                                                                                                  | Quantitative  and Qualitative Disclosures About Market Risk                                 |
| Item  8.                                                                                                   | Financial  Statements and Financial Statement Schedules                                     |
| Item  9.                                                                                                   | Changes  In and Disagreements With Accountants On Accounting and Financial Disclosure       |
|                                                                                                       |                                                                                        |
| **Part III**                                                                                               |                                                                                        |
| Item  10.                                                                                                  | Directors  and Executive Officers of the Registrant                                         |
| Item 11.                                                                                                   | Executive Compensation                                                                      |
| Item  12.                                                                                                  | Security  Ownership of Certain Beneficial Owners and Management                             |
| Item  13.                                                                                                  | Certain  Relationships and Related Transactions                                             |
|                                                                                                       |                                                                                        |
| **Part IV**                                                                                                |                                                                                        |
| Item  14.                                                                                                  | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |
|                                                                                                       |                                                                                        |
| **Signatures**                                                                                             |                                                                                        |
|                                                                                                       |                                                                                        |
| **Index  to Financial Statements, Supplementary Financial Information and Financial  Statement Schedules** |

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*Allstatements other than statements of historical facts included in this reportare considered forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements aresubject to known and unknown risks, uncertainties and other factors, which aredifficult to predict. Changes in such factors could cause actual results todiffer materially from those contemplated in such forward-looking statements aswe describe in “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Special Note Regarding Forward-LookingStatements.” Although we believe that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to be correct. We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

**PART I**

**ITEM 1.**                                         DESCRIPTION OF BUSINESS

**Company Overview**

DeCrane Holdings Co., a Delaware corporation foundedin 1998, is a holding company and does not have any material operations orassets other than its ownership of all of the common stock of DeCrane AircraftHoldings, Inc. DeCrane Holdings and DLJ Merchant Banking Partners II, L.P. andaffiliated entities acquired DeCrane Aircraft in August 1998. DeCrane Aircraftis the predecessor of DeCrane Holdings. As used in this report, unless thecontext indicates otherwise, “DeCrane” and “we,” “us,” “our,” and similar termsrefer to the combined business of DeCrane Holdings (and DeCrane Aircraft, ourpredecessor) and all of its subsidiaries, collectively.

DeCrane Aircraft Holdings, Inc., a Delawarecorporation founded in 1989, is a leading provider of integrated assemblies,sub-assemblies and component parts to the aerospace industry. Since ourfounding in 1989, we have experienced both internal growth and external growthby identifying fragmented, high-growth niche segments within the aerospaceindustry and acquiring market-leading companies in those niches. Today, we haveassembled product capability within three specific segments of the aerospaceindustry: cabin management for corporate, VIP and head-of-state aircraft;specialty aviation electronic components, commonly referred to as avionics; andsystems integration. We have also focused on diversifying our revenue streambetween the commercial, commercial after- and retrofit markets, and corporateand regional aircraft markets in order to reduce the impact from cycles in anysingle market segment. Within these markets, our customers include originalmanufacturers of aircraft and related avionics equipment, commonly referred to asOEM’s, major components suppliers, aircraft repair and modification centers andcommercial airlines.

We are organized into three operating groups,consistent with the segments in which we operate: Cabin Management, SpecialtyAvionics and Systems Integration. Through our operating groups, we offer acomplete line of cabinetry, galleys, seating and cabin management systems forcorporate aircraft, as well as specialty avionics components and systemsintegration services.

**Our Operating Groups**

Our historical financial position and results ofoperations have been affected by our history of acquisitions. As a result, ourhistorical financial statements do not reflect the financial position andresults of operations of our current businesses and capital structure. Ouracquisitions are described in Note 3 accompanying our financial statementslisted in the index on page F-1 of this report. Historical segment informationfor the three years ended December 31, 2001 is included in Note 16accompanying our financial statements.

** **

** **

**1**

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**Cabin Management Group**

DeCrane’s Cabin Management Group contributedapproximately 52% of our revenues for the year ended December 31, 2001.

***Business Description***

Our Cabin Management Group is a leading independentprovider of cabin products, with a primary focus on serving the corporateaircraft market. Since 1997, our Cabin Management Group has acquired ninecompanies involved in the engineering, manufacturing and assembly of the keycomponents for the interior of a corporate aircraft, including cabin interiorfurnishings, cabin management systems, seating and composite components. OurCabin Management Group serves major manufacturers of corporate aircraft,including Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream andRaytheon.

The Cabin Management Group introduced the concept ofmodularity to the corporate aircraft market by offering totally integratedinterior products. In our view, one of the greatest challenges facing theindustry’s aircraft manufacturers is minimizing the lead-time necessary tocomplete an unfinished “green” aircraft. We also believe our distinctiveapproach of delivering integrated assemblies and sub-assemblies addresses thischallenge by providing our customers with entire pre-engineered, pre-wired andpre-plumbed modular cabin interiors and management systems ready for finalintegration into the aircraft. We believe our totally integrated interiorproducts enable our customers to reduce their lead times, supplier base andoverall costs.

The Cabin Management Group is guided by our overallstrategy to gain market leadership positions in high-growth segments of theaerospace industry by building more related product capabilities than any othercompany in the industry. To that end, our Cabin Management Group has focused onpursuing two, closely related, strategic imperatives:

 

•                    *Building Critical Mass in Cabin Interior Furnishings,Cabin Management Systems and Seating for the Corporate, VIP, and Head-of-StateAircraft Markets.*  Our CabinManagement Group is aggressively focused on broadening and deepening itsproduct offerings to the corporate, VIP and head-of-state aircraft markets. Asa result of this strategy, we have increased revenue content per plane with ourexisting customer base and have successfully attracted new customers.

 

•                    *Developing Capabilities to Provide Modular “TotalCabin Solutions” to the Corporate Aircraft Market. *Consistent with our overall corporate strategy tobuild integrated system solutions, the Cabin Management Group is focused onaggregating its capabilities to provide partial or fully assembled modularcorporate aircraft cabin interiors to its customers.

In order to meet these strategic objectives, we haveaggressively pursued growth in our Cabin Management Group through selectiveacquisitions.

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***2***

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***Products and Services***

Our Cabin Management Group designs, engineers andmanufactures a full line of customized, pre-fit products and provides relatedservices. Approximately 51% of our Cabin Management Group’s revenues in 2001were from two customers, Textron and Bombardier. Our products and services arein four broad categories, as summarized below.

 
| *Interior Furnishings*                                | *Seating*                                                                   |   |
|-------------------------------------------------------|-----------------------------------------------------------------------------|--------|
| •  entertainment and refreshment centers    | •  executive track and swivel seats                               |   |
| •  conference tables                        | •  jump-seats                                                     |   |
| •  hi-low dining and coffee tables          | •  divans, including models that convert to                       |   |
| •  end tables                               |         beds  or contain storable tables |   |
| •  cabinets                                 | •  upholstery services                                            |   |
| •  arm and side ledges                      |                                                                        |   |
| •  galleys                                  | *Composite Components*                                                      |   |
| •  lavatories                               | •  sound-dampening side walls and headliners                      |   |
| •  vanities                                 | •  passenger service units                                        |   |
| •  room enclosures                          | •  environmental (HVAC) ducting                                   |   |
| •  cabinetry refurbishment services         | •  closets                                                        |   |
|                                                  |                                                                        |   |
| *Cabin Management Systems*                            |                                                                        |   |
| •  in-flight entertainment systems          |                                                                        |   |
| •  in-flight data network and communication |                                                                        |   |
|         systems         |                                                                        |   |
| •  cabin controls                           |                                                                        |   |
| •  switches                                 |                                                                        |   |

***Competition***

The markets served by our Cabin Management Group arefragmented, with several competitors offering similar products and services.Due to the global nature of the aerospace industry, competition comes from bothU.S. and foreign companies. Our Cabin Management Group generally facescompetition from a group of smaller companies and enterprises, except for thecorporate aircraft manufacturers and independent completion centers. Ourprincipal competitors are summarized below.

 
| *Interior Furnishings*                                   | *Seating*                           |
|----------------------------------------------------------|-------------------------------------|
| •  Bomhoff, Inc.                               | •   BE Aerospace          |
| •   Custom Aircraft Cabinets                   | •   Fisher (Germany)      |
| •   Hiller                                     |                                |
| •   The Nordam Group                           | *Composite Components*              |
| •   Independent completion centers             | •   AAR                   |
| •   Corporate aircraft manufacturers           | •   Fibre Art             |
|         completion centers | •   Plastic Fab           |
|                                                     | •   Scale Composite Works |
|                                                     | •   The Nordam Group      |
| *Cabin Management Systems*                               |                                |
| •   Air Show / Pacific Systems                 |                                |
| •   Baker Electronics                          |                                |
| •   DPI Labs                                   |                                |
| •   IEC, International                         |                                |

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**3**

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**Specialty Avionics Group**

DeCrane’s Specialty Avionics Group contributedapproximately 31% of our revenues for the year ended December 31, 2001.

***Business Description***

Our Specialty Avionics Group supplies aircraftavionics components to the commercial and military aircraft markets as well asto several avionics systems suppliers including Honeywell and Rockwell-Collins.We focus on assembling design, engineering and manufacturing capabilitiesacross several specialty avionics product categories, including cockpit andcabin audio management systems, flight deck visual display and communicationsystems, power and control devices, and specialty interconnect solutions suchas contacts, connectors and various harness assemblies. Our Specialty AvionicsGroup is also a leading manufacturer of high quality electrical contacts formilitary and aviation applications.

Through its strong focus on building integratedsolutions, we believe our Specialty Avionics Group has achieved solid positionsin many product categories within the avionics components market. Today, webelieve we are the world’s largest supplier of power and signal contacts to theaircraft market, with almost twice the number of FAA approved parts as ournearest competitor. In addition, our dichroic liquid crystal display devices,commonly referred to as LCD’s, are found on most, if not all, commercialaircraft produced today, making us the largest supplier of dichroic LCD devicesto commercial aircraft OEM’s. Our Specialty Avionics Group has leveraged itsreputation as a high quality manufacturer of avionics products and contacts tobuild a broader customer base and to deepen its relationships with existingcustomers.

The strategic objectives of our Specialty AvionicsGroup are well aligned with our overall corporate strategy of capturing andmaintaining number 1 or 2 market share in high growth segments of the avionicscomponent market. In pursuing our objectives for the group, we have been guidedby three strategic principles:

 

•                    *Broaden and Deepen Relationships with Key Customersby Assembling Integrated Customer Solutions.*  We believe our Specialty Avionics Group hasaggressively pursued opportunities to assemble more integrated productcapabilities in the specialty avionics segment than any competitor in theaerospace industry, thereby increasing revenue content per plane and growingprofitability.

 

•                    *Identify and Evaluate Opportunities in High-GrowthProduct Categories.*  Wecontinue to explore and evaluate growth opportunities in product categorieswithin the specialty avionics segment of our business.

 

•                    *Maintain Technologically Superior ProductOfferings. *The specialtyavionics market is a highly specialized and highly technical business. It isimperative that we remain abreast of technological innovations and incorporatethem into our products and services.

***Products and Services***

Our Specialty Avionics Group designs, engineers andmanufactures electronic components, electronic display devices and interconnectcomponents and assemblies. Approximately 22% of our Specialty Avionics Group’srevenues in 2001 were from Boeing. The products we offer are described below.

 

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*Cockpitand Cabin Audio, Communication, Lighting and Power and Control Devices.* Our Specialty Avionics Group is a leading manufacturer of cockpit audio,lighting and power and control devices, including selective calling systemdecoders, used in commercial, regional and corporate aircraft. We alsomanufacture a variety of other commercial aircraft safety system components,including warning tone generators, temperature and de-icing monitoring systems,steep approach monitors and low voltage power supplies for traffic collisionavoidance systems.

*Electrical Contacts.* Contacts conduct electronic signals or electricity and are installed atthe terminus of a wire or an electronic or electrical device. We supplyprecision-machined contacts for use in connectors found in virtually everyelectronic and electrical system on a commercial aircraft. We sell contactsdirectly to aircraft and related electronics manufacturers and through ourprivate labeling programs to several major connector manufacturers who sellconnectors to the same markets under their brand name.

*Connectors and Harness Assemblies.* Electronic and electrical connectors link wires and devices in avionics systems,and permit their assembly, installation, repair and removal. Our connectors arespecially manufactured to meet the critical performance requirements demandedby manufacturers and required in the harsh environment of an operatingaircraft. We produce connectors that are used in aircraft galleys, flight decksand control panels in the passenger cabin, in addition to producing wireharness assemblies for use in cabin avionics systems, including wire,connectors, contacts and hardware. We typically sell our harness assemblies tomanufacturers of aircraft electronic systems but also sell these assemblies aspart of our systems integration services through our Systems Integration Group.

*Liquid Crystal Display Devices. *We manufacture a wide variety of displays in bothdichroic and twisted nematic formats, as well as LCD modules used in commercialand military aircraft. LCD modules are liquid crystal displays packaged with abacklight source, and additional mechanical and electronic components that areplug-and-play ready for the customers’ instrument display application. Dichroicdisplays perform best in situations with high ambient lighting and lowbacklighting. Twisted nematic displays are suited for situations where a strongbacklight is required. Our LCD products are used in a variety of flight deckapplications such as auto pilot flight control systems, fuel quantityindicators, exhaust gas temperature indicators, airborne communications,navigation and safety systems and transportation signage. Dichroic and twistednematic liquid crystal display products are widely used in the aerospaceindustry because they are easily adapted to custom design and possess a varietyof high performance characteristics, including wide viewing angles, highreadability in sunlight, and the ability to withstand wide temperaturefluctuations. We also manufacture a variety of electronic clock instruments forcommercial and military aircraft, including fixed wing and rotary wing, all ofwhich use our LCD devices.

*Wire Marking and Crimping Equipment.* We design and manufacture high-speed wire marking systems and portablecrimping machines used by harness manufacturers, wire mills, aircraftmanufacturers and the U.S. military.

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***5***

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***Competition***

The markets served by our Specialty Avionics Group arefragmented, with several competitors offering similar products and services.Due to the global nature of the aerospace industry, competition comes from bothU.S. and foreign companies. Our Specialty Avionics Group generally facescompetition from large, diversified companies that produce a broad range ofproducts. Our principal competitors are summarized below.

 
| *Cockpit and Cabin Audio,  Communication,*          | *Connector and Harness Assemblies*                  |
|-----------------------------------------------------|-----------------------------------------------------|
| *Lighting and Power and Control  Devices*           | •   AMP (connectors)                      |
| •   Baker Electronics                     | •   Carlyle (harness assemblies)          |
| •   Diehl GmbH (Germany)                  | •   Electronic Cable Specialists (harness |
| •   Gables Engineering                    |         assemblies)   |
| •   Korry                                 | •   ITT Cannon (connectors)               |
| •   Team (France)                         | •   Radiall S.A. (France) (connectors)    |
|                                                |                                                |
| *Electrical Contacts*                               | *Liquid Crystal Display Devices*                    |
| •   Deutsch                               | •   Crystalloid                           |
| •   Lemco                                 | •   DCI                                   |
| •   Several small contact blank suppliers | •   Electronic Martin                     |
|                                                | •   Grayhill                              |
|                                                | •   LSI                                   |

**Systems Integration Group**

DeCrane’s Systems Integration Group contributedapproximately 17% of our revenues for the year ended December 31, 2001.

***Business Description***

Our Systems Integration Group provides aircraftretrofit and refurbishment solutions, from design to FAA certification,including engineering, manufacturing and installation. Our largest business isthe design, production and installation of auxiliary fuel tanks, which extendthe range of the aircraft. Our Systems Integration Group has an exclusivelong-term contract with Boeing Business Jet to design, manufacture and installauxiliary fuel tanks. We also focus on FAA safety mandate “kits” and we believewe are the major supplier of integration kits for smoke detection and firesuppression in the cargo hold. We also perform structural modifications and FAAre-certification before placing aircraft back into service.

There are a limited number of companies that have thenecessary authorization to offer aircraft re-certification on behalf of theFAA. Our Systems Integration Group is authorized to provide the full spectrumof services, from design to FAA re-certification, needed for timelyretrofitting of an aircraft, thus providing a significant competitiveadvantage.

Our Systems Integration Group has adopted a two-prongedstrategic approach to managing its operations:

 

•                    *Develop the Most Comprehensive Integrated RetrofitOffering.*  For the lasteleven years, our Systems Integration Group has focused on developing thecapabilities necessary to provide a fully integrated offering with respect toaircraft refurbishing and aircraft retrofitting with FAA mandated changes andtechnological innovations. Through several related acquisitions and aggressiveinternal product development, our Systems Integration Group has become one ofthe few non-OEM related operations with the authority to provide alterationservices and to offer

 

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       FAA re-certification of aircraft thatundergo overhaul. This re-certification ability represents a significantcompetitive advantage, as we can offer all the products and services requiredto re-commission an aircraft in a timely and cost efficient manner. We believewe have developed the most comprehensive offering in retrofitting aircraft withauxiliary fuel tanks in the industry.

 

•                    *Target Development of Specialty Products and ServicesRelating to FAA Mandates.* Consistent with its first strategic imperative, our Systems IntegrationGroup is also growing its capabilities in providing solution “kits” in responseto FAA mandated aircraft upgrades. For example, if the FAA mandates new firesafety measures for all aircraft, we will develop a stand-alone kit that can bequickly incorporated into an aircraft to ensure compliance with minimaldowntime. Our Systems Integration Group has demonstrated the ability toidentify and quickly respond to probable new FAA mandates.

***Products and Services***

Our Systems Integration Group provides auxiliary fueltanks, auxiliary power units and system integration services, includingengineering, kit manufacturing, installation and certification. Customersinclude Boeing Business Jet, Bombardier, Cessna, Gulfstream, Raytheon andRockwell Collins. Approximately 61% of our Systems Integration Group’s revenuesin 2001 were from Boeing. The products and services we provide are describedbelow.

*Auxiliary Fuel Systems and PowerUnits.*  We design, engineer, manufacture and installauxiliary fuel tanks for corporate and commercial aircraft. Our unique designand tank construction have made us a leader in the auxiliary fuel tank market.We also manufacture auxiliary power units, which provide ground power tocorporate jets made by Bombardier, Cessna, Gulfstream, Learjet and Raytheon.

*Cabin and Flight Deck SystemsIntegration.*  We have designed and patented avionicssupport structures we sell under the Box-MountTM name. These structures are usedto support and environmentally cool avionics equipment, including navigation,communication and flight control equipment. These support structures are soldto aircraft and related electronics manufacturers, airlines and majormodification centers. In addition, these products are essential components ofthe installation kits used in our systems integration operations.

*Aircraft Modification Services. *Through our Boeing-approved Boeing Business JetService Center, we provide extensive modification and integration services tothe corporate aircraft market.

*Retrofit and Refurbishment Services.* We also provide retrofit and refurbishment services, includingengineering, kit manufacturing, installation and certification, to bothcommercial and corporate aircraft customers.

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***7***

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***Competition***

The markets served by our Systems Integration Groupare fragmented with several competitors offering similar products and services.Due to the global nature of the aerospace industry, competition comes from bothU.S. and foreign companies. Our Systems Integration Group generally facescompetition from a group of smaller companies and enterprises, except for thecorporate aircraft manufacturers and independent completion centers. Ourprincipal competitors are summarized below.

 
| *Auxiliary Fuel Systems and Power  Units*   | *Cabin and Flight Deck Systems  Integration and*                   |
|---------------------------------------------|--------------------------------------------------------------------|
| •   Marshalls                     | *Retrofit and Refurbishment  Services*                             |
| •   Pfalz Flugewerke (Germany)    | •   ARINC                                                |
|                                        | •   Aviation Sales                                       |
|                                        | •   Boeing Aircraft Services                             |
| *Auxiliary Power Units (Integration  Only)* | •   Flight Structures                                    |
| •   Honeywell                     | •   In-house engineering departments of                  |
| •   Sundstrand                    |         commercial airlines          |
|                                        | •   Numerous independent airframe                        |
|                                        |         maintenance and modification |
| *Aircraft Modification Services*            |         companies                    |
| •   Associated Air Center         |                                                               |
| •   Jet Aviation                  |                                                               |
| •   Lufthansa                     |                                                               |

**Other Information**

**Acquisitions**

***Companies Acquired by DeCrane Aircraft***

During the five years ended December 31, 2001, DeCraneAircraft has acquired the stock or assets of nine significant businesses, assuch term is defined by Securities and Exchange Commission rules. Theseacquisitions are summarized below.

 
| **Year Acquired**            |   | **Group / Company Acquired**     |   | **Principal Products and Services at Acquisition Date** |
|------------------------------|--------|----------------------------------|--------|---------------------------------------------------------|
| *Cabin  Management Group*    |   |                             |
| 1997                         |   | Audio International (1)          |   | Cabin management and entertainment systems              |
| 1999                         |   | Precision Pattern (1)            |   | Aircraft furniture components                           |
| 1999                         |   | Custom Woodwork and Plastics (2) |   | Aircraft furniture components                           |
| 1999                         |   | PCI NewCo (2)                    |   | Composite material components                           |
| 1999                         |   | The Infinity Partners (2)        |   | Aircraft furniture components                           |
| 2000                         |   | Carl F. Booth & Co. (2)      |   | Wood veneer panels for aircraft interior cabinetry      |
| 2000                         |   | ERDA (1)                         |   | Aircraft seats                                          |
|                         |   |                             |   |                                                    |
| *Specialty  Avionics Group*  |   |                             |
| 1998                         |   | Avtech (1)                       |   | Cockpit audio, lighting, power and control              |
|                         |   |                             |   |                                                    |
| *Systems  Integration Group* |   |                             |
| 1999                         |   | PATS (1)                         |   | Auxiliary fuel and power systems                        |

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(1)                      Acquired stock.

(2)                      Acquired assets, subject to liabilitiesassumed.

Audio International, based in Arkansas, was acquiredduring 1997 for $24.7 million plus $6.0 million of contingent considerationthat was paid during the two years following its acquisition.  The

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contingent considerationwas payable upon attainment of defined performance criteria. Avtech, based inWashington, was acquired during 1998 for $84.7 million. Our 1999 and 2000acquisitions are described in Note 3 accompanying our financial statementsincluded in this report.

All of the acquisitions were accounted for aspurchases. We intend to use the acquired assets to manufacture products similarto those previously manufactured by the companies prior to their acquisition.Our financial statements reflect the acquired companies subsequent to theirrespective acquisition dates.

***DeCrane Holdings’ Acquisition of DeCrane Aircraft***

DeCrane Holdings Co. and DLJ Merchant Banking PartnersII, L.P. and affiliated entities acquired all of the stock of DeCrane Aircraftin August 1998 for $186.3 million. This acquisition is referred to in thisreport as the DLJ acquisition. As a result, DeCrane Aircraft is the predecessorof DeCrane Holdings.

In November 2000, Credit Suisse First Boston, Inc.acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ MerchantBanking Partners II, L.P. and other entities affiliated with Donaldson Lufkin& Jenrette, Inc. became indirect affiliates of Credit Suisse First Boston,Inc and Credit Suisse Group. The combined operations of the DLJ entities andCredit Suisse First Boston are commonly referred to collectively as CreditSuisse First Boston. See “Item 13. Certain Relationships and RelatedTransactions—Acquisition of Donaldson, Lufkin & Jenrette, Inc. by CreditSuisse Group” for additional information.

**Customers**

We estimate that in 2001, we sold our products andservices to approximately 1,500 customers. Our primary customers includemanufacturers of aircraft and related avionics equipment, airlines, aircraftcomponent manufacturers and distributors, and aircraft repair and modificationcompanies. Each of the following customers accounted for 10% or more of ourconsolidated revenues for the year ended December 31, 2001:

 
| **Significant  Customers**         |   | **Cabin  Management**

**Group** | ** ** | **Specialty Avionics**

**Group** | ** ** | **Systems****Integration**

**Group** | ** ** | **Consolidated****Total (1** | **)**  |
|------------------------------------|--------|----------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|------------------------------|--------|
| Percent of  consolidated revenues: |   |                             |       |                              |       |                                  |       |                         |   |
| Boeing (2)                         |   | 0.8                              | %          | 6.7                               | %          | 10.3                                  | %          | 17.8                         | %      |
| Bombardier                         |   | 12.7                             |       | 1.5                               |       | 1.4                                   |       | 15.6                         |   |
| Textron (3)                        |   | 14.0                             |       | 0.7                               |       | —                                |       | 14.7                         |   |
| Consolidated  revenues             |   | 27.5                             | %          | 8.9                               | %          | 11.7                                  | %          | 48.1                         | %      |
|                               |   |                             |       |                              |       |                                  |       |                         |   |
| Percent of group  revenues (4):    |   |                             |       |                              |       |                                  |       |                         |   |
| Boeing (2)                         |   | 1.4                              | %          | 21.6                              | %          | 60.9                                  | %          |                         |   |
| Bombardier                         |   | 24.4                             |       | 4.9                               |       | 7.9                                   |       |                         |   |
| Textron (3)                        |   | 27.0                             |       | 2.2                               |       | —                                |       |                         |   |
| Consolidated  revenues             |   | 52.8                             | %          | 28.7                              | %          | 68.8                                  | %          |                         |   |

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(1)                      Historical data for the three years endedDecember 31, 2001 is presented in Note 16 accompanying our financial statementsincluded in this report.

(2)                      Reflects only our direct revenues fromBoeing. Excludes revenues from components our Specialty Avionics Group providesindirectly to Boeing through its sales to other Boeing suppliers. Our SystemsIntegration Group’s revenues from Boeing result from auxiliary fuel tanksystems for the Boeing Business Jet.

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(3)                      Includes Cessna.

(4)                      Inter-group revenues are eliminatedagainst the group originating the sale.

Complete loss of any of the customers identified abovecould have a significant adverse impact on our results of operations expectedin future periods.

Significant portions of our revenues from our majorcustomers are pursuant to contracts that may include a variety of termsfavorable to the customer. Such terms may include our agreement to one or moreof the following:

 

•                    the customeris not required to make purchases, and may terminate such contracts at anytime;

 

•                    we makesubstantial expenditures to develop products for customers that we may notrecoup if we do not receive sufficient orders;

 

•                    on aprospective basis, we must extend to the customers any reductions in prices orlead times that we provide to other customers;

 

•                    we must matchother suppliers’ price reductions or delete the affected products from thecontract; and

 

•                    we must grantirrevocable non-exclusive worldwide licenses to use our designs, tooling andother intellectual property rights to products sold to a customer if wedefault, or suffer a bankruptcy filing, or transfer our manufacturing rights toa third party.

**Backlog**

As of December 31, 2001, we had an aggregate salesorder backlog of $149.9 million compared to $178.3 million as of December 31,2000, as follows:
|                       |   | **December 31,**   |    |
|----------------------------|--------|--------------------|---------|
|                       |   | **2001**           |    | **2000** |   |
|                       |   | **(in thousands)** |    |
| Cabin Management  Group    |   | $                  | 43,653  |   | $ | 53,383 |   |
| Specialty  Avionics Group  |   | 50,410             |    | 59,467 |   |
| Systems  Integration Group |   | 55,865             |    | 65,447 |   |
| Consolidated  totals       |   | $                  | 149,928 |   | $ | 178,297 |   |

Orders are usually filled within twelve months;however, backlog totaling $20.7 million as of December 31, 2001 is scheduledfor delivery in 2003 and beyond. Orders may be subject to cancellation by thecustomer prior to shipment. The level of unfilled orders at any given date willbe materially affected by when we receive orders and how fast we fill them.Period-to-period comparisons of backlog figures may not be meaningful. For thatreason, our backlogs do not necessarily accurately predict actual shipments orsales for any future period.

As described in “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Industry Overview andTrends,” the September 11th terrorist attack is having an adverseimpact on the aerospace industry and, in turn, is having an unfavorable impacton the commercial airline portion of our business. In addition, the weakeningof global economic conditions has negatively impacted other portions of ourbusiness as well. We are not currently able to determine the continuing impactthese events will have on our bookings and resulting backlog for futureperiods. However, given the magnitude of these events, the impact could bematerial.

 

10

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**Employees**

As of December 31, 2001, we had 2,647 employees: 1,416in our Cabin Management Group; 876 in our Specialty Avionics Group; 342 in ourSystems Integration Group; and 13 in our corporate office. None of ouremployees is subject to a collective bargaining agreement, and we have notexperienced any material business interruption as a result of labor disputes.We believe that we generally have a good relationship with our employees.

**Research and Development**

We continually evaluate opportunities to improve ourproduct offerings and develop new products that incorporate new technologies tomeet the demands of our customers and the FAA. Total expenditures were $3.7million for the year ended December 31, 2001, $4.6 million during the yearended December 31, 2000 and $4.3 million during the year ended December31, 1999.

**Financial Information About Geographic Areas**

Financial information about our revenues and assets bygeographic area are included in Note 16 accompanying our financial statementsincluded in this report.

**Seasonality**

Our businesses are not seasonal in nature.

**Sales and Marketing**

Our Cabin Management Group has designated relationshipmanagers who are responsible for maintaining and cultivating relationships withcustomers. In addition, a dedicated sales force is utilized for some of ourproducts.

Our Specialty Avionics Group has a dedicated salesforce, which cooperates with distributors and independent sales representativesto execute its sales and marketing strategy. We have distributors thatpurchase, stock and resell several of our product lines.

Our Systems Integration Group has a dedicated salesforce that handles most of its sales activities.

We are continuously seeking opportunities to combineour sales efforts across the operating groups in order to ensure that all salesopportunities are explored and that we maximize our revenue content per plane.We may also assign marketing and sales responsibilities for key customers toone of our senior corporate executives.

**Raw Materials and Component Parts**

The components we manufacture require the use ofvarious raw materials including gold, aluminum, copper, rhodium, platingchemicals, LCD glass, hardwoods and plastics. The availability and prices ofthese materials may fluctuate. The cost of such raw materials is a significantcomponent in, and part of, the sales price of many of our products. Althoughsome of our contracts have prices tied to raw materials prices, we cannotalways recover increases in raw materials prices in our product sale prices. Wealso purchase a variety of manufactured sub-component parts from varioussuppliers. Raw materials and component parts are generally available frommultiple suppliers at competitive prices. However, any delay in our ability toobtain necessary raw materials and component parts may affect our ability tomeet customer production needs.

 

11

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**Electrical Energy**

Some of our facilities within our Specialty Avionicsand Systems Integration Groups, as well as our corporate headquarters, arelocated in California. These California-based facilities provided approximately18% of our consolidated revenues during 2001. During 2000 and 2001, Californiaexperienced temporary electrical power shortages, which resulted in “rollingblackouts” and curtailment of power for some of our facilities with“interruptible” supply agreements with their providers. To date, powershortages have not caused any significant disruptions to our operations,however, prolonged or frequent blackouts could cause disruptions to ouroperations and the operations of our suppliers and customers. We are uninsuredfor losses and interruptions caused by power outages.

**Intellectual Property and Proprietary Information**

We have various trade secrets, proprietaryinformation, trademarks, tradenames, patents, copyrights and other intellectualproperty rights we believe are important to our business in the aggregate, butnot individually.

**Government Regulation**

***Federal Aviation Administration***

The aerospace industry is highly regulated in theUnited States by the Federal Aviation Administration and in other countries bysimilar agencies to ensure that aviation products and services meet stringentsafety and performance standards. In addition, many of our customers imposetheir own compliance and quality requirements on us. The FAA prescribesstandards and licensing requirements for aircraft components, issues designatedalteration station authorizations, and licenses private repair stations. Wehold various FAA approvals and licenses, which may only be used by oursubsidiary obtaining such approval. If material FAA or customer authorizationsor approvals were revoked or suspended, our operations could be adverselyaffected.

The FAA can authorize or deny authorization of many ofthe services and products we provide. Any such denial would preclude ourability to provide the pertinent service or product. If we failed to complywith applicable FAA standards or regulations, the FAA could exercise a widerange of remedies, including a warning letter, a letter of correction, a civilpenalty action, and emergency or non-emergency suspension or revocation of acertificate or approval.

Each type of aircraft operated by airlines in theUnited States must possess an FAA type certificate, generally held by theaircraft manufacturer, indicating that the type design meets applicableairworthiness standards. When someone else develops a major modification to anaircraft already type-certificated, that person must obtain an FAA-issuedSupplemental Type Certificate for the modification. Historically, we haveobtained several hundred of these Supplemental Type Certificates, most of whichwe obtained on behalf of our customers as part of our systems integrationservices. Some of these certificates we obtain were or eventually will betransferred to our customers. As of December 31, 2001, we own and/or manage onbehalf of our customers approximately 290 Supplemental Type Certificates. Manyare multi-aircraft certificates, which apply to all of the aircraft of a singletype. We foresee the need to obtain additional Supplemental Type Certificatesso that we can expand the services we provide and the customers we serve.

Supplemental Type Certificates can be issued forproposed aircraft modifications directly by the FAA, or on behalf of the FAA bya Designated Alteration Station. The FAA designates what types of SupplementalType Certificates can be issued by each Designated Alteration Station. Asubsidiary within our Systems Integration Group is an FAA-authorized DesignatedAlteration Station and can directly issue

 

12

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many of the SupplementalType Certificates our customers and we require for our systems integrationoperations.

After obtaining a Supplemental Type Certificate, amanufacturer must apply for a Parts Manufacturer Approval from the FAA, or asupplement to an existing Parts Manufacturer Approval, which permits the holderto manufacture and sell installation kits according to the approved design anddata package. We have nine Parts Manufacturer Approvals and over 235supplements to those approvals. In general, each initial Parts ManufacturerApproval is an approval of a manufacturing or modification facility’sproduction quality control system. Each Parts Manufacturer Approval supplementauthorizes the manufacture of a particular part in accordance with therequirements of the corresponding Supplemental Type Certificate. We routinelyapply for and receive such Parts Manufacturer Approval supplements. In order toperform the actual installations of a modification, we are also required tohave FAA approval. This authority is contained either in our Parts ManufacturerApprovals and related supplements, or in our repair station certificates. Inorder for a company to perform most kinds of repair, engineering, installationor other services on aircraft, its facility must be designated as anFAA-authorized repair station. As of December 31, 2001, we had ten authorizedrepair stations and employ over 125 FAA certified representatives.

***Occupational Safety and Health Administration***

Our manufacturing operations in the United States aresubject to a variety of worker and community safety laws. The OccupationalSafety and Health Act of 1970 mandates general requirements for safe workplacesfor all employees. In addition, OSHA provides special procedures and measuresfor the handling of hazardous and toxic substances. Specific safety standardshave been promulgated for workplaces engaged in the treatment, disposal orstorage of hazardous waste. We believe that our operations are in materialcompliance with OSHA’s health and safety requirements.

**Environmental Matters**

Our facilities and operations are subject to variousfederal, state, local, and foreign environmental laws and regulations,including those relating to discharges to air, water, and land, the handlingand disposal of solid and hazardous waste, and the cleanup of propertiesaffected by hazardous substances. In addition, some environmental laws, such asthe federal Comprehensive Environmental Response, Compensation and LiabilityAct, as amended (“CERCLA”) and similar state laws, impose strict liability uponpersons responsible for releases or potential releases of hazardous substances.That liability generally is retroactive, and may create “joint and several”liability among multiple parties who have some relationship to a site or asource of waste. We have sent waste to treatment, storage, or disposalfacilities that have been designated as National Priority List sites underCERCLA or equivalent listings under state laws. We have received CERCLArequests for information or allegations of potential responsibility from the EnvironmentalProtection Agency regarding our use of several of those sites. In addition,some of our operations are located on properties that are contaminated tovarying degrees.

We have not incurred, nor do we expect to incur,liabilities in any significant amount as a result of the foregoing matters,because in these cases other entities have been held primarily responsible, thelevels of contamination are sufficiently low so as not to require remediation,or we are indemnified against such costs. In most cases, we do not believe thatwe have any material liability for past waste disposal. However, in a fewcases, we do not have sufficient information to assess our potential liability,if any. It is possible, given the potentially retroactive nature of environmentalliability that we will receive additional notices of potential liabilityrelating to current or former activities.

Some of our manufacturing processes create wastewaterthat requires chemical treatment, and one of our facilities was cited for excessivequantity and strength of its wastewater. The costs associated with remedyingthat failure have not been material.

 

13

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We believe that we have been and are in substantialcompliance with environmental laws and regulations and that we have noliabilities under environmental laws and regulations, except for liabilitieswhich we do not expect would likely have a material adverse effect on ourbusiness, financial position, results of operations or cash flows. However,some risk of environmental liability is inherent in the nature of our business,and we might in the future incur material costs to meet current or morestringent compliance, cleanup, or other obligations pursuant to environmentallaws and regulations.

**ITEM 2.**                                         PROPERTIES

We operate in a number of manufacturing, engineeringand office facilities in the United States and abroad. At December 31, 2001, weutilized approximately 1.3 million square feet of floor space, approximately95% of which is located in the United States. We believe that our facilitiesare in good condition and are adequate to support our operations for theforeseeable future. Our operating groups’ facilities at December 31, 2001are summarized below.
|                            |   | **Leased**                        |   | **Owned** |   | **Total** |   |
|---------------------------------|--------|-----------------------------------|--------|-----------|--------|-----------|--------|
|                            |   | **(in thousands of square feet)** |   |
| Cabin Management Group (1)      |   | 544                               |   | 276       |   | 820       |   |
| Specialty Avionics Group        |   | 164                               |   | 80        |   | 244       |   |
| Systems Integration Group       |   | 106                               |   | 150       |   | 256       |   |
| Corporate                       |   | 8                                 |   | —    |   | 8         |   |
| Total in use                    |   | 822                               |   | 506       |   | 1,328     |   |
|                            |   |                              |   |      |   |      |   |
| Not in use, subleased to others |   | 92                                |   | 38        |   | 130       |   |
| Total                           |   | 914                               |   | 544       |   | 1,458     |   |

----

(1)                      Includes 91,328 square feet pertaining toan owned manufacturing facility we are idling for an indefinite period and29,700 square feet pertaining to a leased manufacturing facility we arepermanently closing in 2002. See “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations—Restructuring and AssetImpairment Charges” for additional information.

**ITEM 3.**                                         LEGAL PROCEEDINGS

As part of its investigation of the crash off theCanadian coast on September 2, 1998 of Swissair Flight 111, the CanadianTransportation Safety Board (“TSB”) notified us that they recovered burned wirethat was attached to the in-flight entertainment system installed on some of Swissair’saircraft by one of our subsidiaries. We are fully cooperating with the ongoingTSB investigation. Although the TSB has not issued a final report, it hasadvised us that it has no evidence to date that the system we installedmalfunctioned or failed during the flight. Families of the 229 persons who diedaboard the flight have filed actions in federal and state courts against us,and many other parties unaffiliated with us, including Swissair and Boeing. Theactions claim negligence, strict liability and breach of warranty relating tothe installation and testing of the in-flight entertainment system. The actionsseek compensatory and punitive damages and costs in an unstated amount. All ofthe actions have been transferred to the United States District Court for theEastern District of Pennsylvania and assigned under MDL Case No. 1269 forcoordinated or consolidated pretrial proceedings. We intend to defend theclaims vigorously.

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

** **

**14**

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** **

**ITEM 4.**                                         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

**PART II**

**ITEM 5.**                                         MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS

**Market Information**

There is no established public trading market for ourshares. In August 1998, we purchased and canceled all of DeCrane Aircraft’sissued and outstanding shares in connection with the DLJ acquisition.

**Holders**

As of March 26, 2002, there are 35 holders of recordof our common stock.

**Dividends**

We have not paid dividends to date on our common stockand do not anticipate paying any cash dividends in the foreseeable future. Theterms of our senior credit facility and senior subordinated note indenturerestrict our ability to pay dividends if we do not meet certain financialcriteria.

**Recent Sale of Unregistered Securities**

Our recent sales of unregistered securities aredescribed in Note 11 accompanying our financial statements included in thisreport.

 

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**ITEM 6.**                                         SELECTED FINANCIAL DATA
|                                                                    |       | **Year Ended December 31, (in thousands) (1)** |       |
|-------------------------------------------------------------------------|------------|------------------------------------------------|------------|
|                                                                    |       |                                           |       |   |   |   |   | **1998** |   |   |   |
| ** **                                                              | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Four  Months Ended**

**December  31,** | ** ** | **Eight Months Ended**

**August 31,** | ** ** | ** ** |   |
|                                                                    |       | **2001**                                       | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** | **1998** | ** ** | **1997** |   |
|                                                                    |       |                                           | ** ** |   | ** ** |   | ** ** |   | ** ** | **(Predecessor)  (2)** |   |
| **Statement  of Operations Data:**                                      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                |       | $                                              | 395,352    |   | $ | 347,379 |   | $ | 244,048 |   | $ | 60,356 |   | $ | 90,077 |   | $ | 108,903 |   |
| Cost of sales (3)                                                       |       | 279,681                                        |       | 232,048 |   | 165,871 |   | 42,739 |   | 60,101 |   | 80,247 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                            |       | 115,671                                        |       | 115,331 |   | 78,177 |   | 17,617 |   | 29,976 |   | 28,656 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses (4)                       |       | 68,517                                         |       | 45,394 |   | 40,157 |   | 10,274 |   | 19,351 |   | 15,756 |   |
| Amortization of intangible assets                                       |       | 19,920                                         |       | 17,948 |   | 13,073 |   | 3,148 |   | 1,347 |   | 905 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Operating income                                                        |       | 27,234                                         |       | 51,989 |   | 24,947 |   | 4,195 |   | 9,278 |   | 11,995 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                        |       | 39,001                                         |       | 41,623 |   | 27,903 |   | 6,867 |   | 2,350 |   | 3,154 |   |
| Minority  interest in preferred stock of subsidiary (5)                 |       | 5,061                                          |       | 2,274 |   | — |   | — |   | — |   | — |   |
| Other expenses, net (6)                                                 |       | 1,047                                          |       | 482 |   | 447 |   | 335 |   | 847 |   | 243 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  before provision for income taxes and extraordinary item |       | (17,875                                        | )          | 7,610 |   | (3,403 | ) | (3,007 | ) | 6,081 |   | 8,598 |   |
| Provision for income taxes (benefit) (7)                                |       | 1,188                                          |       | 6,282 |   | 952 |   | (2,668 | ) | 2,892 |   | 3,344 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before extraordinary item                                 |       | (19,063                                        | )          | 1,328 |   | (4,355 | ) | (339 | ) | 3,189 |   | 5,254 |   |
| Extraordinary loss from debt refinancing (8)                            |       | —                                         |       | — |   | — |   | (2,229 | ) | — |   | (2,078 | ) |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                       |       | $                                              | (19,063    | ) | $ | 1,328 |   | $ | (4,355 | ) | $ | (2,568 | ) | $ | 3,189 |   | $ | 3,176 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) applicable to common stockholders                    |       | $                                              | (26,034    | ) | $ | (4,746 | ) | $ | (9,649 | ) | $ | (4,210 | ) | $ | 3,189 |   | $ | 531 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Other  Financial Data:**                                              |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows from operating activities                                    |       | $                                              | 14,929     |   | $ | 16,783 |   | $ | 15,200 |   | $ | 1,008 |   | $ | 3,014 |   | $ | 4,641 |   |
| Cash flows from investing activities                                    |       | (24,792                                        | )          | (112,164 | ) | (152,774 | ) | (186,939 | ) | (87,378 | ) | (27,809 | ) |
| Cash flows from financing activities                                    |       | 11,397                                         |       | 95,656 |   | 142,052 |   | 189,268 |   | 89,871 |   | 22,957 |   |
| EBITDA (9)                                                              |       | 88,791                                         |       | 80,992 |   | 56,526 |   | 13,476 |   | 13,743 |   | 16,915 |   |
| Depreciation and amortization (10)                                      |       | 32,376                                         |       | 27,187 |   | 19,186 |   | 4,604 |   | 4,358 |   | 4,920 |   |
| Capital expenditures:                                                   |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Paid in cash (11)                                                       |       | 11,899                                         |       | 22,689 |   | 7,262 |   | 1,813 |   | 1,745 |   | 3,842 |   |
| Financed with capital lease obligations                                 |       | 4,438                                          |       | 109 |   | 1,711 |   | 48 |   | 116 |   | 182 |   |
|                                                                    |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Other  Operating Data:**                                              |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Bookings (12)                                                           |       | $                                              | 366,983    |   | $ | 359,975 |   | $ | 252,100 |   | $ | 54,021 |   | $ | 94,439 |   | $ | 112,082 |   |
| Backlog at end of period (13)                                           |       | 149,928                                        |       | 178,297 |   | 156,100 |   | 75,388 |   | 84,184 |   | 49,005 |   |

 

 
|                                   |   | **As of December 31, (in thousands) (1)** |   |
|----------------------------------------|--------|-------------------------------------------|--------|
|                                   |   | **2001**                                  |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                   |   |                                      |   |   |   |   |   |   |   | **(Predecessor)****(2)** |   |
| **Balance  Sheet Data:**               |   |                                      |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents              |   | $                                         | 9,794  |   | $ | 8,199 |   | $ | 7,918 |   | $ | 3,518 |   | $ | 206 |   |
| Working capital                        |   | 81,656                                    |   | 61,398 |   | 32,412 |   | 49,277 |   | 24,772 |   |
| Total assets                           |   | 645,711                                   |   | 664,254 |   | 531,842 |   | 330,575 |   | 99,137 |   |
| Total debt (14)                        |   | 400,250                                   |   | 383,279 |   | 315,651 |   | 186,765 |   | 38,838 |   |
| Mandatorily redeemable securities (15) |   | 82,463                                    |   | 70,431 |   | 41,178 |   | 35,884 |   | — |   |
| Stockholders’ equity              |   | 46,153                                    |   | 72,503 |   | 65,063 |   | 61,879 |   | 39,527 |   |
|                                        |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying Notes toSelected Consolidated Financial Data.

 

16

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**Notes to Selected ConsolidatedFinancial Data:**

(1)                      Reflects the results of operations andfinancial position of companies we acquired for all periods subsequent to theirrespective acquisition dates as follows:
| **Company  Acquired**                        |   | **Date  Acquired** |   |
|----------------------------------------------|--------|--------------------|--------|
| •  Coltech                         |   | August 31, 2000    |   |
| •  ERDA                            |   | June 30, 2000      |   |
| •  Carl F.  Booth & Co.        |   | May 11, 2000       |   |
| •  Infinity                        |   | December 17, 1999  |   |
| •   International Custom Interiors |   | October 8, 1999    |   |
| •  PCI NewCo                       |   | October 6, 1999    |   |
| •  Custom  Woodwork                |   | August 5, 1999     |   |
| •  Precision  Pattern              |   | April 23, 1999     |   |
| •  PATS                            |   | January 22, 1999   |   |
| •  Dettmers                        |   | June 30, 1998      |   |
| •  Avtech                          |   | June 26, 1998      |   |
| •  Audio  International            |   | November 14, 1997  |   |

(2)                      Reflects DeCrane Aircraft’s results ofoperations and financial position prior to (predecessor) the DLJ acquisition.

(3)                      Includes charges to reflect:

 

•                    a noncashinventory write-down of $4.2 million, a noncash write-off of $7.9 million ofproduct development costs and charges totaling $3.9 million for the realignmentof production programs between facilities during the twelve months endedDecember 31, 2001 related to our restructuring;

 

•                    a noncashinventory write-down of $6.0 million during the twelve months ended December31, 1999 related to our Systems Integration Group restructuring; and

 

•                    cost of salesbased on the fair value of inventory acquired of $1.6 million during the twelvemonths ended December 31, 1999 in connection with the Precision Pattern andCustom Woodworks acquisitions and $4.4 million during the four months endedDecember 31, 1998 in connection with the DLJ acquisition, collectively referredto as noncash acquisition charges.

(4)                      Includes charges of:

 

•                    $12.6 millionduring the year ended December 31, 2001 related to restructuring and assetimpairment charges, $9.9 million of which was a noncash asset impairmentwrite-down;

 

•                    $3.9 millionduring the year ended December 31, 1999 related to our Systems IntegrationGroup’s restructuring and asset impairment charges, $1.3 million of which was anoncash asset impairment write-down; and

 

•                    $3.6 millionduring the eight months ended August 31, 1998 for non-capitalized transactioncosts associated with the DLJ acquisition.

(5)                      Reflects accrued dividends and redemptionvalue accretion on DeCrane Aircraft’s 16% mandatorily redeemable preferredstock.

(6)                      For the eight months ended August 31,1998, reflects a $0.6 million charge for costs incurred in connection with adebt offering terminated as a result of the DLJ acquisition.

 

17

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(7)                      For the four months ended December 31,1998, includes a $2.6 million benefit from the reduction of the deferred taxvaluation allowance. The provision for income taxes differs from the amountdetermined by applying the applicable U.S. statutory federal rate to the incomebefore income taxes primarily due to the effects of state and foreign incometaxes and non-deductible expenses, principally goodwill amortization andminority interest in preferred stock of subsidiary. The difference in theeffective tax rates between periods is mostly a result of the relationship ofnon-deductible expenses to income before income taxes.

(8)                      Reflects the write-off, net of an incometax benefit, of:

 

•                  deferredfinancing costs as a result of the repayment of our then existing indebtednessin connection with the DLJ acquisition and the refinancing of the bridge notesduring the four months ended December 31, 1998; and

 

•                  deferredfinancing costs, unamortized original issue discounts, a prepayment penalty andother related expenses incurred as a result of the repayment of debt by DeCraneAircraft with the net proceeds from its initial public offering in April 1997.

(9)                      We define EBITDA as earnings beforeinterest, income taxes, depreciation and amortization, restructuring and assetimpairment charges, acquisition related charges and other noncash andnonoperating charges. EBITDA, as defined, is the primary measurement we use toevaluate our operating groups’ performance and is consistent with the manner inwhich our lenders and ultimate investors measure our overall performance. Areconciliation of EBITDA to consolidated operating income is as follows:
|                                              |   | **Year Ended December 31, (in thousands)** |       |
|---------------------------------------------------|--------|--------------------------------------------|------------|
|                                              |   |                                       |       |   |   |   |   | **1998** |   |   |   |
|                                              |   |                                       |       |   |   |   |   | **Four Months  Ended**

**December  31,** |   | **Eight Months**

**Ended**

**August 31,** |   |   |   |
|                                              |   | **2001**                                   | ** ** | **2000** | ** ** | **1999** | ** ** | **1998** | ** ** | **1998** |   | **1997** |   |
|                                              |   |                                       |       |   |   |   |   |   |   | **(Predecessor)** |   |
| Consolidated EBITDA                               |   | $                                          | 88,791     |   | $ | 80,992 |   | $ | 56,526 |   | $ | 13,476 |   | $ | 13,743 |   | $ | 16,915 |   |
| Depreciation and amortization                     |   | (32,376                                    | )          | (27,187 | ) | (19,186 | ) | (4,604 | ) | (4,358 | ) | (4,920 | ) |
| Restructuring and asset impairment charges        |   | (28,658                                    | )          | — |   | (9,935 | ) | — |   | — |   | — |   |
| Acquisition related charges:                      |   |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Noncash inventory related charges (Note 3)        |   | —                                     |       | — |   | (1,606 | ) | (4,448 | ) | — |   | — |   |
| Acquisition related charges not capitalized       |   | (308                                       | )          | (538 | ) | (709 | ) | (229 | ) | (107 | ) | — |   |
| Nonrecurring manufacturing facility startup costs |   | —                                     |       | (717 | ) | — |   | — |   | — |   | — |   |
| Other noncash charges                             |   | (215                                       | )          | (561 | ) | (143 | ) | — |   | — |   | — |   |
| Consolidated operating income                     |   | $                                          | 27,234     |   | $ | 51,989 |   | $ | 24,947 |   | $ | 4,195 |   | $ | 9,278 |   | $ | 11,995 |   |

EBITDA is not a measureof performance or financial condition under accounting principles generallyaccepted in the United States of America. EBITDA is not intended to representcash flow from operations and should not be considered as an alternative toincome from operations or net income computed in accordance with generallyaccepted accounting principles, as an indicator of our operating performance,as an alternative to cash flow from operating activities or as a measure ofliquidity. The funds depicted by EBITDA are not available for our discretionaryuse due to funding requirements for working capital, capital expenditures, debtservice, income taxes and other commitments and contingencies. We believe thatEBITDA is a standard measure of liquidity commonly reported and widely used byanalysts, investors and other interested parties in the financial markets.However, not all companies calculate EBITDA using the same method, and theEBITDA numbers we report may not be comparable to EBITDA reported by othercompanies.

 

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(10)                Reflects depreciation and amortization of plant andequipment, goodwill and other intangible assets. Excludes amortization of deferredfinancing costs and debt discounts that are classified as a component ofinterest expense.

(11)                Includes $5.4 million for the year ended December 31,2000 related to our acquisition of a manufacturing facility.

(12)                Bookings represent the total invoice value of purchaseorders received during the period.

(13)                Backlog represents the total invoice value of unfilledpurchase orders at the end of the period. Orders may be subject to cancellationby 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.

(14)                Total debt is defined as long-term debt, includingcurrent portion, and short-term borrowings.

(15)                Reflects DeCrane Holdings mandatorily redeemable 14%preferred stock and includes DeCrane Aircraft 16% mandatorily redeemablepreferred stock as of December 31, 2001 and 2000, which is reflected asminority interest in preferred stock of subsidiary in our consolidatedfinancial statements.

** **

**19**

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** **

**ITEM 7.**                                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

The following discussions should be read inconjunction with our financial statements and accompanying notes included inthis report.

**Overview**

Our financial position and results of operations havebeen affected by our history of acquisitions. As a result, our historicalfinancial statements do not reflect the financial position and results ofoperations of our current businesses. Our most recent acquisitions, whichaffect the comparability of the historical financial condition and results ofoperations described herein, are:

*CabinManagement Group*

•                    PrecisionPattern, acquired on April 23, 1999;

•                    CustomWoodwork, acquired on August 5, 1999;

•                    PCI NewCo,acquired on October 6, 1999;

•                    InternationalCustom Interiors, acquired on October 8, 1999;

•                    The InfinityPartners, acquired on December 17, 1999;

•                    Carl F. Booth& Co., acquired on May 11, 2000;

•                    ERDA, acquiredon June 30, 2000;

*SpecialtyAvionics Group*

•                    Coltech,acquired on August 31, 2000; and

*SystemsIntegration Group*

•                    PATS, acquiredon January 22, 1999.

Our historical financial statements reflect thefinancial position and results of operations of the acquired businessessubsequent to their respective acquisition dates.

**Industry Overview and Trends**

We compete in the aircraft products and servicesmarket of the aerospace industry. The market for our products and services islargely driven by demand in the three civil aircraft markets: commercial,regional and corporate aircraft. We provide a minimal amount of products andservices to the military aircraft market and are therefore relativelyunaffected by defense spending and other factors affecting that market.

The September 11, 2001 terrorist attack on the UnitedStates and the further weakening of global economic conditions is adverselyimpacting the commercial airline industry. As a result of the substantialreduction in airline traffic, the airline industry is expected to reportextremely large losses for the year 2001. Accordingly, most major U.S. carriershave implemented substantially reduced flight schedules, resulting in thetemporary or permanent retirement of a portion of their fleets and workforcereductions aggregating over 100,000 employees. The airlines also appear to betaking measures to conserve cash by deferring or eliminating the purchase ofparts and components for their aircraft and by canceling or deferring thedelivery of new aircraft on order with original equipment manufacturers. Theseactions, in turn, are having an unfavorable impact upon that portion of ourbusiness. The commercial and regional original equipment andaftermarket/retrofit portions of our business are currently estimated atapproximately 31% of our revenues.

In addition, an estimated 60% of our revenues arecurrently derived from the corporate aircraft original equipment andaftermarket/retrofit business. The weakening of global economic conditions has

20

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negatively impacted thisportion of our business as well, although not a severely as the commercialmarket. The remaining 9% of our revenues are derived from the military aircraftand other markets.

In response to theseadverse conditions, we announced and implemented a restructuring plan inDecember 2001 designed to reduce expenses and conserve working capital. Thisplan includes permanently closing one manufacturing facility and idling asecond facility for an indefinite period, curtailing several productdevelopment programs and instituting workforce reductions. In lateFebruary 2002, we also announced we would consolidate the production oftwo Cabin Management manufacturing facilities into a single facility, resultingin the permanent closure of one additional facility. See “—Restructuring andAsset Impairment Charges” below for additional information.

We believe the commercial aircraft portion of ourbusiness will experience significant weakness during 2002 and 2003, withpotential recovery occurring during 2004 and continuing into 2005. We alsobelieve the corporate aircraft portion of our business will experience slightweakness during 2002 with aircraft deliveries recovering in 2003 and continuinggrowth thereafter.

**Results of Operations**

**Year Ended December 31, 2001 Compared to Year EndedDecember 31, 2000**

**Revenues.* ***Revenues increased $48.0 million, or13.8%, to $395.4 million for the year ended December 31, 2001 from $347.4 millionfor the year ended December 31, 2000. By segment, revenues changed as follows:
| ** **               |   | **Increase (Decrease)****From 2000** |   |
|--------------------------|--------|--------------------------------------|--------|
|                     |   | **Amount**                           |   | **Percent** |   |
|                     |   | **(in  millions)**                   |   |   |   |
| Cabin Management         |   | $                                    | 31.3   |   | 17.9 | % |
| Specialty  Avionics      |   | 12.3                                 |   | 11.1 |   |
| Systems  Integration     |   | 4.6                                  |   | 7.2 |   |
| Inter-group  elimination |   | (0.2                                 | )      |   |   |
| Total                    |   | $                                    | 48.0   |   |   |   |

*Cabin Management. *Revenues increased by $31.3 million, or 17.9% over theprior year, due to:

 

•                    the inclusionof $23.8 million of revenues resulting from our acquisitions of Carl F. Booth& Co. and ERDA in 2000; and

 

•                    a $7.5 millionincrease in cabin furniture and related products revenues.

*SpecialtyAvionics.*  Revenues increased by $12.3 million, or11.1% over the prior year, due to:

 

•                    a $8.5 millionincrease in cockpit audio, communications, lighting and power and controldevices revenues; and

 

•                    a $3.8 millionrevenue increase resulting from higher volume for our interconnect products.

*Systems Integration.* Revenues increased by $4.6 million, or 7.2% over the prior year, due to:

 

•                    a $9.3 millionincrease in auxiliary fuel tank system and power unit revenues; offset by

 

•                    a $4.7 milliondecrease in cabin and flight deck systems integration revenues resulting fromreducing the number of product offerings to focus on our core product lines.

 

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**Grossprofit.**  Gross profit increased $0.3 million, or0.3%, to $115.7 million for the year ended December 31, 2001. Gross profit forthe year ended December 31, 2001 is reduced by $16.1 million of restructuringcharges, $12.2 million of which are noncash charges, relating to our 2001restructuring. Excluding these restructuring charges, gross profit increased$16.4 million over the prior year and gross profit as a percent of revenues of33.3% for the year ended December 31, 2001 is comparable to 33.2% for the sameperiod last year. By segment, gross profit changed as follows:
| ** **               |   | **Increase (Decrease)****From 2000** |   |
|--------------------------|--------|--------------------------------------|--------|
|                     |   | **Amount**                           |   | **Percent** |   |
|                     |   | **(in  millions)**                   |   |   |   |
| Cabin Management         |   | $                                    | (9.5   | ) | (15.9% | ) |
| Specialty Avionics       |   | 6.5                                  |   | 19.0 |   |
| Systems  Integration     |   | 3.5                                  |   | 15.7 |   |
| Inter-group  elimination |   | (0.2                                 | )      |   |   |
| Total                    |   | $                                    | 0.3    |   |   |   |

*Cabin Management.* Gross profit decreased by $9.5 million, or 15.9% compared to prior year,primarily due to:

 

•                    a $13.6million decrease caused by 2001 restructuring charges relating to thecurtailment and resulting write-off of inventoried costs for several productdevelopment programs, realignment of production programs between facilities andinventory write-downs, and

 

•                    a $4.3 milliondecrease in profit margins associated with higher manufacturing costs forcorporate aircraft furniture related to large airframe models; offset by

 

•                    a $7.1 millionincrease in gross profit related to our 2000 acquisitions; and

 

•                    a $1.3 millionincrease in gross profit related to higher product volume for corporateaircraft furniture.

*Specialty Avionics.* Gross profit increased by $6.5 million, or 19.0% over the prior year,due to:

 

•                    a $4.6 millionincrease related to higher volume for our cockpit audio, communications,lighting and power and control devices products; and

 

•                    a $4.4 millionincrease related to a shift in product mix to items with higher margins; offsetby

 

•                    a $2.5 milliondecrease caused by 2001 restructuring charges relating to excess inventorywrite–downs.

*Systems Integration.* Gross profit increased by $3.5 million, or 15.7% over the prior year,due to:

 

•                    a $3.1 millionincrease due to higher auxiliary fuel tank systems volume and favorablemanufacturing efficiencies; and

 

•                    a $1.2 millionincrease resulting, in part, from improved operating results subsequent to ourfourth quarter 1999 restructuring; offset by

 

•                    a $0.8 milliondecrease resulting from lower cabin and flight deck systems integrationservices volume.

 

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**Selling,general and administrative expenses.**  Selling,general and administrative expenses increased $23.1 million, or 50.9%, to $68.5million for the year ended December 31, 2001, from $45.4 million for the sameperiod last year. SG&A expenses for the year ended December 31, 2001includes $12.6 million of restructuring and asset impairment charges, $9.9million of which are noncash charges. Excluding these restructuring and assetimpairment charges, SG&A expenses increased $10.5 million over the prioryear and SG&A expenses as a percent of revenues increased to 14.1% for theyear ended December 31, 2001 compared to 13.1% for the same period lastyear. By segment, SG&A expenses changed as follows:
|                 |   | **Increase (Decrease)** |   |
|----------------------|--------|-------------------------|--------|
|                 |   | **From 2000**           |   |
|                 |   | **Amount**              |   | **Percent** |   |
|                 |   | **(in  millions)**      |   |   |   |
| Cabin Management     |   | $                       | 15.4   |   | 97.1 | % |
| Specialty  Avionics  |   | 2.5                     |   | 20.4 |   |
| Systems  Integration |   | 4.6                     |   | 52.4 |   |
| Corporate            |   | 0.6                     |   | 7.6 |   |
| Total                |   | $                       | 23.1   |   |   |   |

*Cabin Management. *SG&A expenses increased by $15.4 million, or 97.1%over the prior year, due to:

 

•                    a $8.7 millionincrease caused by 2001 restructuring and asset impairment charges relating tothe impairment of long–lived assets, severance, lease termination andother related costs;

 

•                    a $3.6 millionincrease in expenses to support increased production and new programs; and

 

•                    a $3.1 millionincrease in expenses resulting from our 2000 acquisitions.

*Specialty Avionics.* SG&A expenses increased by $2.5 million, or 20.4% over the prioryear, due to:

 

•                    a $2.1 millionincrease in labor and employee benefit costs in support of revenue growth; and

 

•                    a $0.4 millionincrease caused by 2001 restructuring charges relating to severance and otherrelated compensation costs.

*Systems Integration. *SG&A expenses increased by $4.6 million, or 52.4%over the prior year, due to:

 

•                    a $3.5 millionincrease caused by 2001 charges relating to the impairment of long–livedassets; and

 

•                    a $1.1 millionincrease in expenses associated with refocusing our cabin and flight decksystems integration services to product offerings requiring higher levels ofsales and marketing, program management and customer service support.

*Corporate. *SG&Aexpenses increased by $.6 million, or 7.6% over the prior year, primarily dueto increased depreciation expense.

**Depreciation and amortization ofintangibles.**  Depreciation and amortization expense, whichincludes amortization of goodwill and identifiable intangible assets, increased$5.2 million, or 19.1%, for the year ended December 31, 2001. The increaseresults from the inclusion of $2.2 million of depreciation and amortizationexpense in 2001 from companies we acquired during 2000 and additionaldepreciation resulting from our capital expenditures during the period.

 

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**EBITDA and Operating income.** EBITDA increased $7.8 million to $88.8 million, or 9.6%, for the yearended December 31, 2001, from $81.0 million for the same period last year.EBITDA as a percent of revenues decreased to 22.5% for the year ended December31, 2001, from 23.3% for the same period last year.

Operating income decreased $24.8 million to $27.2million for the year ended December 31, 2001, from $52.0 million for thesame period last year. Operating income for the year ended December 31, 2001 isreduced by $28.7 million of restructuring and asset impairment charges, $22.1million of which are noncash charges. Excluding these restructuring and assetimpairment charges, operating income increased $3.9 million, or 7.5%, over theprior year.

EBITDA and operating income changed as follows:
|                                           |   | **Increase (Decrease)** |   |
|------------------------------------------------|--------|-------------------------|--------|
|                                           |   | **From 2000**           |   |
|                                           |   | **Amount**              |   | **Percent** |   |
|                                           |   | **(in  millions)**      |   |   |   |
| EBITDA                                         |   |                    |   |   |   |
| Cabin Management                               |   | $                       | (0.5   | ) | (1.1% | ) |
| Specialty  Avionics                            |   | 6.6                     |   | 24.6 |   |
| Systems  Integration                           |   | 2.1                     |   | 14.1 |   |
| Corporate                                      |   | (0.2                    | )      | (2.2 | ) |
| Inter-group  elimination                       |   | (0.2                    | )      |   |   |
| Total EBITDA                                   |   | 7.8                     |   |   |   |
|                                           |   |                    |   |   |   |
| Restructuring  and asset impairment charges    |   | (28.7                   | )      |   |   |
| Depreciation and  amortization                 |   | (5.2                    | )      |   |   |
| Other noncash  and acquisition related charges |   | 1.3                     |   |   |   |
| Total operating  income                        |   | $                       | (24.8  | ) |   |   |

*Cabin Management.* EBITDA decreased by $0.5 million, or 1.1% compared to the prior year,primarily due to:

 

•                    a $5.5 milliondecrease primarily resulting from higher manufacturing costs for corporateaircraft furniture related to the large airframe models; offset by

 

•                    a $5.0 millionincrease resulting from our 2000 acquisitions.

*Specialty Avionics.* EBITDA increased by $6.6 million, or 24.6% over the prior year, due tohigher demand for our commercial aircraft products prior to the September 11thterrorist attack.

*Systems Integration. *EBITDA increased by $2.1 million, or 14.1% over theprior year, due principally to higher auxiliary fuel tank systems revenues andfavorable manufacturing efficiencies.

**Interest expense.** Interest expense was $39.0 million for the year ended December 31,2001 compared to $41.6 million for the year ended December 31, 2000, areduction of $2.6 million due to the following:

 

•                    a $4.4 milliondecrease resulting from lower average interest rates charged by our lendersduring 2001; offset by

 

•                    a $1.8 millionincrease resulting from higher levels of indebtedness.

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**Minority interest in preferred stockof subsidiary. **Minority interest increased $2.8 millionto $5.1 million for the year ended December 31, 2001 compared to $2.3 millionfor the same period last year. Minority interest reflects the accrued dividendsand redemption value accretion during the periods on DeCrane Aircrafts’ 16%preferred stock issued on June 30, 2000.

**Provision for income taxes.** The provision for income taxes differs from the amount determined byapplying the applicable U.S. statutory federal rate to the income before incometaxes primarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization and minorityinterest in preferred stock of subsidiary. The difference in the effective taxrates between periods is mostly a result of the relationship of non-deductibleexpenses to income before income taxes.

**Net income (loss).** Net income decreased $20.4 million to a net loss of $19.1 million forthe year ended December 31, 2001 compared to net income of $1.3million for the same period last year.

**Net loss applicable to commonstockholders.**  Net loss applicable to common stockholdersincreased $21.3 million to a net loss of $26.0 million for the year endedDecember 31, 2001 compared to a net loss of $4.7 million for the sameperiod last year. The increase in the net loss applicable to our commonstockholders is attributable to:

 

•                    a $20.4million net loss increase, which is net of a $2.8 million increase in thecharge for minority interest in preferred stock of subsidiary issued on June30, 2000; and

 

•                    a $0.9 millionincrease in noncash preferred stock dividend accretion on our 14% mandatorilyredeemable preferred stock.

**Bookings. **Bookingsincreased $7.0 million, or 1.9%, to $367.0 million for the year endedDecember 31, 2001 compared to $360.0 million for the same period lastyear. The increase in bookings for 2001 results from:

 

•                    a $22.5million increase associated with companies we acquired during 2000 that areincluded for a full year in our 2001 results; offset by

 

•                    a $15.5million decrease resulting from the adverse impact the events of September 11thand its aftermath and the weakening global economic conditions are having onour businesses.

**Backlogat end of period.**  Backlog decreased $28.4 million to $149.9million as of December 31, 2001 compared to $178.3 million as of December31, 2000. The decrease in backlog for 2001 primarily results from the adverseimpact the events of September 11th and its aftermath and theweakening global economic conditions are having on our businesses.

 

                As described in“—Industry Overview and Trends,” the September 11th terrorist attackis having an adverse impact on the aerospace industry and, in turn, is havingan unfavorable impact on the commercial airline portion of our business. Inaddition, the weakening of global economic conditions has negatively impactedother portions of our business as well. We are not currently able to determinethe continuing impact these events will have on our bookings and resultingbacklog for future periods. However, given the magnitude of these events, theimpact could be material.

** **

**25**

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** **

**Year Ended December 31,2000 Compared to Year Ended December 31, 1999**

**Revenues. **Revenuesincreased $103.3 million, or 42.3%, to $347.4 million for the year endedDecember 31, 2000 from $244.0 million for the year ended December 31, 1999. Theincrease primarily results from the inclusion of revenues in 2000 fromcompanies we acquired during 1999 and 2000. By segment, revenues changed asfollows:
|                     |   | **Increase (Decrease)** |   |
|--------------------------|--------|-------------------------|--------|
|                     |   | **From 1999**           |   |
|                     |   | **Amount**              |   | **Percent** |   |
|                     |   | **(in  millions)**      |   |   |   |
| Cabin Management         |   | $                       | 100.6  |   | 135.6 | % |
| Specialty  Avionics      |   | (1.6                    | )      | (1.4 | ) |
| Systems  Integration     |   | 4.4                     |   | 7.6 |   |
| Inter-group  elimination |   | (0.1                    | )      |   |   |
| Total                    |   | $                       | 103.3  |   |   |   |

*Cabin Management. *Revenues increased by $100.6 million, or 135.6% overthe prior year, due to:

 

•                    the inclusionof $94.1 million of revenues resulting from our acquisitions of PrecisionPattern, Custom Woodwork, PCI NewCo, International Custom Interiors andInfinity in 1999 and Carl F. Booth and ERDA in 2000; and

 

•                    a $6.5 millionincrease in entertainment and cabin management product revenues reflectingprimarily a higher volume of corporate jet production by the aircraftmanufacturers.

*Specialty Avionics.* Revenues decreased by $1.6 million, or 1.4% from the prior year, due tosomewhat lower demand for our commercial aircraft products during the first twoquarters of the year.

*Systems Integration.* Revenues increased by $4.4 million, or 7.6% over the prior year, due to:

 

•                    a $3.3 millionrevenue increase resulting from the inclusion of PATS for an entire twelvemonths during 2000; and

 

•                    a $1.1 millionincrease related to timing differences between when orders are received versusshipped.

**Gross profit.** Gross profit increased $37.2 million, or 47.5%, to $115.3 million forthe year ended December 31, 2000. The increase primarily results from theinclusion of gross profit in 2000 from companies we acquired in 1999 and 2000.Gross profit as a percent of revenues increased to 33.2% for the year ended December31, 2000 from 32.0% for the same period last year primarily as a result ofimproved Systems Integration profit margins. By segment, gross profit changedas follows:
|                     |   | **Increase (Decrease)** |   |
|--------------------------|--------|-------------------------|--------|
|                     |   | **From 1999**           |   |
|                     |   | **Amount**              |   | **Percent** |   |
|                     |   | **(in  millions)**      |   |   |   |
| Cabin Management         |   | $                       | 28.6   |   | 94.5 | % |
| Specialty  Avionics      |   | (2.7                    | )      | (7.5 | ) |
| Systems  Integration     |   | 11.2                    |   | 101.5 |   |
| Inter-group  elimination |   | 0.1                     |   |   |   |
| Total                    |   | $                       | 37.2   |   |   |   |
|                          |        |                         |        |  |  |  |  |

*Cabin Management.* Gross profit increased by $28.6 million, or 94.5% over the prior year,due to:

 

•                    a $31.4million increase in gross profit resulting from our 1999 and 2000 acquisitions;offset by

 

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•                    a $1.7 milliondecrease related to lower margins resulting from higher engineering costsassociated with developing new entertainment system products;

 

•                    a $0.8 milliondecrease from production startup inefficiencies at a new manufacturingfacility; and

 

•                    a $0.3 milliondecrease related to product mix.

*Specialty Avionics.* Gross profit decreased by $2.7 million, or 7.5% from the prior year, dueto somewhat lower demand for our commercial aircraft products as a result oflower commercial jet production by Boeing and price reductions to several largecustomers.

*Systems Integration.* Gross profit increased by $11.2 million, or 101.5% over the prior year,due to:

 

•                    a $5.9 millionincrease due to recording a one time restructuring charge to cost of sales in1999,

 

•                    a $2.8 millionincrease in gross profit resulting from favorable auxiliary fuel tank manufacturingand installation efficiencies achieved;

 

•                    a $2.1 millionincrease resulting, in part, from improved operating results subsequent to our1999 restructuring, which included our exit from the manufacturing business attwo of our subsidiaries; and

 

•                    a $0.4 millionreduction in engineering costs attributable to project development incurred in1999 but not in 2000.

**Selling, general and administrativeexpenses. **Selling, general and administrativeexpenses increased $5.2 million, or 12.9%, to $45.4 million for the year endedDecember 31, 2000, from $40.2 million for the same period last year. Theincrease primarily results from the inclusion of $7.7 million of SG&Aexpenses in 2000 from companies we acquired in 1999 and 2000. SG&A expensesas a percent of revenues decreased to 13.1% for the year ended December 31,2000 compared to 16.5% for the same period last year. By segment, SG&Aexpenses changed as follows:
|                 |   | **Increase (Decrease)** |   |
|----------------------|--------|-------------------------|--------|
|                 |   | **From 1999**           |   |
|                 |   | **Amount**              |   | **Percent** |   |
|                 |   | **(in  millions)**      |   |   |   |
| Cabin Management     |   | $                       | 7.4    |   | 86.5 | % |
| Specialty  Avionics  |   | (1.1                    | )      | (8.3 | ) |
| Systems  Integration |   | (3.1                    | )      | (25.9 | ) |
| Corporate            |   | 2.0                     |   | 29.7 |   |
| Total                |   | $                       | 5.2    |   |   |   |

*Cabin Management.* SG&A expenses increased by $7.4 million, or 86.5% over the prioryear, due to:

 

•                    the inclusionof $7.5 million related to our 1999 and 2000 acquisitions; and

 

•                    manufacturingfacility startup costs of $0.7 million in 2000; offset by

 

•                    a $0.8 milliondecrease in expenses resulting from the consolidation of administrativeactivities during 2000 of companies we acquired during 1999 and 2000.

*Specialty Avionics.* SG&A expenses decreased by $1.1 million, or 8.3% from the prioryear, due to reduced selling costs related to lower sales.

*Systems Integration.* SG&A expenses decreased by $3.1 million, or 25.9% over the prioryear, due to:

 

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•                    a $3.9 milliondecrease related to 1999 restructuring and asset impairment charges; offset by

 

•                    a $0.6 millionincrease in expenses resulting from an increase in engineering projectmanagement, and

 

•                    the inclusionof $0.2 million related to our 1999 acquisition.

*Corporate. *SG&Aexpenses increased by $2.0 million, or 29.7% over the prior year due toincreased incentive compensation and spending for sales and marketing programs.

**Depreciation and amortization ofintangibles.**  Depreciation and amortization expense, whichincludes amortization of goodwill and identifiable intangible assets, increased$8.0 million, or 41.7%, for the year ended December 31, 2000. The increase resultsfrom the inclusion of $4.9 million of depreciation and amortization expense in2000 from companies we acquired during 1999 and 2000 and additionaldepreciation resulting from our capital expenditures during the period.

**EBITDA and Operating income.** EBITDA increased $24.5 million to $81.0 million, or 43.3%, for the yearended December 31, 2000, from $56.5 million for the same period last year. Theincrease primarily results from the contribution to year 2000 results fromcompanies we acquired during 1999 and 2000. EBITDA as a percent of revenuesincreased to 23.3% for the year ended December 31, 2000, from 23.2% for thesame period last year. Operating income increased $27.0 million to $51.9million, or 108.4%, for the year ended December 31, 2000, from $24.9 millionfor the same period last year. By segment, EBITDA changed as follows:
|                                               |   | **Increase (Decrease)** |   |
|----------------------------------------------------|--------|-------------------------|--------|
|                                               |   | **From 1999**           |   |
|                                               |   | **Amount**              |   | **Percent** |   |
|                                               |   | **(in  millions)**      |   |   |   |
| EBITDA                                             |   |                    |   |   |   |
| Cabin Management                                   |   | $                       | 21.8   |   | 90.6 | % |
| Specialty  Avionics                                |   | (0.4                    | )      | (1.6 | ) |
| Systems  Integration                               |   | 4.5                     |   | 42.2 |   |
| Corporate                                          |   | (1.5                    | )      | (28.2 | ) |
| Inter-group  elimination                           |   | 0.1                     |   |   |   |
| Total EBITDA                                       |   | 24.5                    |   |   |   |
|                                               |   |                    |   |   |   |
| Depreciation and  amortization                     |   | (8.0                    | )      |   |   |
| Restructuring  and asset impairment charges        |   | 9.9                     |   |   |   |
| Acquisition  related charges                       |   | 1.8                     |   |   |   |
| Nonrecurring  manufacturing facility startup costs |   | (0.7                    | )      |   |   |
| Other noncash  and acquisition related charges     |   | (0.5                    | )      |   |   |
| Total operating  income                            |   | $                       | 27.0   |   |   |   |

*Cabin Management.* EBITDA increased by $21.8 million, or 90.6% over the prior year, due toacquisitions and increased volume to support higher production levels ofcorporate jets.

*Specialty Avionics.* EBITDA decreased by $0.4 million, or 1.6% from the prior year, due tosomewhat lower demand for our commercial aircraft products as a result of lowercommercial jet production by Boeing.

*Systems Integration.* EBITDA increased by $4.5 million, or 42.2% from the prior year, due to:

 

•                    a $2.2 millionincrease resulting primarily from favorable auxiliary fuel tank and power unitmanufacturing efficiencies; and

 

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**•**                  a$2.3 million increase resulting, in part, from improved operating resultssubsequent to our 1999 restructuring, which included our exit from themanufacturing business at two of our subsidiaries.

*Corporate.* EBITDA decreased by $1.5 million, or 28.2% over the prior year, due toincreased incentive compensation and spending for sales and marketing programs.

**Interest expense. **Interest expense increased $13.7 million to $41.6million for the year ended December 31, 2000, from $27.9 million for the sameperiod last year, due to:

** **

**•**                  a$13.3 million increase resulting from higher debt levels associated with ouracquisition of companies during 1999 and 2000; and

** **

**•**                  a$0.4 million increase resulting from higher average interest rates charged byour lenders during 2000.

**Minority interest in preferred stockof subsidiary.**  Minority interest was $2.3 million for theyear ended December 31, 2000 and reflects the accrued dividends and redemptionvalue accretion during the period on DeCrane Aircrafts’ 16% preferred stockissued on June 30, 2000.

**Provision for income taxes.** The provision for income taxes differs from the amount determined byapplying the applicable U.S. statutory federal rate to the income before incometaxes primarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization and minorityinterest in preferred stock of subsidiary. The difference in the effective taxrates between periods is mostly a result of the relationship of non-deductibleexpenses to income before income taxes.

**Net income (loss).** Net income increased $5.7 million to $1.3 million for the year endedDecember 31, 2000 compared to a net loss of $4.4 million for the sameperiod last year.

**Net loss applicable to commonstockholders.**  Net loss applicable to common stockholdersdecreased $4.9 million to a net loss of $4.7 million for the year endedDecember 31, 2000 compared to a net loss of $9.6 million for the same periodlast year. The net loss decrease resulted from:

** **

**•**                  a$5.7 million increase in net income, which includes a $2.3 million charge forminority interest in preferred stock of subsidiary; offset by

** **

**•**                  a$0.8 million increase in noncash preferred stock dividend accretion on our 14%mandatorily redeemable preferred stock.

**Bookings. **Bookingsincreased $107.9 million, or 42.8%, to $360.0 million for the year endedDecember 31, 2000 compared to $252.1 million for the same period last year. Theincrease in bookings for 2000 results from:

** **

**•**                  a$91.8 million increase associated with companies we acquired in 1999 and 2000;and

** **

**•**                  a$16.1 million increase related to business growth, principally related to ourCabin Management and Specialty Avionics Group’s product lines.

**Backlog at end of period.** Backlog increased $22.2 million to $178.3 million as ofDecember 31, 2000 compared to $156.1 million as of December 31, 1999.The increase in backlog for 2000 includes:

** **

**•**                  $9.6million attributable to existing order backlog for companies we acquired during2000; and

** **

**•**                  anet $12.6 million increase primarily related to our Specialty Avionics andSystems Integration Groups.

 

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**Restructuring and Asset Impairment Charges**

The following discussion should be read in conjunctionwith Note 2 accompanying our financial statements included in this report.

**2001 Restructuring andAsset Impairment Charges**

During the second quarter of 2001, our CabinManagement Group adopted a restructuring plan to realign production programsbetween its manufacturing facilities. In response to the adverse impact on theaerospace industry resulting from the September 11th terroristattack and its aftermath, as well as the weakening of global economicconditions, we announced and implemented a further restructuring plan inDecember 2001 designed to reduce costs and conserve working capital. This planincludes permanently closing one manufacturing facility and idling a secondfacility for an indefinite period, curtailing several product developmentprograms and instituting workforce reductions. This plan primarily affects ourCabin Management and Specialty Avionics Groups.

In connection with these restructuring plans, werecorded nonrecurring pre-tax charges to operations of $28.7 million in 2001,of which $22.1 million were noncash charges, for the impairment of long-livedassets and restructuring costs related to write-downs and write-offs ofinventoried costs, costs associated with the realignment of production programsbetween facilities, severance, lease termination and other related costs. Ofthis amount, $16.1 million is included in cost of sales and the remaining $12.6million is included in selling, general and administration expenses.

During 2001, we paid $5.0 million of costs related tothis restructuring in cash and a $1.6 million restructuring reserve remains atDecember 31, 2001 solely for severance, lease termination and other relatedcosts. Future cash payments will be funded from existing cash balances andinternally generated cash from operations.

**2002 ManufacturingFacilities Consolidation**

In late February 2002, we announced we wouldconsolidate the production of two Cabin Management manufacturing facilitiesinto a single facility, resulting in the permanent closure of one additionalfacility. We have evaluated the carrying value of the long-lived assets relatedto the facility we are closing and do not expect an asset impairment charge.

We estimate that approximately $1.8 million ofnonrecurring costs associated with this decision will be recorded during 2002.In addition, capital expenditures of approximately $2.0 million will berequired during 2002 for improvements to the manufacturing facility that willhouse the combined operations.

**1999 Restructuring andAsset Impairment Charges**

This Systems Integration Group restructuring wascompleted in the third quarter of 2000, however, future cash payments willextend beyond this date due to future lease payments on the vacated facility.During 2001, we paid $0.3 million of costs related to this restructuring and a$0.4 million restructuring reserve remains at December 31, 2001 solely forlease termination costs through the lease termination date. Future cashpayments will be funded from existing cash balances and internally generatedcash from operations. We do not anticipate recording any additional chargesrelating this restructuring effort.

 

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**Liquidity and CapitalResources**

We have required cash primarily to fund acquisitions,capital expenditures and for working capital. Our principal sources ofliquidity have been cash flow from operations, third party borrowings and theissuance of common and preferred stock.

Net cash provided by operating activities was $14.9million for the year ended December 31, 2001 and consisted of $43.3 million ofcash provided by operations after adding back depreciation, amortization, thenoncash portion of our restructuring and asset impairment charges and othernoncash items, $28.2 million used for working capital, and $0.2 million used toreduce other liabilities. The following factors contributed to the $28.2million working capital increase:

 

•                    a $12.0million inventory increase resulting from longer production lead times and newproduct development costs, primarily engineering costs, for new cabin interiorproducts and components;

 

•                    a $5.1 millionaccounts receivable increase resulting from higher revenues, timing differencesrelating to progress and final billings on long-term contracts versus theassociated collection and the timing of other collections;

 

•                    a $2.3 millionincrease in prepaid and other assets; and

 

•                    an $8.8million net decrease in accounts payable and accrued expenses.

Net cash used for investing activities was $24.8million for the year ended December 31, 2001 and consisted of:

 

•                    $17.1 millionof contingent acquisition consideration paid during 2001; and

 

•                    $11.9 millionfor capital expenditures; offset by

 

•                    $3.6 millionof cash purchase price reductions received for previously completedacquisitions; and further offset by

 

•                    $0.6 millionof proceeds from the sale of property and equipment, principally an ownedmanufacturing facility replaced with a larger leased facility.

We anticipate spending approximately $6.0 to $8.0million for capital expenditures in 2002, which includes approximately $2.0million for improvements to the manufacturing facility that will house thecombined operations of two facilities resulting from the permanent closure ofone facility in 2002.

Net cash provided by financing activities was $11.4million for the year ended December 31, 2001 and, along with cash provided byoperations, was used to fund the payment of contingent acquisitionconsideration and capital expenditures. We obtained these funds by borrowing$19.6 million under our senior credit facility and $2.8 million of otherlong-term borrowings. We used $10.1 million to make principal payments on oursenior term debt, capitalized leases and other debt.

At December 31, 2001, senior credit facilityborrowings totaling $287.7 million are at variable interest rates based ondefined margins over the current prime or LIBOR rates. At December 31, 2001 wehad $81.7 million of working capital and had $25.0 million of borrowings availableunder our working capital credit facility and $13.0 million available under ouracquisition credit facility.

On March 19, 2002, the Company amended certain of theterms of its senior credit facility. The amendment combines the two $25.0million working capital and acquisitions credit facilities into a single $50.0million working capital credit facility, increases the prime rate and LIBORrate margins by 50 basis points, resulting in a range of 2.00% to 3.25% forprime rate borrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amendscertain financial covenants, principally through December 31, 2003.

 

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We are being affected by economic, financial,competitive, legislative, regulatory, business and other factors beyond ourcontrol. As described in “—Industry Overview and Trends,” the September 11thterrorist attack and its aftermath is having a severe adverse impact on theaerospace industry and, in turn, is having an unfavorable impact on portions ofour business. In addition, the weakening of global economic conditions isadversely impacting other portions of our business as well. As described in“—Restructuring and Asset Impairment Charges,” we are taking measures to reducecosts and conserve working capital.

Although we cannot be certain, we believe ouroperating cash flows, together with borrowings under our bank credit facility,will be sufficient to meet our future short- and long-term operating expenses,working capital requirements, capital expenditures and debt service obligationsfor the next twelve months. However, our ability to pay principal or interest,to refinance our debt and to satisfy our other debt obligations will depend onour future operating performance.

In addition, we are continually consideringacquisitions that complement or expand our existing businesses or that mayenable us to expand into new markets. Future acquisitions may requireadditional debt, equity financing or both. We may not be able to obtain anyadditional financing on acceptable terms.

**Critical Accounting Policies**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which are prepared in accordance with accounting principles generally acceptedin the United States of America. Our preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure of contingentassets and liabilities.

We evaluate our estimates on an on-going basis. Webase our estimates on historical experience and on various assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultscould differ from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies affect our more significantestimates and judgments used in the preparation of our financial statements.

**Allowance for uncollectible accountsreceivable.**  Accounts receivable are reduced by anallowance for amounts that are deemed uncollectible. The estimated allowancefor uncollectible amounts is based primarily on our evaluation of the financialcondition of each of our customers and their payment history. We also providean allowance based on the age of all receivables for which we have notestablished a customer-specific allowance. Generally, we do not requirecollateral or other security to support accounts receivable, however, undercertain circumstances, we require deposits or cash-on-delivery terms. While ourlosses have been within our expectations, a deterioration of our customers’financial condition may require that we provide additional allowances, reducingour operating income in future periods. Our customers operate in the corporateand commercial aircraft industry throughout the world and are being adverselyimpacted by the consequences of the September 11th terrorist attackand the further weakening of global economic conditions. Accounts receivable of$61.1 million is reduced by an allowance for uncollectible accounts of $2.6million as of December 31, 2001.

**Work-in-process inventory—deferredprogram costs.**  We incur product development costs,comprised principally of engineering costs, relative to programs and contractswith long production cycles. In accordance with industry practice, we deferthese costs in inventory. Program costs are charged to cost of sales over theproduction cycle of the program. Periodically, we assess the recoverability ofthe deferred program costs based on existing order backlog and our estimate offuture orders. We reduce the deferred program costs to estimated realizablevalue in the period in which recoverability becomes

 

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uncertain. As of December31, 2001, we have $11.0 million of deferred program costs included inwork-in-process inventory.

**Allowance for excess and obsoleteinventory. **Inventories are reduced by an allowancefor estimated excess and obsolete inventory. The allowance is the differencebetween the cost of the inventory and its estimated market value. Our marketvalue estimates are based upon existing order backlog, our assumptions aboutmarket conditions, including future orders and market pricing. While ourproducts are not subject to rapid technological obsolescence, we also considerthis factor in determining our market value estimates. If our customers cancelexisting orders or actual market conditions, including future orders, are lessfavorable than we projected, we may provide additional allowances, reducing ourgross profit in future periods. Inventories of $93.1 million were reduced by anallowance for excess and obsolete inventory of $6.6 million as of December 31,2001.

**Valuation of long-lived assets,goodwill and intangible assets. **We review long-lived assets, goodwill andother identifiable intangible assets for impairment when events or changes incircumstances indicate that the carrying value of an asset may not berecoverable. Factors we consider important, which could trigger an impairmentreview, include significant:

 

•                    underperformancerelative to expected future operating results;

 

•                    changes in themanner of our use of the acquired assets;

 

•                    changes in ourbusiness strategy; or

 

•                    negativeaerospace industry or global economic conditions.

Our impairment review consists of comparing the sum ofthe expected undiscounted future cash flows resulting from the use of the assetto the carrying value of the assets. When we determine that the carrying valuemay not be recoverable, we record an impairment loss equal to the excess of theasset’s carrying value over its fair value. We measure fair value based on aprojected discounted cash flow method using a discount rate we believe to becommensurate with the risk inherent in our current business model. Netlong-lived assets, goodwill and intangible assets amounted to $462.2 million asof December 31, 2001.

As more fully described in “—Recently IssuedAccounting Pronouncements” below, we will adopt the provisions of SFAS No. 141,“Business Combinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets” for our fiscal year beginning January 1, 2002. As a result, we willcease to amortize approximately $342.2 million of goodwill, including thevalues ascribed to assembled workforces we acquired which are not recognized asan intangible asset apart from goodwill under SFAS No. 141. In lieu ofamortization, we are required to perform a transitional impairment review ofour goodwill by June 30, 2002 and an annual impairment review thereafter. Theamount of impairment losses recognizable upon adoption, if any, is not known atthis time.

**Accounting for income taxes.** As part of the process of preparing our financial statements, we arerequired to estimate our income taxes in each of the jurisdictions in which weoperate. This process involves estimating our actual current tax exposuretogether with assessing permanent and temporary differences resulting fromdiffering treatment of items, such as amortization of assets and othernondeductible expenses, for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are included within ourstatement of financial position. We must then assess the likelihood that ourdeferred tax assets will be recovered from future taxable income and, to theextent we believe that recovery is not likely, we must establish a valuationallowance which increases our provision for income taxes in our statement ofoperations.

We have $14.1 million of deferred tax assets as ofDecember 31, 2001, which includes $9.0 million of federal and state losscarryforwards. Based on our estimates of taxable income by jurisdiction and the

 

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periods over which ourdeferred tax assets will be recoverable, we believe it is more likely than notthat we will generate taxable income in future periods sufficient to realizethe tax benefit associated with these assets. As a result, we have notestablished a valuation allowance reducing our deferred tax assets as ofDecember 31, 2001. In the event actual results differ from our estimates or weadjust these estimates in future periods, we would need to establish avaluation allowance in the period such determination is made, which wouldincrease our provision for income taxes.

**Revenue and profit recognition underlong-term contracts. **Because of relatively long productioncycles, a portion of our revenues and profits are recognized underpercentage-of-completion method of accounting using total contract price,actual costs incurred to date and an estimate of the completion costs for eachcontract. We use this method because reasonably accurate estimates of therevenue and costs applicable to the various stages of a contract can be made.Recognized revenues and profits on each contract are subject to revisions asthe contract progresses towards completion. Revisions to revenue and profitestimates are made in the period in which the facts that give rise to therevision become known. Provisions for estimated losses on uncompleted contractsare fully recognized in the period in which such losses are determined.Approximately 19.2% of our revenues and 17.9% of our gross profit during theyear ended December 31, 2001 was recognized under the percentage-of-completionmethod of accounting.

**Litigation. **Weevaluate contingencies in accordance with SFAS No. 5, “Accounting forContingencies.” We establish reserves for estimated loss contingencies when itis our assessment that a loss is probable and the amount of the loss can bereasonably estimated. Revisions to contingent liabilities are charged againstincome in the period in which different facts or information becomes known orcircumstances change that affect the previous assumptions with respect to thelikelihood or amount of loss. Reserves for contingent liabilities are basedupon our assumptions and estimates, advice of legal counsel or other thirdparties regarding the probable outcomes of the matter. Should the outcomediffer from the assumptions and estimates, revisions to the estimated reservesfor contingent liabilities would be required.

As described in “Item 3. Legal Proceedings” and Note12 accompanying our financial statements beginning on page F-1 of this report,we are involved in legal proceedings for which no reserves for estimated losscontingencies has been established as of December 31, 2001. Our currentevaluation of these matters is that it is probable we will prevail andtherefore are not required to accrue estimated losses in accordance with SFASNo. 5. However, there is a possibility that we may ultimately be required topay all or a portion of the contingent liabilities related to these matters,which may have an adverse impact on our business, financial position, resultsof operations or cash flows in future periods.

**Restructuring of our businesses.** As described in “—Restructuring and Asset Impairment Charges,” werecorded restructuring and asset impairment charges totaling $28.7 millionduring 2001 in response to the adverse aerospace industry impact the September 11thterrorist attack and its aftermath and weakening global economic conditions arehaving on our businesses. These charges are based on our present estimates ofthe impact these events are having on our businesses and the future recovery ofthe aerospace industry. Actual results and future recovery could differ fromthese estimates, potentially resulting in further restructuring and assetimpairment charges.

**Recently Issued Accounting Pronouncements**

***SFAS Nos. 141 and 142***

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

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SFAS No. 141 establishes accounting and reportingstandards for business combinations. SFAS No. 141 requires that allbusiness combinations be accounted for using the purchase method of accountingand provides criteria for the initial recognition and measurement of goodwilland other intangible assets. SFAS No. 141 is effective for all businesscombinations initiated or completed after June 30, 2001. For businesscombinations completed prior to July 1, 2001, SFAS No. 141 is effectiveconcurrent with the adoption of SFAS No. 142.

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

We are currently evaluating the impact the newaccounting standards will have on our consolidated financial position andresults of operations upon adoption on January 1, 2002; there will be no impacton cash flows. While the full, net of tax, impact has yet to be determined,adoption of the new standards will result in the following:

 

•                    Under thecriteria established in SFAS No. 141, the values ascribed to the assembledworkforces acquired are not recognized as an intangible asset apart fromgoodwill. As a result, as of December 31, 2001 the $4,803,000 net book valueascribed to the assembled workforces, which is also net of the related deferredincome tax liabilities, will be reclassified to goodwill as of January 1, 2002.

 

•                    Adoption ofSFAS No. 142 on January 1, 2002 will reduce amortization expense in futureperiods. If the nonamortization provisions of SFAS No. 142 had been effectiveas of the beginning of 2001, goodwill and assembled workforces amortizationtotaling $14,319,000 for the year ended December 31, 2001 would have been eliminated.

We have until June 30, 2002 to complete ourtransitional impairment testing of goodwill associated with adopting SFAS No.142 and until March 31, 2002 to complete our transitional impairment testing ofother intangible assets. The amount of impairment losses recognizable uponadoption, if any, is not known at this time.

***SFAS No. 143***

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No.143 requires recognition of the fair value of liabilities associated with theretirement of long-lived assets when a legal obligation to incur such costsarises as a result of the acquisition, construction, development and/or thenormal operation of a long-lived asset. Adoption of SFAS No. 143 is requiredfor our fiscal year beginning January 1, 2002 although early application ispermitted. We do not expect that the adoption of SFAS No. 143 will have animpact on our business, consolidated financial position, results of operationsor cash flows.

***SFAS No. 144***

In August 2001, the Financial Accounting StandardsBoard issued SFAS No. 144, "Accounting for the Impairment or Disposal ofLong-Lived Assets," which replaces SFAS No. 121, “Accounting forImpairment of Long-Lived Assets and for Long-Lived to be Disposed Of” and alsoreplaces and broadens the provisions of Accounting Principles Board Opinion No.30, “Reporting Results of Operations — Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions.”

 

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SFAS No. 144 establishes one accounting model, basedon framework established in SFAS No. 121, for the recognition,measurement and reporting of impairment of long-lived assets to be held andused and measurement of long-lived assets to be disposed of by sale. Thisaspect of SFAS No. 144 will primarily affect our accounting forintangible assets subject to amortization as well as property and equipment andother long-lived assets.

SFAS No. 144 significantly changes the criteria thatwould have to be met to classify an asset as held-for-sale. Under theprovisions of SFAS No. 144, assets to be disposed of will be stated at thelower of their fair values or carrying amounts and depreciation will no longerbe recognized.

SFAS No. 144 also supersedes the provisions of APBOpinion No. 30 with regard to reporting the effects of a disposal of a segmentof a business. SFAS No. 144 requires expected future operating losses fromdiscontinued operations to be displayed in discontinued operations in theperiod(s) in which the losses are incurred, rather than as of the measurementdate as presently required.

Adoption of SFAS No. 144 is required for our fiscalyear beginning January 1, 2002 although early application is permitted. We arecurrently evaluating the impact this new standard will have on our business,consolidated financial position, results of operations and cash flows.

**Common European Currency**

We have evaluated, and will continue to evaluate, theeffects on our operations of the European Economic Monetary Union conversion tothe Euro. We do not expect the introduction and use of the Euro, including ourcosts to adapt our information systems for this conversion, to be material to ourbusiness, financial position, results of operations or cash flows.

**Special Note Regarding Forward-Looking Statements**

All statements other than statements of historicalfacts included in this report are considered forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements are subject to known and unknown risks,uncertainties and other factors, which are difficult to predict. We arevulnerable to a variety of factors that affect many businesses, such as:

 

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

 

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

 

•                    our relianceon key customers and the adverse effect a significant decline in business fromany one of them would have on our business;

 

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

 

•                    competitionfrom larger companies;

 

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

 

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

 

•                    liability andother claims asserted against us that exceeds our insurance coverage;

 

•                    the ability toattract and retain qualified personnel;

 

•                    labordisturbances; and

 

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

Changes in such factors could cause our actual resultsto differ materially from those contemplated in such forward-looking statements.Although we believe that the expectations reflected in such forward-lookingstatements are reasonable, we can give no assurance that such expectations willprove to be correct. We undertake no obligation to release publicly anyrevisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. You should not rely on our forward-looking statements asif they were certainties.

**ITEM 7A.**                                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

We are exposed to various market risks, includinginterest rates and changes in foreign currency exchange rates. Market risk isthe potential loss arising from adverse changes in prevailing market rates andprices. From time to time we use derivative financial instruments to manage andreduce risks associated with these factors. We do not enter into derivatives orother financial instruments for trading or speculative purposes.

**Interest Rate Risk.** A significant portion of our capital structure is comprised of long-termvariable- and fixed-rate debt.

Market risk related to our variable-rate debt isestimated as the potential decrease in pre-tax earnings resulting from anincrease in interest rates. The interest rates applicable to variable-rate debtare, at our option, based on defined margins over the current prime or LIBORrates. At December 31, 2001, the current prime rate was 4.75% and the currentLIBOR rate was 2.10%. Based on $287.7 million of variable-rate debt outstandingas of December 31, 2001, a hypothetical one percent rise in interest rates, to5.75% for prime rate borrowings and 3.10% for LIBOR borrowings, would reduceour pre-tax earnings by $2.9 million annually.

To limit our exposure related to rising interestrates, we have entered into an interest rate swap contract to effectivelyconvert an additional $4.5 million variable-rate debt to 4.2% fixed-rate debtuntil maturity in 2008. The contract is considered to be a hedge againstchanges in the amount of future cash flows associated with interest payments onthis portion of our variable-rate debt. Market risk related to this interestrate swap contract is estimated as the potential higher interest expense wewill incur if the variable interest rate decreases below the 4.2% fixed rate.Based on the $4.5 million of variable-rate debt converted to fixed-rate debtoutstanding as of December 31, 2001, a hypothetical one percent decrease in thevariable interest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1million annually.

The estimated fair value of our $100.0 millionfixed-rate long-term debt is approximately $93.5 million at December 31, 2001.Market risk related to our fixed-rate debt is deemed to be the potentialincrease in fair value resulting from a decrease in interest rates. Forexample, a hypothetical ten percent decrease in the interest rates, from 12.0%to 10.8%, would increase the fair value of our fixed-rate debt by approximately$7.0 million.

**Foreign Currency Exchange RateRisk. **Our foreign customers are located in various parts ofthe world, primarily Western Europe, the Far East and Canada, and we havesubsidiaries with manufacturing facilities in Switzerland and Mexico. To limitour foreign currency exchange rate risk related to sales to our customers,orders are primarily valued and sold in U.S. dollars. From time to time we haveentered into forward foreign exchange contracts to limit our exposure relatedto foreign inventory procurement and operating costs. While we have not enteredinto any such contracts since 1998, we may do so in the future depending on ourassessment of future foreign exchange rate trends.

 

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**ITEM 8.**                                         FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

**Ourconsolidated financial statements, supplementary financial information andfinancial statement schedules are included in a separate section at the end ofthis report. The financial statements, supplementary information and schedulesare listed in the index on page F-1 of this report and are incorporated hereinby reference.**
| **ITEM 9.** |   | **CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL** |
|-------------|--------|--------------------------------------------------------------------------------|
|        |   | **DISCLOSURE**                                                                 |

None.

**PART III**
| **ITEM 10.** |   | **DIRECTORS AND  EXECUTIVE OFFICERS OF THE REGISTRANT** |
|--------------|--------|---------------------------------------------------------|

** **

**Directors and Executive Officers**

The following table sets forth certain informationconcerning each person who is currently a director or executive officer ofDeCrane Holdings and its wholly-owned subsidiary, DeCrane Aircraft.

 
| **Name**            |   | **Age** |   | **DeCrane Holdings**                                                    |   | **DeCrane Aircraft**                                                                  |
|---------------------|--------|---------|--------|-------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|
| Thompson Dean       |   | 43      |   | Chairman of the Board of Directors and President                        |   | Chairman of the Board of Directors                                                    |
| R. Jack DeCrane *   |   | 55      |   | Vice Chairman of the Board of Directors                                 |   | Director and Chief Executive Officer                                                  |
| Richard J. Kaplan   |   | 59      |   | Assistant Secretary and Assistant Treasurer (chief  accounting officer) |   | Director and Senior Vice President, Chief Financial  Officer, Secretary and Treasurer |
| John F. Fort, III * |   | 60      |   | Director                                                                |   | Director                                                                              |
| Susan C. Schnabel * |   | 40      |   | Director                                                                |   | Director                                                                              |
| Robert G. Martin    |   | 64      |   | —                                                                  |   | Senior Vice President and Group President                                             |
| Jeffrey A. Nerland  |   | 44      |   | —                                                                  |   | Senior Vice President and Group President                                             |
| Jeffrey F. Smith    |   | 41      |   | —                                                                  |   | Senior Vice President and Group President                                             |

 

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*                             Member of DeCrane Holding’s CompensationCommittee.

*Thompson Dean* has been the Managing Partner of DLJMerchant Banking, Inc. since November 1995. Previously, Mr. Dean was a ManagingDirector of DLJ Merchant Banking, Inc. and its predecessor. In November 2000,Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette,Inc. As a result, DLJ Merchant Banking, Inc. became an indirect affiliate ofCredit Suisse First Boston, Inc. and Credit Suisse Group. Mr. Dean serves as adirector of AKI Holding Corp., Amatek Holdings S.A., Arcade HoldingCorporation, Formica Corporation, Insilco Holdings Co., Manufacturers’ ServicesLimited, Mueller Holdings, Inc., and Von Hoffman Holdings, Inc. He became adirector in 1998.

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*R. Jack DeCrane* is the founder of DeCrane Aircraft. Mr.DeCrane served as President from the time DeCrane Aircraft was founded inDecember 1989 until April 1993, when he was elected to the newly created officeof Chief Executive Officer. Prior to founding our company, Mr. DeCrane heldvarious positions at the aerospace division of B.F. Goodrich. Mr. DeCrane was aGroup Vice President at the aerospace division of B.F. Goodrich with managementresponsibility for three business units from 1986 to 1989. He has served on ourboard of directors since its inception.

*Richard J. Kaplan* has been the Senior Vice President,Chief Financial Officer, Secretary and Treasurer of DeCrane Aircraft sinceMarch 1999. From April 1998 to March 1999, he served as Executive VicePresident and Chief Operating Officer of Developers Diversified RealtyCorporation. From 1977 to 1998, he was a partner with Price Waterhouse LLP,having joined the firm in 1964. He became a director in 2000.

*John F. Fort, III* serves as a director of Insilco HoldingsCo., Manufacturers’ Services Limited, Mueller Holdings, Inc., Roper Industries,Inc., Thermadyne Holdings Corporation and Tyco International Ltd. He became adirector in 1998.

*Susan C. Schnabel* has been a Managing Director of DLJMerchant Banking, Inc. since January 1998. In 1997, she served as Chief FinancialOfficer of PETsMART, a specialty retailer of pet products and supplies. From1990 to 1996, Ms. Schnabel was with Donaldson, Lufkin & Jenrette SecuritiesCorporation, where she became a Managing Director in 1996. In November 2000,Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette,Inc. As a result, DLJ Merchant Banking, Inc. and Donaldson, Lufkin &Jenrette Securities Corporation became indirect affiliates of Credit SuisseFirst Boston, Inc. and Credit Suisse Group. Ms. Schnabel serves as a directorof Environmental Systems Products Holdings, Inc., Shoppers Drug Mart, Inc. andNoveon, Inc. She became a director in 1998.

*Robert G. Martin* has been our Senior Vice President andPresident of the Systems Integration Group since October 1999 and President ofPATS since we acquired it in January 1999. Mr. Martin also served as Presidentof Aerospace Display Systems from September 1996 until October 1999. Prior toour acquisition of Aerospace Display Systems in 1996, Mr. Martin had served asits President since 1992.

*Jeffrey A. Nerland* has been our Senior Vice President andPresident of the Cabin Management Group since December 2001. From January 1999until December 2001, Mr. Nerland served as Vice President, BusinessDevelopment, and was appointed Senior Vice President in March 2001. From July1994 through December 1998, he was President of The Nerland Group and a partnerwith Budetti, Harrison, Nerland and Associates, a consulting and interimmanagement firm. Previously, Mr. Nerland was a director with Kibel, Green Inc.,a consulting firm.

*Jeffrey F. Smith* has been our Senior Vice President andPresident of the Specialty Avionics Group since October 1999 and President ofAvtech since we acquired it in June 1998. Previously, he has served in variouscapacities with Avtech since 1989.

**Selection of Directors and Term of Office**

DLJ Merchant Banking Partners II, L.P. is entitled toselect all members of the Board of Directors of DeCrane Holdings and DeCraneAircraft as described in “Item 13. Certain Relationships and RelatedTransactions—Investors’ Agreement.” At least one of such directors selected byDLJ Merchant Banking on each board must be an independent director. Mr. Fort isan independent director. All directors hold office until their successor isdesignated and qualified.

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**ITEM 11.**                                  EXECUTIVE COMPENSATION

**Summary Compensation Table**

The following table describes all annual compensationawarded to, earned by or paid to our Chief Executive Officer and the four mosthighly compensated executive officers other than the Chief Executive Officerfor the years ended December 31, 2001, 2000 and 1999.

 
|                                    |   |     |   | **Annual Compensation** |    | **All Other Compensation** |   |
|-----------------------------------------|--------|----------|--------|-------------------------|---------|----------------------------|--------|
| **Name**                                |   | **Year** |   | **Salary**              |    | **Bonus**                  |   | **Securities Underlying Options (1)** |   | **Other (2)** |   |
| R. Jack DeCrane  (3)                    |   | 2001     |   | $                       | 352,906 |                       | $      | 1,290,000 |   | — |   | $ | 15,741 |   |
| *Chief  Executive Officer and Director* |   | 2000     |   | 341,381                 |    | 1,100,000                  |   | 2,981 |   | 48,979 |   |
|                                    |   | 1999     |   | 334,791                 |    | 700,000                    |   | 106,877 |   | 25,570 |   |
| Richard J.  Kaplan (4)                  |   | 2001     |   | 213,531                 |    | 470,000                    |   | — |   | 5,809 |   |
| *Senior  Vice President and Director*   |   | 2000     |   | 207,293                 |    | 400,000                    |   | 4,093 |   | 25,721 |   |
|                                    |   | 1999     |   | 158,333                 |    | 258,000                    |   | 28,669 |   | 4,556 |   |
| Robert G. Martin  (5)                   |   | 2001     |   | 222,789                 |    | 403,639                    |   | — |   | 6,275 |   |
| *Senior  Vice President*                |   | 2000     |   | 216,300                 |    | 384,000                    |   | 3,229 |   | 5,100 |   |
|                                    |   | 1999     |   | 187,500                 |    | 209,000                    |   | 17,813 |   | — |   |
| Jeffrey A.  Nerland (6)                 |   | 2001     |   | 191,794                 |    | 290,000                    |   | — |   | 5,541 |   |
| *Senior  Vice President*                |   | 2000     |   | 185,338                 |    | 250,000                    |   | 5,344 |   | 5,024 |   |
|                                    |   | 1999     |   | 160,000                 |    | 181,000                    |   | 10,688 |   | 2,217 |   |
| Jeffrey F. Smith  (7)                   |   | 2001     |   | 212,003                 |    | 490,000                    |   | — |   | 5,250 |   |
| *Senior  Vice President*                |   | 2000     |   | 206,063                 |    | 249,000                    |   | 3,000 |   | 5,250 |   |
|                                    |   | 1999     |   | 179,347                 |    | 130,000                    |   | 18,272 |   | 5,080 |   |
|                                         |        |          |        |                         |         |                            |        |  |  |  |  |  |  |  |

 

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(1)                      Number of shares of common stock ofDeCrane Holdings issuable upon exercise of options granted pursuant to ourmanagement incentive plan during the last fiscal year.

(2)                      Comprised of relocation costs, lifeinsurance premiums and matching contributions to the 401(k) Retirement Plan.

(3)                      Mr. DeCrane also serves as Vice Chairmanof the Board of Directors of DeCrane Holdings.

(4)                      Mr. Kaplan joined DeCrane Aircraft asSenior Vice President on March 15, 1999. Mr. Kaplan also serves as AssistantSecretary, Assistant Treasurer and chief accounting officer of DeCraneHoldings.

(5)                      Mr. Martin served as President AerospaceDisplay Systems from September 1996 through October 1999. Mr. Martin has beenPresident of PATS since we acquired it in January 1999, and became our SeniorVice President and Group President of Systems Integration in October 1999.

(6)                      Mr. Nerland served as Vice President,Business Development, from January 1999 through December 2001 and was appointedSenior Vice President in March 2001. In December 2001, Mr. Nerland became ourPresident of the Cabin Management Group.

(7)                      Mr. Smith has been our Senior VicePresident and President of the Specialty Avionics Group since October 1999.Prior to October 1999, Mr. Smith was President of our Avtech subsidiary.

 

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**Stock Option Grants inLast Fiscal Year**

During the fiscal year ended December 31, 2001, nooptions to purchase shares of DeCrane Holdings common stock were grantedpursuant to the management incentive plan. See “—Employment Agreements andCompensation Arrangements — Incentive Plans.”

**Aggregated Option Exercises in Last Fiscal Year andFiscal Year-End Option Values**

No stock options were exercised by our executiveofficers during the year ended December 31, 2001. The following tables setsforth information about the stock options held by the executive officers namedbelow as of December 31, 2001.

 
| **Name**            |   | **Number of Securities Underlying  Unexercised Options********Exercisable / Unexercisable** |   | **Value of Unexercised In-the-Money Options  at Fiscal Year End (1)  Exercisable**/**Unexercisable** |              |
|---------------------|--------|---------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|-------------------|
|                |
| R. Jack DeCrane     |   | 36,253 / 73,605                                                                             |   | $                                                                                                    | 145,012 / 294,420 |   |
| Richard J.  Kaplan  |   | 10,812 / 21,950                                                                             |   | 39,360 / 79,904                                                                                      |              |
| Robert G. Martin    |   | 6,944 / 14,098                                                                              |   | 23,816 **/**48,352                                                                                   |              |
| Jeffrey A.  Nerland |   | 5,291 / 10,741                                                                              |   | 14,564 / 29,564                                                                                      |              |
| Jeffrey F. Smith    |   | 7,019 / 14,253                                                                              |   | 24,116 / 48,972                                                                                      |              |
|                     |        |                                                                                             |        |                                                                                                      |                   |  |

 

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(1)                      Computed based on a common stock shareprice of $27.00 per share as of December 31, 2001, the measuring date.

**Compensation Committee Interlocks and InsiderParticipation**

The Compensation Committee of our Board of Directorsmakes decisions regarding officer compensation. Jack DeCrane, chief executiveofficer of DeCrane Aircraft, participates in those discussions as a member ofthe Committee.

**Employment Agreements and Compensation Arrangements**

**R. Jack DeCrane**

On July 17, 1998, the Compensation Committee of ourBoard of Directors approved a three-year employment agreement between DeCraneAircraft and R. Jack DeCrane, replacing his prior employment agreement that wasto expire on September 1, 1998. Mr. DeCrane’s employment agreement was amendedon May 5, 2000 to provide for a term through June 30, 2001, which term shallautomatically extend for additional one year periods unless terminated byeither party giving the other party notice of termination prior to April 1stof the year prior to the year in which the agreement would otherwise terminate.Mr. DeCrane’s employment agreement provides for various benefits, including aninitial salary of $310,000, which is subject to annual review and increase, butnot a decrease, and an annual bonus, currently determined pursuant to theperformance-based cash incentive bonus plan.

The employment agreement also provides that ifspecified change-of-control events occur, and Mr. DeCrane’s employment isterminated by us for any reason other than for cause or as a result of hisdeath or disability, or by Mr. DeCrane for “good reason,” as defined in theagreement, then we will pay Mr. DeCrane a lump sum in cash within fifteen days.The amount of that payment will be $1.00 less than three times the sum of Mr.DeCrane’s average base salary plus bonus for the five calendar years precedinghis termination date and accrued but unpaid salary and bonus through thetermination date. Mr. DeCrane will also receive other specified benefits,including continued coverage under our welfare plans for up to two years; alump sum payment in cash equal to any unvested portions of our contributions to

 

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him under specifiedsavings plans, plus two times the amount of our annual contributions on hisbehalf to those plans; a lump sum payment in cash equal to our matchingcontributions under those savings plans that Mr. DeCrane would have receivedhad he continued maximum participation in the plans until the earlier of twoyears following his termination and December 31 of the year he turns 65, plusthe vested and unvested amounts credited to him under any of our deferredcompensation plans and the amount required to be credited during the year ofhis termination; and outplacement consulting services to aid Mr. DeCrane withre-employment. We will reduce these payments to the extent necessary to ensuredeductibility for tax purposes.

**Robert G. Martin**

We entered into an employment agreement with Robert G.Martin, Senior Vice President of DeCrane Aircraft and President of the SystemsIntegration Group on September 10, 1999, amending his prior employmentagreement dated September 19, 1996. Mr. Martin’s employment agreement providesfor an annual salary of $210,000 and an annual bonus determined pursuant to theperformance-based cash incentive bonus plan. Mr. Martin’s employment agreementexpired on December 31, 2001 and has not been replaced.

**Jeffrey F. Smith**

We entered into an employment agreement with JeffreyF. Smith, Vice President and General Manager of our Avtech subsidiary, on June26, 1998. Mr. Smith’s employment agreement provided for an annual salary,initially in the amount of $145,000 and an annual bonus currently determinedpursuant to the performance-based cash incentive bonus plan. Mr. Smith’semployment agreement expired on June 30, 2000 and has not been replaced.

**Change of Control Agreements**

In September 2000, we entered into change of controlagreements with each of our executive officers, other than Mr. DeCrane, whoseabove described employment agreement contains provisions concerning change ofcontrol. The agreements provide that, for a term of two years from theeffective date, should a change of control, as defined, occur during the termof the agreement and the executive officer’s employment shall be involuntarilyterminated for any reason on a date which is less than two years after the dateof the change of control, other than for cause, death or disability, DeCraneAircraft is required to pay such executive his then salary plus average annualbonus over the last five years, equal to twenty four months compensation lessthe number of months elapsed from the date of the change of control to theemployment termination date.

**401(k) Retirement Plan**

Substantially all of our full-time employees areeligible to participate in one of the 401(k) retirement plans we sponsor. The401(k) plans allow employees as participants to defer, on a pre-tax basis, aportion of their salary and accumulate tax deferred earnings, as a retirementfund. The plans generally provide for us to match a percentage of the employeecontribution up to a specified percentage of the employee’s salary. The fullamount vested in a participant’s account will be distributed to a participantfollowing termination of employment, normal retirement or in the event ofdisability or death.

**Incentive Plans**

Our management incentive plan provides for theissuance of options to purchase the common stock of DeCrane Holdings asincentive compensation to designated executive personnel and other keyemployees of DeCrane Aircraft and its subsidiaries. The Compensation Committeeof the Board of Directors administers the management incentive plan. The planprovides for the granting of options to

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purchase 356,257 commonshares and expires in 2009. Substantially all of the options awarded becomefully vested and exercisable eight years from the date of grant but vesting andexercise can be accelerated based upon future attainment of defined performancecriteria. At December 31, 2001, 33% of most of the options granted are vestedand exercisable. We believe the per share exercise price of the options grantedapproximated the fair market value of the underlying common stock on each ofthe grant dates.

From time-to-time, we have permitted designatedexecutive personnel and other key employees to purchase shares of common stockof DeCrane Holdings, with a portion of the purchase price to be loaned to theparticipants by DeCrane Aircraft. This arrangement was made available topersons and in amounts determined by the Compensation Committee of the Board ofDirectors. In December 1999, management purchased 171,295 shares of DeCraneHoldings common stock for $23.00 per share. The total purchase price was $3.9million, of which one-half was paid in cash and one-half was loaned tomanagement by DeCrane Aircraft with interest at applicable federal rates.During 2000, an additional 19,707 shares of DeCrane Holdings common stock waspurchased by employees at $23.00 per share, which was paid in cash.

Our cash incentive bonus plan provides for theallocation of a bonus pool each year for incentive compensation to designatedexecutive personnel and certain other employees of DeCrane Aircraft and itssubsidiaries. The bonus pool for participants will be adjusted upwards ordownwards each year based on EBITDA and cash flow, as defined, generated by therelevant participant’s operating unit. Bonus payments will be made in thequarter following the end of the year or period to which they relate.

**Deferred Compensation Plan**

We have a deferred compensation plan in which certaindesignated executive officers and key employees are permitted to defer aportion of their compensation earned. The Company invests amounts deferred andparticipants are fully vested in the amounts representing the fair market valueof their investment accounts. We make no contributions on behalf of theparticipants and the invested assets are subject to the claims of our generalcreditors.

**Directors’ Compensation**

The directors of DeCrane Aircraft generally do notreceive annual fees or fees for attending meetings of the Board of Directors ofDeCrane Aircraft or committees thereof. However, John F. Fort, III, anindependent director not affiliated with any investor in DeCrane Holdings,receives a director’s fee of $25,000 per year. In addition, the Board ofDirectors of DeCrane Holdings authorized the issuance of options to purchase7,500 shares of DeCrane Holdings common stock to Mr. Fort under the same termsas the management incentive plan. See “Item 13. Certain Relationships andRelated Transactions—Transactions with Management and Others — TransactionsDuring 2001 and 2002” for additional information. Also, Mr. Fort is reimbursedfor out-of-pocket expenses. We expect to continue these policies.

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**ITEM 12.**                                  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT

**Security Ownership of Certain Beneficial Owners andManagement**

**DeCrane Holdings**

As of February 28, 2002, DeCrane Holdings has thefollowing securities issued and outstanding:

 

•                    3,895,531shares of common stock, which is owned by 35 stockholders; and

 

•                    342,417 sharesof non-voting 14% Senior Redeemable Exchangeable Preferred Stock Due 2009,which is owned by 18 stockholders.

The following table sets forth the beneficialownership of DeCrane Holdings’ voting and non-voting securities as of February28, 2002 by its principal owners and its executive officers and directors.

 
|                                                                        |   | **Common Stock (2)**                    |   | **14% Senior Redeemable Preferred Stock** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------------|--------|-------------------------------------------|--------|
| **Name of  Beneficial Owner (1)**                                           |   | **Number of Shares, Partially Diluted** |   | **Percentage**                            |   | **Number of Shares** |   | **Percentage** |   |
| DLJ Merchant  Banking Partners II, L.P. and affiliates (3)                  |   | 3,962,138                               |   | 94.8                                      | %      | 340,000 |   | 99.3 | % |
| Eleven Madison  Avenue, New York, NY 10010                                  |   |                                    |   |                                      |   |   |   |   |   |
| Thompson Dean  (4)                                                          |   | —                                  |   | —                                    |   | — |   | — |   |
| c/o Credit  Suisse First Boston

Eleven Madison  Avenue, New York, NY 10010 |   |                                    |   |                                      |   |   |   |   |   |
| Susan C.  Schnabel (4)                                                      |   | —                                  |   | —                                    |   | — |   | — |   |
| c/o Credit  Suisse First Boston

Eleven Madison  Avenue, New York, NY 10010 |   |                                    |   |                                      |   |   |   |   |   |
| Putnam  Investment Management, Inc. and affiliates (5)                      |   | 27,871                                  |   | *                                         |   | — |   | — |   |
| One Post Office  Square, Boston, MA 02109                                   |   |                                    |   |                                      |   |   |   |   |   |
| John F. Fort,  III (6)                                                      |   | 5,927                                   |   | *                                         |   | — |   | — |   |
| R. Jack DeCrane  (7)                                                        |   | 95,755                                  |   | 2.4                                       | %      | — |   | — |   |
| Richard J.  Kaplan (8)                                                      |   | 33,698                                  |   | *                                         |   | — |   | — |   |
| Robert G. Martin  (9)                                                       |   | 11,520                                  |   | *                                         |   | — |   | — |   |
| Jeffrey A.  Nerland (10)                                                    |   | 12,156                                  |   | *                                         |   | — |   | — |   |
| Jeffrey A. Smith  (11)                                                      |   | 16,173                                  |   | *                                         |   | — |   | — |   |
| All directors  and named executive officers as a group (eight persons)      |   | 175,229                                 |   | 4.4                                       | %      | — |   | — |   |

 

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*                             Less than 1.0%

(1)                      Each person who has the power to vote anddirect the disposition of shares is deemed to be a beneficial owner of thoseshares.

(2)                      The common stock columns reflect thenumber of shares owned and the total percentage ownership in the mannerrequired by Securities and Exchange Commission rules. The entries for eachholder assumes, if applicable, that the particular holder, and no one else,fully exercises all rights under warrants to purchase common stock and commonstock which may be acquired upon the exercise of

 

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stock options and which are exercisable, or will beexercisable, prior to 60 days from February 28, 2002.

(3)                      Reflects 3,695,652 shares of commonstock, warrants to purchase an additional 266,486 shares of common stock andpreferred stock held directly by DLJ Merchant Banking Partners II, L.P. and thefollowing affiliated investors:

 

| •      DLJ  Diversified Partners, L.P.   |   | •      DLJ  Merchant Banking Partners II-A, L.P.                                                             |
|------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| •      DLJ  Diversified Partners-A, L.P. |   | •      DLJ  Millennium Partners, L.P.

•      DLJ  Millennium Partners-A, L.P. |
| •      DLJ EAB  Partners, L.P.           |   |
| •      DLJ ESC  II, L.P.                 |   | •      DLJ  Offshore Partners II, C.V.                                                                       |
| •      DLJ First  ESC L.P.               |   | •      DLJIP II  Holdings, L.P.                                                                              |
| •      DLJ  Investment Partners, L.P.    |   | •      DLJMB  Funding II, Inc.                                                                               |
| •      DLJ  Investment Partners II, L.P. |   | •      UK  Investment Plan 1997 Partners, Inc.                                                               |

The address of each of the investors is Eleven MadisonAvenue, New York, New York 10010.

(4)                      Mr. Dean and Ms. Schnabel are officers ofDLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II,L.P and directors of DeCrane Aircraft. The DLJ entities are affiliates of, andcommonly collectively referred to as, Credit Suisse First Boston. See “Item 13.Certain Relationships and Related Transactions—Transactions with Management andOthers” for additional information. The share data shown for these individualsexcludes shares shown as held by the DLJ affiliates separately listed in thistable; Mr. Dean and Ms. Schnabel disclaim beneficial ownership of those shares.

(5)                      Reflects warrants to purchase shares ofcommon stock held by the following investors related to Putnam InvestmentManagement, Inc.:

 

| •      Putnam  Diversified Income Trust                     |   | •      Putnam  High Yield Trust                                |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
| •      Putnam  Fund Trust — Putnam High Yield Trust II |   | •      Putnam  Strategic Income Fund                           |
| •      Putnam  High Yield Advantage Fund                    |   | •      Putnam  Variable Trust — Putnam VT High Yield Fund |

The address of each of the investors is One PostOffice Square, Boston, MA 02109.

(6)                      Includes 4,927 shares that may beacquired upon the exercise of stock options that are exercisable or will becomeexercisable prior to 60 days from February 28, 2002.

(7)                      Includes 36,253 shares that may beacquired upon the exercise of stock options that are exercisable or will becomeexercisable prior to 60 days from February 28, 2002.

(8)                      Includes 10,812 shares that may beacquired upon the exercise of stock options that are exercisable or will becomeexercisable prior to 60 days from February 28, 2002.

(9)                      Includes 6,944 shares that may beacquired upon the exercise of stock options that are exercisable or will becomeexercisable prior to 60 days from February 28, 2002.

(10)                Includes 5,291 shares that may be acquired upon theexercise of stock options that are exercisable or will become exercisable priorto 60 days from February 28, 2002.

(11)                Includes 7,019 shares that may be acquired upon theexercise of stock options that are exercisable or will become exercisable priorto 60 days from February 28, 2002.

 

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**DeCrane Aircraft**

As of February 28, 2002, DeCrane Aircraft has thefollowing securities issued and outstanding:

•                    100 shares ofcommon stock, which are owned by one stockholder; and

•                    250,000 sharesof non-voting 16% Senior Redeemable Exchangeable Preferred Stock Due 2009,which are owned by nine stockholders.

The following table sets forth the beneficialownership of DeCrane Aircraft’s voting and non-voting securities as of February28, 2002 by its principal owners and its executive officers and directors.

 
|                                                                                    |   | **Common Stock (2)**                    |   | **16% Senior Redeemable Preferred Stock** |   |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-------------------------------------------|--------|
| **Name of  Beneficial Owner (1)**                                                       |   | **Number of Shares, Partially Diluted** |   | **Percentage**                            |   | **Number of Shares** |   | **Percentage** |   |
| DeCrane Holdings  Co.                                                                   |   | 100                                     |   | 100.0                                     | %      | — |   | — |   |
| c/o DLJ Merchant  Banking Partners II, L.P.

Eleven Madison  Avenue, New York, NY 10010 |   |                                    |   |                                      |   |   |   |   |   |
| DLJ Merchant  Banking Partners II, L.P. affiliates (3)                                  |   | —                                  |   | —                                    |   | 200,000 |   | 80.0 | % |
| Eleven Madison  Avenue, New York, NY 10010                                              |   |                                    |   |                                      |   |   |   |   |   |
| Thompson Dean  (4)                                                                      |   | —                                  |   | —                                    |   | — |   | — |   |
| c/o Credit  Suisse First Boston

Eleven Madison  Avenue, New York, NY 10010             |   |                                    |   |                                      |   |   |   |   |   |
| Susan C.  Schnabel (4)                                                                  |   | —                                  |   | —                                    |   | — |   | — |   |
| c/o Credit  Suisse First Boston

Eleven Madison  Avenue, New York, NY 10010             |   |                                    |   |                                      |   |   |   |   |   |
| Putnam  Investment Management, Inc. and affiliates (5)                                  |   | —                                  |   | —                                    |   | 50,000 |   | 20.0 | % |
| One Post Office  Square, Boston, MA 02109                                               |   |                                    |   |                                      |   |   |   |   |   |
| John F. Fort,  III                                                                      |   | —                                  |   | —                                    |   | — |   | — |   |
| R. Jack DeCrane                                                                         |   | —                                  |   | —                                    |   | — |   | — |   |
| Richard J.  Kaplan                                                                      |   | —                                  |   | —                                    |   | — |   | — |   |
| Robert G. Martin                                                                        |   | —                                  |   | —                                    |   | — |   | — |   |
| Jeffrey A.  Nerland                                                                     |   | —                                  |   | —                                    |   | — |   | — |   |
| Jeffrey A. Smith                                                                        |   | —                                  |   | —                                    |   | — |   | — |   |
| All directors  and named executive officers as a group (eight persons)                  |   | —                                  |   | —                                    |   | — |   | — |   |

 

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(1)                      Each person who has the power to vote anddirect the disposition of shares is deemed to be a beneficial owner of those shares.

(2)                      The common stock columns reflect thenumber of shares owned and the total percentage ownership in the mannerrequired by Securities and Exchange Commission rules. The entries for eachholder assumes, if applicable, that the particular holder, and no one else,fully exercises all rights under warrants to purchase common stock and commonstock which may be acquired upon the exercise of stock options and which areexercisable, or will be exercisable, prior to 60 days fromFebruary 28, 2002.

 

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(3)                      Reflects preferred stock held by thefollowing investors affiliated with DLJ Merchant Banking Partners II, L.P.:

 

| •      DLJ  Investment Partners, L.P.    |   | •      DLJIP II  Holdings, L.P. |
|------------------------------------------------------------------------|--------|---------------------------------------------------------------|
| •      DLJ  Investment Partners II, L.P. |   |                                                          |

The address of each of the investors is Eleven MadisonAvenue, New York, New York 10010.

(4)                      Mr. Dean and Ms. Schnabel are officers ofDLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II,L.P and directors of DeCrane Holdings Co. The DLJ entities are affiliates of,and commonly collectively referred to as, Credit Suisse First Boston. See “Item13. Certain Relationships and Related Transactions—Transactions with Managementand Others” for additional information. The share data shown for theseindividuals excludes shares shown as held by the DLJ affiliates and DeCraneHoldings Co. separately listed in this table; Mr. Dean and Ms. Schnabeldisclaim beneficial ownership of those shares.

(5)                      Reflects preferred stock held by the followinginvestors related to Putnam Investment Management, Inc.:

 

| •      Putnam  Diversified Income Trust            |   | •      Putnam  High Yield Trust                     |
|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|
| •      Putnam  Fund Trust — Putnam High Yield |   | •      Putnam  Strategic Income Fund                |
| Trust II                                                                         |   | •      Putnam  Variable Trust — Putnam VT High |
| •      Putnam  High Yield Advantage Fund           |   | Yield Fund                                                                        |

The address of each of the investors is One PostOffice Square, Boston, MA 02109.

**Securities Authorized for Issuance Under EquityCompensation Plans**

Our Management Incentive Stock Option Plan, which isan equity compensation plan approved by our stockholders, is described in Note14 accompanying our financial statements included in this report.

**ITEM 13.**                                  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

**Transactions with Management and Others**

**Acquisition of Donaldson, Lufkin & Jenrette, Inc.by Credit Suisse Group**

DLJ Merchant Banking Partners, II, L.P. is anaffiliate of Donaldson, Lufkin & Jenrette, Inc. In November 2000, CreditSuisse Group and its Credit Suisse First Boston, Inc. subsidiary acquiredDonaldson, Lufkin & Jenrette, Inc. Upon completion of the acquisition,Donaldson, Lufkin & Jenrette, Inc. was renamed Credit Suisse First Boston(USA), Inc. The combined operations are commonly referred to collectively asCredit Suisse First Boston.

**Arrangements With Other CSFB / DLJ Affiliates**

Credit Suisse First Boston, as successor to DLJCapital Funding, Inc., receives customary fees and reimbursement of expenses inconnection with the arrangement and syndication of our senior bank creditfacility. Credit Suisse First Boston Corporation, referred to herein as CSFBCorporation and formerly known as Donaldson, Lufkin & Jenrette SecuritiesCorporation, is the sole market-maker for our senior subordinated notes. Inaddition, DeCrane Aircraft is obligated to pay CSFB Corporation an annualadvisory fee of $300,000 until 2003. We may from time to time enter into otherinvestment banking relationships with CSFB Corporation or one of its affiliatespursuant to which they will receive customary fees and will be entitled toreimbursement for all reasonable disbursements and out-of-pocket expensesincurred in connection therewith. We expect that any such arrangement willinclude provisions for the

47

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indemnification of CSFBCorporation against liabilities, including liabilities under the federalsecurities laws.

**Investors’ Agreement**

Investors owing 96.6% of DeCrane Holdings’ issued andoutstanding common stock and common stock warrants and options, all of DeCraneHoldings’ preferred stock and all of DeCrane Aircraft’s preferred and commonstock, have entered into an Amended and Restated Investors’ Agreement, datedOctober 6, 2000. The investors who own DeCrane Holdings’ warrants to purchase159,794 shares of common stock are not parties to the Investors’ Agreement. Theagreement provides that:

 

•                    The parties tothe agreement shall vote their shares to cause DLJ Merchant BankingPartners, II, L.P. to select all members of the Board of Directors ofDeCrane Holdings and DeCrane Aircraft and at least one of such directors oneach board shall be an independent director.

 

•                    Transfers ofthe shares by the parties to the agreement are restricted.

 

•                    Parties to theagreement may participate in some specific kinds of sales of shares by DLJaffiliates.

 

•                    DLJ affiliatesmay require the other parties to the agreement to sell shares of DeCraneHoldings’ common stock in some cases should the DLJ affiliates choose to sellany such shares owned by them.

 

•                    The DLJaffiliates may request six demand registrations with respect to all or any ofthe DeCrane Holdings common stock, preferred stock and Class A warrants topurchase 155,000 common shares held by those affiliates, which are immediatelyexercisable subject to customary deferral and cutback provisions.

 

•                    The holders ofClass B warrants to purchase 139,357 shares of DeCrane Holdings common stockmay request two demand registrations together with all or any common stock heldby them, which are immediately exercisable subject to customary deferral andcutback provisions.

 

•                    The parties tothe agreement are entitled to unlimited piggyback registration rights, subjectto customary cutback provisions, and excluding registrations of shares issuablein connection with any employee stock options, employee benefit plan or anacquisition.

 

•                    DeCraneHoldings will indemnify the stockholders against some liabilities and expenses,including liabilities under the Securities Act.

 

•                    Any personacquiring shares of common stock or preferred stock who is required by the termsof the Investors’ Agreement or any employment agreement or stock purchase,option, stock option or other compensation plan to become a party thereto shallexecute an agreement to become bound by the Investors’ Agreement.

Each DeCrane Holdings’ Class A Warrant entitles theholder to purchase one share of common stock at an exercise price of not lessthan $0.01 per share subject to customary antidilution provisions and othercustomary terms. The warrants are exercisable at any time prior to 5:00 p.m.New York City time on August 28, 2009, subject to applicable federal and statesecurities laws.

Each DeCrane Holdings’ Class B Warrant entitles theholder to purchase one share of common stock at an exercise price of not lessthan $0.01 per share subject to customary antidilution provisions and othercustomary terms. The warrants are exercisable at any time prior to 5:00 p.m.New York City time on June 30, 2010, subject to applicable federal andstate securities laws.

48

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**Transactions During 2001and 2002**

Securities and Exchange Commission rules require webriefly describe transactions, or series of similar transactions, withspecified persons (as defined in the rules) and involving amounts exceeding$60,000, which have occurred since January 1, 2001, the beginning of our mostrecent fiscal year. These transactions are briefly described below and are alsodescribed in the notes accompanying our financial statements included in thisreport.

Credit Suisse First Boston, as successor to DLJCapital Funding, Inc., received customary fees and reimbursement of expenses inconnection with the flowing transactions:

 

•                    During 2001DeCrane Aircraft amended its senior credit facility and borrowed an additional$20.0 million of term debt; and

 

•                    In March 2002,DeCrane Aircraft further amended the terms of its senior credit facility.

In addition, CSFB Corporation receives a $300,000annual advisory fee and, in January 2002, Mr. Fort was granted additionaloptions to purchase 7,500 common shares at $27.00 per share under the sameterms as the management incentive plan.

**Indebtedness of Executive Officers and Directors**

The following table sets forth all indebtedness owedto us by our executive officers and directors that individually exceeds $60,000as required by Securities and Exchange Commission rules. All indebtedness setforth below results from purchases of DeCrane Holdings common stock and ispayable to DeCrane Aircraft. The indebtedness, plus accrued interest, ispayable upon the sale of the DeCrane Holdings stock held as collateral for eachof the loans. See “Item 10. Directors and Executive Officers of the Registrant”for information regarding each individual’s relationship with DeCrane Aircraftand DeCrane Holdings.

 
|                |   | **Number of Shares**       |   |                  |   | **Total Indebtedness to DeCrane Aircraft as of December 31,  2001** |    |
|---------------------|--------|----------------------------|--------|-----------------------|--------|---------------------------------------------------------------------|---------|
| **Name**            |   | **Held as Collateral (1)** |   | **Interest Rate (2)** |   | **Principal (3)**                                                   |    | **Accrued Interest (4)** |   | **Total (5)** |   |
| R. Jack DeCrane     |   | 56,521                     |   | 5.74                  | %      | $                                                                   | 649,991 |   | $ | 78,018 |   | $ | 728,009 |   |
| Richard J. Kaplan   |   | 21,739                     |   | 5.74                  |   | 249,998                                                             |    | 30,007 |   | 280,005 |   |
| Jeffrey A.  Nerland |   | 6,521                      |   | 5.74                  |   | 74,991                                                              |    | 9,001 |   | 83,992 |   |
| Jeffrey F. Smith    |   | 8,695                      |   | 5.74                  |   | 99,992                                                              |    | 12,002 |   | 111,994 |   |
|                     |        |                            |        |                       |        |                                                                     |         |  |  |  |  |  |  |  |

 

----

(1)                      Reflects the number of shares of DeCraneHoldings common stock held by DeCrane Aircraft as collateral for the loans.

(2)                      Reflects the applicable federal rate ofinterest charged on the loans. Interest is compounded annually.

(3)                      Reflects the original principal amount ofthe loans.

(4)                      Reflects accrued interest payable throughDecember 31, 2001.

(5)                      Reflects the maximum amount ofindebtedness during the year ended December 31, 2001.

 

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**PART IV**

**ITEM 14.**                                  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTSON FORM 8-K

**List of Documents Filed as Part of this Report**

**1.         Financial Statements**

Our consolidated financial statements filed with thisreport are included in a separate section at the end of this report and arelisted in an index on page F-1.

**2.         Financial Statement Schedules**

Our consolidated financial statement schedules filedwith this report are included in a separate section at the end of this reportand are listed in an index on page F-1.

**3.         Exhibits**

The following exhibits are filed as part of thisreport.
| **Exhibit Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                    |
|--------------------|--------|----------------------|--------|----------------------------------------------------------------------------------------------------------------------------|
| 3.1.1              |   | (1)                  |   | Bylaws of DeCrane Holdings Co.                                                                                             |
|               |   |                 |   |                                                                                                                       |
| 3.1.2              |   | (1)                  |   | Certificate of Incorporation of DeCrane Holdings Co.                                                                       |
|               |   |                 |   |                                                                                                                       |
| 3.1.2.1            |   | (11)                 |   | Certificate of Amendment of Certificate of  Incorporation of DeCrane Holdings Co. dated May 8, 2000                        |
|               |   |                 |   |                                                                                                                       |
| 3.2.1              |   | (1)                  |   | Certificate of Incorporation of DeCrane Aircraft  Holdings, Inc.                                                           |
|               |   |                 |   |                                                                                                                       |
| 3.2.1.1            |   | (15)                 |   | Certificate of Amendment of Certificate of  Incorporation of  DeCrane Aircraft  Holdings, Inc. dated October 17, 2001 |
|               |   |                 |   |                                                                                                                       |
| 3.2.2              |   | (1)                  |   | Bylaws of DeCrane Aircraft Holdings, Inc.                                                                                  |
|               |   |                 |   |                                                                                                                       |
| 3.3.1              |   | (10)                 |   | Certificate of Formation and Certificate of Merger  of  Aerospace Display Systems, LLC                                |
|               |   |                 |   |                                                                                                                       |
| 3.3.2              |   | (10)                 |   | Limited Liability Company Operating Agreement  for  Aerospace Display Systems, LLC                                    |
|               |   |                 |   |                                                                                                                       |
| 3.4.1              |   | (1)                  |   | Articles of Incorporation of Audio International,  Inc.                                                                    |
|               |   |                 |   |                                                                                                                       |
| 3.4.2              |   | (1)                  |   | Amended & Restated Bylaws of Audio  International, Inc.                                                                |
|               |   |                 |   |                                                                                                                       |
| 3.5.1              |   | (1)                  |   | Articles of Incorporation of Avtech Corporation                                                                            |
|               |   |                 |   |                                                                                                                       |
| 3.5.2              |   | (1)                  |   | Bylaws of Avtech Corporation                                                                                               |
|               |   |                 |   |                                                                                                                       |
| 3.7.1              |   | *                    |   | Certificate of Formation and Certificate of Merger  of Dettmers Industries, LLC                                  |
|               |   |                 |   |                                                                                                                       |
| 3.7.2              |   | *                    |   | Limited Liability Company Operating Agreement of  Dettmers Industries, LLC                                       |
|               |   |                 |   |                                                                                                                       |
| 3.10.1             |   | (1)                  |   | Articles of Incorporation of Hollingsead International,  Inc.                                                              |
|               |   |                 |   |                                                                                                                       |
| 3.10.2             |   | (1)                  |   | Bylaws of Hollingsead International Inc.                                                                                   |
|               |   |                 |   |                                                                                                                       |
| 3.11.1             |   | (1)                  |   | Articles of Incorporation of Tri-Star Electronics  International, Inc.                                                     |
|               |   |                 |   |                                                                                                                       |
| 3.11.2             |   | (1)                  |   | Bylaws of Tri-Star Electronics International, Inc.                                                                         |

 

50

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| **Exhibit Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                            |
|--------------------|--------|----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.12.1             |   | (1)                  |   | Articles of Incorporation of PATS, Inc.                                                                                                                                                                            |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.12.2             |   | (1)                  |   | Bylaws of PATS, Inc.                                                                                                                                                                                               |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.12.3             |   | (1)                  |   | Amendment to Articles of Incorporation of PATS, Inc.                                                                                                                                                               |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.12.4             |   | (1)                  |   | Amendment to Bylaws of PATS, Inc.                                                                                                                                                                                  |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.17.1             |   | (3)                  |   | Articles of Incorporation of PPI Holdings, Inc.                                                                                                                                                                    |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.17.2             |   | (3)                  |   | Bylaws of PPI Holdings, Inc.                                                                                                                                                                                       |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.18.1             |   | (3)                  |   | Articles of Incorporation of Precision Pattern, Inc.                                                                                                                                                               |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.18.2             |   | (3)                  |   | Bylaws of Precision Pattern, Inc.                                                                                                                                                                                  |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.19.1             |   | (10)                 |   | Certificate of Formation and Certificate of Merger  for  Custom Woodwork & Plastics,  LLC                                                                                                                 |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.19.2             |   | (10)                 |   | Limited Liability Company Operating Agreement  for  Custom Woodwork & Plastics,  LLC                                                                                                                      |
| 3.20.1             |   | (4)                  |   | Articles of Incorporation of PCI Newco, Inc.  (formerly  PCI Acquisition Co., Inc.)                                                                                                                           |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.20.1.1           |   | *                    |   | Certificate of Amendment of Articles of  Incorporation of  PCI Acquisition Co.,  Inc. (changing its name to PCI Newco, Inc.)                                                                                  |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.20.2             |   | (4)                  |   | Bylaws of PCI Newco, Inc. (formerly PCI Acquisition  Co., Inc.)                                                                                                                                                    |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.22.1             |   | (5)                  |   | Articles of Incorporation DAH-IP Holdings, Inc.                                                                                                                                                                    |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.22.2             |   | (5)                  |   | Bylaws of DAH-IP Holdings, Inc.                                                                                                                                                                                    |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.23.1             |   | (5)                  |   | Articles of Incorporation of DAH-IP Infinity, Inc.                                                                                                                                                                 |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.23.2             |   | (5)                  |   | Bylaws of DAH-IP Infinity, Inc.                                                                                                                                                                                    |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.24.1             |   | (5)                  |   | Certificate of Limited Partnership of The Infinity  Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.)                                                                                                         |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.24.1.1           |   | *                    |   | Certificate of Amendment of the Certificate of  Limited Partnership of DAH-IP Acquisition Co., L.P. (changing its name to The  Infinity Partners, LTD.)                                                            |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.24.2             |   | (5)                  |   | Limited Partnership Agreement of The Infinity  Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) among DAH-IP Holdings,  Inc., the General Partner, and DeCrane Aircraft Holdings, Inc., the Limited  Partner |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.24.3             |   | (5)                  |   | Assignment of Partnership Interest in The Infinity  Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) by DeCrane Aircraft  Holdings, Inc. to DAH-IP Infinity, Inc.                                            |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.25.1             |   | (8)                  |   | Certificate of Formation and Certificate of  Amendment of  Carl F. Booth & Co.,  LLC                                                                                                                      |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.25.2             |   | (8)                  |   | Limited Liability Company Agreement of Carl F. Booth  & Co., LLC                                                                                                                                               |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.26.1             |   | (10)                 |   | Restated Articles of Incorporation of ERDA, Inc.                                                                                                                                                                   |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.26.2             |   | (10)                 |   | Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co.,  Inc.)                                                                                                                                                        |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.27.1             |   | (12)                 |   | Articles of Incorporation of Coltech, Inc.                                                                                                                                                                         |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.27.2             |   | (12)                 |   | Bylaws of Coltech, Inc.                                                                                                                                                                                            |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.29.1             |   | (13)                 |   | Certificate of Limited Partnership of DeCrane Aircraft  Furniture Co., LP                                                                                                                                          |
|               |   |                 |   |                                                                                                                                                                                                               |
| 3.29.2             |   | (13)                 |   | Limited Partnership Agreement of DeCrane Aircraft  Furniture Co., LP                                                                                                                                               |

 

51

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| **Exhibit Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                |
|--------------------|--------|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1                |   | (1)                  |   | Indenture dated October 5, 1998 between DeCrane  Aircraft and  State Street Bank and  Trust Company                                                                                                                                                               |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.1              |   | (1)                  |   | Supplemental Indenture dated January 22, 1999 among  PATS, Inc. and its subsidiaries, the other guarantors under the Indenture,  DeCrane Aircraft and State Street Bank and Trust Company                                                                              |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.2              |   | (2)                  |   | Supplemental Indenture to be dated April 23, 1999  among PPI Holdings, Inc., Precision Pattern, Inc., the other guarantors under  the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                              |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.3              |   | (12)                 |   | Supplemental Indenture to be dated August 5, 1999  among CWP Acquisition, Inc. d/b/a Custom Woodwork & Plastics, Inc., the  other guarantors under the Indenture, DeCrane Aircraft and State Street Bank  and Trust Company                                        |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.4              |   | (12)                 |   | Supplemental Indenture to be dated October 6, 1999  among PCI Acquisition Co., Inc. d/b/a PCI Newco, Inc., the other guarantors  under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                         |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.5              |   | (12)                 |   | Supplemental Indenture to be dated October 8, 1999  among International Custom Interiors, Inc., the other guarantors under the  Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                    |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.6              |   | (12)                 |   | Supplemental Indenture to be dated December 17, 1999  among DAH-IP Acquisition, L.P. d/b/a Infinity Partners, L.P., DAH-IP  Holdings, Inc., DAH-IP Infinity, Inc., the other guarantors under the  Indenture, DeCrane Aircraft and State Street Bank and Trust Company |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.7              |   | (12)                 |   | Supplemental Indenture to be dated May 11, 2000  among Booth Acquisition, LLC, the other guarantors under the Indenture,  DeCrane Aircraft and State Street Bank and Trust Company                                                                                     |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.8              |   | (12)                 |   | Supplemental Indenture to be dated June 16, 2000  among DeCrane Aircraft Furniture Co., L.P., the other guarantors under the  Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                      |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.9              |   | (12)                 |   | Supplemental Indenture to be dated June 30, 2000  among ERDA, Inc., the other guarantors under the Indenture, DeCrane Aircraft  and State Street Bank and Trust Company                                                                                                |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.1.10             |   | (12)                 |   | Supplemental Indenture to be dated August 31, 2000  among Coltech, Inc., the other guarantors under the Indenture, DeCrane  Aircraft and State Street Bank and Trust Company                                                                                           |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.3                |   | (1)                  |   | Form of Class A Warrant for the Purchase of 155,000  Shares of Common Stock of DeCrane Holdings Co. at an exercise price of $.01  per share                                                                                                                            |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.3.1              |   | (10)                 |   | Form of Class B Warrant for the Purchase of 139,357  Shares of Common Stock of DeCrane Holdings Co. at an exercise price of $.01  per share                                                                                                                            |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.3.2              |   | *                    |   | Warrant Agreement dated October 5, 1998 for the  Purchase of 155,000 Shares of Common of DeCrane Holdings Co. at an exercise  price of $23.00 per share                                                                                                                |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.4                |   | (1)                  |   | Warrant Registration Rights Agreement — DeCrane  Holdings Co.                                                                                                                                                                                                     |
|               |   |                 |   |                                                                                                                                                                                                                                                                   |
| 4.5                |   | *                    |   | Certificate of Amendment amending the Certificate of  Designations, Preferences and Rights of 14% Senior Redeemable Exchangeable  Preferred Stock due 2008, effective October 2, 1998                                                                                  |

 

52

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| **Exhibit Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                     |
|--------------------|--------|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.5.1              |   | (10)                 |   | Amendment No. 1 to the Certificate of Designations,  Preferences and Rights of 14% Senior Redeemable Exchangeable Preferred Stock  due 2008, effective June 29, 2000                                                                                                                                        |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.1               |   | (10)                 |   | Securities Purchase Agreement dated as of June 30,  2000 among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the  purchasers named therein                                                                                                                                                      |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.2               |   | (12)                 |   | Amended and Restated Investors’ Agreement dated as  of October 6, 2000 by and among DeCrane Holdings Co., DeCrane Aircraft  Holdings, Inc. and the stockholders named therein                                                                                                                          |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.5               |   | (1)                  |   | Tax Sharing Agreement dated March 15, 1993 between  DeCrane Aircraft and several subsidiaries                                                                                                                                                                                                               |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.6 **            |   | (1)                  |   | Employment Agreement dated July 17, 1998 between  DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane                                                                                                                                                                                                       |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.6.1 **          |   | (13)                 |   | First Amendment to Employment Agreement dated May 5,  2000 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane                                                                                                                                                                                      |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.7 **            |   | (1)                  |   | 401(k) Salary Reduction Non-Standardized Adoption  Agreement dated April 30, 1992 between the Company and The Lincoln  National Life Insurance Company                                                                                                                                            |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.8               |   | (1)                  |   | Form of Subscription Agreement for DeCrane Holdings  Co. common and preferred stock by certain members of Global Technology  Partners LLC                                                                                                                                                                   |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10              |   | (1)                  |   | Credit Agreement dated August 28, 1998 by and among  DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.)  and DLJ Capital Funding, Inc.                                                                                                                                            |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.1            |   | (1)                  |   | First Amendment to Credit Agreement dated January  22, 1999                                                                                                                                                                                                                                                 |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.2            |   | (6)                  |   | Second Amended and Restated Credit Agreement dated  as of December 17, 1999 among DeCrane Aircraft Holdings, Inc., the  lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and  Bank One NA, as administrative agent                                                        |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.3            |   | (9)                  |   | Third Amended and Restated Credit Agreement dated as  of May 11, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed  therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as  administrative agent                                                                        |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.3.1          |   | (12)                 |   | First Amendment to the Third Amended and Restated  Credit Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings,  Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication  agent, and Bank One NA, as administrative agent                                                |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.4            |   | (14)                 |   | Increased Commitments Agreement, dated as of April  27, 2001, pursuant to Third Amended and Restated Credit Agreement, dated as  of May 11, 2000, as amended by the First Amendment to the Third Amended and  Restated Credit Agreement, dated as of June 30, 2000                                          |
|               |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.5            |   | *                    |   | Second Amendment to the Third Amended and Restated  Credit Agreement dated as of March 19, 2002 among DeCrane Aircraft Holdings,  Inc., the lenders listed therein, Credit Suisse First Boston (as successor to  DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as  administrative agent |

 

53

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| **Exhibit Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                     |
|--------------------|--------|----------------------|--------|---------------------------------------------------------------------------------------------|
| 10.19 **           |   | (5)                  |   | Amended Management Incentive Stock Option Plan                                              |
|               |   |                 |   |                                                                                        |
| 10.20 **           |   | (5)                  |   | Amended Stock Subscription Agreement                                                        |
|               |   |                 |   |                                                                                        |
| 10.21 **           |   | (5)                  |   | Amended Incentive Bonus Plan                                                                |
|               |   |                 |   |                                                                                        |
| 10.22 **           |   | (7)                  |   | Executive Deferred Compensation Plan                                                        |
|               |   |                 |   |                                                                                        |
| 10.23.3 **         |   | (13)                 |   | Change of Control Agreement between DeCrane Aircraft  Holdings, Inc. and Richard J. Kaplan  |
|               |   |                 |   |                                                                                        |
| 10.23.5 **         |   | (13)                 |   | Change of Control Agreement between DeCrane Aircraft  Holdings, Inc. and Robert G. Martin   |
|               |   |                 |   |                                                                                        |
| 10.23.7 **         |   | (13)                 |   | Change of Control Agreement between DeCrane Aircraft  Holdings, Inc. and Jeffrey A. Nerland |
|               |   |                 |   |                                                                                        |
| 10.23.8 **         |   | (13)                 |   | Change of Control Agreement between DeCrane Aircraft  Holdings, Inc. and Jeffrey F. Smith   |
|               |   |                 |   |                                                                                        |
| 21.1               |   | *                    |   | List of Subsidiaries of Registrant                                                          |
|               |   |                 |   |                                                                                        |
| 23.1               |   | *                    |   | Consent of PricewaterhouseCoopers LLP                                                       |
|               |   |                 |   |                                                                                        |
| 99.1               |   | (13)                 |   | Unaudited Pro Forma Financial Data for the year  ended December 31, 2000                    |

 

----

*                              Filed herewith.

**                       Denotes management contracts andcompensatory plans and arrangements required to be filed as exhibits to thisreport.

(1)                       Filed as an exhibit to our RegistrationStatement (Registration No. 333-70363) on Form S-1 (Amendment No. 1) filedwith the Commission on March 3, 1999.

(2)                       Filed as an exhibit to our RegistrationStatement (Registration No. 333-70363) on Form S-1 (Amendment No. 2) filedwith the Commission on April 23, 1999.

(3)                       Filed as an exhibit to our RegistrationStatement (Registration No. 333-70363) on Form S-1 (Amendment No. 3) filedwith the Commission on May 6, 1999.

(4)                       Filed as an exhibit to our Form 8-K datedAugust 5, 1999 filed with the Commission on October 19, 1999.

(5)                       Filed as an exhibit to our Form 8-K datedDecember 17, 1999 filed with the Commission on December 31, 1999.

(6)                       Filed as an exhibit to our Form 10-Kdated December 31, 1999 filed with the Commission on March 30, 2000.

(7)                       Filed as an exhibit to our Form 10-Qdated March 31, 2000 filed with the Commission on May 9, 2000.

(8)                       Filed as an exhibit to our Form 8-K datedMay 11, 2000 filed with the Commission on May 25, 2000.

(9)                       Filed as an exhibit to our Form 8-K(Amendment No. 1) dated May 11, 2000 filed with the Commission onJune 16, 2000.

(10)                 Filed as an exhibit to our Form 8-K (Amendment No. 1)dated June 30, 2000 filed with the Commission on August 2, 2000.

 

54

----

(11)                 Filed as an exhibit to our Form 10-Q datedJune 30, 2000 filed with the Commission on August 14, 2000.

(12)                 Filed as an exhibit to our Form 10-Q datedSeptember 30, 2000 filed with the Commission onNovember 14, 2000.

(13)                 Filed as an exhibit to our Form 10-K dated December31, 2000 filed with the Commission on March 30, 2001.

(14)                 Filed as an exhibit to our Form 10-Q dated March 31,2001 filed with the Commission on May 14, 2001.

(15)                 Filed as an exhibit to our Form 10-Q dated September30, 2001 filed with the Commission on November 13, 2001.

**            Reports of Form 8-K Filed During the Quarter EndedDecember 31, 2001**

None.

55

----

**SIGNATURES**

Pursuant to the requirements of Section 13 of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 

**DECRANE HOLDINGS CO. (Registrant)**

 

 
| By:    | /s/  Thompson  Dean |   | By:    | /s/  Richard  J. Kaplan                                            |
|--------|--------------------------|--------|--------|-------------------------------------------------------------------------|
|   | Thompson Dean            |   |   | Richard J. Kaplan                                                       |
|   | President                |   |   | Assistant Secretary and Assistant Treasurer (chief  accounting officer) |
|   |                     |   |   |                                                                    |
| Date:  | March 26, 2002           |   |   |                                                                    |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| By:    | /s/  Thompson  Dean           |   | By:    | /s/  R. Jack  DeCrane          |
|--------|------------------------------------|--------|--------|-------------------------------------|
|   | Thompson Dean                      |   |   | R. Jack DeCrane                     |
|   | Chairman of the Board of Directors |   |   | Vice Chairman of Board of Directors |
|   |                               |   |   |                                |
|   |                               |   |   |                                |
| By:    | /s/  John F.  Fort, III       |   | By:    | /s/  Susan C.  Schnabel        |
|   | John F. Fort, III                  |   |   | Susan C. Schnabel                   |
|   | Director                           |   |   | Director                            |
|   |                               |   |   |                                |
| Date:  | March 26, 2002                     |   |   |                                |

 

 

56

----

 

 

 

**Indexto Consolidated Financial Statements and Financial Statement Schedules**
|                                                                                                        |   |
|-------------------------------------------------------------------------------------------------------------|--------|
| **Consolidated Financial Statements**                                                                       |   |
| Report of Independent  Accountants                                                                          |   |
| Consolidated Balance Sheets  as of December 31, 2001 and 2000                                               |   |
| Consolidated  Statements of Operations for the years ended December 31, 2001, 2000 and 1999                 |   |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2001,  2000 and 1999 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999                 |   |
| Notes to  Consolidated Financial Statements                                                                 |   |
|                                                                                                        |   |
| **Consolidated Supplementary  Financial Information**                                                       |   |
|                                                                                                        |   |
| Selected Quarter Financial Data (Unaudited)                                                                 |   |
|                                                                                                        |   |
| **Consolidated Financial Statement  Schedules**                                                             |   |
|                                                                                                        |   |
| For the years ended December 31, 2001, 2000 and  1999:                                                      |   |
|                                                                                                        |   |
| II — Valuation  and Qualifying Accounts                                                                |   |

All other schedules are omitted because they areeither not applicable or the required information is shown in the consolidatedfinancial statements or notes thereto.

 

 

 

 

F-1

----

**REPORT OF INDEPENDENT ACCOUNTANTS**

To the Board of Directors

and Stockholders of

DeCrane Holdings Co.

 

In our opinion, the consolidated financial statementslisted in the accompanying index present fairly, in all material respects, thefinancial position of DeCrane Holdings Co. and its subsidiary at December 31,2001 and 2000, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2001, in conformity withaccounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements. These financial statements and financial statementschedule are the responsibility of the Company’s management; our responsibilityis to express an opinion on these financial statements and financial statementschedule based on our audits. We conducted our audits of these statements inaccordance with auditing standards generally accepted in the United States ofAmerica, which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

 

 

 

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

March 1, 2002, except for Note 18,

which is as of March 19, 2002

 

 

 

 

**F-2**

----

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**ConsolidatedBalance Sheets**

**(In thousands, except share data)**
|                                        |   | **December 31,** |    |
|---------------------------------------------|--------|------------------|---------|
|                                        |   | **2001**         |    | **2000** |   |
| **Assets**                                  |   |             |    |   |   |
| Current assets:                             |   |             |    |   |   |
| Cash and cash  equivalents                  |   | $                | 9,794   |   | $ | 8,199 |   |
| Accounts  receivable, net                   |   | 58,451           |    | 53,830 |   |
| Inventories                                 |   | 86,498           |    | 86,696 |   |
| Deferred income  taxes                      |   | 14,063           |    | 15,090 |   |
| Prepaid expenses  and other current assets  |   | 2,559            |    | 1,366 |   |
| Total current  assets                       |   | 171,365          |    | 165,181 |   |
|                                        |   |             |    |   |   |
| Property and  equipment, net                |   | 61,073           |    | 59,491 |   |
| Other assets,  principally intangibles, net |   | 413,273          |    | 439,582 |   |
| Total assets                                |   | $                | 645,711 |   | $ | 664,254 |   |
|                                             |        |                  |         |  |  |  |  |  |  |

 
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity**                                                    |   |    |    |    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|---------|--------|
| Current liabilities:                                                                                                                      |   |    |    |    |   |
| Current portion  of long-term debt                                                                                                        |   | $       | 13,899  |    | $      | 9,289 |   |
| Accounts payable                                                                                                                          |   | 19,051  |    | 20,304  |   |
| Accrued  liabilities                                                                                                                      |   | 56,626  |    | 74,190  |   |
| Income taxes  payable                                                                                                                     |   | 133     |    | —  |   |
| Total current  liabilities                                                                                                                |   | 89,709  |    | 103,783 |   |
|                                                                                                                                      |   |    |    |    |   |
| Long-term debt                                                                                                                            |   | 386,351 |    | 373,990 |   |
| Deferred income  taxes                                                                                                                    |   | 33,597  |    | 37,013  |   |
| Other long-term  liabilities                                                                                                              |   | 7,438   |    | 6,534   |   |
|                                                                                                                                      |   |    |    |    |   |
| Commitments and  contingencies (Note 12)                                                                                                  |   |    |    |    |   |
|                                                                                                                                      |   |    |    |    |   |
| Minority  interest in preferred stock of subsidiary                                                                                       |   | 28,240  |    | 23,179  |   |
| Mandatorily  redeemable preferred stock                                                                                                   |   | 54,223  |    | 47,252  |   |
|                                                                                                                                      |   |    |    |    |   |
| Stockholders’  equity:                                                                                                               |   |    |    |    |   |
| Undesignated  preferred stock, $.01 par value, 1,140,000 shares authorized; none issued and  outstanding as of December 31, 2001 and 2000 |   | —  |    | —  |   |
| Common stock, $.01 par  value, 10,000,000 shares authorized; 3,914,274 shares issued and outstanding  as of December 31, 2001 and 2000    |   | 39      |    | 39      |   |
| Additional  paid-in capital                                                                                                               |   | 75,542  |    | 82,298  |   |
| Notes receivable  for shares sold                                                                                                         |   | (2,668  | )       | (2,552  | )      |
| Accumulated deficit                                                                                                                       |   | (24,658 | )       | (5,595  | )      |
| Accumulated  other comprehensive loss                                                                                                     |   | (2,102  | )       | (1,687  | )      |
| Total  stockholders’ equity                                                                                                          |   | 46,153  |    | 72,503  |   |
| Total  liabilities and stockholders’ equity                                                                                          |   | $       | 645,711 |    | $      | 664,254 |   |
|                                                                                                                                           |        |         |         |         |        |  |  |  |  |

 

 

 

 

The accompanyingnotes are an integral part of the consolidated financial statements.

** **

** **

**F-3**

----

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Consolidated Statements of Operations**

**(In thousands)**
|                                                |   | **Year Ended December 31,** |    |
|-----------------------------------------------------|--------|-----------------------------|---------|
|                                                |   | **2001**                    |    | **2000** |   | **1999** |   |
|                                                |   |                        |    |   |   |   |   |
| Revenues                                            |   | $                           | 395,352 |   | $ | 347,379 |   | $ | 244,048 |   |
| Cost of sales                                       |   | 279,681                     |    | 232,048 |   | 165,871 |   |
|                                                |   |                        |    |   |   |   |   |
| Gross profit                                        |   | 115,671                     |    | 115,331 |   | 78,177 |   |
|                                                |   |                        |    |   |   |   |   |
| Operating  expenses:                                |   |                        |    |   |   |   |   |
| Selling, general  and administrative expenses       |   | 68,517                      |    | 45,394 |   | 40,157 |   |
| Amortization of  intangible assets                  |   | 19,920                      |    | 17,948 |   | 13,073 |   |
| Total operating  expenses                           |   | 88,437                      |    | 63,342 |   | 53,230 |   |
|                                                |   |                        |    |   |   |   |   |
| Income from  operations                             |   | 27,234                      |    | 51,989 |   | 24,947 |   |
|                                                |   |                        |    |   |   |   |   |
| Other expenses:                                     |   |                        |    |   |   |   |   |
| Interest expense                                    |   | 39,001                      |    | 41,623 |   | 27,903 |   |
| Minority  interest in preferred stock of subsidiary |   | 5,061                       |    | 2,274 |   | — |   |
| Other expenses,  net                                |   | 1,047                       |    | 482 |   | 447 |   |
|                                                |   |                        |    |   |   |   |   |
| Income (loss)  before provision for income taxes    |   | (17,875                     | )       | 7,610 |   | (3,403 | ) |
| Provision for  income taxes                         |   | 1,188                       |    | 6,282 |   | 952 |   |
|                                                |   |                        |    |   |   |   |   |
| Net income  (loss)                                  |   | (19,063                     | )       | 1,328 |   | (4,355 | ) |
|                                                |   |                        |    |   |   |   |   |
| Noncash  preferred stock dividend accretion         |   | (6,971                      | )       | (6,074 | ) | (5,294 | ) |
|                                                |   |                        |    |   |   |   |   |
| Net loss  applicable to common stockholders         |   | $                           | (26,034 | ) | $ | (4,746 | ) | $ | (9,649 | ) |
|                                                     |        |                             |         |  |  |  |  |  |  |  |  |

 

 

 

 

The accompanying notesare an integral part of the consolidated financial statements.

** **

** **

**F-4**

----

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Consolidated Statements of Stockholders’ Equity**

**(In thousands, except share data)**
|                                                                                     |   |             |       |       |       | **Additional  Paid-in Capital** |       | **Notes  Receivable For Shares Sold** |       | **Accumulated  Deficit** |       | **Accumulated  Other Comprehensive Loss** |       | **Total** |       |
|------------------------------------------------------------------------------------------|--------|------------------|------------|------------|------------|---------------------------------|------------|---------------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|-----------|------------|
|                                                                                     |   |             |       |       |       |                            |       |                                  |       |                     |
|                                                                                     |   | **Common Stock** |       |       |       |                            |       |                                  |
|                                                                                     |   | **Shares**       |       | **Amount** |       |                            |       |                                  |       |                     |
|                                                                                     |   |             | ** ** |       | ** ** |                            | ** ** |                                  | ** ** |                     | ** ** |                                      | ** ** |      | ** ** |
| Balance, December 31, 1998                                                               |   | 2,846,185        |       | $          | 28         |                            | $          | 64,497                                |       | $                        | (352       | )                                         | $          | (2,568    | )          | $ | 274 |   | $ | 61,879 |   |
|                                                                                     |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       |      |       |
| Comprehensive income (loss):                                                             |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       |      |       |
| Net loss                                                                                 |   | —           |       | —     |       | —                          |       | —                                |       | (4,355                   | )          | —                                    |       | (4,355    | )          |
| Translation adjustment                                                                   |   | —           |       | —     |       | —                          |       | —                                |       | —                   |       | (1,800                                    | )          | (1,800    | )          |
|                                                                                     |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       | (6,155    | )          |
| Sale of common stock and related notes  receivable issued in connection with shares sold |   | 725,642          |       | 8          |       | 16,598                          |       | (2,095                                | )          | —                   |       | —                                    |       | 14,511    |       |
| Noncash dividend accretion on preferred  stock                                           |   | —           |       | —     |       | (5,294                          | )          | —                                |       | —                   |       | —                                    |       | (5,294    | )          |
| Compensatory stock option expense                                                        |   | —           |       | —     |       | 143                             |       | —                                |       | —                   |       | —                                    |       | 143       |       |
| Notes receivable interest accrued                                                        |   | —           |       | —     |       | —                          |       | (21                                   | )          | —                   |       | —                                    |       | (21       | )          |
| Balance, December 31, 1999                                                               |   | 3,571,827        |       | 36         |       | 75,944                          |       | (2,468                                | )          | (6,923                   | )          | (1,526                                    | )          | 65,063    |       |
| Comprehensive income (loss):                                                             |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       |      |       |
| Net income                                                                               |   | —           |       | —     |       | —                          |       | —                                |       | 1,328                    |       | —                                    |       | 1,328     |       |
| Translation adjustment                                                                   |   | —           |       | —     |       | —                          |       | —                                |       | —                   |       | (161                                      | )          | (161      | )          |
|                                                                                     |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       | 1,167     |       |
| Sale of common stock, net of stock  repurchased and canceled                             |   | 342,447          |       | 3          |       | 7,848                           |       | 51                                    |       | —                   |       | —                                    |       | 7,902     |       |
| Value of warrants issued with sale of  preferred stock by subsidiary                     |   | —           |       | —     |       | 4,019                           |       | —                                |       | —                   |       | —                                    |       | 4,019     |       |
| Noncash dividend accretion on preferred  stock                                           |   | —           |       | —     |       | (6,074                          | )          | —                                |       | —                   |       | —                                    |       | (6,074    | )          |
|                                                                                     |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       |      |       |
| Compensatory stock option expense                                                        |   | —           |       | —     |       | 561                             |       | —                                |       | —                   |       | —                                    |       | 561       |       |
| Notes receivable interest accrued                                                        |   | —           |       | —     |       | —                          |       | (135                                  | )          | —                   |       | —                                    |       | (135      | )          |
| Balance, December 31, 2000                                                               |   | 3,914,274        |       | 39         |       | 82,298                          |       | (2,552                                | )          | (5,595                   | )          | (1,687                                    | )          | 72,503    |       |
| Comprehensive income (loss):                                                             |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       |      |       |
| Net income                                                                               |   | —           |       | —     |       | —                          |       | —                                |       | (19,063                  | )          | —                                    |       | (19,063   | )          |
| Translation adjustment                                                                   |   | —           |       | —     |       | —                          |       | —                                |       | —                   |       | (327                                      | )          | (327      | )          |
| Unrealized loss on interest rate swap  contract                                          |   | —           |       | —     |       | —                          |       | —                                |       | —                   |       | (88                                       | )          | (88       | )          |
|                                                                                     |   |             |       |       |       |                            |       |                                  |       |                     |       |                                      |       | (19,478   | )          |
| Noncash dividend accretion on preferred  stock                                           |   | —           |       | —     |       | (6,971                          | )          | —                                |       | —                   |       | —                                    |       | (6,971    | )          |
| Compensatory stock option expense                                                        |   | —           |       | —     |       | 215                             |       | —                                |       | —                   |       | —                                    |       | 215       |       |
| Notes receivable interest accrued                                                        |   | —           |       | —     |       | —                          |       | (116                                  | )          | —                   |       |                                      |       | (116      | )          |
| Balance, December 31, 2001                                                               |   | 3,914,274        |       | $          | 39         |                            | $          | 75,542                                |       | $                        | (2,668     | )                                         | $          | (24,658   | )          | $ | (2,102 | ) | $ | 46,153 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

** **

**F-5**

----

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Consolidated Statements of Cash Flows**

**(In thousands)**
|                                                                                      |   | **Year Ended December 31,** |    |
|-------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                                      |   | **2001**                    |    | **2000** |   | **1999** |   |
|                                                                                      |   |                        |    |   |   |   |   |
| **Cash  flows from operating activities:**                                                |   |                        |    |   |   |   |   |
| Net income  (loss)                                                                        |   | $                           | (19,063 | ) | $ | 1,328 |   | $ | (4,355 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                        |    |   |   |   |   |
| Depreciation and  amortization                                                            |   | 34,594                      |    | 29,445 |   | 20,802 |   |
| Noncash portion of  restructuring and asset impairment charges                            |   | 22,058                      |    | — |   | 7,242 |   |
| Minority  interest in preferred stock of subsidiary                                       |   | 5,061                       |    | 2,274 |   | — |   |
| Deferred income  taxes                                                                    |   | (37                         | )       | 5,121 |   | (380 | ) |
| Other, net                                                                                |   | 689                         |    | 773 |   | 132 |   |
| Changes in  assets and liabilities, net of effect from acquisitions:                      |   |                        |    |   |   |   |   |
| Accounts  receivable                                                                      |   | (5,085                      | )       | 1,036 |   | (3,736 | ) |
| Inventories                                                                               |   | (11,990                     | )       | (14,321 | ) | (11,243 | ) |
| Prepaid expenses  and other assets                                                        |   | (2,278                      | )       | 2,048 |   | 96 |   |
| Accounts payable                                                                          |   | (1,248                      | )       | 2,259 |   | 3,754 |   |
| Accrued  liabilities                                                                      |   | (7,615                      | )       | (12,973 | ) | 3,703 |   |
| Income taxes  payable                                                                     |   | 64                          |    | 583 |   | 862 |   |
| Other long-term  liabilities                                                              |   | (221                        | )       | (790 | ) | (1,677 | ) |
| Net cash  provided by operating activities                                                |   | 14,929                      |    | 16,783 |   | 15,200 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| **Cash  flows from investing activities:**                                                |   |                        |    |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired                                         |   | (13,529                     | )       | (89,546 | ) | (145,706 | ) |
| Capital  expenditures                                                                     |   | (11,899                     | )       | (22,689 | ) | (7,262 | ) |
| Other, net                                                                                |   | 636                         |    | 71 |   | 194 |   |
| Net cash used  for investing activities                                                   |   | (24,792                     | )       | (112,164 | ) | (152,774 | ) |
|                                                                                      |   |                        |    |   |   |   |   |
| **Cash  flows from financing activities:**                                                |   |                        |    |   |   |   |   |
| Senior term debt  borrowings                                                              |   | 20,000                      |    | 55,000 |   | 135,000 |   |
| Senior revolving  line of credit borrowings (repayments), net                             |   | (400                        | )       | 12,400 |   | (5,800 | ) |
| Proceeds from  the sale of preferred stock of subsidiary                                  |   | —                      |    | 24,924 |   | — |   |
| Proceeds from  the sale of common stock                                                   |   | —                      |    | 7,902 |   | 14,511 |   |
| Customer advance  and other borrowings                                                    |   | 2,797                       |    | 3,451 |   | 5,000 |   |
| Principal payments on  term debt, capitalized leases and other debt                       |   | (10,076                     | )       | (5,824 | ) | (1,953 | ) |
| Deferred  financing costs                                                                 |   | (767                        | )       | (1,900 | ) | (4,348 | ) |
| Other, net                                                                                |   | (157                        | )       | (297 | ) | (358 | ) |
| Net cash  provided by financing activities                                                |   | 11,397                      |    | 95,656 |   | 142,052 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| Effect of  foreign currency translation on cash                                           |   | 61                          |    | 6 |   | (78 | ) |
|                                                                                      |   |                        |    |   |   |   |   |
| Net increase in  cash and cash equivalents                                                |   | 1,595                       |    | 281 |   | 4,400 |   |
| Cash and cash  equivalents at beginning of period                                         |   | 8,199                       |    | 7,918 |   | 3,518 |   |
| Cash and cash  equivalents at end of period                                               |   | $                           | 9,794   |   | $ | 8,199 |   | $ | 7,918 |   |

 

 

 

 

The accompanying notesare an integral part of the consolidated financial statements.

** **

**F-6**

----

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**Note 1.           Summary of Significant AccountingPolicies**

**Organization and Description of Business**

DeCrane Holdings Co. (“DeCrane Holdings”) is a holdingcompany and does not have any material operations or assets other than itsownership of all of the common stock of DeCrane Aircraft Holdings, Inc. (“DeCraneAircraft”). References to the “Company” include both DeCrane Holdings andDeCrane Aircraft.

The Company is a leading provider of integratedassemblies, sub-assemblies and component parts to the aerospace industry. TheCompany’s businesses are organized into three separate operating groups: CabinManagement, Specialty Avionics and Systems Integration.

**Basis of Presentation**

The consolidated financial statements include theaccounts of the Company and all wholly-owned subsidiaries and majority-owned partnershipinterests. All intercompany accounts and transactions have been eliminated.Certain reclassifications have been made to prior years’ financial statementsto conform to the current year presentation.

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

**Inventories**

Inventories are stated at the lower of cost, as determinedunder the first-in, first-out (“FIFO”) method, or market. Costs includematerials, labor and manufacturing overhead.

**Property and Equipment**

Property and equipment for companies acquired arestated at fair value as of the date the acquisition occurred and at cost forall subsequent additions. Property and equipment are depreciated using thestraight-line method over their estimated useful lives. Useful lives formachinery and equipment range from three to twenty years. Building and buildingimprovements are depreciated using the straight-line method over theirestimated useful lives of forty years. Leasehold improvements are amortizedusing the straight-line method over their estimated useful lives or remaininglease term, whichever is less. Expenditures for maintenance and repairs areexpensed as incurred. The costs for improvements are capitalized. Uponretirement or disposal, the cost and accumulated depreciation of property andequipment are reduced and any gain or loss is recorded in income or expense.

** **

** **

**F-7**

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**Other Assets**

Goodwill is amortized on a straight-line basis overthirty years from the date the acquisition occurred. Additional goodwillresulting from contingent consideration payments subsequent to the acquisitiondate is amortized prospectively over the remaining period of the initialthirty-year term. Other intangibles are amortized on a straight-line basis overtheir estimated useful lives, ranging from five to fifteen years. Deferredfinancing costs are amortized using either the straight-line or effectiveinterest method, over the term of the related debt.

**Accounting for the Impairment of Long-Lived Assets**

The Company reviews long-lived assets and intangibleassets for impairment when events or changes in circumstances indicate thecarrying amount of an asset may not be recoverable. In the event the sum of theexpected undiscounted future cash flows resulting from the use of the asset isless than the carrying value of the asset, an impairment loss equal to theexcess of the asset’s carrying value over its fair value is recorded. In 2001,the Company recorded a $9,903,000 pre-tax charge to reflect the impairment lossresulting from a restructuring in the aftermath of the September 11, 2001 terroristattack on the United States. In 1999, the Company recorded a $1,259,000 pre-taxcharge to reflect the impairment loss resulting from the closing of amanufacturing facility. The impairment losses are described in Note 2.

**Accrued Warranties**

The Company sells some products to customers withvarious repair or replacement warranties. The terms of the warranties varyaccording to the customer and/or product involved. The most common warrantyperiods are either the earlier of twelve to sixty months from the date ofdelivery to the operator or forty-two months from the date of manufacture.

Provisions for estimated future warranty costs aremade in the period corresponding to the sale of the product and such costs havebeen within management’s expectations. Classification between short andlong-term warranty obligations is estimated based on historical trends.

**Income Taxes**

Deferred income taxes are determined using theliability method. A deferred tax asset or liability is determined based on thedifference between the financial statement and tax basis of assets andliabilities as measured by the enacted tax rates that will be in effect whenthese differences reverse. Deferred tax expense is the result of changes in thedeferred tax asset or liability. If necessary, valuation allowances areestablished to reduce deferred tax assets to their expected realizable values.

** **

** **

**F-8**

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**Derivative Financial Instruments**

Effective January 1, 2001, the Company adopted andbegan accounting for derivative financial instruments in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities.” The adoption did not have amaterial impact on the Company’s business, consolidated financial position,results of operations or cash flows. SFAS No. 133 requires companies to recordderivatives on the balance sheet as assets or liabilities, measured at fairvalue. It also requires that gains or losses resulting from changes in thevalues of those derivatives be accounted for depending on the use of thederivative and whether it qualifies for hedge accounting.

The Company does not use derivative financialinstruments for trading purposes but only to manage the risk that changes ininterest rates would have on future interest payments for a portion of itsvariable-rate debt. At December 31, 2001, the Company has an interest rate swapcontract to effectively convert $4,500,000 of variable-rate debt to 4.2%fixed-rate debt until maturity in 2008. The contract is considered to be ahedge against changes in the amount of future cash flows associated withinterest payments on this variable-rate debt. As a result, the interest rateswap contract is reflected at fair value and the related loss of $88,000 onthis contract is deferred in stockholders’ equity as a component ofcomprehensive income (loss). The deferred loss will be recognized in futureperiods as interest expense as the related fixed-rate interest payments aremade. In the unlikely event that the counterparty fails to perform under thecontract, the Company bears the credit risk that payments due to the Companymay not be collected.

**Fair Value of Financial Instruments**

All financial instruments are held for purposes otherthan trading. The estimated fair value of the Company’s long-term debt is basedon either quoted market prices or current rates for similar issues for debt ofthe same remaining maturities. The estimated fair value of the Company’s$100,000,000 senior subordinated debt was approximately $93,500,000 at December31, 2001 and $91,000,000 at December 31, 2000. All other non-derivativefinancial instruments as of December 31, 2001 and 2000 approximate theircarrying amounts either because of the short maturity of the instrument, orbased on their effective interest rates compared to current market rates forsimilar long-term debt or obligations.

**Foreign Currency Translation and Transactions**

The financial statements of the Company’s U.K. andSwiss subsidiaries have been translated into U.S. dollars from their functionalcurrencies, pounds sterling and Swiss francs, respectively, in the consolidatedfinancial statements. Assets and liabilities have been translated at theexchange rate on the balance sheet date and income statement amounts have beentranslated at average exchange rates in effect during the period. The nettranslation adjustment is reflected as a component of accumulated comprehensiveincome or loss within stockholders’ equity.

Realized foreign currency exchange gains included inother expenses, net in the consolidated statements of operations were $103,000for the year ended December 31, 2001, $351,000 for the year ended December 31,2000 and $530,000 for the year ended December 31, 1999.

** **

**F-9**

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**Revenue Recognition**

Revenues from the sale of manufactured products,except for products manufactured under long-term contracts, are recognized uponshipment of product to the customer provided that the Company has received asigned purchase order, the price is fixed, title has transferred, collection ofthe resulting receivables is probable, product returns are reasonably estimableand there are no remaining significant obligations. Provision for future returnsis recorded based on historical experience at the time revenue is recognized.

Revenues for products manufactured under long-termcontracts are recognized under the percentage-of-completion method using totalcontract price, actual costs incurred to date and an estimate of the completioncosts for each contract. Costs include all direct material and labor costs andthose indirect costs related to contract performance, such as indirect labor,supplies, tools, repairs, and depreciation costs. Selling, general, andadministrative costs are charged to expense as incurred.

Percentage-of-completion is measured using an estimateof direct labor incurred to date to total expected direct labor for eachcontract. This method is used because management considers expended directlabor to be the best available measure of progress on these contracts.Provisions for estimated losses on uncompleted contracts are made in the periodin which such losses are determined. Management believes that the Company willnot incur any losses on uncompleted contracts at December 31, 2001.

Measuring a contract’s percentage-of-completionrequires management to make estimates. As a result, it is reasonably possiblethat factors may cause management to change its revenue and cost estimates, therebyaltering estimated profitability. These factors include, but are not limitedto, changes in contract scope, material and labor efficiencies, contractpenalty provisions, if any, and final contract settlements. Revisions torevenue and profit estimates are made in the period in which the facts thatgive rise to the revision become known.

The asset “Costs and estimated earnings in excess ofbillings” represents revenues recognized in excess of amounts billed onuncompleted contracts and is reflected as a component of inventory. Conversely,the liability “Billings in excess of costs and estimated earnings” representsbillings in excess of revenues recognized on uncompleted contracts and isreflected as an accrued liability. Unbilled revenues are expected to be billedand collected during the succeeding twelve-month period.

**Research and Development Costs**

Research and development costs are expensed asincurred. Such costs were $3,697,000 for the year ended December 31, 2001,$4,630,000 for the year ended December 31, 2000 and $4,264,000 for the yearended December 31, 1999.

**Stock Option Plan**

As permitted under SFAS No. 123, “Accounting forStock-Based Compensation,” the Company measures compensation expense related tothe employee stock option plan utilizing the intrinsic value method asprescribed by Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees.”

** **

** **

**F-10**

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**Statements of Cash Flows**

For purposes of the statements of cash flows, cashequivalents include short-term, highly liquid investments with maturities ofthree months or less at the time of purchase.

**Recent Accounting Pronouncements**

*SFAS Nos. 141 and 142*

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

SFAS No. 141 establishes accounting and reportingstandards for business combinations. SFAS No. 141 requires that allbusiness combinations be accounted for using the purchase method of accountingand provides criteria for the initial recognition and measurement of goodwilland other intangible assets. SFAS No. 141 is effective for all businesscombinations initiated or completed after June 30, 2001. For business combinationscompleted prior to July 1, 2001, SFAS No. 141 is effective concurrent with theadoption of SFAS No. 142.

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

The Company is currently evaluating the impact the newaccounting standards will have on its consolidated financial position andresults of operations upon adoption on January 1, 2002; there will be no impacton cash flows. While the full, net of tax, impact has yet to be determined,adoption of the new standards will result in the following:

 

•                    Under thecriteria established in SFAS No. 141, the values ascribed to the assembledworkforces acquired are not recognized as an intangible asset apart fromgoodwill. As a result, as of December 31, 2001 the $4,803,000 net book valueascribed to the assembled workforces, which is also net of the related deferredincome tax liabilities, will be reclassified to goodwill as of January 1, 2002.

 

•                                Adoption of SFAS No. 142 on January1, 2002 will reduce amortization expense in future periods. If thenonamortization provisions of SFAS No. 142 had been effective as of thebeginning of 2001, goodwill and assembled workforces amortization totaling$14,319,000 for the year ended December 31, 2001 would have been eliminated.

The Company has until June 30, 2002 to complete itstransitional impairment testing of goodwill associated with adopting SFAS No.142 and until March 31, 2002 to complete its transitional impairment testing ofother intangible assets. The amount of impairment losses recognizable upon adoption,if any, is not known at this time.

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** **

**F-11**

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***SFAS No. 143***

In June 2001, the Financial Accounting Standards Boardissued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No.143 requires recognition of the fair value of liabilities associated with theretirement of long-lived assets when a legal obligation to incur such costsarises as a result of the acquisition, construction, development and/or thenormal operation of a long-lived asset. Adoption of SFAS No. 143 is requiredfor the Company’s fiscal year beginning January 1, 2002 although earlyapplication is permitted. The Company does not expect that the adoption of SFASNo. 143 will have an impact on its business, consolidated financial position,results of operations or cash flows.

*SFAS No. 144*

In August 2001, the Financial Accounting StandardsBoard issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets, “ which replaces SFAS No. 121, “Accounting for Impairment ofLong-Lived Assets and for Long-Lived to be Disposed Of” and also replaces andbroadens the provisions of Accounting Principles Board Opinion No. 30,“Reporting Results of Operations — Reporting the Effects of Disposal of aSegment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions.”

SFAS No. 144 establishes one accounting model, basedon framework established in SFAS No. 121, for the recognition,measurement and reporting of impairment of long-lived assets to be held andused and measurement of long-lived assets to be disposed of by sale. Thisaspect of SFAS No. 144 will primarily affect the Company’s accountingfor intangible assets subject to amortization as well as property and equipmentand other long-lived assets.

SFAS No. 144 significantly changes the criteria thatwould have to be met to classify an asset as held-for-sale. Under theprovisions of SFAS No. 144, assets to be disposed of will be stated at thelower of their fair values or carrying amounts and depreciation will no longerbe recognized.

SFAS No. 144 also supersedes the provisions of APBOpinion No. 30 with regard to reporting the effects of a disposal of a segmentof a business. SFAS No. 144 requires expected future operating losses from discontinuedoperations to be displayed in discontinued operations in the period(s) in whichthe losses are incurred, rather than as of the measurement date as presentlyrequired.

Adoption of SFAS No. 144 is required for the Company’sfiscal year beginning January 1, 2002 although early application is permitted.The Company is currently evaluating the impact this new standard will have onits business, consolidated financial position, results of operations and cashflows.

** **

**F-12**

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**Note 2.           Restructuringand Asset Impairment Charges**

**2001 Restructuring and Asset Impairment Charges**

During the second quarter of 2001, the Company’s CabinManagement Group adopted a restructuring plan to realign production programsbetween its manufacturing facilities. In response to the adverse impact on theaerospace industry resulting from the September 11th terroristattack and its aftermath, as well as the weakening of global economicconditions, the Company announced and implemented a further restructuring planin December 2001 designed to reduce costs and conserve working capital. Thisplan includes permanently closing one manufacturing facility and idling asecond facility for an indefinite period, curtailing several product developmentprograms and instituting workforce reductions. This plan primarily affects theCompany’s Cabin Management and Specialty Avionics Groups.

In connection with these restructuring plans, theCompany recorded nonrecurring pre-tax charges to operations of $28,658,000 in2001 for restructuring costs and asset impairment charges. Of this amount,$16,057,000 is included in cost of sales and the remaining $12,601,000 isincluded in selling, general and administration expenses. The restructuringcosts and asset impairment charges are comprised of the following:

 

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

 

•                    *Write-off of Product Development Costs.*  The curtailment of several productdevelopment programs in 2001 resulting in the write-off of inventoried costsrelated to these programs.

 

•                    *Excess Inventory Write-Downs. *Inventory was written down to netrealizable value for quantities on hand exceeding current and forecast orderbacklog requirements. Inventory at the closed and temporarily idledmanufacturing facilities was also written down to net realizable value.

 

•                    *Realignment of Production Programs BetweenFacilities.*  Costs associatedwith this realignment were incurred during the fiscal second quarter of 2001.

 

•                    *Severance and Other Compensation Costs.*  Since the September 11thterrorist attack, the Company has reduced its total workforce by over 350 employees,or approximately 12%, as of February 2002, of which approximately 260employees had been terminated as of December 31, 2001.

 

•                    *Lease Termination and Other Related Costs.*Lease termination and other related costs are comprised of the net losses expectedto be incurred under the existing long-term lease agreements for facilitiespermanently vacated. The losses have been reduced by the expected subleaseincome. These expected losses were based on estimated current market rates andanticipated dates that these facilities are subleased. If market rates decreaseor should it take longer than expected to sublease these facilities, the actualloss could exceed these estimates.

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** **

**F-13**

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**Note 2.           Restructuringand Asset Impairment Charges**

The Company expects to complete the restructuring planin the second quarter of fiscal 2002. The components of the restructuring,assets impairment and other nonrecurring charges are as follows:
|                                                   |   |                |        |                 |     |    |   | **Balance at****December 31,2001** |   |
|--------------------------------------------------------|--------|---------------------|-------------|----------------------|----------|---------|--------|------------------------------------|--------|
|                                                   |   | **Total Charges**   |        | **Amounts Incurred** |     |    |
|                                                   |   | ** **          | **Noncash** | ** **           | **Cash** |    |   |
|                                                   |   | **(in  thousands)** |        |
| Impairment  of long-lived assets:                      |   |                |        |                 |     |    |   |                               |   |
| Goodwill                                               |   | $                   | 8,583       |                 | $        | (8,583  | )      | $                                  | — |   | $ | — |   |
| Property  and equipment                                |   | 1,320               |        | (1,320               | )        | —  |   | —                             |   |
| Product  development cost write-offs                   |   | 7,908               |        | (7,908               | )        | —  |   | —                             |   |
| Excess  inventory write-downs                          |   | 4,247               |        | (4,247               | )        | —  |   | —                             |   |
| Realignment  of production programs between facilities |   | 3,902               |        | —               |     | (3,902  | )      | —                             |   |
| Severance  and other compensation costs                |   | 2,024               |        | —               |     | (839    | )      | 1,185                              |   |
| Lease  termination and other related costs             |   | 674                 |        | —               |     | (250    | )      | 424                                |   |
| Total                                                  |   | $                   | 28,658      |                 | $        | (22,058 | )      | $                                  | (4,991 | ) | $ | 1,609 |   |

 

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

**2002 Manufacturing Facilities Consolidation**

In late February 2002, the Company announced it wouldconsolidate the production of two Cabin Management manufacturing facilitiesinto a single facility, resulting in the permanent closure of one additionalfacility. The Company has evaluated the carrying value of the long-lived assetsrelated to the facility that is closing and does not expect an asset impairmentcharge. The Company estimates that approximately $1,800,000 of nonrecurringcosts associated with this decision will be recorded during 2002.

**1999 Restructuring and Asset Impairment Charges**

In December 1999, the Company announced a plan toreorganize and restructure the operations of two of its subsidiaries within theSystems Integration Group. The restructuring was a result of a management decisionto exit the manufacturing business at these subsidiaries and consolidate andrelocate operations into one facility to more efficiently and effectivelymanage the business and be more competitive.

In connection with the restructuring plan, the Companyrecorded nonrecurring pre-tax charges to operations of $9,935,000 in 1999 forrestructuring costs including severance and other exit costs, asset impairmentsand inventory reserves. Of this amount, $5,983,000 is included in cost of salesfor inventory write-downs as a consequence of exiting the manufacturingbusiness. The remaining $3,952,000 is included in selling, general andadministration expenses and relates to asset impairment charges, severance andlease termination costs.

** **

**F-14**

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The Company commenced the restructuring during 1999and completed the plan in the third quarter of 2000. Of the total charge,$7,242,000 represents a noncash write-down of assets. Components of therestructuring, asset impairment and other nonrecurring charges incurred throughDecember 31, 2001 are as follows:

** **
|                                                |   | **Noncash Write-Downs** |   | **Severance and Other Compensation** |      | **Lease****Termination and Other Related Costs** |   | **Other****Exit****Costs** |   |   |   |
|-----------------------------------------------------|--------|-------------------------|--------|--------------------------------------|-----------|--------------------------------------------------|--------|----------------------------|--------|--------|--------|
|                                                |   | **Inventory**           |   | **Property and Equipment**      | **Total** |                                             |
|                                                |   | **(in  thousands)**     |   |
| Pre-tax  restructuring and asset impairment charges |   | $                       | 5,983  |                                 | $         | 1,259                                            |   | $                          | 1,077  |   | $      | 752 |   | $ | 864 |   | $ | 9,935 |   |
| Noncash  write-downs                                |   | (5,983                  | )      | (1,259                               | )         | —                                           |   | —                     |   | — |   | (7,242 | ) |
| Cash  paid during the period                        |   | —                  |   | —                               |      | (293                                             | )      | (31                        | )      | (188   | )      | (512 | ) |
| Balance,  December 31, 1999                         |   | —                  |   | —                               |      | 784                                              |   | 721                        |   | 676    |   | 2,181 |   |
|                                                |   |                    |   |                                 |      |                                             |   |                       |   |   |   |   |   |
| Adjustments                                         |   | —                  |   | —                               |      | —                                           |   | 641                        |   | — |   | 641 |   |
| Cash  paid during the period                        |   | —                  |   | —                               |      | (784                                             | )      | (775                       | )      | (558   | )      | (2,117 | ) |
| Balance,  December 31, 2000                         |   | —                  |   | —                               |      | —                                           |   | 587                        |   | 118    |   | 705 |   |
|                                                |   |                    |   |                                 |      |                                             |   |                       |   |   |   |   |   |
| Cash  paid during the period                        |   | —                  |   | —                               |      | —                                           |   | (189                       | )      | (118   | )      | (307 | ) |
| Balance,  December 31, 2001                         |   | $                       | — |                                 | $         | —                                           |   | $                          | — |   | $      | 398 |   | $ | — |   | $ | 398 |   |

The adjustments made in 2000 reflect the increase tothe restructuring reserves as a result of higher than anticipated costs tocomplete certain actions compared to previous estimates. Additionally, during2000 the Company was able to sell property and equipment previously writtendown and recognized a gain on disposal of approximately $600,000.

The remaining balance of restructuring costs includeslease termination costs. The restructuring plan was completed in the thirdquarter of 2000, however, future cash payments will extend beyond this date dueto future lease payments on the vacated facility through the lease terminationdate. The cash payments will be funded from existing cash balances andinternally generated cash from operations.

 

**Note 3.           Acquisitions**

During the years ended December 31, 1999 and 2000, theCompany acquired:

*Cabin Management Group*

 

•                    all of thecommon stock of Precision Pattern, Inc., a Kansas-based designer andmanufacturer of interior furniture components for corporate aircraft, on April23, 1999;

 

•                    substantiallyall of the assets of Custom Woodwork & Plastics, Inc., a Georgia-based designerand manufacturer of interior furniture components for corporate aircraft, onAugust 5, 1999;

 

•                    substantiallyall of the assets of PCI NewCo, Inc., a Kansas-based manufacturer of compositematerial and components for corporate aircraft, on October 6, 1999;

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** **

**F-15**

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•                    all of thecommon stock of International Custom Interiors, Inc., a Florida-based designerand manufacturer of interior furniture components and provider of upholsteryservices for corporate aircraft, on October 8, 1999

 

•                    substantiallyall of the assets of The Infinity Partners, Ltd., a Texas-based designer andmanufacturer of interior furniture components for middle- and high-endcorporate aircraft, on December 17, 1999;

 

•                    substantiallyall of the assets of Carl F. Booth & Co., an Indiana-based manufacturer ofwood veneer panels primarily used in aircraft interior cabinetry, on May 11,2000;

 

•                    all of thecommon stock of ERDA, Inc., a Wisconsin-based designer and manufacturer ofaircraft seating, on June 30, 2000;

*Specialty Avionics Group*

 

•                    all of thecommon stock of Coltech, Inc., an Arizona-based designer and manufacturer ofaudio components for commercial and corporate aircraft, on August 31, 2000; and

*Systems Integration Group*

 

•                    all of thecommon stock of PATS, Inc., a Maryland-based designer, manufacturer andinstaller of auxiliary fuel tank systems for corporate aircraft and amanufacturer of aircraft auxiliary power units, on January 22, 1999.

The acquisitions were accounted for as purchases andthe assets acquired and liabilities assumed have been recorded at theirestimated fair values. The consolidated financial statements reflect theacquired companies subsequent to their respective acquisition dates. Theacquisitions are summarized in the following table.
|                                                                                                                                     |   | **Year Ended December 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                                                     |   | **2000**                    |   | **1999** |   |
|                                                                                                                                     |   | **(in  thousands)**         |   |
| Paid in cash:                                                                                                                            |   |                        |   |   |   |
| Purchase price                                                                                                                           |   | $                           | 55,852 |   | $ | 140,819 |   |
| Acquisition  related costs                                                                                                               |   | 3,511                       |   | 4,491 |   |
| Total purchase  price                                                                                                                    |   | $                           | 59,363 |   | $ | 145,310 |   |
|                                                                                                                                     |   |                        |   |   |   |
| Maximum determinable  contingent consideration payable, based on future attainment of defined  performance criteria                      |   | $                           | 2,000  |   | $ | 48,950 |   |
|                                                                                                                                     |   |                        |   |   |   |
| Adjustments to  reflect assets acquired at fair value:                                                                                   |   |                        |   |   |   |
| Increase to  historical value of inventory acquired                                                                                      |   | $                           | — |   | $ | 1,606 |   |
| Identifiable  intangible assets recorded                                                                                                 |   | 18,936                      |   | 15,341 |   |
| Difference between the  total purchase price and fair value of the net assets acquired; recorded as  goodwill as of the acquisition date |   | 41,622                      |   | 110,922 |   |

The acquisitions were funded with borrowings under theCompany’s senior credit facility, proceeds from the sale of common andpreferred stock as described in Note 11, and a $5,000,000 customer advanceto be offset against amounts receivable from future product deliveries.

** **

**F-16**

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** **

The increase in inventory value was charged tooperations as the inventory was sold during the periods immediately followingacquisition. Identifiable intangible assets are being amortized on astraight-line basis over their estimated useful lives, ranging from seven tofifteen years. Goodwill is being amortized on a straight-line basis over thirtyyears. The amount of contingent consideration paid in the future, if any, willincrease goodwill.

Based upon the acquired companies level of attainmentof their defined performance criteria during the three years ended December 31,2001, the Company recorded contingent consideration payable of $700,000 in2001, $20,154,000 in 2000 and $29,825,000 in 1999 resulting in a correspondingincrease in goodwill. The Company’s determinable maximum contingentconsideration payment obligations remaining as of December 31, 2001 aredescribed in Note 12.

During 2001, the Company settled its asserted claimsagainst the sellers of two companies acquired in 2000 for breach ofrepresentation and warranty provisions contained in the purchase agreements.The Company received $3,718,000 from the sellers upon entering into thesettlement agreements, which also provided that the Company pay in 2002 aminimum of $3,125,000 of previously contingent consideration for the year endedDecember 31, 2001 which is reflected as an accrued liability as of December 31,2001.

Unaudited pro forma consolidated results of operationsare presented in the table below for the years ended December 31, 2000 and1999. The results of operations reflect the Company’s acquisitions as if all ofthese transactions were consummated as of January 1, 1999.
|                          |   | **Pro Forma for the**          |    |
|-------------------------------|--------|--------------------------------|---------|
|                          |   | **Year Ended December 31,**    |    |
|                          |   | **2000**                       |    | **1999** |   |
|                          |   | **(Unaudited,  in thousands)** |    |
| Revenues                      |   | $                              | 371,584 |   | $ | 335,542 |   |
| EBITDA,  as defined (Note 16) |   | 89,160                         |    | 78,455 |   |
| Net  loss                     |   | (79                            | )       | (6,735 | ) |
|                               |        |                                |         |  |  |  |  |

The pro forma results of operations do not purport torepresent what actual results would have been if the transactions describedabove occurred on such dates or to project the results of operations for anyfuture period. The above information reflects adjustments for inventory,depreciation, amortization, general and administrative expenses and interestexpense based on the new cost basis and debt and capital structure of theCompany following the acquisitions.

** **

**F-17**

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** **

During 2001, three customers accounted for more than10% of the Company’s consolidated revenues (Note 16). If the Company hadcompleted its 1999 and 2000 acquisitions at the beginning of 1999, revenuesfrom these customers would have been as follows:
|       |   | **Pro Forma for the****Year Ended  December 31,** |    |
|------------|--------|---------------------------------------------------|---------|
|       |   |                                              |
|       |   | **2000**                                          |    | **1999** |   |
|       |   | **(Unaudited,  in thousands)**                    |    |
| Bombardier |   | $                                                 | 65,746  |   | $ | 42,391 |   |
| Boeing     |   | 53,735                                            |    | 47,366 |   |
| Textron.   |   | 53,669                                            |    | 47,654 |   |
| Total      |   | $                                                 | 173,150 |   | $ | 137,411 |   |
|            |        |                                                   |         |  |  |  |  |  |  |  |

Complete loss of any of the customers identified abovecould have a significant adverse impact on the results of operations expectedin future periods.

 

**Note 4.           AccountsReceivable**

The Company is potentially subject to concentrationsof credit risk as the Company relies heavily on customers operating in thedomestic and foreign corporate and commercial aircraft industries. Generally,the Company does not require collateral or other security to support accountsreceivable subject to credit risk. Under certain circumstances, deposits orcash-on-delivery terms are required. The Company maintains reserves forpotential credit losses and generally, such losses have been withinmanagement’s expectations.

Accounts receivable are net of an allowance fordoubtful accounts of $2,647,000 at December 31, 2001 and $1,902,000 at December31, 2000.

 

**Note 5.           Inventories**

Inventories are comprised of the following as ofDecember 31, 2001 and 2000:
|                                                                         |   | **December 31,**   |   |
|------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                         |   | **2001**           |   | **2000** |   |
|                                                                         |   | **(in thousands)** |   |
| Raw  materials                                                               |   | $                  | 50,503 |   | $ | 49,235 |   |
| Work-in-process:                                                             |   |               |   |   |   |
| Direct  and indirect manufacturing costs                                     |   | 16,260             |   | 13,772 |   |
| Program  costs, principally engineering costs                                |   | 10,974             |   | 8,603 |   |
| Finished  goods                                                              |   | 3,089              |   | 7,693 |   |
| Costs  and estimated earnings in excess of billings on uncompleted contracts |   | 5,672              |   | 7,393 |   |
| Total  inventories                                                           |   | $                  | 86,498 |   | $ | 86,696 |   |

** **

** **

**F-18**

----

** **

Inventoried costs are not in excess of estimatedrealizable value and include direct engineering, production and tooling costs,and applicable manufacturing overhead. In accordance with industry practice,inventoried costs include amounts relating to programs and contracts with longproduction cycles that will be recovered from future sales. Periodicassessments are performed to ensure recoverability of the program costs andadjustments are made, if necessary, to reduce inventoried costs to estimatedrealizable value. In connection with the 2001 restructuring, $7,908,000 ofpreviously inventoried program costs were determined to be unrecoverable andwere charged to cost of sales.

Total costs and estimated earnings on all uncompletedcontracts as of December 31, 2001 and 2000 are comprised of the following:
|                                                                          |   | **December 31,**   |   |
|-------------------------------------------------------------------------------|--------|--------------------|--------|
|                                                                          |   | **2001**           |   | **2000** |   |
|                                                                          |   | **(in thousands)** |   |
| Costs  incurred on uncompleted contracts                                      |   | $                  | 46,757 |   | $ | 34,438 |   |
| Estimated  earnings recognized                                                |   | 50,413             |   | 31,345 |   |
| Total  costs and estimated earnings                                           |   | 97,170             |   | 65,783 |   |
| Less  billings to date                                                        |   | (102,653           | )      | (70,225 | ) |
| Net                                                                           |   | $                  | (5,483 | ) | $ | (4,442 | ) |
|                                                                          |   |               |   |   |   |
| Balance  sheet classification:                                                |   |               |   |   |   |
| Asset  — Costs and estimated earnings in excess of billings              |   | $                  | 5,672  |   | $ | 7,393 |   |
| Liability  — Billings in excess of costs and estimated earnings (Note 8) |   | (11,155            | )      | (11,835 | ) |
| Net                                                                           |   | $                  | (5,483 | ) | $ | (4,442 | ) |
|                                                                               |        |                    |        |  |  |  |  |  |

 

**Note 6.           Property andEquipment**

Property and equipment includes the following as ofDecember 31, 2001 and 2000:
|                                                     |   | **December 31,**   |   |
|----------------------------------------------------------|--------|--------------------|--------|
|                                                     |   | **2001**           |   | **2000** |   |
|                                                     |   | **(in thousands)** |   |
| Land,  buildings and leasehold improvements              |   | $                  | 34,795 |   | $ | 30,841 |   |
| Machinery  and equipment                                 |   | 30,311             |   | 27,393 |   |
| Computer  equipment and software, furniture and fixtures |   | 17,396             |   | 13,985 |   |
| Tooling                                                  |   | 6,052              |   | 2,594 |   |
| Total  cost                                              |   | 88,554             |   | 74,813 |   |
| Accumulated  depreciation and amortization               |   | (27,481            | )      | (15,322 | ) |
| Net  property and equipment                              |   | $                  | 61,073 |   | $ | 59,491 |   |
|                                                          |        |                    |        |  |  |  |  |  |

Included above is property and equipment related to amanufacturing facility the Company is idling for an indefinite period. The costof the property and equipment is $6,441,000 as of December 31, 2001 and$6,979,000 as of December 31, 2000; the corresponding accumulated depreciationand amortization is $549,000 as of December 31, 2001 and $188,000 as ofDecember 31, 2000.

** **

**F-19**

----

** **

Property and equipment under capital leases includedabove consists of the following as of December 31, 2001 and 2000:

 
|                                                     |   | **December 31,**   |   |
|----------------------------------------------------------|--------|--------------------|--------|
|                                                     |   | **2001**           |   | **2000** |   |
|                                                     |   | **(in thousands)** |   |
| Land  and building                                       |   | $                  | 2,727  |   | $ | — |   |
| Machinery  and equipment                                 |   | 1,281              |   | 1,283 |   |
| Computer  equipment and software, furniture and fixtures |   | 1,849              |   | 2,113 |   |
| Total  cost                                              |   | 5,857              |   | 3,396 |   |
| Accumulated  depreciation and amortization               |   | (2,193             | )      | (954 | ) |
| Net  property and equipment                              |   | $                  | 3,664  |   | $ | 2,442 |   |

Depreciation of property and equipment under capitalleases is included in depreciation expense in the consolidated financialstatements.

 

**Note 7.           Other Assets**

Other assets includes the following as of December 31,2001 and 2000:
|                            |   | **December 31, 2001** |    | **December 31, 2000**           |    |
|---------------------------------|--------|-----------------------|---------|---------------------------------|---------|
|                            |   |                  |    | **Accumulated****Amortization** |    |   |   |   |   | **Accumulated****Amortization** |   |   |   |
|                            |   | **Cost**              |    |                            | **Net** |   | **Cost** |   |   | **Net** |   |
|                            |   |                  |    |                            |    | **(in thousands)** |   |   |   |   |   |
| Goodwill                        |   | $                     | 369,202 |                            | $       | (31,759 | ) | $ | 337,443 |   | $ | 377,167 |   | $ | (20,811 | ) | $ | 356,356 |   |
| Identifiable  intangibles:      |   |                  |    |                            |    |   |   |   |   |   |   |   |   |
| FAA  certifications             |   | 45,816                |    | (8,485                          | )       | 37,331 |   | 45,816 |   | (5,431 | ) | 40,385 |   |
| Other  identifiable intangibles |   | 38,409                |    | (12,092                         | )       | 26,317 |   | 38,421 |   | (7,906 | ) | 30,515 |   |
| Deferred  financing costs       |   | 16,653                |    | (6,449                          | )       | 10,204 |   | 15,927 |   | (4,231 | ) | 11,696 |   |
| Other  non-amortizable assets   |   | 1,978                 |    | —                          |    | 1,978 |   | 630 |   | — |   | 630 |   |
| Total  other assets             |   | $                     | 472,058 |                            | $       | (58,785 | ) | $ | 413,273 |   | $ | 477,961 |   | $ | (38,379 | ) | $ | 439,582 |   |

** **

** **

**F-20**

----

** **

**Note 8.           Accrued Liabilities**

Accrued liabilities are comprised of the following asof December 31, 2001 and 2000:
|                                                                         |   | **December  31,**   |       |
|------------------------------------------------------------------------------|--------|---------------------|------------|
|                                                                         |   | **2001**            |       | **2000** |   |
|                                                                         |   | **(in  thousands)** | ** ** |
| Salaries,  wages, compensated absences and payroll related taxes             |   | $                   | 17,179     |   | $ | 15,337 |   |
| Billings  in excess of costs and estimated earnings on uncompleted contracts |   | 11,155              |       | 11,835 |   |
| Acquisition  related contingent consideration                                |   | 6,904               |       | 20,154 |   |
| Accrued  interest                                                            |   | 4,692               |       | 3,730 |   |
| Customer  advances and deposits                                              |   | 3,260               |       | 5,965 |   |
| Other  accrued liabilities                                                   |   | 13,436              |       | 17,169 |   |
| Total  accrued liabilities                                                   |   | $                   | 56,626     |   | $ | 74,190 |   |

** **

**Note 9.           Long-Term Debt**

Long-term debt includes the following amounts as ofDecember 31, 2001 and 2000:
|                                                                                  |   | **December 31,**    | ** ** |
|---------------------------------------------------------------------------------------|--------|---------------------|------------|
|                                                                                  |   | **2001**            |       | **2000** | ** ** |
|                                                                                  |   | **(in  thousands)** | ** ** |
| Senior  credit facility:                                                              |   |                |       |   |   |
| 25  million working capital revolving line of credit                                  |   | $                   | —     |   | $ | — |   |
| 25  million acquisition revolving line of credit                                      |   | 12,000              |       | 12,400 |   |
| Term  loans                                                                           |   | 275,706             |       | 263,443 |   |
|                                                                                  |   |                |       |   |   |
| 12%  senior subordinated notes                                                        |   | 100,000             |       | 100,000 |   |
|                                                                                  |   |                |       |   |   |
| Capital  lease obligations and term debt financing, secured by property and equipment |   | 10,745              |       | 5,231 |   |
|                                                                                  |   |                |       |   |   |
| Other  indebtedness                                                                   |   | 1,799               |       | 2,205 |   |
| Total  long-term debt                                                                 |   | 400,250             |       | 383,279 |   |
| Less  current portion                                                                 |   | (13,899             | )          | (9,289 | ) |
| Long-term  debt, less current portion                                                 |   | $                   | 386,351    |   | $ | 373,990 |   |

During 2001, the Company borrowed $20,000,000 underits term loan senior credit facility and used the net proceeds to repay amountsthen outstanding under the acquisition revolving line of credit. During 2000,the Company borrowed $55,000,000 under its term loan senior credit facility tofinance, in part, acquisitions.

** **

**F-21**

----

** **

**Senior Credit Facility**

The senior credit facility provides for term loanborrowings in the initial principal amount of $290,000,000 and revolving linesof credit for borrowings up to an aggregate principal amount of $25,000,000each for working capital and to finance acquisitions. Principal payments forterm loan borrowings are due in increasing amounts over the next five years andall borrowings under the revolving loan facility must be repaid by September 30,2004. Loans under the senior credit facility generally bear interest based on amargin over, at the Company’s option, the prime rate or the LIBOR rate. Themargins applicable to portions of amounts borrowed may vary depending upon theCompany’s consolidated debt leverage ratio. Currently, the applicable marginsare 1.50% to 2.75% for prime rate borrowings and 2.75% to 4.00% for LIBOR rateborrowings. The weighted-average interest rate on all senior credit facilityborrowings outstanding was 5.67% as of December 31, 2001. Borrowings under thesenior credit facility are secured by substantially all of the assets of theCompany. The Company is subject to certain commitment fees under the facilityas well as the maintenance of certain financial ratios, cash flow results andother restrictive covenants, including the payment of dividends in cash.

On March 19, 2002, the Company amended the terms ofits senior credit facility (Note 18).

**12% Senior Subordinated Notes**

The senior subordinated notes mature on September 30,2008 and interest is payable semi-annually on March 30th andSeptember 30th of each year. The senior subordinated notes areunsecured general obligations of the Company and are subordinated in right ofpayment to substantially all existing and future senior indebtedness of theCompany, including senior credit facility indebtedness. Prior to maturity, theCompany may redeem all or some of the senior subordinated notes at definedredemption prices, which may include a premium. In the event of a change incontrol, the holders may require the Company to repurchase the seniorsubordinated notes for a redemption price that may also include a premium. TheCompany is subject to restrictive covenants, including the payment of dividendsin cash.

**Other Indebtedness**

As of December 31, 2001, other indebtedness reflectsacquisition financing payable to sellers in connection with their respectiveacquisitions. The debt is non-interest bearing; original issue discountsranging between 10.5% and 12.5% are being amortized over the term.

** **

**F-22**

----

** **

**Aggregate Maturities**

The total annual maturities of long-term debtoutstanding as of December 31, 2001 are as follows:

 

|                             |   | **(in thousands)** |          |
|----------------------------------|--------|--------------------|---------------|
| Year  ending December 31,        |   |               |          |
| 2002                             |   | $                  |  13,927  |   |
| 2003                             |   | 16,987             |          |
| 2004                             |   | 48,015             |          |
| 2005                             |   | 97,848             |          |
| 2006                             |   | 107,287            |          |
| 2007  and thereafter             |   | 116,387            |          |
| Total  aggregate maturities      |   | 400,451            |          |
| Less  unamortized debt discounts |   | (201               | )             |
| Total  long-term debt            |   | $                  |  400,250 |   |

 

**Note 10.         Income Taxes**

Income (loss) before income taxes was taxed under thefollowing jurisdictions:
|     |   | **Year Ended December 31,** |    |
|----------|--------|-----------------------------|---------|
|     |   | **2001**                    |    | **2000** |   | **1999** |   |
|     |   | **(in thousands)**          |    |
| Domestic |   | $                           | (17,297 | ) | $ | 7,775 |   | $ | (3,517 | ) |
| Foreign  |   | (578                        | )       | (165 | ) | 114 |   |
| Total    |   | $                           | (17,875 | ) | $ | 7,610 |   | $ | (3,403 | ) |

 

 

** **

**F-23**

----

** **

The provisions for income taxes (benefit) are asfollows:
|             |   | **Year Ended  December 31,** |   |
|------------------|--------|------------------------------|--------|
|             |   | **2001**                     |   | **2000** |   | **1999** |   |
|             |   | **(in  thousands)**          |   |
| Current:         |   |                         |   |   |   |   |   |
| U.S. federal     |   | $                            | 62     |   | $ | 370 |   | $ | 89 |   |
| State and local  |   | 1,133                        |   | 671 |   | 1,140 |   |
| Foreign          |   | 30                           |   | 120 |   | 103 |   |
| Total current    |   | 1,225                        |   | 1,161 |   | 1,332 |   |
|             |   |                         |   |   |   |   |   |
| Deferred:        |   |                         |   |   |   |   |   |
| U.S. federal     |   | 545                          |   | 4,599 |   | (76 | ) |
| State and local  |   | (464                         | )      | 557 |   | (284 | ) |
| Foreign          |   | (118                         | )      | (35 | ) | (20 | ) |
| Total deferred   |   | (37                          | )      | 5,121 |   | (380 | ) |
|             |   |                         |   |   |   |   |   |
| Total provision: |   |                         |   |   |   |   |   |
| U.S. federal     |   | 607                          |   | 4,969 |   | 13 |   |
| State and local  |   | 669                          |   | 1,228 |   | 856 |   |
| Foreign          |   | (88                          | )      | 85 |   | 83 |   |
| Total provision  |   | $                            | 1,188  |   | $ | 6,282 |   | $ | 952 |   |

 

The provision for income taxes differs from the amountof income tax determined by applying the applicable U.S. statutory federal rateto the income (loss) before income taxes as a result of the followingdifferences:
|                                                                                        |   | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                        |   | **2001**                    |       | **2000** |   | **1999** | ** ** |
|                                                                                        |   | **(in thousands)**          | ** ** |
| Income tax  (benefit) at U.S. statutory rates                                               |   | $                           | (6,256     | ) | $ | 2,664 |   | $ | (1,157 | ) |
| Tax effect of  increases (decreases) resulting from:                                        |   |                        |       |   |   |   |   |
| Amortization of  assets and other expenses not deductible for income tax purposes           |   | 5,477                       |       | 2,247 |   | 2,025 |   |
| Minority  interest in preferred stock of subsidiary not deductible for income tax  purposes |   | 1,771                       |       | 796 |   | — |   |
| State income  taxes, net of federal benefit                                                 |   | 265                         |       | 798 |   | 111 |   |
| Lower tax rates  on earnings of foreign subsidiaries and foreign sales corporation          |   | (57                         | )          | (214 | ) | (48 | ) |
| Other, net                                                                                  |   | (12                         | )          | (9 | ) | 21 |   |
| Income tax at  effective rates                                                              |   | $                           | 1,188      |   | $ | 6282 |   | $ | 952 |   |

 

 

F-24

----

 

Deferred taxliabilities (assets) are comprised of the following as of December 31, 2001 and2000:

 
|                               |   | **December 31,**   |   |
|------------------------------------|--------|--------------------|--------|
|                               |   | **2001**           |   | **2000** |   |
|                               |   | **(in thousands)** |   |
| Gross  deferred tax liabilities:   |   |               |   |   |   |
| Intangible  assets                 |   | $                  | 31,849 |   | $ | 33,229 |   |
| Program  costs                     |   | 4,839              |   | — |   |
| Property  and equipment            |   | 3,461              |   | 3,784 |   |
| Other                              |   | 322                |   | — |   |
| Gross  deferred tax liabilities    |   | 40,471             |   | 37,013 |   |
|                               |   |               |   |   |   |
| Gross  deferred tax (assets:)      |   |               |   |   |   |
| Loss  carryforwards                |   | (8,980             | )      | (3,710 | )  |
| Accrued  liabilities               |   | (7,732             | )      | (7,598 | )  |
| Inventory                          |   | (3,130             | )      | (2,772 | )  |
| Other                              |   | (1,095             | )      | (1,010 | )  |
| Gross  deferred tax (assets)       |   | (20,937            | )      | (15,090 | )  |
| Net  deferred tax liability        |   | $                  | 19,534 |   | $ | 21,923 |   |
|                               |   |               |   |   |   |
| Balance  sheet classification:     |   |               |   |   |   |
| Noncurrent  deferred tax liability |   | $                  | 33,597 |   | $ | 37,013 |   |
| Current  deferred tax asset        |   | (14,063            | )      | (15,090 | )  |
| Net  Deferred tax liability        |   | $                  | 19,534 |   | $ | 21,923 |   |
|                                    |        |                    |        |  |  |  |  |  |  |  |

As of December 31, 2001, the Company has total losscarryforwards of approximately $22,653,000 for federal income tax purposes and$21,268,000 for state income tax purposes, which includes federal losscarryforwards acquired in acquisitions. The loss carryforwards are not subjectto limitations on their annual utilization (“Section 382 limitation,” asdefined in the Internal Revenue Code) and therefore are available forutilization in 2002. The federal and state loss carryforwards expire in varyingamounts commencing in 2010 and continuing through 2021. Management believesthat it is more likely than not that the Company will generate taxable incomesufficient to realize the tax benefit associated with the future deductibledeferred tax assets and loss carryforwards prior to their expiration.

Undistributed earnings of foreign subsidiaries are notmaterial to the consolidated financial statements. As such, foreign taxes thatmay be due, net of U.S. foreign tax credits, have not been provided.

 

 

 

F-25

----

 

**Note 11.         Capital Structure**

**Mandatorily Redeemable Preferred Stock**

The table below summarizes mandatorily redeemablepreferred stock issued during the three years ended December 31, 2001.

 

|                                                 |   | **DeCrane Aircraft  16% Preferred Stock** |   | **DeCrane Holdings**** 14%  Preferred Stock**  |   |
|------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------------------------------|--------|
|                                                 |   | **Number  of Shares**                     |   | **Mandatory Redemption Value**                      |   | **Unamortized Issuance Discount** |   | **Net Book  Value** |   | **Number of Shares** |   | **Mandatory Redemption Value** |   |
|                                                 |   |                                           |   | **(in thousands, except share and per share data)** |   |
| Balance, December 31, 1998                           |   | —                                         |   | $                                                   | — |   | $ | — |   | $ | — |   | 342,417 |   | $ | 35,884 |   |
|                                                 |   |                                           |   |                                                |   |   |   |   |   |   |   |   |   |
| Noncash dividend accretion                           |   | —                                         |   | —                                              |   | — |   | — |   | — |   | 5,294 |   |
| Balance, December 31, 1999                           |   | —                                         |   | —                                              |   | — |   | — |   | 342,417 |   | 41,178 |   |
|                                                 |   |                                           |   |                                                |   |   |   |   |   |   |   |   |   |
| Sale of preferred stock                              |   | 250,000                                        |   | 25,000                                              |   | (4,019 | ) | 20,981 |   | — |   | — |   |
| Issuance costs                                       |   | —                                         |   | —                                              |   | (76 | ) | (76 | ) | — |   | — |   |
| Accrued dividends and redemption value accretion     |   | 20,400                                         |   | 2,040                                               |   | 234 |   | 2,274 |   | — |   | — |   |
| Noncash dividend accretion                           |   | —                                         |   | —                                              |   | — |   | — |   | — |   | 6,074 |   |
| Balance, December 31, 2000                           |   | 270,400                                        |   | 27,040                                              |   | (3,861 | ) | 23,179 |   | 342,417 |   | 47,252 |   |
|                                                 |   |                                           |   |                                                |   |   |   |   |   |   |   |   |   |
| Accrued dividends and redemption value accretion     |   | 45,930                                         |   | 4,593                                               |   | 468 |   | 5,061 |   | — |   | — |   |
| Noncash dividend accretion                           |   | —                                         |   | —                                              |   | — |   | — |   | — |   | 6,971 |   |
| Balance, December 31, 2001                           |   | 316,330                                        |   | $                                                   | 31,633 |   | $ | (3,393 | ) | $ | 28,240 |   | 342,417 |   | $ | 54,223 |   |
|                                                 |   |                                           |   |                                                |   |   |   |   |   |   |   |   |   |
| Per share  liquidation value as of December 31, 2001 |   |                                           |   | $                                                   | 100.00 |   |   |   |   |   |   |   | $ | 158.35 |   |
|                                                      |        |                                                |        |                                                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

DeCrane Aircraft’s 16% preferred stock is reflected asminority interest in preferred stock of subsidiary in the consolidatedfinancial statements.

On June 30, 2000, 250,000 shares of DeCrane Aircraft16% preferred stock and warrants to purchase 139,357 shares of DeCrane Holdingscommon stock were sold for $25,000,000 to DLJ affiliates (Note 15). Theproceeds from the sale were used to fund, in part, the ERDA acquisition. Aportion of the proceeds from the sale totaling $4,019,000 was ascribed to thecommon stock warrants and was credited to additional paid-in capital. Thecorresponding reduction in redemption value of the preferred stock, and relatedissuance costs, are recorded as an issuance discount and are being amortizedusing the effective interest method through the preferred stock mandatoryredemption date.

Additional terms of the preferred stock and common stockwarrants are described below.

 

F-26

----

*DeCraneAircraft 16% Mandatorily Redeemable Preferred Stock*

DeCrane Aircraft is authorized to issue 700,000 sharesof 16% Senior Redeemable Exchangeable Preferred Stock Due 2009, $.01 par value.The preferred stock has a $100.00 per share liquidation preference, plusaccrued and unpaid cash dividends, and is non-voting.

Holders of the preferred stock are entitled toreceive, when, as and if declared, dividends at a rate equal to 16% per annum.Prior to June 30, 2005, DeCrane Aircraft may, at its option, pay dividendseither in cash or by the issuance of additional shares of preferred stock.Since the preferred stock issuance date on June 30, 2000, DeCrane Aircraft haselected to issue additional shares in lieu of cash dividend payments; suchshares are reflected as a component of minority interest in preferred stock ofsubsidiary. The preferred stock is mandatorily redeemable onMarch 31, 2009. Upon the occurrence of a change in control, asdefined, each holder has the right to require DeCrane Aircraft to redeem all orpart of such holder’s shares at a price equal to 101% of the liquidationpreference, plus accrued and unpaid cash dividends.

*DeCrane Holdings 14% Mandatorily Redeemable PreferredStock*

DeCrane Holdings is authorized to issue 1,360,000shares of 14% Senior Redeemable Exchangeable Preferred Stock Due 2009, $.01 parvalue. The preferred stock had an initial $100.00 per share liquidationpreference, subject to increases through noncash dividend accretion, plusaccrued and unpaid cash dividends, and is non-voting.

Holders of the preferred stock are entitled toreceive, when, as and if declared, dividends at a rate equal to 14% per annum.Prior to September 30, 2005, dividends are not paid in cash but instead accreteto the liquidation value of the preferred stock, which, in turn, increases theredemption obligation. The preferred stock is mandatorily redeemable onSeptember 30, 2009. Upon the occurrence of a change in control, as defined,each holder has the right to require DeCrane Holdings to redeem all or part ofsuch holder’s shares at a price equal to 101% of the liquidation preferenceplus accrued and unpaid cash dividends.

**Undesignated Preferred Stock**

The Company is authorized to issue 2,500,000 shares of$.01 par value preferred stock of which 1,360,000 are designated 14% SeniorRedeemable Exchangeable Preferred Stock Due 2009; 1,140,000 shares remainundesignated as of December 31, 2001 and 2000.

**Common Stock**

DeCrane Holdings is authorized to issue 10,000,000shares of $.01 par value common stock, of which 3,914,274 are issued andoutstanding at December 31, 2001 and 2000. As of December 31, 2001, a total of855,020 shares of common stock are reserved for issuance upon exercise of allwarrants and stock options.

 

 

F-27

----

 

During the three years ended December 31, 2001,DeCrane Holdings sold:

 

•                    543,478 sharesto DLJ and its affiliates for $12,500,000 in April 1999 and used the proceedsto fund a portion of the Precision Pattern acquisition;

 

•                    10,869 sharesto a group of related party investors (Note 15) for $250,000 in October 1999;one-half of the purchase price was loaned to the investors as described below;

 

•                    171,295 sharesto DeCrane Aircraft management for $3,940,000 in December 1999; one-half of thepurchase price was loaned to management as described below;

 

•                    326,087 sharesto DLJ and its affiliates for $7,500,000 in May 2000 and used the proceeds tofund a portion of the Carl F. Booth acquisition; and

 

•                    20,707 sharesto DeCrane Aircraft management for $476,000 during 2000.

During 2000, DeCrane Holdings also repurchased andcanceled 4,347 shares from a former member of DeCrane Aircraft management forits original $23.00 per share issuance price.

Expenses related to common stock transactions total$84,000 in 1999 and $24,000 in 2000 and were charged to additional paid-incapital.

**Notes Receivable for Shares Sold**

During 1998 and 1999, DeCrane Holdings sold mandatorilyredeemable preferred and common stock in three transactions in which one-halfof the purchase price was paid in cash and one-half was loaned to thepurchasers by DeCrane Aircraft, with interest at the then applicable federalrates. The loans bear interest at rates ranging between 4.33% and 5.74%. Theloans, plus accrued interest, are payable upon the sale of the stock and arecollaterialized by such stock. The resulting notes receivable, plus accruedinterest, are classified as a reduction of stockholders’ equity in theconsolidated statement of financial position. The three transactions, whichwere based on the fair market value of the underlying securities as determinedby the Board of Directors, resulted in loans for one-half of the total purchaseprice, were as follows:

 

•                    in December1998, a group of related party investors purchased mandatorily redeemablepreferred and common stock for $704,000;

 

•                    in October1999, the same group of investors purchased additional shares of common stockfor $250,000; and

 

•                    in December1999, DeCrane Aircraft’s management purchased common stock for $3,940,000.

During 2000, a note receivable totaling $51,000,including accrued interest, was canceled in conjunction with the repurchase ofthe common stock that collaterialized the note.

 

 

F-28

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**Common Stock Warrants**

Common stock warrants issued during the three yearsended December 31, 2001 are summarized in the table below.

|                                                            |   | **$ .01 Warrants**                            |   |                  |   |      |                 |
|-----------------------------------------------------------------|--------|-----------------------------------------------|--------|-----------------------|--------|-----------|----------------------|
| ** **                                                      |   | **Class A  Warrants**                         |   | **Class B  Warrants** |   |      | **$22.31  Warrants** |   | **Total** |   |
|                                                            |   | **(number of shares, except per share data)** |   |
| Balance, December 31, 1998 and 1999                             |   | 155,000                                       |   | —                |   | 155,000   |                 | 310,000 |   |
|                                                            |   |                                          |   |                  |   |      |                 |   |   |
| Issued with the sale of  DeCrane Aircraft 16 % preferred stock: |   |                                          |   |                  |   |      |                 |   |   |
| Issued with the sale of preferred stock:                        |   | —                                        |   | 139,357               |   | —    |                 | 139,357 |   |
| Issued pursuant to anti-dilution provisions                     |   | —                                        |   | —                |   | 4,794     |                 | 4,794 |   |
| Balance, December 31, 2000 and 2001                             |   | 155,000                                       |   | 139,357               |   | 159,794   |                 | 454,151 |   |
|                                                            |   |                                          |   |                  |   |      |                 |   |   |
| Warrants exercisable at:                                        |   |                                          |   |                  |   |      |                 |   |   |
| December 31, 1999                                               |   | 155,000                                       |   | —                |   | 155,000   |                 | 310,000 |   |
| December 31, 2000                                               |   | 155,000                                       |   | 69,679                |   | 159,794   |                 | 384,473 |   |
| December 31, 2001                                               |   | 155,000                                       |   | 139,357               |   | 159,794   |                 | 454,151 |   |
|                                                            |   |                                          |   |                  |   |      |                 |   |   |
| Other information:                                              |   |                                          |   |                  |   |      |                 |   |   |
| Exercise price per share                                        |   | $                                             | 0.01   |                  | $      | .01       |                 | $ | 22.31 |   |   |   |
| Expiration date                                                 |   | Aug. 28,                                      |   | Jun. 30,              |   | Sept. 30, |                 |   |   |
|                                                            |   | 2009                                          |   | 2010                  |   | 2008      |                 |   |   |
|                                                                 |        |                                               |        |                       |        |           |                      |  |  |  |  |  |

All common stock warrants are subject to adjustmentfor anti-dilution and have demand registrations rights.

The Class B warrants were sold in June 2000 inconnection with DeCrane Aircraft’s sale of 16% preferred stock. A portion ofthe proceeds from the sale totaling $4,019,000 were allocated to the warrantsand credited to additional paid-in capital. Prior to July 1, 2001, warrants topurchase 69,678 shares of common stock were cancelable upon redemption of thepreferred stock and as a result, were not exercisable until on or after thatdate. The issuance of the Class B warrants resulted in the exercise price andnumber of shares of common stock represented by the $22.31 warrants to beadjusted pursuant to their anti-dilution provisions.

 

 

F-29

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**Note 12.         Commitments and Contingencies**

**Litigation**

As part of its investigation of the crash Swissair Flight111 off the Canadian coast on September 2, 1998, the Canadian TransportationSafety Board (the “CTSB”) notified the Company that they recovered burned wirethat was attached to the in-flight entertainment system installed on some ofSwissair’s aircraft by one of the Company’s subsidiaries. The Company is fullycooperating with the on-going CTSB investigation. Although the CTSB has notissued a final report, it has advised the Company that it has no evidence todate that the system the Company’s subsidiary installed malfunctioned or failedduring the flight. Families of the 229 persons who died aboard the flight havefiled actions in federal and state courts against the Company, and many otherunaffiliated parties, including Swissair and Boeing. The actions claimnegligence, strict liability and breach of warranty relating to theinstallation and testing of the in-flight entertainment system. The actionsseek compensatory and punitive damages and costs in an unstated amount. All ofthe actions have been transferred to the United States District Court for theEastern District of Pennsylvania and assigned under MDL Case No. 1269 forcoordinated or consolidated pretrial proceedings. The Company intends to defendthe claims vigorously.

The Company and its subsidiaries are also involved inother routine legal and administrative proceedings incident to the normalconduct of business. Management believes the ultimate disposition of all of theforegoing matters will not have a material adverse effect on the Company’sbusiness, consolidated financial position, results of operations or cash flows.

**Lease Commitments**

The Company leases some of its facilities andequipment under capital and operating leases. Some of the leases requirepayment of property taxes and include escalation clauses. Future minimumcapital and operating lease commitments under non-cancelable leases are asfollows as of December 31, 2001:

| ** **                                     |   | **Capital   Leases** |   | **Operating Leases** |   |
|------------------------------------------------|--------|----------------------|--------|---------------------------|--------|
|                                           |   | **(in thousands)**   |   |
| Year  ending December 31,                      |   |                 |   |                      |   |
| 2002                                           |   | $                    | 1,372  |                      | $      | 3,080 |   |
| 2003                                           |   | 1,004                |   | 2,729                     |   |
| 2004                                           |   | 876                  |   | 2,444                     |   |
| 2005                                           |   | 746                  |   | 1,723                     |   |
| 2006                                           |   | 568                  |   | 1,523                     |   |
| 2007  and thereafter                           |   | 2,493                |   | 10,362                    |   |
| Total  minimum payments required               |   | 7,059                |   | $                         | 21,861 |   |
| Less  amount representing future interest cost |   | (2,106               | )      |                      |   |
| Recorded  obligation under capital leases      |   | $                    | 4,953  |                      |   |   |

Total rental expense charged to operations was$4,232,000 for the year ended December 31, 2001, $3,903,000 for the year endedDecember 31, 2000 and $3,620,000 for the year ended December 31, 1999.

 

 

F-30

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**Contingent Acquisition Consideration**

The Company’s remaining maximum contingent acquisitionconsideration payment obligation is $600,000 as of December 31, 2001. Thecontingent consideration is payable based upon an acquired company’s level ofattainment of its defined performance criteria for the year endingDecember 31, 2002 and excludes amounts earned and recorded throughDecember 31, 2001 (Notes 3, 8 and 13). The contingent consideration, if any, ispayable during the first quarter of 2003.

 

**Note 13.         ConsolidatedStatements of Cash Flows**

The following information supplements the Company’sconsolidated statements of cash flows.

 
|                                                                                                           |   | **Year Ended December 31,** |   |     |
|----------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|----------|
|                                                                                                           |   | **2001**                    |   | **2000** |   | **1999** |   |   |
|                                                                                                           |   | **(in thousands)**          |   |     |
| Components of cash  paid for acquisitions:                                                                     |   |                        |   |     |   |   |   |   |
| Fair value of  assets acquired                                                                                 |   | $                           | — |     | $ | 94,155 |   | $ | 165,628 |   |
| Liabilities  assumed                                                                                           |   | —                      |   | (34,792  | ) | (20,318 | ) |   |
| Cash paid                                                                                                      |   | —                      |   | 59,363   |   | 145,310 |   |   |
| Less cash  acquired                                                                                            |   | —                      |   | (292     | ) | (2,604 | ) |   |
| Net cash paid  for acquisitions                                                                                |   |                        |   | 59,071   |   | 142,706 |   |   |
|                                                                                                           |   |                        |   |     |   |   |   |   |
| Contingent  consideration paid for previously completed acquisitions                                           |   | 17,075                      |   | 29,825   |   | 3,000 |   |   |
| Cash purchase  price reductions received as a result of settling asserted claims against the  sellers (Note 3) |   | (3,718                      | )      | —   |   | — |   |   |
| Additional  acquisition related expenses                                                                       |   | 172                         |   | 650      |   | — |   |   |
| Total cash paid  for acquisitions                                                                              |   | $                           | 13,529 |     | $ | 89,546 |   | $ | 145,706 |   |
|                                                                                                           |   |                        |   |     |   |   |   |   |
| Noncash  investing and financing transactions:                                                                 |   |                        |   |     |   |   |   |   |
| 14% mandatorily  redeemable preferred stock liquidation value accretion in lieu of cash  dividend payments     |   | $                           | 6,971  |     | $ | 6,074 |   | $ | 5,294 |   |
| 16% mandatorily  redeemable preferred stock dividends paid by the issuance of additional  shares               |   | 4,593                       |   | 2,040    |   | — |   |   |
| Capital  expenditures financed with capital lease obligations                                                  |   | 4,438                       |   | 109      |   | 1,711 |   |   |
| Additional  acquisition contingent consideration recorded                                                      |   | 3,825                       |   | 20,154   |   | 29,825 |   |   |
| Loans to  stockholders to purchase DeCrane Holdings capital stock, plus accrued  interest                      |   | 116                         |   | 84       |   | 2,468 |   |   |
|                                                                                                           |   |                        |   |     |   |   |   |   |
| Paid in cash:                                                                                                  |   |                        |   |     |   |   |   |   |
| Interest                                                                                                       |   | $                           | 35,821 |     | $ | 39,160 |   | $ | 26,005 |   |
| Income taxes  paid, net of refunds received                                                                    |   | 1,161                       |   | 578      |   | 470 |   |   |
|                                                                                                                |        |                             |        |          |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

F-31

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**Note 14.         Employee BenefitPlans**

**Stock Based Incentive Compensation**

*Management Incentive Stock Option Plan*

In December 1999, DeCrane Holding’s Board of Directorsapproved a management incentive plan which provides for the issuance of optionsto purchase the common stock of DeCrane Holdings as incentive compensation todesignated executive personnel and other key employees of the Company and itssubsidiaries. The Compensation Committee of the Board of Directors of DeCraneHoldings administers the plan and makes a determination as to any options to begranted. The plan provides for the granting of options to purchase a maximum of356,257 common shares prior to expiration in 2009. The options are granted atfair market value at the date of grant. Substantially all of the optionsawarded become fully vested and exercisable eight years from the date of grantbut vesting can be accelerated based upon future attainment of definedperformance criteria. In addition, the Compensation Committee may authorizealternate vesting schedules. The plan also provides for the acceleration ofvesting upon the occurrence of certain events, including, under certaincircumstances, a change of control.

During 1999, options to purchase 282,922 shares weregranted under the plan, of which 27,994 shares vested immediately and optionsto purchase an additional 29,942 shares vested based on the attainment of year1999 performance criteria. During 2000, options to purchase 80,623 shares weregranted under the plan, of which 15,828 shares vested immediately. Anadditional 36,832 shares from the 1999 and 2000 grants vested based on theattainment of year 2000 performance criteria. During 2001, no options weregranted under the plan and no additional shares from the 1999 and 2000 grantsvested based on the required year 2001 performance criteria.

The per share exercise price of the options grantedwas equal to the fair market value of the common stock on each of the grantdates and, accordingly, no compensation expense was recognized during the threeyears ended December 31, 2001.

*Incentive Stock Options Granted to Others*

In July 1999, a group of related party investors,including two individuals who were then serving as directors, were grantedoptions as compensation for consulting services. Options were granted topurchase 44,612 shares of DeCrane Holdings common stock at an exercise price of$23.00 per share, equal to the fair market value of the common stock on thegrant date. The options vest over a three-year period, are subject toacceleration if DLJ and its affiliates sell any of their shares of commonstock, and expire in 2009.

 

F-32

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*Summary of All Stock Options*

The following table summarizes all stock optionactivity.

| ** **                              |   | **Number  of  Shares** |   | **Weighted-  Average  Exercise  Price** |   |
|-----------------------------------------|--------|------------------------|--------|-----------------------------------------|--------|
| Granted                                 |   | 327,534                |   | $                                       | 23.00  |   |
| Options  outstanding, December 31, 1999 |   | 327,534                |   | 23.00                                   |   |
|                                    |   |                   |   |                                    |   |
| Granted                                 |   | 80,623                 |   | 31.94                                   |   |
| Canceled                                |   | (21,288                | )      | 23.00                                   |   |
| Options  outstanding, December 31, 2000 |   | 386,869                |   | 24.86                                   |   |
|                                    |   |                   |   |                                    |   |
| Canceled                                |   | (23,516                | )      | 25.55                                   |   |
| Options  outstanding, December 31, 2001 |   | 363,353                |   | 24.82                                   |   |
|                                    |   |                   |   |                                    |   |
| Options  exercisable, December 31,      |   |                   |   |                                    |   |
| 1999                                    |   | 57,936                 |   | $                                       | 23.00  |   |
| 2000                                    |   | 124,395                |   | 24.07                                   |   |
| 2001                                    |   | 139,051                |   | 23.82                                   |   |

As of December 31, 2001, options to purchase 37,516common shares remained available for grant under the Management Incentive StockOption Plan. The following table summarizes information about stock optionsoutstanding and stock options exercisable at December 31, 2001.

|                       |   | **All Options Outstanding**                      |   | **Number**                                        |   |
|----------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------|--------|
| ** **                 |   | **Number  of Shares  as of  December 31,  2001** |   | **Weighted-Average  Remaining  Contractual Life** |   | **of Shares  Exercisable  as of  December 31, 2001** |   |
| Per  share exercise price: |   |                                             |   |                                              |   |   |   |
| $23.00                     |   | 308,307                                          |   | 7.95 years                                        |   | 129,584 |   |
| $35.00                     |   | 55,046                                           |   | 8.93 years                                        |   | 9,467 |   |
| Total                      |   | 363,353                                          |   | 8.10 years                                        |   | 139,051 |   |

For compensatory stock options granted tonon-employees, the Company recognized compensation expense of $215,000 for theyear ended December 31, 2001, $561,000 for the year ended December 31,2000 and $143,000 for the year ended December 31, 1999. For non-compensatorystock options, the Company uses APB Opinion No. 25 to account for stock-basedcompensation and, accordingly, no compensation expense was recognized duringthe three years ended December 31, 2001. The Company has adopted thedisclosure-only provisions of SFAS No. 123.

 

F-33

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For the year ended December 31, 1999, the effect ofapplying the fair value method of SFAS No. 123 to the options grantedto employees and directors in 1999 did not result in pro forma net income orloss that was materially different from the historical amount reported. For thetwo years ended December 31, 2001, net income (loss), pro forma for theeffect of applying the fair value method to the options granted in 1999 and2000, would have been as follows:
|                                                        |   | **Year Ended December 31,** |   |
|-------------------------------------------------------------|--------|-----------------------------|--------|
|                                                        |   | **2001**                    |   | **2000** |   |
|                                                        |   | **(in thousands)**          |   |
| Net income  (loss):                                         |   |                        |   |   |   |
| As reported                                                 |   | $(19,063                    | )      | $1,328 |   |
| Pro forma                                                   |   | (19,455                     | )      | 889 |   |
|                                                        |   |                        |   |   |   |
| Weighted-average  fair value of options granted (per share) |   | —                      |   | 9.48 |   |

For the purposes of the pro forma disclosure, theestimated fair value of the options is amortized over the options’ vestingperiod. The effect of applying SFAS No. 123 may not be representative ofthe pro forma effect in future years since additional options may be grantedduring those future years.

The fair value of the options was determined using thefollowing assumptions:

|                               |   | **2001** |   | **2000**  |   | **1999**  |
|------------------------------------|--------|----------|--------|-----------|--------|-----------|
| Compensatory options (1):          |   |     |   |      |   |      |
| Risk free  interest rates          |   | 5.35%    |   | 5.23%     |   | 6.8%      |
| Expected  dividend yield           |   | —   |   | —    |   | —    |
| Expected life                      |   | 10 years |   | 10 years  |   | 10 years  |
| Expected stock  price volatility   |   | 63.0%    |   | 65.0%     |   | 67.0%     |
|                               |   |     |   |      |   |      |
| Employee and director options (2): |   |     |   |      |   |      |
| Risk free  interest rates          |   | —   |   | 5.5%-6.7% |   | 5.8%-6.5% |
| Expected  dividend yield           |   | —   |   | —    |   | —    |
| Expected life                      |   | —   |   | 8 years   |   | 8 years   |

----

(1)       Using the Black Scholes option valuationmodel.

(2)       Using the minimum value method.

The Black-Scholes option valuation model was developedfor use in estimating the fair value of traded options that have no vestingrestrictions and are fully transferable. In addition, option valuation modelsrequire the input of highly subjective assumptions including the expected stockprice volatility. Because the Company’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models, as well asthe minimum value method, do not necessarily provide a reliable single measureof its employee stock options.

The minimum value method, which is an acceptablemethod for non-public companies, excludes stock price volatility.

 

F-34

----

 

 

**Management Stock Purchases**

Beginning in December 1999, DeCrane Holding’s Board ofDirectors has permitted designated executive personnel and other key employeesto purchase shares of common stock of DeCrane Holdings, with a portion of thepurchase price to be loaned to the participants by DeCrane Aircraft. InDecember 1999, management purchased 171,295 shares of DeCrane Holdings’ commonstock for $23.00 per share. The total purchase price was approximately$3,900,000, of which one-half was paid in cash and one-half was loaned tomanagement by DeCrane Aircraft as described in Note 11. In 2000, managementpurchased an additional 20,707 shares for $23.00 per share in cash pursuant tothe plan’s antidilution provisions. Dilution resulted from the issuance of theDeCrane Holdings common stock warrants in connection with the sale of DeCrane Aircraft’s16% preferred stock.

**401(k) Retirement Plan**

Substantially all domestic employees are eligible toparticipate in one of the 401(k) retirement plans the Company sponsors, whichare defined contribution plans satisfying the requirements of the EmployeeRetirement Income Security Act of 1974. The Company’s expense related to itsmatching contributions to these plans totaled $2,272,000 for the year endedDecember 31, 2001, $2,203,000 for the year ended December 31, 2000 and$1,272,000 for the year ended December 31, 1999.

 

**Note 15.         Related PartyTransactions**

The Company’s transactions with related partiesincluded in the consolidated financial statements are summarized in the tablebelow.

|                                             |   | **Year Ended December 31,** |   |
|--------------------------------------------------|--------|-----------------------------|--------|
|                                             |   | **2001**                    |   | **2000** |   | **1999** |   |
|                                             |   | **(in thousands)**          |   |
| CSFB  / DLJ:                                     |   |                        |   |   |   |   |   |
| Transaction  financing fees and expenses         |   | $                           | 520    |   | $ | 1,703 |   | $ | 4,048 |   |
| Management fees:                                 |   |                        |   |   |   |   |   |
| Charged to  operations during the period         |   | 300                         |   | 300 |   | 302 |   |
| Payable as of  period end                        |   | 375                         |   | 75 |   | 75 |   |
|                                             |   |                        |   |   |   |   |   |
| Global  Technology Partners, LLC:                |   |                        |   |   |   |   |   |
| Promissory  notes:                               |   |                        |   |   |   |   |   |
| Receivable as of  period end, including interest |   | 542                         |   | 518 |   | 495 |   |
| Interest income  recorded during the period      |   | 24                          |   | 23 |   | 18 |   |
|                                                  |        |                             |        |  |  |  |  |  |  |  |

Each related party is described below.

 

F-35

----

 

 

**CSFB / DLJ**

DLJ Merchant Banking Partners II, L.P. and affiliatedfunds own 83.3% of DeCrane Holdings common stock and 99.3% of its preferredstock, and 80% of DeCrane Aircraft’s preferred stock, all on a fully dilutedbasis. In November 2000, DLJ Merchant Banking Partners II, L.P. and affiliatedfunds became indirect affiliates of Credit Suisse Group and Credit Suisse FirstBoston, Inc.

DLJ affiliated funds were the initial purchasers ofall of DeCrane Aircraft’s 16% preferred stock and DeCrane Holdings common stockwarrants sold during 2000. Subsequent to the initial purchase, the DLJaffiliated funds sold 20% of the preferred stock and common stock warrants tounaffiliated parties in a private transaction.

DLJ is represented on the Board of Directors of bothDeCrane Holdings and DeCrane Aircraft. In addition, Credit Suisse First BostonCorporation (formerly Donaldson, Lufkin & Jenrette Securities Corporation)is involved in market-making activities for DeCrane Holding’s Class A $22.31 commonstock warrants and DeCrane Aircraft’s senior subordinated notes and may holdsuch securities from time to time. A DLJ affiliate is also paid fees forarranging the syndicate of lenders providing DeCrane Aircraft’s senior creditfacility.

**Global Technology Partners, LLC**

Members of Global Technology own 1.6% of DeCraneHoldings common stock and 0.7% of its preferred stock, all on a fully dilutedbasis, and had two members on the Company’s Board of Directors from August 1998through July 2000. DeCrane Aircraft loaned one-half of the purchase price forsuch shares to the members at rates ranging between 4.33% and 5.44%. The loans,plus accrued interest, are payable from the proceeds from the sale of the stockand are collaterialized by such stock.

 

F-36

----

 

 

**Note 16.         Business SegmentInformation**

The Company supplies products and services to theaerospace industry. The Company’s subsidiaries are organized into three groups,each of which are strategic businesses that develop, manufacture and selldistinct products and services. The groups and a description of theirbusinesses are as follows:

 

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

 

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

 

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

Management utilizes more than one measurement toevaluate group performance and allocate resources, however, managementconsiders EBITDA to be the primary measurement of overall economic returns andcash flows. Management defines EBITDA as earnings before interest, incometaxes, depreciation and amortization, restructuring and asset impairmentcharges, acquisition related charges and other noncash and nonoperatingcharges. This is consistent with the manner in which the Company’s lenders andultimate investors measure its overall performance.

The accounting policies of the groups aresubstantially the same as those described in the summary of significantaccounting policies (Note 1). Some transactions are recorded at the Company’scorporate headquarters and are not allocated to the groups, such as most of theCompany’s cash and cash equivalents, debt and related net interest expense,corporate headquarters costs and income taxes.

 

F-37

----

 

 

**Summary of Business by Segment**

|                                      |   | **Year Ended December 31,** |    |
|-------------------------------------------|--------|-----------------------------|---------|
|                                      |   | **2001**                    |    | **2000** |   | **1999** |   |
|                                      |   | **(in thousands)**          |    |
| Revenues:                                 |   |                        |    |   |   |   |   |
| Cabin Management                          |   | $                           | 206,052 |   | $ | 174,796 |   | $ | 74,244 |   |
| Specialty  Avionics                       |   | 123,240                     |    | 110,878 |   | 112,501 |   |
| Systems  Integration                      |   | 67,528                      |    | 62,965 |   | 58,483 |   |
| Inter-group  elimination (1)              |   | (1,468                      | )       | (1,260 | ) | (1,180 | ) |
| Consolidated  totals                      |   | $                           | 395,352 |   | $ | 347,379 |   | $ | 244,048 |   |
|                                      |   |                        |    |   |   |   |   |
| Revenues from  significant customers (2): |   |                        |    |   |   |   |   |
| Cabin Management                          |   | $                           | 108,737 |   | $ | 107,194 |   | $ | 39,737 |   |
| Specialty  Avionics                       |   | 35,115                      |    | 30,542 |   | 31,425 |   |
| Systems  Integration                      |   | 46,138                      |    | 31,750 |   | 22,774 |   |
| Consolidated  totals                      |   | $                           | 189,990 |   | $ | 169,486 |   | $ | 93,936 |   |
|                                      |   |                        |    |   |   |   |   |
| EBITDA:                                   |   |                        |    |   |   |   |   |
| Cabin Management                          |   | $                           | 45,554  |   | $ | 46,041 |   | $ | 24,153 |   |
| Specialty  Avionics                       |   | 33,272                      |    | 26,696 |   | 27,124 |   |
| Systems  Integration                      |   | 17,152                      |    | 15,026 |   | 10,569 |   |
| Corporate (3)                             |   | (7,125                      | )       | (6,969 | ) | (5,436 | ) |
| Inter-group  elimination (4)              |   | (62                         | )       | 198 |   | 116 |   |
| Consolidated  totals (5)                  |   | $                           | 88,791  |   | $ | 80,992 |   | $ | 56,526 |   |
|                                      |   |                        |    |   |   |   |   |
| Depreciation and  amortization:           |   |                        |    |   |   |   |   |
| Cabin Management                          |   | $                           | 14,607  |   | $ | 9,477 |   | $ | 3,548 |   |
| Specialty  Avionics                       |   | 12,012                      |    | 12,101 |   | 10,871 |   |
| Systems  Integration                      |   | 4,346                       |    | 4,682 |   | 4,473 |   |
| Corporate                                 |   | 1,411                       |    | 927 |   | 294 |   |
| Consolidated totals  (6)                  |   | $                           | 32,376  |   | $ | 27,187 |   | $ | 19,186 |   |
|                                      |   |                        |    |   |   |   |   |
| Total assets (as  of period end):         |   |                        |    |   |   |   |   |
| Cabin Management                          |   | $                           | 311,476 |   | $ | 307,241 |   | $ | 181,744 |   |
| Specialty  Avionics                       |   | 214,569                     |    | 227,093 |   | 224,305 |   |
| Systems  Integration                      |   | 76,312                      |    | 86,602 |   | 93,473 |   |
| Corporate (7)                             |   | 43,497                      |    | 43,651 |   | 33,175 |   |
| Inter-group  elimination (8)              |   | (143                        | )       | (333 | ) | (855 | ) |
| Consolidated  totals                      |   | $                           | 645,711 |   | $ | 664,254 |   | $ | 531,842 |   |
|                                      |   |                        |    |   |   |   |   |
| Capital  expenditures:                    |   |                        |    |   |   |   |   |
| Cabin Management                          |   | $                           | 6,579   |   | $ | 14,896 |   | $ | 2,355 |   |
| Specialty  Avionics                       |   | 1,708                       |    | 2,496 |   | 3,217 |   |
| Systems  Integration                      |   | 3,371                       |    | 1,612 |   | 1,534 |   |
| Corporate                                 |   | 241                         |    | 3,685 |   | 156 |   |
| Consolidated  totals (9)                  |   | $                           | 11,899  |   | $ | 22,689 |   | $ | 7,262 |   |

----

The notes appear on the next page.

 

F-38

----

 

 

**Summary of Business by Geographical Area**

** **
|                                                       |   | **Year Ended December 31,**                                                                                                                                                                                                                                                                                                                                                                          |    |
|------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                       |   | **2001**                                                                                                                                                                                                                                                                                                                                                                                             |    | **2000** |   | **1999** |   |
|                                                       |   | **(in thousands)**                                                                                                                                                                                                                                                                                                                                                                                   |    |
| Consolidated net  revenues to unaffiliated customers (10): |   |                                                                                                                                                                                                                                                                                                                                                                                                 |    |   |   |   |   |
| United States                                              |   | $                                                                                                                                                                                                                                                                                                                                                                                                    | 391,296 |   | $ | 344,150 |   | $ | 240,707 |   |
| Western Europe                                             |   | 4,056                                                                                                                                                                                                                                                                                                                                                                                                |    | 3,229 |   | 3,341 |   |
| Consolidated  totals                                       |   | $                                                                                                                                                                                                                                                                                                                                                                                                    | 395,352 |   | $ | 347,379 |   | $ | 244,048 |   |
|                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                 |    |   |   |   |   |
| Consolidated  long-lived assets (11):                      |   |                                                                                                                                                                                                                                                                                                                                                                                                 |    |   |   |   |   |
| United States                                              |   | $                                                                                                                                                                                                                                                                                                                                                                                                    | 56,218  |   | $ | 54,566 |   | $ | 35,465 |   |
| Western Europe                                             |   | 2,564                                                                                                                                                                                                                                                                                                                                                                                                |    | 2,758 |   | 2,235 |   |
| Mexico                                                     |   | 2,291                                                                                                                                                                                                                                                                                                                                                                                                |    | 2,167 |   | — |   |
| Consolidated  totals                                       |   | $                                                                                                                                                                                                                                                                                                                                                                                                    | 61,073  |   | $ | 59,491 |   | $ | 37,700 |   |
|                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                 |    |   |   |   |   |
| **Notes**                                                  |   |                                                                                                                                                                                                                                                                                                                                                                                                 |    |   |   |   |   |
| (1)                                                        |   | Inter-group sales are accounted for at prices  comparable to sales to unaffiliated customers, and are eliminated in  consolidation.                                                                                                                                                                                                                                                                  |    |
|                                                       |   |                                                                                                                                                                                                                                                                                                                                                                                                 |    |   |   |   |   |
| (2)                                                        |   | Three customers each accounted for more than 10% of  the Company’s consolidated revenues in 2001 and 2000 and two in 1999 as shown  in the table below. Customer data for periods prior to reaching the 10  threshold is included for comparability. Complete loss of any of these  customers could have a significant adverse impact on the results of  operations expected in future periods. |    |
|                                                            |        |                                                                                                                                                                                                                                                                                                                                                                                                      |         |  |  |  |  |  |  |  |  |  |

 

|                 |   | **Year Ended December 31,** |    |
|----------------------|--------|-----------------------------|---------|
|                 |   | **2001**                    |    | **2000** |   | **1999** |   |
|                 |   | **(in thousands)**          |    |
| Boeing  (a)          |   | $                           | 70,257  |   | $ | 52,735 |   | $ | 46,436 |   |
| Bombardier (b)       |   | 61,541                      |    | 64,131 |   | 16,308 |   |
| Textron (c)          |   | 58,192                      |    | 52,620 |   | 31,192 |   |
| Consolidated  totals |   | $                           | 189,990 |   | $ | 169,486 |   | $ | 93,936 |   |

 

----

(a)                      Exceeds 10% for all periods. Alloperating groups derived revenues from Boeing during each of the periods.

(b)                     Exceeds 10% for 2001 and 2000; 1999 data is includedfor comparability. All operating groups derived revenues from Bombardier duringeach of the periods.

(c)                      Exceeds 10% for all periods. The CabinManagement and Specialty Avionics Groups derived revenues from Textron duringeach of the periods. The Systems Integration Group derived revenues fromTextron during 2000 and 1999.

(3)                      Reflects the Company’s corporateheadquarters costs and expenses not allocated to the groups.

(4)                      Reflects elimination of the effect ofinter-group profits in inventory.

 

F-39

----

 

 

**Note 16.         Business SegmentInformation (Continued)**

(5)                      The table below reconciles EBITDA toconsolidated income from operations and income (loss) before income taxes.

 

|                                                |   | **Year Ended December 31,** |    |
|-----------------------------------------------------|--------|-----------------------------|---------|
|                                                |   | **2001**                    |    | **2000** |   | **1999** |   |
|                                                |   | **(in thousands)**          |    |
| Consolidated  EBITDA                                |   | $                           | 88,791  |   | $ | 80,992 |   | $ | 56,526 |   |
| Depreciation  and amortization (6)                  |   | (32,376                     | )       | (27,187 | ) | (19,186 | ) |
| Restructuring  and asset impairment charges         |   | (28,658                     | )       | — |   | (9,935 | ) |
| Acquisition  related charges:                       |   |                        |    |   |   |   |   |
| Noncash  inventory related charges                  |   | —                      |    | — |   | (1,606 | ) |
| Acquisition  related charges not capitalized        |   | (308                        | )       | (538 | ) | (709 | ) |
| Nonrecurring  manufacturing facility startup costs  |   | —                      |    | (717 | ) | — |   |
| Other  noncash charges                              |   | (215                        | )       | (561 | ) | (143 | ) |
| Consolidated  income from operations                |   | 27,234                      |    | 51,989 |   | 24,947 |   |
|                                                |   |                        |    |   |   |   |   |
| Interest  expense                                   |   | (39,001                     | )       | (41,623 | ) | (27,903 | ) |
| Minority  interest in preferred stock of subsidiary |   | (5,061                      | )       | (2,274 | ) | — |   |
| Other  expenses, net                                |   | (1,047                      | )       | (482 | ) | (447 | ) |
| Consolidated  income (loss) before income taxes     |   | $                           | (17,875 | ) | $ | 7,610 |   | $ | (3,403 | ) |

(6)                      Reflects depreciation and amortization oflong-lived assets, goodwill and other intangible assets. Excludes amortizationof deferred financing costs, which are classified as a component of interestexpense. The table below reconciles depreciation and amortization of long-livedassets to consolidated depreciation and amortization.
|                                                |   | **Year Ended December 31,** |   |
|-----------------------------------------------------|--------|-----------------------------|--------|
|                                                |   | **2001**                    |   | **2000** |   | **1999** |   |
|                                                |   | **(in thousands)**          |   |
| Depreciation  and amortization of long-lived assets |   | $                           | 32,376 |   | $ | 27,187 |   | $ | 19,186 |   |
| Amortization  of deferred financing costs           |   | 2,218                       |   | 2,258 |   | 1,616 |   |
| Consolidated  depreciation and amortization         |   | $                           | 34,594 |   | $ | 29,445 |   | $ | 20,802 |   |

 

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

(8)                      Reflects elimination of inter-groupreceivables and profits in inventory as of period end.

(9)                      Reflects capital expenditures paid incash. Excludes capital expenditures financed with capital lease obligations of$4,438,000 for the year ended December 31, 2001, $109,000 for the year endedDecember 31, 2000 and $1,711,000 for the year ended December 31, 1999.

(10)                Allocated on the basis of the location of thesubsidiary originating the sale.

(11)                Allocated on the basis of the location of thesubsidiary and consists of the Company’s property and equipment. Corporatelong-lived assets are included with the United States assets.

 

F-40

----

 

 

**Note 17.         SupplementalCondensed Consolidating Financial Information**

In conjunction with the senior credit facility and 12%senior subordinated notes described in Note 9, the following condensedconsolidating financial information is presented segregating DeCrane Aircraft,as the issuer, and guarantor and non-guarantor subsidiaries. The accompanyingfinancial information in the guarantor subsidiaries column reflects thefinancial position, results of operations and cash flows for those subsidiariesguaranteeing the senior credit facility and the notes. DeCrane Holdings in nota guarantor of either the senior credit facility or the notes and is thereforereflected in the non-guarantor subsidiary column with DeCrane Aircraft’snon-guarantor subsidiaries.

The guarantor subsidiaries are wholly-ownedsubsidiaries of the DeCrane Aircraft and their guarantees are full andunconditional on a joint and several basis. There are no restrictions on theability of the guarantor subsidiaries to transfer funds to the issuer in theform of cash dividends, loans or advances. Separate financial statements of theguarantor subsidiaries are not presented because management believes that suchfinancial statements would not be material to investors. Investments insubsidiaries in the following condensed consolidating financial information areaccounted for under the equity method of accounting. Consolidating adjustmentsinclude the following:

(1)                      Elimination of investments insubsidiaries.

(2)                      Elimination of intercompany accounts.

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

(4)                      Elimination of equity in earnings ofsubsidiaries.

 

F-41

----

 

 

**BalanceSheets**

 
|                                                                                    | ** ** | **December 31, 2001** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **Issuer**            | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Consolidating Adjustments** | ** ** | **Consolidated Total** | ** ** |
|                                                                                    |       | **(in thousands)**    |       |
| **Assets**                                                                              |       |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Current assets:                                                                         |       |                  | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Cash and cash equivalents                                                               |       | $                     | 9,641      |   | $ | (92 | ) | $ | 245 |   | $ | — |   | $ | 9,794 |   |
| Accounts receivable, net                                                                |       | —                |       | 56,973 |   | 1,478 |   | — |   | 58,451 |   |
| Inventories                                                                             |       | —                |       | 84,864 |   | 1,634 |   | — |   | 86,498 |   |
| Other current assets                                                                    |       | 15,153                |       | 1,138 |   | 331 |   | — |   | 16,622 |   |
| Total current assets                                                                    |       | 24,794                |       | 142,883 |   | 3,688 |   | — |   | 171,365 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                             |       | 3,355                 |       | 55,152 |   | 2,566 |   | — |   | 61,073 |   |
| Other assets, principally intangibles, net                                              |       | 15,348                |       | 388,269 |   | 9,656 |   | — |   | 413,273 |   |
| Investments in subsidiaries                                                             |       | 403,786               |       | 20,697 |   | 105,146 |   | (529,629 | )(1) | — |   |
| Intercompany receivables                                                                |       | 256,360               |       | 121,030 |   | 4,300 |   | (381,690 | )(2) | — |   |
| Total assets                                                                            |       | $                     | 703,643    |   | $ | 728,031 |   | $ | 125,356 |   | $ | (911,319 | ) | $ | 645,711 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholders’ Equity**  | ** ** |                  | ** ** |   | ** ** |   | ** ** |
| Current liabilities:                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                       |       | $                     | 11,839     |   | $ | 2,054 |   | $ | 6 |   | $ | — |   | $ | 13,899 |   |
| Other current liabilities                                                               |       | 24,849                |       | 49,854 |   | 1,107 |   | — |   | 75,810 |   |
| Total current liabilities                                                               |       | 36,688                |       | 51,908 |   | 1,113 |   | — |   | 89,709 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                                          |       | 376,392               |       | 9,959 |   | — |   | — |   | 386,351 |   |
| Intercompany payables                                                                   |       | 120,998               |       | 260,660 |   | 32 |   | (381,690 | )(2) | — |   |
| Other long-term liabilities                                                             |       | 38,847                |       | 1,806 |   | 382 |   | — |   | 41,035 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                      |       | 28,240                |       | — |   | — |   | — |   | 28,240 |   |
| Mandatorily redeemable preferred stock                                                  |       | —                |       | — |   | 54,223 |   | — |   | 54,223 |   |
|                                                                                    |       |                  |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                                              |       |                  |       |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                         |       | 119,801               |       | 336,986 |   | 91,021 |   | (474,895 | )(1) | 72,913 |   |
| Retained earnings (deficit)                                                             |       | (17,323               | )          | 66,800 |   | (19,401 | ) | (54,734 | )(1) | (24,658 | ) |
| Accumulated other comprehensive loss                                                    |       | —                |       | (88 | ) | (2,014 | ) | — |   | (2,102 | ) |
| Total stockholders’ equity                                                         |       | 102,478               |       | 403,698 |   | 69,606 |   | (529,629 | ) | 46,153 |   |
| Total liabilities, mandatorily redeemable preferred stockand  stockholders’ equity |       | $                     | 703,643    |   | $ | 728,031 |   | $ | 125,356 |   | $ | (911,319 | ) | $ | 645,711 |   |

 

 

 

F-42

----

 
| ** **                                                                               | ** ** | **December 31, 2000** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **Issuer**            | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Consolidating Adjustments** | ** ** | **Consolidated Total** | ** ** |
|                                                                                     |       | **(in thousands)**    |       |
| **Assets**                                                                               |       |                  |       |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |       |                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                |       | $                     | 7,553      |   | $ | 233 |   | $ | 413 |   | $ | — |   | $ | 8,199 |   |
| Accounts receivable, net                                                                 |       | —                |       | 52,095 |   | 1,735 |   | — |   | 53,830 |   |
| Inventories                                                                              |       | —                |       | 85,032 |   | 1,664 |   | — |   | 86,696 |   |
| Other current assets                                                                     |       | 15,161                |       | 1,118 |   | 177 |   | — |   | 16,456 |   |
| Total current assets                                                                     |       | 22,714                |       | 138,478 |   | 3,989 |   | — |   | 165,181 |   |
| Property and equipment, net                                                              |       | 4,423                 |       | 52,303 |   | 2,765 |   | — |   | 59,491 |   |
| Other assets, principally intangibles, net                                               |       | 16,514                |       | 412,730 |   | 10,338 |   | — |   | 439,582 |   |
| Investments in subsidiaries                                                              |       | 394,794               |       | 20,739 |   | 123,994 |   | (539,527 | )(1) | — |   |
| Intercompany receivables                                                                 |       | 251,725               |       | 92,991 |   | 3,863 |   | (348,579 | )(2) | — |   |
| Total assets                                                                             |       | $                     | 690,170    |   | $ | 717,241 |   | $ | 144,949 |   | $ | (888,106 | ) | $ | 664,254 |   |
|                                                                                     |       |                  |       |   |   |   |   |   |   |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholders’ Equity**   |       |                  |       |   |   |   |
|                                                                                     |       |                  |       |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                     |       |                  |       |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                        |       | $                     | 7,997      |   | $ | 1,266 |   | $ | 26 |   | $ | — |   | $ | 9,289 |   |
| Other current liabilities                                                                |       | 35,098                |       | 58,102 |   | 1,294 |   | — |   | 94,494 |   |
| Total current liabilities                                                                |       | 43,095                |       | 59,368 |   | 1,320 |   | — |   | 103,783 |   |
| Long-term debt                                                                           |       | 368,837               |       | 5,147 |   | 6 |   | — |   | 373,990 |   |
| Intercompany payables                                                                    |       | 92,991                |       | 255,588 |   | — |   | (348,579 | )(2) | — |   |
| Other long-term liabilities                                                              |       | 40,626                |       | 2,344 |   | 577 |   | — |   | 43,547 |   |
|                                                                                     |       |                  |       |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                       |       | 23,179                |       | — |   | — |   | — |   | 23,179 |   |
| Mandatorily redeemable preferred stock                                                   |       | —                |       | — |   | 47,252 |   | — |   | 47,252 |   |
| Stockholders’ equity:                                                               |       |                  |       |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |       | 124,763               |       | 338,729 |   | 97,777 |   | (481,484 | )(1) | 79,785 |   |
| Retained earnings (deficit)                                                              |       | (3,321                | )          | 56,065 |   | (296 | ) | (58,043 | )(1) | (5,595 | ) |
| Accumulated other comprehensive loss                                                     |       | —                |       | — |   | (1,687 | ) | — |   | (1,687 | ) |
| Total stockholders’ equity                                                          |       | 121,442               |       | 394,794 |   | 95,794 |   | (539,527 | ) | 72,503 |   |
| Total liabilities, mandatorily redeemable preferred stock and  stockholders’ equity |       | $                     | 690,170    |   | $ | 717,241 |   | $ | 144,949 |   | $ | (888,106 | ) | $ | 664,254 |   |
|                                                                                          |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-43

----

 

**Statements of Operations**
| ** **                                          | ** ** | **Year Ended December 31, 2001** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **Issuer**                       | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Consolidating Adjustments** | ** ** | **Consolidated Total** | ** ** |
|                                                |       | **(in thousands****)**           | ** ** |
| Revenues                                            |       | $                                | —     |   | $ | 391,677 |   | $ | 11,322 |   | $ | (7,647 | )(3) | $ | 395,352 |   |
| Cost of sales                                       |       | —                           |       | 277,414 |   | 9,914 |   | (7,647 | )(3) | 279,681 |   |
|                                                |       |                             |       |   |   |   |   |   |   |   |   |
| Gross profit                                        |       | —                           |       | 114,263 |   | 1,408 |   | — |   | 115,671 |   |
|                                                |       |                             |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses        |       | 9,390                            |       | 58,347 |   | 780 |   | — |   | 68,517 |   |
| Amortization of intangible assets                   |       | 202                              |       | 19,313 |   | 405 |   | — |   | 19,920 |   |
| Interest expense                                    |       | 37,796                           |       | 1,187 |   | 18 |   | — |   | 39,001 |   |
| Minority interest in preferred stock of  subsidiary |       | —                           |       | — |   | 5,061 |   | — |   | 5,061 |   |
| Intercompany charges                                |       | (23,815                          | )          | 23,815 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                  |       | (4,894                           | )          | (115 | ) | 14,002 |   | (8,993 | )(4) | — |   |
| Other expenses (income), net                        |       | 361                              |       | 508 |   | 178 |   | — |   | 1,047 |   |
| Provision for income taxes (benefit)                |       | (5,038                           | )          | 6,314 |   | (88 | ) | — |   | 1,188 |   |
| Net income (loss)                                   |       | $                                | (14,002    | ) | $ | 4,894 |   | $ | (18,948 | ) | $ | 8,993 |   | $ | (19,063 | ) |

 

 

 

|                                               |   | **Year Ended December 31, 2000** |   |
|----------------------------------------------------|--------|----------------------------------|--------|
| ** **                                         |   | **Issuer**                       |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                               |   | **(in thousands)**               |   |
| Revenues                                           |   | $                                | — |   | $ | 343,710 |   | $ | 11,873 |   | $ | (8,204 | )(3) | $ | 347,379 |   |
| Cost of sales                                      |   | —                           |   | 230,864 |   | 9,388 |   | (8,204 | )(3) | 232,048 |   |
| Gross profit                                       |   | —                           |   | 112,846 |   | 2,485 |   | — |   | 115,331 |   |
| Selling, general and administrative expenses       |   | 8,720                            |   | 35,359 |   | 1,315 |   | — |   | 45,394 |   |
| Amortization of intangible assets                  |   | 276                              |   | 17,263 |   | 409 |   | — |   | 17,948 |   |
| Interest expense                                   |   | 40,864                           |   | 752 |   | 7 |   | — |   | 41,623 |   |
| Minority interest in preferred stock of subsidiary |   | —                           |   | — |   | 2,274 |   | — |   | 2,274 |   |
| Intercompany charges                               |   | (20,214                          | )      | 20,214 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                 |   | (15,668                          | )      | (681 | ) | (3,602 | ) | 19,951 | (4) | — |   |
| Other expenses (income), net                       |   | 336                              |   | 158 |   | (12 | ) | — |   | 482 |   |
| Provision for income taxes (benefit)               |   | (17,916                          | )      | 24,113 |   | 85 |   | — |   | 6,282 |   |
| Net income                                         |   | $                                | 3,602  |   | $ | 15,668 |   | $ | 2,009 |   | $ | (19,951 | ) | $ | 1,328 |   |

 

 

F-44

----

 

 

|                                         |   | **Year Ended December 31, 1999** |   |
|----------------------------------------------|--------|----------------------------------|--------|
|                                         |   | **Issuer**                       |   | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating****Adjustments** |   | **Consolidated****Total** |   |
|                                         |   | **(in thousands)**               |   |
| Revenues                                     |   | $                                | — |   | $ | 237,837 |   | $ | 11,549 |   | $ | (5,338 | )(3) | $ | 244,048 |   |
| Cost of sales                                |   | —                           |   | 161,770 |   | 9,439 |   | (5,338 | )(3) | 165,871 |   |
| Gross profit                                 |   | —                           |   | 76,067 |   | 2,110 |   | — |   | 78,177 |   |
| Selling, general and administrative expenses |   | 6,419                            |   | 32,232 |   | 1,506 |   | — |   | 40,157 |   |
| Amortization of intangible assets            |   | 161                              |   | 12,417 |   | 495 |   | — |   | 13,073 |   |
| Interest expense                             |   | 27,493                           |   | 386 |   | 24 |   | — |   | 27,903 |   |
| Intercompany charges                         |   | (8,888                           | )      | 8,888 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries           |   | (12,611                          | )      | (406 | ) | 4,370 |   | 8,647 | (4) | — |   |
| Other expenses (income), net                 |   | 646                              |   | 219 |   | (418 | ) | — |   | 447 |   |
| Provision for income taxes (benefit)         |   | (8,850                           | )      | 9,720 |   | 82 |   | — |   | 952 |   |
| Net income (loss)                            |   | $                                | (4,370 | ) | $ | 12,611 |   | $ | (3,949 | ) | $ | (8,647 | ) | $ | (4,355 | ) |
|                                              |        |                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-45

----

 

** **

** **
|                                                  |   | **Year Ended December 31, 2001** |          |
|-------------------------------------------------------|--------|----------------------------------|---------------|
|                                                  |   | **Issuer**                       |          | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |
|                                                  |   | **(in thousands)**               |          |
| **Cash flows  from operating activities:**            |   |                             |          |   |   |   |   |   |   |   |   |
| Net income (loss)                                     |   | $                                |  (14,002 | ) | $ |  4,894 |   | $ |  (18,948 | ) | $ |  8,993 | (4) | $ |  (19,063 | ) |
| Noncash adjustments                                   |   |                             |          |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                    |   | (4,894                           | )             | (115 | ) | 14,002 |   | (8,993 | )(4) | — |   |
| Other noncash adjustments                             |   | 3,950                            |          | 52,467 |   | 5,948 |   | — |   | 62,365 |   |
| Changes in working capital                            |   | 19,987                           |          | (47,707 | ) | (653 | ) | — |   | (28,373 | ) |
| Net cash provided by operating activities             |   | 5,041                            |          | 9,539 |   | 349 |   | — |   | 14,929 |   |
| **Cash flows  from investing activities:**            |   |                             |          |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired     |   | (13,529                          | )             | — |   | — |   | — |   | (13,529 | ) |
| Capital expenditures and other                        |   | (241                             | )             | (10,470 | ) | (552 | ) | — |   | (11,263 | ) |
| Net cash used for investing activities                |   | (13,770                          | )             | (10,470 | ) | (552 | ) | — |   | (24,792 | ) |
| **Cash flows  from financing activities**             |   |                             | ** **    |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Debt financing for acquisitions                       |   | 20,000                           |          | — |   | — |   | — |   | 20,000 |   |
| Net revolving line of credit repayments               |   | (400                             | )             | — |   | — |   | — |   | (400 | ) |
| Other borrowings                                      |   | —                           |          | 2,797 |   | — |   | — |   | 2,797 |   |
| Principal payments on long-term debt and  leases      |   | (8,203                           | )             | (1,847 | ) | (26 | ) | — |   | (10,076 | ) |
| Other, net                                            |   | (580                             | )             | (344 | ) | — |   | — |   | (924 | ) |
| Net cash provided by (used for) financing  activities |   | 10,817                           |          | 606 |   | (26 | ) | — |   | 11,397 |   |
| Effect of foreign currency translation on cash        |   | —                           |          | — |   | 61 |   | — |   | 61 |   |
| Net increase (decrease) in cash and  equivalents      |   | 2,088                            |          | (325 | ) | (168 | ) | — |   | 1,595 |   |
| Cash and equivalents at beginning of period           |   | 7,553                            |          | 233 |   | 413 |   | — |   | 8,199 |   |
| Cash and equivalents at end of period                 |   | $                                |  9,641   |   | $ |  (92 | ) | $ |  245 |   | $ |  — |   | $ |  9,794 |   |

 

 

F-46

----

 
|                                                                      |   | **Year Ended December 31, 2000** |        |
|---------------------------------------------------------------------------|--------|----------------------------------|-------------|
|                                                                      |   | **Issuer**                       |        | **Guarantor Subsidiaries** |   | **Non-Guarantor Subsidiaries** |   | **Consolidating Adjustments** |   | **Consolidated Total** |   |
|                                                                      |   | **(in thousands)**               |        |
| **Cash flows  from operating activities:**                                |   |                             |        |   |   |   |   |   |   |   |   |
| Net income                                                                |   | $                                |  3,602 |   | $ |  15,668 |   | $ |  2,009 |   | $ |  (19,951 | )(4) | $ |  1,328 |   |
| Noncash adjustments:                                                      |   |                             |        |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                        |   | (15,668                          | )           | (681 | ) | (3,602 | ) | 19,951 | (4) | — |   |
| Other noncash adjustments                                                 |   | 9,092                            |        | 25,293 |   | 3,228 |   | — |   | 37,613 |   |
| Changes in working capital                                                |   | 1,283                            |        | (22,458 | ) | (983 | ) | — |   | (22,158 | ) |
| Net cash provided by (used for) operating  activities                     |   | (1,691                           | )           | 17,822 |   | 652 |   | — |   | 16,783 |   |
| **Cash flows  from investing activities:**                                |   |                             |        |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired                         |   | (89,838                          | )           | 292 |   | (7,902 | ) | 7,902 | (1) | (89,546 | ) |
| Capital expenditures and other                                            |   | (3,614                           | )           | (18,370 | ) | (634 | ) | — |   | (22,618 | ) |
| Net cash used for investing activities                                    |   | (93,452                          | )           | (18,078 | ) | (8,536 | ) | 7,902 |   | (112,164 | ) |
| **Cash flows  from financing activities:**                                |   |                             |        |   |   |   |   |   |   |   |   |
| Debt financing for acquisitions                                           |   | 55,000                           |        | — |   | — |   | — |   | 55,000 |   |
| Proceeds from sale of preferred stock and  warrants                       |   | 24,924                           |        | — |   | — |   | — |   | 24,924 |   |
| Net revolving line of credit borrowings                                   |   | 12,400                           |        | — |   | — |   | — |   | 12,400 |   |
| Capital contribution to subsidiary of  proceeds from sale of common stock |   | 7,902                            |        | — |   | 7,902 |   | (7,902 | )(1) | 7,902 |   |
| Other borrowings                                                          |   | —                           |        | 3,451 |   | — |   | — |   | 3,451 |   |
| Principal payments on long-term debt and  leases                          |   | (3,419                           | )           | (2,392 | ) | (13 | ) | — |   | (5,824 | ) |
| Other, net                                                                |   | (1,950                           | )           | (247 | ) | — |   | — |   | (2,197 | ) |
| Net cash provided by (used for) financing  activities                     |   | 94,857                           |        | 812 |   | 7,889 |   | (7,902 | ) | 95,656 |   |
| Effect of foreign currency translation on  cash                           |   | —                           |        | — |   | 6 |   | — |   | 6 |   |
| Net increase (decrease) in cash and  equivalents                          |   | (286                             | )           | 556 |   | 11 |   | — |   | 281 |   |
| Cash and equivalents at beginning of period                               |   | 7,839                            |        | (323 | ) | 402 |   | — |   | 7,918 |   |
| Cash and equivalents at end of period                                     |   | $                                |  7,553 |   | $ |  233 |   | $ |  413 |   | $ |  — |   | $ |  8,199 |   |
|                                                                           |        |                                  |             |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-47

----

 
| ** **                                                                | ** ** | **Year Ended December 31, 1999** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **Issuer**                       | ** ** | **Guarantor****Subsidiaries** | ** ** | **Non-Guarantor****Subsidiaries** | ** ** | **Consolidating****Adjustments** | ** ** | **Consolidated****Total** | ** ** |
|                                                                      |       | **(in thousands****)**           | ** ** |
| **Cash flows  from operating activities:**                                |       |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Net income (loss)                                                         |       | $                                | (4,370     | ) | $ | 12,611 |   | $ | (3,949 | ) | $ | (8,647 | )(4) | $ | (4,355 | ) |
| Noncash adjustments:                                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                        |       | (12,611                          | )          | (406 | ) | 4,370 |   | 8,647 | (4) | — |   |
| Other noncash adjustments                                                 |       | 1,787                            |       | 25,188 |   | 821 |   | — |   | 27,796 |   |
| Changes in working capital                                                |       | 30,867                           |       | (38,903 | ) | (62 | ) | (143 | )(1) | (8,241 | ) |
| Net cash provided by (used for) operating  activities                     |       | 15,673                           |       | (1,510 | ) | 1,180 |   | (143 | ) | 15,200 | ) |
| **Cash flows  from investing activities:**                                |       |                             |       |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired                          |       | (148,310                         | )          | 2,604 |   | — |   | — |   | (145,706 | ) |
| Investment in subsidiary                                                  |       | —                           |       | — |   | (14,511 | ) | 14,511 | (1) | — |   |
| Capital expenditures and other                                            |       | (156                             | )          | (6,289 | ) | (623 | ) | — |   | (7,068 | ) |
| Net cash used for investing activities                                    |       | (148,466                         | )          | (3,685 | ) | (15,134 | ) | 14,511 |   | (152,774 | ) |
| **Cash flows  from financing activities:**                                |       |                             |       |   |   |   |   |   |   |   |   |
| Debt financing for acquisitions                                           |       | 135,000                          |       | — |   | — |   | — |   | 135,000 |   |
| Capital contribution to subsidiary of  proceeds from sale of common stock |       | 14,368                           |       | — |   | 14,511 |   | (14,368 | )(1) | 14,511 |   |
| Customer advance                                                          |       | —                           |       | 5,000 |   | — |   | — |   | 5,000 |   |
| Net revolving line of credit borrowings                                   |       | (5,800                           | )          | — |   | — |   | — |   | (5,800 | ) |
| Principal payments on long-term debt and  leases                          |       | (1,046                           | )          | (675 | ) | (232 | ) | — |   | (1,953 | ) |
| Other, net                                                                |       | (4,348                           | )          | (215 | ) | (143 | ) | — |   | (4,706 |   |
| Net cash provided by (used for) financing  activities                     |       | 138,174                          |       | 4,110 |   | 14,136 |   | (14,368 | ) | 142,052 |   |
|                                                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on  cash                           |       | —                           |       | — |   | (78 | ) | — |   | (78 | ) |
| Net increase (decrease) in cash and  equivalents                          |       | 5,381                            |       | (1,085 | ) | 104 |   | — |   | 4,400 |   |
| Cash and equivalents at beginning of period                               |       | 2,458                            |       | 762 |   | 298 |   | — |   | 3,518 |   |
| Cash and equivalents at end of period                                     |       | $                                | 7,839      |   | $ | (323 | ) | $ | 402 |   | $ | — |   | $ | 7,918 |   |

 

 

**F-48**

----

**Note 18. SubsequentEvent**

On March 19, 2002, the Company amended certain of theterms of its senior credit facility. The amendment combines the two $25,000,000working capital and acquisitions lines of credit into a single $50,000,000working capital line of credit, increases the prime rate and LIBOR rate marginsby 50 basis points, resulting in a range of 2.00% to 3.25% for prime rateborrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amends certainfinancial covenants, principally through December 31, 2003.

 

F-49

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**DECRANE HOLDINGS CO. AND SUBSIDIARY**

**Consolidated Supplementary Financial Information**

**Selected Quarterly Financial Data (Unaudited)**

Unaudited condensed quarterly data for the two yearsended December 31, 2001 are summarized in the tables below.

 

|                         |   | **Year Ended December 31, 2001** |         |
|------------------------------|--------|----------------------------------|--------------|
|                         |   | **1st**                          |         | **2nd** |   | **3rd** |   | **4th** |   |
|                         |   | **(in thousands)**               | ** **   |
| Revenues                     |   | $                                |  99,151 |   | $ |  102,780 |   | $ |  102,928 |   | $ |  90,493 |   |
| Gross profit                 |   | 35,045                           |         | 32,576 |   | 32,776 |   | 15,274 |   |
| EBITDA, as defined (Note 16) |   | 23,385                           |         | 26,308 |   | 21,998 |   | 17,100 |   |
| Net income (loss)            |   | 1,273                            |         | 870 |   | (425 | ) | (20,781 | ) |
|                              |        |                                  |              |  |  |  |  |  |  |  |  |  |  |

During the second quarter of 2001, the Company adopteda restructuring plan to realign production programs between its manufacturingfacilities and recorded restructuring charges aggregating $3,902,000 related tothis restructuring. During the fourth quarter of 2001, the Company announcedand implemented a further restructuring plan in response to the adverse impacton the aerospace industry resulting from the September 11thterrorist attack and further weakening of global economic conditions. As aresult, additional restructuring and asset impairment charges aggregating$24,756,000 was recorded in the fourth quarter. Restructuring and assetimpairment charges totaled $28,658,000 for the year.

 

|                         |   | **Year Ended December 31, 2000** |         |
|------------------------------|--------|----------------------------------|--------------|
|                         |   | **1st**                          |         | **2nd** |   | **3rd** |   | **4th** |   |
|                         |   | **(in thousands)**               |         |
| Revenues                     |   | $                                |  79,178 |   | $ |  82,094 |   | $ |  93,149 |   | $ |  92,958 |   |
| Gross profit                 |   | 26,152                           |         | 27,611 |   | 31,131 |   | 30,437 |   |
| EBITDA, as defined (Note 16) |   | 17,182                           |         | 19,941 |   | 22,159 |   | 21,710 |   |
| Net income (loss)            |   | 755                              |         | 1,987 |   | (110 | ) | (1,304 | ) |
|                              |        |                                  |              |  |  |  |  |  |  |  |  |  |  |

** **

** **

**F-50**

----

** **

** **

**DECRANE HOLDINGSCO. AND SUBSIDIARY**

** **

**Schedule II —Valuation And Qualifying Accounts**

**(In Thousands)**

|                                                                   |   |
|------------------------------------------------------------------------|--------|
|                                                                   |   | **Balance at  Beginning of Period** |   | **Charged to  Cost and Expense** |   | **Charged to  Other Accounts** |   | **Deductions** |   | **Balance at  Endo of Period** | ** ** |
| **Year  Ended December 31, 2001**                                      |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts                                       |   | $ | 1,902 |   | $ | 2,418 |   | $ | — |   | $ | 1,673 |   | $ | 2,647 |   |
| Reserve for excess,  slow moving and potentially obsolete material (1) |   | 5,580 |   | 1,829 |   | — |   | 773 |   | 6,636 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |   |   |
| **Year  Ended December 31, 2000**                                      |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts                                       |   | $ | 1,966 |   | $ | 120 |   | $ | 223 | (2) | $ | 407 |   | $ | 1,902 |   |
| Reserve for excess,  slow moving and potentially obsolete material     |   | 6,966 |   | 1,261 |   | 215 | (2) | 2,862 |   | 5,580 |   |
|                                                                   |   |   |   |   |   |   |   |   |   |   |   |
| **Year  Ended December 31, 1999**                                      |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts                                       |   | $ | 581 |   | $ | 1,252 |   | $ | 1,407 | (2) | $ | 1,274 |   | $ | 1,966 |   |
| Reserve for excess,  slow moving and potentially obsolete material (3) |   | 5,702 |   | 1,373 |   | 2,567 |  (2) | 2,676 |   | 6,966 |   |
|                                                                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                      Excludes $12,155,000 of inventory andcapitalized program cost write-offs resulting from the 2001 restructuring plan.

(2)                      Attributable to companies acquired.Reflects historical amounts used to determine the fair value of assetsacquired.

(3)                      Excludes $5,983,000 of inventorywrite-downs resulting from the 1999 restructuring plan.

 

 

F-51

----