**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

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**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE FISCAL YEAR ENDED DECEMBER 31, 2003**

 

**COMMISSIONFILE NUMBER 333-70363**

 

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**DECRANE HOLDINGS CO.**

(Exact name of registrant as specified in its charter)

 

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

 

**c/oCredit Suisse First Boston / DLJ Merchant Banking Partners II, L.P.Eleven Madison AvenueNew York, NY 10010(212) 325-2000**

(Address andTelephone Number of Principal Executive Offices)

 

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

 

None.

 

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

 

None.

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days. ý** **YES  o NO

 

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

 

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

 

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter: Nil

 

The number of shares ofCommon Stock outstanding on March 25, 2004 was 4,009,297.

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

None.

 

 

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**Table of Contents**

 
| **Part I**                                                           |                                                                                        |   |
|----------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.                                                              | 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 Supplementary Data                                                |   |
| Item  9.                                                             | Changes  In and Disagreements With Accountants On Accounting and Financial Disclosure       |   |
| Item  9A.                                                            | Controls  and Procedures                                                                    |   |
|                                                                 |                                                                                        |   |
| **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                                             |   |
| Item  14.                                                            | Principal  Accounting Fees and Services                                                     |   |
|                                                                 |                                                                                        |   |
| **Part IV**                                                          |                                                                                        |   |
| Item  15.                                                            | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                           |   |
|                                                                 |                                                                                        |   |
| **Signatures**                                                       |                                                                                        |   |
|                                                                 |                                                                                        |   |
| **Index to Financial Statements 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 are subject to known and unknown risks,uncertainties and other factors, which are difficult to predict.  Changes in such factors could cause actualresults to differ materially from those contemplated in such forward-lookingstatements as we describe in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Forward-Looking Statements and Risk Factors.”  Although we believe that the expectationsreflected in such forward-looking statements are reasonable, we can give noassurance that such expectations will prove to be correct.  We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

 

**PART I**

**ITEM 1.**              BUSINESS

** **

**CompanyOverview**

** **

DeCrane Holdings Co., aDelaware corporation founded in 1998, is a holding company and does not haveany material operations or assets other than its ownership of all of the commonstock of DeCrane Aircraft Holdings, Inc. As used in this report, unless the context indicates otherwise, “DeCrane”and “we,” “us,” “our,” and similar terms collectively refer to the combinedbusinesses of DeCrane Holdings, DeCrane Aircraft and all of DeCrane Aircraft’ssubsidiaries.

 

DeCrane AircraftHoldings, Inc., a Delaware corporation founded in 1989, is a provider ofintegrated assemblies, sub-assemblies and component parts to the aerospaceindustry.  Since our founding in 1989,we have experienced both internal growth and external growth by identifyingfragmented, high-growth niche segments within the aerospace industry andacquiring market-leading companies in those niches.  Today, we have product capability within two specific segments ofthe aerospace industry: cabin interiors for business, VIP and head-of-stateaircraft and systems integration services, including auxiliary fuel tanks,retrofit and aircraft completion services. Within these markets, our customers include original manufacturers ofbusiness, VIP and head-of-state aircraft, commonly referred to as OEM’s, andaircraft repair and modification centers.

 

**OurOperating Groups**

** **

We are organized into twooperating groups, consistent with the segments in which we operate: CabinManagement and Systems Integration. Through our operating groups, we offer a complete line of cabinetry,galleys, seating and cabin management systems for business, VIP andhead-of-state aircraft, as well as systems integration services.

 

During the first fivemonths of 2003, we also had a third strategic business, the Specialty AvionicsGroup.  As described in “Item 7.  Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statementsand related notes included in this report, we sold our equity interests in thecompanies comprising this group on May 23, 2003.  As a result of the sale, the Specialty Avionics Group ispresented as a discontinued operation in our consolidated financial statementsfor all periods and our discussion below reflects only our continuingoperations.

 

**CabinManagement Group**

** **

DeCrane’s CabinManagement Group contributed approximately 70% of our revenues from continuingoperations for the year ended December 31, 2003.

 

1

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***BusinessDescription***

*** ***

Our Cabin ManagementGroup is a leading independent provider of cabin products, with a primary focuson serving the business, VIP and head-of-state aircraft market.  Since 1997, our Cabin Management Group hasacquired nine companies involved in the engineering, manufacturing and assemblyof the key components for the interior of a business, VIP and head-of-stateaircraft, including cabin interior furnishings, veneer, cabin managementsystems, seating and composite components. Our Cabin Management Group serves major manufacturers of business, VIPand head-of-state aircraft, including Boeing Business Jet, Bombardier, Cessna,Dassault, Gulfstream and Raytheon.

 

The Cabin ManagementGroup introduced the concept of modularity to the business, VIP andhead-of-state aircraft market by offering totally integrated interiorproducts.  In our view, one of the greatestchallenges facing the industry’s aircraft manufacturers is minimizing theproduction cycle time necessary to complete an unfinished “green”aircraft.  We 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.  Webelieve our totally integrated interior products enable our customers to reducetheir lead times, supplier base and overall costs.

 

The Cabin ManagementGroup is guided by our overall strategy to gain market leadership positions inhigh-growth segments of the aerospace industry by building more related productcapabilities than any other company in the industry.  To that end, our Cabin Management Group has focused on pursuingtwo, closely related, strategic imperatives:

 

•      *Building Critical Massin Cabin Interior Furnishings, Cabin Management Systems and Seating for theBusiness, VIP and Head-of-State Aircraft Markets.* Our Cabin Management Group is aggressively focused on broadening anddeepening its product offerings to the business, VIP and head-of-state aircraftmarkets.  As a result of this strategy,we have increased revenue content per plane with our existing customer base andhave successfully attracted new customers.

 

•      *Developing Capabilitiesto Provide Modular “Total Cabin Solutions” to the Business, VIP andHead-of-State Aircraft Market. *Consistent with our overall corporatestrategy to build integrated system solutions, the Cabin Management Group isfocused on aggregating its capabilities to provide partial or fully assembledmodular business, VIP and head-of-state aircraft cabin interiors to its customers.

 

In order to meet thesestrategic objectives, we have aggressively pursued growth in our CabinManagement Group through selective acquisitions.

 

***Productsand Services***

 

Our Cabin ManagementGroup designs, engineers and manufactures a full line of customized, pre-fitproducts and provides related services. Approximately 39% of our Cabin Management Group’s revenues in 2003 werefrom two customers, Textron and Bombardier. Our products and services are in four broad categories, as summarizedbelow.

 

2

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*Interior Furnishings*

•      entertainment and refreshment centers

•      conference tables

•      hi-low dining and coffee tables

•      end tables

•      cabinets

•      arm and side ledges

•      galleys

•      lavatories

•      vanities

•      room enclosures

•      cabinetry refurbishment services

•      veneers

* *

*Seating*

•      executive track and swivel seats

•      jump-seats

•      divans, including modelsthat convert to beds or contain storable tables

•      upholstery services

 

*Cabin Management Systems*

•      in-flight entertainment systems

•      in-flight data network andcommunication systems

•      cabin controls

•      switches, controls and lighting

 

*Composite Components*

•      sound-dampening side walls and headliners

•      passenger service units

•      environmental (HVAC) ducting

•      closets

 

Our interior furnishingsproducts and services provided approximately 36% of our consolidated revenuesduring 2003 and 47% of our consolidated revenues during 2002 and 2001.  Seating provided approximately 13% of ourconsolidated revenues during 2003 and 10% of our consolidated revenues during2002 and 2001.  The decrease in interiorfurnishings products and services is primarily caused by lower revenues fromour major customers, Textron and Bombardier, as described in “—Customers”below.

 

***Competition***

*** ***

The markets served by ourCabin Management Group are fragmented, with several competitors offeringsimilar products and services.  Due tothe global nature of the aerospace industry, competition comes from both U.S.and foreign companies.  Our CabinManagement Group generally faces competition from a group of smaller companiesand enterprises, except for the business, VIP and head-of-state aircraftmanufacturers and independent completion centers.  We believe that the principal competitive factors in the marketswe serve are quality, price, timely deliveries and overall customerservice.  Our principal competitors aresummarized below.

 

*Interior Furnishings*

•      BE Aerospace

•      C & D Interiors

•      Global Technology

•      Hiller Aircraft

•      The Nordam Group

•      Independent completion centers

•      Business, VIP andhead-of-state aircraft manufacturers and completion centers

* *

*Seating*

•      BE Aerospace

•      Fisher (Germany)

•      IPECO

 

*Cabin Management Systems*

•      DPI Labs

•      Honeywell Cabin Management Systems and Services

•      IEC, International

•      Rockwell Collins / Airshow

* *

*Composite Components*

•      AAR

•      Fibre Art

•      Plastic Fab

•      Scale Composite Works

•      The Nordam Group

3

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**SystemsIntegration Group**

** **

DeCrane’s SystemsIntegration Group contributed approximately 30% of our revenues from continuingoperations for the year ended December 31, 2003.

 

***BusinessDescription***

*** ***

Our Systems IntegrationGroup provides a range of aircraft retrofit, completion and refurbishmentservices, from conceptual design to Federal Aviation Administrationcertification, including engineering, manufacturing and installation.  One of our largest businesses in this groupis the design, production and installation of auxiliary fuel systems, whichextend the range of an aircraft.  We arepresently the sole-source provider of auxiliary fuel systems to Boeing BusinessJet (“BBJ”) for its BBJ, a Boeing 737-700IGW, and the BBJ2, a Boeing 737-800,and are one of only four world-wide approved BBJ/BBJ2 service centers.  During 2003, we delivered our secondaircraft interior completion on a BBJ aircraft.

 

We also focus onregulatory authority safety mandates and believe we are the major supplier ofintegration kits for smoke detection and fire suppression in the cargo hold,and perform structural, avionics and mechanical systems modifications,including FAA certification of those modifications before returning an aircraftto service.

 

The aerospace industry ishighly regulated in the United States by the FAA and similar regulatoryagencies abroad, such as the European Joint Aviation Authorities (commonlyreferred to as the JAA), to ensure that aviation products and services meetstringent safety and performance standards. There are approximately 35 companies world-wide that have the necessaryDesignated Alteration Station authorization to offer aircraft certification onbehalf of the FAA.  Two companies withinour Systems Integration Group are authorized to provide the full spectrum ofservices, from design to FAA certification, needed for timely retrofitting ofan aircraft, thus providing a significant competitive advantage.

 

Our Systems IntegrationGroup has adopted a two-pronged strategic approach to managing its operations:

 

•      *Develop the MostComprehensive Integrated Retrofit Offering. *For thelast thirteen years, our Systems Integration Group has focused on developingthe capabilities necessary to provide a fully integrated offering with respectto aircraft refurbishing and aircraft retrofitting with FAA mandated changesand technological innovations.  Throughseveral related acquisitions and aggressive internal product development, ourSystems Integration Group has become one of the few non-OEM related operationswith the authority to provide alteration services and to offer FAAcertification of aircraft that undergo overhaul.  This certification ability represents a significant competitiveadvantage, as we can offer all the products and services required tore-commission an aircraft in a timely and cost efficient manner.  We believe we have developed the mostcomprehensive offering in retrofitting aircraft with auxiliary fuel systems inthe industry.

 

•      *Target Development ofSpecialty Products and Services Relating to Regulatory Authority Mandates.* Consistent with its first strategic imperative, our Systems IntegrationGroup is also growing its capabilities in providing solution “kits” in responseto FAA and JAA mandated aircraft upgrades. Our Systems Integration Group has demonstrated the ability to identifyand quickly respond to probable new regulatory authority mandates.  For example:

 

•      Many domestic commercial airlines believe the FAA willissue a safety mandate requiring cockpit door video surveillance on everycommercial aircraft traveling in U.S. domestic airspace by no later than aspecific compliance date.  In response,we consulted with commercial airlines and developed what we believe to be alow-cost, high quality cockpit

 

4

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door video surveillancesystem.  Our Sentry OneTM system is basedon an in-house developed camera control unit with integral power supplies andis combined with state-of-the-art extreme low light cameras and 5.6” videomonitors.  Some airlines are voluntarilyelecting to install surveillance systems on their aircraft prior to theexpected FAA mandate.  We have receivedFAA approval for our Sentry OneTM system on Boeing 737-NG and Embraer EMB 135,140 and 145 aircraft.  We believe wewill also receive FAA approval on Boeing 737-400 and 747-400 aircraft in May2004.  We are also working on approvalfor Boeing 737-400, 747-400 and 747-Classics model aircraft as well as severalmodels of 767 and 777 aircraft.  Webelieve we will be successful in obtaining FAA approval for our system on theseand other types of aircraft as well.

 

•      We believe the JAA will mandate new fire safetymeasures for all aircraft in Europe, similar to the FAA mandate in the UnitedStates.  We expect to develop astand-alone kit, similar to our FAA approved kit, which can be quicklyincorporated into an aircraft to ensure compliance with the JAA ruling withminimal downtime.

 

***Productsand Services***

*** ***

Our Systems IntegrationGroup provides auxiliary fuel systems, auxiliary power units and system integrationservices, including engineering, kit manufacturing, installation andcertification.  Customers include Boeing(Boeing Business Jet, Boeing’s Commercial Airplane Group and Boeing IntegratedDefense Systems), Bombardier, Cessna, Gulfstream, Honeywell, Raytheon andRockwell Collins.  Approximately 50% ofour Systems Integration Group’s revenues in 2003 were from Boeing.  The products and services we provide aredescribed below.

 

*AuxiliaryFuel Systems and Power Units.*  We design,engineer, manufacture and install auxiliary fuel systems for business, VIP,head-of-state and commercial aircraft. Our unique design and construction have made us a leader in theauxiliary fuel system market.  We alsomanufacture auxiliary power units, which provide ground power to corporate jetsmade by Bombardier, Cessna, Gulfstream, Learjet and Raytheon.  These products and services providedapproximately 16% of our consolidated revenues during 2003, 15% during 2002 and14% during 2001.

 

*Cabinand Flight Deck Systems Integration.*  We havedesigned and patented avionics support structures we sell under the Box-MountTMname.  These structures are used tosupport and environmentally cool avionics equipment, including navigation,communication and flight control equipment. These support structures are sold to aircraft and related electronicsmanufacturers, airlines and major modification centers.  In addition, these products are essentialcomponents of the installation kits used in our systems integration operations.

 

*AircraftCompletion and Modification Services. *We are one of only four world-wideapproved Boeing Business Jet Service Centers providing extensive completion,modification and integration services to the business, VIP and head-of-stateaircraft market.

 

*Retrofitand Refurbishment Services.*  We alsoprovide retrofit and refurbishment services, including engineering, kitmanufacturing, installation and certification, to both commercial and business,VIP and head-of-state aircraft customers.

 

5

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***Competition***

*** ***

The markets served by ourSystems Integration Group are fragmented with several competitors offeringsimilar products and services.  Due tothe global nature of the aerospace industry, competition comes from both U.S.and foreign companies.  Our SystemsIntegration Group generally faces competition from a group of smaller companiesand enterprises, except for the business, VIP and head-of-state aircraftmanufacturers and independent completion centers.  We believe that the principal competitive factors in the marketswe serve are quality, price, timely deliveries and overall customerservice.  Our principal competitors aresummarized below.

 

*Auxiliary Fuel Systems and Power Units*

•      Marshalls (United Kingdom)

•      Pfalz Flugewerke (Germany)

 

*Auxiliary Power Units (Integration Only)*

•      Honeywell

•      Sundstrand

 

*Aircraft Modification Services*

•      Associated Air Center

•      Jet Aviation (United Statesand Switzerland)

•      Lufthansa Technik (Germany)

 

*Cabin and Flight Deck Systems Integration andRetrofit and Refurbishment Services*

•      ARINC

•      AviationSales

•      BoeingAircraft Services

•      FlightStructures

•      In-houseengineering departments of commercial airlines

•      Numerousindependent airframe maintenance and modification companies

 

**OtherInformation**

** **

**Acquisitionsand Dispositions**

** **

***Dispositionof the Specialty Avionics Group***

*** ***

On May 23, 2003, weconsummated the sale of our equity interests in the companies comprising theSpecialty Avionics Group to Wings Holdings, Inc., an affiliate of OdysseyInvestment Partners, LLC. for $140.0 million in cash.  We used $130.7 million of the proceeds from the sale to repayborrowings under our first-lien credit facility, as amended.  The Specialty Avionics Group consisted ofAvtech Corporation of Seattle, Washington, Aerospace Display Systems, LLC ofHatfield, Pennsylvania, and Tri-Star Electronics International, Inc. ofEl Segundo, California.

 

The sale of the SpecialtyAvionics Group is not expected to affect the operations of our remainingoperating groups and is reflected as a discontinued operation in thisreport.  See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” foradditional information.

 

***CompaniesAcquired by DeCrane Aircraft***

*** ***

During the five yearsended December 31, 2003, DeCrane Aircraft has acquired the stock or assets ofseven significant businesses, as such term is defined by Securities andExchange Commission rules, as follows:

 

*Cabin Management Group*

 

•      all of the common stock of Precision Pattern, Inc., aKansas-based designer and manufacturer of interior furniture components forbusiness, VIP and head-of-state aircraft, on April 23, 1999;

 

•      substantially all of the assets of Custom Woodwork& Plastics, Inc., a Georgia-based designer and manufacturer of interiorfurniture components for business, VIP and head-of-state aircraft, onAugust 5, 1999;

 

6

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•      substantially all of the assets of PCI NewCo, Inc., aKansas-based manufacturer of composite material and components for business,VIP and head-of-state aircraft, on October 6, 1999;

 

•      substantially all of the assets of The InfinityPartners, Ltd., a Texas-based designer and manufacturer of interior furniturecomponents for middle- and high-end business, VIP and head-of-state aircraft,on December 17, 1999;

 

•      substantially all of the assets of Carl F. Booth &Co., an Indiana-based manufacturer of wood veneer panels primarily used inaircraft interior cabinetry, on May 11, 2000;

 

•      all of the common stock of ERDA, Inc. (subsequentlyrenamed DeCrane Aircraft Seating Co., Inc.), a Wisconsin-based designer andmanufacturer of aircraft seating, on June 30, 2000; and

 

*Systems Integration Group*

 

•      all of the common stock of PATS, Inc., aMaryland-based designer, manufacturer and installer of auxiliary fuel systemsfor business, VIP and head-of-state aircraft and a manufacturer of aircraftauxiliary power units, on January 22, 1999.

 

All of the acquisitionswere accounted for as purchases.  Wehave used the acquired assets to manufacture products similar to thosepreviously manufactured by the companies prior to their acquisition.  Our financial statements reflect theacquired companies subsequent to their respective acquisition dates.

 

**Customers**

 

We estimate that ourCabin Management Group currently sells its products and services toapproximately 800 customers and our Systems Integration Group sells itsproducts and services to approximately 200 customers.  Our primary customers include manufacturers of business, VIP andhead-of-state aircraft, airlines and aircraft repair and modificationcompanies.

 

The following customersaccounted for 10% or more of our consolidated revenues from continuingoperations for the year ended December 31, 2003.  Historical data for the three years ended December 31, 2003 ispresented in Note 17 accompanying our consolidated financial statementsincluded in this report.

 
| **Significant Customers**         |   | **Cabin  Management  Group** |   | **Systems  Integration  Group** |   | **Consolidated  Total** |   |
|-----------------------------------|--------|------------------------------|--------|---------------------------------|--------|-------------------------|--------|
|                              |   |                         |   |                            |   |                    |   |
| Percent of consolidated revenues: |   |                         |   |                            |   |                    |   |
| Year ended December 31, 2003:     |   |                         |   |                            |   |                    |   |
| Boeing (1)                        |   | 2.4                          | %      | 15.1                            | %      | 17.5                    | %      |
| Textron (2)                       |   | 16.2                         |   | 0.1                             |   | 16.3                    |   |
| Bombardier                        |   | 11.0                         |   | 1.6                             |   | 12.6                    |   |
| Consolidated revenues             |   | 29.6                         | %      | 16.8                            | %      | 46.4                    | %      |
|                              |   |                         |   |                            |   |                    |   |
| Year ended December 31, 2002:     |   |                         |   |                            |   |                    |   |
| Boeing (1)                        |   | 1.4                          | %      | 14.0                            | %      | 15.4                    | %      |
| Textron (2)                       |   | 23.5                         |   | —                          |   | 23.5                    |   |
| Bombardier                        |   | 16.0                         |   | 1.4                             |   | 17.4                    |   |
| Consolidated revenues             |   | 40.9                         | %      | 15.4                            | %      | 56.3                    | %      |

 

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| **Significant Customers**      |   | **Cabin  Management  Group** |   | **Systems  Integration  Group** |   |
|--------------------------------|--------|------------------------------|--------|---------------------------------|--------|
|                           |   |                         |   |                            |   |
| Percent of group revenues (3): |   |                         |   |                            |   |
| Year ended December 31, 2003:  |   |                         |   |                            |   |
| Boeing (1)                     |   | 3.4                          | %      | 50.1                            | %      |
| Textron (2)                    |   | 23.2                         |   | 0.1                             |   |
| Bombardier                     |   | 15.7                         |   | 5.3                             |   |
| Group revenues                 |   | 42.3                         | %      | 55.5                            | %      |
|                           |   |                         |   |                            |   |
| Year ended December 31, 2002:  |   |                         |   |                            |   |
| Boeing (1)                     |   | 1.9                          | %      | 56.0                            | %      |
| Textron (2)                    |   | 31.3                         |   | —                          |   |
| Bombardier                     |   | 21.4                         |   | 5.4                             |   |
| Group revenues                 |   | 54.6                         | %      | 61.4                            | %      |

 

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(1)           Reflects only our direct revenues fromBoeing.  Our Systems Integration Group’srevenues from Boeing result from auxiliary fuel systems for the Boeing BusinessJet.

 

(2)           Includes Cessna.

 

(3)           Inter-group revenues are eliminated againstthe group originating the sale.

 

Revenues from Textron andBombardier, as a percentage of total consolidated revenues, decreased duringthe year ended December 31, 2003 compared to our revenues from these customersduring the prior year.  The decrease iscaused by both companies temporarily suspending production of various models ofaircraft for several weeks during fiscal 2003 in response to their low orderbacklog resulting from the weak demand for new aircraft as described in“—Backlog” below.  Complete loss of anyof the customers identified above could have a significant adverse impact onour results of operations expected in future periods.

 

Significant portions ofour revenues from our major customers are pursuant to contracts that mayinclude a variety of terms favorable to the customer.  Such terms may include our agreement to one or more of the following:

 

•      the customer is not required to make purchases, andmay terminate such contract at any time;

 

•      we make substantial expenditures to develop productsfor customers that we may not recoup if we do not receive sufficient orders;

 

•      on a prospective basis, we must extend to thecustomers any reductions in prices or lead times that we provide to othercustomers;

 

•      we must match other suppliers’ price reductions ordelete the affected products from the contract; and

 

•      we must grant irrevocable non-exclusive worldwidelicenses to use our designs, tooling and other intellectual property rights toproducts sold to a customer if we default, or suffer a bankruptcy filing, ortransfer our manufacturing rights to a third party.

** **

**8**

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** **

**Backlog**

** **

As of December 31, 2003,we had an aggregate sales order backlog of $58.0 million compared to $66.8million as of December 31, 2002, as follows:

 
|                |   | **December  31,** |   |
|---------------------|--------|-------------------|--------|
| **(In thousands)**  |   | **2003**          |   | **2002** |   |
|                |   |              |   |   |   |
| Cabin Management    |   | $                 | 33,679 |   | $ | 31,679 |   |
| Systems Integration |   | 24,323            |   | 35,126 |   |
| Consolidated totals |   | $                 | 58,002 |   | $ | 66,805 |   |

 

Orders are usually filledwithin twelve months; however, backlog totaling $2.5 million as of December 31,2003 is scheduled for delivery in 2005 and beyond as follows: Cabin Management— $1.4 million; and Systems Integration — $1.1 million.  Orders may be subject to cancellation by thecustomer prior to shipment.  The levelof unfilled orders at any given date will be materially affected by when wereceive orders and how fast we fill them. Period-to-period comparisons of backlog figures may not bemeaningful.  For that reason, ourbacklogs do not necessarily accurately predict actual shipments or sales forany future period.

 

As described in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Industry Overview and Trends,” the acts and ongoing threats ofglobal terrorism, the current military conflicts, health epidemics and weakglobal economic conditions are all adversely impacting the aerospace industry.  We are not able to predict the continuingimpact these events will have in future periods.  However, given the magnitude of these events, the adverse impactcould be material.

 

**Employees**

** **

As of December 31, 2003,we had 1,296 employees: 1,018 in our Cabin Management Group; 266 in our SystemsIntegration Group; and 12 in our corporate office.  None of our employees is subject to a collective bargainingagreement, and we have not experienced any material business interruption as aresult of labor disputes.  We believethat we generally have a good relationship with our employees.

 

**Researchand Development**

** **

We continually evaluateopportunities to improve our product offerings and develop new products thatincorporate new technologies to meet the demands of our customers and theFAA.  Total research and developmentexpense was $10.4 million for the year ended December 31, 2003, $0.1 millionfor the year ended December 31, 2002 and $0.7 million during the year ended December 31,2001.

 

Commencing January 1, 2003,we elected to change our accounting policy and discontinued the use of programaccounting, which resulted in product development costs being expensed asincurred.  Prior to January 1, 2003,such costs were deferred and charged to cost of sales over the expectedproduction cycle of the program. Product development costs are now reflected as research and developmentexpenses.  If the new accounting policywas in effect during the prior years, total research and development expensewould have been $5.0 million for the year ended December 31, 2002 and $11.7million during the year ended December 31, 2001.

 

**FinancialInformation About Geographic Areas**

** **

Financial informationabout our revenues and assets by geographic area are included in Note 17accompanying our financial statements included in this report.

 

9

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**Seasonality**

** **

Our businesses generallyare not seasonal in nature.

 

**Salesand Marketing**

** **

Our Cabin ManagementGroup has designated relationship managers who are responsible for maintainingand cultivating relationships with customers. In addition, a dedicated sales force is utilized for some of ourproducts and services.

 

Our Systems IntegrationGroup has a dedicated sales force that handles most of its sales activities.

 

We are continuouslyseeking opportunities to combine our sales efforts across all of our operatinggroups in order to ensure that all sales opportunities are explored and that wemaximize our revenue content per plane. We may also assign marketing and sales responsibilities for keycustomers to one of our senior corporate executives.

 

**RawMaterials and Component Parts**

** **

The components wemanufacture require the use of various raw materials including aluminum,hardwoods and plastics.  The availabilityand prices of these materials may fluctuate. The cost of such raw materials is a significant component in, and partof, the sales price of many of our products. Although some of our contracts have prices tied to raw materials prices,we cannot always recover raw material price increases in our product saleprice.  We also purchase a variety ofmanufactured sub-component parts from various suppliers.  Raw materials and component parts aregenerally available from multiple suppliers at competitive prices.  However, any delay in our ability to obtainnecessary raw materials and component parts may affect our ability to meetcustomer production needs.

 

**IntellectualProperty and Proprietary Information**

** **

We have various tradesecrets, proprietary information, trademarks, tradenames, patents, copyrightsand other intellectual property rights we believe are important to our businessin the aggregate, but not individually.

 

**GovernmentRegulation**

** **

***FederalAviation Administration***

*** ***

The aerospace industry ishighly regulated in the United States by the Federal Aviation Administrationand in other countries by similar agencies to ensure that aviation products andservices meet stringent safety and performance standards.  In addition, many of our customers imposetheir own compliance and quality requirements on us.  The FAA prescribes standards and licensing requirements foraircraft components, issues designated alteration station authorizations, andlicenses private repair stations.  Wehold various FAA approvals and licenses, which may only be used by oursubsidiary obtaining such approval.  Ifmaterial FAA or customer authorizations or approvals were revoked or suspended,our operations could be adversely affected.

 

The FAA can authorize ordeny authorization of many of the services and products we provide.  Any such denial would preclude our abilityto provide the pertinent service or product. If we failed to comply with applicable FAA standards or regulations, theFAA could exercise a wide range of remedies, including a warning letter, aletter of correction, a civil penalty action, and emergency or non-emergencysuspension or revocation of a certificate or approval.

 

10

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Each type of aircraftoperated by airlines in the United States must possess an FAA type certificate,generally held by the aircraft manufacturer, indicating that the type designmeets applicable airworthiness standards. When someone else develops a major modification to an aircraft already type-certificated,that person must obtain an FAA-issued Supplemental Type Certificate for themodification.  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 weobtain were or eventually will be transferred to our customers.  As of December 31, 2003, we own and/or manageon behalf of our customers approximately 300 Supplemental Type Certificates.  Many are multi-aircraft certificates, whichapply to all of the aircraft of a single type. We foresee the need to obtain additional Supplemental Type Certificatesso that we can expand the services we provide and the customers we serve andbelieve we will be able to obtain such certificates as the need arises.

 

Supplemental TypeCertificates can be issued for proposed aircraft modifications directly by theFAA, or on behalf of the FAA by a Designated Alteration Station.  The FAA designates what types ofSupplemental Type Certificates can be issued by each Designated AlterationStation.  Two subsidiaries within ourSystems Integration Group are FAA-authorized Designated Alteration Stations andcan directly issue many of the Supplemental Type Certificates our customers andwe require for our systems integration operations.

 

After obtaining aSupplemental Type Certificate, a manufacturer must apply for a PartsManufacturer Approval from the FAA, or a supplement to an existing PartsManufacturer Approval, which permits the holder to manufacture and sellinstallation kits according to the approved design and data package.  We have six Parts Manufacturer Approvals andapproximately 160 supplements to those approvals.  In general, each initial Parts Manufacturer Approval is anapproval of a manufacturing or modification facility’s production qualitycontrol system.  Each Parts ManufacturerApproval supplement authorizes the manufacture of a particular part inaccordance with the requirements of the corresponding Supplemental TypeCertificate.  We routinely apply for andreceive such Parts Manufacturer Approval supplements.  In order to perform the actual installations of a modification,we are also required to have FAA approval. This authority is contained either in our Parts Manufacturer Approvalsand related supplements, or in our repair station certificates.  In order for a company to perform most kindsof repair, engineering, installation or other services on aircraft, itsfacility must be designated as an FAA-authorized repair station.  As of December 31, 2003, we had sevenauthorized repair stations and employed approximately 100 FAA certifiedrepresentatives.

 

***OccupationalSafety and Health Administration***

*** ***

Our manufacturingoperations in the United States are subject to a variety of worker andcommunity safety laws.  The OccupationalSafety and Health Act of 1970 mandates general requirements for safe workplacesfor all employees.  In addition, OSHAprovides special procedures and measures for the handling of hazardous andtoxic substances and has established specific safety standards for workplacesengaged in the treatment, disposal or storage of hazardous waste.  We believe that our operations are inmaterial compliance with OSHA’s health and safety requirements.

 

**EnvironmentalMatters**

** **

Our facilities andoperations are subject to various federal, state, local, and foreignenvironmental laws and regulations, including those relating to discharges toair, water, and land, the handling and disposal of solid and hazardous waste,and the cleanup of properties affected by hazardous substances.  In addition, some environmental laws, suchas the 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 hazardoussubstances.  That liability generally isretroactive, and may create “joint and several” liability among multiple partieswho have

 

11

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some relationship to asite or a source of waste, such as a current or former owner or operator ofreal property or a party who arranges to transport wastes to a third-partysite.  We have sent waste to treatment,storage, or disposal facilities that have been designated as National PriorityList sites under CERCLA or equivalent listings under state laws.  We have received CERCLA requests forinformation or allegations of potential responsibility from the EnvironmentalProtection Agency regarding our use of several of those sites.  In addition, some of our operations arelocated on properties that may be contaminated to varying degrees.

 

We have not incurred, nordo we expect to incur, liabilities in any significant amount as a result of theforegoing matters because in most of these cases other entities have been heldprimarily responsible, the levels of contamination are sufficiently low so asnot to require remediation, or we are indemnified against such costs.  However, in a few cases, we do not havesufficient information to assess our potential liability, if any.  In addition, it is possible, given thepotentially retroactive nature of environmental liability, that we will receiveadditional notices of potential liability relating to current or formeractivities.

 

We believe that we haveno liabilities 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 environmentalliability is inherent in the nature of our business, and we might in the futureincur material costs to meet current or more stringent compliance, cleanup, orother obligations pursuant to environmental laws and regulations.

 

In connection with thesale of the Specialty Avionics Group, we have agreed to indemnify the buyer forall pre-closing releases of hazardous materials at any of Avtech’s facilitiesup to a maximum amount of $5.0 million.

 

**ITEM 2.**              PROPERTIES

** **

We operate in a number ofmanufacturing, engineering and office facilities in the United States andabroad.  At December 31, 2003, weutilized approximately 0.9 million square feet of floor space, approximately96% of which is located in the United States. We believe that our facilities are in good condition and are adequate tosupport our operations for the foreseeable future.  Our operating groups’ facilities at December 31, 2003 aresummarized below.

 
| **(In thousands of square feet)** |   | **Leased** |   | **Owned** |   | **Total** |   |
|-----------------------------------|--------|------------|--------|-----------|--------|-----------|--------|
|                              |   |       |   |      |   |      |   |
| Cabin Management                  |   | 441        |   | 204       |   | 645       |   |
| Systems Integration               |   | 136        |   | 150       |   | 286       |   |
| Corporate                         |   | 8          |   | —    |   | 8         |   |
| Total in use                      |   | 585        |   | 354       |   | 939       |   |
|                              |   |       |   |      |   |      |   |
| Not in use, subleased to others   |   | 88         |   | —    |   | 88        |   |
| Total                             |   | 673        |   | 354       |   | 1,027     |   |

 

**ITEM 3.**              LEGAL PROCEEDINGS

** **

As part of itsinvestigation of the crash of Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the “CTSB”)initially notified us that it recovered burned wire that was attached to thein-flight entertainment system installed on some of Swissair’s aircraft by oneof our subsidiaries.  Our subsidiary hasworked vigorously over the last five years with the CTSB investigators in thefact-finding investigation of this catastrophic incident.  On March 27, 2003, the CTSB released itsfinal report on its investigation.  Thisreport indicated that the CTSB was unable to conclusively determine the causeof the fire which led to the crash of the aircraft.

 

12

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We were a defendant inmost, but not all, of the actions brought by the estates of the 229 victims ofthe crash.  The actions, which soughtdamages and costs in unstated amounts, claimed negligence, strict liability,and breach of warranty.  Virtually allof the cases have been settled by Boeing and Swissair’s insurers and bothassignment of the claims against, and releases in favor, of us have beenobtained by the Boeing and Swissair insurers.

 

On September 22, 2003,the Company and our insurers entered into an agreement with Boeing, Swissairand each of their respective insurers, in which the Company received a releasefrom those parties and an indemnification by Boeing and Swissair’s insurersagainst claims asserted on behalf of passengers for compensatory damage and byothers for contribution and/or indemnity claims.  We believe the agreement adequately protects the Company from allexisting litigation pending against the Company arising from this catastrophicincident.  Punitive damages are notsubject to the indemnity; however, while some of the passenger actionsoriginally asserted punitive damages, by virtue of a court order, claims forpunitive damages may not be prosecuted. The aforementioned agreement did not result in the Company incurring aloss and, accordingly, no charge to operations was required.

 

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

** **

None.

 

**PART II**

** **

**ITEM 5.**              MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS

** **

**MarketInformation**

** **

There is no establishedpublic trading market for our shares.

 

**Holders**

** **

As of March 29, 2004there are 31 holders of record of our common stock.

 

**Dividends**

** **

We have not paiddividends to date on our common stock and do not anticipate paying any cashdividends in the foreseeable future. The terms of our first-lien credit facility, second-lien term notes andsubordinated note indenture restrict our ability to pay dividends if we do notmeet certain financial criteria.

 

**RecentSale of Unregistered Securities**

** **

None.

 

13

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**ITEM 6.**              SELECTED FINANCIAL DATA

** **
|                                                          |   | **Year Ended  December 31, (1)** |    |
|---------------------------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                                            |   | **2003**                         |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| **Statement of Operations Data:**                             |   |                             |    |   |   |   |   |   |   |   |   |
| Revenues                                                      |   | $                                | 170,109 |   | $ | 229,841 |   | $ | 272,112 |   | $ | 236,501 |   | $ | 131,547 |   |
| Cost of sales (2)                                             |   | 134,953                          |    | 170,485 |   | 196,866 |   | 155,134 |   | 90,103 |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Gross profit                                                  |   | 35,156                           |    | 59,356 |   | 75,246 |   | 81,367 |   | 41,444 |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses (3)             |   | 24,896                           |    | 40,262 |   | 44,731 |   | 31,730 |   | 23,465 |   |
| Research and development expenses (4)                         |   | 10,440                           |    | 56 |   | 698 |   | 1,615 |   | 3,347 |   |
| Impairment of goodwill (5)                                    |   | 34,000                           |    | — |   | 8,583 |   | — |   | — |   |
| Amortization of intangible assets (6)                         |   | 3,651                            |    | 3,540 |   | 12,436 |   | 10,628 |   | 5,938 |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Operating income (loss)                                       |   | (37,831                          | )       | 15,498 |   | 8,798 |   | 37,394 |   | 8,694 |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Interest expense (7)                                          |   | 26,219                           |    | 25,376 |   | 29,645 |   | 27,181 |   | 15,874 |   |
| Minority interest in preferred stock of  subsidiary (8)       |   | 6,754                            |    | 5,841 |   | 5,061 |   | 2,274 |   | — |   |
| Loss on extinguishment of debt (9)                            |   | 1,439                            |    | — |   | — |   | — |   | — |   |
| Other expenses, net                                           |   | 945                              |    | 505 |   | 634 |   | 277 |   | 855 |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations  before income taxes |   | (73,188                          | )       | (16,224 | ) | (26,542 | ) | 7,662 |   | (8,035 | ) |
| Provision for income taxes (benefit) (10)                     |   | (13,496                          | )       | (3,621 | ) | (3,933 | ) | 4,607 |   | (2,102 | ) |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                      |   | (59,692                          | )       | (12,603 | ) | (22,609 | ) | 3,055 |   | (5,933 | ) |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Income (loss) from discontinued operations,  net of tax (11)  |   | (6,621                           | )       | (41,396 | ) | 3,546 |   | (1,727 | ) | 1,578 |   |
| Cumulative effect of changes in accounting  principles (12)   |   | (13,764                          | )       | (17,828 | ) | — |   | — |   | — |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Net income (loss)                                             |   | $                                | (80,077 | ) | $ | (71,827 | ) | $ | (19,063 | ) | $ | 1,328 |   | $ | (4,355 | ) |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) applicable to common  stockholders          |   | $                                | (89,257 | ) | $ | (79,826 | ) | $ | (26,034 | ) | $ | (4,746 | ) | $ | (9,649 | ) |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Restructuring, asset impairment and other  related            |   |                             |    |   |   |   |   |   |   |   |   |
| charges (13)                                                  |   | $                                | 41,889  |   | $ | 17,255 |   | $ | 25,834 |   | $ | — |   | $ | 9,935 |   |
| Depreciation and amortization (14)                            |   | 9,781                            |    | 10,612 |   | 20,364 |   | 15,086 |   | 8,315 |   |
| Capital expenditures:                                         |   |                             |    |   |   |   |   |   |   |   |   |
| Paid in cash                                                  |   | 4,797                            |    | 4,356 |   | 10,191 |   | 20,193 |   | 4,077 |   |
| Financed with capital lease obligations                       |   | 14                               |    | 67 |   | 4,376 |   | 105 |   | 1,012 |   |
|                                                          |   |                             |    |   |   |   |   |   |   |   |   |
| **Other Operating Data:**                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Bookings (15)                                                 |   | $                                | 161,306 |   | $ | 197,132 |   | $ | 252,800 |   | $ | 238,546 |   | $ | 170,547 |   |
| Backlog at end of period (16)                                 |   | 58,002                           |    | 66,805 |   | 99,518 |   | 118,830 |   | 107,634 |   |

 
|                                   |   | **As of  December 31, (1)** | ** ** |
|----------------------------------------|--------|-----------------------------|------------|
| **(In thousands)**                     |   | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                   |   |                        |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                |   |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents              |   | $                           | 6,936      |   | $ | 12,421 |   | $ | 9,478 |   | $ | 7,706 |   | $ | 7,899 |   |
| Working capital (17)                   |   | 37,904                      |       | 196,176 |   | 81,656 |   | 61,398 |   | 32,412 |   |
| Total assets (17)                      |   | 303,876                     |       | 548,967 |   | 645,711 |   | 664,254 |   | 531,842 |   |
| Total debt (18)                        |   | 269,406                     |       | 381,017 |   | 399,268 |   | 381,513 |   | 314,936 |   |
| Mandatorily redeemable securities (19) |   | 112,237                     |       | 96,303 |   | 82,463 |   | 70,431 |   | 41,178 |   |
| Stockholders’ equity (deficit)    |   | (116,583                    | )          | (27,271 | ) | 48,167 |   | 74,190 |   | 66,595 |   |
|                                        |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying Notes to Selected Financial Data.

 

14

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**Notes to Selected Financial Data:**

 

----

(1)       Reflects historical selected consolidated financialdata derived from the audited consolidated financial statements and relatednotes for the periods, reclassified to reflect the Specialty Avionics Group asa discontinued operation.

 

Also reflects the results of operations and financial position of companieswe acquired for all periods subsequent to their respective acquisition dates asfollows:

 
| **Company Acquired** |   | **Date  Acquired**                            |
|----------------------|--------|-----------------------------------------------|
| **•**           |   | DeCrane Aircraft  Seating Co. (formerly 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 |
|                      |        |                                               |  |  |  |  |

 

(2)       Includes charges to reflect:

 

•      our restructuring activities as follows:

 

•      a $4.2 million charge related to leasetermination and related expenses and a $3.1 non-cash inventory write-downduring the twelve months ended December 31, 2003;

 

•      a $6.9 million noncash inventorywrite-down, a $2.6 million charge for estimated losses on uncompleted long-termcontracts and $1.2 million of other charges during the twelve months endedDecember 31, 2002;

 

•      a $1.8 million noncash inventorywrite-down, a noncash write-off of $7.9 million of curtailed productdevelopment costs and charges totaling $3.9 million for the realignment ofproduction programs between facilities during the twelve months ended December31, 2001; and

 

•      a $6.0 million noncash inventorywrite-down during the twelve months ended December 31, 1999; and

 

•      cost of sales based on the purchaseaccounting write-up to fair value of inventory acquired of $1.6 million duringthe twelve months ended December 31, 1999 in connection with the PrecisionPattern and Custom Woodworks acquisitions.

 

(3)       Includes charges to reflect our restructuringactivities as follows:

 

•      $0.6 million during the year endedDecember 31, 2003;

 

•      $6.5 million during the year endedDecember 31, 2002, $3.9 million of which was a noncash asset impairmentwrite-down;

 

•      $3.7 million during the year endedDecember 31, 2001, $1.3 million of which was a noncash asset impairmentwrite-down; and

 

•      $3.9 million during the year endedDecember 31, 1999, $1.3 million of which was a noncash asset impairmentwrite-down.

 

(4)       Reflects research and development expenses and,commencing January 1, 2003, includes product development costs.  In 2003, we elected to change our accountingpolicy and discontinue the use of program accounting, which resulted in productdevelopment costs being expensed as incurred. See “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” for additional information.

 

15

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(5)       Reflects noncash goodwill impairment charges,including charges resulting from our restructuring activities.

 

(6)       For the five years ended December 31, 2003,reflects the amortization of identifiable intangible assets.  For periods prior to January 1, 2002, alsoreflects the amortization of goodwill as follows: 2001 –$9.1 million; 2000–$7.8 million; and 1999 –$3.8 million. Starting January 1, 2002, goodwill is no longer amortized butinstead subject to annual impairment testing with a loss charged to operationsin the period in which impairment occurs, as required by SFAS No. 142,“Goodwill and Other Intangible Assets.”

 

(7)       Excludes interest expense attributable to theSpecialty Avionics Group, which is classified as a component of the income orloss from discontinued operations, as described in Note 11 below.

 

(8)       Reflects accrued dividends and redemption valueaccretion on DeCrane Aircraft’s 16% mandatorily redeemable preferred stock.

 

(9)       Reflects the write-off of deferred financingcosts associated with debt repaid during the year ended December 31, 2003.

 

(10)     For the year ended December 31, 2003, includes a$19.5 million charge resulting from establishing a net deferred tax assetvaluation allowance.  Excluding theeffect of the valuation allowances, the provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate tothe income before income taxes primarily due to the effects of state incometaxes and non-deductible expenses, principally goodwill impairment charges andamortization (for periods prior to January 1, 2002) and minority interest inpreferred stock of subsidiary.  Thedifference in the effective tax rates between periods is mostly a result of therelationship of non-deductible expenses to the loss before income taxes.

 

(11)     Reflects the net income or loss of the SpecialtyAvionics Group, which was sold on May 23, 2003 and therefore classified as adiscontinued operation during the periods. Includes charges to reflect:

 

•      a $39.3 million noncash charge during theyear ended December 31, 2002 to reflect the cumulative effect of the change inaccounting principle for the impairment of goodwill upon adoption of SFAS No.142 on January 1, 2002; and

 

•      interest expense attributable to theSpecialty Avionics Group as follows:

 
|                                                      |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                        |   | **2003**                     |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                      |   |                         |   |   |   |   |   |   |   |   |   |
| Interest expense associated with:                         |   |                         |   |   |   |   |   |   |   |   |   |
| First-lien credit facility debt required to  be repaid    |   | $                            | 3,297  |   | $ | 7,720 |   | $ | 8,439 |   | $ | 13,337 |   | $ | 10,875 |   |
| Debt obligations assumed by the buyer                     |   | 270                          |   | 798 |   | 917 |   | 1,105 |   | 1,154 |   |
| Interest expense attributable to  discontinued operations |   | $                            | 3,567  |   | $ | 8,518 |   | $ | 9,356 |   | $ | 14,442 |   | $ | 12,029 |   |

 

Interest expense on first-lien creditfacility debt required to be repaid reflects allocated interest expense attributableto the debt which was required to be repaid with the proceeds from thesale.  The allocation is based upon$130.7 million of debt repaid and the historical interest rates charged duringeach of the periods.  Interest expensefor 2003 is through May 23, 2003, the date of sale.

 

(12)     Reflects:

 

•      a $13.8 million noncash charge to reflectthe cumulative effect on prior years of changing our accounting policy anddiscontinuing the use of program accounting. See “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” for additional information.

 

•      a $17.8 million noncash charge, net of$0.9 million tax benefit, for the impairment of goodwill upon adoption of SFASNo. 142 on January 1, 2002.

 

16

----

 

(13)     Reflects the total restructuring, asset impairmentand other related charges incurred during the periods related to ourrestructuring activities.

 

(14)     Reflects depreciation and amortization of plantand equipment, goodwill (for periods prior to the January 1, 2002 adoption ofSFAS No. 142) and other intangible assets. Excludes amortization of deferred financing costs, which are classifiedas a component of interest expense.

 

(15)     Bookings represent the total invoice value ofpurchase orders received during the period.

 

(16)     Backlog represents the total invoice value ofunfilled purchase orders at the end of the period.  Orders may be subject to cancellation by the customer prior toshipment.  The level of unfilled ordersat any given date during the year will be materially affected by the timing ofour receipt of orders and the speed with which those orders are filled.

 

(17)     Includes amounts attributable to the SpecialtyAvionics Group, which is reflected as a discontinued operation, as follows:

 
|                    |   | **As of  December 31,** |    |
|-------------------------|--------|-------------------------|---------|
| **(In thousands)**      |   | **2003**                |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                    |   |                    |    |   |   |   |   |   |   |   |   |
| Working capital:        |   |                    |    |   |   |   |   |   |   |   |   |
| Continuing operations   |   | $                       | 37,904  |   | $ | 55,363 |   | $ | 39,862 |   | $ | 20,480 |   | $ | (1,992 | ) |
| Discontinued operations |   | —                  |    | 140,813 |   | 41,794 |   | 40,918 |   | 34,404 |   |
| Total working capital   |   | $                       | 37,904  |   | $ | 196,176 |   | $ | 81,656 |   | $ | 61,398 |   | $ | 32,412 |   |
|                    |   |                    |    |   |   |   |   |   |   |   |   |
| Total  assets:          |   |                    |    |   |   |   |   |   |   |   |   |
| Continuing operations   |   | $                       | 303,876 |   | $ | 388,226 |   | $ | 423,272 |   | $ | 429,812 |   | $ | 305,685 |   |
| Discontinued operations |   | —                  |    | 160,741 |   | 222,439 |   | 234,442 |   | 226,157 |   |
| Total assets            |   | $                       | 303,876 |   | $ | 548,967 |   | $ | 645,711 |   | $ | 664,254 |   | $ | 531,842 |   |

 

(18)     Total debt is defined as long-term debt, includingcurrent portion.

 

(19)     Reflects DeCrane Holdings mandatorily redeemable14% preferred stock and includes DeCrane Aircraft’s 16% mandatorily redeemablepreferred stock for all periods except December 31, 1999.  DeCrane Aircraft’s preferred stock, whichwas issued during 2000, is reflected as minority interest in preferred stock ofsubsidiary in our consolidated financial statements.

 

17

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

** **

The following discussionsshould be read in conjunction with our financial statements and accompanyingnotes included in this report.

 

**IndustryOverview and Trends**

** **

We compete in theaircraft products and services market of the aerospace industry.  The market for our products and services islargely driven by demand in the three civil aircraft markets: (1) business, VIPand head-of-state aircraft and, to a lesser extent, (2) commercial and (3)regional aircraft.  Weak global economicconditions, which were exacerbated by the September 11, 2001 terrorist attackon the United States, ongoing concerns about global terrorism and healthepidemics, and the current Middle Eastern military conflicts are all adverselyimpacting the aerospace industry and have led to a decrease in demand forbusiness, VIP and head-of-state aircraft. In response to certain of these adverse conditions, we have announcedand implemented a series of restructuring activities designed to reduceexpenses and conserve working capital. See “—Restructuring, Asset Impairment and Other Related Charges” belowfor additional information.

 

The business, VIP andhead-of-state aircraft portion of our business experienced weakness during 2003as evidenced by various manufacturers’ decision to temporarily suspendproduction at various times throughout 2003 in response to the weak demand fornew aircraft.  While global economicconditions appeared to improve during the second half of 2003, the improvementdid not affect the markets we serve, which we believe lag trends in the generaleconomy by six to twelve months.  As aresult, we believe orders for business, VIP and head-of-state aircraft mayexperience a modest recovery in 2004 and reflect continuing strengtheningthereafter.  The commercial aircraftportion of our business, which subsequent to the sale of the Specialty AvionicsGroup accounts for less than 5% of consolidated revenues, also experiencedsignificant weakness in 2003 and we believe this condition will continue into2004, with potential recovery not expected to occur until at least 2005.  Our beliefs are based on the assumptionsthat we will experience economic recovery and there are no further negativegeo-political developments affecting our industry.

 

**Resultsof Operations**

** **

**PerformanceMeasures**

** **

The following discussionof our results of operations includes discussions of financial measures andoperating statistics we use to evaluate the performance of, and trends in, ourbusinesses.  We believe the presentationof these measures and statistics are relevant and useful to investors becauseit allows them to view performance and trends in a manner similar to themethods we use.  These measures andstatistics, and why they are important to us and could be of interest to you,are described below.

 

**Adjusted EBITDA.** Our discussion of the results of operations includes discussions offinancial measures determined in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) as well as thefinancial measure Adjusted EBITDA, which excludes certain charges reflected inour GAAP basis financial statements. Our presentation of Adjusted EBITDA is in accordance with the GAAPrequirements of SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” which requires us to report the primary measure of segmentperformance we use to evaluate and manage our businesses.

 

We utilize more than onemeasurement to evaluate segment performance and allocate resources among ouroperating segments; however, we consider Adjusted EBITDA, as defined below, tobe the primary measurement of overall operating segment core economicperformance and return on invested

 

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capital.  We also use Adjusted EBITDA in the annualbudgeting and planning for future periods, as one of the decision-makingcriteria for funding discretionary capital expenditure and product developmentprograms and as the measure for determining the value of acquisitions anddispositions.  Our board of directorsuses Adjusted EBITDA as one of the performance metrics for determining theamount of bonuses awarded to pursuant to the cash incentive bonus plan and asan indicator of enterprise value used in determining the exercise price ofstock options granted and the acceleration of stock option vesting pursuant theincentive stock option plan.

 

We define Adjusted EBITDAas earnings before interest, income taxes, depreciation and amortization,restructuring, asset impairment and other related charges, acquisition relatedcharges not capitalized and other noncash and nonoperating charges.  We believe the presentation of this measureis relevant and useful to investors because it allows investors and analysts toview segment performance in a manner similar to the method we use, helpsimprove their ability to understand our core segment performance, adjusted foritems we believe are unusual, and makes it easier to compare our results withother companies that have different financing, capital structures and taxrates.  In addition, we believe thesemeasures are consistent with the manner in which our lenders and investorsmeasure our overall performance and liquidity, including our ability to servicedebt and fund discretionary capital expenditure and product developmentprograms.

 

Our method of calculatingAdjusted EBITDA may not be consistent with that of other companies and shouldbe viewed in conjunction with measurements that are computed in accordanceGAAP, such as net income (loss), the nearest comparable GAAP financial measure.  Adjusted EBITDA should not be viewed assubstitutes for or superior to net income (loss), cash flow from operations orother data prepared in accordance with GAAP as a measure of our profitabilityor liquidity.  The notes to ourfinancial statements include information about our operating segments,including Adjusted EBITDA, and should be read in conjunction with thediscussions presented herein.  The notesto our financial statements also include a reconciliation of Adjusted EBITDA tonet income (loss) to clarify the differences between these financial measures.

 

**Bookings and Backlog.** Bookings and backlog are operating statistics we use as leading trendindicators of future demand for our products and services.  Bookings and backlog are based upon the valueof purchase orders received from our customers, which will result in revenues,if and when such orders are filled.

 

Bookings represent thetotal invoice value of purchase orders received during the period and backlogrepresents the total invoice value of unfilled purchase orders as of the end ofa period.  Orders may be subject tochange or cancellation by the customer prior to shipment.  The level of unfilled orders at any givendate during the year will be materially affected by the timing of our receiptof orders and the speed with which those orders are filled.

 

**YearEnded December 31, 2003 Compared to Year Ended December 31, 2002**

** **

**Restructuring, Asset Impairment andOther Charges.**  Our results of operations have been affectedby restructuring, impairment and other related charges relating to a series ofrestructuring activities.  Thesecharges, which affect the comparability of our reported results of operationsbetween periods, are more fully described in “—Restructuring, Asset Impairmentand Other Related Charges” and “—Goodwill Impairment Charges” below.

 

**Change in Accounting Principle.** Inventories are stated at the lower of cost or market.  Costs include materials, labor, includingdirect engineering labor, tooling costs and manufacturing overhead.  As described below, measurement of the costsof inventories associated with products manufactured for delivery underproduction-type contracts in prior periods was made pursuant to the use ofprogram accounting.  As such, the costof inventories included certain deferred program costs, which were principallycomprised of engineering costs.

 

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The events of September11, 2001 and its aftermath have impacted the predictability of demand for ourbusiness, VIP and head-of-state aircraft products.  The ability to make reliable estimates of future demand for theseproducts is critical to the use of program accounting and the deferral ofengineering and production costs.  Underprogram accounting, certain product development costs incurred in connectionwith specific contracted programs were deferred and charged to cost of saleswhen revenues from the sale of products related to the program wererecorded.  Because of the changingeconomic conditions affecting the markets we serve, demand for our products hasexhibited an increased degree of volatility not seen in the past.  In order to improve the reliability of ourfinancial reporting, we decided to discontinue the use of program accountingwhich requires us to make long-term estimates of future sales for eachprogram.  Therefore, product developmentcosts not specifically reimbursable through contractual terms or recoverablethrough firm orders will no longer be deferred and included in programinventory.

 

We concluded that the newmethod of accounting for program costs is preferable based, in part, on theaforementioned improvement in the reliability of our financial reporting.  This new accounting method will also havethe advantage of enhancing investor understanding of our performance since cashflows from operations will now more closely align with Adjusted EBITDA, ourprimary measurement of overall economic performance and return on investedcapital.

 

This change in accountingpolicy was made after concluding the 2003 fiscal year but has been appliedretroactively to the beginning of the year, January 1, 2003, as required bygenerally accepted accounting principles. As a result of the change, program-related product development costs arenow classified as a component of research and development expenses in theconsolidated financial statements for 2003 rather than classified as acomponent of inventory cost.  The effectof this accounting change was to increase the Company’s net loss by $17,942,000through a charge for the cumulative effect of a change in accounting principlein 2003 of $13,764,000 and increase by $4,178,000 the reported loss fromcontinuing operations.

 

As a result of thechange, we have restated the quarterly results of operations for 2003.  Restated condensed quarterly data is in Note19 accompanying our financial statements included in this report.  The following pro forma data summarizes theresults of operations for the years ended December 31, 2002 and 2001 as ifthe new accounting policy had been in effect during those years.

 
|                            |   | **Year Ended  December 31,** |   |
|---------------------------------|--------|------------------------------|--------|
| **(In millions)**               |   | **2002**                     |   | **2001** |   |
|                            |   |                         |   |   |   |
| As reported:                    |   |                         |   |   |   |
| Loss from continuing operations |   | $                            | (12.6  | ) | $ | (22.6 | ) |
| Net loss                        |   | (71.8                        | )      | (19.1 | ) |
|                            |   |                         |   |   |   |
| Pro forma:                      |   |                         |   |   |   |
| Loss from continuing operations |   | $                            | (15.6  | ) | $ | (24.5 | ) |
| Net loss                        |   | (74.8                        | )      | (20.9 | ) |

** **

**Revenues.* ***Revenues decreased $59.7 million, or26.0%, to $170.1 million for the year ended December 31, 2003 from $229.8million for the year ended December 31, 2002. By segment, revenues changed as follows:

 
|                    |   | **Increase  (Decrease)  From 2002** |   |
|-------------------------|--------|-------------------------------------|--------|
| **(In millions)**       |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | (53.8  | ) | (31.1 | )% |
| Systems Integration     |   | (6.4                                | )      | (11.0 | ) |
| Inter-group elimination |   | 0.5                                 |   |   |   |
| Total                   |   | $                                   | (59.7  | ) |   |   |

 

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*CabinManagement. *Revenues decreased by $53.8 million, or31.1% compared to the prior year.  Thedecrease, which is across substantially all of our product and servicescategories, is caused by the ongoing adverse impact of weak global economicconditions which reduces the affordability of business, VIP and head-of-stateaircraft and therefore demand for the products and services we provide.  As a result, the manufacturers of theseaircraft have experienced a decrease in orders for new aircraft which, in turn,reduces the orders our customers place with us.  The 2003 decrease consists of:

 

•      a $50.9 million decrease in aircraft furniture andrelated products revenues;

 

•      a $3.4 million decrease in cabin management andentertainment systems revenues; and

 

•      a $0.5 million decrease in seating products revenues;offset by

 

•      a $1.0 million increase in other product and servicesrevenues.

 

The revenue decrease wascaused by lower order volume (as described above) from our customers as opposedto a loss of customers or price reductions.

 

Revenues from Textron andBombardier, our principal customers, decreased $44.6 million compared to theprior year as a result of the decrease in orders and resulting lower productionof aircraft they are experiencing during the economic downturn.  Both companies temporarily suspendedproduction of various aircraft models for several weeks during fiscal 2003 inresponse to their low order backlog.  Wealso experienced similar volume decreases from our other customers during theperiod.

 

*SystemsIntegration.*  Revenues decreased by $6.4 million, or 11.0%compared to the prior year, due to:

 

•      a $8.6 million decrease resulting from reduced demandfor almost all of our products and services as a result of reduced productionand delivery of business, VIP and head-of-state aircraft; offset by

 

•      a $0.1 million increase in the commercial aircraftsystems integration engineering services; and

 

•      a $2.1 million increase resulting from revenuepursuant to the “take-or-pay” provisions of a major supply contract.

 

**Grossprofit.**  Gross profit decreased $24.2 million, or40.8%, to $35.2 million for the year ended December 31, 2003 from $59.4 millionfor the same period in the prior year. By segment, gross profit changed as follows:

 
|                |   | **Increase  (Decrease)  From 2002** |   |
|---------------------|--------|-------------------------------------|--------|
| **(In millions)**   |   | **Amount**                          |   | **Percent** |   |
|                |   |                                |   |   |   |
| Cabin Management    |   | $                                   | (20.2  | ) | (52.2 | )% |
| Systems Integration |   | (4.0                                | )      | (19.7 | ) |
| Total               |   | $                                   | (24.2  | ) |   |   |

 

*CabinManagement.*  Gross profit decreased by $20.2 million, or52.2% compared to the prior year, primarily due to:

 

•      a $20.1 million decrease resulting from lower volumefor our business, VIP and head-of-state aircraft furniture and seatingproducts; and

 

•      a $1.2 million decrease in gross profit related tolower volume for our cabin management and entertainment systems; offset by

 

•      a $1.1 million increase from our other products andservices.

 

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*SystemsIntegration.*  Gross profit decreased by $4.0 million, or19.7% compared to the prior year, primarily due to:

 

•      a $7.0 million decrease resulting from lower revenuesand unfavorable overhead absorption as a result of lower production and achange in product delivery mix; and

 

•      a $0.3 million decrease in the commercial aircraftsystems integration engineering services provided; offset by

 

•      a $3.3 million decrease in restructuring chargesincurred in 2003 as compared to those recorded in 2002 related to ourrestructuring activities.

 

**Selling,general and administrative expenses.**  Selling,general and administrative expenses decreased $15.4 million, or 38.2%, to $24.9million for the year ended December 31, 2003, from $40.3 million for the sameperiod in the prior year.  By segment,SG&A expenses changed as follows:

 
|                |   | **Increase  (Decrease)  From 2002** |   |
|---------------------|--------|-------------------------------------|--------|
| **(In millions)**   |   | **Amount**                          |   | **Percent** |   |
|                |   |                                |   |   |   |
| Cabin Management    |   | $                                   | (11.2  | ) | (46.2 | )% |
| Systems Integration |   | (2.8                                | )      | (36.6 | ) |
| Corporate           |   | (1.4                                | )      |   |   |
| Total               |   | $                                   | (15.4  | ) |   |   |

 

*CabinManagement. *SG&A expenses decreased by $11.2million, or 46.2% compared to the prior year, due to:

 

•      a $6.0 million decrease in restructuring chargesincurred in 2003 as compared to those recorded in 2002 related to ourrestructuring activities; and

 

•      a $5.2 million decrease in expenses resulting fromcost reduction measures implemented in response to lower sales volume resultingfrom the weak demand for our products and services.

 

*SystemsIntegration. *SG&A expenses decreased by $2.8million, or 36.6% compared to the prior year, due to lower labor and employeebenefit costs resulting from workforce reductions in 2003.

 

**Research and developmentexpenses. **Research and development expenses were$10.4 million for the year ended December 31, 2003 compared to $0.1 million inthe prior year.  As more fully describedin “—Change in Accounting Principle,” we elected to change our accountingpolicy for product development costs incurred for long-term programs afterconcluding the 2003 fiscal year but retroactively applied the change to thebeginning of the year, January 1, 2003. Commencing January 1, 2003, such costs are classified as a component ofresearch and development expenses. Expenses would have been $5.0 million in 2002 if the new accountingpolicy had been in effect during that year.

 

*Cabin Management. *R&D expenses were $8.1 million for the year endedDecember 31, 2003, principally incurred for the development our newsingle-design seat technology and new interior furnishing components for amajor customer’s new model of aircraft they recently introduced.

 

*Systems Integration. *R&D expenses were $2.3 million for the year endedDecember 31, 2003, principally for development of several new products.

 

**Impairment of goodwill. **During the year ended December 31, 2003, a $34.0million charge was recorded to reflect the additional impairment of goodwill inconnection with the impairment testing provision of SFAS No. 142, “Goodwill andOther Intangible Assets.”  Theadditional impairment results from continuing weak global economic conditionswhich reduces the affordability of business, VIP and head-of-state aircraft andtherefore demand for the products and services we provide.  The impairment

 

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charge pertains to ourfurniture manufacturing reporting unit within our Cabin Management Group.  See “—Goodwill Impairment Charges” below foradditional information.

 

**Depreciationand amortization of intangibles.**  Depreciationand amortization expense decreased $0.8 million to $9.8 million for the yearended December 31, 2003 from $10.6 million for the same period in the prioryear, primarily resulting from reduced capital expenditures and a lowerdepreciable base resulting from impairment charges recorded during 2002 asfollows.

 
|                                        |   | **Increase  (Decrease)  From 2002** |   |
|---------------------------------------------|--------|-------------------------------------|--------|
| **(In millions)**                           |   | **Amount**                          |   | **Percent** |   |
|                                        |   |                                |   |   |   |
| Depreciation charged to:                    |   |                                |   |   |   |
| Cost of sales                               |   | $                                   | (0.3   | ) | (6.6 | )% |
| Selling, general and administrative expense |   | (0.6                                | )      | (26.2 | ) |
| Amortization of intangible assets           |   | 0.1                                 |   | 3.1 |   |
| Total                                       |   | $                                   | (0.8   | ) |   |   |

 

**AdjustedEBITDA. **As described above in“—Performance Measures—Adjusted EBITDA,” we use this financial measure toevaluate the core economic performance of our operating segments.  The notes to our financial statementsinclude additional information about Adjusted EBITDA, and should be read inconjunction with the discussions presented herein.  The notes to our financial statements also include areconciliation of Adjusted EBITDA to net income (loss), a GAAP financialmeasure, to clarify the differences between these two measures.

 

*Cabin Management. *Adjusted EBITDAdecreased by $23.6 million, or 72.5%, to $9.0 million for the year endedDecember 31, 2003 compared to $32.6 million for the same period in theprior year primarily due to:

 

•      a $13.6 million decrease in gross profit related toour business, VIP and head-of-state aircraft furniture and seating operations;

 

•      an $8.1 million increase in research and developmentexpenses;

 

•      a $1.1 million decrease in gross profit related ourcabin management and entertainment systems; and

 

•      a $0.8 million decrease in gross profit related to ourother products and services.

 

*SystemsIntegration. *Adjusted EBITDA decreased by $7.1million, or 39.1%, to $11.0 million for the year ended December 31, 2003compared to $18.1 million for the same period in the prior year due to lowersales volume and a $2.3 million increase in research and development expenses,partially offset by reduced SG&A spending resulting from workforcereductions.

 

**Operatingincome (loss).**  Operating income decreased $53.3 million toa loss of $37.8 million for the year ended December 31, 2003, from operatingincome of $15.5 million for the same period in the prior year.  By segment, operating income changed asfollows:

 
|                |   | **Increase  (Decrease)  From 2002** |   |
|---------------------|--------|-------------------------------------|--------|
| **(In millions)**   |   | **Amount**                          |   | **Percent** |   |
|                |   |                                |   |   |   |
| Cabin Management    |   | $                                   | (51.2  | ) | (401.8 | )% |
| Systems Integration |   | (3.6                                | )      | (32.3 | ) |
| Corporate           |   | 1.5                                 |   |   |   |
| Total               |   | $                                   | (53.3  | ) |   |   |

 

*CabinManagement. *Operating income decreased by $51.2million, or 401.8% compared to the prior year, due to:

 

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•      a $34.0 million goodwill impairment charge in 2003;

 

•      a $20.1 million decrease in gross profit, primarilydue to lower revenues related to our furniture and seating operations; and

 

•      an $8.1 million increase in research and developmentexpenses; offset by

 

•      a $6.0 million decrease in restructuring chargesincurred in 2003 as compared to those recorded in 2002 related to ourrestructuring activities; and

 

•      a $5.0 million decrease in expenses resulting fromcost reduction measures implemented in response to lower sales volume resultingfrom the weak global economic conditions.

 

*SystemsIntegration.*Operatingincome decreased by $3.6 million, or 32.3% compared to the prior year, due to:

 

•      a $7.0 million decrease in gross profit resulting fromlower revenues and unfavorable overhead absorption as a result of lowerproduction and a change in product delivery mix;

 

•      a $2.3 million increase in research and developmentexpenses; and

 

•      a $0.3 million decrease in gross profit in thecommercial aircraft systems integration engineering services provided; offsetby

 

•      a $3.0 million decrease in restructuring chargesincurred in 2003 as compared to those recorded in 2002 related to ourrestructuring activities; and

 

•      a $3.0 million decrease in expenses resulting fromcost reduction measures implemented in response to lower sales volume resultingfrom the weak global economic conditions.

 

**Interestexpense.**  Interest expense increased $0.8 million, or3.3%, to $26.2 million for the year ended December 31, 2003 compared to $25.4million for the same period in the prior year. The increase is attributable to a 1.5% increase in interest rate marginscharged by our lenders pursuant to the March 28, 2003 first-lien bank creditfacility amendment, partially offset by lower principal balances outstandingduring 2003 compared to the prior year.

 

**Minorityinterest in preferred stock of subsidiary.**  Minority interest increased $0.8 million to$6.8 million for the year ended December 31, 2003 compared to $5.8 million forthe same period in the prior year.  Minority interest reflects accrueddividends, which are compounded quarterly, and redemption value accretionduring the periods on DeCrane Aircrafts’ 16% preferred stock.

 

**Loss on extinguishment of debt. **Loss on extinguishment of debt was $1.4 million forthe year ended December 31, 2003 and reflects the write-off of deferredfinancing costs attributable to debt repaid during the year.

 

**Provisionfor income tax benefit.**  The provision for income taxesis comprised of the following:

 
|                                               |   | **Year Ended  December 31,** |   |
|----------------------------------------------------|--------|------------------------------|--------|
| **(In millions)**                                  |   | **2003**                     |   | **2002** |   |
|                                               |   |                         |   |   |   |
| Income tax benefit based on reported  pre-tax loss |   | $                            | 33.0   |   | $ | 2.9 |   |
| Net deferred tax asset valuation allowance         |   | (19.5                        | )      | — |   |
| Net income tax benefit                             |   | $                            | 13.5   |   | $ | 3.6 |   |

 

The provision for incometaxes, based on the reported consolidated pre-tax loss, differs from the amountdetermined by applying the applicable U.S. statutory federal rate to thepre-tax loss primarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally the non-deductible portion of goodwillimpairment charges and minority interest in preferred stock of subsidiary.

 

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As of December 31, 2003,we had net deferred tax assets of $19.5 million, prior to recording a valuationallowance; net deferred tax liabilities existed in prior periods.  The change to a net asset position wasprimarily caused by the $34.0 million goodwill impairment charge recordedduring fiscal 2003.  SFAS No. 109, “Accountingfor Income Taxes,” requires the recognition of a deferred tax asset for thefuture income tax benefit of goodwill deductions that will be taken for incometax purposes (i.e. the goodwill that has been written off in the financialstatements for book purposes will continue to be amortized and deducted for taxpurposes and, accordingly, represents a new deferred tax asset).

 

As required by SFAS No.109, we evaluated our deferred assets for expected recoverability based on thenature of the item, the associated taxing jurisdictions, the applicableexpiration dates and future taxable income forecasts that would impactutilization.  Since there is no losscarry back potential and we do not have any tax planning strategies to assurerecoverability, the only possibility for recovery of the net deferred assets isfuture taxable income.  Since there havebeen prior year losses, we believe it is not prudent to rely on future incomeas the means to support the carrying value of the net assets.  As a result of our evaluation, we recorded a$19.5 million valuation allowance, eliminating the net deferred asset, as ofDecember 31, 2002.

 

We had net deferred taxliability of $16.6 million as of December 31, 2002.  The full realization of the deferred assets was achieved throughthe reversal of the deferred tax liabilities in future periods.  As a result, a valuation allowance was notrequired for periods ending on or prior to December 31, 2003.

 

**Loss from continuing operations.** The loss from continuing operations increased $47.1 million to a loss of$59.7 million for the year ended December 31, 2003 compared to a loss of $12.6million for the same period in the prior year, primarily due to:

 

•      a $53.3 million decrease in operating incomeresulting, in part, from a $34.0 million goodwill impairment charge;

 

•      a $2.3 million increase in interest and other expenses(net); and

 

•      a $1.4 million increase in loss on extinguishment ofdebt; offset by

 

•      a $9.9 million increase in income tax benefit.

 

**Loss from discontinued operations.**  Lossfrom discontinued operations decreased $34.8 million, to a loss of $6.6 millionfor the year ended December 31, 2003 compared to a loss of $41.4 million forthe same period in the prior year.  The decrease is primarily due to:

 

•      a $39.4 million charge in 2002 to reflect thecumulative effect on discontinued operations of the change in accountingprinciple associated with initial adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets” as described below; offset by

 

•      the result of operations of the Specialty AvionicsGroup through May 22, 2003 compared to a full year of operating resultsincluded in the prior year.

 

**Cumulative effect of change inaccounting principle.**  The $13.8 million chargeduring the year ended December 31, 2003 was to reflect the cumulative effect oncontinuing operations of the change in accounting for product developmentcosts.  See “—Change in Accounting forProduct Development Costs” for additional information.

 

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

 

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**Netloss.**  Net loss increased $8.3 million to a netloss of $80.1 million for the year ended December 31, 2003 compared to anet loss of $71.8 million for the same period in the prior year.  The decrease is attributable to:

 

•      an increase in loss from continuing operations of$47.1 million; offset by

 

•      a decrease in loss from discontinued operations of$34.8 million; and

 

•      a decrease in cumulative effect of change inaccounting principle of $4.0 million.

 

**Net lossapplicable to common stockholders.**  Net lossapplicable to our common stockholders increased $9.5 million to a net loss of$89.3 million for the year ended December 31, 2003 compared to a net lossof $79.8 million for the same period in the prior year.  The increase in the net loss applicable toour common stockholder is attributable to:

 

•      a $8.3 million increase in our net loss;

 

•      a $1.2 million increase in noncash preferred stockdividend accretion on our 14% mandatorily redeemable preferred stock.

 

**Bookings. **Bookings decreased $35.8 million, or 18.2%, to $161.3million for the year ended December 31, 2003 compared to $197.1 million for thesame period in the prior year.  Thedecrease in bookings for 2003 is due to decreases in orders for all of ourbusiness segments.

 

**Backlogat end of period.**  Backlog decreased $8.8 million to $58.0million as of December 31, 2003 compared to $66.8 million as of December 31,2002.

 

As described in“—Industry Overview and Trends,” the acts and ongoing threats of globalterrorism, the current military conflicts, health epidemics and weak globaleconomic conditions are having an adverse impact on our business, resulting inthe decrease in bookings during 2003. In addition, we believe that some of our customers have substantiallyreduced their order lead times which may have adversely affected bookingsduring the period.

 

We are not able topredict the continuing impact these events will have on bookings and backlog infuture periods.  However, given themagnitude of these events, the adverse impact could be material.

 

**YearEnded December 31, 2002 Compared to Year Ended December 31, 2001**

** **

Our results of operationshave been affected by restructuring, asset impairment and other related chargesrelating to a series of restructuring activities and goodwill impairmentcharges.  These charges, which affectthe comparability of our reported results of operations between periods, aremore fully described in “—Restructuring, Asset Impairment and Other RelatedCharges” and “—Goodwill Impairment Charges” below.

 

**Revenues.* ***Revenues decreased $42.3 million, or15.5%, to $229.8 million for the year ended December 31, 2002 from $272.1million for the year ended December 31, 2001. By segment, revenues changed as follows:

 
|                    |   | **Increase  (Decrease)  From 2001** |   |
|-------------------------|--------|-------------------------------------|--------|
| **(In millions)**       |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | (33.2  | ) | (16.1 | )% |
| Systems Integration     |   | (9.5                                | )      | (14.0 | ) |
| Inter-group elimination |   | 0.4                                 |   |   |   |
| Total                   |   | $                                   | (42.3  | ) |   |   |

 

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*CabinManagement. *Revenues decreased by $33.2 million, or16.1% compared to the prior year.  Thedecrease, which is across most of our product and services categories, iscaused by the ongoing adverse impact of weak global economic conditions whichreduces the affordability of business, VIP and head-of-state aircraft andtherefore demand for the products and services we provide.  The 2002 decrease consists of:

 

•      a $22.4 million decrease in aircraft furniture andrelated products revenues;

 

•      a $9.8 million decrease in cabin management andentertainment systems revenues; and

 

•      a $6.1 million decrease in seating products revenues;offset by

 

•      a $5.1 million increase in other product and servicesrevenues.

 

The revenue decrease wascaused by lower order volume from our customers as opposed to a loss ofcustomers or price reductions.  Thedecrease in order volume is attributable to weak global economic conditions andthe impact these conditions are having on manufacturers of business, VIP andhead-of-state aircraft and therefore demand for the products and services weprovide to them.  Weak global economicconditions have reduced the amount of discretionary income available topurchase and operate these types of aircraft. As a result, the manufacturers of these aircraft have experienced adecrease in orders for new aircraft which, in turn, reduces the orders ourcustomers place with us.

 

Revenuesfrom Textron and Bombardier, our principal customers, decreased $15.0 millioncompared to the prior year as a result of the decrease in orders and resultingproduction of aircraft they are experiencing due to the economic downturn.  We also experienced similar volume decreasesfrom our other customers during the period.

 

*SystemsIntegration.*  Revenues decreased by $9.5 million, or 14.0%compared to the prior year, due to:

 

•      a $7.5 million decrease in the commercial aircraft systemsintegration and engineering services we provide resulting from the aftermath ofSeptember 11th, and resulting down-turn in the commercial airlineindustry; the airline industry’s corresponding reduction in the size of itsoperating fleet and the delay or postponement retrofit and refurbishmentprograms for the remaining operational fleet reduced demand for our integrationand engineering services; and

 

•      a $2.0 million decrease resulting from reduced demandfor our business, VIP and head-of-state aircraft products and services due tothe adverse impact weak global economic conditions are having on the demand forthose types of aircraft as follows:

 

•      a $5.6 million decrease in BBJ auxiliary fuel systemsrevenues; offset by

 

•      a $3.6 million increase in our aircraft completion andmodification revenues, principally resulting for our first aircraft interiorcompletion during 2002.

 

**Grossprofit.**  Gross profit decreased $15.9 million, or21.1%, to $59.3 million for the year ended December 31, 2002 from $75.2 millionfor the same period in the prior year. By segment, gross profit changed as follows:

 
|                    |   | **Increase  (Decrease)  From 2001** |   |
|-------------------------|--------|-------------------------------------|--------|
| **(In millions)**       |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | (10.7  | ) | (21.7 | )% |
| Systems Integration     |   | (5.3                                | )      | (20.3 | ) |
| Inter-group elimination |   | 0.1                                 |   |   |   |
| Total                   |   | $                                   | (15.9  | ) |   |   |

 

27

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*CabinManagement.*  Gross profit decreased by $10.7 million, or21.7% compared to the prior year, primarily due to:

 

•      a $6.6 million net decrease caused by charges relatedto our 2001 and 2002 restructuring activities;

 

•      a $3.8 million decrease in profit margins due to lowervolume for our business, VIP and head-of-state aircraft furniture and seatingproducts, and

 

•      a $0.3 million decrease in gross profit related tolower volume for our cabin management and entertainment systems.

 

*SystemsIntegration.*  Gross profit decreased by $5.3 million, or20.3% compared to the prior year, primarily due to $4.1 million of other assetimpairment related charges and lower sales volume.

 

**Selling,general and administrative expenses.**  Selling,general and administrative expenses decreased $4.4 million, or 10.0%, to $40.3million for the year ended December 31, 2002, from $44.7 million for the sameperiod in the prior year.  By segment,SG&A expenses changed as follows:

 
|                |   | **Increase  (Decrease)  From 2001** |   |
|---------------------|--------|-------------------------------------|--------|
| **(In millions)**   |   | **Amount**                          |   | **Percent** |   |
|                |   |                                |   |   |   |
| Cabin Management    |   | $                                   | (1.2   | ) | (7.3 | )% |
| Systems Integration |   | (2.1                                | )      | (22.0 | ) |
| Corporate           |   | (1.1                                | )      |   |   |
| Total               |   | $                                   | (4.4   | ) |   |   |

 

*CabinManagement. *SG&A expenses decreased by $1.2million, or 7.3% compared to the prior year, due to:

 

•      a $4.0 million decrease in expenses as a result ofcost reduction measures implemented in 2001 and 2002 in response to lower salesvolume resulting from the weak global economic conditions; offset by

 

•      a $2.8 million increase caused by charges relating toour 2001 and 2002 restructuring activities.

 

*SystemsIntegration. *SG&A expenses decreased by $2.1million, or 22.0% compared to the prior year, due to lower labor and employeebenefit costs resulting from workforce reductions implemented during the fourthquarter of fiscal 2001.

 

*Corporate. *SG&A expenses decreased by $1.1 million comparedto the prior year, primarily due to workforce and travel expense reductions offsetby increases in insurance and employee benefit costs.

 

**Research and developmentexpenses. **Research and development expenses were$0.1 million for the year ended December 31, 2002 compared to $0.7 million inthe prior year.  As more fully describedin “—Change in Accounting Principle,” we elected to change our accountingpolicy for product development costs incurred for long-term programs.  Commencing January 1, 2003, such costs areclassified as a component of result, research and development expenses.  Expenses would have been $5.0 million in2002 and $11.7 million in 2001 if the new accounting policy had been in effectduring those years.

 

**Impairmentof goodwill.**  In 2001, an $8.6 million impairment chargewas recognized pursuant to the provisions of SFAS No. 121, “Accounting forImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”to reflect the impairment resulting from our restructuring activities.  See “—Goodwill Impairment Charges” below foradditional information.

 

28

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**Depreciationand amortization of intangibles.**  Depreciationand amortization expense decreased $9.8 million to $10.6 million for the yearended December 31, 2002 compared to $20.4 million for the same period in theprior year, primarily resulting from the adoption of new accounting standards,as follows:

 
|                                        |   | **Increase  (Decrease)  From 2001** |   |
|---------------------------------------------|--------|-------------------------------------|--------|
| **(In millions)**                           |   | **Amount**                          |   | **Percent** |   |
|                                        |   |                                |   |   |   |
| Depreciation charged to:                    |   |                                |   |   |   |
| Cost of sales                               |   | $                                   | (0.7   | ) | (14.2 | )% |
| Selling, general and administrative expense |   | (0.2                                | )      | (5.1 | ) |
| Amortization of intangible assets:          |   |                                |   |   |   |
| Goodwill                                    |   | (9.1                                | )      | (100.0 | ) |
| Identifiable intangible assets              |   | 0.2                                 |   | 5.0 |   |
| Total                                       |   | $                                   | (9.8   | ) |   |   |

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill andOther Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-livedasset and, as a result, the recording of periodic goodwill amortization chargeswas discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating toacquired assembled workforce intangibles not meeting the criteria forrecognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $9.1 million forthe year ended December 31, 2001,******which includes $1.1 million of assembledworkforce amortization, now deemed part of goodwill.  See “—Goodwill Impairment Charges” below for additionalinformation.

 

Excluding the effect ofthe accounting change, depreciation and amortization decreased $0.9 million asa result of lower depreciable costs resulting from the impairment of long-livedassets recorded during the fourth quarter of fiscal 2001 and 2002, partiallyoffset by additional depreciation resulting from capital expenditures duringthe period.

 

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

 

*CabinManagement.*  Adjusted EBITDA decreased by $12.9 million,or 28.3% compared to the prior year, primarily due to:

 

•      a $9.3 million decrease related principally to lowerrevenues in our business, VIP and head-of-state aircraft furniture and seatingoperations; and

 

•      a $3.6 million decrease resulting from lower salesvolume for our cabin management and entertainment systems.

 

*SystemsIntegration. *Adjusted EBITDA increased by $0.9million, or 5.4% compared to the prior year, primarily the result of reducedSG&A spending resulting from workforce reductions.

 

**Operatingincome.**  Operating income increased $6.7 million to$15.5 million for the year ended December 31, 2002, from $8.8 million for thesame period in the prior year. Operating income changed as follows:

 

29

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|                    |   | **Increase  (Decrease)  From 2001** |   |
|-------------------------|--------|-------------------------------------|--------|
| **(In millions)**       |   | **Amount**                          |   | **Percent** |   |
|                    |   |                                |   |   |   |
| Cabin Management        |   | $                                   | 2.7    |   | 55.9 | % |
| Systems Integration     |   | 1.4                                 |   | 18.1 |   |
| Corporate               |   | 2.5                                 |   |   |   |
| Inter-group elimination |   | 0.1                                 |   |   |   |
| Total                   |   | $                                   | 6.7    |   |   |   |

 

*CabinManagement.*  Operating income increased by $2.7 million,or 55.9% compared to the prior year, primarily due to:

 

•      a $10.7 million decrease in gross profit primarilycaused by charges related to our restructuring activities and due to lowervolume for our business, VIP and head-of-state aircraft furniture and seatingproducts; offset by

 

•      a $1.9 million decrease in SG&A resulting fromcost reduction measures and restructuring charges;

 

•      a $5.0 million decrease in goodwill impairment; and

 

•      a $6.7 million decrease in amortization ofintangibles.

 

*SystemsIntegration. *Operating income increased by $1.4million, or 18.1% compared to the prior year, primarily due to:

 

•      a $5.2 million decrease in gross profit due to otherasset impairment related charges and lower sales volumes; offset by

 

•      a $2.2 million decrease in SG&A resulting fromlower labor and employee benefit costs;

 

•      a $3.5 million decrease in goodwill impairment; and

 

•      a $0.9 million decrease in amortization ofintangibles.

 

*Corporate. *Operatingincome increased $2.5 million compared to the prior year, due to principally toreduced SG&A spending.

 

**Interestexpense.**  Interest expense decreased $4.3 million, or14.4%, to $25.4 million for the year ended December 31, 2002 compared to $29.7million for the same period in the prior year due almost entirely to lower averageinterest rates charged by our lenders.

 

**Minorityinterest in preferred stock of subsidiary.**  Minority interest increased $0.8 million to$5.8 million for the year ended December 31, 2002 compared to $5.0 million forthe same period in the prior year.  Minority interest reflects accrueddividends, which are compounded quarterly, and redemption value accretionduring the periods on DeCrane Aircrafts’ 16% preferred stock.

 

**Provisionfor income taxes.**  The provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate tothe income before income taxes primarily due to the effects of state andforeign income taxes and non-deductible expenses, principally goodwillimpairment charges and amortization (for periods prior to the January 1, 2002adoption of SFAS No. 142). The difference in the effective tax rates between periods is mostly theresult of the adoption of SFAS No. 142.

 

**Lossfrom continuing operations. **Loss from continuing operations decreased$10.0 million to a loss of $12.6 million for the year ended December 31, 2002,compared to a loss of $22.6 million for the same period in the prior year.  The decrease in loss from continuingoperations is attributable to:

 

30

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•      an $8.9 million decrease in amortization of goodwilland intangible assets resulting from the adoption of SFAS No. 142, “Goodwilland Other Intangible Assets,” on January 1, 2002;

 

•      an $8.6 million decrease in goodwill impairment charges;and

 

•      a $4.3 million decrease in interest expense; offset by

 

•      an $11.0 million loss increase principally resultingfrom reduced profits caused by lower revenues; and

 

•      a $0.8 million increase in minority interest inpreferred stock of subsidiary.

 

**Income(loss) from discontinued operations. **Income fromdiscontinued operations decreased $44.9 million to a loss of $41.4 million forthe year ended December 31, 2002 compared to income of $3.5 million for thesame period in theprior year.  The change in income (loss) from discontinued operations isattributable to:

 

•      a $39.4 million charge in 2002 to reflect thecumulative effect on discontinued operations of the change in accountingprinciple associated with initial adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets;” and

 

•      a $7.7 million charge in 2002 to reflect theadditional impairment of goodwill in connection with the annual impairmenttesting provisions of SFAS No. 142; and

 

•      a $3.1 million loss increase principally resulting fromreduced profits caused by lower revenues; offset by

 

•      a $5.3 million reduction in goodwill amortizationexpense resulting from discontinuance of periodic amortization charges pursuantto SFAS No. 142.

 

The $39.4 million and$7.7 million charges in 2002 are attributable to the goodwill impairment of oneof the three reporting units within the Specialty Avionics Group.  Aggregate goodwill was $126.5 million as ofDecember 31, 2001 and $80.7 million as of December 31, 2002, after the $47.1million 2002 impairment charges and a $1.3 million reclassification ofintangible assets in connection with the adoption of SFAS No. 142.  See “—Goodwill Impairment Charges” below foradditional information.

 

**Cumulativeeffect of change in accounting principle. **The $17.8 million charge to reflect the cumulative effect of change inaccounting principle for the year ended December 31, 2002 was a result oftransitional goodwill impairment charges recognized upon initial adoption ofSFAS No. 142, “Goodwill and Other Intangible Assets.”  See“—Goodwill Impairment Charges” below for additional information.

 

**Netincome (loss).**  Net loss increased $52.7 million to a netloss of $71.8 million for the year ended December 31, 2002 compared to a netloss of $19.0 million for the same period in the prior year.  The increase over the prior year is a resultof a $10.0 million decrease in loss from continuing operations offset by anincrease in loss from discontinued operations of $44.9 million and thecumulative effect of change in accounting principle of $17.8 million.

 

**Net lossapplicable to common stockholders.**  Net lossapplicable to common stockholders increased $53.8 million to a net loss of$79.8 million for the year ended December 31, 2002 compared to a net loss of$26.0 million for the same period in the prior year.  The increase in the net loss applicable to our commonstockholders is attributable to:

 

•      a $52.8 million net loss increase; and

 

•      a $1.0 million increase innoncash preferred stock dividend accretion on our 14% mandatorily redeemablepreferred stock resulting from the quarterly compounding of the dividendsaccreted.

 

31

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**Bookings. **Bookings decreased $55.7 million, or 22.0%, to $197.1million for the year ended December 31, 2002 compared to $252.8 million for thesame period in the prior year.  Thedecrease in bookings for 2002 is due to decreases in orders for all of our businesssegments.

 

**Backlogat end of period.**  Backlog decreased $32.7 million to $66.8million as of December 31, 2002 compared to $99.5 million as ofDecember 31, 2001.

 

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

** **

The following discussion shouldbe read in conjunction with Note 3 accompanying our financial statementsincluded in this report.

 

During the three yearsended December 31, 2003, we recorded restructuring, asset impairment and otherrelated pre-tax charges, principally relating to our restructuringactivities.  These charges aresummarized below.

 
|                                                                        |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------------------------|--------|------------------------------|--------|
| **(In millions)**                                                           |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                        |   |                         |   |   |   |   |   |
| Nature of charges:                                                          |   |                         |   |   |   |   |   |
| Seating Product Line and Furniture  Manufacturing  Facilities Restructuring |   | $                            | 7.1    |   | $ | — |   | $ | — |   |
| Asset Realignment Restructuring                                             |   | —                       |   | 6.9 |   | 20.1 |   |
| Seat Manufacturing Facilities Restructuring                                 |   | —                       |   | 6.3 |   | — |   |
| Adjustment of Previous Restructuring Charge                                 |   | 0.8                          |   | — |   | — |   |
| Goodwill impairment charges                                                 |   | 41.5                         |   | 7.7 |   | 8.6 |   |
| Other asset impairment related charges                                      |   | —                       |   | 4.3 |   | — |   |
| Total pre-tax charges                                                       |   | $                            | 49.4   |   | $ | 25.2 |   | $ | 28.7 |   |
|                                                                        |   |                         |   |   |   |   |   |
| Business segment recording the charges:                                     |   |                         |   |   |   |   |   |
| Cabin Management                                                            |   | $                            | 41.1   |   | $ | 13.2 |   | $ | 22.4 |   |
| Systems Integration                                                         |   | 0.8                          |   | 4.0 |   | 3.5 |   |
| Total charged to continuing operations                                      |   | 41.9                         |   | 17.2 |   | 25.9 |   |
| Discontinued operations (Specialty  Avionics)                               |   | 7.5                          |   | 8.0 |   | 2.8 |   |
| Total pre-tax charges                                                       |   | $                            | 49.4   |   | $ | 25.2 |   | $ | 28.7 |   |
|                                                                        |   |                         |   |   |   |   |   |
| Charged to operations:                                                      |   |                         |   |   |   |   |   |
| Cost of sales                                                               |   | $                            | 7.3    |   | $ | 10.7 |   | $ | 13.6 |   |
| Selling, general and administrative  expenses                               |   | 0.6                          |   | 6.5 |   | 3.7 |   |
| Impairment of goodwill                                                      |   | 34.0                         |   | — |   | 8.6 |   |
| Total charged to operations                                                 |   | 41.9                         |   | 17.2 |   | 25.9 |   |
| Charged to discontinued operations  (Specialty Avionics)                    |   | 7.5                          |   | 8.0 |   | 2.8 |   |
| Total pre-tax charges                                                       |   | $                            | 49.4   |   | $ | 25.2 |   | $ | 28.7 |   |
|                                                                        |   |                         |   |   |   |   |   |
| Components of charges:                                                      |   |                         |   |   |   |   |   |
| Noncash charges                                                             |   | $                            | 37.7   |   | $ | 11.4 |   | $ | 19.6 |   |
| Cash charges                                                                |   | 4.2                          |   | 5.8 |   | 6.3 |   |
| Total charged to continuing operations                                      |   | 41.9                         |   | 17.2 |   | 25.9 |   |
| Charged to discontinued operations                                          |   | 7.5                          |   | 8.0 |   | 2.8 |   |
| Total pre-tax charges                                                       |   | $                            | 49.4   |   | $ | 25.2 |   | $ | 28.7 |   |

 

**SeatingProduct Line and Furniture Manufacturing Facilities Restructuring**

** **

During the second quarterof fiscal 2003, we consolidated our seating product line offerings and adopteda restructuring plan to down-size a furniture manufacturing facility inresponse to continuing

 

32

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weakness in the business,VIP and head-of-state aircraft market. These actions were designed to reduce engineering, production andinventory carrying costs by supporting fewer product offerings and achieveprofitability at the furniture manufacturing facility based on its lowerproduction levels.  In connection withthese actions, we recorded pre-tax charges to operations totaling $7.1 millionduring the second quarter of fiscal 2003, of which $3.6 million were noncashcharges.  The charges are comprised ofthe write-off of excess and obsolete inventory costs related to thediscontinued product offerings, lease termination and related charges, andseverance and other compensation costs. These restructuring activities were completed by the end of fiscal 2003.

 

**AssetRealignment Restructuring**

** **

During the second quarterof fiscal 2001, we adopted a restructuring program to realign aircraftfurniture production programs among our manufacturing facilities.  In addition, and in response to the adverseimpact on the aerospace industry resulting from the September 11thterrorist attack and its aftermath, as well as the weakening of global economicconditions, we announced and implemented a further restructuring program inDecember 2001 designed to reduce costs and conserve working capital.  This program included permanently closingone manufacturing facility and idling a second facility for an indefiniteperiod, curtailing several product development programs and institutingworkforce reductions.  This programprimarily affected our Cabin Management and Specialty Avionics Groups.

 

In connection with theserestructuring activities, we recorded pre-tax charges to operations of $28.7million in fiscal 2001, of which $22.1 million were noncash charges, for theimpairment of long-lived assets and restructuring costs related to write-downsand write-offs of inventoried costs, costs associated with the realignment ofaircraft furniture production programs among facilities, severance, leasetermination and other related costs. During 2001, we paid $5.0 million of costs related to this restructuringin cash and a $1.6 million restructuring reserve remained as of December 31,2001 solely for severance, lease termination and other related costs.

 

Due to the ongoingweakness of the business, VIP and head-of-state aircraft market, we decidedduring the second quarter of fiscal 2002 to permanently close the temporarilyidled manufacturing facility.  Inconnection with this decision, we recorded additional pre-tax charges tooperations totaling $6.9 million during the year ended December 31, 2002, ofwhich $3.8 million were noncash charges, for restructuring, asset impairmentcharges and other related expenses. During 2002 and 2003, we paid $4.7 million of costs related to thisrestructuring in cash.  No future cashpayment obligations related to these restructuring activities remains as ofDecember 31, 2003.

 

**SeatManufacturing Facilities Restructuring**

** **

In 2002, we announced wewould consolidate the production of four seating and related manufacturingfacilities into two, resulting in the permanent closure of two facilities.  This program was designed to improvemanufacturing efficiencies and to further reduce costs and conserve workingcapital.  In connection with theserestructuring activities, we recorded pre-tax charges to operations totaling$6.3 million during the year ended December 31, 2002, of which $3.6 millionwere noncash charges, for restructuring, asset impairment and other relatedrestructuring charges.

 

The restructuring, assetimpairment and other related expenses are comprised of charges for currentasset write-downs, the impairment of long-lived assets, severance and leasetermination costs and other restructuring-related expenses pertaining to FAAretesting and recertification, moving, transportation and travel costs andshutdown and startup costs.  Theserestructuring activities were substantially completed during the second quarterof fiscal 2002.

 

33

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**Adjustment of PreviousRestructuring Charge**

** **

In December 1999, weinitiated a plan to reorganize and restructure the operations of two of our subsidiarieswithin the Systems Integration Group. The restructuring was a result of a management decision to exit themanufacturing business at these subsidiaries and consolidate and relocateoperations into one facility to more efficiently and effectively manage thebusiness and be more competitive.

 

In connection with theserestructuring activities, we provided for lease termination costs expected tobe incurred over the remaining term of the existing long-term lease at thefacility being vacated following the restructuring. The expected costs werereduced by estimated sublease income which was based on estimated future marketrates and anticipated sublease rental periods.

 

During 2003, the initialsublease was canceled and we entered into a new sublease agreement.  Due to the deterioration in market ratessince 1999, the terms of the new sublease were less favorable than the initiallease.  As a result, we determined thatthe remaining accrual for lease termination costs was insufficient to cover thenet costs expected to be incurred over the remaining lease term.  Consequently, an additional $0.8 million wascharged to operations during 2003 for these additional costs.  A payment obligation totaling $0.7 millionremains as of December 31, 2003.  Thefuture cash payments will be funded from internally generated cash foroperations.

 

**Goodwill ImpairmentCharges**

** **

During 2003, we recorded$41.5 million of goodwill impairment charges. Impairment charges totaling $34.0 million pertained to goodwillimpairment testing pursuant to SFAS No. 142 for our Cabin Management Group andwere charged to continuing operations. The remaining $7.5 million pertained to the sale of the SpecialtyAvionics Group and was charged to discontinued operations.

 

During 2002, we recordeda pre-tax charge of $7.7 million related to our annual goodwill impairmenttesting pursuant to SFAS No. 142.  Thecharged pertained to discontinued operations.

 

Prior to adoption of SFASNo. 142, impairment testing was in accordance with SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of.”  In 2001, we recorded an$8.6 million pre-tax charge to operations to reflect the impairment lossresulting from our restructuring activities. The impairment charge pertained to our Cabin Management and SystemsIntegration Groups.

 

See “—Goodwill ImpairmentCharges” below for additional information on all of the impairment charges.

 

**OtherAsset Impairment Related Charges**

** **

Due to continued weaknessin the commercial aircraft portion of our business, in the fourth quarter offiscal 2002 we recorded a pre-tax charge to cost of goods sold of $4.3 millionrelated to inventories.  Of this amount,charges totaling $0.3 million pertained to discontinued operations.

 

34

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**GoodwillImpairment Charges**

** **

The following discussionshould be read in conjunction with Notes 3 and 7 accompanying our financialstatements included in this report.

 

Our results of operationshave been affected by the adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets,” and goodwill impairment charges.  The table below summarizes the changes in goodwill during thethree years ended December 31, 2003.

 
|                                              |   | **Continuing  Operations**   |   | **Discontinued  Operations**    |   |
|---------------------------------------------------|--------|------------------------------|--------|---------------------------------|--------|
| **(In millions)**                                 |   | **Cabin  Management  Group** |   | **Systems  Integration  Group** |   | **Corporate** |   | **Total** |   | **Specialty  Avionics  Group** |   |
|                                              |   |                         |   |                            |   |   |   |   |   |   |   |
| Balance, December 31, 2000                        |   | $                            | 187.8  |                            | $      | 33.0 |   | $ | 4.1 |   | $ | 224.9 |   | $ | 131.5 |   |
| Contingent consideration earned                   |   | 3.8                          |   | —                          |   | — |   | 3.8 |   | — |   |
| Amortization during the period                    |   | (6.6                         | )      | (1.2                            | )      | (0.2 | ) | (8.0 | ) | (4.7 | ) |
| Impairment charge (a)                             |   | (5.1                         | )      | (3.5                            | )      | — |   | (8.6 | ) | — |   |
| Cash received upon settlement of asserted  claims |   | (1.2                         | )      | —                          |   | — |   | (1.2 | ) | — |   |
| Foreign currency translation                      |   | —                       |   | —                          |   | — |   | — |   | (0.3 | ) |
| Balance, December 31, 2001                        |   | 178.7                        |   | 28.3                            |   | 3.9 |   | 210.9 |   | 126.5 |   |
|                                              |   |                         |   |                            |   |   |   |   |   |   |   |
| Adoption of SFAS 141 and 142:                     |   |                         |   |                            |   |   |   |   |   |   |   |
| Reclassification of intangible assets             |   | 3.1                          |   | 0.4                             |   | 0.1 |   | 3.6 |   | 1.3 |   |
| Transitional impairment charge (b)                |   | (8.5                         | )      | (7.9                            | )      | (2.3 | ) | (18.7 | ) | (39.4 | ) |
| Contingent consideration earned                   |   | 0.6                          |   | —                          |   | — |   | 0.6 |   | — |   |
| Impairment charge (a)                             |   | —                       |   | —                          |   | — |   | — |   | (7.7 | ) |
| Balance, December 31, 2002                        |   | 173.9                        |   | 20.8                            |   | 1.7 |   | 196.4 |   | 80.7 |   |
|                                              |   |                         |   |                            |   |   |   |   |   |   |   |
| Impairment charge (a)                             |   | (34.0                        | )      | —                          |   | — |   | (34.0 | ) | (7.5 | ) |
| Sale of Specialty Avionics Group                  |   | —                       |   | —                          |   | — |   | — |   | (73.2 | ) |
| Balance, December 31, 2003                        |   | $                            | 139.9  |                            | $      | 20.8 |   | $ | 1.7 |   | $ | 162.4 |   | $ | — |   |

 

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(a)                                  Reflectsa goodwill impairment charge to operations and reflected as a component of ourrestructuring, asset impairment and other related charges.  See “—Restructuring, Asset Impairment andOther Related Charges” above.

 

(b)                                 Reflectsa goodwill impairment charge recorded (before $0.9 million of income taxbenefit) during the year ended December 31, 2002 as the cumulative effect ofchange in accounting principle in accordance with the transitional provisionsof adopting SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

Effective January 1,2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and theprovisions of SFAS No. 141, “Business Combinations,” which were required to beadopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncements resulted in thefollowing:

 

•                  *Reclassification ofIntangible Assets.* Intangible assets relating to acquiredassembled workforce intangibles not meeting the criteria for recognition apartfrom goodwill were reclassified to goodwill, net of deferred income taxes.

 

•                  *Discontinuance ofGoodwill Amortization.*  Goodwill is deemed to be anindefinite-lived asset.  As a result,and in accordance with SFAS No. 142, the recording of periodic goodwillamortization charges was discontinued effective January 1, 2002.

 

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•                  *Annual Testing forGoodwill Impairment.*  In lieu of periodic goodwill amortizationcharges, SFAS No. 142 requires goodwill to be tested annual for impairment, orwhen events or changes in circumstances indicate the carrying value may not berecoverable.

 

During 2002, we completedthe transitional impairment testing of goodwill recorded as of January 1,2002 as required under SFAS No. 142. Fair value of each reporting unit was determined using a discounted cashflow approach taking into consideration projections based on the individualcharacteristics of the reporting units, historical trends, market multiples forcomparable businesses and independent appraisals.  Our Cabin Management Group consists of three reporting units, ourSystems Integration Group consists of two and the Specialty Avionics consistsof three.  Unallocated goodwill wasallocated to the reporting units for impairment testing purposes.  The results indicated that the carryingvalue of goodwill was impaired at one of the reporting units within each of ouroperating groups.  The resultingimpairment was primarily attributable to a change in the evaluation criteriafor goodwill utilized under previous accounting guidance to the fair valueapproach stipulated in SFAS No. 142.  Inaccordance with the transitional provision of SFAS No. 142, we recorded a $17.8million noncash write-down of goodwill (net of $0.9 million income tax benefit)as of January 1, 2002 as a cumulative effect of a change in accountingprinciple.  An additional $39.4 millionnoncash write-down of goodwill pertained to the Specialty Avionics Group and isincluded in the loss from discontinued operations.

 

During the fourth quarterof fiscal 2002, we performed our annual impairment testing and recorded anadditional $7.7 million impairment charge related to one of the reporting unitswithin the Specialty Avionics Group. The charge was primarily the result of a decrease in fair value causedby using lower cash flow forecasts for the commercial aircraft portion of ourbusiness, which experienced further weakness during 2002.  This charge is included as a component ofincome (loss) from discontinued operations.

 

As a result of thecontinuing weakness in the business, VIP and head-of-state aircraft market andour decision to down-size a furniture manufacturing facility in the secondquarter of fiscal 2003, we determined that we should reevaluate the carryingvalue of goodwill prior to the annual October 31st testingdate.  Accordingly, we performed animpairment test of the goodwill associated with the furniture manufacturingreporting unit for recoverability and found the goodwill to be impaired.  As a result, we recorded a pre-tax charge tooperations of $34.0 million during the three months ended June 30, 2003.  The charge was primarily a result of adecrease in fair value caused by using lower cash flow forecasts based on themost recently reduced industry estimates of aircraft deliveries resulting fromoverall industry weakness.  The annualimpairment test on October 31st indicated that no additionalimpairment had occurred.

 

Prior to adoption of SFASNo. 142, impairment testing was in accordance with SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of.”  In 2001, we recorded an $8.6million pre-tax charge to operations to reflect the impairment loss resultingfrom our restructuring activities to close a manufacturing facility.

 

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**Liquidityand Capital Resources**

** **

We are a holding companyand have no direct material operations. Our only asset is our ownership of all of the common stock of DeCraneAircraft, and our only material liability is our guarantee of the DeCraneAircraft first-lien credit facility and second-lien term debt.  Our principal liquidity needs are for incometaxes and, beginning in 2005, the payment cash dividends on our preferredstock, if declared.

 

Our only source of cashis dividends from DeCrane Aircraft.  Thefirst-lien credit facility, second-lien term debt and subordinated notesdescribed below are obligations of DeCrane Aircraft and impose limitations onits ability to pay dividends to us.  Webelieve that DeCrane Aircraft’s debt instruments will permit it to supply uswith sufficient cash to meet the cash needs referred to above for the nexttwelve months.  However, if that is notthe case, we would not be able to satisfy those needs, because we have no othersource of cash other than dividends from DeCrane Aircraft.  We would then be required to securealternate financing, which may not be available on acceptable terms, or at all.

 

DeCrane Aircraft’sprincipal cash needs are for debt service, working capital, capitalexpenditures and strategic acquisitions, as well as to provide us with cash tofinance our needs.  Its principalsources of liquidity are expected to be cash flow from operations, potentialcapital market transactions and third party borrowings, principally under itsfirst-lien credit facility.

 

**CashFlows During the Year Ended December 31, 2003**

** **

Net cash used byoperating activities was $19.1 million for the year ended December 31, 2003 andconsisted of $12.4 million of cash used by operations after adding backdepreciation, amortization, the noncash portion of our restructuring and assetimpairment charges and other noncash items and $7.5 million used for workingcapital, offset by a $0.8 million increase in other liabilities.  The following factors contributed to the$7.5 million working capital increase:

 

•                  a $13.5 million decrease in accrued expenses, primarily resulting from:

 

•                  a $2.5 million decrease in accrued interest due to lower debt levels;

 

•                  a $1.5 million decrease in customer deposits due to lower orderactivity;

 

•                  a $5.2 million decrease in accrued salaries, wages and payroll relatedtaxes due to cost reduction measures; and

 

•                  a $4.3 million decrease in other accrued liabilities;

 

•                  a $1.1 million decrease in income taxes payable due to lower levels oftaxable income; and

 

•                  a $0.3 million net increase in other working capital items; offset by

 

•                  a $4.9 million decrease in accounts receivables due to lower revenues;and

 

•                  a $2.5 million decrease in accounts payable commensurate with lowerpurchasing volume.

 

Net cash provided by investing activities was $130.0 million for theyear ended and consisted of:

 

•                  net proceeds of $132.2 million from the sale of the Specialty AvionicsGroup; and

 

•                  net proceeds of $3.2 million from the sale of property and equipment,principally from the sale of facilities vacated pursuant to our restructuringactivities; offset by

 

•                  capital expenditures of $4.8 million; and

 

•                  payment of $0.6 million of contingent acquisition consideration.

 

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We anticipate spendingapproximately $3.0 to $5.0 million for capital expenditures in 2004.  There are no other remaining contingentacquisition payment obligations remaining as of December 31, 2003.

 

Net cash used forfinancing activities was $118.2 million for the year ended December 31,2003.  During the year, we used the netproceeds of $130.7 million from the sale of the Specialty Avionics Group and$80.0 million of second-lien term loan proceeds to:

 

•                  repay $183.7 million first-line term debt;

 

•                  repay $6.0 million of  revolvingline of credit borrowings;

 

•                  repay $1.9 million of secured long-term debt; and

 

•                  pay $6.6 million of debt issuance costs.

 

In December 2003, wereceived second-lien term loans in the aggregate amount of $80.0 million from asyndicate of lenders and used the net proceeds to repay first-lien creditfacility indebtedness.  The second-liendebt, which is comprised of $70.0 million of fixed rate debt and $10.0 millionof floating rate debt, matures on June 30, 2008.  On both the fixed and floating rate debt, 3% of the interest ispay-in-kind or “accreted” interest, payable at maturity.  The debt is secured by a second lien onsubstantially all of the Company’s assets.

 

**Debt Obligations and CapitalResources as of December 31, 2003**

 

As of December 31, 2003,first-lien credit facility borrowings and second-lien term debt totaling $90.5million are at variable interest rates based on defined margins over thecurrent prime rate or LIBOR.  We alsohad $100.0 million of 12% subordinated notes, $70.1 million of 15% second-lienterm debt and other secured indebtedness totaling $8.8 million outstanding asof the end of the year.  The totalannual maturities of all of our indebtedness outstanding as of December 31,2003 are as follows: 2004 – $1.2 million; 2005 – $4.0 million; 2006 – $13.6million; 2007 – $66.3 million; 2008 – $180.5 million; and 2009 and thereafter –$3.8 million.

 

As of December 31, 2003,we had $37.9 million of working capital and $23.8 million of borrowingsavailable under our revolving line of credit, which expires in March 2006.

 

**Financial Condition and Liquidity**

 

As more fully describedin “—Industry Overview and Trends,” the acts and ongoing threats of globalterrorism, the current military conflicts, health epidemics and weak globaleconomic conditions are all adversely impacting our business.  In response, we have implemented a series ofrestructuring activities as described in “—Restructuring, Asset Impairment andOther Related Charges,” designed to reduce costs and conserve working capital.

 

During the fourth quarterof fiscal 2002, we further assessed our long-term business strategies in lightof current aerospace industry conditions. In addition, we subsequently determined that we would likely not be incompliance with our first-lien credit facility’s financial covenants in2003.  We believe that when theaerospace industry recovers, the demand for our Cabin Management and SystemsIntegration groups’ products and services for business, VIP and head-of-stateaircraft will reflect substantial improvement and, accordingly, we decided to focusour resources in these market segments. To accomplish this objective, we embarked on a plan to sell theSpecialty Avionics Group, which is highly dependent on the commercial airlineindustry.

 

In March 2003, we amendedthe first-lien credit facility to permit the sale Specialty Avionics Group andwe consummated the sale on May 23, 2003. As required by the amendment, we used $130.7 million of the proceedsfrom the sale to repay first-lien credit facility borrowings.  The amendment also relaxed

 

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various financialcovenants for 2003 and beyond, decreased by $10.0 million the revolving line ofcredit commitment, increased the prime rate and LIBOR interest margins by 1.5%and permits the issuance of specified types of additional indebtedness and therepurchase of up to $20.0 million aggregate principal amount of our 12%subordinated notes with the proceeds from the sale of junior securities.  Junior securities means: (i) subordinatednotes issued by us that are unsecured and do not provide for any scheduledredemptions or prepayments or any sinking fund installment payments ormaturities prior to the termination of the first-lien credit facility, or otherindebtedness subordinated in right of payment to our obligations under thefirst-lien credit facility, and whose material terms are satisfactory to thelenders; and (ii) equity securities issued by us.

 

In December 2003, wefurther amended the first-lien credit facility to permit the incurrence of$80.0 million of second-lien term debt to refinance a substantial portion ofour first-lien indebtedness.  Thisamendment further revised various financial covenants to permit the second-liendebt, extended the scheduled repayment dates of the remaining first-lien debtby 12 to 18 months, reduced the revolving commitment by an additional $16.0million and extended the commitment by 18 months.  Interest rates charged on the first-lien debt remained unchanged.  We were in compliance with all debtfinancial covenants during 2003 and are in compliance through the date of thisreport.

 

As a result of theforegoing amendments and transactions, the future maturities of our long-termindebtedness have been significantly reduced and extended compared to the endof prior year.  The table below reflectsthe total annual maturities of our long-debt outstanding as of December 31,2002 and 2003.

 
|                                                  |   | **Aggregate  Maturities of Long-Term Debt** |   |
|-------------------------------------------------------|--------|---------------------------------------------|--------|
| **(In millions)**                                     |   | **As of  December 31,  2002**               |   | **Net  Increase  (Decrease)** |   | **As of  December 31,  2003** |   |
|                                                  |   |                                        |   |   |   |   |   |
| Total maturities during the year ending  December 31, |   |                                        |   |   |   |   |   |
| 2003                                                  |   | $                                           | 16.3   |   | $ | (16.3 | ) | $ | — |   |
| 2004                                                  |   | 54.0                                        |   | (52.8 | ) | 1.2 |   |
| 2005                                                  |   | 97.7                                        |   | (93.7 | ) | 4.0 |   |
| 2006                                                  |   | 107.0                                       |   | (93.4 | ) | 13.6 |   |
| 2007                                                  |   | 0.7                                         |   | 65.6 |   | 66.3 |   |
| 2008                                                  |   | 100.7                                       |   | 79.8 |   | 180.5 |   |
| 2009 and thereafter                                   |   | 4.6                                         |   | (0.8 | ) | 3.8 |   |
| Total aggregate maturities                            |   | $                                           | 381.0  |   | $ | (111.6 | ) | $ | 269.4 |   |

 

We believe the relaxedmaturity schedule through 2006 will coincide with our expectations of therecovery period for the business, VIP and head-of state aircraft market andresulting demand for our products and services.  As a result, we believe our expected operating cash flows,together with borrowings under our first-lien credit facility ($23.8 million ofwhich was available as of December 31, 2003, the commitment for which expiresin March 2006), will be sufficient to meet our operating expenses, workingcapital requirements, capital expenditures and debt service obligations for thenext twelve months.  However, ourability to comply with our debt financial covenants, pay principal or interestand satisfy our other debt obligations will depend on our future operatingperformance as well as competitive, legislative, regulatory, business and otherfactors beyond our control.  Although wecannot be certain, we expect to be in compliance with the revised financialcovenants through the end of the year based on our current operating plan.

 

We continue to explorethe possible restructuring of our other debt and equity instruments that wouldimprove our liquidity and reduce our cash needs.  We have not entered into any commitments to do so and cannotassure you that we will be able to do so in the future.

 

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**Disclosureof Contractual Obligations and Commitments**

** **

The following tablesummarizes our known contractual obligations to make future cash payments as ofDecember 31, 2003, as well an estimate of the periods during which thesepayments are expected to be made.

 
|                                                            |   | **Years  Ending December 31,** |   |
|-----------------------------------------------------------------|--------|--------------------------------|--------|
| **(In millions)**                                               |   | **Total**                      |   | **2004** |   | **2005  and  2006** |   | **2007  and  2008** |   | **2009  and  Beyond** |   |
|                                                            |   |                           |   |   |   |   |   |   |   |   |   |
| Long-term debt (a):                                             |   |                           |   |   |   |   |   |   |   |   |   |
| First-lien term debt (b)                                        |   | $                              | 80.5   |   | $ | — |   | $ | 15.0 |   | $ | 65.5 |   | $ | — |   |
| Second-lien term debt (c)                                       |   | 80.1                           |   | — |   | — |   | 80.1 |   | — |   |
| 12% subordinated notes (d)                                      |   | 100.0                          |   | — |   | — |   | 100.0 |   | — |   |
| Capital lease obligations (e)                                   |   | 3.4                            |   | 0.5 |   | 0.9 |   | 0.6 |   | 1.4 |   |
| Other indebtedness (e)                                          |   | 5.4                            |   | 0.7 |   | 1.7 |   | 0.6 |   | 2.4 |   |
| Total long-term debt                                            |   | 269.4                          |   | 1.2 |   | 17.6 |   | 246.8 |   | 3.8 |   |
|                                                            |   |                           |   |   |   |   |   |   |   |   |   |
| Other long-term liabilities                                     |   | 5.5                            |   | — |   | 3.8 |   | 1.7 |   | — |   |
| Operating lease obligations                                     |   | 14.7                           |   | 2.9 |   | 5.0 |   | 2.4 |   | 4.4 |   |
| Mandatorily redeemable preferred stock  redemption obligations: |   |                           |   |   |   |   |   |   |   |   |   |
| DeCrane Aircraft preferred stock (f)                            |   | 43.3                           |   | — |   | — |   | — |   | 43.3 |   |
| DeCrane Holdings preferred stock (g)                            |   | 71.4                           |   | — |   | — |   | — |   | 71.4 |   |
| Total obligations as of  December 31, 2003                      |   | $                              | 404.3  |   | $ | 4.1 |   | $ | 26.4 |   | $ | 250.9 |   | $ | 122.9 |   |

 

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(a)                                  Excludesinterest payments.

 

(b)                                 Thefirst-lien term debt bears interest at variable rates and therefore the amountof future interest payments are uncertain. The debt bears interest based on a margin over, at our option, the primerate or LIBOR.  The margins applicableto portions of amounts borrowed vary depending on our consolidated debtleverage ratio.  Currently, theapplicable margins are 4.00 to 4.75 for prime rate borrowings and 5.25% to 6.0%for LIBOR borrowings.  Theweighted-average interest rate on all first-lien debt was 6.85% as of December31, 2003.

 

(c)                                  Thesecond-lien term debt is comprised of $70.0 million of fixed rate debt and$10.0 million of variable rate debt. The fixed rate debt bears interest at 15%; 12% payable quarterly in cashand 3% pay-in-kind or “accreted” interest, payable at maturity.  The variable rate debt bears cash interest,at our option, at the prime rate plus 7.5% or LIBOR plus 8.5%, plus 3%pay-in-kind interest payable at maturity. The weighted-average interest rate on all second-lien debt was 14.71% asof December 31, 2003.  All of thesecond-lien debt matures on June 30, 2008, at which time the cash paymentobligation will be $91.7 million, including the 3% pay-in-kind interestobligation.

 

(d)                                 Intereston the 12% subordinated notes is payable semiannually.

 

(e)                                  Interestis generally payable monthly.

 

(f)                                    Dividendsaccrue quarterly at a 16% annual rate. Prior to June 30, 2005, we may, at our option, pay dividends either incash or by the issuance of additional shares of preferred stock.  Since the issuance of the preferred stock inJune 2000, we have elected to issue additional shares in lieu of cash dividendpayments and may continue to do so until June 2005, after which time we arerequired to pay quarterly dividends in cash, if declared.  If we elect to continue issuing additionalshares until June 2005, our mandatory redemption obligation on March 31, 2009,the mandatory redemption date, will be $54.8 million and our annual cashdividend payment obligation will be $8.8 million, payable quarterly, commencingSeptember 2005, if declared.

 

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(g)                                 Dividendsaccrue quarterly at a 14% annual rate. Prior to September 30, 2005, dividends are not paid in cash but insteadaccrete to the liquidation value of the preferred stock.  Our annual cash dividend payment obligationwill be $12.7 million, payable quarterly, commencing December 31, 2005, ifdeclared, and our mandatory redemption obligation on September 30, 2009, themandatory redemption date, will be $90.8 million.

 

**Disclosure AboutOff-Balance Sheet Commitments and Indemnities**

** **

During our normal courseof business, we have entered into agreements containing indemnities pursuant towhich we may be required to make payments in the future.  These indemnities are in connection withfacility leases and liabilities for specified claims arising from investmentbanking services our financial advisors provide to us.  The duration of these indemnities,commitments and guarantees varies, and in certain cases, is indefinite.  Substantially all of these indemnitiesprovide no limitation on the maximum potential future payments we could beobligated to make and is not quantifiable. We have not recorded any liability for these indemnities since no claimshave been asserted to date.

 

In connection with thesale of the Specialty Avionics Group, we made indemnities to the buyer withrespect to a number of customary, and certain other specific, representationsand warranties.  Our indemnities withrespect to some of these matters are limited in terms of duration with themaximum of potential future payments capped at $14.0 million and ourindemnities with respect to specified environmental matters will expire notlater than October 2010 and provides for a maximum liability of $5.0 million,while others will have no limitations.

 

As of December 31, 2003,we also had an irrevocable standby letter of credit in the amount of $0.2million issued and outstanding under our first-lien credit facility.

 

**CriticalAccounting Policies and Estimates**

** **

Our discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which are prepared in accordance withaccounting principles generally accepted in the United States of America.  Our preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities.

 

We evaluate our estimateson an on-going basis.  We base ourestimates on historical experience and on various assumptions that are believedto be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. Actual results could differ from these estimates under differentassumptions or conditions.  We believethe following critical accounting policies affect our more significantestimates and judgments used in the preparation of our financial statements.

 

**Allowancefor uncollectible accounts receivable.**  Accountsreceivable are reduced by an allowance for amounts that are deemeduncollectible.  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 provide an allowance based on theage of all receivables for which we have not established a customer-specificallowance.  Generally, we do not requirecollateral or other security to support accounts receivable, however, under certaincircumstances, we require deposits or cash-on-delivery terms.  While our losses have been within ourexpectations, a deterioration of our customers’ financial condition may requirethat we provide additional allowances, reducing our operating income in futureperiods.  Our customers operate in thebusiness, VIP and head-of-state and commercial aircraft industry throughout theworld and are being adversely impacted by the acts and ongoing threats ofglobal terrorism, the current military conflicts, health epidemics and weakglobal economic conditions.

 

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Accounts receivable of$22.7 million is reduced by an allowance for uncollectible accounts of $1.3million as of December 31, 2003.

 

**Allowancefor excess and obsolete inventory. **Inventories are reduced by an allowancefor estimated excess and obsolete inventory. The allowance is the difference between the cost of the inventory andits estimated market value.  Our marketvalue estimates are based upon existing order backlog, our assumptions aboutmarket conditions, including future orders and market pricing.  While our products are not subject to rapidtechnological obsolescence, we also consider this factor in determining ourmarket value estimates.  If ourcustomers cancel existing orders or actual market conditions, including futureorders, are less favorable than we projected, we may provide additionalallowances, reducing our gross profit in future periods.  Inventories of $48.2 million were reduced byan allowance for excess and obsolete inventory of $5.2 million as of December31, 2003.

 

**Goodwillimpairment.**  On January1, 2002, we began accounting for goodwill under Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 requires an impairment-onlyapproach to accounting for goodwill. Because of our history of acquisitions, goodwill constitutes asignificant portion of our long-term assets.

 

TheSFAS No. 142 goodwill impairment model is a two-step process.  First, it requires a comparison of the bookvalue of net assets to the fair value of the reporting units that have goodwillassigned to them.  If the fair value isdetermined to be less than book value, a second step is performed to computethe amount of the impairment.  In thisprocess, a fair value for goodwill is estimated, based in part on the fairvalue of the reporting unit used in the first step, and is compared to itscarrying value.  The amount by whichcarrying value exceeds fair value represents the amount of goodwillimpairment.  SFAS No. 142 requiresgoodwill to be tested for impairment annually at the same time every year, andwhen an event occurs or circumstances change such that it is reasonablypossible that impairment may exist.  Wehave selected October 31st as our annual testing date.

 

Weestimate the fair values of our reporting units using a discounted cash flow approach, taking into considerationprojections based on the individual characteristics of the reporting units,historical trends, market multiples for comparable businesses and independentappraisals.  The forecasts of future cash flows are based on our best estimate offuture revenues and operating costs, based primarily on existing backlog,expected future bookings based on our estimate of aircraft deliveries andgeneral market conditions.  Changes inthese forecasts could cause a particular reporting unit to either pass or failthe first step in the goodwill impairment mode, which could significantlychange the amount of impairment recorded. Since we began testing goodwill for impairment in 2002, we have recordedimpairment charges totaling $107.3 million, which includes $41.5 millionrecorded during 2003.

 

Goodwillwith an aggregate book value of $162.4 million remains as of December 31, 2003and will be subject impairment testing in October 2004, or sooner, ifadditional events occur or circumstances change such that it is reasonablypossible that further impairment may exist.

 

**Valuationof long-lived assets and other intangible assets. **In accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” we review long-lived assets and otheridentifiable intangible assets for impairment when events or changes incircumstances indicate that the carrying value of an asset may not berecoverable.  Factors we considerimportant, which could trigger an impairment review, include significant:

 

•                  underperformance relative to expected future operating results;

 

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

 

•                  changes in our business strategy; or

 

•                  negative aerospace industry or global economic conditions.

 

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Our impairment reviewconsists of comparing the sum of the expected undiscounted future cash flowsresulting from the use of the asset to 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 a projected discounted cash flow methodusing a discount rate we believe to be commensurate with the risk inherent inour current business model.  Netlong-lived assets and intangible assets, excluding goodwill, amounted to $56.4million as of December 31, 2003.

 

**Accountingfor income taxes.**  As part of the process of preparing ourfinancial statements, we are required to estimate our income taxes in each ofthe jurisdictions in which we operate. 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 differences result in deferred taxassets and liabilities, which are included within our statement of financialposition.  We must then assess thelikelihood that our deferred tax assets will be recovered from future taxableincome and, to the extent we believe that recovery is not likely, we mustestablish a valuation allowance which increases our provision for income taxesin our statement of operations.

 

We have $19.5 million netdeferred tax asset as of December 31, 2003 compared to net deferred tax liabilitiesin prior years.  The change to a netasset position was primarily caused by the $34.0 million goodwill impairmentcharge recorded during fiscal 2003.  Asrequired by SFAS No. 109, we evaluated each deferred assets for expectedrecoverability based on the nature of the item, the associated taxingjurisdictions, the applicable expiration dates and future taxable incomeforecasts that would impact utilization. Since there is no loss carry back potential and we do not have any taxplanning strategies to assure recoverability, the only possibility for recoveryof the net deferred assets is future taxable income.  Since there have been prior year losses, we believe it was notprudent to rely on future income as the means to support the carrying value ofthe net asset.  As a result of theevaluation, we recorded a $19.5 million valuation allowance, eliminating thenet deferred asset, as of December 31, 2003.

 

In the event actualresults differ from our estimates or we adjust these estimates in future periods,we would need to establish an additional valuation allowance in the period suchdetermination is made, which would increase our provision for income taxes.

 

**Revenueand profit recognition under long-term contracts. **Becauseof relatively long production cycles, a portion of our revenues and profits arerecognized under percentage-of-completion method of accounting using totalcontract price, actual costs incurred to date and an estimate of the completioncosts for each contract.  We use thismethod because reasonably accurate estimates of the revenue and costsapplicable to the various stages of a contract can be made.  Recognized revenues and profits on eachcontract are subject to revisions as the contract progresses towardscompletion.  Revisions to revenue andprofit estimates are made in the period in which the facts that give rise tothe revision become known.  Provisionsfor estimated losses on uncompleted contracts are fully recognized in theperiod in which such losses are determined. Approximately 16.7% of our revenues and 41.4% of our gross profit duringthe year ended December 31, 2003 was recognized under thepercentage-of-completion method of accounting.

 

**Litigation. **We evaluate contingencies in accordance with SFAS No.5, “Accounting for Contingencies.”  Weestablish reserves for estimated loss contingencies when it is our assessmentthat a loss is probable and the amount of the loss can be reasonablyestimated.  Revisions to contingentliabilities are charged against income in the period in which different factsor information becomes known or circumstances change that affect the previousassumptions with respect to the likelihood or amount of loss.  Reserves for contingent liabilities arebased upon our assumptions and estimates, advice of legal counsel or otherthird parties regarding the probable outcomes of the matter.  Should the outcome differ

 

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from the assumptions andestimates, revisions to the estimated reserves for contingent liabilities wouldbe required.

 

As described in “Item 3.Legal Proceedings” and Note 13 accompanying our financial statements includedin this report, we are involved in legal proceedings for which no reserves forestimated loss contingencies have been established.  Our current evaluation of these matters is that it is probable wewill prevail and therefore are not required to accrue estimated losses inaccordance with SFAS No. 5.  However,there is a possibility that we may ultimately be required to pay all or aportion of the contingent liabilities related to these matters, which may havean adverse impact on our business, financial position, results of operations orcash flows in future periods.

 

**Restructuringof our businesses.**  As described in “—Restructuring, AssetImpairment and Other Related Charges,” we recorded charges totaling $17.2million during 2002 and $25.9 million during 2001 in response to the adverseaerospace industry impact the acts, and ongoing threats, of global terrorismand the current weak global economic conditions are having on ourbusinesses.  These charges are based onour present estimates of the impact these events are having on our businessesand the future recovery of the aerospace industry.  Actual results and future recovery could differ from theseestimates, potentially resulting in further restructuring, asset impairment andother related charges.

 

**Recently IssuedAccounting Pronouncements**

** **

**SFAS No. 150**

** **

In May 2003, theFinancial Accounting Standards Board issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 establishesstandards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification offinancial instruments within its scope as a liability, including financialinstruments issued in the form of shares that are mandatorily redeemable,because those financial instruments are deemed to be, in essence, obligationsof the issuer.  We will be required toreclassify all of mandatorily redeemable preferred stock as a liabilitycommencing January 1, 2004 and reflect quarterly dividend accretion on the 14%preferred stock as a charge against pre-tax income in future periods.

 

**Forward-LookingStatements and Risk Factors**

** **

**SpecialNote Regarding Forward-Looking Statements**

** **

All statements other thanstatements of historical facts included in this report, including statementsabout our future performance and liquidity and future industry performance, areconsidered forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements are subject to known and unknown risks, uncertaintiesand other factors, which are difficult to predict.  Some of those risks are specifically described below, but we arealso vulnerable to a variety of elements that affect many businesses, such as:

 

•                  fuel prices and general economic conditions that affect demand foraircraft and air travel, which in turn affect demand for our products andservices;

 

•                  acts, and ongoing threats, of global terrorism, military conflicts andhealth epidemics that affect demand for aircraft and air travel, which in turnaffect demand for our products and services;

 

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

 

•                  price and availability of raw materials, component parts and electricalenergy;

 

•                  liability and other claims asserted against us that exceeds ourinsurance coverage;

 

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•                  the ability to attract and retain qualified personnel;

 

•                  labor disturbances;

 

•                  changes in operating strategy, or our acquisition and capitalexpenditure plans; and

 

•                  the risks described below.

 

Changes in such factorscould cause our actual results to differ materially from those expressed orimplied in this report.  Although webelieve that the expectations reflected in such statements are reasonable, wecan give no assurance that such expectations will prove to be correct.  We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence of unanticipatedevents.  You should not rely on ourforward-looking statements as if they were certainties.

 

**RiskFactors**

** **

**Substantial Leverage.** Our substantial levels of debt could adversely affect our financialhealth and prevent us from fulfilling our obligations under the debtagreements.

 

As of December 31, 2003,we had total consolidated indebtedness of approximately $269.4 million and wehad $23.8 million of additional revolving line of credit borrowings availableunder our first-lien credit facility, subject to customary funding conditions.  We also had $114.7 million of mandatorilyredeemable preferred stock as of December 31, 2003.  The first-lien credit facility, second-lien term debt and theindenture under which our subordinated notes are issued each also permit us toincur significant amounts of additional debt and to secure that debt with someof our assets.

 

The amount of debt wecarry could have important consequences:

 

•                  It may limit the cash flow available for general corporate purposes andacquisitions.  Interest payments on ourdebt were $26.0 million for the year ended December 31, 2003.  Earnings from continuing operations wereinsufficient to cover fixed charges by $73.2 million for the year endedDecember 31, 2003.

 

•                  It may limit our ability to obtain additional debt financing in thefuture for working capital, capital expenditures or acquisitions.

 

•                  It may limit our flexibility in reacting to competitive and otherchanges in the industry and economic conditions generally.

 

•                  It may expose us to increased interest expenses, when interest ratesfluctuate, because some of our borrowing may be, and in recent years most of ithas been, at variable “floating” rates.

 

•                  It may limit our ability to respond to changes in our markets orexploit business opportunities.

 

**Restrictive Covenants.** Our operations and those of our subsidiaries are restricted by the termsof our first-lien credit facility, second-lien term debt and subordinated notesindenture.

 

Our first-lien creditfacility and the indenture under which our subordinated notes are issued limitour flexibility in operating our businesses, including our ability and theability of our subsidiaries to:

 

•                  incur debt;

 

•                  issue preferred stock;

 

•                  repurchase capital stock or subordinated debt;

 

•                  enter into transactions with affiliates;

 

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•                  enter into sale and leaseback transactions;

 

•                  create liens or allow them to exist;

 

•                  pay dividends or other distributions;

 

•                  make investments;

 

•                  sell assets; and

 

•                  enter into mergers and consolidations.

 

In addition, ourfirst-lien credit facility requires that we satisfy several tests of financialcondition, including minimum levels of EBITDA and interest and fixed chargescoverage and maximum permitted levels of leverage and senior debt.  Our ability to do so can be affected byevents beyond our control, and we cannot be sure that we will meet thosetests.  Our failure to do so couldresult in a default under our loan agreements, which would permit the lendersto terminate their commitments and accelerate all debt including thesubordinated notes indenture.  Althoughwe were in compliance with these covenants as of December 31, 2003, we haverequired amendments on several occasions in recent years to avoid potentialdefaults and we may not be able to comply with these tests in the future.

 

The first-lien creditfacility second-lien term loans are secured by substantially all our materialassets.  If we default under our debtagreements, the lenders could choose to declare all outstanding amounts immediatelydue and payable, and seek foreclosure of the assets we granted to them ascollateral.

 

**Potential Inability to Service Debt.** We will require a significant amount of cash to service our debt and tofund our operations and planned capital expenditures.  Our ability to generate cash depends on cash flows from oursubsidiaries and many factors beyond our control.

 

We will be required torepay $18.8 million of debt through 2006 and substantial amountsthereafter.  See “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources and —Disclosure of ContractualObligations and Commitments” for additional information.  Our ability to satisfy our debt obligationsand to fund our operations and planned capital expenditures will depend on ourability to generate cash in the future and access to our revolving creditfacility, which will terminate in March 2006. During 2003, we used $19.1 million of cash for operations.  This, to an extent, is subject to generaleconomic, financial, competitive, legislative, regulatory and other factorsthat are beyond our control.

 

We cannot assure you thatwe will generate operating cash flow at all, or that our operating cash flowwill be sufficient to meet our anticipated future operating and capitalexpenditures and debt payments as they become due or that future borrowingswill be available to us for such purposes. If our cash flow in future periods is lower than we expect, we might beforced to reduce or delay acquisitions or capital expenditures, sell assetsand/or reduce operating expenses in order to make all required debt servicepayments.  A reduction in our operatingexpenses might reduce important efforts, such as selling and marketingprograms, management information system upgrades and new productdevelopment.  Also, it is likely we willneed to refinance all or a portion of our debt on or before maturity.  At that time, we may not be able torefinance our debt on commercially reasonable terms or at all.

 

We reported a net loss of$80.1 million for the year ended December 31, 2003 and $71.2 million for thesame period in 2002.  The 2003 lossincludes $13.8 million as a result of a cumulative effect of change in accountingprinciple, a $6.6 million loss attributable to discontinued operations and$49.4 million of pre-tax restructuring and long-lived asset impairment chargeswe recorded resulting from our restructuring activities.  The 2002 loss includes $17.8 million as aresult of a cumulative effect of change in accounting principle, a $41.4million loss attributable to discontinued operations and $17.2 million ofpre-tax restructuring and long-lived asset impairment charges we recordedresulting from our

 

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restructuringactivities.  Our restructuringactivities were implemented in response to the adverse impact the eventsdescribed in “—Aerospace Industry Risks” below are having on our business.

 

**Aerospace Industry Risks.** The aerospace industry is cyclical and affected by many factors beyondour control, including geo-political and global economic conditions.

 

We compete in theaircraft products and services market of the aerospace industry.  The market for our products and services islargely driven by demand in the civil aircraft markets, principally forbusiness, VIP and head-of-state aircraft and, to a lesser extent, commercialand regional aircraft.  The September11, 2001 terrorist attack on the United States, ongoing concerns about globalterrorism, the current Middle-Eastern military conflicts, health epidemics andweak global economic conditions are all adversely impacting the aerospaceindustry and our business.

 

The business, VIP andhead-of-state aircraft portion of our business experienced weakness throughout2003 as evidenced by various manufacturers’ temporarily suspension ofproduction at various times throughout the year in response to the weak demandfor new aircraft.  We believe aircraftdeliveries may reflect a modest recovery in 2004 and show continuing recoverythereafter.  We also believe thecommercial aircraft portion of our business will experience significantweakness 2004, with potential recovery not expected to occur until at least2005.  Our beliefs are based on theassumptions we will experience economic recovery and there are no furthernegative geo-political developments affecting our industry.

 

Further or prolongeddecreases in demand for new business, VIP and head-of-state and commercialaircraft, as well as related component parts (which occur for a variety ofreasons, including those described above), would result in additional decreasesin demand for our products and services, and, correspondingly, our revenues,thereby adversely affecting our financial condition.  In addition, further deterioration or prolonged decreases indemand could result in further restructurings of our business.

 

**Concentration of Key Customers.** We receive a significant portion of our revenues from a small group ofkey customers, and we are vulnerable to changes in their economic condition andpurchasing plans.

 

A significant decline inbusiness from any one of our key customers could have a material adverse effecton our business.  Our three largestcustomers accounted for 46.4% of our consolidated revenues for the year endedDecember 31, 2003 as follows: Boeing – 17.5%; Textron (which includes Cessna) –16.3%; and Bombardier – 12.6%.  Some ofour customers also have the in-house capabilities to perform the services andprovide many of the products we offer and, accordingly, could discontinueoutsourcing their business to us.

 

In addition, significantportions of our revenues from our major customers are pursuant to contractsthat may include a variety of terms favorable to the customer.  Such terms may include our agreement to oneor more of the following:

 

•                  the customer is not required to make purchases, and may terminate suchcontracts at any time;

 

•                  we make substantial expenditures to develop products for customers thatwe may not recoup if we do not receive sufficient orders;

 

•                  on a prospective basis, we must extend to the customers any reductionsin prices or lead times that we provide to other customers;

 

•                  we must match other suppliers’ price reductions or delete the affectedproducts from the contract; and

 

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•                  we must grant irrevocable non-exclusive worldwide licenses to use ourdesigns, tooling and other intellectual property rights to products sold to acustomer if we default, or suffer a bankruptcy filing, or transfer ourmanufacturing rights to a third party.

 

**Intangible Asset Impairment.** Our total assets include a substantial amount of intangible assets.  The write-off of a significant portion ofintangible assets would negatively affect our results of operations.

 

As of December 31, 2003,goodwill and other intangible assets represented approximately 61.8% of ourtotal assets.  Intangible assets consistof goodwill and other identifiable intangible assets associated with our acquisitions,representing the excess of cost over the fair value of tangible assets we haveacquired.  We may not be able to realizethe value of these assets.  Since ourJanuary 1, 2002 adoption of SFAS No. 142, “Goodwill and Other IntangibleAssets,” goodwill is not amortized but is instead subject to annual testing forimpairment.  Identifiable intangibleassets with finite lives are amortized over their individual useful lives andare also subject to annual impairment testing. Simply stated, if the carrying value of the asset exceeds the estimatedundiscounted future cash flows from the operating activities of the relatedbusiness, impairment is deemed to have occurred.  In this event, the amount is written down accordingly.  Under current accounting rules, this wouldresult in a charge against income from operations.  Since we began testinggoodwill for impairment in 2002, we have recorded impairment charges totaling$107.3 million, which includes $41.5 million recorded during 2003.

 

Any future impairmenttesting resulting in the write-off of a significant portion of goodwill oridentifiable intangible assets will have an adverse impact on our results ofoperations and total capitalization, the effect of which could be material.

 

**Competition. **We operate in a highly competitive industry andcompete against a number of companies, some of which have significantly greaterfinancial, technological and marketing resources than we do.

 

We operate in highlycompetitive markets within the aerospace industry.  Our competitors include business aircraft manufacturers,independent completion and modification companies and other independent serviceorganizations, including some of our customers, many of whom may havesignificantly greater financial, technological, manufacturing and marketingresources than we do.  The niche marketswithin the aerospace industry that we serve are relatively fragmented, withseveral competitors offering the same products and services we provide.  Due to the global nature of the aerospaceindustry, competition comes from both U.S. and foreign companies.

 

We believe our ability tocompete depends on high product performance, short lead-time and timelydelivery, competitive pricing, superior customer service and support andcontinued certification under customer quality requirements and assuranceprograms.  There can be no assurancethat we will be able to compete successfully with respect to these factors inthe future.

 

**Growth Strategy.** Our acquisition of other companies may pose certain risks.

 

We consider and takeadvantage of selected opportunities to grow by acquiring other businesses whoseoperations or product lines complement our existing businesses.  Our ability to implement this growthstrategy will depend on finding suitable acquisition candidates at acceptableprices and obtaining the required financing. Any acquisition we may make in the future could be subject to a numberof risks, including:

 

•                  our ability to integrate the operations and personnel of the acquiredcompany;

 

•                  our failure to identify liabilities of the acquired company for whichwe may be responsible as a successor owner or operator;

 

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•                  the loss of key personnel in the acquired company; and

 

•                  the impact on our financial position, results of operations and cashflows resulting from additional acquisition indebtedness.

 

Our inability toadequately manage these or other risks could have an adverse effect on ourbusiness.

 

**Regulation.** The FAA closely regulates many of our operations.  If we fail to comply with its manystandards, or if those standards change, we could lose installation orcertification capabilities, which are important to our business.

 

The aerospace industry ishighly regulated in the United States by the Federal Aviation Administration toensure that aviation products and services meet stringent safety andperformance standards.  The FAAprescribes standards and licensing requirements for aircraft components, issuesdesignated alteration station authorizations, and licenses private repairstations.  We hold various FAAauthorizations and licenses, including a Designated Alteration Stationauthorization, which gives one of our subsidiaries the authority to certifysome aircraft design modifications on behalf of the FAA.  Our business depends on our continuingaccess to, or use of, these FAA authorizations and licenses, and our employmentof, or access to, FAA-certified individual engineering professionals.

 

We cannot assure you thatwe will continue to have adequate access to those authorizations, licenses andcertified professionals, the loss or unavailability of which could adverselyaffect our operations.  The FAA couldalso change its policies regarding the delegation of inspection andcertification responsibilities to private companies, which could adverselyaffect our business.

 

**Environmental Risks and Regulation.** Some of our operations and facilities generate waste or have done so inthe past, which may result in unknown future liabilities for environmental remediation.

 

Environmental laws,particularly the federal Comprehensive Environmental Response, Compensation andLiability Act (“CERCLA”), may impose strict, retroactive and joint and severalliability upon persons responsible for releases or potential releases ofhazardous substances and other parties who have some relationship to a site ora source of waste, such as a current or former owner or operator of realproperty or a party who arranges to transport wastes to a third-party site.  We have sent waste to treatment, storage ordisposal facilities that have been designated as National Priority List (morecommonly known as Superfund) sites under CERCLA or equivalent listings understate laws.  We have received requestsfor information or allegations of potential responsibility from the U.S.Environmental Protection Agency regarding our use of several of thesesites.  Given the potentiallyretroactive nature of environmental liability, it is possible that we will receiveadditional notices of potential liability relating to current or formeractivities.  We may incur costs in thefuture for prior waste disposal by us or former owners of our subsidiaries orour facilities.  Some of our operationsare also located on properties that may be contaminated to varyingdegrees.  We may incur costs in thefuture to address existing or future contamination.  If we incur significant costs in connection with these or otherenvironmental issues, our business and financial condition could be adverselyaffected.

 

**Excess Loss Risks.** We could sustain losses in excess of our insurance for liability claims.

 

Our business exposes usto possible claims for damages resulting from the manufacture, installation anduse of our products.  Many factorsbeyond our control could lead to such claims, such as the failure of anaircraft on which our products have been installed, the reliability and skillof the operators of such aircraft and the maintenance performed on suchaircraft.  We carry aircraft productsand grounding liability insurance for this purpose, but we cannot assure youthat our insurance coverage will be adequate

 

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to cover claims that mayarise or that we will be able to renew our coverage in the future atcommercially reasonable rates.

 

**Industry and Market Data. **We cannot guarantee the accuracy and completeness ofthe industry and market data and trends we describe in this report and relyupon in preparing our operating forecasts.

 

The industry and marketdata we use in this report is based on the good faith estimates of ourmanagement, which estimates are based primarily upon internal managementinformation and, to the extent available, independent industry publications andother publicly available information. However, the nature of the aerospace industry and competition in ourmarkets results in limited availability of reliable, independent data.  Although we believe that the sources we haveused are reliable, we do not guarantee, and have not independently verified, theaccuracy and completeness of the information.

 

**Dependence on Key Personnel.** We need to retain the services of our key employees.

 

Our success and growthdepends in large part on the skills and efforts of our management team and onour ability to attract and retain qualified personnel experienced in thevarious operations of our business.  Theloss of key personnel, including our founder, R. Jack DeCrane, combined withthe failure to attract additional qualified personnel for whatever reason,could delay implementation of our business plan or otherwise adversely affectour operations.  We do not haveemployment contracts with our key personnel, other than Mr. DeCrane.  We do not carry key man life insurance onany members of our management team.

 

**ITEM 7A**.                                QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

** **

We are exposed to variousmarket risks, including interest rates and changes in foreign currency exchangerates.  Market risk is the potentialloss arising from adverse changes in prevailing market rates and prices.  From time to time, we use derivativefinancial instruments to manage and reduce risks associated with thesefactors.  We do not enter intoderivatives or other 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 toour variable-rate debt is estimated as the potential decrease in pre-taxearnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime rate or LIBOR.  As ofDecember 31, 2003, the current prime rate was 4.00% and the current LIBOR was1.16%.  Based on $90.5 million ofvariable-rate debt outstanding as of December 31, 2003, a hypothetical onepercent rise in interest rates, to 5.00% for prime rate borrowings and 2.12%for LIBOR borrowings, would reduce our pre-tax earnings by $0.9 millionannually.  As of December 31, 2002, thecurrent prime rate was 4.75% and the current LIBOR was 1.95%.  Based on $270.2 million of variable-ratedebt outstanding as of December 31, 2002, a hypothetical one percent rise ininterest rates, to 5.75% for prime rate borrowings and 2.95% for LIBORborrowings, would reduce our pre-tax earnings by $2.7 million annually.

 

To limit a portion of ourexposure related to rising interest rates, we have entered into an interestrate swap contract to effectively convert our variable-rate industrial revenuebonds to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedge against changes in theamount of future cash flows associated with interest payments on this portionof our variable-rate debt.  Market riskrelated to this interest rate swap contract is estimated as the potentialhigher interest expense we will incur if the variable interest rate decreasesbelow the 4.2% fixed rate.  Based on the$3.1 million of variable-rate debt

 

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converted to fixed-ratedebt outstanding as of December 31 2003, a hypothetical one percent decrease inthe variable interest rate to 3.2%, would reduce our pre-tax earnings by lessthan $0.1 million annually.

 

The estimated fair valueof our $100.0 million fixed-rate long-term debt increased $5.0 million, or12.5%, to approximately $45.0 million as of December 31, 2003 from $40.0million as of December 31, 2002. Although we cannot be certain, we believe the increase may have been aresult of the sale of the Specialty Avionics Group.  Market risk related to our fixed-rate debt is deemed to be thepotential increase in fair value resulting from a decrease in interest rates.  For example, a hypothetical ten percentdecrease in the interest rates, from 12.0% to 10.8%, would increase the fairvalue of our fixed-rate debt by approximately $7.0 million.

 

**Foreign Currency Exchange Rate Risk.** Our foreign customers are located in various parts of the world,primarily Canada, the Far and Middle East and Western Europe, and we have asubsidiary with manufacturing facilities in Mexico.  To limit our foreign currency exchange rate risk related to salesto our customers, orders are almost always valued and sold in U.S.dollars.  We have entered into forward foreignexchange contracts in the past, primarily to limit the Specialty AvionicsGroup’s exposure related to foreign inventory procurement and operatingcosts.  While we have not entered intoany such contracts since 1998, we may do so in the future depending on thevolume of non-U.S. dollar denominated transactions and our assessment of futureforeign exchange rate trends.

 

**ITEM 8**.              FINANCIAL STATEMENTS AND SUPPLEMENTARYDATA

** **

Our consolidatedfinancial statements, supplementary financial information and financialstatement schedules are included in a separate section at the end of thisreport.  The financial statements,supplementary information and schedules are listed in the index on page F-1 ofthis report and are incorporated herein by reference.

 

**ITEM 9**.              CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

** **

None.

 

**ITEM 9A**.           CONTROLS AND PROCEDURES

** **

The management of DeCraneHoldings Co. (the “Company”), under the supervision and with the participationof the Company’s Chief Executive Officer and Chief Financial Officer, conductedan evaluation of the Company’s “disclosure controls and procedures” (as definedin Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the periodcovered by this report.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective as of theend of the period covered by this report.

 

There was no change inthe Company’s internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules13a-15 or 15d-15 that occurred during the Company’s last fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART III**

** **

**ITEM 10**.                                  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

** **

**Directors andExecutive Officers**

** **

The following table setsforth certain information concerning each person who is currently a director orexecutive officer of DeCrane Aircraft and its parent company, DeCrane Holdings.

 
| **Name**                  |   | **Age** |   | **DeCrane  Holdings**                                               |   | **DeCrane  Aircraft**                                                              |
|---------------------------|--------|---------|--------|---------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|
|                      |   |    |   |                                                                |   |                                                                               |
| R. Jack DeCrane (1) (2)   |   | 57      |   | Vice Chairman of the Board of Directors and Chief Executive Officer |   | Director and Chief Executive Officer                                               |
|                      |   |    |   |                                                                |   |                                                                               |
| Richard J. Kaplan (2)     |   | 61      |   | Director, Chief Financial Officer and Assistant Secretary           |   | Director, Senior Vice President, Chief Financial Officer, Secretary  and Treasurer |
|                      |   |    |   |                                                                |   |                                                                               |
| James E. Mann             |   | 51      |   | —                                                              |   | Vice President, Tax and SEC Compliance                                             |
|                      |   |    |   |                                                                |   |                                                                               |
| Robert G. Martin          |   | 66      |   | —                                                              |   | Senior Vice President and Group President                                          |
|                      |   |    |   |                                                                |   |                                                                               |
| Jeffrey A. Nerland        |   | 46      |   | —                                                              |   | Senior Vice President and Group President                                          |
|                      |   |    |   |                                                                |   |                                                                               |
| Thompson Dean (2)         |   | 45      |   | Chairman of the Board of Directors                                  |   | Chairman of the Board of Directors                                                 |
|                      |   |    |   |                                                                |   |                                                                               |
| Susan C. Schnabel (1) (2) |   | 42      |   | Director                                                            |   | Director                                                                           |
|                      |   |    |   |                                                                |   |                                                                               |
| Albert E. Suter (1) (2)   |   | 68      |   | Director                                                            |   | Director                                                                           |

 

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(1)                                  Member of theCompensation Committee; Ms. Schnabel serves as the committee’s chairperson.

 

(2)                                  Member of the AuditCommittee; the entire board of directors acts as the audit committee.

 

*R. Jack DeCrane* is the founder of DeCrane Aircraft.  Mr. DeCrane served as President from thetime DeCrane Aircraft was founded in December 1989 until April 1993, when hewas elected to the newly created office of Chief Executive Officer.  In August 2002, Mr. DeCrane was alsoappointed Chief Executive Officer of DeCrane Holdings.  He has served on the board of directors ofDeCrane Aircraft and DeCrane Holdings since their inceptions.

 

*Richard J. Kaplan* has been the Senior Vice President, Chief FinancialOfficer, Secretary and Treasurer of DeCrane Aircraft and Assistant Treasurerand Assistant Secretary (principal accounting officer) of DeCrane Holdingssince March 1999.  In August 2002, Mr.Kaplan was appointed Chief Financial Officer and Assistant Secretary of DeCraneHoldings.  From April 1998 to March1999, he served as Executive Vice President and Chief Operating Officer of DevelopersDiversified Realty Corporation.  From1977 to 1998, he was a partner with Price Waterhouse LLP, having joined thefirm in 1964.  He became a director ofDeCrane Aircraft and DeCrane Holdings in 2000.

 

*James E. Mann* has been our Vice President, Tax and SEC Compliancesince January 2000.  During 1999, Mr.Mann was an independent consultant engaged by DeCrane Aircraft to assist withvarious tax and SEC compliance matters. From 1992 through 1998, Mr. Mann severed in various capacities withDeCrane Aircraft, most recently as Vice President, Corporate Controller.

 

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*Robert G. Martin* has been our Senior Vice President and President ofthe Systems Integration Group since October 1999.  Mr. Martin also served as President of PATS since we acquired itin January 1999 through December 2002 and as President of AerospaceDisplay Systems from September 1992 until October 1999.

 

*Jeffrey A. Nerland* has been our Senior Vice President and President ofthe Cabin Management Group since December 2001.  From January 1999 until December 2001, Mr. Nerland served as VicePresident, Business Development, and was appointed Senior Vice President inMarch 2001.  Mr. Nerland also served asPresident of the Cabin Management Group’s Seating Division from June 2000through December 2001.  FromJuly 1994 through December 1998, he was President of The Nerland Group anda partner with Budetti, Harrison, Nerland and Associates, a consulting andinterim management firm.

 

*Thompson Dean* has been a director of DeCrane Aircraft and DeCraneHoldings since 1998.  Mr. Dean alsoserved as President of DeCrane Holdings from its inception in 1998 throughAugust 2002.  Mr. Dean has also been theManaging Partner of DLJ Merchant Banking, Inc. since November 1995.  In November 2000, Credit Suisse FirstBoston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking, Inc.became an indirect affiliate of Credit Suisse First Boston, Inc. and CreditSuisse Group.  Mr. Dean serves as adirector of AKI Holding Corp., Amatek Holdings S.A., Arcade HoldingCorporation, Manufacturers’ Services Limited, Mueller Holdings, Inc., and VonHoffman Holdings, Inc.

 

*Susan C. Schnabel* has been a director of DeCrane Aircraft and DeCraneHoldings since 1998.  Ms. Schnabel hasalso been a Managing Director of DLJ Merchant Banking, Inc. since January1998.  In November 2000, Credit SuisseFirst Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking, Inc. andDonaldson, Lufkin & Jenrette Securities Corporation became indirectaffiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group.  Ms. Schnabel serves as a director ofEnvironmental Systems Products Holdings, Inc., Noveon, Inc. and Shoppers DrugMart, Inc.

 

*Albert E. Suter* has been a director ofDeCrane Aircraft and DeCrane Holdings since May 2002.  Mr. Suter is a Senior Advisor and Retired Vice Chairman and ChiefOperating Officer of Emerson Electric Co., a manufacturer of electrical,electromechanical and electronic products and systems.  Mr. Suter has served Emerson in variouscapacities since 1989.  Mr. Suter servesas a director of Furniture Brands International, Inc. and TK Aluminum, Ltd.

 

**Audit CommitteeFinancial Expert**

** **

Theentire board of directors of DeCrane Aircraft and DeCrane Holdings serves aseach Company’s audit committee.  Theboard of directors has carefully considered the definition of “audit committeefinancial expert” adopted by the United States Securities and ExchangeCommission and has determined that Mr. Kaplan is an audit committee financialexpert.  Mr. Kaplan is not independentunder Rule 10a-3.

 

**Code of Ethics**

** **

DeCraneAircraft and DeCrane Holdings has adopted a Code of Ethics applicable to itsChief Executive Officer, Chief Financial Officer and all employees performingaccounting functions.  A copy of theCode of Ethics is available, without charge, upon written request to the ChiefFinancial Officer of DeCrane Aircraft at 2361 Rosecrans Avenue, Suite 180, ElSegundo, CA 90245.

 

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**ITEM 11**.                                  EXECUTIVE COMPENSATION

** **

**SummaryCompensation Table**

** **

The following tabledescribes all annual compensation awarded to, earned by or paid to our ChiefExecutive Officer and the four most highly compensated executive officers otherthan the Chief Executive Officer for the three years ended December 31,2003.  Columns and tables have beenomitted, as permitted by Securities and Exchange Commission rules, becausethere has been no compensation awarded to, earned by or paid to any of thenamed executive officers required to be reported in the omitted column or tableduring any of the years in the three year period ended December 31, 2003.

 
|                                 |   |     |   |                     |    | **All Other  Compensation** |   |
|--------------------------------------|--------|----------|--------|--------------------------|---------|-----------------------------|--------|
|                                 |   |     |   | **Annual  Compensation** |    | **Securities  Underlying**  |   |   |   |
| **Name**                             |   | **Year** |   | **Salary**               |    | **Bonus**                   |   | **Options  (1)** |   | **Other (2)** |   |
|                                 |   |     |   |                     |    |                        |   |   |   |   |   |
| R. Jack DeCrane (3)                  |   | 2003     |   | $                        | 355,144 |                        | $      | — |   | — |   | $ | 13,533 |   |
| *Chief Executive Officer and*        |   | 2002     |   | 355,144                  |    | 750,000                     |   | — |   | 19,477 |   |
| *Director*                           |   | 2001     |   | 352,906                  |    | 1,290,000                   |   | — |   | 15,741 |   |
|                                 |   |     |   |                     |    |                        |   |   |   |   |   |
| Richard J. Kaplan (4)                |   | 2003     |   | 212,200                  |    | —                      |   | — |   | 4,649 |   |
| *Senior Vice President and Director* |   | 2002     |   | 212,200                  |    | 330,000                     |   | — |   | 9,029 |   |
|                                 |   | 2001     |   | 212,200                  |    | 470,000                     |   | — |   | 5,809 |   |
|                                 |   |     |   |                     |    |                        |   |   |   |   |   |
| James E. Mann (5)                    |   | 2003     |   | 146,200                  |    | 20,000                      |   | — |   | 671 |   |
| *Vice President, Tax and SEC*        |   | 2002     |   | 146,200                  |    | 33,000                      |   | — |   | 4,583 |   |
| *Compliance*                         |   | 2001     |   | 146,200                  |    | 40,000                      |   | — |   | 3,961 |   |
|                                 |   |     |   |                     |    |                        |   |   |   |   |   |
| Robert G. Martin (6)                 |   | 2003     |   | 222,789                  |    | —                      |   | — |   | 9,434 |   |
| *Senior Vice President*              |   | 2002     |   | 222,789                  |    | 300,000                     |   | — |   | 6,500 |   |
|                                 |   | 2001     |   | 222,789                  |    | 403,639                     |   | — |   | 6,275 |   |
|                                 |   |     |   |                     |    |                        |   |   |   |   |   |
| Jeffrey A. Nerland (7)               |   | 2003     |   | 210,000                  |    | —                      |   | — |   | 1,044 |   |
|  *Senior Vice President*        |   | 2002     |   | 210,000                  |    | 250,000                     |   | — |   | 6,507 |   |
|                                 |   | 2001     |   | 191,794                  |    | 290,000                     |   | — |   | 5,541 |   |
|                                      |        |          |        |                          |         |                             |        |  |  |  |  |  |  |  |

 

----

(1)                                  Number of shares ofcommon stock of DeCrane Holdings issuable upon exercise of options grantedpursuant to our management incentive plan during the applicable fiscal year.

 

(2)                                  Comprised of lifeinsurance premiums and matching contributions to the Company’s 401(k)Retirement Plan.

 

(3)                                  Mr. DeCrane alsoserves as Vice Chairman of the Board of Directors of DeCrane Holdings and wasappointed its Chief Executive Officer in August 2002.

 

(4)                                  Mr. Kaplan alsoserved as Assistant Treasurer and Assistant Secretary (principal accountingofficer) of DeCrane Holdings from March 1999 until August 2002 when he wasappointed its Chief Financial Officer and Assistant Secretary.

 

(5)                                  Mr. Mann has servedas our Vice President, Tax and SEC Compliance, since January 1, 2000.

 

(6)                                  Mr. Martin served asPresident of PATS since we acquired it in January 1999 throughDecember 2002.  In December 2001,Mr. Martin became the President of our Systems Integration Group.

 

54

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

 

**Stock OptionGrants in Last Fiscal Year**

** **

During the fiscal yearended December 31, 2003, no options to purchase shares of DeCrane Holdingscommon stock were granted pursuant to the management incentive plan.  See “—Employment Agreements and CompensationArrangements–Incentive Plans.”

 

**Aggregated OptionExercises in Last Fiscal Year and Fiscal Year-End Option Values**

** **

No stock options wereexercised by our executive officers during the year ended December 31,2003.  The following table sets forthinformation about the stock options held by the executive officers named belowas of December 31, 2003.

 
| **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            |   |                                                                                   |   |                                                                                                 |            |   |   |
| Exercisable at $23.00 per share |   | 36,253/73,605                                                                          |   | $                                                                                                    | — / — |   |   |
| Richard J. Kaplan               |   |                                                                                   |   |                                                                                                 |            |   |   |
| Exercisable at $23.00 per share |   | 9,840/19,976                                                                           |   |                                                                                                 | — / — |   |   |
| Exercisable at $35.00 per share |   | 972/1,974                                                                              |   |                                                                                                 | — / — |   |   |
| James E. Mann                   |   |                                                                                   |   |                                                                                                 |            |   |   |
| Exercisable at $23.00 per share |   | 644/1,306                                                                              |   |                                                                                                 | — / — |   |   |
| Exercisable at $35.00 per share |   | 330/670                                                                                |   |                                                                                                 | — / — |   |   |
| Robert G. Martin                |   |                                                                                   |   |                                                                                                 |            |   |   |
| Exercisable at $23.00 per share |   | 5,954/12,088                                                                           |   |                                                                                                 | — / — |   |   |
| Exercisable at $35.00 per share |   | 990/2,010                                                                              |   |                                                                                                 | — / — |   |   |
| Jeffrey A. Nerland              |   |                                                                                   |   |                                                                                                 |            |   |   |
| Exercisable at $23.00 per share |   | 3,641/7,391                                                                            |   |                                                                                                 | —/—   |   |   |
| Exercisable at $35.00 per share |   | 1,650/3,350                                                                            |   |                                                                                                 | — / — |   |   |

 

----

(1)                                  All unexercisedoptions had an exercise price above fair market value as of December 31,2003.  Since the common stock of DeCraneHoldings is privately-held, there is no established public trading market forits shares.  The Board of Directorsdetermines the fair value of stock options granted and the fair value of thecommon stock as of any given period-end date based on the aggregate enterprisevalue of DeCrane Holdings.  Enterprisevalue is computed based upon a multiple of Adjusted EBITDA, as reflected in ourfinancial statements, and the multiple is based upon comparable data from otherpublicly-held companies as well as publicly available information onprivately-held companies.  The Board ofDirectors did not determine the specific fair value of the common stock as ofDecember 31, 2003, but did conclude that fair value was below $23.00per share, the lowest exercise price of any options granted.

 

**CompensationCommittee Interlocks and Insider Participation**

** **

The CompensationCommittee of our Board of Directors makes decisions regarding officercompensation.  Jack DeCrane, chiefexecutive officer of DeCrane Aircraft and DeCrane Holdings, participates inthose discussions as a member of the Committee.

 

55

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**EmploymentAgreements and Compensation Arrangements**

** **

**R.Jack DeCrane**

** **

On July 17, 1998, theCompensation Committee of our Board of Directors approved a three-yearemployment agreement between DeCrane Aircraft and R. Jack DeCrane, replacinghis prior employment agreement that was to expire on September 1, 1998.  Mr. DeCrane’s employment agreement wasamended on May 5, 2000 to provide for a term through June 30, 2001, which termshall automatically 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 terminateand has therefore been extended to June 30, 2005.  Mr. DeCrane’s employment agreement provides for various benefits,including an initial salary of $310,000, which is subject to annual review andincrease, but not a decrease, and an annual bonus, currently determinedpursuant to the performance-based cash incentive bonus plan.

 

The employment agreementalso provides that if specified change-of-control events occur, and Mr.DeCrane’s employment is terminated by us for any reason other than for cause oras a result of his death or disability, or by Mr. DeCrane for “good reason,” asdefined in the agreement, then we will pay Mr. DeCrane a lump sum in cashwithin fifteen days.  The amount of thatpayment will be $1.00 less than three times the sum of Mr. DeCrane’s averagebase salary plus bonus for the five calendar years preceding his terminationdate and accrued but unpaid salary and bonus through the termination date.  Mr. DeCrane will also receive otherspecified benefits, including continued coverage under our welfare plans for upto two years; a lump sum payment in cash equal to any unvested portions of ourcontributions to him under specified savings plans, plus two times the amountof our annual contributions on his behalf to those plans; a lump sum payment incash equal to our matching contributions under those savings plans that Mr.DeCrane would have received had he continued maximum participation in the plansuntil the earlier of two years following his termination and December 31 of theyear he turns 65, plus the vested and unvested amounts credited to him underany of our deferred compensation plans and the amount required to be creditedduring the year of his termination; and outplacement consulting services to aidMr. DeCrane with re-employment.  We willreduce these payments to the extent necessary to ensure deductibility for taxpurposes.

 

**Changeof Control Agreements**

** **

In August 2002, weentered into change of control agreements with each of our executive officers,other than Mr. DeCrane, whose above described employment agreement containsprovisions concerning change of control, and Mr. Mann.  The agreements, which replaced earlieragreements which had expired, 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 orterminated by the officer for good reason, DeCrane Aircraft is required to paysuch executive a lump sum equal to his then salary plus average annual bonusover the last five years, equal to twenty four months compensation less thenumber of months elapsed from the date of the change of control to theemployment termination date.

 

**401(k)Retirement Plan**

** **

Substantially all of ourfull-time employees are eligible to participate in one of the 401(k) retirementplans we sponsor.  The 401(k) plansallow employees as participants to defer, on a pre-tax basis, a portion oftheir salary and accumulate tax deferred earnings, as a retirement fund.  The plans generally provide for adiscretionary Company match of a percentage of the employee contribution up toa specified percentage of the employee’s salary.  The full amount vested in a participant’s account will be

 

56

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distributed to aparticipant following termination of employment, normal retirement or in theevent of disability or death.

 

**IncentivePlans**

** **

Our management incentiveplan provides for the issuance of options to purchase the common stock ofDeCrane Holdings as incentive compensation to designated executive personneland other key employees of DeCrane Aircraft and its subsidiaries.  The Compensation Committee of the Board ofDirectors of DeCrane Holdings administers the management incentive plan.  The plan provides for the granting ofoptions to purchase 356,257 common shares and expires in 2009.  Substantially all of the options awardedbecome fully vested and exercisable eight years from the date of grant butvesting and exercise can be accelerated based upon future attainment of definedperformance criteria.  As ofDecember 31, 2003, 34% of the options granted pursuant to the plan arevested and exercisable.  We believe theper share exercise price of the options granted approximated the fair marketvalue of the underlying common stock on each of the grant dates.

 

From time-to-time, wehave permitted designated executive personnel and other key employees topurchase shares of common stock of DeCrane Holdings.  Prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of2002, a portion of the purchase price was in certain instances, loaned to theparticipants by DeCrane Aircraft.  Thisarrangement was made available to persons and in amounts determined by theCompensation Committee of the Board of Directors.  In December 1999, management purchased 171,295 shares of DeCraneHoldings common stock for $23.00 per share. The total purchase price was $3.9 million, of which one-half was paid incash and one-half was loaned to management by DeCrane Aircraft with interest atapplicable federal rates.  During 2000,an additional 19,707 shares of DeCrane Holdings common stock was purchased byemployees at $23.00 per share, which was paid in cash.  Subsequent to the July 30, 2002 enactment ofthe Sarbanes-Oxley Act, we have discontinued making new loans to participantsas mandated by the Act.  Loansoriginated prior to and outstanding as of the effective date of the Act will berepaid in accordance with their terms, as permitted by the Act.

 

Upon termination ofemployment of any purchaser by us without cause, DeCrane Holdings has the rightto purchase, and the purchaser has the right to cause DeCrane Holdings topurchase, such purchased stock at its then fair market value or, if weterminate the purchaser with cause or the purchaser terminates employment, thepurchase price is the lower of $23.00 per share or its then fair market value.

 

During the year endedDecember 31, 2003, several DeCrane Aircraft management members surrendered107,330 shares.  In accordance with theterms of notes evidencing the loans, DeCrane Aircraft canceled the notes.

 

Our cash incentive bonusplan provides for the allocation of a bonus pool each year for incentivecompensation to designated executive personnel and certain other employees ofDeCrane Aircraft and its subsidiaries. The bonus pool, which is approved by the compensation committee, isadjusted each year based on the achievement of certain financial measures,including Adjusted EBITDA, as defined, generated by the relevant participant’soperating unit.  Bonus payments aregenerally made in the quarter following the end of the year or period to whichthey pertain.

 

**DeferredCompensation Plan**

** **

From December 1999through December 2002, we had a deferred compensation plan in which certaindesignated executive officers and key employees were permitted to defer aportion of their compensation earned. DeCrane Aircraft invested amounts deferred and participants were fullyvested in the amounts representing the fair market value of their investmentaccounts.  We made no contributions onbehalf of the participants and the invested assets are subject to the claims ofour general creditors.  The

 

57

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plan was terminated inJanuary 2003 and the fair market values of the individual investment accountson the termination date were distributed to the individual participants.

 

**Directors**

** **

**Selectionof Directors and Term of Office**

** **

DLJ Merchant BankingPartners II, L.P. is entitled to select all members of the Board of Directorsof DeCrane Holdings and DeCrane Aircraft as described in “Certain Relationshipsand Related Transactions—Investors’ Agreement.”  At least one of such directors selected by DLJ Merchant Bankingon each board must be an independent director as defined in the agreement.  Mr. Suter is an independent director.  All directors hold office until theirsuccessor is designated and qualified.

 

**Directors’Compensation**

** **

The directors of DeCraneHoldings and DeCrane Aircraft generally do not receive annual fees or fees forattending meetings of the Board of Directors or committees thereof.  However, Albert E. Suter, an independentdirector not affiliated with any investor in DeCrane Holdings, receives adirector’s fee of $50,000 per year.  Inaddition, the Board of Directors of DeCrane Holdings authorized the issuance ofoptions to purchase 7,500 shares of DeCrane Holdings common stock to Mr. Suterunder the same terms as the management incentive plan.  See “Certain Relationships and RelatedTransactions—Transactions with Management and Others–Recent Transactions” foradditional information.  Also, Mr. Suteris reimbursed for out-of-pocket expenses. We expect to continue these policies.

 

**ITEM 12**.                                  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT

** **

**Security Ownershipof Certain Beneficial Owners and Management**

** **

**DeCraneHoldings**

** **

As of March 15, 2004,DeCrane Holdings has the following securities issued and outstanding:

 

•                  4,009,297 shares of common stock, which is owned by 31 stockholders;and

 

•                  342,417 shares of non-voting 14% Senior Redeemable ExchangeablePreferred Stock Due 2009, which is owned by 18 stockholders.

 

The following table setsforth the beneficial ownership of DeCrane Holdings’ voting and non-votingsecurities as of March 15, 2004 by its principal owners and its executiveofficers and directors.

 

58

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|                                                                   |   | **Common  Stock (2)**                      |   | **14% Senior  Redeemable  Preferred Stock** |   |
|------------------------------------------------------------------------|--------|--------------------------------------------|--------|---------------------------------------------|--------|
|                                                                   |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                              |   |   |
| **Name of Beneficial Owner (1)**                                       |   |                                       |   | **Number  of  Shares**                      |   | **Percentage** |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| DLJ Merchant Banking Partners II, L.P.  and affiliates (3)        |   | 4,179,530                                  |   | 97.7                                        | %      | 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                              |   |                                       |   |                                        |   |   |   |   |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| Albert E. Suter (5)                                                    |   | 8,704                                      |   | *                                           |   | — |   | — |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| R. Jack DeCrane (6)                                                    |   | 36,253                                     |   | *                                           |   | — |   | — |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| Richard J. Kaplan (7)                                                  |   | 10,812                                     |   | *                                           |   | — |   | — |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| James E. Mann (8)                                                      |   | 974                                        |   | *                                           |   | — |   | — |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| Robert G. Martin (9)                                                   |   | 6,944                                      |   | *                                           |   | — |   | — |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| Jeffrey A. Nerland (10)                                                |   | 5,291                                      |   | *                                           |   | — |   | — |   |
|                                                                   |   |                                       |   |                                        |   |   |   |   |   |
| All directors and named executive officers  as a group (eight persons) |   | 68,978                                     |   | 1.7                                         | %      | — |   | — |   |

 

----

*              Lessthan 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 the numberof shares owned and the total percentage ownership in the manner required bySecurities and Exchange Commission rules. The entries for each holder assumes, if applicable, that the particularholder, and no one else, fully exercises all rights under warrants to purchasecommon stock and common stock which may be acquired upon the exercise of stockoptions and which are exercisable, or will be exercisable, prior to 60 daysfrom March 15, 2004.

 

(3)           Reflects 3,913,044 shares of common stock,warrants to purchase an additional 266,486 shares of common stock and preferredstock held directly by DLJ Merchant Banking Partners II, L.P. and the followingaffiliated investors:

 

•                  DLJ Diversified Partners, L.P.

•                  DLJ Diversified Partners-A, L.P.

•                  DLJ EAB Partners, L.P.

•                  DLJ ESC II, L.P.

•                  DLJ First ESC L.P.

•                  DLJ Investment Partners, L.P.

•                  DLJ Investment Partners II, L.P.

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

•                  DLJ Millennium Partners, L.P.

•                  DLJ Millennium Partners-A, L.P.

•                  DLJ Offshore Partners II, C.V.

•                  DLJIP II Holdings, L.P.

•                  DLJMB Funding II, Inc.

•                  MBP II Plan Investors

•                  UK Investment Plan 1997 Partners, Inc.

 

The address ofeach of the investors is Eleven Madison Avenue, New York, New York 10010.

 

(4)                                  Mr. Dean and Ms.Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJMerchant 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 andRelated Transactions—Transactions with Management and Others” for additionalinformation.  The share data shown forthese individuals excludes shares shown as held by the DLJ affiliatesseparately listed in this table; Mr. Dean and Ms. Schnabel disclaim beneficialownership of those shares.

 

59

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(5)                                  Includes 2,500 sharesthat may be acquired upon the exercise of stock options that are exercisable orwill become exercisable prior to 60 days from March 15, 2004.

 

(6)                                  Includes 36,253shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 15, 2004.

 

(7)                                  Includes 10,812shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 15, 2004.

 

(8)                                  Includes 974 sharesthat may be acquired upon the exercise of stock options that are exercisable orwill become exercisable prior to 60 days from March 15, 2004.

 

(9)                                  Includes 6,944 sharesthat may be acquired upon the exercise of stock options that are exercisable orwill become exercisable prior to 60 days from March 15, 2004.

 

(10)                            Includes 5,291 shares thatmay be acquired upon the exercise of stock options that are exercisable or willbecome exercisable prior to 60 days from March 15, 2004.

 

**DeCraneAircraft**

** **

As ofMarch 15, 2004, DeCrane Aircraft has the following securities issued andoutstanding:

 

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

 

•                  250,000 shares of non-voting 16% Senior Redeemable ExchangeablePreferred Stock Due 2009, which are owned by seven stockholders.

 

The following table setsforth the beneficial ownership of DeCrane Aircraft’s voting and non-votingsecurities as of March 15, 2004 by its principal owners and its executiveofficers and directors.

 
|                                                                                             |   | **Common  Stock (2)**                      |           | **16% Senior  Redeemable  Preferred Stock** |                   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------|----------------|---------------------------------------------|------------------------|
|                                                                                             |   | **Number of  Shares,  Partially  Diluted** |           |                                        |                   |   |
| **Name of Beneficial Owner (1)**                                                                 |   |                                       | **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) Eleven Madison Avenue, New York, NY 10010 |   | —                                     |           | —                                      |                   | 200,000 |   | 80.0 | % |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| 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)                                           |   | —                                     |           | —                                      |                   | 29,000 |   | 11.6 | % |
| One Post Office Square, Boston, MA 02109                                                         |   |                                       |           |                                        |                   |   |   |   |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| Neon Capital Limited.                                                                            |   | —                                     |           | —                                      |                   | 21,000 |   | 8.4 | % |
| c/o Deutsche Bank (Cayman) Limited                                                               |   |                                       |           |                                        |                   |   |   |   |   |
| P.O. Box 1984, George Town                                                                       |   |                                       |           |                                        |                   |   |   |   |   |
| Cayman Islands, British West Indies                                                              |   |                                       |           |                                        |                   |   |   |   |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| Albert E. Suter                                                                                  |   | —                                     |           | —                                      |                   | — |   | — |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| R. Jack DeCrane                                                                                  |   | —                                     |           | —                                      |                   | — |   | — |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| Richard J. Kaplan                                                                                |   | —                                     |           | —                                      |                   | — |   | — |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| James E. Mann                                                                                    |   | —                                     |           | —                                      |                   | — |   | — |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| Robert G. Martin                                                                                 |   | —                                     |           | —                                      |                   | — |   | — |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| Jeffrey A. Nerland                                                                               |   | —                                     |           | —                                      |                   | — |   | — |   |
|                                                                                             |   |                                       |           |                                        |                   |   |   |   |   |
| All directors and named executive officers  as a group (eight persons)                           |   | —                                     |           | —                                      |                   | — |   | — |   |

 

60

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(1)                                  Each person who hasthe power to vote and direct the disposition of shares is deemed to be abeneficial owner of those shares.

 

(2)                                  The common stockcolumns reflect the number of shares owned and the total percentage ownershipin the manner required by Securities and Exchange Commission rules.  The entries for each holder assumes, ifapplicable, that the particular holder, and no one else, fully exercises allrights under warrants to purchase common stock and common stock which may beacquired upon the exercise of stock options and which are exercisable, or willbe exercisable, prior to 60 days from March 15, 2004.

 

(3)                                  Reflects preferredstock held by the following investors affiliated with DLJ Merchant BankingPartners II, L.P.:

 

•                  DLJ Investment Partners, L.P.

•                  DLJ Investment Partners II, L.P.

•                  DLJIP II Holdings, L.P.

 

The address ofeach of the investors is Eleven Madison Avenue, New York, New York 10010.

 

(4)                                  Mr. Dean and Ms.Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJMerchant Banking Partners II, L.P. and directors of DeCrane Holdings Co.  The DLJ entities are affiliates of, andcommonly collectively referred to as, Credit Suisse First Boston.  See “Item 13. Certain Relationships andRelated Transactions—Transactions with Management and Others” for additionalinformation.  The share data shown forthese individuals excludes shares shown as held by the DLJ affiliates andDeCrane Holdings Co. separately listed in this table; Mr. Dean and Ms. Schnabeldisclaim beneficial ownership of those shares.

 

(5)                                  Reflects preferredstock held by the following investors related to Putnam Investment Management,Inc.:

 

•                  Putnam Fund Trust - Putnam High Yield Trust II

•                  Putnam High Yield Trust

•                  Putnam Variable Trust – Putnam VT High Yield Fund

 

The address ofeach of the investors is One Post Office Square, Boston, MA 02109.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

** **

We have a ManagementIncentive Stock Option Plan under which shares of DeCrane Holdings common stockare authorized for issuance to employees and directors in exchange for theirservices.  In 1999, we also granted DeCraneHoldings incentive common stock options to non-employees in exchange forconsulting and advisory services.  OurManagement Incentive Stock Option Plan and the stock options

 

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awarded to non-employeesare approved by our security holders. The following table provides aggregate information regarding the sharesof DeCrane Holdings common stock that may be issued upon the exercise of theoptions as of December 31, 2003.

 
| **Plan Category**                                           |   | **Number of  Securities to be Issued  Upon Exercise of  Outstanding Options,  Warrants and Rights** |   | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** |   | **Number of  Securities Remaining  Available for Future  Issuance Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column (1))** |    |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                        |   |                                                                                                |   |                                                                               |   |                                                                                                                                                  |    |
| Equity compensation plans approved by security holders:     |   |                                                                                                |   |                                                                               |   |                                                                                                                                                  |    |
| Management Incentive Stock Option Plan                      |   | 239,515                                                                                             |   | $                                                                                  | 24.15  |                                                                                                                                                  | 107,490 |   |
| Incentive stock options granted to  non-employees           |   | 44,612                                                                                              |   | 23.00                                                                              |   | —                                                                                                                                                |    |
| Equity compensation plans not approved by  security holders |   | —                                                                                              |   | —                                                                             |   | —                                                                                                                                                |    |
| Total                                                       |   | 284,127                                                                                             |   | 23.97                                                                              |   | 107,490                                                                                                                                               |    |
|                                                             |        |                                                                                                     |        |                                                                                    |        |                                                                                                                                                       |         |  |

 

The provisions of ourManagement Incentive Stock Option Plan and the terms of the options granted tonon-employees are described in Note 15 accompanying our financial statementsincluded in this report.

 

**ITEM 13**.                                  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

** **

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

** **

DLJ Merchant BankingPartners, II, L.P. is an affiliate of Donaldson, Lufkin & Jenrette,Inc.  In November 2000, Credit SuisseGroup and its Credit Suisse First Boston, Inc. subsidiary acquired Donaldson,Lufkin & Jenrette, Inc.  Uponcompletion of the acquisition, Donaldson, Lufkin & Jenrette, Inc. wasrenamed Credit Suisse First Boston (USA), Inc. The combined operations are commonly referred to collectively as CreditSuisse First Boston or CSFB.

 

**Transactions withManagement and Others**

** **

**Arrangementswith Other CSFB / DLJ Affiliates**

** **

Credit Suisse FirstBoston, as successor to DLJ Capital Funding, Inc., receives customary fees andreimbursement of expenses in connection with the arrangement, syndication andadministration of our first-lien credit facility, second-lien debt and aslenders thereunder.  Credit Suisse FirstBoston LLC is the sole market-maker for our subordinated notes.  In addition, DeCrane Aircraft is obligatedto pay CSFB Corporation an annual advisory fee, currently in the amount of$350,000 per year.  We may from time totime enter into other investment banking relationships with CSFB Corporation orone of its affiliates pursuant to which they will receive customary fees andwill be entitled to reimbursement for all reasonable disbursements andout-of-pocket expenses incurred in connection therewith.  We expect that any such arrangement willinclude provisions for the indemnification of CSFB Corporation againstliabilities, including liabilities under the federal securities laws.

 

**Investors’Agreement**

** **

Investors owing 96.6% ofDeCrane Holdings’ issued and outstanding common stock and common stock warrantsand options, all of DeCrane Holdings’ preferred stock and all of DeCraneAircraft’s

 

62

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preferred and commonstock, have entered into an Amended and Restated Investors’ Agreement, datedOctober 6, 2000, among DeCrane Holdings Co., DLJ Merchant Banking Partners II,L.P. and affiliated funds and entities, Putnam Investment Management, Inc. andaffiliated funds and entities and all management investors.  Investors who own DeCrane Holdings’ warrantsto purchase 159,794 shares of common stock are not parties to the Investors’Agreement.  The agreement provides that:

 

•                  The parties to the agreement shall vote their shares to cause DLJMerchant Banking Partners, II, L.P. to select all members of the Board ofDirectors of DeCrane Holdings and DeCrane Aircraft and at least one of suchdirectors on each board shall be an independent director.

 

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

 

•                  Parties to the agreement may participate in some specific kinds ofsales of shares by DLJ affiliates.

 

•                  DLJ affiliates may require the other parties to the agreement to sellshares of DeCrane Holdings’ common stock in some cases should the DLJaffiliates choose to sell any such shares owned by them.

 

•                  The DLJ affiliates may request six demand registrations with respect toall or any of the DeCrane Holdings common stock, preferred stock and Class Awarrants to purchase 155,000 common shares held by those affiliates, which areimmediately exercisable subject to customary deferral and cutback provisions.

 

•                  The holders of Class B warrants to purchase 139,357 shares of DeCraneHoldings common stock may request two demand registrations together with all orany common stock held by them, which are immediately exercisable subject tocustomary deferral and cutback provisions.

 

•                  The parties to the agreement are entitled to unlimited piggybackregistration rights, subject to customary cutback provisions, and excludingregistrations of shares issuable in connection with any employee stock options,employee benefit plan or an acquisition.

 

•                  DeCrane Holdings will indemnify the stockholders against someliabilities and expenses, including liabilities under the Securities Act.

 

•                  Any person acquiring shares of common stock or preferred stock who isrequired by the terms of the Investors’ Agreement or any employment agreementor stock purchase, option, stock option or other compensation plan to become aparty thereto shall execute an agreement to become bound by the Investors’Agreement.

 

Each DeCrane Holdings’Class A Warrant entitles the holder to purchase one share of common stock at anexercise price of not less than $0.01 per share subject to customaryantidilution provisions and other customary terms.  The warrants are exercisable at any time prior to 5:00 p.m. NewYork City time on August 28, 2009, subject to applicable federal and statesecurities laws.

 

Each DeCrane Holdings’Class B Warrant entitles the holder to purchase one share of common stock at anexercise price of not less than $0.01 per share subject to customaryantidilution provisions and other customary terms.  The warrants are exercisable at any time prior to 5:00 p.m. New YorkCity time on June 30, 2010, subject to applicable federal and statesecurities laws.

 

**TransactionsDuring 2003 and 2004**

** **

Securities and ExchangeCommission rules require we briefly describe transactions, or series of similartransactions, with specified persons (as defined in the rules) and involvingamounts exceeding $60,000, which have occurred since January 1, 2003, thebeginning of our most recent fiscal year. These

 

63

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transactions are brieflydescribed below and are also described in the notes accompanying our financialstatements included in this report.

 

#### ***Year Ended December 31, 2003***

#### ** **

The followingtransactions occurred during the year ended December 31, 2003.

 

•                  DeCrane Aircraft sold its Specialty Avionics Group on May 23,2003.  CSFB Corporation served asDeCrane Aircraft’s financial advisors for the transaction and receivedcustomary fees and reimbursement of expenses in connection with thetransaction.

 

•                  DeCrane Aircraft amended its first-lien credit facility in connectionwith the sale of its Specialty Avionics Group in March 2003 and in connectionwith issuance of second-lien term debt in December 2003.  Credit Suisse First Boston receivedcustomary fees and reimbursement of expenses in connection with obtaining theseamendments.  Credit Suisse First Bostonwas also paid an annual fee for serving as administrative agent for thefirst-lien credit facility and second-lien term debt.

 

•                  DeCrane Aircraft paid Credit Suisse First Boston a fee for arrangingthe syndication of its second-lien term debt in December 2003.

 

•                  CSFB Corporation received an annual advisory fee.

 

CSFB and affiliated fundsand entities were paid an aggregate of $9.7 million in connection with theabove transactions.

 

#### ***January 1, 2004 to the Present***

#### ** **

The following transactionsoccurred during the period from January 1, 2004 to the date of this report:

 

•                  CSFB Corporation has received $87,500 of its annual advisory fee for2004.

 

•                  CSFB Corporation has also received $375,000 for additional financialadvisory services.

 

**Indebtedness ofExecutive Officers and Directors**

** **

Securities and ExchangeCommission rules require we disclose indebtedness owed to us by our executiveofficers and directors that individually exceeded $60,000 at any time duringthe year ended December 31, 2003.

 

All indebtedness setforth below results from purchases of DeCrane Holdings common stock intransactions consummated prior to the July 30, 2002 enactment of theSarbanes-Oxley Act of 2002 and was payable to DeCrane Aircraft.  Beginning July 30, 2002, we no longerprovide loans to directors or executive officers as mandated by the Act.  The indebtedness, plus accrued interest, iscollateralized by shares of DeCrane Holdings stock.  On December 29, 2003, the executive officers listed in the tablesurrendered the shares of stock collateralizing the loans.  In accordance with the terms of notesevidencing the loans, DeCrane Aircraft canceled the notes.  See “Item 10. Directors and ExecutiveOfficers of the Registrant” for information regarding each individual’srelationship with DeCrane Aircraft and DeCrane Holdings.

 

The table sets forth themaximum amount of indebtedness during the year ended December 31, 2003.  None of the indebtedness remains as ofDecember 31, 2003.

 

64

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|               |   | **Number  of Shares**       |   |                   | **Maximum  Indebtedness to DeCrane Aircraft  During the Year Ended December 31, 2003** |               |
|--------------------|--------|-----------------------------|--------|------------------------|----------------------------------------------------------------------------------------|--------------------|
| **Name**           |   | **Held as  Collateral (1)** |   | **Interest  Rate (2)** |                                                                                   | **Principal  (3)** |   | **Accrued  Interest (4)** |   | **Total** |   |
|               |   |                        |   |                   |                                                                                   |               |   |   |   |   |   |
| R. Jack DeCrane    |   | 56,521                      |   | 5.74                   | %                                                                                      | $                  | 649,991 |   | $ | 163,992 |   | $ | 813,983 |   |
| Richard J. Kaplan  |   | 21,739                      |   | 5.74                   |                                                                                   | 249,998            |   | 63,074 |   | 313,072 |   |
| James E. Mann      |   | 4,347                       |   | 5.74                   |                                                                                   | 49,990             |   | 12,613 |   | 62,603 |   |
| Robert G. Martin   |   | 4,347                       |   | 5.74                   |                                                                                   | 49,990             |   | 12,613 |   | 62,603 |   |
| Jeffrey A. Nerland |   | 6,521                       |   | 5.74                   |                                                                                   | 74,991             |   | 18,920 |   | 93,911 |   |
|                    |        |                             |        |                        |                                                                                        |                    |  |  |  |  |  |  |  |  |

 

----

(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.  Interestis compounded annually.

 

(3)           Reflects the original principal amount ofthe loans.

 

(4)           Reflects accrued interest payable throughDecember 29, 2003, the date the stock was surrendered.

 

**ITEM 14**.           PRINCIPALACCOUNTING FEES AND SERVICES

 

**PrincipalAudit and Non-Audit Fees and Services**

 

Theaggregate fees billed by PricewaterhouseCoopers LLP (“PWC”), our independentaccountants, in fiscal years 2003 and 2002 were as follows:

 
|                   |   | **Year Ended  December 31,** |   |
|------------------------|--------|------------------------------|--------|
| **(In  thousands)**    |   | **2003**                     |   | **2002** |   |
|                   |   |                         |   |   |   |
| Audit fees (1)         |   | $                            | 383    |   | $ | 253 |   |
| Audit related fees (2) |   | 358                          |   | 181 |   |
| Tax fees (3)           |   | 479                          |   | 206 |   |
| All other fees         |   | —                       |   | — |   |
| Consolidated totals    |   | $                            | 1,220  |   | $ | 640 |   |

 

----

(1)           Reflects fees for the audits of our annualfinancial statements included in our Form 10-K’s and the review of thequarterly financial statements included in our Form 10-Q’s for fiscal years2003 and 2002.

 

(2)           Includes fees for due diligence related toacquisitions, stand-alone audits of acquisition targets and dispositions,employee benefit plan audits and consents related to SEC filings.

 

(3)           Reflects fees for federal, state, local andforeign tax compliance, advisory (including due diligence related toacquisitions and dispositions) and planning services.

 

TheAudit Committee has concluded the provision of the non-audit services listedabove is compatible with maintaining the independence of PricewaterhouseCoopersLLP.

 

**Pre-approvalPolicies and Procedures**

** **

TheBoard of Directors, acting as the audit committee, has adopted policies andprocedures for pre-approving all non-audit work performed by PWC after January1, 2003.  Specifically, the policies andprocedures prohibit PWC from performing any services for the Company or itssubsidiaries without the

 

65

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prior approval of the audit committee, except that the audit committeepre-approved the use of PWC for tax compliance, advisory and planning services.

 

All ofthe services provided by PWC in 2003 were approved by the audit committeepursuant to the approval policies described above.  None of such services were approved pursuant to the proceduresdescribed in Rule 2-01(c)(7)(i)(C) of Regulation S-X, which waives the generalrequirement for pre-approval in certain circumstances.

 

**PART IV**

 

**ITEM 15**.           EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

** **

**(a)**           List of Documents Filed as Part of this Report

** **

**1.**             Financial Statements

** **

Ourconsolidated financial statements filed with this report are included in aseparate section at the end of this report and are listed in an index on pageF-1.

 

**2.**             Financial Statement Schedules

** **

Ourconsolidated financial statement schedules filed with this report are includedin a separate section at the end of this report and are listed in an index onpage F-1.

 

**3.**             Exhibits

** **

Thefollowing exhibits are filed as part of this report.

 
| **Exhibit  Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                |
|---------------------|--------|----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 2.1                 |   | (17)                 |   | Stock Purchase Agreement dated as of March 14, 2003 among Wings  Holdings, Inc. and DeCrane Aircraft Holdings, Inc. and DeCrane Holdings Co.  relating to the purchase and sale of 100% of the Common Stock of Avtech  Corporation and Tri-Star Electronics International, Inc. and 100% of the  Membership Interest of Aerospace Display Systems, LLC |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.1.1               |   | (1)                  |   | Certificate of Incorporation of DeCrane Holdings Co.                                                                                                                                                                                                                                                                                                   |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.1.2               |   | *                    |   | Bylaws of DeCrane Holdings Co., as amended on February 2, 2004                                                                                                                                                                                                                                                                                         |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.1.2.1             |   | (10)                 |   | 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             |   | (14)                 |   | Certificate of Amendment of Certificate of Incorporation of  DeCrane Aircraft Holdings, Inc. dated  October 17, 2001                                                                                                                                                                                                                              |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.2.2               |   | *                    |   | Bylaws of DeCrane Aircraft Holdings, Inc., as amended on February 2,  2004                                                                                                                                                                                                                                                                             |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.3.1               |   | (1)                  |   | Articles of Incorporation of Audio International, Inc.                                                                                                                                                                                                                                                                                                 |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.3.2               |   | (1)                  |   | Amended & Restated Bylaws of Audio International, Inc.                                                                                                                                                                                                                                                                                             |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.4.1               |   | (1)                  |   | Articles of Incorporation of Hollingsead International, Inc.                                                                                                                                                                                                                                                                                           |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.4.2               |   | (1)                  |   | Bylaws of Hollingsead International Inc.                                                                                                                                                                                                                                                                                                               |

 

66

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| **Exhibit  Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                           |
|---------------------|--------|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.5.1               |   | *                    |   | Certificate of Formation and Certificate of Merger for  PATS Aircraft, LLC                                                                                                                                   |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.5.2               |   | *                    |   | Limited Liability Company Operating Agreement for  PATS Aircraft, LLC                                                                                                                                        |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.6.1               |   | (3)                  |   | Articles of Incorporation of PPI Holdings, Inc.                                                                                                                                                                   |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.6.2               |   | (3)                  |   | Bylaws of PPI Holdings, Inc.                                                                                                                                                                                      |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.7.1               |   | (3)                  |   | Articles of Incorporation of Precision Pattern, Inc.                                                                                                                                                              |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.7.2               |   | (3)                  |   | Bylaws of Precision Pattern, Inc.                                                                                                                                                                                 |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.8.1               |   | (9)                  |   | Certificate of Formation and Certificate of Merger for  Custom Woodwork & Plastics, LLC                                                                                                                  |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.8.2               |   | (9)                  |   | Limited Liability Company Operating Agreement for  Custom Woodwork & Plastics, LLC                                                                                                                       |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.9.1               |   | (4)                  |   | Articles of Incorporation of PCI Newco, Inc. (formerly  PCI Acquisition Co., Inc.)                                                                                                                           |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.9.1.1             |   | (15)                 |   | Certificate of Amendment of Articles of Incorporation of  PCI Acquisition Co., Inc. (changing its  name to PCI Newco, Inc.)                                                                                  |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.9.2               |   | (4)                  |   | Bylaws of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.)                                                                                                                                                    |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.10.1              |   | (5)                  |   | Articles of Incorporation DAH-IP Holdings, Inc.                                                                                                                                                                   |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.10.2              |   | (5)                  |   | Bylaws of DAH-IP Holdings, Inc.                                                                                                                                                                                   |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.11.1              |   | (5)                  |   | Articles of Incorporation of DAH-IP Infinity, Inc.                                                                                                                                                                |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.11.2              |   | (5)                  |   | Bylaws of DAH-IP Infinity, Inc.                                                                                                                                                                                   |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.12.1              |   | (5)                  |   | Certificate of Limited Partnership of The Infinity Partners, LTD.  (formerly DAH-IP Acquisition Co., L.P.)                                                                                                        |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.12.1.1            |   | (15)                 |   | Certificate of Amendment of the Certificate of Limited Partnership of  DAH-IP Acquisition Co., L.P. (changing its name to The Infinity Partners,  LTD.)                                                           |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.12.2              |   | (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 |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.12.3              |   | (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.                                           |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.13.1              |   | (7)                  |   | Certificate of Formation and Certificate of Amendment of  Carl F. Booth & Co., LLC                                                                                                                       |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.13.2              |   | (7)                  |   | Limited Liability Company Agreement of Carl F. Booth & Co., LLC                                                                                                                                               |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.14.1              |   | (9)                  |   | Restated Articles of Incorporation of ERDA, Inc.                                                                                                                                                                  |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.14.1.1            |   | (16)                 |   | Articles of Amendment amending the Restated Articles of Incorporation  of ERDA, Inc. (changing its name to DeCrane Aircraft Seating Company, Inc.)                                                                |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.14.2              |   | (9)                  |   | Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co., Inc.)                                                                                                                                                        |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.15.1              |   | (16)                 |   | Certificate of Formation of DeCrane Cabin Interiors, LLC                                                                                                                                                          |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.15.2              |   | (16)                 |   | Limited Liability Company Agreement of DeCrane Cabin Interiors, LLC                                                                                                                                               |
|                |   |                 |   |                                                                                                                                                                                                              |
| 3.16.1              |   | *                    |   | Certificate of Incorporation of DeCrane Cabin Interiors – Canada, Inc.                                                                                                                                       |

 

67

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| **Exhibit  Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                          |
|---------------------|--------|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 3.16.2              |   | *                    |   | Bylaws of DeCrane Cabin Interiors – Canada, Inc.                                                                                                                                                                                                            |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.1                 |   | (1)                  |   | Indenture dated October 5, 1998 between DeCrane Aircraft and  State Street Bank and Trust Company                                                                                                                                                           |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.1.1               |   | *                    |   | Supplemental Indenture dated December 11, 2003 among PATS Aircraft,  LLC, the other guarantors under the Indenture, DeCrane Aircraft and State  Street Bank and Trust Company                                                                                    |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.1.2               |   | (2)                  |   | Supplemental Indenture 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               |   | (11)                 |   | Supplemental Indenture 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               |   | (11)                 |   | Supplemental Indenture 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               |   | (11)                 |   | Supplemental Indenture 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 |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.1.6               |   | (11)                 |   | Supplemental Indenture dated May 11, 2000 among Booth Acquisition,  LLC, the other guarantors under the Indenture, DeCrane Aircraft and State  Street Bank and Trust Company                                                                                     |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.1.7               |   | (11)                 |   | Supplemental Indenture dated June 30, 2000 among ERDA, Inc., the  other guarantors under the Indenture, DeCrane Aircraft and State Street Bank  and Trust Company                                                                                                |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.1.8               |   | (18)                 |   | Supplemental Indenture dated June 17, 2003 among DeCrane Cabin  Interiors, LLC, the other guarantors under the Indenture, DeCrane Aircraft  and State Street Bank and Trust Company                                                                              |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.1.9               |   | *                    |   | Supplemental Indenture dated January 1, 2004 among DeCrane Cabin  Interiors – Canada, 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               |   | (9)                  |   | 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               |   | (15)                 |   | 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                 |   | (1a)                 |   | Form of DeCrane Aircraft 12% Senior Subordinated Notes due 2008                                                                                                                                                                                                  |
|                |   |                 |   |                                                                                                                                                                                                                                                             |
| 4.5                 |   | (15)                 |   | Certificate of Amendment amending the Certificate of Designations,  Preferences and Rights of 14% Senior Redeemable Exchangeable Preferred Stock  due 2008, effective October 2, 1998                                                                            |

 

68

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| **Exhibit  Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                                                              |
|---------------------|--------|----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                 |   |                                                                                                                                                                                                                                                 |
| 4.5.1               |   | (9)                  |   | Amendment No. 1 to the Certificate of Designations, Preferences and  Rights of 14% Senior Redeemable Exchangeable Preferred Stock due 2008,  effective June 29, 2000                                                                                 |
|                |   |                 |   |                                                                                                                                                                                                                                                 |
| 4.6                 |   | (9a)                 |   | Certificate of Designations, Preferences and Rights of 16% Senior  Redeemable Exchangeable Preferred Stock due 2009                                                                                                                                  |
|                |   |                 |   |                                                                                                                                                                                                                                                 |
| 4.6.1               |   | (11a)                |   | Amendment to the Certificate of Designations, Preferences and Rights  of 16% Senior Redeemable Exchangeable Preferred Stock due 2009 dated October  5, 2000                                                                                          |
|                |   |                 |   |                                                                                                                                                                                                                                                 |
| 4.7                 |   | (9a)                 |   | Senior Preferred Stock Registration Rights Agreement dated as of  June 30, 2000 among DeCrane Aircraft Holdings, Inc. and the Holders  of Senior Preferred Stock                                                                           |
|                |   |                 |   |                                                                                                                                                                                                                                                 |
| 4.7.1               |   | (11a)                |   | Amendment No. 1 to the Senior Preferred Stock Registration Rights  Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc. and  the Holders of Senior Preferred Stock dated October 6, 2000                                        |
|                |   |                 |   |                                                                                                                                                                                                                                                 |
| 10.1                |   | (9)                  |   | Securities Purchase Agreement dated as of June 30, 2000 among DeCrane  Aircraft Holdings, Inc., DeCrane Holdings Co. and the purchasers named  therein                                                                                               |
|                |   |                 |   |                                                                                                                                                                                                                                                 |
| 10.2                |   | (11)                 |   | 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 **           |   | (12)                 |   | 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             |   | (8)                  |   | 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                 |

 

69

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| **Exhibit  Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                     |
|---------------------|--------|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.3.1           |   | (11)                 |   | 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             |   | (13)                 |   | 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             |   | (15)                 |   | 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  |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.6             |   | (17)                 |   | Third Amendment to the Third Amended and Restated Credit Agreement  dated as of March 31, 2003 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   |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.7             |   | *                    |   | Fourth Amendment to the Third Amended and Restated Credit Agreement  dated as of December 10, 2003 among DeCrane Aircraft Holdings, Inc., the  lenders listed therein and Credit Suisse First Boston (as successor to DLJ  Capital Funding, Inc.), as syndication and administrative agent for the  lenders |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.11               |   | (1)                  |   | General Terms Agreement between The Boeing Company and PATS, Inc.  dated February 17, 1998                                                                                                                                                                                                                  |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.11.1             |   | (1)                  |   | Special Business Provisions between The Boeing Company and PATS, Inc.  dated February 17, 1998                                                                                                                                                                                                              |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.11.2             |   | (1)                  |   | Letter Agreement between The Boeing Company and DeCrane Aircraft  Holdings, Inc. dated January 15, 1999                                                                                                                                                                                                     |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.11.3             |   | (19)                 |   | Addendum 6-5723-03-064 to the Special Business Provisions between The  Boeing Company and PATS, Inc. dated April 16, 2003                                                                                                                                                                                   |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.12               |   | *                    |   | Credit Agreement dated as of December 22, 2003 among DeCrane Aircraft  Holdings, Inc., the lenders listed therein and Credit Suisse First Boston  (acting through its Cayman Islands Branch), as syndication and administrative  agent for the lenders                                                      |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.19 **            |   | (5)                  |   | Amended Management Incentive Stock Option Plan                                                                                                                                                                                                                                                              |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.20 **            |   | (5)                  |   | Amended Stock Subscription Agreement                                                                                                                                                                                                                                                                        |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.21 **            |   | (5)                  |   | Amended Incentive Bonus Plan                                                                                                                                                                                                                                                                                |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 10.23 **            |   | (17)                 |   | Form of Change of Control Agreements between DeCrane Aircraft  Holdings, Inc. and certain executives                                                                                                                                                                                                        |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 18                  |   | *                    |   | Letter regarding change in accounting principle effective January 1,  2003                                                                                                                                                                                                                                  |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 21.1                |   | *                    |   | List of Subsidiaries of Registrant                                                                                                                                                                                                                                                                          |
|                |   |                 |   |                                                                                                                                                                                                                                                                                                        |
| 31.1                |   | *                    |   | Chief Executive Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            |

 

70

----

 
| **Exhibit  Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                       |
|---------------------|--------|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------|
|                |   |                 |   |                                                                                                                          |
| 31.2                |   | *                    |   | Chief Financial Officer Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                              |
|                |   |                 |   |                                                                                                                          |
| 32                  |   | *                    |   | Chief Executive Officer and Chief Financial Officer Certifications  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

----

*          Filed herewith.

 

**       Denotes management contracts and compensatoryplans and arrangements required to be filed as exhibits to this report.

 

(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.

 

(1a)     Filed as an exhibit to the Registration Statementof DeCrane Aircraft Holdings, Inc. (Registration No. 333-70365) on Form S-1(Amendment No. 1) filed with the Commission on March 3, 1999 andincorporated herein by reference.

 

(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 dated August5, 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-K datedDecember 31, 1999 filed with the Commission on March 30, 2000.

 

(7)       Filed as an exhibit to our Form 8-K dated May11, 2000 filed with the Commission on May 25, 2000.

 

(8)       Filed as an exhibit to our Form 8-K (AmendmentNo. 1) dated May 11, 2000 filed with the Commission on June 16, 2000.

 

(9)       Filed as an exhibit to our Form 8-K (AmendmentNo. 1) dated June 30, 2000 filed with the Commission onAugust 2, 2000.

 

(9a)     Filed as an exhibit to the Form 8-K (Amendment No.1) dated June 30, 2000 of DeCrane Aircraft Holdings, Inc. filed with theCommission on August 2, 2000 and incorporated herein by reference.

 

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

 

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

 

(11a)   Filed as an exhibit to the Form 10-Q datedSeptember 30, 2000 of DeCrane Aircraft Holdings, Inc. filed with theCommission on November 14, 2000 and incorporated herein by reference.

 

71

----

 

(12)     Filed as an exhibit to our Form 10-K datedDecember 31, 2000 filed with the Commission on March 30, 2001.

 

(13)     Filed as an exhibit to our Form 10-Q dated March31, 2001 filed with the Commission on May 14, 2001.

 

(14)     Filed as an exhibit to our Form 10-Q datedSeptember 30, 2001 filed with the Commission on November 13, 2001.

 

(15)     Filed as an exhibit to our Form 10-K datedDecember 31, 2001 filed with the Commission on March 27, 2002.

 

(16)     Filed as an exhibit to our Form 10-Q dated March31, 2002 filed with the Commission on May 13, 2002.

 

(17)     Filed as an exhibit to our Form 10-K datedDecember 31, 2002 filed with the Commission on April 15, 2003.

 

(18)     Filed as an exhibit to our Registration Statement(Registration No. 333-106381) on Form S-1 filed with Commission on June 23,2003.

 

(19)     Filed as an exhibit to our Registration Statement(Registration No. 333-106381) on Form S-1 (Amendment No. 1) filed withCommission on August 12, 2003.

 

(20)     Filed as an exhibit to our Registration Statement(Registration No. 333-106381) on Form S-1 (Amendment No. 2) filed withCommission on September 18, 2003.

 

**(b)**           Reports of Form 8-K Filed During the Quarter EndedDecember 31, 2003

** **

OnNovember 26, 2003 we filed a Form 8-K Current Report regarding the Companyreceiving commitments from financial institutions for an $80.0 millionsyndicated second-lien term loan.

 

OnDecember 11, 2003 we filed a Form 8-K Current Report regarding the Companyreceiving requisite lender approval to permit the $80.0 million syndicatedsecond-lien term loan.

 

OnDecember 22, 2003 we filed a Form 8-K Current Report regarding the Companycompleting the $80.0 million syndicated second-lien term loan financing.

 

72

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

**DECRANE HOLDINGS CO. (Registrant)**

 

 
| By:    | /s/ R. Jack DeCrane     |   | By:    | /s/ Richard J. Kaplan                            |   |
|--------|-------------------------|--------|--------|--------------------------------------------------|--------|
|   | R. Jack DeCrane         |   |   | Richard J. Kaplan                                |   |
|   | Chief Executive Officer |   |   | Chief Financial Officer and  Assistant Secretary |   |

 

 
| Date: | March 25, 2004 |   |   |
|-------|----------------|--------|--------|

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities 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 |   |   | Director                   |   |

 

 
| By:    | /s/  Richard J. Kaplan |   | By:    | /s/   Susan C. Schnabel |   |
|--------|-----------------------------|--------|--------|------------------------------|--------|
|   | Richard J. Kaplan           |   |   | Susan C. Schnabel            |   |
|   | Director                    |   |   | Director                     |   |

 

 
| By:    | /s/   Albert E. Suter |   |   |
|--------|----------------------------|--------|--------|
|   | Albert E. Suter            |   |   |
|   | Director                   |   |   |

 
| Date: | March 25, 2004 |   |   |
|-------|----------------|--------|--------|

 

73

----

 

**Index to Consolidated Financial Statementsand Financial Statement Schedules**

 
| **Consolidated Financial Statements**                                                                                 |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                  |   |
| Report of Independent Auditors                                                                                        |   |
|                                                                                                                  |   |
| Consolidated Balance Sheets as of December 31, 2003 and 2002                                                          |   |
|                                                                                                                  |   |
| Consolidated Statements of Operations for  the years ended  December 31, 2003, 2002 and 2001                          |   |
|                                                                                                                  |   |
| Consolidated Statements of Stockholders’  Equity (Deficit) for the years ended  December 31, 2003, 2002 and 2001 |   |
|                                                                                                                  |   |
| Consolidated Statements of Cash Flows for  the years ended  December 31, 2003, 2002 and 2001                          |   |
|                                                                                                                  |   |
| Notes to Consolidated Financial Statements                                                                            |   |
|                                                                                                                  |   |
| **Consolidated Financial Statement Schedule**                                                                         |   |
|                                                                                                                  |   |
| For  the years ended December 31, 2003, 2002 and 2001:  II – Valuation and Qualifying Accounts                   |   |

 

Allother schedules are omitted because they are either not applicable or therequired information is shown in the consolidated financial statements or notesthereto.

 

F-1

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

 

To the Board of Directors and Stockholders of

DeCrane Holdings Co.

 

In ouropinion, the consolidated financial statements listed in the accompanying indexpresent fairly, in all material respects, the financial position of DeCraneHoldings Co. and its subsidiary at December 31, 2003 and 2002, and the resultsof their operations and cash flows for each of the three years in the periodended December 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America. In addition, in our opinion, the financial statement schedule listed inthe accompanying index presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

Asdiscussed in Note 1, the Company decided to discontinue the use of programaccounting for the costs of products manufactured for delivery underproduction-type contacts in 2003.  As aresult, certain deferred program costs are no longer included in inventorycommencing January 1, 2003.

 

Asdiscussed in Note 7, in 2002 the Company adopted Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets.”  Accordingly, the Company ceased amortizinggoodwill as of January 1, 2002.

 

 

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

 

March 25, 2004

 

F-2

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**Consolidated BalanceSheets**

 
|                                                                                                                                                                            |   | **December  31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
| **(In  thousands, except share data)**                                                                                                                                          |   | **2003**          |    | **2002** |   |
|                                                                                                                                                                            |   |              |    |   |   |
| **Assets**                                                                                                                                                                      |   |              |    |   |   |
|                                                                                                                                                                            |   |              |    |   |   |
| Current assets:                                                                                                                                                                 |   |              |    |   |   |
| Cash and cash equivalents                                                                                                                                                       |   | $                 | 6,936   |   | $ | 12,421 |   |
| Accounts receivable, net                                                                                                                                                        |   | 21,455            |    | 26,354 |   |
| Inventories                                                                                                                                                                     |   | 42,981            |    | 59,300 |   |
| Deferred income taxes                                                                                                                                                           |   | —            |    | 16,430 |   |
| Prepaid expenses and other current assets                                                                                                                                       |   | 1,082             |    | 1,724 |   |
| Assets of discontinued operations                                                                                                                                               |   | —            |    | 160,741 |   |
| Total current assets                                                                                                                                                            |   | 72,454            |    | 276,970 |   |
|                                                                                                                                                                            |   |              |    |   |   |
| Property and equipment, net                                                                                                                                                     |   | 30,900            |    | 36,139 |   |
| Goodwill                                                                                                                                                                        |   | 162,430           |    | 196,430 |   |
| Other assets, principally intangibles, net                                                                                                                                      |   | 38,092            |    | 39,428 |   |
| Total assets                                                                                                                                                                    |   | $                 | 303,876 |   | $ | 548,967 |   |
|                                                                                                                                                                            |   |              |    |   |   |
| **Liabilities, Mandatorily  Redeemable Preferred Stock and Stockholders’ Equity (Deficit)**                                                                                |   |              |    |   |   |
|                                                                                                                                                                            |   |              |    |   |   |
| Current liabilities:                                                                                                                                                            |   |              |    |   |   |
| Current portion of long-term debt                                                                                                                                               |   | $                 | 1,198   |   | $ | 16,317 |   |
| Accounts payable                                                                                                                                                                |   | 15,462            |    | 13,055 |   |
| Accrued liabilities                                                                                                                                                             |   | 17,890            |    | 31,494 |   |
| Liabilities of discontinued operations                                                                                                                                          |   | —            |    | 19,928 |   |
| Total current liabilities                                                                                                                                                       |   | 34,550            |    | 80,794 |   |
|                                                                                                                                                                            |   |              |    |   |   |
| Long-term debt                                                                                                                                                                  |   | 268,208           |    | 364,700 |   |
| Deferred income taxes                                                                                                                                                           |   | —            |    | 27,077 |   |
| Other long-term liabilities                                                                                                                                                     |   | 5,464             |    | 7,364 |   |
|                                                                                                                                                                            |   |              |    |   |   |
| Commitments and contingencies (Note 13)                                                                                                                                         |   |              |    |   |   |
|                                                                                                                                                                            |   |              |    |   |   |
| Minority interest in preferred stock of  subsidiary                                                                                                                             |   | 40,835            |    | 34,081 |   |
| Mandatorily redeemable preferred stock                                                                                                                                          |   | 71,402            |    | 62,222 |   |
|                                                                                                                                                                            |   |              |    |   |   |
| Stockholders’ equity (deficit):                                                                                                                                            |   |              |    |   |   |
| Undesignated preferred stock, $.01 par value,  1,140,000 shares authorized; none issued and outstanding as of December 31,  2003 and 2002                                       |   | —            |    | — |   |
| Common stock, $.01 par value, 10,000,000  shares authorized; 4,009,297 and 4,116,627 shares issued and outstanding as  of December 31, 2003 and December 31, 2002, respectively |   | 40                |    | 41 |   |
| Additional paid-in capital                                                                                                                                                      |   | 61,475            |    | 72,125 |   |
| Notes receivable for shares sold                                                                                                                                                |   | (1,268            | )       | (2,591 | ) |
| Accumulated deficit                                                                                                                                                             |   | (176,562          | )       | (96,485 | ) |
| Accumulated other comprehensive loss                                                                                                                                            |   | (268              | )       | (361 | ) |
| Total stockholders’ equity (deficit)                                                                                                                                       |   | (116,583          | )       | (27,271 | ) |
| Total liabilities, mandatorily redeemable  preferred stock and stockholders’ equity (deficit)                                                                              |   | $                 | 303,876 |   | $ | 548,967 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

F-3

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**ConsolidatedStatements of Operations**

 
|                                                    |   | **Year Ended  December 31,** |    |
|---------------------------------------------------------|--------|------------------------------|---------|
| **(In  thousands)**                                     |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                    |   |                         |    |   |   |   |   |
| Revenues                                                |   | $                            | 170,109 |   | $ | 229,841 |   | $ | 272,112 |   |
| Cost of sales                                           |   | 134,953                      |    | 170,485 |   | 196,866 |   |
|                                                    |   |                         |    |   |   |   |   |
| Gross profit                                            |   | 35,156                       |    | 59,356 |   | 75,246 |   |
|                                                    |   |                         |    |   |   |   |   |
| Operating expenses:                                     |   |                         |    |   |   |   |   |
| Selling, general and administrative  expenses           |   | 24,896                       |    | 40,262 |   | 44,731 |   |
| Research and development expenses                       |   | 10,440                       |    | 56 |   | 698 |   |
| Impairment of goodwill                                  |   | 34,000                       |    | — |   | 8,583 |   |
| Amortization of goodwill and other  intangible assets   |   | 3,651                        |    | 3,540 |   | 12,436 |   |
| Total operating expenses                                |   | 72,987                       |    | 43,858 |   | 66,448 |   |
|                                                    |   |                         |    |   |   |   |   |
| Income (loss) from operations                           |   | (37,831                      | )       | 15,498 |   | 8,798 |   |
|                                                    |   |                         |    |   |   |   |   |
| Other expenses:                                         |   |                         |    |   |   |   |   |
| Interest expense                                        |   | 26,219                       |    | 25,376 |   | 29,645 |   |
| Minority interest in preferred stock of  subsidiary     |   | 6,754                        |    | 5,841 |   | 5,061 |   |
| Loss on extinguishment of debt                          |   | 1,439                        |    | — |   | — |   |
| Other expenses, net                                     |   | 945                          |    | 505 |   | 634 |   |
|                                                    |   |                         |    |   |   |   |   |
| Loss from continuing operations before  income taxes    |   | (73,188                      | )       | (16,224 | ) | (26,542 | ) |
| Income tax benefit                                      |   | 13,496                       |    | 3,621 |   | 3,933 |   |
|                                                    |   |                         |    |   |   |   |   |
| Loss from continuing operations                         |   | (59,692                      | )       | (12,603 | ) | (22,609 | ) |
|                                                    |   |                         |    |   |   |   |   |
| Income (loss) from discontinued operations,  net of tax |   | (6,621                       | )       | (41,396 | ) | 3,546 |   |
| Cumulative effect of change in accounting  principle    |   | (13,764                      | )       | (17,828 | ) | — |   |
|                                                    |   |                         |    |   |   |   |   |
| Net loss                                                |   | (80,077                      | )       | (71,827 | ) | (19,063 | ) |
|                                                    |   |                         |    |   |   |   |   |
| Noncash preferred stock dividend accretion              |   | (9,180                       | )       | (7,999 | ) | (6,971 | ) |
|                                                    |   |                         |    |   |   |   |   |
| Net loss applicable to common stockholders              |   | $                            | (89,257 | ) | $ | (79,826 | ) | $ | (26,034 | ) |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

F-4

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**ConsolidatedStatements of Stockholders’ Equity**

 
|                                                                                                    |   |              |       |        |       |           |       | **Notes**       |       |              |       | **Accumulated** |       |      |       |
|---------------------------------------------------------------------------------------------------------|--------|-------------------|------------|-------------|------------|----------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|-----------|------------|
|                                                                                                    |   |              |       |        |       | **Additional** |       | **Receivable**  |       |              |       | **Other**       |       |      |       |
|                                                                                                    |   | **Common  Stock** |       | **Paid-in** |       | **For Shares** |       | **Accumulated** |       | **Comprehensive** |       |            |       |
| **(In thousands, except share data)**                                                                   |   | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Sold**        | ** ** | **Deficit**       | ** ** | **Loss**        | ** ** | **Total** | ** ** |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Balance, December 31, 2000                                                                              |   | 3,914,274         |       | $           | 39         |           | $          | 82,298          |       | $                 | (2,552     | )               | $          | (5,595    | )          | $ | — |   | $ | 74,190 |   |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Comprehensive loss:                                                                                     |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Net income                                                                                              |   | —            |       | —      |       | —         |       | —          |       | (19,063           | )          | —          |       | (19,063   | )          |
| Unrealized loss on interest rate swap  contract                                                         |   | —            |       | —      |       | —         |       | —          |       | —            |       | (88             | )          | (88       | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       | (19,151   | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| 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           | )          | (88             | )          | 48,167    |       |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Comprehensive loss:                                                                                     |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Net loss                                                                                                |   | —            |       | —      |       | —         |       | —          |       | (71,827           | )          | —          |       | (71,827   | )          |
| Unrealized loss on interest rate swap  contract                                                         |   | —            |       | —      |       | —         |       | —          |       | —            |       | (273            | )          | (273      | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       | (72,100   | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Sale of common stock                                                                                    |   | 221,096           |       | 2           |       | 4,998          |       | —          |       | —            |       | —          |       | 5,000     |       |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Repurchase of common stock, net of related  note receivable repaid and tax benefit of options exercised |   | (18,743           | )          | —      |       | (554           | )          | 200             |       | —            |       | —          |       | (354      | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Noncash dividend accretion on preferred  stock                                                          |   | —            |       | —      |       | (7,999         | )          | —          |       | —            |       | —          |       | (7,999    | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Compensatory stock option expense                                                                       |   | —            |       | —      |       | 138            |       | —          |       | —            |       | —          |       | 138       |       |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Notes receivable interest accrued                                                                       |   | —            |       | —      |       | —         |       | (123            | )          | —            |       | —          |       | (123      | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Balance, December 31, 2002                                                                              |   | 4,116,627         |       | 41          |       | 72,125         |       | (2,591          | )          | (96,485           | )          | (361            | )          | (27,271   | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Comprehensive income (loss):                                                                            |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Net loss                                                                                                |   | —            |       | —      |       | —         |       | —          |       | (80,077           | )          | —          |       | (80,077   | )          |
| Unrealized gain on interest rate swap  contract                                                         |   | —            |       | —      |       | —         |       | —          |       | —            |       | 93              |       | 93        |       |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       | (79,984   | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Common stock (collateral) surrendered and  cancellation of the related notes                            |   | (107,330          | )          | (1          | )          | (1,470         | )          | 1,471           |       | —            |       | —          |       | —    |       |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Noncash dividend accretion on preferred  stock                                                          |   | —            |       | —      |       | (9,180         | )          | —          |       | —            |       | —          |       | (9,180    | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Notes receivable interest accrued                                                                       |   | —            |       | —      |       | —         |       | (148            | )          | —            |       | —          |       | (148      | )          |
|                                                                                                    |   |              |       |        |       |           |       |            |       |              |       |            |       |      |       |
| Balance, December 31, 2003                                                                              |   | 4,009,297         |       | $           | 40         |           | $          | 61,475          |       | $                 | (1,268     | )               | $          | (176,562  | )          | $ | (268 | ) | $ | (116,583 | ) |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

F-5

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatements of Cash Flows**

 
|                                                                                        |   | **Year Ended  December 31,** |    |
|---------------------------------------------------------------------------------------------|--------|------------------------------|---------|
| **(In  thousands)**                                                                         |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                                        |   |                         |    |   |   |   |   |
| **Cash flows from  operating activities:**                                                  |   |                         |    |   |   |   |   |
| Net loss                                                                                    |   | $                            | (80,077 | ) | $ | (71,827 | ) | $ | (19,063 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used for) operating activities: |   |                         |    |   |   |   |   |
| Cumulative effect of change in accounting  principle                                        |   | 13,764                       |    | 17,828 |   | — |   |
| Net (income) loss from discontinued  operations                                             |   | 6,621                        |    | 41,396 |   | (3,546 | ) |
| Minority interest in preferred stock of  subsidiary                                         |   | 6,754                        |    | 5,841 |   | 5,061 |   |
| Loss on extinguishment of debt                                                              |   | 1,439                        |    | — |   | — |   |
| Noncash portion of restructuring, asset  impairment and other related charges               |   | 37,664                       |    | 11,456 |   | 19,558 |   |
| Depreciation and amortization                                                               |   | 12,589                       |    | 13,304 |   | 22,582 |   |
| Deferred income taxes                                                                       |   | (11,461                      | )       | 690 |   | 2,322 |   |
| Other, net                                                                                  |   | 331                          |    | 110 |   | 389 |   |
| Changes in assets and liabilities:                                                          |   |                         |    |   |   |   |   |
| Accounts receivable                                                                         |   | 4,899                        |    | 14,969 |   | (5,508 | ) |
| Inventories                                                                                 |   | (518                         | )       | (4,792 | ) | (10,427 | ) |
| Prepaid expenses and other assets                                                           |   | 241                          |    | 155 |   | (2,126 | ) |
| Accounts payable                                                                            |   | 2,407                        |    | (1,458 | ) | 409 |   |
| Accrued liabilities                                                                         |   | (13,496                      | )       | (16,418 | ) | (7,321 | ) |
| Income taxes payable                                                                        |   | (1,079                       | )       | 438 |   | 3 |   |
| Other long-term liabilities                                                                 |   | 834                          |    | 28 |   | (400 | ) |
| Net cash provided by (used for) operating  activities                                       |   | (19,088                      | )       | 11,720 |   | 1,933 |   |
|                                                                                        |   |                         |    |   |   |   |   |
| **Cash flows from  investing activities:**                                                  |   |                         |    |   |   |   |   |
| Net cash proceeds from sale of Specialty  Avionics Group                                    |   | 132,223                      |    | — |   | — |   |
| Proceeds from sale of property and  equipment                                               |   | 3,208                        |    | — |   | 636 |   |
| Capital expenditures                                                                        |   | (4,797                       | )       | (4,356 | ) | (10,191 | ) |
| Cash paid for acquisitions                                                                  |   | (606                         | )       | (5,890 | ) | (13,529 | ) |
| Net cash provided by (used for) investing  activities                                       |   | 130,028                      |    | (10,246 | ) | (23,084 | ) |
|                                                                                        |   |                         |    |   |   |   |   |
| **Cash flows from  financing activities:**                                                  |   |                         |    |   |   |   |   |
| Debt borrowings:                                                                            |   |                         |    |   |   |   |   |
| First-lien term debt                                                                        |   | —                       |    | — |   | 20,000 |   |
| Second-lien term debt                                                                       |   | 80,000                       |    | — |   | — |   |
| Other secured long-term debt                                                                |   | —                       |    | 1,145 |   | 2,797 |   |
| Proceeds from sale of common stock                                                          |   | —                       |    | 5,000 |   | — |   |
| Debt repayments:                                                                            |   |                         |    |   |   |   |   |
| Revolving line of credit, net                                                               |   | (6,000                       | )       | (6,000 | ) | (400 | ) |
| First-lien term debt                                                                        |   | (183,679                     | )       | (11,506 | ) | (7,738 | ) |
| Other secured long-term debt                                                                |   | (1,876                       | )       | (2,028 | ) | (1,401 | ) |
| Deferred financing costs                                                                    |   | (6,614                       | )       | (1,656 | ) | (767 | ) |
| Return of capital in connection with shares  repurchased                                    |   | —                       |    | (368 | ) | — |   |
| Net cash provided by (used for) financing  activities                                       |   | (118,169                     | )       | (15,413 | ) | 12,491 |   |
|                                                                                        |   |                         |    |   |   |   |   |
| Net cash provided by discontinued  operations                                               |   | 1,744                        |    | 16,882 |   | 10,432 |   |
|                                                                                        |   |                         |    |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                       |   | (5,485                       | )       | 2,943 |   | 1,772 |   |
| Cash and cash equivalents at beginning of  period                                           |   | 12,421                       |    | 9,478 |   | 7,706 |   |
| Cash and cash equivalents at end of period                                                  |   | $                            | 6,936   |   | $ | 12,421 |   | $ | 9,478 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

F-6

----

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

 

**Notes to Consolidated Financial Statements**

 

**Note 1.**           **Summary of Significant Accounting Policies**

** **

**Description of theBusiness**

** **

DeCraneHoldings Co. (“DeCrane Holdings”) is a holding company and does not have anymaterial operations or assets other than its ownership of all of the commonstock of DeCrane Aircraft Holdings, Inc. (“DeCrane Aircraft”). References tothe “Company” include both DeCrane Holdings and DeCrane Aircraft.

 

TheCompany is a provider of products and services to the business, VIP andhead-of-state aircraft market within the aerospace industry.  The Company’s businesses are organized intotwo separate operating groups: Cabin Management and Systems Integration.  The Company also had a third strategicbusiness, its Specialty Avionics Group, which it sold in 2003 (Note 2).

 

**Basis of Presentation**

** **

Theconsolidated financial statements include the accounts of the Company and allwholly-owned subsidiaries and a majority-owned partnership.  All intercompany accounts and transactionshave been eliminated.  Certainreclassifications have been made to prior years’ financial statements toconform to the current year presentation.

 

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

 

**Change in AccountingPrinciple**

 

Inventories are stated atthe lower of cost or market.  Costsinclude materials, labor, including direct engineering labor, tooling costs andmanufacturing overhead.  As describedbelow, measurement of the costs of inventories associated with productsmanufactured for delivery under production-type contracts in prior periods wasmade pursuant to the use of program accounting.  As such, the cost of inventories included certain deferredprogram costs, which were principally comprised of engineering costs.

 

The events of September11, 2001 and its aftermath have impacted the predictability of demand for theCompany’s business, VIP and head-of-state aircraft products.  The ability to make reliable estimates offuture demand for these products is critical to the use of program accountingand the deferral of engineering and production costs.  Under program accounting, certain product development costsincurred in connection with specific contracted programs were deferred andcharged to cost of sales when revenues from the sale of products related to theprogram were recorded.  Because of thechanging economic conditions affecting the Company’s markets, demand for theCompany’s products has exhibited an increased degree of volatility not seen inthe past.  In order to improve the reliabilityof its financial reporting, the Company decided to discontinue the use ofprogram accounting which requires it to make long-term estimates of futuresales for each program.  Therefore,product development costs not specifically reimbursable through contractualterms or recoverable through firm orders will no longer be deferred andincluded in program inventory.

** **

 

F-7

----

 

The Company concludedthat the new method of accounting for program costs is preferable based, inpart, on the aforementioned improvement in the reliability of its financialreporting.  This new accounting methodwill also have the advantage of enhancing investor understanding of theCompany’s performance since cash flows from operations will now more closelyalign with Adjusted EBITDA, the Company’s primary measurement of overalleconomic performance and return on invested capital.

 

This change in accountingpolicy was made after concluding the 2003 fiscal year but has been applied retroactivelyto the beginning of the year, January 1, 2003, as required by generallyaccepted accounting principles.  As aresult of the change, program-related product development costs are nowclassified as a component of research and development expenses in theconsolidated financial statements for 2003 rather than classified as acomponent of inventory cost.  The effectof this accounting change was to increase the Company’s net loss by $17,942,000through a charge for the cumulative effect of a change in accounting principlein 2003 of $13,764,000 and increase by $4,178,000 the reported loss fromcontinuing operations.

 

As aresult of the change, the Company has restated its quarterly results ofoperations for 2003 (Note 19).  Thefollowing pro forma data summarizes the results of operations for the yearsended December 31, 2002 and 2001 as if the new accounting policy had beenin effect during those years.

 
|                            |   | **Year Ended  December 31,** |    |
|---------------------------------|--------|------------------------------|---------|
| **(In  thousands)**             |   | **2002**                     |    | **2001** |   |
|                            |   |                         |    |   |   |
| As reported:                    |   |                         |    |   |   |
| Loss from continuing operations |   | $                            | (12,603 | ) | $ | (22,609 | ) |
| Net loss                        |   | (71,827                      | )       | (19,063 | ) |
|                            |   |                         |    |   |   |
| Pro forma:                      |   |                         |    |   |   |
| Loss from continuing operations |   | $                            | (15,579 | ) | $ | (24,484 | ) |
| Net loss                        |   | (74,803                      | )       | (20,938 | ) |

 

**Inventories**

 

Inventoriesare stated at the lower of cost, as determined under the first-in, first-out(“FIFO”) method, or market.  Costsinclude materials, labor, including direct engineering labor, tooling costs andmanufacturing overhead.  Prior toJanuary 1, 2003, inventories also included deferred program costs, which wereprincipally comprised of engineering costs relative to programs and contractswith long production cycles.

 

F-8

----

 

**Property and Equipment**

 

Propertyand equipment for companies acquired are stated at fair value as of the datethe acquisition occurred and at cost for all subsequent additions.  Property and equipment are depreciated usingthe straight-line method over their estimated useful lives.  Useful lives for machinery and equipmentrange from three to twenty years. Building and building improvements are depreciated using thestraight-line method over their estimated useful lives of forty years.  Leasehold improvements are amortized usingthe straight-line method over their estimated useful lives or remaining leaseterm, whichever is less.  Expendituresfor maintenance and repairs are expensed as incurred.  The costs for improvements are capitalized.  Upon retirement or disposal, the cost andaccumulated depreciation of property and equipment are reduced and any gain orloss is recorded in income or expense.

 

**Goodwill**

** **

Priorto January 1, 2002, goodwill was amortized on a straight-line basis over thirtyyears from the date the acquisition occurred. Additional goodwill resulting from contingent consideration paymentssubsequent to the acquisition date was amortized prospectively over theremaining period of the initial thirty-year term.  Starting January 1, 2002, goodwill is no longer amortized butinstead is subject to at least annual impairment testing with a loss charged tooperations in the period in which impairment occurs (Note 7).

 

**Other Assets**

 

Identifiablefinite-lived intangible assets are amortized on a straight-line basis overtheir estimated useful lives, ranging from three to fifteen years.  Deferred financing costs are amortized usingeither the straight-line or effective interest method, over the term of therelated debt.

 

**Impairment of Goodwill**

 

EffectiveJanuary 1, 2002 the Company adopted and began testing goodwill for impairmentin accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” asdescribed in Note 7.  As required bySFAS No. 142, the Company tests goodwill for impairment annually, on October 31stof each year, or when events or changes in circumstances indicate the carryingamount may not be recoverable.  Thegoodwill impairment model is a two-step process.  First, it requires a comparison of the book value of net assetsto the fair value of the related reporting units that have goodwill assigned tothem.  If the fair value is determinedto be less than book value, a second step is performed to compute the amount ofthe impairment.  In this process, a fairvalue for goodwill is estimated, based in part on the fair value of theoperations used in the first step, and is compared to its carrying value.  The amount by which carrying value exceedsfair value represents the amount of goodwill impairment.  As a result of this impairment testing, theCompany recorded pre-tax charges in 2003 of $34,000,000 relating to its CabinManagement Group and $7,500,000 relating to the sale of its Specialty AvionicsGroup.  In 2002, the Company recordedpre-tax charges of $7,672,000 relating to its Specialty Avionics Group.

 

Priorto adoption of SFAS No. 142, impairment testing was in accordance with SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of.”  In 2001, theCompany recorded an $8,583,000 pre-tax charge to operations to reflect theimpairment loss resulting from its restructuring program to close amanufacturing facility (Notes 3 and 7).

 

F-9

----

 

**Impairment of Long-LivedAssets and Other Intangible Assets**

 

Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” the Company reviews long-lived assets held for use andintangible assets, other than goodwill, for impairment when events or changesin circumstances indicate the carrying amount of an asset may not berecoverable.  In the event the sum ofthe expected undiscounted future cash flows resulting from the use of the assetis less 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.  Long-lived assets deemed held for sale arestated at the lower of cost or fair value. As a result of two restructuring programs conducted during 2001 and2002, the Company recorded pre-tax charges of $1,320,000 during 2001 and $3,931,000during 2002 to reflect the impairment of long-lived assets.  The impairment losses are described in Note3.

 

**Product WarrantyObligations**

 

TheCompany sells some products to customers with various repair or replacementwarranties.  The terms of the warrantiesvary according to the customer and/or product involved.  The most common warranty periods aregenerally one to five years from the earlier of the date of delivery to thecustomer or six to twelve months from the date of manufacture.

 

Provisionsfor estimated future warranty costs are made in the period corresponding to thesale of the product and are charged to cost of sales.  Warranty costs have been within management’s expectations.  Classification between current and long-termwarranty obligations is estimated based on historical trends.

 

**Income Taxes**

 

Deferredincome taxes are determined using the liability method.  A deferred tax asset or liability isdetermined based on the difference between the financial statement and taxbasis of assets and liabilities as measured by the enacted tax rates that willbe in effect when these differences reverse. Deferred tax expense is the result of changes in the deferred tax assetor liability.  If necessary, valuationallowances are established to reduce deferred tax assets to their expected realizablevalues.

 

**Derivative FinancialInstruments**

 

TheCompany accounts for derivative financial instruments in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  SFAS No. 133 requires companies to record derivatives on thebalance sheet as assets or liabilities, measured at fair value.  It also requires that gains or lossesresulting from changes in the values of those derivatives be accounted fordepending on the use of the derivative and whether it qualifies for hedgeaccounting.

 

F-10

----

 

TheCompany does not use derivative financial instruments for trading purposes butonly to manage the risk that changes in interest rates would have on futureinterest payments for a portion of its variable-rate debt.  As of December 31, 2003, the Company has aninterest rate swap contract to effectively convert $3,102,000 of variable-ratedebt to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedge against changes in theamount of future cash flows associated with interest payments on thisvariable-rate debt.  As a result, theinterest rate swap contract is reflected at fair value and the related loss of$268,000 on this contract is deferred in stockholders’ equity as a component ofcomprehensive income (loss).  Thedeferred loss will be recognized in future periods as interest expense as therelated fixed-rate interest payments are made. 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 FinancialInstruments**

** **

Allfinancial instruments are held for purposes other than trading.  The estimated fair value of the Company’slong-term debt is based on either quoted market prices or current rates forsimilar issues for debt of the same remaining maturities.  The estimated fair value of the Company’s$100,000,000 subordinated debt was approximately $45,000,000 as of December 31,2003 and $40,000,000 as of December 31, 2002.  All other non-derivative financial instruments as of December 31,2003 and 2002 approximate their carrying amounts either because of the shortmaturity of the instrument, or based on their effective interest rates comparedto current market rates for similar long-term debt or obligations.

 

**Revenue Recognition**

** **

Revenuesfrom the sale of manufactured products, except for products manufactured underlong-term contracts, are recognized upon shipment of product to the customerprovided that the Company has received a signed purchase order, the price isfixed, title has transferred, collection of the resulting receivables isreasonably assured and there are no remaining significant obligations.

 

Revenuesfor products manufactured under long-term contracts are recognized under thepercentage-of-completion method using total contract price, actual costsincurred to date and an estimate of the completion costs for eachcontract.  Costs include all directmaterial and labor costs and those indirect costs related to contractperformance, such as indirect labor, supplies, tools, repairs, anddepreciation.  Selling, general, andadministrative costs are charged to expense as incurred.

 

Percentage-of-completionis measured using an estimate of total costs incurred to date to total expectedcosts for each contract.  This method isused because management considers total costs expended to be the best availablemeasure of progress on these contracts. Provisions for estimated losses on uncompleted contracts are made in theperiod in which such losses are determined. Management believes that the Company will not incur any losses onuncompleted contracts as of December 31, 2003.

 

F-11

----

 

Measuringa contract’s percentage-of-completion requires management to makeestimates.  As a result, it isreasonably possible that factors may cause management to change its revenue andcost estimates, thereby altering 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 to revenue and profit estimatesare made in the period in which the facts that give rise to the revision becomeknown.

 

Theasset “Costs and estimated earnings in excess of billings” represents revenuesrecognized in excess of amounts billed on uncompleted contracts and is reflectedas a component of inventory. Conversely, the liability “Billings in excess of costs and estimatedearnings” represents billings in excess of revenues recognized on uncompletedcontracts and is reflected as an accrued liability.  Unbilled revenues are expected to be billed and collected duringthe succeeding twelve-month period.

 

**Research and DevelopmentCosts**

** **

Researchand development costs are expensed as incurred.  Commencing January 1, 2003, the Company changed its accountingpolicy for product developments costs incurred for long-term programs and suchcosts are also reflected as research and development.  See “—Change in Accounting Principle” for additional information.

 

**Stock Option Plan**

** **

TheCompany has one stock-based employee compensation plan, which is more fullydescribed in the Note 15.  As permittedunder SFAS No. 123, “Accounting for Stock-Based Compensation,” the Companymeasures compensation expense related to the employee stock option plan utilizingthe intrinsic value method as prescribed by Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  No stock-basedemployee compensation cost is reflected in net income (loss), as all optionsgranted under the plan had an exercise price equal to the value of theunderlying common stock on the date of grant.

 

Thefollowing table illustrates the effect on net income if the Company had appliedthe fair value recognition provisions of SFAS No. 123 to stock-based employeecompensation.

 
|                                                                                                                                           |   | **Year Ended  December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
| **(In  thousands)**                                                                                                                            |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                                                                                           |   |                         |    |   |   |   |   |
| Net loss, as reported                                                                                                                          |   | $                            | (80,077 | ) | $ | (71,827 | ) | $ | (19,063 | ) |
| Less total stock-based employee  compensation expense determined under the fair value based method for all  awards, net of related tax effects |   | (324                         | )       | (376 | ) | (392 | ) |
| Pro forma net loss                                                                                                                             |   | $                            | (80,401 | ) | $ | (72,203 | ) | $ | (19,455 | ) |

 

Theeffect of applying SFAS No. 123 may not be representative of the pro formaeffect in future years since additional options may be granted during those futureyears.  The assumptions underlying thecomputations of the fair value of the options are described in Note 15.

 

F-12

----

 

**Statements of Cash Flows**

 

Forpurposes of the statements of cash flows, cash equivalents include short-term,highly liquid investments with maturities of three months or less at the timeof purchase.

 

**Recent AccountingPronouncements**

** **

*SFAS No. 150*

* *

In May2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 establishesstandards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification offinancial instruments within its scope as a liability, including financialinstruments issued in the form of shares that are mandatorily redeemable,because those financial instruments are deemed to be, in essence, obligationsof the issuer.  The Company will berequired to reclassify all of its mandatorily redeemable preferred stock as aliability commencing January 1, 2004 and reflect quarterly dividend accretionon its 14% preferred stock as a charge against pre-tax income in futureperiods.

 

**Note 2.**           Acquisitions and Dispositions

 

**Disposition of SpecialtyAvionics Group**

 

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

 

OnMarch 14, 2003, the Company entered into a definitive agreement to sell itsequity interests in the subsidiaries comprising its Specialty Avionics Group toWings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC, for$140,000,000 in cash.  The sale wasconsummated on May 23, 2003.  Proceedsfrom the sale of $130,723,000 were used to repay first-lien credit facilityborrowings (Note 10).  The sale of theSpecialty Avionics Group is not expected to affect the operations of theCompany’s remaining operating groups.

 

Basedupon the fair value of the group implied in the definitive agreement, theCompany determined that the carrying value of the group’s net assets was notfully recoverable.  As required by SFASNo. 142, the Company recorded a goodwill impairment charge of $7,500,000 in2003 to reduce the carrying value to the estimated net realizable valueestablished by the definitive agreement. The Company recorded a modest $72,000 loss on the sale, based on theactual financial position of the group on the date of sale.

 

F-13

----

 

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

 

Inaccordance with the Financial Accounting Standards Board’s Emerging Issues TaskForce Issue No. 87-24, “Allocation of Interest to Discontinued Operations,” asamended, interest expense includes interest on debt that is to be assumed bythe buyer as well as interest on the $130,723,000 of debt that was required tobe repaid as a result of the sale. Interest expense was based on the historical interest rates chargedduring each of the periods.  Inaddition, and also in accordance with EITF 87-24, costs and expenses of theSpecialty Avionics Group exclude the allocation of general corporate overhead.

 

The following tables summarize the financial position, resultsoperations and cash flows of the Specialty Avionics Group.

 
| **(In  thousands)**                        |   | **December 31,  2002** |    |
|--------------------------------------------|--------|-----------------------------|---------|
|                                       |   |                        |    |
| Assets:                                    |   |                        |    |
| Current assets                             |   | $                           | 41,614  |   |
| Property and equipment, net                |   | 15,744                      |    |
| Other assets, principally intangibles, net |   | 103,383                     |    |
| Total assets                               |   | 160,741                     |    |
|                                       |   |                        |    |
| Liabilities:                               |   |                        |    |
| Current liabilities                        |   | 8,288                       |    |
| Long-term liabilities                      |   | 11,640                      |    |
| Total liabilities                          |   | 19,928                      |    |
|                                       |   |                        |    |
| Net assets of the Specialty Avionics Group |   | $                           | 140,813 |   |

 

F-14

----

 
|                                                  |   | **Year Ended  December 31,** |   |
|-------------------------------------------------------|--------|------------------------------|--------|
| **(In  thousands)**                                   |   | **2003 (1)**                 |   | **2002** |   | **2001** |   |
|                                                  |   |                         |   |   |   |   |   |
| Results of Operations:                                |   |                         |   |   |   |   |   |
| Revenues                                              |   | $                            | 36,595 |   | $ | 95,789 |   | $ | 123,240 |   |
|                                                  |   |                         |   |   |   |   |   |
| Operating expenses:                                   |   |                         |   |   |   |   |   |
| Costs and expenses                                    |   | 30,128                       |   | 75,031 |   | 97,320 |   |
| Impairment of goodwill                                |   | 7,500                        |   | 7,672 |   | — |   |
| Amortization of goodwill and other  intangible assets |   | 878                          |   | 2,228 |   | 7,484 |   |
| Total operating expenses                              |   | 38,506                       |   | 84,931 |   | 104,804 |   |
|                                                  |   |                         |   |   |   |   |   |
| Income (loss) from operations                         |   | (1,911                       | )      | 10,858 |   | 18,436 |   |
|                                                  |   |                         |   |   |   |   |   |
| Other expenses:                                       |   |                         |   |   |   |   |   |
| Interest expense:                                     |   |                         |   |   |   |   |   |
| Debt required to be repaid with proceeds  from sale   |   | 3,297                        |   | 7,720 |   | 8,439 |   |
| Debt obligations assumed by the buyer                 |   | 270                          |   | 798 |   | 917 |   |
| Other expenses, net                                   |   | 153                          |   | 439 |   | 413 |   |
|                                                  |   |                         |   |   |   |   |   |
| Pre-tax income (loss)                                 |   | (5,631                       | )      | 1,901 |   | 8,667 |   |
| Provision for income taxes                            |   | (918                         | )      | (3,975 | ) | (5,121 | ) |
|                                                  |   |                         |   |   |   |   |   |
| Income (loss) before change in accounting  principle  |   | (6,549                       | )      | (2,074 | ) | 3,546 |   |
| Cumulative effect of change in accounting  principle  |   | —                       |   | (39,322 | ) | — |   |
| Income (loss) from operations                         |   | (6,549                       | )      | (41,396 | ) | 3,546 |   |
| Loss on sale, net of tax                              |   | (72                          | )      | — |   | — |   |
|                                                  |   |                         |   |   |   |   |   |
| Net income (loss) from discontinued  operations       |   | $                            | (6,621 | ) | $ | (41,396 | ) | $ | 3,546 |   |
|                                                  |   |                         |   |   |   |   |   |
| Cash Flows Provided By (Used For):                    |   |                         |   |   |   |   |   |
| Operating activities                                  |   | $                            | 3,310  |   | $ | 18,598 |   | $ | 12,996 |   |
| Investing activities                                  |   | (902                         | )      | (1,073 | ) | (1,708 | ) |
| Financing activities                                  |   | (649                         | )      | (815 | ) | (1,094 | ) |
| Net (increase) decrease in cash and cash  equivalents |   | (13                          | )      | 125 |   | 177 |   |
| Effect of foreign currency translation on cash        |   | (2                           | )      | 47 |   | 61 |   |
| Net cash provided by discontinued  operations         |   | $                            | 1,744  |   | $ | 16,882 |   | $ | 10,432 |   |

 

----

(1)           Reflectsthe results of operations and cash flows through May 23, 2003, the date ofsale.

 

F-15

----

 

**Contingent AcquisitionConsideration**

 

Duringthe three years ended December 31, 2000, seven companies were acquired intransactions in which the sellers were entitled to contingent considerationpayments based upon their respective levels of attainment of definedperformance criteria.  Based upon thelevels of attainment of the defined performance criteria during the two yearsended December 31, 2002, the Company recorded contingent consideration payableof $600,000 in 2002 and $700,000 in 2001 resulting in a corresponding increasein goodwill.  As of December 31, 2002and 2003, there are no remaining contingent consideration payment obligations.

 

During2001, the Company settled its asserted claims against the sellers of twocompanies acquired in 2000 for breach of representation and warranty provisionscontained 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.

 

**Note 3.**           Restructuring, Asset Impairment and Other RelatedCharges

** **

Duringthe three years ended December 31, 2003, the Company recorded restructuring,assets impairment and other related charges as follows:

 
|                                                                       |   | **Year Ended  December 31,** |   |
|----------------------------------------------------------------------------|--------|------------------------------|--------|
| **(In  thousands)**                                                        |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                       |   |                         |   |   |   |   |   |
| Nature of charges:                                                         |   |                         |   |   |   |   |   |
| Seating Product Line and Furniture  Manufacturing Facilities Restructuring |   | $                            | 7,132  |   | $ | — |   | $ | — |   |
| Asset Realignment Restructuring                                            |   | —                       |   | 6,901 |   | 20,075 |   |
| Seat Manufacturing Facilities Restructuring                                |   | —                       |   | 6,294 |   | — |   |
| Adjustment of Previous Restructuring Charge                                |   | 754                          |   | — |   | — |   |
| Goodwill impairment charges                                                |   | 41,500                       |   | 7,672 |   | 8,583 |   |
| Other asset impairment related charges                                     |   | —                       |   | 4,376 |   | — |   |
| Total pre-tax charges                                                      |   | $                            | 49,386 |   | $ | 25,243 |   | $ | 28,658 |   |
|                                                                       |   |                         |   |   |   |   |   |
| Business segment recording the charges:                                    |   |                         |   |   |   |   |   |
| Cabin Management                                                           |   | $                            | 41,132 |   | $ | 13,195 |   | $ | 22,309 |   |
| Systems Integration                                                        |   | 754                          |   | 4,060 |   | 3,525 |   |
| Total continuing operations                                                |   | 41,886                       |   | 17,255 |   | 25,834 |   |
| Discontinued operations (Specialty  Avionics)                              |   | 7,500                        |   | 7,988 |   | 2,824 |   |
| Total pre-tax charges                                                      |   | $                            | 49,386 |   | $ | 25,243 |   | $ | 28,658 |   |
|                                                                       |   |                         |   |   |   |   |   |
| Charged to operations:                                                     |   |                         |   |   |   |   |   |
| Cost of sales                                                              |   | $                            | 7,327  |   | $ | 10,676 |   | $ | 13,557 |   |
| Selling, general and administrative  expenses                              |   | 559                          |   | 6,579 |   | 3,694 |   |
| Impairment of goodwill                                                     |   | 34,000                       |   | — |   | 8,583 |   |
| Discontinued operations (Specialty  Avionics)                              |   | 7,500                        |   | 7,988 |   | 2,824 |   |
| Total pre-tax charges                                                      |   | $                            | 49,386 |   | $ | 25,243 |   | $ | 28,658 |   |

 

F-16

----

 
|                                           |   | **Year Ended  December 31,** |   |
|------------------------------------------------|--------|------------------------------|--------|
| **(In  thousands)**                            |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                           |   |                         |   |   |   |   |   |
| Components of charges:                         |   |                         |   |   |   |   |   |
| Continuing operations:                         |   |                         |   |   |   |   |   |
| Noncash charges                                |   | $                            | 37,664 |   | $ | 11,456 |   | $ | 19,558 |   |
| Cash charges                                   |   | 4,222                        |   | 5,799 |   | 6,276 |   |
| Total continuing operations                    |   | 41,886                       |   | 17,255 |   | 25,834 |   |
|                                           |   |                         |   |   |   |   |   |
| Discontinued operations (Specialty  Avionics): |   |                         |   |   |   |   |   |
| Noncash charges                                |   | 7,500                        |   | 7,988 |   | 2,500 |   |
| Cash charges                                   |   | —                       |   | — |   | 324 |   |
| Total discontinued operations                  |   | 7,500                        |   | 7,988 |   | 2,824 |   |
| Total pre-tax charges                          |   | $                            | 49,386 |   | $ | 25,243 |   | $ | 28,658 |   |

 

**Seating Product Line andFurniture Manufacturing Facilities Restructuring**

 

Duringthe second quarter of fiscal 2003, the Company consolidated its seating productline offerings and adopted a restructuring plan to down-size a furnituremanufacturing facility in response to continuing weakness in the business, VIPand head-of-state aircraft market. These actions were designed to reduce engineering, production andinventory carrying costs by supporting fewer product offerings and achieveprofitability at the furniture manufacturing facility based on its lowerproduction levels.  In connection withthese actions, the Company recorded pre-tax charges to operations totaling$7,132,000, comprised of the following:

 

•      *Lease Termination and RelatedCharges. *Leasetermination charges reflect lease cancellation costs for the facilities vacatedand possession returned to the lessor in connection with down-sizing afurniture manufacturing facility.  Otherrelated charges include the write-off of leasehold improvements related to thevacated facilities.

 

•      *Excess and Obsolete InventoryWrite-Downs. *Inventory waswritten down by $3,073,000 to reflect its net realizable value for quantitieson hand exceeding current and forecast order backlog requirements and obsoleteinventory related to the curtailed seating product offerings.

 

•      *Severance and Other CompensationCosts. *The Company reduced itstotal workforce at the down-sized facility by 49 employees, or 37%, fromDecember 31, 2002 levels.

 

Thecomponents of the restructuring, asset impairment and other related charges areas follows:

 
|                                        |   |        |       |                  |       |                  |       | **Balance at** |       |
|---------------------------------------------|--------|-------------|------------|-----------------------|------------|-----------------------|------------|----------------|------------|
|                                        |   | **Total**   |       | **Amounts  Incurred** |       | **December 31,** |       |
| **(In thousands)**                          |   | **Charges** | ** ** | **Noncash**           | ** ** | **Cash**              | ** ** | **2003**       | ** ** |
|                                        |   |        |       |                  |       |                  |       |           |       |
| Lease termination and other related charges |   | $           | 3,876      |                  | $          | (591                  | )          | $              | (3,285     | ) | $ | — |   |
| Excess and obsolete inventory write-downs   |   | 3,073       |       | (3,073                | )          | —                |       | —         |       |
| Severance and other compensation costs      |   | 183         |       | —                |       | (183                  | )          | —         |       |
| Total                                       |   | $           | 7,132      |                  | $          | (3,664                | )          | $              | (3,468     | ) | $ | — |   |

 

Therestructuring activities were completed during 2003.

 

F-17

----

 

**Asset RealignmentRestructuring**

 

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

 

Therestructuring, asset impairment and other related charges are comprised of thefollowing:

 

•      *Impairment ofLong-Lived Assets.*  In 2001, the restructuring program resultedin the impairment of property, equipment and goodwill and, accordingly, theseassets were written down to their net realizable value.  In 2002, the decision to permanently closethe additional manufacturing facility resulted in an additional impairment ofproperty and equipment and, accordingly, these assets were written down totheir estimated net realizable value in 2002. Net realizable values are based on estimated current market values andthe actual losses could exceed these estimates.

 

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

 

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

 

•      *Realignment ofProduction Programs Between Facilities.*  Costsassociated with this realignment were incurred during the fiscal second quarterof 2001.

 

•      *Severance and OtherCompensation Costs.*  Since the September 11thterrorist attack, the Company has reduced its total workforce by approximately500 employees, or 18.5%, as of December 2002, of which approximately 260employees had separated as of December 31, 2001.

 

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

 

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

 

F-18

----

 

The components of the restructuring, assets impairment and otherrelated charges are as follows:

 
|                                                   |   | **Balance at**    |   |        |   |                  |   |       |    | **Balance at** |   |
|--------------------------------------------------------|--------|-------------------|--------|-------------|--------|-----------------------|--------|------------|---------|----------------|--------|
|                                                   |   | **Beginning  of** |   | **Total**   |   | **Amounts  Incurred** |   | **End of** |    |
| **(In thousands)**                                     |   | **the Year**      |   | **Charges** |   | **Noncash**           |   | **Cash**   |    | **the Year**   |   |
|                                                   |   |              |   |        |   |                  |   |       |    |           |   |
| *Year ended December 31, 2002:*                        |   |              |   |        |   |                  |   |       |    |           |   |
|                                                   |   |              |   |        |   |                  |   |       |    |           |   |
| Severance and other compensation costs                 |   | $                 | 1,185  |        | $      | —                |   | $          | —  |           | $      | (1,185 | ) | $ | — |   |
| Lease termination and other related costs              |   | 424               |   | —      |   | —                |   | (334       | )       | 90             |   |
| Impairment of property and equipment                   |   | —            |   | 2,557       |   | (2,557                | )      | —     |    | —         |   |
| Excess inventory write-downs                           |   | —            |   | 1,265       |   | (1,265                | )      | —     |    | —         |   |
| Total                                                  |   | $                 | 1,609  |        | 3,822  |                  | $      | (3,822     | )       | $              | (1,519 | ) | $ | 90 |   |
|                                                   |   |              |   |        |   |                  |   |       |    |           |   |
| Other restructuring-related charges                    |   |              |   | 3,079       |   |                  |   |       |    |           |   |
| Total pre-tax charges                                  |   |              |   | $           | 6,901  |                  |   |       |    |           |   |   |
|                                                   |   |              |   |        |   |                  |   |       |    |           |   |
| *Year ended December 31, 2001:*                        |   |              |   |        |   |                  |   |       |    |           |   |
|                                                   |   |              |   |        |   |                  |   |       |    |           |   |
| 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 |   |

 

Fromthe inception of this restructuring program in 2001, severance and othercompensation costs of approximately $2,024,000 have been paid to manufacturingand administrative employees terminated at the manufacturing facilities closed.  Since the September 11thterrorist attack, the Company has, in addition to the positions eliminated as aresult of the 2002 plant closures described below, reduced its total workforceby approximately 500 employees, or 18.5%, as of December 2002 pursuant to thisrestructuring program, of which approximately 260 employees had separated as ofDecember 31, 2001.

 

Thisrestructuring program was completed during the fourth quarter of fiscal2002.  The remaining balance ofrestructuring costs includes lease termination and other exit costs.  The restructuring program related to leasedfacilities was completed during the second quarter of fiscal 2002; however,$90,000 of future cash payments extend into 2003 due to lease payments on thevacated facility and the incurrence of other exit costs.  No future cash payment obligations relatedthese restructuring activities remains as of December 31, 2003.

 

F-19

----

 

**Seat ManufacturingFacilities Restructuring**

 

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

 

•      *Inventory and AccountsReceivable Write-Downs.*  In connection with the consolidation ofall production, the Company will discontinue manufacturing certain products,principally those which overlap. Inventory and certain receivables related to the discontinued productswere written down to net realizable value.

 

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

 

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

 

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

 

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

 

The components of the restructuring, assets impairment and otherrelated charges are as follows:

 
|                                              |   |        |   |                  |   |                  |   | **Balance at** |   |
|---------------------------------------------------|--------|-------------|--------|-----------------------|--------|-----------------------|--------|----------------|--------|
|                                              |   | **Total**   |   | **Amounts  Incurred** |   | **December 31,** |   |
| **(In thousands)**                                |   | **Charges** |   | **Noncash**           |   | **Cash**              |   | **2002**       |   |
|                                              |   |        |   |                  |   |                  |   |           |   |
| Restructuring and assets impairment  charges:     |   |        |   |                  |   |                  |   |           |   |
| Inventory and accounts receivable  write-downs    |   | $           | 2,200  |                  | $      | (2,200                | )      | $              | — |   | $ | — |   |
| Impairment of property and equipment              |   | 1,374       |   | (1,374                | )      | —                |   | —         |   |
| Severance and other compensation costs            |   | 450         |   | —                |   | (450                  | )      | —         |   |
| Lease termination and other related costs         |   | 300         |   | —                |   | (236                  | )      | 64             |   |
| Total restructuring and asset impairment  charges |   | 4,324       |   | $                     | (3,574 | )                     | $      | (686           | )      | $ | 64 |   |
|                                              |   |        |   |                  |   |                  |   |           |   |
| Other restructuring-related expenses              |   | 1,970       |   |                  |   |                  |   |           |   |
| Total pre-tax charges                             |   | $           | 6,294  |                  |   |                  |   |           |   |   |

 

Thisrestructuring program was completed during the second quarter of fiscal2002.  The remaining balance ofrestructuring costs includes lease termination and other exit costs.  The manufacturing facilities were closedduring June 2002; however, future cash payments extend beyond this date due tolease payments on the vacated facilities and the incurrence of other exitcosts.  No future cash paymentobligations remain as of December 31, 2003.

 

F-20

----

 

**Adjustment of PreviousRestructuring Charge**

 

InDecember 1999, the Company initiated a plan to reorganize and restructure theoperations of two of its subsidiaries within the Systems IntegrationGroup.  The restructuring was a resultof a management decision to exit the manufacturing business at thesesubsidiaries and consolidate and relocate operations into one facility to moreefficiently and effectively manage the business and be more competitive.

 

Inconnection with these restructuring activities, the Company provided for leasetermination costs expected to be incurred over the remaining term of theexisting long-term lease at the facility being vacated following therestructuring. The expected costs were reduced by estimated sublease incomewhich was based on estimated future market rates and anticipated subleaserental periods.

 

During2003, the initial sublease was canceled and the Company entered into a newsublease agreement.  Due to thedeterioration in market rates since 1999, the terms of the new sublease wereless favorable than the initial one.  Asa result, the Company determined that its remaining accrual for leasetermination costs was insufficient to cover the net costs expected to beincurred over the remaining lease term. Consequently, an additional $754,000 was charged to operations during2003 for these additional costs.  Apayment obligation totaling $734,000 remains as of December 31, 2003.  The future cash payments will be funded frominternally generated cash for operations.

 

**Goodwill and Other AssetImpairment Related Charges**

 

Duringthe year ended December 31, 2003, the Company recorded $41,500,000 of goodwillimpairment charges.  Impairment chargestotaling $34,000,000 pertained to goodwill impairment testing pursuant to SFASNo. 142 (Note 7) and were charged to continuing operations.  The remaining $7,500,000 pertained to thesale of the Specialty Avionics Group and was charged to discontinued operations(Notes 2 and 7).

 

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

 

**Note 4.**           Accounts Receivable

** **

TheCompany is potentially subject to concentrations of credit risk as the Companyrelies heavily on customers operating in the domestic and foreign business, VIPand head-of-state aircraft industries. Generally, the Company does not require collateral or other security tosupport accounts receivable subject to credit risk.  Under certain circumstances, deposits or cash-on-delivery termsare required.  The Company maintainsallowances for doubtful accounts and generally, such losses have been withinmanagement’s expectations.

 

Accountsreceivable are net of an allowance for doubtful accounts of $1,268,000 as ofDecember 31, 2003 and $1,205,000 as of December 31, 2002.

 

F-21

----

 

**Note 5.**           Inventories

 

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

 
|                                                                         |   | **December  31,** |   |
|------------------------------------------------------------------------------|--------|-------------------|--------|
| **(In  thousands)**                                                          |   | **2003**          |   | **2002** |   |
|                                                                         |   |              |   |   |   |
| Raw materials                                                                |   | $                 | 30,414 |   | $ | 28,911 |   |
| Work-in-process:                                                             |   |              |   |   |   |
| Direct and indirect manufacturing costs                                      |   | 6,817             |   | 6,843 |   |
| Program costs, principally engineering  costs                                |   | —            |   | 13,764 |   |
| Finished goods                                                               |   | 1,693             |   | 4,773 |   |
| Costs and estimated earnings in excess of  billings on uncompleted contracts |   | 4,057             |   | 5,009 |   |
| Total inventories                                                            |   | $                 | 42,981 |   | $ | 59,300 |   |

 

Asdescribed in Note 1, the Company changed its accounting policy for programcosts, electing to expense such costs as incurred commencing January 1, 2003.

 

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

 
|                                                                          |   | **December  31,** |   |
|-------------------------------------------------------------------------------|--------|-------------------|--------|
| **(In  thousands)**                                                           |   | **2003**          |   | **2002** |   |
|                                                                          |   |              |   |   |   |
| Costs incurred on uncompleted contracts                                       |   | $                 | 71,784 |   | $ | 50,577 |   |
| Estimated earnings recognized                                                 |   | 77,782            |   | 63,699 |   |
| Total costs and estimated earnings                                            |   | 149,566           |   | 114,276 |   |
| Less billings to date                                                         |   | (145,661          | )      | (109,880 | ) |
| Net                                                                           |   | $                 | 3,905  |   | $ | 4,396 |   |
|                                                                          |   |              |   |   |   |
| Balance sheet classification:                                                 |   |              |   |   |   |
| Asset – Costs and estimated earnings in  excess of billings              |   | $                 | 4,017  |   | $ | 5,009 |   |
| Liability – Billings in excess of costs and  estimated earnings (Note 9) |   | (112              | )      | (613 | ) |
| Net                                                                           |   | $                 | 3,905  |   | $ | 4,396 |   |

 

**Note 6.**           Property and Equipment

 

Propertyand equipment includes the following as of December 31, 2003 and 2002:

 
|                                                     |   | **December  31,** |   |
|----------------------------------------------------------|--------|-------------------|--------|
| **(In  thousands)**                                      |   | **2003**          |   | **2002** |   |
|                                                     |   |              |   |   |   |
| Land, buildings and leasehold improvements               |   | $                 | 22,251 |   | $ | 25,074 |   |
| Machinery and equipment                                  |   | 16,430            |   | 16,500 |   |
| Computer equipment and software, furniture  and fixtures |   | 15,700            |   | 13,459 |   |
| Tooling                                                  |   | 1,001             |   | 1,111 |   |
| Total cost                                               |   | 55,382            |   | 56,144 |   |
| Accumulated depreciation and amortization                |   | (24,482           | )      | (20,005 | ) |
| Net property and equipment                               |   | $                 | 30,900 |   | $ | 36,139 |   |

 

F-22

----

 

Propertyand equipment under capital leases included above consists of the following asof December 31, 2003 and 2002:

 
|                                                     |   | **December  31,** |   |
|----------------------------------------------------------|--------|-------------------|--------|
| **(In  thousands)**                                      |   | **2003**          |   | **2002** |   |
|                                                     |   |              |   |   |   |
| Land, buildings and leasehold improvements               |   | $                 | 4,608  |   | $ | 4,594 |   |
| Machinery and equipment                                  |   | 601               |   | 608 |   |
| Computer equipment and software, furniture  and fixtures |   | 1,717             |   | 1,747 |   |
| Total cost                                               |   | 6,926             |   | 6,949 |   |
| Accumulated depreciation and amortization                |   | (1,836            | )      | (1,424 | ) |
| Net property and equipment                               |   | $                 | 5,090  |   | $ | 5,525 |   |

 

Depreciationof property and equipment under capital leases is included in depreciationexpense in the consolidated financial statements.

 

**Note 7.**           Goodwill

 

EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” and the provisions of SFAS No. 141, “Business Combinations,”which were required to be adopted concurrent with the adoption of SFAS No.142.  Adoption of these accountingpronouncements resulted in the following:

 

•      *Reassessment of Useful Lives of Intangible Assets.* The reassessment of the useful lives of intangible assets acquired on orbefore June 30, 2001 (Note 8) was completed during the first quarter of fiscal2002.  The remaining useful lives weredeemed appropriate.

 

•      *Reclassification of Intangible Assets.* Intangible assets relating to acquired assembled workforce intangibles(Note 8) not meeting the criteria for recognition apart from goodwill werereclassified to goodwill, net of deferred income taxes.

 

•      *Discontinuance of Goodwill Amortization.* Goodwill is deemed to be an indefinite-lived asset.  As a result, and in accordance with SFAS No.142, the recording of periodic goodwill amortization charges was discontinuedeffective January 1, 2002.

 

During2002, the Company completed the transitional impairment testing of goodwillrecorded as of January 1, 2002 as required under SFAS No. 142.  Fair value of each reporting unit wasdetermined using a discounted cash flow approach taking into considerationprojections based on the individual characteristics of the reporting units,historical trends, market multiples for comparable businesses and independentappraisals.  Unallocated goodwill wasallocated to the reporting units for impairment testing purposes.  The results indicated that the carryingvalue of goodwill was impaired.  Theresulting impairment was primarily attributable to a change in the evaluationcriteria for goodwill utilized under previous accounting guidance to the fairvalue approach stipulated in SFAS No. 142. In accordance with the transitional provision of SFAS No. 142, theCompany recorded a $17,828,000 noncash write-down of goodwill (net of $878,000income tax benefit) as of January 1, 2002 as a cumulative effect of a change inaccounting principle.  An additional$39,322,000 noncash write-down of goodwill pertained to the Specialty AvionicsGroup and is included in the loss from discontinued operations.

 

F-23

----

 

Reportedincome (loss) from continuing operations, net of tax and before the cumulativeeffect of the change in accounting principle, adjusted to reflect thediscontinuance of periodic goodwill and assembled workforce amortizationcharges, is as follows:

 
|                                                                |   | **Year Ended  December 31,** |    |
|---------------------------------------------------------------------|--------|------------------------------|---------|
| **(In  thousands)**                                                 |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                |   |                         |    |   |   |   |   |
| Reported loss from continuing operations,  net of tax               |   | $                            | (59,692 | ) | $ | (12,603 | ) | $ | (22,609 | ) |
| Add back goodwill and assembled workforce  amortization, net of tax |   | —                       |    | — |   | 6,681 |   |
| Adjusted loss from continuing operations                            |   | $                            | (59,692 | ) | $ | (12,603 | ) | $ | (15,928 | ) |

 

Changesin the carrying amount of goodwill, by business segment (Note 17), for the twoyears ended December 31, 2003 are as follows:

 
|                                                                     |   | **Continuing  Operations**   |    | **Discontinued**                |   |
|--------------------------------------------------------------------------|--------|------------------------------|---------|---------------------------------|--------|
| **(In thousands)**                                                       |   | **Cabin  Management  Group** |    | **Systems  Integration  Group** |   | **Corporate** |   | **Total** |   | **Specialty  Avionics  Group** |   |
|                                                                     |   |                         |    |                            |   |   |   |   |   |   |   |
| Balance, December 31, 2001                                               |   | $                            | 178,715 |                            | $      | 28,277 |   | $ | 3,956 |   | $ | 210,948 |   | $ | 126,495 |   |
| Adoption of SFAS 141 and 142:                                            |   |                         |    |                            |   |   |   |   |   |   |   |
| Reclassification of intangible assets                                    |   | 3,076                        |    | 386                             |   | 120 |   | 3,582 |   | 1,221 |   |
| Transitional impairment charge                                           |   | (8,463                       | )       | (7,881                          | )      | (2,362 | ) | (18,706 | ) | (39,322 | ) |
| Contingent consideration earned, including  acquisition related expenses |   | 606                          |    | —                          |   | — |   | 606 |   | — |   |
| Impairment charge                                                        |   | —                       |    | —                          |   | — |   | — |   | (7,672 | ) |
| Balance, December 31, 2002                                               |   | 173,934                      |    | 20,782                          |   | 1,714 |   | 196,430 |   | 80,722 |   |
|                                                                     |   |                         |    |                            |   |   |   |   |   |   |   |
| Impairment charge                                                        |   | (34,000                      | )       | —                          |   | — |   | (34,000 | ) | (7,500 | ) |
| Sale of Specialty Avionics Group                                         |   | —                       |    | —                          |   | — |   | — |   | (73,222 | ) |
| Balance, December 31, 2003                                               |   | $                            | 139,934 |                            | $      | 20,782 |   | $ | 1,714 |   | $ | 162,430 |   | $ | — |   |

 

Duringthe fourth quarter of fiscal 2002, the Company performed its annual impairmenttesting and recorded an additional $7,672,000 impairment charge related to theSpecialty Avionics Group.  The chargeresulted from a decrease in fair value due to further weakness during 2002 inthe commercial aircraft portion of our business.  This charge is included as a component of income (loss) fromdiscontinued operations.

 

Asdescribed in Note 2, on March 14, 2003, the Company entered into a definitiveagreement to sell its equity interests in the subsidiaries comprising itsSpecialty Avionics Group.  Based uponthe fair value of the group implied in the definitive agreement, the Companydetermined that the carrying value of the group’s net assets was not fullyrecoverable.  As a result, the Companyrecorded a goodwill impairment charge of $7,500,000 during the three monthsended March 31, 2003 to reduce the carrying value to estimated net realizablevalue.

 

F-24

----

 

As a result of thecontinuing weakness in the business, VIP and head-of-state aircraft market andthe Company’s decision to down-size a furniture manufacturing facility in thesecond quarter of fiscal 2003, the Company determined that it should reevaluatethe carrying value of its goodwill prior to the annual October 31sttesting date.  Accordingly, the Companyperformed an impairment test of the goodwill associated with its furnituremanufacturing reporting unit for recoverability and found the goodwill to beimpaired.  As a result, the Companyrecorded a pre-tax charge to operations of $34,000,000 during the three monthsended June 30, 2003.  The charge wasprimarily a result of a decrease in fair value caused by using lower cash flowforecasts based on the most recently reduced industry estimates of aircraftdeliveries resulting from overall industry weakness.  The annual impairment test on October 31st indicatedthat no additional impairment had occurred.

 

**Note8.**           Other Assets, Principally Intangibles

** **

Otherassets are comprised of the following as of December 31, 2003 and 2002:

 
|                                                     |   | **December  31,** |   |
|----------------------------------------------------------|--------|-------------------|--------|
| **(In thousands)**                                       |   | **2003**          |   | **2002** |   |
|                                                     |   |              |   |   |   |
| Identifiable intangible assets with finite  useful lives |   | $                 | 25,455 |   | $ | 29,106 |   |
| Deferred financing costs                                 |   | 11,812            |   | 9,168 |   |
| Other non-amortizable assets                             |   | 825               |   | 1,154 |   |
| Total other assets                                       |   | $                 | 38,092 |   | $ | 39,428 |   |

 

**Identifiable Intangible Assets with Finite UsefulLives**

** **

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

 
|                           |   | **December  31, 2003** |   | **December 31,  2002**   |   |
|--------------------------------|--------|------------------------|--------|-------------------------------|--------|
| **(In thousands)**             |   | **Cost**               |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                           |   |                   |   |                          |   |   |   |   |   |   |   |   |   |
| FAA certifications             |   | $                      | 22,272 |                          | $      | (6,222 | ) | $ | 16,050 |   | $ | 22,272 |   | $ | (4,737 | ) | $ | 17,535 |   |
| Engineering drawings           |   | 7,645                  |   | (2,286                        | )      | 5,359 |   | 7,645 |   | (1,776 | ) | 5,869 |   |
| Other identifiable intangibles |   | 11,345                 |   | (7,299                        | )      | 4,046 |   | 11,345 |   | (5,643 | ) | 5,702 |   |
| Total identifiable intangibles |   | $                      | 41,262 |                          | $      | (15,807 | ) | $ | 25,455 |   | $ | 41,262 |   | $ | (12,156 | ) | $ | 29,106 |   |

 

Estimatedannual amortization expense for all identifiable intangible assets with finiteuseful lives for the five-year period ending December 31, 2008 is asfollows: 2004 – $3,644,000; 2005 – $3,477,000; 2006 – $2,275,000; 2007 –$2,175,000; and 2008 – $2,171,000.

 

F-25

----

 

EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” and the provisions of SFAS No. 141, “Business Combinations,”which were required to be adopted concurrent with the adoption of SFAS No.142.  Adoption of these accountingpronouncements resulted in the following:

 

•      *Reassessment of Useful Lives of Intangible Assets.* The reassessment of the useful lives of intangible assets acquired on orbefore June 30, 2001 was completed during the first quarter of fiscal2002.  The remaining useful lives weredeemed appropriate.

 

•      *Reclassification of Intangible Assets.* Intangible assets relating to acquired assembled workforce intangiblesnot meeting the criteria for recognition apart from goodwill were reclassifiedto goodwill, net of deferred income taxes.

 

**Note9.**           Accrued Liabilities

** **

Accruedliabilities are comprised of the following as of December 31, 2003 and 2002:

 
|                                                                         |   | **December  31,** |   |
|------------------------------------------------------------------------------|--------|-------------------|--------|
| **(In thousands)**                                                           |   | **2003**          |   | **2002** |   |
|                                                                         |   |              |   |   |   |
| Accrued interest                                                             |   | $                 | 4,969  |   | $ | 7,465 |   |
| Salaries, wages, compensated absences and  payroll related taxes             |   | 4,017             |   | 9,212 |   |
| Customer advances and deposits                                               |   | 3,147             |   | 4,662 |   |
| Current portion of accrued product warranty  obligations                     |   | 2,064             |   | 2,801 |   |
| Billings in excess of costs and estimated  earnings on uncompleted contracts |   | 112               |   | 613 |   |
| Other accrued liabilities                                                    |   | 3,581             |   | 6,741 |   |
| Total accrued liabilities                                                    |   | $                 | 17,890 |   | $ | 31,494 |   |

 

**Accrued Product WarrantyObligations**

** **

Thefollowing table reflects the accrued product warranty obligation activityduring the three years ended December 31, 2003.

 
|                                                           |   | **Year Ended  December 31,** |   |
|----------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                             |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                           |   |                         |   |   |   |   |   |
| Accrual activity during the year:                              |   |                         |   |   |   |   |   |
| Accrual at beginning of the year                               |   | $                            | 3,686  |   | $ | 2,642 |   | $ | 2,640 |   |
| Accruals for warranties issued during the  period              |   | 369                          |   | 763 |   | 602 |   |
| Change in accrual estimate related to  pre-existing warranties |   | 518                          |   | 481 |   | (482 | ) |
| Settlements made (in cash or in kind)  during the period       |   | (989                         | )      | (200 | ) | (118 | ) |
| Accrual at end of the year                                     |   | $                            | 3,584  |   | $ | 3,686 |   | $ | 2,642 |   |
|                                                           |   |                         |   |   |   |   |   |
| Classification at end of the year:                             |   |                         |   |   |   |   |   |
| Current liability                                              |   | $                            | 2,064  |   | $ | 2,801 |   | $ | 2,531 |   |
| Long-term liability                                            |   | 1,520                        |   | 885 |   | 111 |   |
| Total                                                          |   | $                            | 3,584  |   | $ | 3,686 |   | $ | 2,642 |   |

** **

**F-26**

----

** **

**Note10.**         Long-Term Debt

** **

Long-termdebt includes the following amounts as of December 31, 2003 and 2002:

 
|                                                                         |   | **December  31,** |    |
|------------------------------------------------------------------------------|--------|-------------------|---------|
| **(In thousands)**                                                           |   | **2003**          |    | **2002** |   |
|                                                                         |   |              |    |   |   |
| First-lien credit facility:                                                  |   |              |    |   |   |
| Term debt                                                                    |   | $                 | 80,521  |   | $ | 264,200 |   |
| Revolving line of credit                                                     |   | —            |    | 6,000 |   |
| Second-lien term debt                                                        |   | 80,067            |    | — |   |
| Capital lease obligations and other debt,  secured by property and equipment |   | 8,818             |    | 10,817 |   |
| 12% subordinated notes                                                       |   | 100,000           |    | 100,000 |   |
| Total long-term debt                                                         |   | 269,406           |    | 381,017 |   |
| Less current portion                                                         |   | (1,198            | )       | (16,317 | ) |
| Long-term debt, less current portion                                         |   | $                 | 268,208 |   | $ | 364,700 |   |

 

**First-Lien CreditFacility**

** **

Thecredit facility provides, through a syndicate of lenders, for term debtborrowings in the initial principal amount of $290,000,000 and a revolving lineof credit for working capital and to finance acquisitions.  In March 2003, the credit facility wasamended to permit the sale of the Specialty Avionics Group and, in December2003, the credit facility was further amended to permit the incurrence of$80,000,000 of second-lien term debt.

 

Netproceeds from the sale of the Specialty Avionics Group of $130,723,000 and thenet proceeds from the second-lien term debt of $74,081,000 were used to repayfirst-lien credit facility indebtedness. As a result of the debt repayments, the Company recorded noncash chargesof $3,494,000 to reflect the write-off of deferred financing costs associatedwith the debt repaid.  In connectionwith debt repaid with the proceeds from the sale of the Specialty AvionicsGroup, $2,055,000 of such debt issuance costs were written off and arereflected in the loss from discontinued operations; the remaining $1,439,000 isreflected as a loss on the extinguishment of debt.

 

TheMarch 2003 amendment also revised various financial covenants (which theCompany would otherwise have not been able to meet as ofMarch 31, 2003), decreased by $10,000,000 the revolving line ofcredit commitment, increased the prime rate and LIBOR interest margins by 1.5%and permits the repurchase of a portion of the Company’s 12% subordinated noteswith the proceeds from the sale of junior securities.  The December 2003 amendment further revised various financialcovenants to permit the second-lien debt, extended the scheduled repaymentdates of the remaining first-lien term debt by 12 to 18 months, reduced therevolving credit commitment by an additional $16,000,000 and extended thecommitment by 18 months.  Interest ratescharged on the first-lien debt remained unchanged.

 

F-27

----

 

Therevolving line of credit commitment is $24,000,000 as of December 31, 2003 andall borrowings under the revolving facility must be repaid by March 31,2006.  Term debt principal payments aredue in increasing amounts commencing December 31, 2005 and continue throughDecember 31, 2007.  Loans under thecredit facility generally bear interest based on a margin over, at theCompany’s option, prime rate or LIBOR. The margins applicable to portions of amounts borrowed vary dependingupon the Company’s consolidated debt leverage ratio.  Currently, the applicable margins are 4.00% to 4.75% for primerate borrowings and 5.25% to 6.00% for LIBOR borrowings.  The weighted-average interest rate on allfirst-lien credit facility borrowings outstanding was 6.85% as of December 31,2003.  Borrowings under this creditfacility are secured by a first lien on substantially all of the assets of theCompany.  The Company is subject tocertain commitment fees under the facility as well as the maintenance ofcertain financial ratios, cash flow results and other restrictive covenants,including the payment of dividends in cash. The Company was in compliance with the covenants during the year endedDecember 31, 2003.

 

As ofDecember 31, 2003, the Company had an irrevocable standby letter of credit inthe amount of $250,000 issued and outstanding under the credit facility, whichreduces borrowings available under the revolving line credit.

 

**Second-Lien Term Debt**

** **

InDecember 2003, the Company received proceeds from second-lien term loans in theaggregate amount of $80,000,000 from a syndicate of lenders and used the netproceeds to repay first-lien credit facility indebtedness.  The second-lien debt, which is comprised of$70,000,000 of fixed rate debt and $10,000,000 of floating rate debt, matureson June 30, 2008.

 

Thefixed rate debt bears interest at 15%; 12% payable quarterly in cash and 3%pay-in-kind or “accreted” interest, payable at maturity.  The variable rate debt bears cash interest,at the Company’s option, at prime rate plus 7.5% or LIBOR plus 8.5%, plus 3%pay-in-kind interest.  Theweighted-average interest rate on all second-lien term debt outstanding was14.71% as of December 31, 2003.  As ofDecember 31, 2003, $67,000 of pay-in-kind interest has accreted to the initialprincipal balance of the term debt.  Theterm debt is secured by a second lien on substantially all of the assets of theCompany.  The Company is subject tocustomary fees under the agreement as well as the maintenance of certainfinancial ratios, cash flow results and other restrictive covenants which aresimilar to the covenants in the first-lien credit facility.  The Company was in compliance with thecovenants during the year ended December 31, 2003.

 

**12% Subordinated Notes**

** **

Thesubordinated notes mature on September 30, 2008 and interest is payablesemi-annually on March 30, and September 30, of each year.  The subordinated notes are unsecured generalobligations of the Company and are subordinated in right of payment tosubstantially all existing and future senior indebtedness of the Company,including first-lien credit facility and second-lien term indebtedness.  Prior to maturity, the Company may redeemall or some of the subordinated notes at defined redemption prices, which mayinclude a premium.  In the event of achange in control, the holders may require the Company to repurchase thesubordinated notes for a redemption price that may also include a premium.  The Company is subject to restrictivecovenants, including the payment of dividends in cash.

 

F-28

----

 

**Aggregate Maturities**

** **

Thetotal annual maturities of long-term debt outstanding as of December 31, 2003are as follows:

 

*(In thousands)*

 
| **Year ending December 31,** |   |    |    |
|------------------------------|--------|---------|---------|
| 2004                         |   | $       | 1,198   |   |
| 2005                         |   | 4,007   |    |
| 2006                         |   | 13,536  |    |
| 2007                         |   | 66,289  |    |
| 2008                         |   | 180,540 |    |
| 2009 and thereafter          |   | 3,836   |    |
| Total aggregate maturities   |   | $       | 269,406 |   |

 

**Financial Condition andLiquidity**

** **

Theacts and ongoing threats of global terrorism, the current military conflicts,health epidemics and weak global economic conditions are all adverselyimpacting the Company’s business.  Inresponse, a series of restructuring activities have been implemented as describedin Note 3 which were designed to reduce costs and conserve working capital.

 

Also,as described above, the first-lien credit facility was amended twice during2003 and $80,000,000 of second-lien debt was issued with the proceeds thereofused to repay first-lien indebtedness. These actions, among other things, resulted in debt maturities beingextended and debt covenants relaxed.

 

Theability to comply with debt financial covenants, pay principal or interest andsatisfy other debt obligations will depend on the Company’s future operatingperformance as well as competitive, legislative, regulatory, business and otherfactors beyond its control.  The Companybelieves the extended debt maturity schedule through 2006 will coincide withits expectations of the recovery period for the business, VIP and head-of stateaircraft market and resulting demand for its products and services.  As a result, management believes expectedoperating cash flows, together with borrowings under the first-lien creditfacility ($23,800,000 of which was available as of December 31, 2003, thecommitment for which expires in March 2006), will be sufficient to meetoperating expenses, working capital requirements, capital expenditures and debtservice obligations for the next twelve months.

 

F-29

----

 

**Note11.**         Income Taxes

** **

Thecomponents of the loss before income taxes and cumulative effect of change inaccounting principle are as follows:

 
|                                     |   | **Year Ended  December 31,** |    |
|------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                       |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                     |   |                         |    |   |   |   |   |
| Reported by:                             |   |                         |    |   |   |   |   |
| Continuing operations                    |   | $                            | (73,188 | ) | $ | (16,224 | ) | $ | (26,542 | ) |
| Discontinued operations                  |   | (5,631                       | )       | 1,901 |   | 8,667 |   |
| Total                                    |   | $                            | (78,819 | ) | $ | (14,323 | ) | $ | (17,875 | ) |
|                                     |   |                         |    |   |   |   |   |
| Taxed under the following jurisdictions: |   |                         |    |   |   |   |   |
| Domestic                                 |   | $                            | (78,411 | ) | $ | (13,222 | ) | $ | (17,297 | ) |
| Foreign                                  |   | (408                         | )       | (1,101 | ) | (578 | ) |
| Total                                    |   | $                            | (78,819 | ) | $ | (14,323 | ) | $ | (17,875 | ) |

 

The provisions for income taxes (benefit) areas follows:

 
|                           |   | **Year Ended  December 31,** |       |
|--------------------------------|--------|------------------------------|------------|
| **(In thousands)**             |   | **2003**                     | ** ** | **2002** | ** ** | **2001** |   |
|                           |   |                         |       |   |   |   |   |
| Current:                       |   |                         |       |   |   |   |   |
| U.S. federal                   |   | $                            | (1,548     | ) | $ | — |   | $ | 62 |   |
| State and local                |   | 295                          |       | 255 |   | 1,133 |   |
| Foreign                        |   | (82                          | )          | 67 |   | 30 |   |
| Total current                  |   | (1,335                       | )          | 322 |   | 1,225 |   |
|                           |   |                         |       |   |   |   |   |
| Deferred:                      |   |                         |       |   |   |   |   |
| U.S. federal                   |   | (6,112                       | )          | (144 | ) | 545 |   |
| State and local                |   | (5,131                       | )          | 463 |   | (464 | ) |
| Foreign                        |   | —                       |       | (287 | ) | (118 | ) |
| Total deferred                 |   | (11,243                      | )          | 32 |   | (37 | ) |
|                           |   |                         |       |   |   |   |   |
| Total provision:               |   |                         |       |   |   |   |   |
| U.S. federal                   |   | (7,660                       | )          | (144 | ) | 607 |   |
| State and local                |   | (4,836                       | )          | 718 |   | 669 |   |
| Foreign                        |   | (82                          | )          | (220 | ) | (88 | ) |
| Total provision                |   | $                            | (12,578    | ) | $ | 354 |   | $ | 1,188 |   |
|                           |   |                         |       |   |   |   |   |
| Allocation of total provision: |   |                         |       |   |   |   |   |
| Continuing operations          |   | $                            | (13,496    | ) | $ | (3,621 | ) | $ | (3,933 | ) |
| Discontinued operations        |   | 918                          |       | 3,975 |   | 5,121 |   |
| Total provision                |   | $                            | (12,578    | ) | $ | 354 |   | $ | 1,188 |   |

 

Theprovision for income taxes differs from the amount of income tax determined byapplying the applicable U.S. statutory federal rate to the income (loss) beforeincome taxes and cumulative effect of change in accounting principle as aresult of the following differences:

 

F-30

----

 
|                                                                                       |   | **Year Ended  December 31,** |    |
|--------------------------------------------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                                                                         |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                                       |   |                         |    |   |   |   |   |
| Income tax (benefit) at U.S. statutory  rates                                              |   | $                            | (27,587 | ) | $ | (5,013 | ) | $ | (6,256 | ) |
| Tax effect of increases (decreases)  resulting from:                                       |   |                         |    |   |   |   |   |
| Book benefit not provided for operating  loss carryforwards                                |   | 12,402                       |    | — |   | — |   |
| Amortization of assets and other expenses  not deductible for income tax purposes          |   | 3,422                        |    | 2,927 |   | 5,477 |   |
| Minority interest in preferred stock of  subsidiary not deductible for income tax purposes |   | 2,364                        |    | 2,044 |   | 1,771 |   |
| State income taxes, net of federal benefit                                                 |   | (3,143                       | )       | 467 |   | 265 |   |
| Lower tax rates on earnings of foreign  subsidiaries and foreign sales corporation         |   | (64                          | )       | (8 | ) | (57 | ) |
| Other, net                                                                                 |   | 28                           |    | (63 | ) | (12 | ) |
| Income tax (benefit) at effective rates                                                    |   | $                            | (12,578 | ) | $ | 354 |   | $ | 1,188 |   |

 

Deferred tax assets and(liabilities) are comprised of the following as of December 31, 2003 and 2002:

 
|                                                       |   | **December  31,** |   |
|------------------------------------------------------------|--------|-------------------|--------|
| **(In thousands)**                                         |   | **2003**          |   | **2002** |   |
|                                                       |   |              |   |   |   |
| Gross deferred tax assets:                                 |   |              |   |   |   |
| Loss carryforwards                                         |   | $                 | 23,471 |   | $ | 12,173 |   |
| Accrued liabilities                                        |   | 3,670             |   | 6,797 |   |
| Inventory                                                  |   | 2,920             |   | 4,252 |   |
| Other                                                      |   | 1,165             |   | 832 |   |
| Gross deferred tax assets                                  |   | 31,226            |   | 24,054 |   |
|                                                       |   |              |   |   |   |
| Gross deferred tax (liabilities):                          |   |              |   |   |   |
| Intangible assets                                          |   | (10,902           | )      | (31,267 | ) |
| Program costs                                              |   | (491              | )      | (6,168 | ) |
| Property and equipment                                     |   | (305              | )      | (3,119 | ) |
| Other                                                      |   | —            |   | (56 | ) |
| Gross deferred tax (liabilities)                           |   | (11,698           | )      | (40,610 | ) |
|                                                       |   |              |   |   |   |
| Net deferred asset (liability) before  valuation allowance |   | 19,528            |   | (16,556 | ) |
| Net deferred tax asset valuation allowance                 |   | (19,528           | )      | — |   |
| Net deferred tax liability                                 |   | $                 | — |   | $ | (16,556 | ) |
|                                                       |   |              |   |   |   |
| Balance sheet classification:                              |   |              |   |   |   |
| Continuing operations:                                     |   |              |   |   |   |
| Current deferred tax asset                                 |   | $                 | — |   | $ | 16,430 |   |
| Noncurrent deferred tax liability                          |   | —            |   | (27,077 | ) |
| Net continuing operations                                  |   | —            |   | (10,647 | ) |
|                                                       |   |              |   |   |   |
| Discontinued operations:                                   |   |              |   |   |   |
| Current deferred tax asset                                 |   | —            |   | 6,201 |   |
| Noncurrent deferred tax liability                          |   | —            |   | (12,110 | ) |
| Net discontinued operations                                |   | —            |   | (5,909 | ) |
| Net deferred tax liability                                 |   | $                 | — |   | $ | (16,556 | ) |

** **

**F-31**

----

** **

As ofDecember 31, 2003, the Company had a net deferred tax asset of $19,528,000,prior to recording the valuation allowance; a net deferred tax liabilityexisted in prior periods.  The change toa net asset position was primarily caused by the $34,000,000 goodwillimpairment charge recorded during fiscal 2003. SFAS No. 109, “Accounting for Income Taxes,” requires the recognition ofa deferred tax asset for the future income tax benefit of goodwill deductionsthat will be taken for income tax purposes (i.e. the goodwill that has beenwritten off in the financial statements for book purposes will continue to beamortized and deducted for tax purposes and, accordingly, represents a newdeferred tax asset).

 

Asrequired by SFAS No. 109, the Company evaluated its deferred assets forexpected recoverability based on the nature of the item, the associated taxingjurisdictions, the applicable expiration dates and future taxable incomeforecasts that would impact utilization. Since there is no loss carry back potential and the Company does nothave any tax planning strategies to assure recoverability, the only possibilityfor recovery of the net deferred assets is future taxable income.  Since there have been prior year losses, theCompany believes it is not prudent to rely on future income as the means tosupport the carrying value of the net asset. As a result of the evaluation, the Company recorded a $19,528,000valuation allowance, eliminating the net deferred asset, as of December 31,2003.

 

TheCompany had a net deferred tax liability of $16,556,000 as of December 31,2002.  The full realization of thedeferred tax assets was achieved through the reversal of the deferred tax liabilitiesin future periods.  As a result, avaluation allowance was not required for periods ending or prior to December31, 2002.

 

As ofDecember 31, 2003, the Company has total loss carryforwards of approximately$55,472,000 for federal income tax purposes and $60,985,000 for state incometax purposes.  The loss carryforwardsare not subject to limitations on their annual utilization (“Section 382limitation,” as defined in the Internal Revenue Code) and therefore areavailable for utilization in 2004 and future periods.  The federal and state loss carryforwards expire in varyingamounts commencing in 2011 and continuing through 2023.

 

F-32

----

 

**Note12.**         Capital Structure

** **

**Mandatorily RedeemablePreferred Stock**

** **

Thetable below summarizes mandatorily redeemable preferred stock issued during thethree years ended December 31, 2003.

 
|                                                 |   | **DeCrane  Aircraft  16% Preferred Stock** |   | **DeCrane  Holdings  14% Preferred Stock** |   |
|------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **(In thousands, except per share data)**            |   | **Number  of  Shares**                     |   | **Mandatory  Redemption  Value**           |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   | **Number  of  Shares** |   | **Mandatory  Redemption  Value** |   |
|                                                 |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| 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 |   |
| Accrued dividends and redemption value accretion     |   | 53,731                                     |   | 5,373                                      |   | 468 |   | 5,841 |   | — |   | — |   |
| Noncash dividend accretion                           |   | —                                     |   | —                                     |   | — |   | — |   | — |   | 7,999 |   |
| Balance, December 31, 2002                           |   | 370,061                                    |   | 37,006                                     |   | (2,925 | ) | 34,081 |   | 342,417 |   | 62,222 |   |
| Accrued dividends and redemption value  accretion    |   | 62,858                                     |   | 6,286                                      |   | 468 |   | 6,754 |   | — |   | — |   |
| Noncash dividend accretion                           |   | —                                     |   | —                                     |   | — |   | — |   | — |   | 9,180 |   |
| Balance, December 31, 2003                           |   | 432,919                                    |   | $                                          | 43,292 |   | $ | (2,457 | ) | $ | 40,835 |   | 342,417 |   | $ | 71,402 |   |
| Per share liquidation value as of December  31, 2003 |   |                                       |   | $                                          | 100.00 |   |   |   |   |   |   |   | $ | 208.52 |   |

* *

*DeCrane Aircraft16% Mandatorily Redeemable Preferred Stock*

* *

DeCraneAircraft’s 16% preferred stock is reflected as minority interest in preferredstock of subsidiary in the consolidated financial statements.

 

DeCraneAircraft is authorized to issue 700,000 shares of 16% Senior RedeemableExchangeable Preferred Stock Due 2009, $.01 par value.  The preferred stock has a $100.00 per shareliquidation preference, plus accrued and unpaid cash dividends, and is non-voting.

 

Holdersof the preferred stock are entitled to receive, when, as and if declared,dividends at a rate equal to 16% per annum. Prior to June 30, 2005, DeCrane Aircraft may, at its option, paydividends either in cash or by the issuance of additional shares of preferredstock.  Since the preferred stockissuance date on June 30, 2000, DeCrane Aircraft has elected to issueadditional shares in lieu of cash dividend payments; such shares are reflectedas a component of minority interest in preferred stock of subsidiary.  The preferred stock is mandatorilyredeemable on March 31, 2009. Upon the occurrence of a change in control, as defined, each holder hasthe right to require DeCrane Aircraft to redeem all or part of such holder’sshares at a price equal to 101% of the liquidation preference, plus accrued andunpaid cash dividends.

 

F-33

----

 

Aportion of the proceeds from the sale of the preferred stock was ascribed tothe value of the DeCrane Holdings common stock warrants issued in connectionwith the sale and was credited to additional paid-in capital.  The corresponding reduction in redemptionvalue of the preferred stock, and related issuance costs, are recorded as anissuance discount and are being amortized using the effective interest methodthrough the preferred stock mandatory redemption date.

 

*DeCrane Holdings14% Mandatorily Redeemable Preferred Stock*

* *

DeCraneHoldings is authorized to issue 1,360,000 shares of 14% Senior RedeemableExchangeable Preferred Stock Due 2009, $.01 par value.  The preferred stock had an initial $100.00per share liquidation preference, subject to increases through noncash dividendaccretion, plus accrued and unpaid cash dividends, and is non-voting.

 

Holdersof the preferred stock are entitled to receive, 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 insteadaccrete to the liquidation value of the preferred stock, which, in turn, increasesthe redemption obligation.  The preferredstock is mandatorily redeemable on September 30, 2009.  Upon the occurrence of a change in control,as defined, each holder has the right to require DeCrane Holdings to redeem allor part of such holder’s shares at a price equal to 101% of the liquidationpreference plus accrued and unpaid cash dividends.

 

**Undesignated PreferredStock**

** **

TheCompany is authorized to issue 2,500,000 shares of $.01 par value preferredstock of which 1,360,000 are designated 14% Senior Redeemable ExchangeablePreferred Stock Due 2009; 1,140,000 shares remain undesignated as of December31, 2003 and 2002.

 

**Common Stock**

** **

DeCraneHoldings is authorized to issue 10,000,000 shares of $.01 par value commonstock, of which 4,009,297 shares are issued and outstanding as of December 31,2003 and 4,116,627 shares at December 31, 2002.  As of December 31, 2003, a total of 855,020 shares of commonstock are reserved for issuance upon exercise of all warrants and stockoptions.

 

Duringthe year ended December 31, 2002, DeCrane Holdings sold 221,096 shares to DLJand its affiliates and a director for $5,100,000 and used the proceeds to fundworking capital requirements and repurchased and canceled 18,743 shares fromformer members of DeCrane Aircraft management at $27.00 per share.  Also during 2002, the former DeCraneAircraft management members elected to exercise 9,252 vested stock options on acashless basis.  The $14,000 income taxbenefit associated with the stock options exercised was also credited toadditional paid-in capital.  Expensesrelated to the 2002 common stock transactions total $100,000 and were chargedto additional paid-in capital.

 

F-34

----

 

**NotesReceivable for Shares Sold**

** **

During1998 and 1999, DeCrane Holdings sold mandatorily redeemable preferred andcommon stock in three transactions in which one-half of the purchase price waspaid in cash and one-half was loaned to the purchasers by DeCrane Aircraft,with interest at the then applicable federal rates.  The loans bear interest at rates ranging between 4.33% and5.74%.  The loans, plus accruedinterest, are payable upon the sale of the stock and are collateralized by suchstock.  The resulting notes receivable,plus accrued interest, are classified as a reduction of stockholders’ equity inthe consolidated statement of financial position.  The three transactions, which were based on the fair market valueof the underlying securities as determined by the Board of Directors, resultedin loans for one-half of the total purchase price, were as follows:

 

•      in December 1998, a group of related party investors(Note 16) purchased mandatorily redeemable preferred and common stock for$704,000;

 

•      in October 1999, the same group of investors purchasedadditional shares of common stock for $250,000; and

 

•      in December 1999, DeCrane Aircraft’s managementpurchased common stock for $3,940,000.

 

During2002, a note receivable totaling $200,000, plus accrued interest, was repaid inconnection with the repurchase of the common stock collateralizing the notereceivable.  During 2003, severalDeCrane Aircraft management members surrendered 107,330 shares of commonstock.  In accordance with the terms ofthe notes evidencing the loans, the Company canceled the notes.  The cancellation of the notes, whichaggregated $1,471,000, including accrued interest, was charged to additionalpaid-in capital.

 

**Common Stock Warrants**

** **

Commonstock warrants issued outstanding during the three years ended December 31,2003 are summarized in the table below.

 
|                                                                                                  |   | **$.01  Warrants**    |   |                  |   |                 |   |
|-------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|----------------------|--------|
| **(Number of shares, except per  share data)**                                                        |   | **Class A  Warrants** |   | **Class B  Warrants** |   | **$22.31  Warrants** |   | **Total** |   |
|                                                                                                  |   |                  |   |                  |   |                 |   |   |   |
| Warrants issued, outstanding and  exercisable during the years ended December 31, 2001, 2002 and 2003 |   | 155,000               |   | 139,357               |   | 159,794              |   | 454,151 |   |
|                                                                                                  |   |                  |   |                  |   |                 |   |   |   |
| Other information:                                                                                    |   |                  |   |                  |   |                 |   |   |   |
| Exercise price per share                                                                              |   | $                     | 0.01   |                  | $      | 0.01                 |   | $ | 22.31 |   |   |   |
| Expiration date                                                                                       |   | Aug. 28, 2009         |   | Jun. 30, 2010         |   | Sept. 30, 2008       |   |   |   |
|                                                                                                       |        |                       |        |                       |        |                      |        |  |  |  |  |  |

 

Allcommon stock warrants are subject to adjustment for anti-dilution and havedemand registrations rights.

 

F-35

----

 

**Note13.**         Commitments and Contingencies

** **

**Litigation**

** **

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

 

TheCompany was a defendant in most, but not all, of the actions brought by theestates of the 229 victims of the crash. The actions, which sought damages and costs in unstated amounts, claimednegligence, strict liability, and breach of warranty.  Virtually all of the cases have been settled by Boeing andSwissair’s insurers and both assignment of the claims against, and releases infavor, of the Company have been obtained by the Boeing and Swissair insurers.

 

OnSeptember 22, 2003, the Company and its insurers entered into an agreement withBoeing, Swissair and each of their respective insurers, in which the Companyreceived a release from those parties and an indemnification by Boeing andSwissair’s insurers against claims asserted on behalf of passengers forcompensatory damage and by others for contribution and/or indemnityclaims.  Company management believes theagreement adequately protects the Company from all existing litigation pendingagainst the Company arising from this catastrophic incident.  Punitive damages are not subject to theindemnity; however, while some of the passenger actions originally assertedpunitive damages, by virtue of a court order, claims for punitive damages maynot be prosecuted.  The aforementionedagreement did not result in the Company incurring a loss and, accordingly, nocharge to operations was required.

 

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

 

**Lease Commitments**

** **

TheCompany leases some of its facilities and equipment under capital and operatingleases.  Some of the leases requirepayment of property taxes and include escalation clauses.  Future minimum capital and operating leasecommitments under non-cancelable leases are as follows as of December 31, 2003:

 

F-36

----

 
| **(In thousands)**                             |   | **Capital  Leases** |   | **Operating  Leases** |   |
|------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                           |   |                |   |                  |   |
| Year ending December 31,                       |   |                |   |                  |   |
| 2004                                           |   | $                   | 786    |                  | $      | 2,937 |   |
| 2005                                           |   | 839                 |   | 2,656                 |   |
| 2006                                           |   | 595                 |   | 2,359                 |   |
| 2007                                           |   | 534                 |   | 1,481                 |   |
| 2008                                           |   | 368                 |   | 885                   |   |
| 2009 and thereafter                            |   | 1,787               |   | 4,403                 |   |
| Total minimum payments required                |   | 4,909               |   | $                     | 14,721 |   |
| Less amount representing future interest  cost |   | (1,534              | )      |                  |   |
| Recorded obligation under capital leases       |   | $                   | 3,375  |                  |   |   |

 

Totalrental expense charged to operations was $2,911,000 for the year ended December31, 2003, $3,083,000 for the year ended December 31, 2002 and $2,982,000 forthe year ended December 31, 2001.

 

**Note14.**         Consolidated Statements of Cash Flows

** **

Thefollowing information supplements the Company’s consolidated statements of cashflows.

 
|                                                                                                            |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                                                                              |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                                                            |   |                         |   |   |   |   |   |
| Components of cash paid for acquisitions:                                                                       |   |                         |   |   |   |   |   |
| Contingent consideration paid for  previously completed acquisitions                                            |   | $                            | 600    |   | $ | 5,826 |   | $ | 17,075 |   |
| Cash purchase price reductions received as  a result of settling asserted claims against the sellers (Note 2)   |   | —                       |   | — |   | (3,718 | ) |
| Additional acquisition related expenses                                                                         |   | 6                            |   | 64 |   | 172 |   |
| Total cash paid for acquisitions                                                                                |   | $                            | 606    |   | $ | 5,890 |   | $ | 13,529 |   |
|                                                                                                            |   |                         |   |   |   |   |   |
| Noncash investing and financing  transactions:                                                                  |   |                         |   |   |   |   |   |
| 14% mandatorily redeemable preferred stock  liquidation value accretion in lieu of cash dividend payments       |   | $                            | 9,180  |   | $ | 7,999 |   | $ | 6,971 |   |
| 16% mandatorily redeemable preferred stock:                                                                     |   |                         |   |   |   |   |   |
| Dividends paid by the issuance of  additional shares                                                            |   | 6,286                        |   | 5,373 |   | 4,593 |   |
| Redemption value accretion                                                                                      |   | 468                          |   | 468 |   | 468 |   |
| Capital expenditures financed with capital  lease obligations                                                   |   | 14                           |   | 67 |   | 4,376 |   |
| Additional acquisition contingent  consideration earned and recorded as a liability                             |   | —                       |   | 600 |   | 3,825 |   |
| Interest accrued during the period on loans  to stockholders for the purchase of DeCrane Holdings capital stock |   | 148                          |   | 123 |   | 116 |   |
|                                                                                                            |   |                         |   |   |   |   |   |
| Paid in cash:                                                                                                   |   |                         |   |   |   |   |   |
| Interest                                                                                                        |   | $                            | 25,973 |   | $ | 27,619 |   | $ | 34,904 |   |
| Income taxes paid (refunded), net                                                                               |   | (225                         | )      | (91 | ) | 1,161 |   |

 

F-37

----

 

**Note15.**         Employee Benefit Plans

** **

**Stock Based IncentiveCompensation**

** **

*ManagementIncentive Stock Option Plan*

* *

DeCraneHolding’s Board of Directors has approved a management incentive plan whichprovides for the issuance of options to purchase the common stock of DeCraneHoldings as incentive compensation to designated executive personnel and otherkey employees of the Company and its subsidiaries.  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 thegranting of options to purchase a maximum of 356,257 common shares prior toexpiration in 2009.  The options are grantedat fair market value at the date of grant. Substantially all of the options awarded become fully vested andexercisable eight years from the date of grant but vesting can be acceleratedbased upon future attainment of defined performance criteria.  In addition, the Compensation Committee mayauthorize alternate vesting schedules. The plan also provides for the acceleration of vesting upon theoccurrence of certain events, including, under certain circumstances, a changeof control.

 

During2001, no options were granted under the plan and no additional shares fromprior year grants vested based on the required year 2001 performancecriteria.  During 2002, options topurchase 15,000 shares, with vesting over a three year period from the grantdate, were granted under the plan and no additional shares from prior yeargrants vested based on the required year 2002 performance criteria.  During 2003, no options were granted underthe plan and no additional shares from prior year grants vested based on therequired year 2003 performance criteria.

 

Theper share exercise price of the options granted was equal to the fair marketvalue of the common stock on each of the grant dates and, accordingly, nocompensation expense was recognized during the three years ended December 31,2003.

 

*Incentive StockOptions Granted to Others*

* *

InJuly 1999, a group of related party investors, including two individuals whowere then serving as directors, were granted options as compensation forconsulting services.  Options weregranted to purchase 44,612 shares of DeCrane Holdings common stock at an exerciseprice of $23.00 per share, equal to the fair market value of the common stockon the grant date.  The options vestover a three-year period, are subject to acceleration if DLJ and its affiliatessell any of their shares of common stock, and expire in 2009.  The options are fully vested as of December31, 2003.

 

F-38

----

 

*Summary of AllStock Options*

* *

Thefollowing table summarizes all stock option activity during the three yearsended December 31, 2003.

 
|                                          |   | **Year Ended  December 31,** |   |
|-----------------------------------------------|--------|------------------------------|--------|
|                                          |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                          |   | **Number  of  Shares**       |   | **Weighted-  Average  Exercise  Price** |   | **Number  of  Shares** |   | **Weighted-  Average  Exercise  Price** |   | **Number  of  Shares** |   | **Weighted-  Average  Exercise  Price** |   |
|                                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Options outstanding at beginning of the  year |   | 338,073                      |   | $ | 24.37 |   | 363,353 |   | $ | 24.82 |   | 386,869 |   | $ | 24.86 |   |
| Granted                                       |   | —                       |   | — |   | 15,000 |   | 27.00 |   | — |   | — |   |
| Exercised                                     |   | —                       |   | — |   | (9,252 | ) | 23.00 |   | — |   | — |   |
| Canceled                                      |   | (53,946                      | )      | 26.45 |   | (31,028 | ) | 31.32 |   | (23,516 | ) | 25.55 |   |
| Options outstanding at end of the year        |   | 284,127                      |   | 23.97 |   | 338,073 |   | 24.37 |   | 363,353 |   | 24.82 |   |
| Options exercisable at end of the year        |   | 125,185                      |   | 23.56 |   | 138,546 |   | 23.66 |   | 139,051 |   | 23.82 |   |
|                                               |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As ofDecember 31, 2003, options to purchase 107,490 common shares remained availablefor grant under the Management Incentive Stock Option Plan.  The following table summarizes informationabout stock options outstanding and stock options exercisable as of December31, 2003.

 
|                      |   | **All  Options Outstanding**                     |   | **Number  of Shares  Exercisable  as of  December 31,  2003** |   |
|---------------------------|--------|--------------------------------------------------|--------|---------------------------------------------------------------|--------|
|                      |   | **Number  of Shares  as of  December 31,  2003** |   | **Weighted-Average  Remaining  Contractual Life**             |   |   |
|                      |
|                      |
|                      |
|                      |
|                      |   |                                             |   |                                                          |   |   |   |
| Per share exercise price: |   |                                             |   |                                                          |   |   |   |
| $23.00                    |   | 256,081                                          |   | 5.94 years                                                    |   | 117,630 |   |
| $27.00                    |   | 7,500                                            |   | 8.35 years                                                    |   | 2,500 |   |
| $35.00                    |   | 20,546                                           |   | 6.93 years                                                    |   | 5,055 |   |
| Total                     |   | 284,127                                          |   | 6.07 years                                                    |   | 125,185 |   |

 

Forcompensatory stock options granted to non-employees, the Company recognizedcompensation expense of $138,000 for the year ended December 31, 2002 and$215,000 for the year ended December 31, 2001.

 

F-39

----

 

Fornon-compensatory stock options granted to employees, the Company uses APBOpinion No. 25 to account for stock-based compensation and, accordingly, nocompensation expense was recognized during the three years ended December 31,2003.  The Company has adopted thedisclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148(Note 1).  For the purposes of the proforma disclosure presented in Note 1, the estimated fair value of the optionsis amortized over the options’ vesting period. The effect of applying SFAS No. 123 may not be representative ofthe pro forma effect in future years since additional options may be grantedduring those future years.

 

Thefair value of the options was determined using the following assumptions:

 
|                                                              |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                              |   |     |   |     |   |     |   |
| Compensatory options (1):                                         |   |     |   |     |   |     |   |
| Risk free interest rates                                          |   | —   |   | 5.13     | %      | 5.35     | %      |
| Expected dividend yield                                           |   | —   |   | —   |   | —   |   |
| Expected life                                                     |   | —   |   | 10 years |   | 10 years |   |
| Expected stock price volatility                                   |   | —   |   | —   |   | —   |   |
|                                                              |   |     |   |     |   |     |   |
| Non-compensatory options granted to  employees and directors (2): |   |     |   |     |   |     |   |
| Risk free interest rates                                          |   | —   |   | —   |   | —   |   |
| Expected dividend yield                                           |   | —   |   | —   |   | —   |   |
| Expected life                                                     |   | —   |   | —   |   | —   |   |
| Weighted-average fair value of options  granted (per share)       |   | $        | — |     | $      | 10.96    |   | $ | — |   |
|                                                                   |        |          |        |          |        |          |        |  |  |  |

 

----

(1)           Using the Black Scholes option valuation model.

 

(2)           Using the minimum value method.

 

TheBlack-Scholes option valuation model was developed for use in estimating the fairvalue of traded options that have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because the Company’s employee stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,in management’s opinion, the existing models, as well as the minimum valuemethod, do not necessarily provide a reliable single measure of its employeestock options.  The Company determinesthe fair value of its common shares as of any given period-end date based onthe aggregate enterprise value of DeCrane Holdings.  Enterprise value is computed based upon a multiple of AdjustedEBITDA, as reflected in its financial statements, and the multiple is basedupon comparable data from other publicly-held companies as well as publiclyavailable information on privately-held companies.

 

Theminimum value method, which is an acceptable method for non-public companies,excludes stock price volatility.

 

F-40

----

 

**Management StockPurchases**

** **

Beginningin December 1999, DeCrane Holding’s Board of Directors has 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.  InDecember 1999, management purchased 171,295 shares of DeCrane Holdings’common stock for $23.00 per share.  Thetotal purchase price was approximately $3,900,000, of which one-half was paidin cash and one-half was loaned to management by DeCrane Aircraft as describedin Note 12.  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 the DeCrane Holdings common stockwarrants in connection with the sale of DeCrane Aircraft’s 16% preferred stock.

 

**401(k) Retirement Plan**

** **

Substantiallyall domestic employees are eligible to participate in one of the 401(k)retirement plans the Company sponsors, which are defined contribution planssatisfying the requirements of the Employee Retirement Income Security Act of1974.  The Company’s expense related toits matching contributions to these plans totaled $1,007,000 for the year endedDecember 31, 2002 and $1,767,000 for the year ended December 31, 2001; nomatching contributions were made during the year ended December 31, 2003.

 

**Note16.**         Related Party Transactions and Investors’Agreement

** **

**Related PartyTransactions**

** **

TheCompany’s transactions with related parties included in the consolidatedfinancial statements are summarized in the table below.

 
|                                             |   | **Year Ended  December 31,** |   |
|--------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                               |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                             |   |                         |   |   |   |   |   |
| CSFB / DLJ:                                      |   |                         |   |   |   |   |   |
| Transaction and advisory fees and expenses       |   | $                            | 9,375  |   | $ | 1,627 |   | $ | 520 |   |
| Management fees:                                 |   |                         |   |   |   |   |   |
| Charged to operations during the period          |   | 350                          |   | 350 |   | 300 |   |
| Payable as of period end                         |   | —                       |   | 125 |   | 375 |   |
|                                             |   |                         |   |   |   |   |   |
| Global Technology Partners, LLC:                 |   |                         |   |   |   |   |   |
| Promissory notes:                                |   |                         |   |   |   |   |   |
| Receivable as of period end, including  interest |   | 594                          |   | 567 |   | 542 |   |
|                                                  |        |                              |        |  |  |  |  |  |  |  |

 

Each related party is describedbelow.

 

F-41

----

 

*CSFB / DLJ*

* *

DLJMerchant Banking Partners II, L.P. and affiliated funds own 97.1% of DeCraneHoldings common stock and 99.3% of its preferred stock, and 80.0% of DeCraneAircraft’s preferred stock, all on a fully diluted basis.  DLJ Merchant Banking Partners II, L.P. andaffiliated funds are indirect affiliates of Credit Suisse First Boston.

 

DLJ isrepresented on the Board of Directors of both DeCrane Holdings and DeCraneAircraft.  In addition, CSFB is involvedin market-making activities for DeCrane Holding’s Class A $22.31 common stockwarrants and DeCrane Aircraft’s subordinated notes and may hold such securitiesfrom time to time.  CSFB is paid feesfor serving as the syndication agent and, commencing in 2003, administrativeagent for the lenders providing DeCrane Aircraft’s first-lien credit facilityand second-lien term debt.  In 2003,CSFB also received customary fees and reimbursement of expenses for serving asDeCrane Aircraft’s financial advisors for the sale of the Specialty AvionicsGroup.

 

*Global TechnologyPartners, LLC*

* *

Membersof Global Technology own 1.8% of DeCrane Holdings common stock and 0.7% of itspreferred stock, all on a fully diluted basis, and had two members on theCompany’s Board of Directors from August 1998 through July 2000.  DeCrane Aircraft loaned one-half of thepurchase price for such shares to the members at rates ranging between 4.33%and 5.44%.  The loans, plus accruedinterest, are payable from the proceeds from the sale of the stock and arecollateralized by such stock.

 

**Investors’ Agreement**

** **

Investorsowing 96.6% of DeCrane Holdings’ issued and outstanding common stock and commonstock warrants and options, all of DeCrane Holdings’ preferred stock and all ofDeCrane Aircraft’s preferred and common stock, have entered into an Amended andRestated Investors’ Agreement, dated October 6, 2000, among DeCrane HoldingsCo., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities,Putnam Investment Management, Inc. and affiliated funds and entities and allmanagement investors.  Investors who ownDeCrane Holdings’ warrants to purchase 159,794 shares of common stock are notparties to the Investors’ Agreement. The agreement provides that:

 

•      The parties to the agreement shall vote their sharesto cause DLJ Merchant Banking Partners, II, L.P. to select all members ofthe Board of Directors of DeCrane Holdings and DeCrane Aircraft, thereby givingthem control over the Company’s operations. At least one of such directors on each board shall be an independentdirector.

 

•      Transfers of the shares by the parties to theagreement are restricted.

 

•      Parties to the agreement may participate in somespecific kinds of sales of shares by DLJ affiliates.

 

•      DLJ affiliates may require the other parties to theagreement to sell shares of DeCrane Holdings’ common stock in some cases shouldthe DLJ affiliates choose to sell any such shares owned by them.

 

F-42

----

 

•      The DLJ affiliates may request six demandregistrations with respect to all or any of the DeCrane Holdings common stock,preferred stock and Class A warrants to purchase 155,000 common shares held bythose affiliates, which are immediately exercisable subject to customarydeferral and cutback provisions.

 

•      The holders of Class B warrants to purchase 139,357shares of DeCrane Holdings common stock may request two demand registrationstogether with all or any common stock held by them, which are immediatelyexercisable subject to customary deferral and cutback provisions.

 

•      The parties to the agreement are entitled to unlimitedpiggyback registration rights, subject to customary cutback provisions, andexcluding registrations of shares issuable in connection with any employeestock options, employee benefit plan or an acquisition.

 

•      DeCrane Holdings will indemnify the stockholdersagainst some liabilities and expenses, including liabilities under theSecurities Act.

 

•      Any person acquiring shares of common stock orpreferred stock who is required by the terms of the Investors’ Agreement or anyemployment agreement or stock purchase, option, stock option or othercompensation plan to become a party thereto shall execute an agreement tobecome bound by the Investors’ Agreement.

 

**Note17.**         Business Segment Information

** **

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

 

•      *Cabin Management –* manufactures interior cabin components,including cabin interior furnishings, cabin management systems, seating andcomposite components;

 

•      *Systems Integration –* manufactures auxiliary fuel systems andauxiliary power units, provides system integration services, provides aircraftcompletion and refurbishment services and is a Boeing Business Jet authorizedservice center.

 

Inprior periods, the Company’s Specialty Avionics Group was a third strategicbusiness for which segment information was provided.  As a result of the sale of the Specialty Avionics Group, thisgroup is reflected as a discontinued operation and segment information forprior periods has been restated to exclude the group.

 

F-43

----

 

Managementutilizes more than one measurement to evaluate group performance and allocateresources; however, management considers Adjusted EBITDA, as defined, to be theprimary measurement of a group’s overall core economic performance and returnon invested capital.  Management alsouses Adjusted EBITDA in the Company’s annual budget and planning process forfuture periods, as one of the decision-making criteria for fundingdiscretionary capital expenditures and product development programs and as themeasure in determining the value of acquisitions and dispositions.  The board of directors uses Adjusted EBITDAas one of the performance metrics for determining the amount of bonuses awardedto pursuant to the Company’s cash incentive bonus plan and as an indicator ofenterprise value used in determining the exercise price of stock optionsgranted and the acceleration of stock option vesting pursuant to the Company’sincentive stock option plan.

 

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

 

Thefinancial measure Adjusted EBITDA, as defined, excludes certain chargesreflected in the Company’s financial statements which are prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”).  However, theCompany’s presentation of Adjusted EBITDA is in accordance with the GAAPrequirements of SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” which requires the Company to report the primary measureof segment performance used by management to evaluate and manage itsbusinesses.  The Company’s method ofcalculating Adjusted EBITDA may not be consistent with that of other companiesand should be viewed in conjunction with measurements that are computed inaccordance GAAP, such as net income (loss), the nearest comparable GAAPfinancial measure.  A reconciliation ofAdjusted EBITDA to net income (loss) is included herein to clarify thedifferences between these financial measures.

 

Theaccounting policies of the groups are substantially the same as those describedin the summary of significant accounting 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-44

----

 

**Summary of Business bySegment**

** **
|                                          |   | **Year Ended  December 31,** |    |
|-----------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                            |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                          |   |                         |    |   |   |   |   |
| Revenues:                                     |   |                         |    |   |   |   |   |
| Cabin Management                              |   | $                            | 119,000 |   | $ | 172,832 |   | $ | 206,052 |   |
| Systems Integration                           |   | 51,687                       |    | 58,051 |   | 67,528 |   |
| Inter-group elimination (1)                   |   | (578                         | )       | (1,042 | ) | (1,468 | ) |
| Consolidated totals                           |   | $                            | 170,109 |   | $ | 229,841 |   | $ | 272,112 |   |
|                                          |   |                         |    |   |   |   |   |
| Revenues from significant customers (2):      |   |                         |    |   |   |   |   |
| Cabin Management                              |   | $                            | 50,297  |   | $ | 94,014 |   | $ | 108,737 |   |
| Systems Integration                           |   | 28,508                       |    | 35,388 |   | 46,138 |   |
| Consolidated totals                           |   | $                            | 78,805  |   | $ | 129,402 |   | $ | 154,875 |   |
|                                          |   |                         |    |   |   |   |   |
| Adjusted EBITDA (as defined):                 |   |                         |    |   |   |   |   |
| Cabin Management                              |   | $                            | 8,978   |   | $ | 32,644 |   | $ | 45,554 |   |
| Systems Integration                           |   | 11,020                       |    | 18,084 |   | 17,152 |   |
| Corporate (3)                                 |   | (5,488                       | )       | (6,072 | ) | (7,125 | ) |
| Inter-group elimination (4)                   |   | 110                          |    | 9 |   | (62 | ) |
| Consolidated totals (5)                       |   | 14,620                       |    | 44,665 |   | 55,519 |   |
| Reconciling items (6)                         |   | (94,697                      | )       | (116,492 | ) | (74,582 | ) |
| Net loss                                      |   | $                            | (80,077 | ) | $ | (71,827 | ) | $ | (19,063 | ) |
|                                          |   |                         |    |   |   |   |   |
| Depreciation and amortization:                |   |                         |    |   |   |   |   |
| Cabin Management                              |   | $                            | 6,335   |   | $ | 6,695 |   | $ | 14,607 |   |
| Systems Integration                           |   | 2,770                        |    | 2,956 |   | 4,346 |   |
| Corporate                                     |   | 676                          |    | 961 |   | 1,411 |   |
| Consolidated totals (7)                       |   | $                            | 9,781   |   | $ | 10,612 |   | $ | 20,364 |   |
|                                          |   |                         |    |   |   |   |   |
| Total assets (as of period end):              |   |                         |    |   |   |   |   |
| Cabin Management                              |   | $                            | 224,116 |   | $ | 281,655 |   | $ | 311,476 |   |
| Systems Integration                           |   | 58,395                       |    | 62,437 |   | 76,312 |   |
| Corporate (8)                                 |   | 21,456                       |    | 44,247 |   | 35,627 |   |
| Inter-group elimination (9)                   |   | (91                          | )       | (113 | ) | (143 | ) |
| Continuing operations                         |   | 303,876                      |    | 388,226 |   | 423,272 |   |
| Discontinued operations (Specialty  Avionics) |   | —                       |    | 160,741 |   | 222,439 |   |
| Consolidated totals                           |   | $                            | 303,876 |   | $ | 548,967 |   | $ | 645,711 |   |
|                                          |   |                         |    |   |   |   |   |
| Capital expenditures:                         |   |                         |    |   |   |   |   |
| Cabin Management                              |   | $                            | 4,216   |   | $ | 3,829 |   | $ | 6,579 |   |
| Systems Integration                           |   | 555                          |    | 478 |   | 3,371 |   |
| Corporate                                     |   | 26                           |    | 49 |   | 241 |   |
| Consolidated totals (10)                      |   | $                            | 4,797   |   | $ | 4,356 |   | $ | 10,191 |   |

 

The notes appear on the next page.

 

F-45

----

 

**Summary of Business byGeographical Area**

** **
|                                                      |   | **Year Ended  December 31,** |    |
|-----------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                                        |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                      |   |                         |    |   |   |   |   |
| Consolidated net revenues to unaffiliated  customers (11) |   |                         |    |   |   |   |   |
| United States                                             |   | $                            | 159,052 |   | $ | 222,401 |   | $ | 268,981 |   |
| Mexico                                                    |   | 11,057                       |    | 7,440 |   | 3,131 |   |
| Consolidated totals                                       |   | $                            | 170,109 |   | $ | 229,841 |   | $ | 272,112 |   |
| Consolidated long-lived assets (12):                      |   |                         |    |   |   |   |   |
| United States                                             |   | $                            | 28,786  |   | $ | 34,420 |   | $ | 40,369 |   |
| Mexico                                                    |   | 2,114                        |    | 1,719 |   | 2,291 |   |
| Consolidated totals                                       |   | $                            | 30,900  |   | $ | 36,139 |   | $ | 42,660 |   |

 

----

**Notes**

 

(1)       Inter-group sales are accounted for at pricescomparable to sales to unaffiliated customers, and are eliminated inconsolidation.

 

(2)       Three customers each accounted for more than 10%of the Company’s consolidated revenues during the three years ended December31, 2003 as shown in the table below. Complete loss of any of these customers could have a significant adverseimpact on the results of operations expected in future periods.

 
|                |   | **Year Ended  December 31,** |   |
|---------------------|--------|------------------------------|--------|
| **(In thousands)**  |   | **2003**                     |   | **2002** |   | **2001** |   |
|                |   |                         |   |   |   |   |   |
| Boeing (b)          |   | $                            | 29,815 |   | $ | 35,427 |   | $ | 43,836 |   |
| Textron (a)         |   | 27,578                       |   | 54,017 |   | 55,522 |   |
| Bombardier (b)      |   | 21,412                       |   | 39,958 |   | 55,517 |   |
| Consolidated totals |   | $                            | 78,805 |   | $ | 129,402 |   | $ | 154,875 |   |

 

All operating groups derived revenues from each of the customers duringeach of the years in the three years ended December 31. 2003.

 

(3)       Reflects the Company’s corporate headquarterscosts and expenses not allocated to the groups.

 

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

 

F-46

----

 

(5)       Adjusted EBITDA (as defined) for the year endedDecember 31, 2003 was reduced by $8,124,000 for Cabin Management and $2,316,000for Systems Integration as a result of the Company’s change in accountingpolicy for program costs as more fully described in Note 1—Change in AccountingPrinciple. 

 

(6)       Adjusted EBITDA (as defined) excludes thefollowing charges reflected in the Company’s financial statements which areprepared in accordance with generally accepted accounting principles:

 
|                                                       |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                         |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                       |   |                         |   |   |   |   |   |
| Restructuring, asset impairment and other  related charges |   | $                            | 41,886 |   | $ | 17,255 |   | $ | 25,834 |   |
| Depreciation and amortization of long-lived  assets (7)    |   | 9,781                        |   | 10,612 |   | 20,364 |   |
| Acquisition related charges not capitalized                |   | 784                          |   | 1,162 |   | 308 |   |
| Other noncash charges                                      |   | —                       |   | 138 |   | 215 |   |
| Interest expense                                           |   | 26,219                       |   | 25,376 |   | 29,645 |   |
| Minority interest in preferred stock of  subsidiary        |   | 6,754                        |   | 5,841 |   | 5,061 |   |
| Loss on extinguishment of debt                             |   | 1,439                        |   | — |   | — |   |
| Other expenses, net                                        |   | 945                          |   | 505 |   | 634 |   |
| Income tax benefit                                         |   | (13,496                      | )      | (3,621 | ) | (3,933 | ) |
| (Income) loss from discontinued operations,  net of tax    |   | 6,621                        |   | 41,396 |   | (3,546 | ) |
| Cumulative effect of change in accounting  principle       |   | 13,764                       |   | 17,828 |   | — |   |
| Total reconciling items                                    |   | $                            | 94,697 |   | $ | 116,492 |   | $ | 74,582 |   |

 

(7)       Reflects depreciation and amortization oflong-lived assets, goodwill (for periods prior to the January 1, 2002 adoptionof SFAS No. 142), other intangible assets and deferred financing costs, whichare classified as a component of interest expense, as follows:

 
|                                                |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                  |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                |   |                         |   |   |   |   |   |
| Depreciation and amortization of long-lived  assets |   | $                            | 9,781  |   | $ | 10,612 |   | $ | 20,364 |   |
| Amortization of deferred financing costs            |   | 2,808                        |   | 2,692 |   | 2,218 |   |
| Consolidated depreciation and amortization          |   | $                            | 12,589 |   | $ | 13,304 |   | $ | 22,582 |   |

 

(8)       Reflects the Company’s corporate headquartersassets, excluding investments in and notes receivable from subsidiaries.

 

(9)       Reflects elimination of inter-group receivablesand profits in inventory as of period end.

 

(10)     Reflects capital expenditures paid in cash.  Excludes capital expenditures financed withcapital lease obligations of $14,000 for the year ended December 31, 2003,$67,000 for the year ended December 31, 2002 and $4,376,000 for the year endedDecember 31, 2001.

 

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

 

(12)     Allocated on the basis of the location of thesubsidiary and consists of the Company’s property and equipment.  Corporate long-lived assets are includedwith the United States assets.

 

F-47

----

 

**Note18.**         Supplemental Condensed ConsolidatingFinancial Information

** **

Inconjunction with the 12% subordinated notes described in Note 10, thefollowing condensed consolidating financial information is presentedsegregating DeCrane Aircraft, as the issuer, and the guarantor andnon-guarantor subsidiaries.  Theaccompanying financial information in the guarantor subsidiaries column reflectsthe financial position, results of operations and cash flows for thosesubsidiaries guaranteeing the notes. DeCrane Holdings is not a guarantor of the notes and is thereforereflected in the non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantorsubsidiaries.  DeCrane Aircraft’snon-guarantor subsidiaries are companies within the Specialty Avionics Groupwhich was sold in May 2003 and is therefore classified as a component ofdiscontinued operations.

 

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

 

(1)   Elimination of investments in subsidiaries.

 

(2)   Elimination of intercompany accounts.

 

(3)   Elimination of equity in earnings of subsidiaries.

 

F-48

----

 

**Balance Sheets**

 
|                                                                                               |   | **December  31, 2003** |    |
|----------------------------------------------------------------------------------------------------|--------|------------------------|---------|
| **(In thousands)**                                                                                 |   | **Issuer**             |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                                         |   |                   |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                    |   |                   |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |   | $                      | 6,540   |   | $ | 396 |   | $ | — |   | $ | — |   | $ | 6,936 |   |
| Accounts receivable, net                                                                           |   | —                 |    | 21,455 |   | — |   | — |   | 21,455 |   |
| Inventories                                                                                        |   | —                 |    | 42,981 |   | — |   | — |   | 42,981 |   |
| Other current assets                                                                               |   | 254                    |    | 828 |   | — |   | — |   | 1,082 |   |
| Total current assets                                                                               |   | 6,794                  |    | 65,660 |   | — |   | — |   | 72,454 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                        |   | 1,047                  |    | 29,853 |   | — |   | — |   | 30,900 |   |
| Other assets, principally goodwill                                                                 |   | 13,615                 |    | 186,907 |   | — |   | — |   | 200,522 |   |
| Investments in subsidiaries                                                                        |   | 85,668                 |    | — |   | (44,913 | ) | (40,755 | )(1) | — |   |
| Intercompany receivables                                                                           |   | 261,631                |    | 100,642 |   | — |   | (362,273 | )(2) | — |   |
| Total assets                                                                                       |   | $                      | 368,755 |   | $ | 383,062 |   | $ | (44,913 | ) | $ | (403,028 | ) | $ | 303,876 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**   |   |                   |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                  |   | $                      | 11      |   | $ | 1,187 |   | $ | — |   | $ | — |   | $ | 1,198 |   |
| Other current liabilities                                                                          |   | 8,532                  |    | 24,820 |   | — |   | — |   | 33,352 |   |
| Total current liabilities                                                                          |   | 8,543                  |    | 26,007 |   | — |   | — |   | 34,550 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                               |   | 260,654                |    | 7,554 |   | — |   | — |   | 268,208 |   |
| Intercompany payables                                                                              |   | 100,642                |    | 261,631 |   | — |   | (362,273 | )(2) | — |   |
| Other long-term liabilities                                                                        |   | 2,994                  |    | 2,470 |   | — |   | — |   | 5,464 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of  subsidiary                                                |   | 40,835                 |    | — |   | — |   | — |   | 40,835 |   |
| Mandatorily redeemable 14% preferred stock                                                         |   | —                 |    | — |   | 71,402 |   | — |   | 71,402 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity (deficit):                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                    |   | 111,719                |    | 151,492 |   | 60,247 |   | (263,211 | )(1) | 60,247 |   |
| Retained earnings (deficit)                                                                        |   | (156,632               | )       | (65,824 | ) | (176,562 | ) | 222,456 |  (1) | (176,562 | ) |
| Accumulated other comprehensive loss                                                               |   | —                 |    | (268 | ) | — |   | — |   | (268 | ) |
| Total stockholders’ equity                                                                    |   | (44,913                | )       | 85,400 |   | (116,315 | ) | (40,755 | ) | (116,583 | ) |
| Total liabilities, mandatorily redeemable  preferred stock and stockholders’ equity (deficit) |   | $                      | 368,755 |   | $ | 383,062 |   | $ | (44,913 | ) | $ | (403,028 | ) | $ | 303,876 |   |

 

F-49

----

 
|                                                                                               |   | **December  31, 2002** | ** ** |
|----------------------------------------------------------------------------------------------------|--------|------------------------|------------|
| **(In thousands)**                                                                                 |   | **Issuer**             | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                                                                               |   |                   |       |   |   |   |   |   |   |   |   |
| **Assets**                                                                                         |   |                   |       |   |   |   |   |   |   |   |   |
|                                                                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Current assets:                                                                                    |   |                   |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |   | $                      | 12,343     |   | $ | 78 |   | $ | — |   | $ | — |   | $ | 12,421 |   |
| Accounts receivable, net                                                                           |   | —                 |       | 26,354 |   | — |   | — |   | 26,354 |   |
| Inventories                                                                                        |   | —                 |       | 59,300 |   | — |   | — |   | 59,300 |   |
| Other current assets                                                                               |   | 17,711                 |       | 443 |   | — |   | — |   | 18,154 |   |
| Assets of discontinued operations                                                                  |   | —                 |       | 166,507 |   | 5,197 |   | (10,963 | )(1) | 160,741 |   |
| Total current assets                                                                               |   | 30,054                 |       | 252,682 |   | 5,197 |   | (10,963 | ) | 276,970 |   |
|                                                                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                        |   | 2,485                  |       | 33,654 |   | — |   | — |   | 36,139 |   |
| Other assets, principally goodwill                                                                 |   | 11,708                 |       | 224,150 |   | — |   | — |   | 235,858 |   |
| Investments in subsidiaries                                                                        |   | 348,559                |       | — |   | 35,312 |   | (383,871 | )(1) | — |   |
| Intercompany receivables                                                                           |   | 276,121                |       | 172,389 |   | 5,740 |   | (454,250 | )(2) | — |   |
| Total assets                                                                                       |   | $                      | 668,927    |   | $ | 682,875 |   | $ | 46,249 |   | $ | (849,084 | ) | $ | 548,967 |   |
|                                                                                               |   |                   |       |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**   |   |                   |       |   |   |   |   |   |   |   |   |
|                                                                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                  |   | $                      | 15,337     |   | $ | 980 |   | $ | — |   | $ | — |   | $ | 16,317 |   |
| Other current liabilities                                                                          |   | 16,786                 |       | 27,763 |   | — |   | — |   | 44,549 |   |
| Liabilities of discontinued operations                                                             |   | —                 |       | 19,954 |   | (26 | ) | — |   | 19,928 |   |
| Total current liabilities                                                                          |   | 32,123                 |       | 48,697 |   | (26 | ) | — |   | 80,794 |   |
| Long-term debt, less current portion                                                               |   | 355,568                |       | 9,132 |   | — |   | — |   | 364,700 |   |
| Intercompany payables                                                                              |   | 178,242                |       | 276,008 |   | — |   | (454,250 | )(2) | — |   |
| Other long-term liabilities                                                                        |   | 33,601                 |       | 840 |   | — |   | — |   | 34,441 |   |
| Minority interest in preferred stock of  subsidiary                                                |   | 34,081                 |       | — |   | — |   | — |   | 34,081 |   |
| Mandatorily redeemable 14% preferred stock                                                         |   | —                 |       | — |   | 62,222 |   | — |   | 62,222 |   |
| Stockholders’ equity (deficit):                                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                    |   | 118,621                |       | 337,592 |   | 85,015 |   | (471,653 | )(1) | 69,575 |   |
| Retained earnings (deficit)                                                                        |   | (83,309                | )          | 10,967 |   | (100,962 | ) | 76,819 | (1) | (96,485 | ) |
| Accumulated other comprehensive loss                                                               |   | —                 |       | (361 | ) | — |   | — |   | (361 | ) |
| Total stockholders’ equity                                                                    |   | 35,312                 |       | 348,198 |   | (15,947 | ) | (394,834 | ) | (27,271 | ) |
| Total liabilities, mandatorily redeemable  preferred stock and stockholders’ equity (deficit) |   | $                      | 668,927    |   | $ | 682,875 |   | $ | 46,249 |   | $ | (849,084 | ) | $ | 548,967 |   |

 

F-50

----

 

**Statements of Operations**

 
|                                                 |   | **Year Ended  December 31, 2003** |    |
|------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Revenues                                             |   | $                                 | —  |   | $ | 170,109 |   | $ | — |   | $ | — |   | $ | 170,109 |   |
| Cost of sales                                        |   | —                            |    | 134,953 |   | — |   | — |   | 134,953 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Gross profit                                         |   | —                            |    | 35,156 |   | — |   | — |   | 35,156 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses        |   | 6,948                             |    | 17,948 |   | — |   | — |   | 24,896 |   |
| Research and development expenses                    |   | —                            |    | 10,440 |   | — |   | — |   | 10,440 |   |
| Impairment of goodwill                               |   | —                            |    | 34,000 |   | — |   | — |   | 34,000 |   |
| Amortization of intangible assets                    |   | —                            |    | 3,651 |   | — |   | — |   | 3,651 |   |
| Interest expense                                     |   | 25,708                            |    | 511 |   | — |   | — |   | 26,219 |   |
| Minority interest in preferred stock of  subsidiary  |   | —                            |    | — |   | 6,754 |   | — |   | 6,754 |   |
| Loss on extinguishment of debt                       |   | 1,439                             |    | — |   | — |   | — |   | 1,439 |   |
| Intercompany charges                                 |   | (25,819                           | )       | 25,819 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                       |   | 55,404                            |    | 218 |   | 73,323 |   | (128,945 | )(3) | — |   |
| Other expenses, net                                  |   | 466                               |    | 479 |   | — |   | — |   | 945 |   |
| Provision for income taxes (benefit)                 |   | 9,177                             |    | (22,673 | ) | — |   | — |   | (13,496 | ) |
| Loss from discontinued operations                    |   | —                            |    | 6,403 |   | 218 |   | — |   | 6,621 |   |
| Cumulative effect of change in accounting  principle |   | —                            |    | 13,764 |   | — |   | — |   | 13,764 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                 | (73,323 | ) | $ | (55,404 | ) | $ | (80,295 | ) | $ | 128,945 |   | $ | (80,077 | ) |

 

F-51

----

 
|                                                 |   | **Year Ended  December 31, 2002** |    |
|------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Revenues                                             |   | $                                 | —  |   | $ | 229,841 |   | $ | — |   | $ | — |   | $ | 229,841 |   |
| Cost of sales                                        |   | —                            |    | 170,485 |   | — |   | — |   | 170,485 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Gross profit                                         |   | —                            |    | 59,356 |   | — |   | — |   | 59,356 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses        |   | 11,206                            |    | 29,056 |   | — |   | — |   | 40,262 |   |
| Research and development expenses                    |   | —                            |    | 56 |   | — |   | — |   | 56 |   |
| Amortization of intangible assets                    |   | —                            |    | 3,540 |   | — |   | — |   | 3,540 |   |
| Interest expense                                     |   | 20,583                            |    | 4,793 |   | — |   | — |   | 25,376 |   |
| Minority interest in preferred stock of  subsidiary  |   | —                            |    | — |   | 5,841 |   | — |   | 5,841 |   |
| Intercompany charges                                 |   | (24,309                           | )       | 24,309 |   | — |   | — |   | — |   |
| Equity in loss of subsidiaries                       |   | 55,833                            |    | 9,535 |   | 65,986 |   | (131,354 | )(3) | — |   |
| Other expenses, net                                  |   | 495                               |    | 10 |   | — |   | — |   | 505 |   |
| Provision for income taxes (benefit)                 |   | 694                               |    | (4,315 | ) | — |   | — |   | (3,621 | ) |
| Loss from discontinued operations                    |   | —                            |    | 31,861 |   | 9,535 |   | — |   | 41,396 |   |
| Cumulative effect of change in accounting  principle |   | 1,484                             |    | 16,344 |   | — |   | — |   | 17,828 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                 | (65,986 | ) | $ | (55,833 | ) | $ | (81,362 | ) | $ | 131,354 |   | $ | (71,827 | ) |

 
|                                                |   | **Year Ended  December 31, 2001** | ** ** |
|-----------------------------------------------------|--------|-----------------------------------|------------|
| **(In thousands)**                                  |   | **Issuer**                        | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                                |   |                              |       |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                 | —     |   | $ | 272,112 |   | $ | — |   | $ | — |   | $ | 272,112 |   |
| Cost of sales                                       |   | —                            |       | 196,866 |   | — |   | — |   | 196,866 |   |
|                                                |   |                              |       |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                            |       | 75,246 |   | — |   | — |   | 75,246 |   |
|                                                |   |                              |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative  expenses       |   | 11,840                            |       | 32,891 |   | — |   | — |   | 44,731 |   |
| Research and development expenses                   |   | —                            |       | 698 |   | — |   | — |   | 698 |   |
| Impairment of goodwill                              |   | —                            |       | 8,583 |   | — |   | — |   | 8,583 |   |
| Amortization of intangible assets                   |   | 202                               |       | 12,234 |   | — |   | — |   | 12,436 |   |
| Interest expense                                    |   | 29,357                            |       | 288 |   | — |   | — |   | 29,645 |   |
| Minority interest in preferred stock of  subsidiary |   | —                            |       | — |   | 5,061 |   | — |   | 5,061 |   |
| Intercompany charges                                |   | (23,815                           | )          | 23,815 |   | — |   | — |   | — |   |
| Equity in (earnings) loss of subsidiaries           |   | (1,259                            | )          | (115 | ) | 14,002 |   | (12,628 | )(3) | — |   |
| Other expenses, net                                 |   | 361                               |       | 273 |   | — |   | — |   | 634 |   |
| Provision for income tax benefit                    |   | (2,684                            | )          | (1,249 | ) | — |   | — |   | (3,933 | ) |
| Income from discontinued operations                 |   | —                            |       | (3,431 | ) | (115 | ) | — |   | (3,546 | ) |
|                                                |   |                              |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                   |   | $                                 | (14,002    | ) | $ | 1,259 |   | $ | (18,948 | ) | $ | 12,628 |   | $ | (19,063 | ) |

 

F-52

----

 

**Statements of Cash Flows**

 
|                                                  |   | **Year Ended  December 31, 2003** |    |
|-------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                    |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**             |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                              |   | $                                 | (73,323 | ) | $ | (55,404 | ) | $ | (80,295 | ) | $ | 128,945 | (3) | $ | (80,077 | ) |
| Noncash adjustments:                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Cumulative effect of change in accounting  principle  |   | —                            |    | 13,764 |   | — |   | — |   | 13,764 |   |
| Loss from discontinued operations                     |   | —                            |    | 6,403 |   | 218 |   | — |   | 6,621 |   |
| Equity in loss of subsidiaries                        |   | 55,404                            |    | 218 |   | 73,323 |   | (128,945 | )(3) | — |   |
| Other noncash adjustments                             |   | (6,835                            | )       | 47,397 |   | 6,754 |   | — |   | 47,316 |   |
| Changes in working capital                            |   | 3,441                             |    | (10,153 | ) | — |   | — |   | (6,712 | ) |
| Net cash provided by (used for) operating  activities |   | (21,313                           | )       | 2,225 |   | — |   | — |   | (19,088 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**             |   |                              |    |   |   |   |   |   |   |   |   |
| Net proceeds from sale of Specialty  Avionics Group   |   | 132,223                           |    | — |   | — |   | — |   | 132,223 |   |
| Proceeds from sale of property and equipment          |   | 855                               |    | 2,353 |   | — |   | — |   | 3,208 |   |
| Capital expenditures                                  |   | (26                               | )       | (4,771 | ) | — |   | — |   | (4,797 | ) |
| Cash paid for acquisitions                            |   | (606                              | )       | — |   | — |   | — |   | (606 | ) |
| Net cash provided by (used for) investing  activities |   | 132,446                           |    | (2,418 | ) | — |   | — |   | 130,028 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**             |   |                              |    |   |   |   |   |   |   |   |   |
| Second-lien term debt borrowings                      |   | 80,000                            |    | — |   | — |   | — |   | 80,000 |   |
| Revolving line of credit repayments, net              |   | (6,000                            | )       | — |   | — |   | — |   | (6,000 | ) |
| First-lien debt repaid                                |   | (183,679                          | )       | — |   | — |   | — |   | (183,679 | ) |
| Other secured long-term debt repaid                   |   | (643                              | )       | (1,233 | ) | — |   | — |   | (1,876 | ) |
| Deferred financing costs                              |   | (6,614                            | )       | — |   | — |   | — |   | (6,614 | ) |
| Net cash used for financing activities                |   | (116,936                          | )       | (1,233 | ) | — |   | — |   | (118,169 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued  operations         |   | —                            |    | 1,744 |   | — |   | — |   | 1,744 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and  equivalents      |   | (5,803                            | )       | 318 |   | — |   | — |   | (5,485 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at beginning of period           |   | 12,343                            |    | 78 |   | — |   | — |   | 12,421 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                 |   | $                                 | 6,540   |   | $ | 396 |   | $ | — |   | $ | — |   | $ | 6,936 |   |

 

F-53

----

 
|                                                                          |   | **Year Ended  December 31, 2002** |    |
|-------------------------------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                                            |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**                                     |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                                                      |   | $                                 | (65,986 | ) | $ | (55,833 | ) | $ | (81,362 | ) | $ | 131,354 | (3) | $ | (71,827 | ) |
| Noncash adjustments:                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| Loss from discontinued operations                                             |   | —                            |    | 31,861 |   | 9,535 |   | — |   | 41,396 |   |
| Equity in loss of subsidiaries                                                |   | 55,833                            |    | 9,535 |   | 65,986 |   | (131,354 | )(3) | — |   |
| Other noncash adjustments                                                     |   | 5,542                             |    | 37,846 |   | 5,841 |   | — |   | 49,229 |   |
| Changes in working capital                                                    |   | 28,171                            |    | (35,249 | ) | — |   | — |   | (7,078 | ) |
| Net cash provided by (used for) operating  activities                         |   | 23,560                            |    | (11,840 | ) | — |   | — |   | 11,720 |   |
|                                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**                                     |   |                              |    |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired                             |   | (5,890                            | )       | — |   | — |   | — |   | (5,890 | ) |
| Investment in subsidiary                                                      |   | —                            |    | — |   | (4,632 | ) | 4,632 | (1) | — |   |
| Capital expenditures                                                          |   | (49                               | )       | (4,307 | ) | — |   | — |   | (4,356 | ) |
| Net cash used for investing activities                                        |   | (5,939                            | )       | (4,307 | ) | (4,632 | ) | 4,632 |   | (10,246 | ) |
|                                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**                                     |   |                              |    |   |   |   |   |   |   |   |   |
| Capital contribution to subsidiary of net  proceeds from sale of common stock |   | 5,000                             |    | — |   | 5,000 |   | (5,000 | )(1) | 5,000 |   |
| Other secured long-term borrowings                                            |   | —                            |    | 1,145 |   | — |   | — |   | 1,145 |   |
| First-lien debt repaid                                                        |   | (11,506                           | )       | — |   | — |   | — |   | (11,506 | ) |
| Revolving line of credit repayments, net                                      |   | (6,000                            | )       | — |   | — |   | — |   | (6,000 | ) |
| Other secured debt repaid                                                     |   | (389                              | )       | (1,639 | ) | — |   | — |   | (2,028 | ) |
| Deferred financing costs                                                      |   | (1,656                            | )       | — |   | — |   | — |   | (1,656 | ) |
| Other, net                                                                    |   | (368                              | )       | — |   | (368 | ) | 368 | (1) | (368 | ) |
| Net cash provided by (used for) financing  activities                         |   | (14,919                           | )       | (494 | ) | 4,632 |   | (4,632 | ) | (15,413 | ) |
|                                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued  operations                                 |   | —                            |    | 16,882 |   | — |   | — |   | 16,882 |   |
|                                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| Net increase in cash and equivalents                                          |   | 2,702                             |    | 241 |   | — |   | — |   | 2,943 |   |
|                                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at beginning of period                                   |   | 9,641                             |    | (163 | ) | — |   | — |   | 9,478 |   |
|                                                                          |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                                         |   | $                                 | 12,343  |   | $ | 78 |   | $ | — |   | $ | — |   | $ | 12,421 |   |

 

F-54

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|                                                     |   | **Year Ended  December 31, 2001** |    |
|----------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                       |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                     |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**                |   |                              |    |   |   |   |   |   |   |   |   |
| Net income (loss)                                        |   | $                                 | (14,002 | ) | $ | 1,259 |   | $ | (18,948 | ) | $ | 12,628 | (3) | $ | (19,063 | ) |
| Noncash adjustments Income from  discontinued operations |   | —                            |    | (3,431 | ) | (115 | ) | — |   | (3,546 | ) |
| Equity in (earnings) loss of subsidiaries                |   | (1,259                            | )       | (115 | ) | 14,002 |   | (12,628 | )(3) | — |   |
| Other noncash adjustments                                |   | 3,950                             |    | 40,901 |   | 5,061 |   | — |   | 49,912 |   |
| Changes in working capital                               |   | 16,352                            |    | (41,722 | ) | — |   | — |   | (25,370 | ) |
| Net cash provided by (used for) operating  activities    |   | 5,041                             |    | (3,108 | ) | — |   | — |   | 1,933 |   |
|                                                     |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**                |   |                              |    |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, net of cash  acquired        |   | (13,529                           | )       | — |   | — |   | — |   | (13,529 | ) |
| Capital expenditures and other                           |   | (241                              | )       | (9,314 | ) | — |   | — |   | (9,555 | ) |
| Net cash used for investing activities                   |   | (13,770                           | )       | (9,314 | ) | — |   | — |   | (23,084 | ) |
|                                                     |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**                |   |                              |    |   |   |   |   |   |   |   |   |
| First-lien term debt borrowings                          |   | 20,000                            |    | — |   | — |   | — |   | 20,000 |   |
| Other secured long-term borrowings                       |   | —                            |    | 2,797 |   | — |   | — |   | 2,797 |   |
| Revolving line of credit repayments, net                 |   | (400                              | )       | — |   | — |   | — |   | (400 | ) |
| First-lien debt repaid                                   |   | (7,738                            | )       | — |   | — |   | — |   | (7,738 | ) |
| Other secured long-term debt repaid                      |   | (465                              | )       | (936 | ) | — |   | — |   | (1,401 | ) |
| Deferred financing costs                                 |   | (580                              | )       | (187 | ) | — |   | — |   | (767 | ) |
| Net cash provided by financing activities                |   | 10,817                            |    | 1,674 |   | — |   | — |   | 12,491 |   |
|                                                     |   |                              |    |   |   |   |   |   |   |   |   |
| Net cash provided by discontinued  operations            |   | —                            |    | 10,432 |   | — |   | — |   | 10,432 |   |
|                                                     |   |                              |    |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and  equivalents         |   | 2,088                             |    | (316 | ) | — |   | — |   | 1,772 |   |
|                                                     |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at beginning of period              |   | 7,553                             |    | 153 |   | — |   | — |   | 7,706 |   |
|                                                     |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                    |   | $                                 | 9,641   |   | $ | (163 | ) | $ | — |   | $ | — |   | $ | 9,478 |   |

 

F-55

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**Note 19.         Restated Selected Quarterly FinancialData (Unaudited)**

 

Unauditedcondensed quarterly data for the year ended December 31, 2003 are summarized inthe tables below.  As more fullydescribed in Note 1—Change in Accounting Principle, the Company elected tochange its accounting policy for program costs after concluding the 2003 fiscalyear but retroactively applied the change to the beginning of the year, January1, 2003.  As a result, the condensedquarterly data are presented on both an “as reported” and “as restated” basis.

 

The“as reported” data for 2003 reflects the results of operations as originallyreported for the first three quarters and, for the fourth quarter and resultingyear, as would have been reported, prior to the accounting change.  The “as restated” data reflects theaccounting change as of the beginning of the year, January 1, 2003.

 
|                                                |   | **Year Ended  December 31, 2003** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands)**                                  |   | **1st  Quarter**             |   | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |   | **Total** |   |
|                                                |   |                              |   |   |   |   |   |   |   |   |   |
| As reported:                                        |   |                              |   |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                 | 41,900 |   | $ | 44,113 |   | $ | 44,273 |   | $ | 39,823 |   | $ | 170,109 |   |
| Gross profit (loss)                                 |   | 10,997                            |   | (1,270 | ) | 9,221 |   | 9,946 |   | 28,894 |   |
| Loss from continuing operations                     |   | (4,360                            | )      | (41,923 | ) | (4,461 | ) | (4,770 | ) | (55,514 | ) |
| Income (loss) from discontinued operations          |   | (6,397                            | )      | 747 |   | — |   | (971 | ) | (6,621 | ) |
| Net loss                                            |   | (10,757                           | )      | (41,176 | ) | (4,461 | ) | (5,741 | ) | (62,135 | ) |
|                                                |   |                              |   |   |   |   |   |   |   |   |   |
| As restated:                                        |   |                              |   |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                 | 41,900 |   | $ | 44,113 |   | $ | 44,273 |   | $ | 39,823 |   | $ | 170,109 |   |
| Gross profit                                        |   | 10,997                            |   | 4,992 |   | 9,221 |   | 9,946 |   | 35,156 |   |
| Loss from continuing operations                     |   | (5,933                            | )      | (38,939 | ) | (6,672 | ) | (8,148 | ) | (59,692 | ) |
| Income (loss) from discontinued operations          |   | (6,397                            | )      | 747 |   | — |   | (971 | ) | (6,621 | ) |
| Cumulative effect of change in accounting principle |   | (13,764                           | )      | — |   | — |   | — |   | (13,764 | ) |
| Net loss                                            |   | (26,094                           | )      | (38,192 | ) | (6,672 | ) | (9,119 | ) | (80,077 | ) |

 

Theprincipal differences between “as reported” and “as restated” are caused by therecognition of the $13,764,000 cumulative effect of the change in accountingprinciple in the first quarter and the timing of a write off of previouslydeferred program costs.  As part of theCompany’s second quarter restructuring activities, $6,262,000 of program coststhat were deferred under the old accounting policy were written off and chargedto cost of sales.  Since under the newpolicy (which was adopted in 2004 and retroactively applied to January 1, 2003)those costs are deemed expensed as incurred, the second quarter write off isnot required in the “as restated” data.

 

F-56

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**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**ConsolidatedFinancial Statement Schedules**

** **

**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  End of  Period** |   |
|------------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|----------------|--------|--------------------------------|--------|
|                                                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year Ended December 31, 2003 (1)**                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for doubtful accounts                                        |   | $                                    | 1,205  |                              | $      | 670                             |   | $              | — |                           | $      | (607 | ) | $ | 1,268 |   |
| Reserve for excess, slow moving and  potentially obsolete material     |   | 3,759                                |   | 3,199                             |   | —                          |   | (1,744         | )      | 5,214                          |   |
| Deferred tax asset valuation allowance                                 |   | —                               |   | 19,528                            |   | —                          |   | —         |   | 19,528                         |   |
|                                                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year Ended December 31, 2002 (1)**                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for doubtful accounts                                        |   | $                                    | 2,108  |                              | $      | 843                             |   | $              | — |                           | $      | (1,746 | ) | $ | 1,205 |   |
| Reserve for excess, slow moving and  potentially obsolete material (2) |   | 2,986                                |   | 3,553                             |   | —                          |   | (2,780         | )      | 3,759                          |   |
|                                                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year Ended December 31, 2001 (1)**                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for doubtful accounts                                        |   | $                                    | 1,536  |                              | $      | 2,001                           |   | $              | — |                           | $      | (1,429 | ) | $ | 2,108 |   |
| Reserve for excess, slow moving and  potentially obsolete material (3) |   | 3,213                                |   | 731                               |   | —                          |   | (958           | )      | 2,986                          |   |

 

----

(1)                      Excludes amounts attributable tothe Specialty Avionics Group which is classified as discontinued operation.

 

(2)                      Excludes $7,241,000 of otherasset impairment related charges resulting from the 2002 and 2001 restructuringprograms.

 

(3)           Excludes $12,155,000of inventory and capitalized program cost write-offs resulting from the 2001restructuring program.

 

F-57

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