**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K/A**

**(AMENDMENTNO. 1)**

 

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002**

 

**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/o  Credit Suisse First Boston / DLJ Merchant Banking Partners II, L.P.  Eleven Madison Avenue  New York, NY 10010  (212) 325-2000** |
| (Address and  Telephone Number of Principal Executive Offices)                                                                          |

 

**SECURITIES REGISTERED PURSUANT TOSECTION 12(b) OF THE ACT:**

 

None.

 

**SECURITIES REGISTERED PURSUANT TOSECTION 12(g) OF THE ACT:**

 

None.

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

ý** **YES  o NO

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).

o YES  ý NO

 

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, as of the last business day of the registrant’smost recently completed second fiscal quarter: $2.6 million

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K. o

 

The number of shares of Common Stock outstanding onMarch 28, 2003 was 4,116,627.

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

None.

 

 

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**Tableof Contents**

 
| **Explanatory  Note**                                                                                      |
|------------------------------------------------------------------------------------------------------------|
|                                                                                                       |   |
| **Part I**                                                                                                 |   |
| Item 1.                                                                                                    | Description of Business |
| Item 2.                                                                                                    | Properties |
| Item 3.                                                                                                    | Legal Proceedings |
| Item 4.                                                                                                    | Submission of Matters to a Vote of Security  Holders |
|                                                                                                       |   |
| **Part II**                                                                                                |   |
| Item 5.                                                                                                    | Market for Registrant’s Common Equity and  Related Stockholder Matters |
| Item 6.                                                                                                    | Selected Financial Data |
| Item 7.                                                                                                    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
| Item 7A.                                                                                                   | Quantitative and Qualitative Disclosures About  Market Risk |
| Item 8.                                                                                                    | Financial Statements and Supplementary Data |
| Item 9.                                                                                                    | Changes In and Disagreements With Accountants On  Accounting and Financial Disclosure |
|                                                                                                       |   |
| **Part III**                                                                                               |   |
| Item 10.                                                                                                   | Directors and Executive Officers of the  Registrant |
| Item 11.                                                                                                   | Executive Compensation |
| Item 12.                                                                                                   | Security Ownership of Certain Beneficial Owners  and Management |
| Item 13.                                                                                                   | Certain Relationships and Related Transactions |
| Item 14.                                                                                                   | Controls and Procedures |
|                                                                                                       |   |
| **Part IV**                                                                                                |   |
| Item 15.                                                                                                   | Exhibits, Financial Statement Schedules, and  Reports on Form 8-K |
|                                                                                                       |   |
| **Signatures**                                                                                             |   |
|                                                                                                       |   |
| **Index  to Financial Statements, Supplementary Financial Information and Financial  Statement Schedules** |

 

 

**ExplanatoryNote**

 

DeCrane Holdings Co. is filing this Amendment No. 1 onForm 10-K/A for the fiscal year ended December 31, 2002 to amend andrestate, in its entirety, its Annual Report on Form 10-K originally filed withthe Securities and Exchange Commission on April 15, 2003 (referred toherein as the “Original Report” and the “Amended Report”).  Except for the reclassifications describedbelow, no changes have been made in this Amended Report to the consolidatedfinancial position, results of operations or cash flows we reported in ourOriginal Report.  This Amended Reportonly modifies and updates our disclosures for events occurring subsequent tothe filing of our Original Report, as described below, which resulted in ourindependent accountants revising and reissuing their report accompanying ourfinancial statements and does not otherwise reflect events occurring after theApril 15, 2003 filing of our Original Report or modify or update thedisclosures set forth in that Original Report in any way to reflect any changesin our business or our consolidated financial position, results of operationsor cash flows subsequent to the filing date of the Original Report.  For the convenience of the reader, we deemedit desirable to amend and restate our Original Report in its entirety toprovide clarity as to the events that have occurred.

 

As described in our Original Report, during the fourthquarter of fiscal 2002 we embarked on a plan to sell the Specialty AvionicsGroup and entered into a definitive agreement to sell the group onMarch 14, 2003.  The sale wasconsummated on May 23, 2003, subsequent to the filing of our OriginalReport.  In addition, at the time offiling our Original Report, our failure to consummate the sale by June 30,2003 would have been an event of default under our amended senior creditfacility.  As a result, our independentaccountants qualified their report on our audited financial statements withrespect to our ability to continue as a going concern.  Consummation of the sale alleviated ourindependent accountants’ doubt about our ability to continue as a goingconcern.  As a result, our independentaccountants issued a revised, unqualified report on our financial statements.

 

In this Amended Report,we are filing in “Item 8. Financial Statements and Supplementary Data” ourindependent accountants’ revised, unqualified report.  We are also reclassifying our consolidated statements of financialposition, results of operations and cash flows to reflect the SpecialtyAvionics Group as a discontinued operation for all periods presented.  In addition, we are also making similarconforming changes to other parts of the Original Report as well.

 

This Amended Reportshould be read in conjunction with our amended Form 10-Q/As (Amendment No. 1)for the quarterly periods ended March 31, 2003 and June 30, 2003filed concurrently with this Amended Report. As required by Rule 12b-15 of the Securities Exchange Act of 1934, ourChief Executive Officer and Chief Financial Officer are providing updatedcertifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002and updated written statements pursuant to Title 18 United States CodeSection 1350, as adopted pursuant to Section 906 of the Act.

 

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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****.****                                                     DESCRIPTIONOF BUSINESS**

** **

**CompanyOverview**

 

DeCrane Holdings Co., a Delaware corporation foundedin 1998, is a holding company and does not have any material operations orassets other than its ownership of all of the common stock of DeCrane AircraftHoldings, Inc.  DeCrane Holdings and DLJMerchant Banking Partners II, L.P. and affiliated entities acquired DeCraneAircraft in August 1998.  DeCraneAircraft is the predecessor of DeCrane Holdings.  As used in this report, unless the context indicates otherwise,“DeCrane” and “we,” “us,” “our,” and similar terms collectively refer to thecombined businesses of DeCrane Holdings, DeCrane Aircraft and all of DeCraneAircraft’s subsidiaries.

 

DeCrane Aircraft Holdings, Inc., a Delawarecorporation founded in 1989, is a provider of integrated assemblies,sub-assemblies and component parts to the aerospace industry.  Since our founding in 1989, we have experiencedboth internal growth and external growth by identifying fragmented, high-growthniche segments within the aerospace industry and acquiring market-leadingcompanies in those niches.  Today, wehave product capability within two specific segments of the aerospace industry:cabin management for business, VIP and head-of-state aircraft and systemsintegration services.  Within thesemarkets, our customers include original manufacturers of business, VIP andhead-of-state aircraft, commonly referred to as OEM’s, and aircraft repair andmodification centers.

 

**OurOperating Groups**

 

We are organized into two operating groups, consistentwith the segments in which we operate: Cabin Management and SystemsIntegration.  Through our operatinggroups, we offer a complete line of cabinetry, galleys, seating and cabinmanagement systems for business, VIP and head-of-state aircraft, as well assystems integration services.

 

Prior to May 23, 2003, we also had a thirdstrategic business, the Specialty Avionics Group.  As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and the consolidated financial statements and related notesincluded in this report, we sold our equity interests in the companiescomprising this group to an affiliate of Odyssey Investment Partners, LLC.  As a result of the sale, the SpecialtyAvionics Group is presented as a discontinued operation in our consolidatedfinancial statements and our discussion below reflects only our continuingoperations for all periods.

 

Our historical financial position and results ofoperations have also been affected by our history of acquisitions.  Our acquisitions are described in “—OtherInformation–Acquisitions” below.

 

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**CabinManagement Group**

 

DeCrane’s Cabin Management Group contributedapproximately 75% of our revenues from continuing operations for the year endedDecember 31, 2002.

 

***Business Description***

 

Our Cabin Management Group is a leading independentprovider of cabin products, with a primary focus on serving the business, VIPand head-of-state aircraft market. Since 1997, our Cabin Management Group has acquired nine companiesinvolved in the engineering, manufacturing and assembly of the key componentsfor the interior of a business, VIP and head-of-state aircraft, including cabininterior furnishings, veneer, cabin management systems, seating and compositecomponents.  Our Cabin Management Groupserves major manufacturers of business, VIP and head-of-state aircraft,including Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream andRaytheon.

 

The Cabin Management Group introduced the concept ofmodularity to the business, VIP and head-of-state aircraft market by offeringtotally integrated interior products. In our view, one of the greatest challenges facing the industry’saircraft manufacturers is minimizing the lead-time necessary to complete anunfinished “green” aircraft.  We believeour distinctive approach of delivering integrated assemblies and sub-assembliesaddresses this challenge by providing our customers with entire pre-engineered,pre-wired and pre-plumbed modular cabin interiors and management systems readyfor final integration into the aircraft. We believe our totally integrated interior products enable our customersto reduce their lead times, supplier base and overall costs.

 

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

 

•                  *Building Critical Mass in Cabin Interior Furnishings,Cabin Management Systems and Seating for the Business, VIP and Head-of-StateAircraft Markets.*  Our CabinManagement Group is aggressively focused on broadening and deepening itsproduct offerings to the business, VIP and head-of-state aircraft markets.  As a result of this strategy, we have increasedrevenue content per plane with our existing customer base and have successfullyattracted new customers.

 

•                  *Developing Capabilities to Provide Modular “TotalCabin Solutions” to the Business, VIP and Head-of-State Aircraft Market. *Consistent with our overallcorporate strategy to build integrated system solutions, the Cabin ManagementGroup is focused on aggregating its capabilities to provide partial or fullyassembled modular business, VIP and head-of-state aircraft cabin interiors toits customers.

 

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

 

***Products and Services***

 

Our Cabin Management Group designs, engineers andmanufactures a full line of customized, pre-fit products and provides relatedservices.  Approximately 55% of ourCabin Management Group’s revenues in 2002 were from two customers, Textron andBombardier.  Our products and servicesare in four broad categories, as summarized below.

 

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*InteriorFurnishings*

•                  entertainmentand refreshment centers

•                  conferencetables

•                  hi-low diningand coffee tables

•                  end tables

•                  cabinets

•                  arm and sideledges

•                  galleys

•                  lavatories

•                  vanities

•                  room enclosures

•                  cabinetryrefurbishment services

•                  veneers

 

*Seating*

•                  executive trackand swivel seats

•                  jump-seats

•                  divans, including models that convertto beds or contain storable tables

•                  upholsteryservices

 

*CabinManagement Systems*

•                  in-flightentertainment systems

•                  in-flight data network andcommunication systems

•                  cabin controls

•                  switches

 

*CompositeComponents*

•                  sound-dampeningside walls and headliners

•                  passengerservice units

•                  environmental(HVAC) ducting

•                  closets

 

Our interior furnishings products and servicesprovided approximately 47% of our consolidated revenues during each of theyears in the three year period ended December 31, 2002 and seatingprovided approximately 10% of our consolidated revenues during each of theyears in the same three year period.  Inaddition, cabin management systems provided approximately 13% our consolidatedrevenues during the year ended December 31, 2000 compared to approximately10% in 2001 and 7% in 2002.  Cabinmanagement systems, as a percent of consolidated revenues, decreased subsequentto 2000 primarily as a result of the interior furnishings and seating companieswe acquired during 2000.

 

***Competition***

 

The markets served by our Cabin Management Group arefragmented, with several competitors offering similar products andservices.  Due to the global nature ofthe aerospace industry, competition comes from both U.S. and foreigncompanies.  Our Cabin Management Groupgenerally faces competition from a group of smaller companies and enterprises,except for the business, VIP and head-of-state aircraft manufacturers andindependent completion centers.  Webelieve that the principal competitive factors in the markets we serve arequality, price, timely deliveries and overall customer service.  Our principal competitors are summarizedbelow.

* *

*InteriorFurnishings*

•                  BE Aerospace

•                  C & DInteriors

•                  GlobalTechnology

•                  Hiller

•                  The Nordam Group

•                  Independentcompletion centers

•                  Business, VIPand head-of-state aircraft manufacturers and completion centers

 

*Seating*

•                  BE Aerospace

•                  Fisher (Germany)

 

*CabinManagement Systems*

•                  DPI Labs

•                  Honeywell CabinManagement Systems and Services

•                  IEC,International

•                  Rockwell Collins/ Airshow

 

*CompositeComponents*

•                  AAR

•                  Fibre Art

•                  Plastic Fab

•                  Scale CompositeWorks

•                  The Nordam Group

 

3

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**SystemsIntegration Group**

 

DeCrane’s Systems Integration Group contributedapproximately 25% of our revenues from continuing operations for the year endedDecember 31, 2002.

 

***Business Description***

 

Our Systems Integration Group provides a range ofaircraft retrofit, completion and refurbishment services, from conceptualdesign to Federal Aviation Administration certification, including engineering,manufacturing and installation.  One ofour largest businesses in this group is the design, production and installationof auxiliary fuel systems, which extend the range of an aircraft.  We have an exclusive long-term contractthrough December 31, 2004 with Boeing Business Jet (“BBJ”) (which may becancelled by BBJ at any time upon prior written notice) to design, manufactureand install auxiliary fuel systems on the BBJ, a Boeing 737-700IGW, and theBBJ2, a Boeing 737-800, and are one of only four world-wide approved BBJ/BBJ2service centers.  During 2002, we deliveredour first business, VIP and head-of-state aircraft interior completion on aBBJ2 aircraft and are under contract to perform an interior completion on a BBJaircraft for delivery in 2003.

 

We also focus on regulatory authority safety mandatesand believe we are the major supplier of integration kits for smoke detectionand fire suppression in the cargo hold, and perform structural, avionics andmechanical systems modifications, including FAA certification of thosemodifications before returning an aircraft to service.

 

The aerospace industry is highly regulated in theUnited States by the FAA and similar regulatory agencies abroad, such as theEuropean Joint Aviation Authorities (commonly referred to as the JAA), toensure that aviation products and services meet stringent safety andperformance standards.  As ofJuly 29, 2003, there are only 33 companies world-wide that have thenecessary Designated Alteration Station authorization to offer aircraft certificationon behalf of the FAA.  Our Systems IntegrationGroup is authorized to provide the full spectrum of services, from design toFAA certification, needed for timely retrofitting of an aircraft, thusproviding a significant competitive advantage.

 

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

 

•                  *Develop the Most Comprehensive Integrated RetrofitOffering. *For the lasttwelve years, our Systems Integration Group has focused on developing thecapabilities necessary to provide a fully integrated offering with respect toaircraft refurbishing and aircraft retrofitting with FAA mandated changes andtechnological innovations.  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 of Specialty Products and ServicesRelating to Regulatory Authority Mandates.*  Consistent with its first strategic imperative, our SystemsIntegration Group is also growing its capabilities in providing solution “kits”in response to FAA and JAA mandated aircraft upgrades.  Our Systems Integration Group hasdemonstrated the ability to identify and quickly respond to probable newregulatory authority mandates.  Forexample:

 

•                  Manydomestic commercial airlines believe the FAA will issue a safety mandate requiringcockpit door video surveillance on every commercial aircraft traveling in U.S.domestic

 

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airspace in 2003 by nolater than a specific compliance date. In response, we consulted with commercial airlines and developed what webelieve to be a low-cost, high quality cockpit door video surveillancesystem.  Our Sentry OneTM system is basedon an in-house developed camera control unit with integral power supplies and iscombined 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 alreadyreceived FAA approval for our Sentry OneTM system on Boeing 737 aircraft andbelieve we will be successful in obtaining FAA approval for our system on othertypes of aircraft as well.

 

•                  Webelieve the JAA will mandate new fire safety measures for all aircraft inEurope, similar to the FAA mandate in the United States.  We expect to develop a stand-alone kit,similar to our FAA approved kit, which can be quickly incorporated into anaircraft to ensure compliance with the JAA ruling with minimal downtime.

 

***Products and Services***

 

Our Systems Integration Group provides auxiliary fuelsystems, auxiliary power units and system integration services, includingengineering, kit manufacturing, installation and certification.  Customers include Boeing (Boeing BusinessJet, Boeing’s Commercial Airplane Group and Boeing Integrated Defense Systems),Bombardier, Cessna, Gulfstream, Honeywell, Raytheon and Rockwell Collins.  Approximately 56% of our Systems IntegrationGroup’s revenues in 2002 were from Boeing. The products and services we provide are described below.

* *

*AuxiliaryFuel Systems and Power Units.*  We design, engineer, manufacture and install auxiliary fuelsystems for business, VIP, head-of-state and commercial aircraft.  Our unique design and construction have madeus a leader in the auxiliary fuel system market.  We also manufacture auxiliary power units, which provide groundpower to corporate jets made by Bombardier, Cessna, Gulfstream, Learjet andRaytheon.  These products and servicesprovided approximately 15% of our consolidated revenues during the year endedDecember 31, 2002 and 14% during each of the years in the two year periodended December 31, 2001.

* *

*Cabinand Flight Deck Systems Integration.*  We have designed and patented avionicssupport structures we sell under the Box-MountTM name.  These structures are used to support and environmentally coolavionics equipment, including navigation, communication and flight controlequipment.  These support structures aresold to aircraft and related electronics manufacturers, airlines and majormodification centers.  In addition, theseproducts are essential components of the installation kits used in our systemsintegration operations.

* *

*AircraftCompletion and Modification Services. *Weare one of only three world-wide approved Boeing Business Jet Service Centersproviding extensive completion, modification and integration services to thebusiness, VIP and head-of-state aircraft market.

* *

*Retrofitand Refurbishment Services.* We also provide retrofit and refurbishment services, includingengineering, kit manufacturing, installation and certification, to bothcommercial and business, VIP and head-of-state aircraft customers.

 

5

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***Competition***

 

The markets served by our Systems Integration Groupare fragmented with several competitors offering similar products andservices.  Due to the global nature ofthe aerospace industry, competition comes from both U.S. and foreigncompanies.  Our Systems IntegrationGroup generally faces competition from a group of smaller companies andenterprises, 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.

 

*AuxiliaryFuel Systems and Power Units*

•                  Marshalls(United Kingdom)

•                  Pfalz Flugewerke(Germany)

* *

*AuxiliaryPower Units (Integration Only)*

•                  Honeywell

•                  Sundstrand

 

*AircraftModification Services*

•                  Associated Air Center

•                  Jet Aviation(United States and Switzerland)

•                  Lufthansa(Germany)

 

*Cabinand Flight Deck Systems Integration and Retrofit and Refurbishment Services*

•                  ARINC

•                  Aviation Sales

•                  Boeing AircraftServices

•                  FlightStructures

•                  In-houseengineering departments of commercial airlines

•                  Numerousindependent airframe maintenance and modification companies

 

**SpecialtyAvionics Group (Discontinued Operations)**

 

As described in “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” we sold theSpecialty Avionics Group on May 23, 2003. As a result, the group is reflected as a discontinued operation in thisreport.  The information below ispresented to provide a historical perspective on the group’s operations.  The Specialty Avionics Group contributedapproximately 29% of our combined revenues from both continuing anddiscontinued operations for the year ended December 31, 2002.

 

***Business Description***

 

The Specialty Avionics Group supplied aircraftavionics components to the commercial and military aircraft markets as well asto several avionics systems suppliers including Honeywell and RockwellCollins.  The group focused onassembling design, engineering and manufacturing capabilities across severalspecialty avionics product categories, including cockpit and cabin audiomanagement systems, flight deck visual display and communication systems, powerand control devices, and specialty interconnect solutions such as contacts,connectors and various harness assemblies. The Specialty Avionics Group is also a leading manufacturer of highquality electrical contacts for military and aviation applications.

 

***Products and Services***

 

The Specialty Avionics Group designed, engineered andmanufactured electronic components, electronic display devices and interconnectcomponents and assemblies. Approximately 15% of the Specialty Avionics Group’s revenues in 2002were from Boeing.  The products offeredare described below.

* *

*Cockpitand Cabin Audio, Communication, Lighting and Power and Control Devices.*  TheSpecialty Avionics Group is a leading manufacturer of cockpit audio, lightingand power and control devices, including selective calling system decoders,used in commercial, regional and business, VIP and

 

6

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head-of-state aircraft.  The group also manufactured a variety ofother commercial aircraft safety system components, including warning tonegenerators, temperature and de-icing monitoring systems, steep approach monitorsand low voltage power supplies for traffic collision avoidance systems.  These products have providedapproximately 13% of our combined revenues from both continuing anddiscontinued operations over the last three years.

* *

*ElectricalContacts.*  Contactsconduct electronic signals or electricity and are installed at the terminus ofa wire or an electronic or electrical device. The group supplies precision-machined contacts for use in connectorsfound in virtually every electronic and electrical system on a commercial aircraft.  The group sells contacts directly toaircraft and related electronics manufacturers and through its private labelingprograms to several major connector manufacturers who sell connectors to thesame markets under their brand name. The contacts are also widely used in military aircraft as well as avariety of commercial and defense telecommunication and data communicationapplications.

* *

*Connectorsand Harness Assemblies.* Electronic and electrical connectors link wires and devices in avionicssystems, and permit their assembly, installation, repair and removal.  The group’s connectors are speciallymanufactured to meet the critical performance requirements demanded bymanufacturers and required in the harsh environment of an operatingaircraft.  The group produces connectorsthat are used in aircraft galleys, flight decks and control panels in thepassenger cabin, in addition to producing wire harness assemblies for use incabin avionics systems, including wire, connectors, contacts and hardware.  Harness assemblies are typically sold tomanufacturers of aircraft electronic systems.

* *

*LiquidCrystal Display Devices. *The group manufactures a wide varietyof displays in both dichroic and twisted nematic formats, as well as LCDmodules used in commercial and military aircraft.  LCD modules are liquid crystal displays packaged with a backlightsource, and additional mechanical and electronic components that areplug-and-play ready for a customers’ instrument display applications.  Dichroic displays perform best in situationswith high ambient lighting and low backlighting.  Twisted nematic displays are suited for situations where a strongbacklight is required.  LCD products areused in a variety of flight deck applications such as auto pilot flight controlsystems, fuel quantity indicators, exhaust gas temperature indicators, airbornecommunications, navigation and safety systems and transportation signage.  Dichroic and twisted nematic liquid crystaldisplay products are widely used in the aerospace industry because they areeasily adapted to custom design and possess a variety of high performancecharacteristics, including wide viewing angles, high readability in sunlightand the ability to withstand wide temperature fluctuations.  The group also manufactures a variety ofelectronic clock instruments for commercial and military aircraft, includingfixed wing and rotary wing, all of which use the group’s LCD devices.

* *

*WireMarking and Crimping Equipment.*  The group designs and manufactures surface preparation and wiremarking systems.  Products include laserand inkjet marking systems, atmospheric plasma systems and automatic crimpingsystems.  The products are used in theaerospace, defense, medical device and biomedical industries, principally wireand cable fabricators, wire processors, fiber optics manufacturers andconsumer-based products manufacturers.

 

***Competition***

 

The markets served by the Specialty Avionics Group arefragmented, with several competitors offering similar products andservices.  Due to the global nature ofthe aerospace industry, competition comes from both U.S. and foreigncompanies.  The Specialty Avionics Groupgenerally faces competition from large, diversified companies that produce abroad range of products.  We believethat the principal competitive factors in the markets we serve are productinnovations, technological superiority and performance, quality, price, timelydeliveries and overall customer service. The principal competitors are summarized below.

 

7

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*Cockpitand Cabin Audio, Communication, Lighting and Power and Control Devices*

•                  BakerElectronics

•                  Diehl GmbH(Germany)

•                  GablesEngineering

•                  Korry

•                  Team (France)

 

*ElectricalContacts*

•                  Deutsch

•                  Lemco

•                  Several small contactblank suppliers

 

*Connectorand Harness Assemblies*

•                  AMP (connectors)

•                  Carlyle (harnessassemblies)

•                  Electronic CableSpecialists (harness assemblies)

•                  ITT Cannon(connectors)

•                  Radiall S.A.(France) (connectors)

 

*LiquidCrystal Displays and Chronometers*

•                  Air Precision

•                  Davtron

•                  DCI (LCD’s only)

•                  ElectroniqueMartin (LCD’s only)

•                  Smiths Group

 

**OtherInformation**

 

**Acquisitionsand Dispositions**

 

***Disposition of the Specialty Avionics Group***

 

On May 23, 2003, we consummated the sale of ourequity interests in the companies comprising the Specialty Avionics Group toWings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC.  The aggregate selling price was $140.0million in cash, subject to a post-closing selling price adjustment for the amountof working capital at closing.  We used$130.0 million of the proceeds from the sale to repay borrowings under oursenior credit facility, as amended.  Thesale of the Specialty Avionics Group is not expected to affect the operationsof our remaining operating groups.  TheSpecialty Avionics Group is reflected as a discontinued operation in thisreport.  See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” foradditional information.

 

The Specialty Avionics Group consisted of AvtechCorporation of Seattle, Washington, Aerospace Display Systems, LLC of Hatfield,Pennsylvania, and Tri-Star Electronics International, Inc. of El Segundo,California.

 

***Companies Acquired by DeCrane Aircraft***

 

During the five years ended December 31, 2002,DeCrane Aircraft has acquired the stock or assets of eight significantbusinesses, as such term is defined by Securities and Exchange Commissionrules, as follows:

 

*Cabin Management Group*

 

•                  allof the common stock of Precision Pattern, Inc., a Kansas-based designer andmanufacturer of interior furniture components for business, VIP andhead-of-state aircraft, on April 23, 1999;

 

•                  substantiallyall of the assets of Custom Woodwork & Plastics, Inc., a Georgia-baseddesigner and manufacturer of interior furniture components for business, VIPand head-of-state aircraft, on August 5, 1999;

 

•                  substantiallyall of the assets of PCI NewCo, Inc., a Kansas-based manufacturer of compositematerial and components for business, VIP and head-of-state aircraft, onOctober 6, 1999;

 

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

 

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

 

•                  allof the common stock of ERDA, Inc. (subsequently renamed DeCrane AircraftSeating Co., Inc.), a Wisconsin-based designer and manufacturer of aircraftseating, on June 30, 2000;

 

*Specialty Avionics Group*

 

•                  allof the common stock of Avtech Corporation, a Washington-based designer andmanufacturer of avionics components for commercial and business, VIP andhead-of-state aircraft, on June 26, 1998; and

 

*Systems Integration Group*

 

•                  allof the common stock of PATS, Inc., a Maryland-based designer, manufacturer andinstaller of auxiliary fuel systems for business, VIP and head-of-stateaircraft and a manufacturer of aircraft auxiliary power units, onJanuary 22, 1999.

 

All of the acquisitions were accounted for aspurchases.  We have used the acquiredassets to manufacture products similar to those previously manufactured by thecompanies prior to their acquisition. Our financial statements reflect the acquired companies subsequent totheir respective acquisition dates.  Ourmore recent acquisitions are described in Note 2 accompanying our financialstatements included in this report.

 

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

 

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

 

In November 2000, Credit Suisse First Boston,Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking Partners II, L.P. and otherentities affiliated with Donaldson Lufkin & Jenrette, Inc. became indirectaffiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group.  The combined operations of the DLJ entitiesand Credit Suisse First Boston are commonly referred to collectively as CreditSuisse First Boston.  See “Item 13.Certain Relationships and Related Transactions—Acquisition of Donaldson, Lufkin& Jenrette, Inc. by Credit Suisse Group” for additional information.

 

**Customers**

 

We estimate that our Cabin Management Group currentlysells its products and services to approximately 800 customers and our SystemsIntegration Group sells its products and services to approximately 200customers.  Our primary customersinclude manufacturers of business, VIP and head-of-state aircraft, airlines andaircraft repair and modification companies.

 

The following customers accounted for 10% or more ofour consolidated revenues from continuing operations for the year endedDecember 31, 2002.  Historical datafor the three years ended December 31, 2002 is presented in Note 17accompanying our consolidated financial statements included in this report.

 

9

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| **Significant Customers**          |   | **Cabin  Management****Group** |   | **Systems  Integration****Group** |   | **Consolidated****Total** |   |
|------------------------------------|--------|--------------------------------|--------|-----------------------------------|--------|---------------------------|--------|
|                               |   |                           |   |                              |   |                      |   |
| Percent  of consolidated revenues: |   |                           |   |                              |   |                      |   |
| Textron  (1)                       |   | 23.5                           | %      | —                            | %      | 23.5                      | %      |
| Bombardier                         |   | 16.0                           |   | 1.4                               |   | 17.4                      |   |
| Boeing  (2)                        |   | 1.4                            |   | 14.0                              |   | 15.4                      |   |
| Consolidated  revenues             |   | 40.9                           | %      | 15.4                              | %      | 56.3                      | %      |
|                               |   |                           |   |                              |   |                      |   |
| Percent  of group revenues (3):    |   |                           |   |                              |   |                      |   |
| Textron  (1)                       |   | 31.3                           | %      | —                            | %      |                      |   |
| Bombardier                         |   | 21.4                           |   | 5.4                               |   |                      |   |
| Boeing  (2)                        |   | 1.9                            |   | 56.0                              |   |                      |   |
| Group  revenues                    |   | 54.6                           | %      | 61.4                              | %      |                      |   |

 

----

(1)                                  IncludesCessna.

 

(2)                                  Reflectsonly our direct revenues from Boeing. Our Systems Integration Group’s revenues from Boeing result fromauxiliary fuel systems for the Boeing Business Jet.

 

(3)                                  Inter-grouprevenues are eliminated against the group originating the sale.

 

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

 

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

 

•                  thecustomer is not required to make purchases, and may terminate such contract atany time;

 

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

 

•                  ona prospective basis, we must extend to the customers any reductions in pricesor lead times that we provide to other customers;

 

•                  wemust match other suppliers’ price reductions or delete the affected productsfrom the contract; and

 

•                  wemust grant irrevocable non-exclusive worldwide licenses to use our designs,tooling and other intellectual property rights to products sold to a customerif we default, or suffer a bankruptcy filing, or transfer our manufacturingrights to a third party.

 

**Backlog**

 

As of December 31, 2002, we had an aggregatesales order backlog from continuing operations of $66.8 million compared to$99.5 million as of December 31, 2001, as follows:

 
|                 |   | **December 31,** |   |
|----------------------|--------|-----------------------|--------|
| **(In  thousands)**  |   | **2002**              |   | **2001** |   |
|                 |   |                  |   |   |   |
| Cabin  Management    |   | $                     | 31,679 |   | $ | 43,653 |   |
| Systems  Integration |   | 35,126                |   | 55,865 |   |
| Consolidated  totals |   | $                     | 66,805 |   | $ | 99,518 |   |

 

 

10

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Orders are usually filledwithin twelve months; however, backlog totaling $9.4 million as ofDecember 31, 2002 is scheduled for delivery in 2004 and beyond as follows:Cabin Management – $0.7 million; and Systems Integration – $8.7 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 andAnalysis of Financial Condition and Results of Operations—Industry Overview andTrends,” the acts and ongoing threats of global terrorism, the current militaryconflicts, SARS epidemic and weak global economic conditions are all adverselyimpacting the aerospace industry.  Weare not able to predict the continuing impact these events will have in futureperiods.  However, given the magnitudeof these events, the adverse impact could be material.

 

**Employees**

 

As of December 31, 2002, we had 2,176 employees:1,117 in our Cabin Management Group; 733 in our Specialty Avionics Group(discontinued operations); 313 in our Systems Integration Group; and 13 in ourcorporate office.  None of our employeesis subject to a collective bargaining agreement, and we have not experiencedany material business interruption as a result of labor disputes.  We believe that we generally have a goodrelationship with our employees.

 

**Researchand Development**

 

We continually evaluate opportunities to improve ourproduct offerings and develop new products that incorporate new technologies tomeet the demands of our customers and the FAA. Total expenditures by continuing operations were $0.1 million for theyear ended December 31, 2002, $0.7 million during the year endedDecember 31, 2001 and $1.6 million during the year ended December 31,2000.

 

**FinancialInformation About Geographic Areas**

 

Financial information about our revenues and assets bygeographic area are included in Note 17 accompanying our financial statementsincluded in this report.

 

**Seasonality**

 

Our businesses generally are not seasonal in nature.

 

**Salesand Marketing**

 

Our Cabin Management Group has designated relationshipmanagers who are responsible for maintaining and cultivating relationships withcustomers.  In addition, a dedicatedsales force is utilized for some of our products and services.

 

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

 

We are continuously seeking opportunities to combineour sales efforts across all of our operating groups in order to ensure thatall sales opportunities are explored and that we maximize our revenue contentper plane.  We may also assign marketingand sales responsibilities for key customers to one of our senior corporateexecutives.

 

11

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**RawMaterials and Component Parts**

 

The components we manufacture require the use ofvarious raw materials including aluminum, hardwoods and plastics.  The availability and prices of thesematerials may fluctuate.  The cost ofsuch raw materials is a significant component in, and part of, the sales priceof many of our products.  Although someof our contracts have prices tied to raw materials prices, we cannot alwaysrecover raw material price increases in our product sale price.  We also purchase a variety of manufacturedsub-component parts from various suppliers. Raw materials and component parts are generally available from multiplesuppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials andcomponent parts may affect our ability to meet customer production needs.

 

**IntellectualProperty and Proprietary Information**

 

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

 

**GovernmentRegulation**

 

***Federal Aviation Administration***

 

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

 

The FAA can authorize or deny authorization of many ofthe services and products we provide. Any such denial would preclude our ability to provide the pertinentservice or product.  If we failed tocomply with applicable FAA standards or regulations, the FAA could exercise awide range of remedies, including a warning letter, a letter of correction, acivil penalty action, and emergency or non-emergency suspension or revocationof a certificate or approval.

 

Each type of aircraft operated by airlines in theUnited States must possess an FAA type certificate, generally held by theaircraft manufacturer, indicating that the type design meets applicableairworthiness standards.  When someoneelse 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, 2002, we own and/ormanage on behalf of our customers approximately 300 Supplemental TypeCertificates.  Many are multi-aircraftcertificates, which apply to all of the aircraft of a single type.  We foresee the need to obtain additionalSupplemental Type Certificates so that we can expand the services we provideand the customers we serve and believe we will be able to obtain suchcertificates as the need arises.

 

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

 

12

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many of the Supplemental Type Certificates our customers and we requirefor our systems integration operations.

 

After obtaining a Supplemental Type Certificate, amanufacturer must apply for a Parts Manufacturer Approval from the FAA, or asupplement to an existing Parts Manufacturer Approval, which permits the holderto manufacture and sell installation kits according to the approved design anddata package.  We have six Parts ManufacturerApprovals and approximately 160 supplements to those approvals.  In general, each initial Parts ManufacturerApproval is an approval of a manufacturing or modification facility’sproduction quality control system.  EachParts Manufacturer Approval supplement authorizes the manufacture of aparticular part in accordance with the requirements of the correspondingSupplemental Type Certificate.  Weroutinely apply for and receive such Parts Manufacturer Approval supplements.  In order to perform the actual installationsof a modification, we are also required to have FAA approval.  This authority is contained either in ourParts Manufacturer Approvals and related supplements, or in our repair stationcertificates.  In order for a company toperform most kinds of repair, engineering, installation or other services onaircraft, its facility must be designated as an FAA-authorized repairstation.  As of December 31, 2002,we had seven authorized repair stations and employed approximately 100 FAA certifiedrepresentatives.

 

***Occupational Safety and Health Administration***

 

Our manufacturing operations in the United States aresubject to a variety of worker and community safety laws.  The Occupational Safety and Health Act of1970 mandates general requirements for safe workplaces for all employees.  In addition, OSHA provides specialprocedures and measures for the handling of hazardous and toxic substances andhas established specific safety standards for workplaces engaged in thetreatment, disposal or storage of hazardous waste.  We believe that our operations are in material compliance withOSHA’s health and safety requirements.

 

**EnvironmentalMatters**

 

Our facilities and operations are subject to variousfederal, state, local, and foreign environmental laws and regulations,including those relating to discharges to air, water, and land, the handlingand disposal of solid and hazardous waste, and the cleanup of propertiesaffected by hazardous substances.  Inaddition, some environmental laws, such as the federal ComprehensiveEnvironmental Response, Compensation and Liability Act, as amended (“CERCLA”)and similar state laws, impose strict liability upon persons responsible forreleases or potential releases of hazardous substances.  That liability generally is retroactive, andmay create “joint and several” liability among multiple parties who have somerelationship to a site or a source of waste, such as a current or former owneror operator of real property or a party who arranges to transport wastes to athird-party site.  We have sent waste totreatment, storage, or disposal facilities that have been designated asNational Priority List sites under CERCLA or equivalent listings under statelaws.  We have received CERCLA requestsfor information 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 are contaminated to varying degrees.

 

We have not incurred, nor do we expect to incur,liabilities in any significant amount as a result of the foregoing mattersbecause in most of these cases other entities have been held primarilyresponsible, the levels of contamination are sufficiently low so as not torequire 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.

 

13

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We believe that we have no liabilities underenvironmental laws and regulations, except for liabilities which we do notexpect would likely have a material adverse effect on our business, financialposition, results of operations or cash flows. However, some risk of environmental liability is inherent in the natureof our business, and we might in the future incur material costs to meetcurrent or more stringent compliance, cleanup, or other obligations pursuant toenvironmental laws and regulations.

 

In connection with the sale of the Specialty AvionicsGroup, we have agreed to indemnify the buyer for all pre-closing releases ofhazardous materials at any of Avtech’s facilities up to a maximum amount of$5.0 million.

 

**ITEM 2****.****                                                    PROPERTIES**

 

We operate in a number of manufacturing, engineeringand office facilities in the United States and abroad.  At December 31, 2002, we utilizedapproximately 1.3 million square feet of floor space, approximately 93% ofwhich 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, 2002 aresummarized below.

* *
| **(In  thousands of square feet)** |   | **Leased** |   | **Owned** |   | **Total** |   |
|------------------------------------|--------|------------|--------|-----------|--------|-----------|--------|
|                               |   |       |   |      |   |      |   |
| Cabin  Management                  |   | 506        |   | 204       |   | 710       |   |
| Specialty  Avionics                |   | 164        |   | 88        |   | 252       |   |
| Systems  Integration               |   | 114        |   | 150       |   | 264       |   |
| Corporate                          |   | 8          |   | —    |   | 8         |   |
| Total  in use                      |   | 792        |   | 442       |   | 1,234     |   |
|                               |   |       |   |      |   |      |   |
| Not  in use, held for sale         |   | —     |   | 104       |   | 104       |   |
| Not  in use, subleased to others   |   | 84         |   | 32        |   | 116       |   |
| Total                              |   | 876        |   | 578       |   | 1,454     |   |

 

In addition to the 252,000 square feet of facilitiesused by the Specialty Avionics Group, an additional 32,000 square feet of ownedfacilities not in use and subleased to others was transferred to the buyer inconnection with our sale of the group in 2003. The sale of the Specialty Avionics Group will not have an impact on theutilization of our remaining facilities.

 

**ITEM 3****.****                                                    LEGALPROCEEDINGS**

 

As part of its investigation of the crash of SwissairFlight 111 off the Canadian coast on September 2, 1998, the CanadianTransportation Safety Board (the “CTSB”) initially notified us that itrecovered burned wire that was attached to the in-flight entertainment systeminstalled on some of Swissair’s aircraft by one of our subsidiaries.  Our subsidiary has worked vigorously overthe last five years with the CTSB investigators in the fact-finding investigationof this catastrophic incident.  OnMarch 27, 2003, the CTSB released its final report on itsinvestigation.  This report indicatedthat the CTSB was unable to conclusively determine the cause of the fire whichled to the crash of the aircraft.

 

We were a defendant in most, but not all, of theactions brought by the estates of the 229 victims of the crash.  The actions, which sought damages and costsin unstated amounts, claimed negligence, strict liability, and breach ofwarranty.  Virtually all of the caseshave been settled by Boeing and Swissair’s insurers and both assignment of theclaims against, and releases in favor, of us have been obtained by the Boeingand Swissair insurers.

 

Boeing and Swissair have made a claim (but have notcommenced litigation) against us to contribute to the amounts paid to settlethe cases.  As there is no litigationpending, no discovery has been

 

14

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taken by either side asto liability for the crash.  We believethat our subsidiary is not responsible for the crash and, in any event, wemaintain insurance for such matters.  Wefurther believe that any loss we may sustain upon the ultimate resolution ofthis matter, if any, will not exceed the amount of insurance coverage maintained.  Accordingly, no accrual for loss has beenrecorded in our financial statements.

 

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

 

None.

 

**PART II**

 

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

 

**MarketInformation**

 

There is no established public trading market for ourshares.  In August 1998, wepurchased and canceled all of DeCrane Aircraft’s issued and outstanding sharesin connection with the DLJ acquisition.

 

**Holders**

 

As of March 28, 2003, there are 37 holders ofrecord of our common stock.

 

**Dividends**

 

We have not paid dividends to date on our common stockand do not anticipate paying any cash dividends in the foreseeable future.  The terms of our senior credit facility andsenior subordinated note indenture restrict our ability to pay dividends if wedo not meet certain financial criteria.

 

**RecentSale of Unregistered Securities**

 

During the year ended December 31, 2002, we soldunregistered shares of our common stock ($.01 par value) in two separate cashtransactions:

 

•                  Sold3,704 shares to a director for $0.1 million, or $27.00 per share, onJune 18, 2002; and

 

•                  Sold217,392 shares to DLJ Merchant Banking Partners II, L.P. and affiliatedentities for $5.0 million, or $23.00 per share, on September 27, 2002.

 

The issuances of shares were exempt from theregistration requirements of the Securities Act of 1933 under Section 4(2)as transactions by an issuer not involving any public offering.

 

15

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**ITEM 6****.****                                                     SELECTEDFINANCIAL DATA**

** **
|                                                                        |       | **(1)**                          |       |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
|                                                                        |       |                             |       | **1998** |   |
| **(In  thousands)**                                                         |       | **Year Ended December 31,** |       | **Four Months  Ended****December 31,  1998** |   | **Eight Months  Ended****August 31,  1998** |   |
| **2002**                                                                    | ** ** | **2001**                         | ** ** | **2000** | ** ** | **1999** |
|                                                                        |       |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** | **(Predecessor)  (2) ** |   |
| **Statement of Operations Data:**                                           |       |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Revenues                                                                    |       | $                                | 229,841    |   | $ | 272,112 |   | $ | 236,501 |   | $ | 131,547 |   | $ | 17,945 |   | $ | 27,518 |   |
| Cost  of sales (3)                                                          |       | 170,485                          |       | 196,866 |   | 155,134 |   | 90,103 |   | 12,011 |   | 17,759 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Gross  profit                                                               |       | 59,356                           |       | 75,246 |   | 81,367 |   | 41,444 |   | 5,934 |   | 9,759 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses (4)                           |       | 40,318                           |       | 45,429 |   | 33,345 |   | 26,812 |   | 5,442 |   | 14,188 |   |
| Impairment  of goodwill (5)                                                 |       | —                           |       | 8,583 |   | — |   | — |   | — |   | — |   |
| Amortization  of intangible assets (6)                                      |       | 3,540                            |       | 12,436 |   | 10,628 |   | 5,938 |   | 748 |   | 615 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Operating  income (loss)                                                    |       | 15,498                           |       | 8,798 |   | 37,394 |   | 8,694 |   | (256 | ) | (5,044 | ) |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest  expense (7)                                                       |       | 25,376                           |       | 29,645 |   | 27,181 |   | 15,874 |   | 4,687 |   | 512 |   |
| Minority  interest in preferred stock of subsidiary (8)                     |       | 5,841                            |       | 5,061 |   | 2,274 |   | — |   | — |   | — |   |
| Other  expenses, net (9)                                                    |       | 505                              |       | 634 |   | 277 |   | 855 |   | 64 |   | 595 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations before provision for income taxes |       | (16,224                          | )          | (26,542 | ) | 7,662 |   | (8,035 | ) | (5,007 | ) | (6,151 | ) |
| Provision  for income taxes (benefit) (10)                                  |       | (3,621                           | )          | (3,933 | ) | 4,607 |   | (2,102 | ) | (3,861 | ) | (2,172 | ) |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) from continuing operations                                   |       | (12,603                          | )          | (22,609 | ) | 3,055 |   | (5,933 | ) | (1,146 | ) | (3,979 | ) |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) from discontinued operations, net of tax (11)                |       | (41,396                          | )          | 3,546 |   | (1,727 | ) | 1,578 |   | 807 |   | 7,168 |   |
| Cumulative  effect of change in accounting principle (12)                   |       | (17,828                          | )          | — |   | — |   | — |   | — |   | — |   |
| Extraordinary  loss from debt refinancing (13)                              |       | —                           |       | — |   | — |   | — |   | (2,229 | ) | — |   |
| Net  income (loss)                                                          |       | $                                | (71,827    | ) | $ | (19,063 | ) | $ | 1,328 |   | $ | (4,355 | ) | $ | (2,568 | ) | $ | 3,189 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss) applicable to common stockholders                        |       | $                                | (79,826    | ) | $ | (26,034 | ) | $ | (4,746 | ) | $ | (9,649 | ) | $ | (4,210 | ) | $ | 3,189 |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                                                   |       |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Restructuring,  asset impairment and other related charges (14)             |       | $                                | 17,255     |   | $ | 25,834 |   | $ | — |   | $ | 9,935 |   | $ | — |   | $ | — |   |
| Depreciation  and amortization (15)                                         |       | 10,612                           |       | 20,364 |   | 15,086 |   | 8,315 |   | 1,004 |   | 1,279 |   |
| Capital  expenditures:                                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Paid  in cash                                                               |       | 4,356                            |       | 10,191 |   | 20,193 |   | 4,077 |   | 801 |   | 272 |   |
| Financed  with capital lease obligations                                    |       | 67                               |       | 4,376 |   | 105 |   | 1,012 |   | — |   | — |   |
|                                                                        |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Other Operating Data:**                                                   |       |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Bookings  (16)                                                              |       | $                                | 197,132    |   | $ | 252,800 |   | $ | 238,546 |   | $ | 170,547 |   | $ | 19,759 |   | $ | 31,660 |   |
| Backlog  at end of period (17)                                              |       | 66,805                           |       | 99,518 |   | 118,830 |   | 107,634 |   | 20,888 |   | 19,583 |   |

 

 
|                                    |   | **As of December 31, (in thousands) (1)** |       |
|-----------------------------------------|--------|------------------------------------------------|------------|
| **(In thousands)**                      |   | **2002**                                       |       | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                    |   |                                           |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                 |   |                                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Cash  and cash equivalents              |   | $                                              | 12,421     |   | $ | 9,478 |   | $ | 7,706 |   | $ | 7,899 |   | $ | 3,831 |   |
| Working  capital (18)                   |   | 196,176                                        |       | 81,656 |   | 61,398 |   | 32,412 |   | 49,033 |   |
| Total  assets (18)                      |   | 548,967                                        |       | 645,711 |   | 664,254 |   | 531,842 |   | 330,927 |   |
| Total  debt (19)                        |   | 381,017                                        |       | 399,268 |   | 381,513 |   | 314,936 |   | 185,807 |   |
| Mandatorily  redeemable securities (20) |   | 96,303                                         |       | 82,463 |   | 70,431 |   | 41,178 |   | 35,884 |   |
| Stockholders’  equity (deficit)    |   | (27,271                                        | )          | 48,167 |   | 74,190 |   | 66,595 |   | 61,625 |   |
|                                         |        |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying Notes to Selected Financial Data.

 

16

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**Notes toSelected Financial Data:**

 

(1)                      Reflectshistorical selected consolidated financial data derived from the auditedconsolidated financial statements and related notes for the periods,reclassified to reflect the Specialty Avionics Group as a discontinuedoperation.

 

Also reflects the resultsof operations and financial position of companies we acquired for all periodssubsequent to their respective acquisition dates as follows:

 
| **Company Acquired**                                                                                                                                           |   | **Date  Acquired**     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|
| •                  Coltech (a  component of discontinued operations) |   | August 31, 2000   |
| •                  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  |
| •                  Dettmers                                          |   | June 30, 1998     |
| •                  Avtech (a  component of discontinued operations)  |   | June 26, 1998     |

 

(2)                      ReflectsDeCrane Aircraft’s results of operations and financial position prior to(predecessor) the DLJ acquisition.

 

(3)                      Includescharges to reflect:

 

•                  ourrestructuring activities as follows:

 

•                  a$6.9 million noncash inventory write-down, a $2.6 million charge for estimatedlosses on uncompleted long-term contracts and $1.2 million of other chargesduring the twelve months ended December 31, 2002;

 

•                  a$1.8 million noncash inventory write-down, a noncash write-off of $7.9 millionof curtailed product development costs and charges totaling $3.9 million forthe realignment of production programs between facilities during the twelvemonths ended December 31, 2001; and

 

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

 

•                  costof sales based on the 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 and $0.7 million during the four monthsended December 31, 1998 in connection with the DLJ acquisition.

 

(4)                      Includescharges of:

 

•                  ourrestructuring activities as follows:

 

•                  $6.5million during the year ended December 31, 2002, $3.9 million of which wasa noncash asset impairment write-down;

 

•                  $3.7million during the year ended December 31, 2001, $1.3 million of which wasa noncash asset impairment write-down;

 

•                  $3.9million during the year ended December 31, 1999, $1.3 million of which wasa noncash asset impairment write-down; and

 

•                  $3.6million during the eight months ended August 31, 1998 for non-capitalizedtransaction costs associated with the DLJ acquisition.

 

17

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(5)                      Reflectsnoncash goodwill impairment charges, including charges resulting from ourrestructuring activities.

 

(6)                      For the fiveyears ended December 31, 2002, reflects the amortization of identifiableintangible assets.  For periods prior toJanuary 1, 2002, also reflects the amortization of goodwill as follows:2001 – $9.1 million; 2000 – $7.8 million; 1999 – $3.8 million; 1998 – $0.5million (four months) and $0.6 million (eight months).  Starting January 1, 2002, goodwill isno longer amortized but instead subject to annual impairment testing with aloss charged to operations in the period in which impairment occurs, asrequired by SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

(7)                      Excludesinterest expense attributable to the Specialty Avionics Group, which isclassified as a component of the income or loss from discontinued operations,as described in Note 11 below.

 

(8)                      Reflectsaccrued dividends and redemption value accretion on DeCrane Aircraft’s 16%mandatorily redeemable preferred stock.

 

(9)                      For theeight months ended August 31, 1998, reflects a $0.6 million charge forcosts incurred in connection with a debt offering terminated as a result of theDLJ acquisition.

 

(10)                For the fourmonths ended December 31, 1998, includes a $2.6 million benefit from thereduction of the deferred tax valuation allowance.  Excluding the effect of the valuation allowances, the provisionfor income taxes differs from the amount determined by applying the applicableU.S. statutory federal rate to the income before income taxes primarily due tothe effects of state income taxes and non-deductible expenses, principallygoodwill impairment charges and amortization (for periods prior toJanuary 1, 2002) and minority interest in preferred stock ofsubsidiary.  The difference in theeffective tax rates between periods is mostly a result of the relationship ofnon-deductible expenses to the loss before income taxes.

 

(11)                Reflects the netincome or loss of the Specialty Avionics Group, which was sold on May 23,2003 and therefore is classified as a discontinued operation during the periodsand includes charges to reflect:

 

•                  a$39.3 million noncash charge during the six months ended June 30, 2002 andthe year ended December 31, 2002 to reflect the cumulative effect of thechange in accounting principle for the impairment of goodwill upon adoption ofSFAS No. 142 on January 1, 2002; and

 

•                  interestexpense attributable to the Specialty Avionics Group as follows:

 
|                                                      |       |                        |       | **1998**                                   |       |
|-----------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| **(In thousands)**                                        |       | **Year Ended December 31,** | ** ** | **Four Months****EndedDecember 31,  1998** | ** ** | **Eight Months  Ended  August 31,****1998** | ** ** |
| **2002**                                                  | ** ** | **2001**                    | ** ** | **2000**                                   | ** ** | **1999** |
|                                                      |       |                        | ** ** |                                       | ** ** |   | ** ** |   | ** ** |   | ** ** | **(Predecessor)** | ** ** |
| Interest expense  associated with:                        |       |                        |       |                                       |       |   |   |   |   |   |   |   |   |
| Senior bank  credit facility debt required to be repaid   |       | $                           | 7,720      |                                       | $          | 8,439 |   | $ | 13,337 |   | $ | 10,875 |   | $ | 1,739 |   | $ | 1,077 |   |
| Debt obligations  assumed by the buyer                    |       | 798                         |       | 917                                        |       | 1,105 |   | 1,154 |   | 441 |   | 761 |   |
| Interest expense  attributable to discontinued operations |       | $                           | 8,518      |                                       | $          | 9,356 |   | $ | 14,442 |   | $ | 12,029 |   | $ | 2,180 |   | $ | 1,838 |   |

 

Interest expenseon senior bank credit facility debt required to be repaid reflects allocatedinterest expense attributable to senior bank credit facility debt which wasrequired to be repaid with the proceeds from the sale.  For the four years ended December 31,2002, the allocation is computed on $130.0 million of debt repaid.  For the four months ended December 31,1998, the allocation is computed on $63.3 million of debt attributable to thegroup subsequent to the DLJ acquisition. For the eight months ended August 31, 1998, the allocation iscomputed on $83.6 million of debt attributable to the Avtech acquisition onJune 26, 1998.  Interest expensewas based on the historical interest rates charged during each of the periods.

 

18

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(12)                Reflects thenoncash charge, net of $0.9 million tax benefit, for the impairment of goodwillupon adoption of SFAS No. 142 on January 1, 2002.

 

(13)                Reflects thewrite-off of deferred financing costs, net of an income tax benefit, as aresult of the repayment of our then existing indebtedness in connection withthe DLJ acquisition and the refinancing of the bridge notes during the fourmonths ended December 31, 1998.

 

(14)                Reflects the totalrestructuring, asset impairment and other related charges incurred during theperiods related to our restructuring activities.

 

(15)                Reflectsdepreciation and amortization of plant and equipment, goodwill (for periodsprior to the January 1, 2002 adoption of SFAS No. 142) and otherintangible assets.  Excludesamortization of deferred financing costs and debt discounts, which areclassified as a component of interest expense.

 

(16)                Bookings representthe total invoice value of purchase orders received during the period.

 

(17)                Backlog representsthe total invoice value of unfilled purchase orders at the end of theperiod.  Orders may be subject tocancellation by the customer prior to shipment.  The level of unfilled orders at any given date during the yearwill be materially affected by the timing of our receipt of orders and thespeed with which those orders are filled.

 

(18)                Includes amountsattributable to the Specialty Avionics Group, which is reflected as adiscontinued operation, as follows:

** **
|                     |   | **As of December 31, (in thousands)** |    |
|--------------------------|--------|--------------------------------------------|---------|
| **(In  thousands)**      |   | **2002**                                   |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                     |   |                                       |    |   |   |   |   |   |   |   |   |
| Working  capital:        |   |                                       |    |   |   |   |   |   |   |   |   |
| Continuing  operations   |   | $                                          | 55,363  |   | $ | 39,862 |   | $ | 20,480 |   | $ | (1,992 | ) | $ | 14,850 |   |
| Discontinued  operations |   | 140,813                                    |    | 41,794 |   | 40,918 |   | 34,404 |   | 34,183 |   |
| Total  working capital   |   | $                                          | 196,176 |   | $ | 81,656 |   | $ | 61,398 |   | $ | 32,412 |   | $ | 49,033 |   |
|                     |   |                                       |    |   |   |   |   |   |   |   |   |
| Total  assets:           |   |                                       |    |   |   |   |   |   |   |   |   |
| Continuing  operations   |   | $                                          | 388,226 |   | $ | 423,272 |   | $ | 429,812 |   | $ | 305,685 |   | $ | 95,640 |   |
| Discontinued  operations |   | 160,741                                    |    | 222,439 |   | 234,442 |   | 226,157 |   | 235,287 |   |
| Total  assets            |   | $                                          | 548,967 |   | $ | 645,711 |   | $ | 664,254 |   | $ | 531,842 |   | $ | 330,927 |   |

 

(19)                Total debt isdefined as long-term debt, including current portion.

 

(20)                Reflects DeCraneHoldings mandatorily redeemable 14% preferred stock and includes DeCraneAircraft 16% mandatorily redeemable preferred stock as of December 31,2002, 2001 and 2000, which is reflected as minority interest in preferred stockof subsidiary in our consolidated financial statements.

 

19

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**ITEM 7****.****                  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**RecentDevelopments**

 

On May 23, 2003, we consummated the sale of ourequity interests in the subsidiaries comprising the Specialty Avionics Group toWings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC, for$140.0 million in cash.  Proceeds of$130.0 million from the sale were used to repay senior credit facility borrowings,in accordance with the facility’s terms which were amended to permit the sale.

 

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

 

The sale of the SpecialtyAvionics Group is not expected to affect the operations of the remainingoperating groups.  As a result of thesale, the Specialty Avionics Group is presented as a discontinued operation inour consolidated financial statements and our discussion below of our resultsof operations reflects only continuing operations for all periods.

 

**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: business, VIP andhead-of-state aircraft and, to a lesser extent, commercial and regionalaircraft.  Weak global economic conditions,which were exacerbated by the September 11, 2001 terrorist attack on theUnited States, ongoing concerns about global terrorism, the current MiddleEastern military conflicts and the Severe Acute Respiratory Syndrome, or SARS,epidemic are all adversely impacting the aerospace industry and have led to adecrease in demand for business, VIP and head-of-state aircraft.  In response to certain of these adverseconditions, we have announced and implemented a series of restructuringactivities designed to reduce expenses and conserve working capital.  See “—Restructuring, Asset Impairment andOther Related Charges” below for additional information.

 

The business, VIP andhead-of-state aircraft portion of our business experienced weakness during 2002and will continue to experience weakness throughout 2003 as evidenced byvarious manufacturers’ announced plans to temporarily suspend production atvarious times throughout the year in response to the weak demand for newaircraft.  However, we believe business,VIP and head-of-state aircraft deliveries may experience a modest recovery in2004 and continuing recovery thereafter. The commercial aircraft portion of our business, which subsequent to thesale of the Specialty Avionics Group accounts for less than 5% of consolidatedrevenues, also experienced significant weakness in 2002 and we believe thiscondition will continue through 2003 and into 2004, with potential recovery notexpected to occur until at least 2005. Our beliefs are based on the assumptions that we will experienceeconomic recovery and there are no further negative geo-political developmentsaffecting our industry.

 

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

 

We 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 capital. We also use Adjusted EBITDA in the annual budgeting and planning forfuture periods, as one of the decision-making criteria for fundingdiscretionary capital expenditure and product development programs and as themeasure for determining the value of acquisitions and dispositions.  Our board of directors uses Adjusted EBITDAas one of the performance metrics for determining the amount of bonuses awardedto pursuant to the cash incentive bonus plan and as an indicator of enterprisevalue used in determining the exercise price of stock options granted and theacceleration of stock option vesting pursuant the incentive 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 should beviewed in conjunction with measurements that are computed in accordance GAAP,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 operatingstatistics we use as leading trend indicators of future demand for our productsand services.  Bookings and backlog arebased upon the

 

21

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value of purchase ordersreceived from our customers, which will result in revenues, if and when suchorders are filled.

 

Bookings represent the total invoice value of purchaseorders received during the period and backlog represents the total invoicevalue of unfilled purchase orders as of the end of a period.  Orders may be subject to change orcancellation by the customer prior to shipment.  The level of unfilled orders at any given date during the yearwill be materially affected by the timing of our receipt of orders and thespeed with which those orders are filled.

 

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

 

Our results of operations have been affected byrestructuring, asset impairment and other related charges relating to a seriesof restructuring activities and goodwill impairment charges.  These charges, which affect thecomparability of our reported results of operations between periods, are morefully described in “—Restructuring, Asset Impairment and Other Related Charges”and “—Goodwill Impairment Charges” below.

** **

**Revenues.* ***Revenuesdecreased $42.3 million, or 15.5%, to $229.8 million for the year endedDecember 31, 2002 from $272.1 million for the year ended December 31,2001.  By segment, revenues changed asfollows:

 
|                     |   | **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      | ) |   |   |

 

*CabinManagement. *Revenuesdecreased by $33.2 million, or 16.1% compared to the prior year.  The decrease, which is across most of ourproduct and services categories, is caused by the ongoing adverse impact ofweak global economic conditions which reduces the affordability of business,VIP and head-of-state aircraft and therefore demand for the products andservices we provide.  The 2002 decreaseconsists of:

 

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

 

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

 

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

 

•                  a$5.1 million increase in other product and services revenues.

 

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.

 

Revenues from Textron andBombardier, our principal customers, decreased $15.0 million compared to theprior year as a result of the decrease in orders and resulting production ofaircraft they are experiencing due to the economic downturn.  We also experienced similar volume decreasesfrom our other customers during the period.

 

22

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

 

•                  a $7.5 million decrease in thecommercial aircraft systems integration and engineering services we provideresulting from the aftermath of September 11th, and resultingdown-turn in the commercial airline industry; the airline industry’s correspondingreduction in the size of its operating fleet and the delay or postponementretrofit and refurbishment programs for the remaining operational fleet reduceddemand for our integration and engineering services; and

 

•                  a $2.0 million decrease resultingfrom reduced demand for our business, VIP and head-of-state aircraft productsand services due to the adverse impact weak global economic conditions arehaving on the demand for those types of aircraft as follows:

 

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

 

•                  a$3.6 million increase in our aircraft completion and modification revenues,principally resulting for our first aircraft interior completion during 2002.

** **

**Grossprofit.**  Gross profitdecreased $15.9 million, or 21.1%, to $59.3 million for the year endedDecember 31, 2002 from $75.2 million for the same period last 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      | ) |   |   |

 

*CabinManagement.*  Grossprofit decreased by $10.7 million, or 21.7% compared to the prior year,primarily due to:

 

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

 

•                  a$3.8 million decrease in profit margins due to lower volume for our business,VIP and head-of-state aircraft furniture and seating products, and

 

•                  a$0.3 million decrease in gross profit related to lower volume for our cabinmanagement and entertainment systems.

* *

*SystemsIntegration.*  Grossprofit decreased by $5.3 million, or 20.3% compared to the prior year,primarily due to $4.1 million of other asset impairment related charges andlower sales volume.

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $5.1 million, or 11.3%, to $40.3 million for the year endedDecember 31, 2002, from $45.4 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                 |   | **Increase (Decrease)  From 2001** |       |
|----------------------|--------|------------------------------------|------------|
| **(In  millions)**   |   | **Amount**                         | ** ** | **Percent** | ** ** |
|                 |   |                               |       |   |   |
| Cabin  Management    |   | $                                  | (1.9       | ) | (7.3 | )% |
| Systems  Integration |   | (2.1                               | )          | (22.0 | ) |
| Corporate            |   | (1.1                               | )          |   |   |
| Total                |   | $                                  | (5.1       | ) |   |   |

 

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*CabinManagement. *SG&Aexpenses decreased by $1.9 million, or 7.3% compared to the prior year, due to:

 

•                  a$4.7 million decrease in expenses as a result of cost reduction measuresimplemented in 2001 and 2002 in response to lower sales volume resulting fromthe weak global economic conditions; offset by

 

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

* *

*SystemsIntegration. *SG&Aexpenses decreased by $2.1 million, or 22.0% compared to the prior year, due tolower labor and employee benefit costs resulting from workforce reductionsimplemented during the fourth quarter of fiscal 2001.

* *

*Corporate. *SG&A expensesdecreased by $1.1 million compared to the prior year, primarily due toworkforce and travel expense reductions offset by increases in insurance andemployee benefit costs.

** **

**Impairmentof goodwill.**  In 2001,an $8.6 million impairment charge was recognized pursuant to the provisions ofSFAS No. 121, “Accounting for Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of,” to reflect the impairment resulting fromour restructuring activities.  See“—Goodwill Impairment Charges” below for additional information.

** **

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $9.8 million to$10.6 million for the year ended December 31, 2002 compared to $20.4million for the same period last year, primarily resulting from the adoption ofnew accounting standards, as follows:

** **
|                                         |   | **Increase (Decrease)  From 2002** |   |
|----------------------------------------------|--------|------------------------------------|--------|
| **(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   | ) |   |   |

 

Effective January 1, 2002, we adoptedSFAS No. 142, “Goodwill and Other Intangible Assets” and theprovisions of SFAS No. 141, “Business Combinations,” which wererequired to be adopted concurrent with the adoption ofSFAS No. 142.  Under these newstandards, goodwill is deemed to be an indefinite-lived asset and, as a result,the recording of periodic goodwill amortization charges was discontinuedeffective January 1, 2002.  Inaddition, SFAS No. 141 requires that intangible assets relating to acquiredassembled workforce intangibles not meeting the criteria for recognition apartfrom goodwill be reclassified to goodwill. Goodwill amortization was $9.1 million for the year endedDecember 31, 2001,******whichincludes $1.1 million of assembled workforce amortization, now deemed part ofgoodwill.  See “—Goodwill ImpairmentCharges” below for additional information.

 

Excluding the effect of the accounting change, depreciationand amortization decreased $0.9 million as a result of lower depreciable costsresulting from the impairment of long-lived assets recorded during the fourthquarter of fiscal 2001 and 2002, partially offset by additional depreciationresulting from capital expenditures during the period.

** **

**AdjustedEBITDA.**  As describedabove in “—Performance Measures—Adjusted EBITDA,” we use this financial measureto evaluate the core economic performance of our operating segments.  The notes to our financial statementsinclude additional information about Adjusted EBITDA, and should be

 

24

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read in conjunction with the discussions presented herein.  The notes to our financial statements alsoinclude a reconciliation of Adjusted EBITDA to net income (loss), a GAAPfinancial measure, to clarify the differences between these two measures.

* *

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

 

•                  a$9.3 million decrease related principally to lower revenues in our business,VIP and head-of-state aircraft furniture and seating operations; and

 

•                  a$3.6 million decrease resulting from lower sales volume for our cabinmanagement and entertainment systems.

* *

*SystemsIntegration. *AdjustedEBITDA increased by $0.9 million, or 5.4% compared to the prior year, primarilythe result of reduced SG&A spending resulting from workforce reductions.

** **

**Operatingincome.**  Operatingincome increased $6.7 million to $15.5 million for the year endedDecember 31, 2002, from $8.8 million for the same period last year.  Operating income changed as follows:

** **
|                     |   | **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.*  Operatingincome increased by $2.7 million, or 55.9% compared to the prior year,primarily due to:

 

•                  a$10.7 million decrease in gross profit primarily caused by charges related toour restructuring activities and due to lower volume for our business, VIP andhead-of-state aircraft furniture and seating products; offset by

 

•                  a$1.9 million decrease in SG&A resulting from cost reduction measures and restructuringcharges;

 

•                  a$5.0 million decrease in goodwill impairment; and

 

•                  a$6.7 million decrease in amortization of intangibles.

* *

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

 

•                  a$5.2 million decrease in gross profit due to other asset impairment relatedcharges and lower sales volumes; offset by

 

•                  a$2.2 million decrease in SG&A resulting from lower labor and employeebenefit costs;

 

•                  a$3.5 million decrease in goodwill impairment; and

 

•                  a$0.9 million decrease in amortization of intangibles.

* *

*Corporate. *Operating income increased$2.5 million compared to the prior year, due to principally to reduced SG&Aspending.

 

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**Interestexpense.**  Interestexpense decreased $4.3 million, or 14.4%, to $25.4 million for the year endedDecember 31, 2002 compared to $29.7 million for the same period last yeardue almost entirely to lower average interest rates charged by our lenders.

** **

**Minorityinterest in preferred stock of subsidiary.**  Minorityinterest increased $0.8 million to $5.8 million for the year endedDecember 31, 2002 compared to $5.0 million for the same period lastyear.  Minority interest reflectsaccrued dividends, which are compounded quarterly, and redemption valueaccretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

** **

**Provisionfor income taxes.**  Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to the income before income taxesprimarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill impairment charges andamortization (for periods prior to the January 1, 2002 adoption ofSFAS No. 142) and minority interest in preferred stock ofsubsidiary.  The difference in theeffective tax rates between periods is mostly the result of the adoption ofSFAS No. 142.

** **

**Lossfrom continuing operations. **Lossfrom continuing operations decreased $10.0 million to a loss of $12.6 millionfor the year ended December 31, 2002, compared to a loss of $22.6 millionfor the same period last year.  Thedecrease in loss from continuing operations is attributable to:

 

•                  an$8.9 million decrease in amortization of goodwill and intangible assetsresulting from the adoption of SFAS No. 142, “Goodwill and Other IntangibleAssets,” 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 resulting from reduced profits causedby lower revenues; and

 

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

** **

**Income(loss) from discontinued operations. **Income from discontinued operations decreased$44.9 million to a loss of $41.4 million for the year ended December 31,2002 compared to income of $3.5 million for the same period last year.  The change in income (loss) from discontinuedoperations is attributable to:

 

•                  a$39.4 million charge in 2002 to reflect the cumulative effect on discontinuedoperations of the change in accounting principle associated with initialadoption of SFAS No. 142, “Goodwill and Other Intangible Assets;” and

 

•                  a$7.7 million charge in 2002 to reflect the additional impairment of goodwill inconnection with the annual impairment testing provisions of SFAS No. 142; and

 

•                  a$3.1 million loss increase principally resulting from reduced profits caused bylower revenues; offset by

 

•                  a$5.3 million reduction in goodwill amortization expense resulting fromdiscontinuance of periodic amortization charges pursuant to SFAS No. 142.

 

The $39.4 million and $7.7 million charges in 2002 areattributable to the goodwill impairment of one of the three reporting unitswithin the Specialty Avionics Group. Aggregate goodwill was $126.5 million as of December 31, 2001 and$80.7 million as of December 31, 2002, after the $47.1 million 2002impairment charges and a $1.3 million reclassification of intangible assets inconnection with the adoption of SFAS No. 142. See “—Goodwill Impairment Charges” below for additional information.

 

26

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**Cumulativeeffect of change in accounting principle. **The $17.8million charge to reflect the cumulative effect of change in accountingprinciple 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 additionalinformation.

** **

**Netincome (loss).**  Netloss increased $52.7 million to a net loss of $71.8 million for the year endedDecember 31, 2002 compared to a net loss of $19.0 million for the sameperiod last year.  The increase over theprior year is a result of a $10.0 million decrease in loss from continuingoperations offset by an increase in loss from discontinued operations of $44.9million and the cumulative effect of change in accounting principle of $17.8 million.

** **

**Net lossapplicable to common stockholders.**  Net loss applicable to common stockholders increased $53.8million 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 last year.  The increase in the net loss applicable toour common stockholders is attributable to:

 

•                  a$52.8 million net loss increase; and

 

•                  a$1.0 million increase in noncash preferred stock dividend accretion on our 14%mandatorily redeemable preferred stock resulting from the quarterly compoundingof the dividends accreted.

** **

**Bookings. **Bookings decreased $55.7million, or 22.0%, to $197.1 million for the year ended December 31, 2002compared to $252.8 million for the same period last year.  The decrease in bookings for 2002 is due todecreases in orders for all of our business segments.

 

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

 

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

 

Our results of operations have been affected byacquisitions during 2000 and, as a result, affect the comparability of ourhistorical results.  The year 2000acquisitions, which affect the comparability of the historical results ofoperations described herein, are within our Cabin Management Group and includeCarl F. Booth & Co., acquired on May 11, 2000, and DeCrane AircraftSeating Co. (formerly ERDA), acquired on June 30, 2000.  Our historical financial statements reflectthe financial position and results of operations of these acquired businessessubsequent to their respective acquisition dates.

 

Our results of operations have also been affected byrestructuring, asset impairment and other related charges relating to a seriesof restructuring activities and goodwill impairment charges.  These charges, which affect thecomparability of our reported results of operations between periods, are morefully described in “—Restructuring, Asset Impairment and Other Related Charges”and “—Goodwill Impairment Charges” below.

** **

**Revenues.* ***Revenuesincreased $35.6 million, or 15.5%, to $272.1 million for the year endedDecember 31, 2001 from $236.5 million for the year ended December 31,2000.  By segment, revenues changed asfollows:

 

27

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|                     |   | **Increase (Decrease)  From 2000** |   |
|--------------------------|--------|------------------------------------|--------|
| **(In millions)**        |   | **Amount**                         |   | **Percent** |   |
|                     |   |                               |   |   |   |
| Cabin  Management        |   | $                                  | 31.3   |   | 17.9 | % |
| Systems  Integration     |   | 4.5                                |   | 7.2 |   |
| Inter-group  elimination |   | (0.2                               | )      |   |   |
| Total                    |   | $                                  | 35.6   |   |   |   |

 

*CabinManagement. *Revenuesincreased by $31.3 million, or 17.9% over the prior year, due to:

 

•                  theinclusion of $23.8 million of revenues resulting from our acquisitions of CarlF. Booth & Co. and DeCrane Aircraft Seating Co. in 2000; and

 

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

* *

*SystemsIntegration.*  Revenuesincreased by $4.5 million, or 7.2% over the prior year, due to:

 

•                  a$9.3 million increase in auxiliary fuel system and power unit revenues; offsetby

 

•                  a$4.8 million decrease in cabin and flight deck systems integration revenuesresulting from reducing the number of product offerings to focus on our coreproduct lines.

 

**Grossprofit.**  Gross profitdecreased $6.1 million, or 6.8%, to $75.2 million for the year endedDecember 31, 2001, from $81.3 million of the same period last year.  By segment, gross profit changed as follows:

 
|                     |   | **Increase (Decrease)  From 2000** |   |
|--------------------------|--------|------------------------------------|--------|
| **(In millions)**        |   | **Amount**                         |   | **Percent** |   |
|                     |   |                               |   |   |   |
| Cabin  Management        |   | $                                  | (9.5   | ) | (15.9 | )% |
| Systems  Integration     |   | 3.5                                |   | 15.7 |   |
| Inter-group  elimination |   | (0.1                               | )      |   |   |
| Total                    |   | $                                  | (6.1   | ) |   |   |

 

*CabinManagement.*  Grossprofit decreased by $9.5 million, or 15.9% compared to prior year, primarilydue to:

 

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

 

•                  a$4.3 million decrease in profit margins associated with higher manufacturingcosts for business, VIP and head-of-state aircraft furniture related to largeairframe models; offset by

 

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

 

•                  a$1.3 million increase in gross profit related to higher product volume forbusiness, VIP and head-of-state aircraft furniture.

 

*SystemsIntegration.*  Grossprofit increased by $3.5 million, or 15.7% over the prior year, due to:

 

•                  a$3.1 million increase due to higher auxiliary fuel systems volume and favorablemanufacturing efficiencies; and

 

•                  a$1.2 million increase resulting, in part, from improved operating resultssubsequent to our fourth quarter 1999 restructuring activities; offset by

 

•                  a$0.8 million decrease resulting from lower cabin and flight deck systemsintegration services volume.

 

28

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**Selling,general and administrative expenses.**  Selling, general and administrative expensesincreased $12.1 million, or 36.2%, to $45.4 million for the year endedDecember 31, 2001, from $33.3 million for the same period last year.  By segment, SG&A expenses changed asfollows:

 
|                 |   | **Increase (Decrease)  From 2000** |   |
|----------------------|--------|------------------------------------|--------|
| **(In millions)**    |   | **Amount**                         |   | **Percent** |   |
|                 |   |                               |   |   |   |
| Cabin  Management    |   | $                                  | 10.3   |   | 65.0 | % |
| Systems  Integration |   | 1.0                                |   | 12.0 |   |
| Corporate            |   | 0.8                                |   | 10.1 |   |
| Total                |   | $                                  | 12.1   |   |   |   |

 

*CabinManagement. *SG&Aexpenses increased by $10.3 million, or 65.0% over the prior year, due to:

 

•                  a$3.7 million increase caused by 2001 restructuring and asset impairment chargesrelating to severance, lease termination and other related costs;

 

•                  a$3.5 million increase in expenses to support increased production and newprograms; and

 

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

* *

*SystemsIntegration. *SG&Aexpenses increased by $1.0 million, or 12.0% over the prior year, due to anincrease in expenses associated with refocusing our cabin and flight decksystems integration services to product offerings requiring higher levels ofsales and marketing, program management and customer service support.

* *

*Corporate. *SG&A expensesincreased by $0.8 million, or 10.1% over the prior year, primarily due toincreased depreciation expense.

** **

**Impairmentof goodwill.**  In 2001,an $8.6 million impairment charge was recognized pursuant to the provisions ofSFAS No. 121, “Accounting for Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of,” to reflect the impairment resulting fromour restructuring activities.  See“—Goodwill Impairment Charges” below for additional information.

** **

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense, which includesamortization of goodwill and identifiable intangible assets, increased $5.3million, or 35.0%, for the year ended December 31, 2001.  The increase results from the inclusion of$2.2 million of depreciation and amortization expense in 2001 from companies weacquired during 2000 and additional depreciation resulting from our capitalexpenditures during the period.

** **

**AdjustedEBITDA.**  As describedabove in “—Performance Measures–Adjusted EBITDA,” we use this financial measureto evaluate 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.

* *

*CabinManagement.*  AdjustedEBITDA decreased by $0.5 million, or 1.1% compared to the prior year, primarilydue to:

* *

•                  a$5.5 million decrease primarily resulting from higher manufacturing costs forbusiness, VIP and head-of-state aircraft furniture related to the largeairframe models; offset by

* *

•                  a$5.0 million increase resulting from our 2000 acquisitions.

 

29

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*SystemsIntegration. *Adjusted EBITDA increased by $2.1million, or 14.1% over the prior year, due principally to higher auxiliary fuelsystems revenues and favorable manufacturing efficiencies.

** **

**Operatingincome.**  Operatingincome decreased $28.6 million to $8.8 million for the year endedDecember 31, 2001, from $37.4 million for the same period last year.  By segment, operating income changed asfollows:

** **
|                     |   | **Increase (Decrease)  From 2000** |   |
|--------------------------|--------|------------------------------------|--------|
| **(In millions)**        |   | **Amount**                         |   | **Percent** |   |
|                     |   |                               |   |   |   |
| Operating  income:       |   |                               |   |   |   |
| Cabin  Management        |   | $                                  | (26.5  | ) | (74.3 | )% |
| Systems  Integration     |   | (1.1                               | )      | (10.3 | ) |
| Corporate                |   | (0.6                               | )      | (8.4 | ) |
| Inter-group  elimination |   | (0.4                               | )      |   |   |
| Total  Operating income  |   | $                                  | (28.6  | ) |   |   |

 

*CabinManagement.*  Operatingincome decreased by $26.5 million, or 74.3% compared to the prior year,primarily due to:

 

•                  a$9.5 million decrease in gross profit primarily caused by 2001 restructuringcharges and lower profit margins associated with higher manufacturing costs;and

 

•                  a$10.3 million increase in SG&A resulting from restructuring and otherrelated charges and expenses to support increased production and new programsand a full year of operations for our 2000 acquisitions;

 

•                  a$5.6 million increase in impairment charges; and

 

•                  a$1.1 million increase in amortization of intangibles.

* *

*SystemsIntegration. *Operatingincome decreased by $1.1 million, or 10.3% over the prior year, due to thefollowing:

 

•                  a$3.5 million increase in gross profit resulting from higher auxiliary fuelsystems volume and favorable manufacturing efficiencies and improvedoperations; offset by

 

•                  a$1.0 million increase in SG&A due to higher levels of sales and marketing,program management and customer service support; and

 

•                  a$3.6 million increase in impairment charges.

** **

**Interestexpense.**  Interestexpense was $29.6 million for the year ended December 31, 2001 compared to$27.2 million for the year ended December 31, 2000, a reduction of $2.4million due to the following:

 

•                  a$4.2 million decrease resulting from lower average interest rates charged byour lenders during 2001; offset by

 

•                  a$1.8 million increase resulting from higher levels of indebtedness.

** **

**Minorityinterest in preferred stock of subsidiary. **Minority interest increased $2.8 million to $5.1million for the year ended December 31, 2001 compared to $2.3 million forthe same period last year.  Minorityinterest reflects the accrued dividends and redemption value accretion duringthe periods on DeCrane Aircrafts’ 16% preferred stock issued on June 30,2000.

** **

**Provisionfor income taxes.**  Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to the income before income taxesprimarily due to

 

30

----

 

the effects of state and foreign income taxes and non-deductibleexpenses, principally goodwill amortization and minority interest in preferredstock of subsidiary.  The difference inthe effective tax rates between periods is mostly a result of the relationshipof non-deductible expenses to income before income taxes.

 

**Lossfrom continuing operations. **Lossfrom continuing operations increased $25.7 million to a loss of $22.6 millionfor the year ended December 31, 2001, compared to income of $3.1 millionfor the same period last year.  Thechange in the loss from continuing operations is principally attributable to:

 

•                  a$25.9 million charge for restructuring, asset impairment and other relatedcharges in 2001;

 

•                  a$5.3 million increase in depreciation and amortization;

 

•                  a$2.8 million increase in minority interest in preferred stock of subsidiary;

 

•                  a$2.6 million decrease in income from operations; offset by

 

•                  a$8.5 million increase in benefit from income taxes; and

 

•                  a$2.4 million decrease in interest expense.

 

**Income(loss) from discontinued operations. **Income from discontinued operations increased$5.3 million to $3.6 million for the year ended December 31, 2002 comparedto a loss of $1.7 million for the same period last year.

 

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

 

**Net lossapplicable to common stockholders.**  Net loss applicable to common stockholders increased $21.3million to a net loss of $26.0 million for the year ended December 31,2001 compared to a net loss of $4.7 million for the same period last year.  The increase in the net loss applicable toour common stockholders is attributable to:

 

•                  a$20.4 million net loss increase, which is net of a $2.8 million increase in thecharge for minority interest in preferred stock of subsidiary issued onJune 30, 2000; and

 

•                  a$0.9 million increase in noncash preferred stock dividend accretion on our 14%mandatorily redeemable preferred stock.

** **

**Bookings. **Bookings increased $14.3million, or 6.0%, to $252.8 million for the year ended December 31, 2001compared to $238.5 million for the same period last year.  The increase in bookings for 2001 resultsfrom:

 

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

 

•                  an$8.2 million decrease resulting from the adverse impact the events ofSeptember 11th and its aftermath and the weakening globaleconomic conditions are having on our businesses.

 

**Backlogat end of period.** Backlog decreased $19.3 million to $99.5 million as of December 31,2001 compared to $118.8 million as of December 31, 2000.  The decrease in backlog for 2001 primarilyresults from the adverse impact the events of September 11thand its aftermath and the weakening global economic conditions are having onour businesses.

 

31

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

 

The following discussion should be read in conjunctionwith Note 3 accompanying our financial statements included in this report.

 

During the years ended December 31, 2002 and2001, we recorded restructuring, asset impairment and other related pre-taxcharges, principally related to our restructuring activities.  These charges are summarized below.

** **
|                                          |   | **Year Ended December 31,** |   |
|-----------------------------------------------|--------|----------------------------------|--------|
| **(In millions)**                             |   | **2002**                         |   | **2001** |   | **2000** |   |
|                                          |   |                             |   |   |   |   |   |
| Nature  of charges:                           |   |                             |   |   |   |   |   |
| Seat  Manufacturing Facilities Restructuring  |   | $                                | 6.3    |   | $ | — |   | $ | — |   |
| Asset  Realignment Restructuring              |   | 6.9                              |   | 20.1 |   | — |   |
| Goodwill impairment charges                   |   | 7.7                              |   | 8.6 |   | — |   |
| Other  asset impairment related charges       |   | 4.3                              |   | — |   | — |   |
| Total  pre-tax charges                        |   | $                                | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                          |   |                             |   |   |   |   |   |
| Business  segment recording the charges:      |   |                             |   |   |   |   |   |
| Cabin  Management                             |   | $                                | 13.2   |   | $ | 22.4 |   | $ | — |   |
| Systems  Integration                          |   | 4.0                              |   | 3.5 |   | — |   |
| Total  charged to continuing operations       |   | 17.2                             |   | 25.9 |   | — |   |
| Specialty  Avionics (discontinued operations) |   | 8.0                              |   | 2.8 |   | — |   |
| Total  pre-tax charges                        |   | $                                | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                          |   |                             |   |   |   |   |   |
| Charged  to operations:                       |   |                             |   |   |   |   |   |
| Cost  of sales                                |   | $                                | 10.7   |   | $ | 13.6 |   | $ | — |   |
| Selling,  general and administrative expenses |   | 6.5                              |   | 3.7 |   | — |   |
| Impairment  of goodwill                       |   | —                           |   | 8.6 |   | — |   |
| Total  charged to continuing operations       |   | 17.2                             |   | 25.9 |   | — |   |
| Charged  to discontinued operations           |   | 8.0                              |   | 2.8 |   | — |   |
| Total  pre-tax charges                        |   | $                                | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                          |   |                             |   |   |   |   |   |
| Components  of charges:                       |   |                             |   |   |   |   |   |
| Noncash  charges                              |   | $                                | 11.4   |   | $ | 19.6 |   | $ | — |   |
| Cash  charges                                 |   | 5.8                              |   | 6.3 |   | — |   |
| Total  charged to continuing operations       |   | 17.2                             |   | 25.9 |   | — |   |
| Charged  to discontinued operations           |   | 8.0                              |   | 2.8 |   | — |   |
| Total  pre-tax charges                        |   | $                                | 25.2   |   | $ | 28.7 |   | $ | — |   |

 

**SeatManufacturing Facilities Restructuring**

 

In 2002, we announced we would consolidate theproduction of four seating and related manufacturing facilities into two,resulting in the permanent closure of two facilities.  This program was designed to improve manufacturing efficienciesand to further reduce costs and conserve working capital.  In connection with these restructuringactivities, we recorded pre-tax charges to operations totaling $6.3 millionduring the year ended December 31, 2002, of which $3.6 million werenoncash charges, for restructuring, asset impairment and other relatedrestructuring charges.

 

The restructuring, asset impairment and other relatedexpenses are comprised of charges for current asset write-downs, the impairmentof long-lived assets, severance and lease termination costs and otherrestructuring-related expenses pertaining to FAA retesting and recertification,moving, transportation and travel costs and shutdown and startup costs.

 

32

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These restructuring activities were substantiallycompleted during the second quarter of fiscal 2002.  A $0.1 million restructuring reserve remains as ofDecember 31, 2002 for lease termination and other related costs.  The manufacturing facilities were closedduring June 2002.

 

**AssetRealignment Restructuring**

 

During the second quarter of fiscal 2001, we adopted arestructuring program to realign aircraft furniture production programs amongour manufacturing facilities.  Inaddition, and in response to the adverse impact on the aerospace industryresulting from the September 11th terrorist attack and itsaftermath, as well as the weakening of global economic conditions, we announcedand implemented a further restructuring program in December 2001 designedto reduce costs and conserve working capital. This program included permanently closing one manufacturing facility andidling a second facility for an indefinite period, curtailing several productdevelopment programs and instituting workforce reductions.  This program primarily affected our CabinManagement and Specialty Avionics Groups.

 

In connection with these restructuring activities, werecorded pre-tax charges to operations of $28.7 million in fiscal 2001, ofwhich $22.1 million were noncash charges, for the impairment of long-livedassets and restructuring costs related to write-downs and write-offs ofinventoried costs, costs associated with the realignment of aircraft furnitureproduction programs among facilities, severance, lease termination and otherrelated costs.  During 2001, we paid$5.0 million of costs related to this restructuring in cash and a $1.6 millionrestructuring reserve remained as of December 31, 2001 solely for severance,lease termination and other related costs.

 

Due to the ongoing weakness of the business, VIP andhead-of-state aircraft market, we decided during the second quarter of fiscal2002 to permanently close the temporarily idled manufacturing facility.  In connection with this decision, werecorded additional pre-tax charges to operations totaling $6.9 million duringthe year ended December 31, 2002, of which $3.8 million were noncashcharges, for restructuring, asset impairment charges and other related expenses.  During 2002, we paid $4.6 million of costsrelated to this restructuring in cash and a $0.1 million restructuring reserveremained as of December 31, 2002 solely for the remaining leasetermination and other related costs. The restructuring activities relating to leased facilities werecompleted during the second quarter of fiscal 2002.

 

**GoodwillImpairment Charges**

 

Due to continued weakness in the commercial aircraftportion of our business, in the fourth quarter of fiscal 2002 we recorded apre-tax charge of $7.7 million related to our annual goodwill impairmenttesting pursuant to SFAS No. 142.  Theimpairment charge pertained to the Specialty Avionics Group.

 

Prior to adoption of SFAS No. 142, impairment testingwas in accordance with SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of.”  In 2001, we recorded an $8.6 million pre-taxcharge to operations to reflect the impairment loss resulting from ourrestructuring activities.  The impairmentcharge pertained to our Cabin Management and Systems Integration Groups.

 

See “—Goodwill Impairment Charges” below foradditional information on all of the impairment charges.

 

**OtherAsset Impairment Related Charges**

 

Due to continued weakness in the commercial aircraftportion of our business, in the fourth quarter of fiscal 2002 we recorded apre-tax charge to cost of goods sold of $4.3 million related toinventories.  Of this amount, chargestotaling $0.3 million pertained to the Specialty Avionics Group.

 

33

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**GoodwillImpairment Charges**

 

The following discussion should be read in conjunctionwith Notes 3 and 7 accompanying our financial included in this report.

 

Our results of operations for each of the years in thetwo year period ended December 31, 2002 have been affected by the adoptionof SFAS No. 142, “Goodwill and Other Intangible Assets,” and goodwillimpairment charges.  The tables belowsummarize the changes in goodwill during the periods.

 
|                                              |   | **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 (c)                            |   | —                       |   | —                          |   | — |   | — |   | (7.7 | ) |
| Balance,  December 31, 2002                  |   | $                            | 173.9  |                            | $      | 20.8 |   | $ | 1.7 |   | $ | 196.4 |   | $ | 80.7 |   |

 

----

(a)                                  Reflectsa goodwill impairment charge to operations during the year endedDecember 31, 2001 and reflected as a component of our restructuring, assetimpairment and other related charges. See “—Restructuring, Asset Impairment and Other 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 effectof change in accounting principle in accordance with the transitionalprovisions of adopting SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

(c)                                  Reflectsa goodwill impairment charge to operations during the year endedDecember 31, 2002 and reflected as a component of our restructuring, assetimpairment and other related charges. See “—Restructuring, Asset Impairment and Other Related Charges” above.

 

Effective January 1, 2002, we adopted SFAS No.142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142.  Adoption ofthese accounting pronouncements resulted in the following:

 

•                  *Reclassificationof 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.

 

•                  *Discontinuanceof 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.

 

34

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•                  *AnnualTesting for Goodwill Impairment.* In lieu of periodic goodwill amortization charges, SFAS No. 142 requiresgoodwill to be tested annual for impairment, or when events or changes incircumstances indicate the carrying value may not be recoverable.

 

During 2002, we completed the transitional impairmenttesting of goodwill recorded as of January 1, 2002 as required under SFASNo. 142.  Fair value of each reportingunit was determined using a discounted cash flow approach taking intoconsideration projections based on the individual characteristics of thereporting units, historical trends, market multiples for comparable businessesand independent appraisals.  Our CabinManagement Group consists of three reporting units, our Systems IntegrationGroup consists of two and the Specialty Avionics consists of three.  Unallocated goodwill was allocated to thereporting units for impairment testing purposes.  The results indicated that the carrying value of goodwill wasimpaired at one of the reporting units within each of our operatinggroups.  The resulting impairment wasprimarily attributable to a change in the evaluation criteria for goodwillutilized under previous accounting guidance to the fair value approachstipulated 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 quarter of fiscal 2002, we performedour annual impairment testing and recorded an additional $7.7 millionimpairment charge related to one of the reporting units within the SpecialtyAvionics Group.  The charge wasprimarily the result of a decrease in fair value caused by using lower cashflow forecasts for the commercial aircraft portion of our business, whichexperienced further weakness during 2002. This charge is included as a component of income (loss) from discontinuedoperations.

 

Prior to adoption of SFAS No. 142, impairment testingwas in accordance with SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of.”  In 2001, we recorded an $8.6 million pre-taxcharge to operations to reflect the impairment loss resulting from ourrestructuring activities to close a manufacturing facility.

 

**Liquidityand Capital Resources**

 

We are a holding company and have no direct materialoperations. Our only asset is our ownership of all of the common stock ofDeCrane Aircraft, and our only material liability is our guarantee of theDeCrane Aircraft senior credit facility. Our principal liquidity needs are for income taxes and, beginning in2005, the payment cash dividends on our preferred stock.

 

Our only source of cash is dividends from DeCraneAircraft.  The senior credit facilityand senior subordinated notes described below are obligations of DeCraneAircraft and impose limitations on its ability to pay dividends to us.  We believe that DeCrane Aircraft’s debtinstruments will permit it to supply us with sufficient cash to meet the cashneeds referred to above for several years. However, if that is not the case, we would not be able to satisfy thoseneeds, because we have no other source of cash other than dividends fromDeCrane Aircraft.  We would then berequired to secure alternate financing, which may not be available onacceptable terms, or at all.

 

DeCrane Aircraft’s principal cash needs are for debtservice, working capital, capital expenditures and strategic acquisitions, aswell as to provide us with cash to finance our needs.  Its principal sources of liquidity are expected to be cash flowfrom operations, potential capital market transactions and third partyborrowings, principally under its senior credit facility.

 

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**CashFlows During the Year Ended December 31, 2002**

 

Net cash provided by operating activities was $11.7million for the year ended December 31, 2002 and consisted of $18.8million of cash provided by operations after adding back depreciation,amortization, the noncash portion of our restructuring and asset impairmentcharges and other noncash items, and $7.1 million used for working capital.  The following factors contributed to the$7.1 million working capital increase:

 

•                  a$17.9 million decrease in accounts payable and accrued expenses, primarilyresulting from reduced purchasing commensurate with lower revenues; and

 

•                  a$4.8 million inventory increase principally related to program costs onlong-term contracts; offset by

 

•                  a$15.0 million accounts receivable decrease resulting from decreased revenues aswell as timing differences relating to progress and final billings on long-termcontracts; and by

 

•                  a$0.2 million decrease in prepaid expenses and other assets; and further offsetby

 

•                  a$0.4 million increase in income taxes payable.

 

We expect moderate working capital growth during 2003.

 

Net cash used for investing activities was $10.2 millionfor the year ended December 31, 2002 and consisted of:

 

•                  $5.9million of contingent acquisition consideration paid during 2002; and

 

•                  $4.3million for capital expenditures.

 

We anticipate spending approximately $5.0 to $6.0million for capital expenditures in 2003. There is $0.6 million of contingent acquisition consideration that wasearned and accrued as of December 31, 2002 that will be paid during thefirst quarter of fiscal 2003.  There areno other remaining contingent acquisition payment obligations remaining.

 

Net cash used for financing activities was $15.4million for the year ended December 31, 2002.  Cash of $21.5 million was used for net repayments of ourrevolving line of credit borrowings under our senior credit facility, principalpayments on our term debt, capitalized lease obligations and other debt,financing costs associated with amending our senior credit facility and therepurchase of stock and options from former management members.  Cash of $6.1 million was provided by $5.0million of proceeds from the sale of common stock and $1.1 million ofadditional long-term borrowings.

 

At December 31, 2002, our senior credit facilityborrowings totaling $270.2 million are at variable interest rates based ondefined margins over the current prime rate or LIBOR.  We also had $100.0 million of 12% senior subordinated notes andother indebtedness totaling $11.5 million outstanding as of the end of theyear.  The total annual maturities ofall of our indebtedness outstanding as of December 31, 2002 are asfollows: 2003 – $16.9 million; 2004 – $54.0 million; 2005 – $97.8 million; 2006– $107.1 million; 2007 – $0.6 million; and 2008 and thereafter – $105.3million.  The senior credit facility andsenior subordinated notes indenture impose restrictive and financial covenantson us.  In March 2003, terms andfinancial covenants contained in our senior credit facility were amended asdescribed below.

 

**Capital Resources and Debt Obligations as ofDecember 31, 2002**

 

As of December 31, 2002, we had $55.4 million ofworking capital, excluding assets and liabilities of the discontinuedoperations we sold in 2003.  As ofDecember 31, 2002, we also had $33.6 million of borrowings available underour revolving line of credit, as amended in March 2003 and describedbelow.

 

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Our revolving line of credit expires in September 2004.  We may not be able to replace it oncommercially acceptable terms, or at all. As of December 31, 2002, our senior credit facility borrowingstotaling $270.2 million are at variable interest rates based on defined marginsover the current prime rate or LIBOR. We also had $100.0 million of 12% senior subordinated notes and otherindebtedness totaling $10.8 million outstanding as of December 31, 2002.

 

The senior credit facility and senior subordinatednotes indenture impose restrictive and financial covenants on us.  In the first quarter of fiscal 2003, termsand financial covenants contained in our senior credit facility were amended to,among other things, permit the sale of the Specialty Avionics Group which wasconsummated on May 23, 2003. As required by the amendment, we repaid $130.0 million of senior creditfacility borrowings with the proceeds from the sale.  See “—Recent Developments Affecting Financial Condition andLiquidity” below for additional information.

 

**Recent Developments Affecting Financial Condition andLiquidity**

 

As more fully described in “—Industry Overview andTrends,” the acts and ongoing threats of global terrorism, the current militaryconflicts, SARS epidemic and weak global economic conditions are all adverselyimpacting our business.  In response, wehave implemented a series of restructuring activities, as described in“—Restructuring, Asset Impairment and Other Related Charges,” designed toreduce costs and conserve working capital.

 

During the fourth quarter of fiscal 2002, we furtherassessed our long-term business strategies in light of current aerospaceindustry conditions.  In addition, wesubsequently determined that we would likely not be in compliance with oursenior credit facility’s financial covenants in 2003.  We believe that when the aerospace industry recovers, the demandfor our Cabin Management and Systems Integration groups’ products and servicesfor business, VIP and head-of-state aircraft will return to historical levelsand, accordingly, we decided to focus our resources in these marketsegments.  To accomplish this objective,we embarked on a plan to sell the Specialty Avionics Group, which is highlydependent on the commercial airline industry.

 

In March 2003, we entered into a definitiveagreement to sell the Specialty Avionics Group and received requisite lenderapproval to amend the senior credit facility to permit the sale.  We consummated the sale on May 23, 2003and, as required by the senior credit facility amendment, used $130.0 millionof the proceeds from the sale to repay senior credit facility borrowings.  The senior credit facility amendment alsorelaxes various financial covenants for 2003 and beyond, decreases by $10.0million the maximum permitted revolving line of credit borrowings to $40.0million, increases the prime rate and LIBOR interest margins by 1.5% andpermits the issuance of specified types of additional indebtedness and therepurchase of up to $20.0 million aggregate principal amount of our 12% seniorsubordinated notes with the proceeds from the sale of junior securities.  Junior securities means: (i) seniorsubordinated notes issued by us that are unsecured and do not provide for anyscheduled redemptions or prepayments or any sinking fund installment paymentsor maturities prior to the termination of the senior credit facility, or otherindebtedness subordinated in right of payment to our obligations under the seniorcredit facility, and whose material terms are satisfactory to the lenders; and(ii) equity securities issued by us.

 

The table below reflects senior credit facilityborrowings as of December 31, 2002, adjusted to reflect the $130.0 millionrepayment with the proceeds from the sale and the adjustment of the futurematurities pursuant to the amendment.

 

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|                                                       |   | **Senior Credit Facility Borrowings  As of December 31, 2002** |   |
|------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
| **(In  millions)**                                         |   | **Historical**                                                      |   | **Repayment** |   | **As  Adjusted** |   |
|                                                       |   |                                                                |   |   |   |   |   |
| Total  maturities during the year ending December 31, |   |                                                                |   |   |   |   |   |
| 2003                                                       |   | $                                                                   | 14.7   |   | $ | (11.4 | ) | $ | 3.3 |   |
| 2004                                                       |   | 52.7                                                                |   | (39.2 | ) | 13.5 |   |
| 2005                                                       |   | 96.6                                                                |   | (29.7 | ) | 66.9 |   |
| 2006                                                       |   | 106.2                                                               |   | (49.7 | ) | 56.5 |   |
| Total  senior credit facility borrowings                   |   | $                                                                   | 270.2  |   | $ | (130.0 | ) | $ | 140.2 |   |

 

We believe our expected operating cash flows, togetherwith borrowings under our senior credit facility ($33.6 million of which wasavailable as of December 31, 2002, the commitment for which expires inSeptember 2004), will be sufficient to meet our future short- andlong-term operating expenses, working capital requirements, capitalexpenditures and debt service obligations for the next twelve months.  However, our ability to comply with our debtfinancial covenants, pay principal or interest and satisfy our other debtobligations will depend on our future operating performance as well ascompetitive, legislative, regulatory, business and other factors beyond ourcontrol.  Although we cannot be certain,we expect to be in compliance with the revised financial covenants through theend of the year based on our current operating plan.

 

In addition, we are continually consideringacquisitions that complement or expand our existing businesses or that mayenable us to expand into new markets, some of which may be material.  Future acquisitions may require additionaldebt, equity financing or both.  We maynot be able to obtain any additional financing on acceptable terms.

 

**Disclosureof Contractual Obligations and Commitments**

 

The following table summarizes our known contractualobligations to make future cash payments as of December 31, 2002, as wellan estimate of the periods during which these payments are expected to be made.

** **
|                                                            |   |      |   | **Years Ending December 31,** |   |
|-----------------------------------------------------------------|--------|-----------|--------|------------------------------------|--------|
| **(In  millions)**                                              |   | **Total** |   | **2003**                           |   | **2004  and  2005** |   | **2006  and  2007** |   | **2008  and  Beyond** |   |
|                                                            |   |      |   |                               |   |   |   |   |   |   |   |
| Long-term  debt (a):                                            |   |      |   |                               |   |   |   |   |   |   |   |
| Senior  credit facility                                         |   | $         | 270.2  |                               | $      | 14.7 |   | $ | 149.3 |   | $ | 106.2 |   | $ | — |   |
| 12%  senior subordinated notes                                  |   | 100.0     |   | —                             |   | — |   | — |   | 100.0 |   |
| Capital  lease obligations                                      |   | 4.0       |   | 0.6                                |   | 1.1 |   | 0.7 |   | 1.6 |   |
| Other  indebtedness                                             |   | 6.8       |   | 1.0                                |   | 1.2 |   | 0.9 |   | 3.7 |   |
| Total  long-term debt                                           |   | 381.0     |   | 16.3                               |   | 151.6 |   | 107.8 |   | 105.3 |   |
|                                                            |   |      |   |                               |   |   |   |   |   |   |   |
| Operating  lease obligations                                    |   | 15.4      |   | 1.8                                |   | 3.2 |   | 2.5 |   | 7.9 |   |
| Mandatorily  redeemable preferred stock redemption obligations: |   |      |   |                               |   |   |   |   |   |   |   |
| DeCrane  Aircraft preferred stock (b)                           |   | 37.0      |   | —                             |   | — |   | — |   | 37.0 |   |
| DeCrane  Holdings preferred stock (c)                           |   | 62.2      |   | —                             |   | — |   | — |   | 62.2 |   |
| Total  obligations                                              |   | $         | 495.6  |                               | $      | 18.1 |   | $ | 154.8 |   | $ | 110.3 |   | $ | 212.4 |   |

 

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(a)                                  Excludesinterest payments.  Interest on the 12%senior subordinated notes is payable semiannually.  The senior credit facility bears interest at a variable rate andtherefore the amount of future interest payments are uncertain.

 

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(b)                                 Dividendsaccrue quarterly at the annual rate of 16% and are payable, at our option,either in cash 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 cashdividend payments and may continue to do so until June 2005, after whichtime we are required to pay quarterly dividends in cash.  If we elect to continue issuing additionalshares until June 2005, our mandatory redemption obligation onMarch 31, 2009, the mandatory redemption date, will be $54.8 million andour annual cash dividend payment obligation will be $8.8 million, payablequarterly, commencing September 2005.

 

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

 

The senior credit facility obligations reflected aboveare prior to the effect of the March 2003 amendment and application of theestimated net proceeds of $130.0 million from May 2003 sale of theSpecialty Avionics Group as required by the amendment.  Assuming the sale of the Specialty AvionicsGroup were to have been consummated on December 31, 2002, our obligationswould have been as follows:

 
|                     |   |      |   | **Years Ending December 31,** |   |
|--------------------------|--------|-----------|--------|------------------------------------|--------|
| **(In  millions)**       |   | **Total** |   | **2003**                           |   | **2004  and  2005** |   | **2006  and  2007** |   | **2008  and  Beyond** |   |
|                     |   |      |   |                               |   |   |   |   | ** ** |   | ** ** |
| Senior  credit facility: |   |      |   |                               |   |   |   |   |   |   |   |
| As  reported             |   | $         | 270.2  |                               | $      | 14.7 |   | $ | 149.3 |   | $ | 106.2 |   | $ | — |   |
| Assumed  debt repayment  |   | (130.0    | )      | (11.4                              | )      | (68.9 | ) | (49.7 | ) | — |   |
| As  adjusted             |   | $         | 140.2  |                               | $      | 3.3 |   | $ | 80.4 |   | $ | 56.5 |   | $ | — |   |
|                     |   |      |   |                               |   |   |   |   |   |   |   |
| Total  obligations:      |   |      |   |                               |   |   |   |   |   |   |   |
| As  reported             |   | $         | 495.6  |                               | $      | 18.1 |   | $ | 154.8 |   | $ | 110.3 |   | $ | 212.4 |   |
| Assumed  debt repayment  |   | (130.0    | )      | (11.4                              | )      | (68.9 | ) | (49.7 | ) | — |   |
| As  adjusted             |   | $         | 365.6  |                               | $      | 6.7 |   | $ | 85.9 |   | $ | 60.6 |   | $ | 212.4 |   |

 

**DisclosureAbout Off-Balance Sheet Commitments and Indemnities**

 

During our normal course of business, we have enteredinto agreements containing indemnities pursuant to which we may be required tomake payments in the future.  Theseindemnities are in connection with facility leases and liabilities forspecified claims arising from investment banking services our financial advisorsprovide 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 as ofDecember 31, 2002 since no claims have been asserted to date.

 

In connection with the sale of the Specialty AvionicsGroup, we made indemnities to the buyer with respect to a number of customary,and certain other specific, representations and warranties.  Our indemnities with respect to some ofthese matters are limited in terms of duration with the maximum of potentialfuture payments capped at $14.0 million and our indemnities with respect tospecified environmental matters will expire not later than October 2010and provides for a maximum liability of $5.0 million, while others will have nolimitations.  In addition, the $140.0million selling price is subject to a potential post-closing adjustment relatedto the amount of working capital at closing. Although we

 

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cannot be certain, we believe the potential adjustment will not bematerial.  The post-closing adjustment,if any, would be payable by us in cash upon its final determination.

 

As of December 31, 2002, we also had anirrevocable standby letter of credit in the amount of $0.4 million issued andoutstanding under our senior credit facility.

 

**CriticalAccounting Policies**

 

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which are prepared in accordance with accounting principles generally acceptedin the United States of America.  Ourpreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities.

 

We evaluate our estimates on an on-going basis.  We base our estimates on historicalexperience and on various assumptions that are believed to be reasonable underthe circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readily apparentfrom other sources.  Actual resultscould differ from these estimates under different assumptions orconditions.  We believe the followingcritical accounting policies affect our more significant estimates andjudgments used in the preparation of our financial statements.

** **

**Allowancefor uncollectible accounts receivable.**  Accounts receivable are reduced by anallowance for amounts that are deemed uncollectible.  The estimated allowance for uncollectible amounts is basedprimarily on our evaluation of the financial condition of each of our customersand their payment history.  We alsoprovide an allowance based on the age of all receivables for which we have notestablished a customer-specific allowance. Generally, we do not require collateral or other security to supportaccounts receivable, however, under certain circumstances, we require depositsor cash-on-delivery terms.  While ourlosses have been within our expectations, a deterioration of our customers’financial condition may require that we provide additional allowances, reducingour operating income in future periods. Our customers operate in the business, VIP and head-of-state andcommercial aircraft industry throughout the world and are being adverselyimpacted by the acts and ongoing threats of global terrorism, the currentmilitary conflicts, SARS epidemic and weak global economic conditions.  Accounts receivable of $27.6 million isreduced by an allowance for uncollectible accounts of $1.2 million as ofDecember 31, 2002.

** **

**Work-in-processinventory–deferred program costs.**  We incur product development costs, comprised principally ofengineering costs, relative to programs and contracts with long productioncycles.  In accordance with industry practice,we defer these costs in inventory. Program costs are charged to cost of sales over the production cycle ofthe program.  Periodically, we assessthe recoverability of the deferred program costs based on existing orderbacklog and our estimate of future orders. We reduce the deferred program costs to estimated realizable value inthe period in which recoverability becomes uncertain.  For example, in connection with our restructuring activities, wereassessed and elected to curtail several programs.  As a result, we wrote off program costs totaling $7.9 millionduring the year ended December 31, 2001. Deferred program costs included in work-in-process inventory are $14.8million as of December 31, 2002.

** **

**Allowancefor excess and obsolete inventory. **Inventoriesare reduced by an allowance for estimated excess and obsolete inventory.  The allowance is the difference between thecost of the inventory and its estimated market value.  Our market value estimates are based upon existing order backlog,our assumptions about market conditions, including future orders and marketpricing.  While our products are notsubject to rapid technological obsolescence, we also consider this factor indetermining our market value estimates. If our customers cancel existing orders or actual market conditions, includingfuture orders, are less favorable than we projected, we may provide additionalallowances, reducing our

 

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gross profit in future periods. Inventories of $63.1 million were reduced by an allowance for excess andobsolete inventory of $3.8 million as of December 31, 2002.

** **

**Goodwillimpairment.**  On January 1, 2002, we began accountingfor goodwill under Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 142 requires an impairment-only approach to accounting forgoodwill.  Because of our history ofacquisitions, goodwill constitutes a significant portion of our long-termassets.  As a result of the adoption ofSFAS No. 142, we recorded a transitional goodwill impairment charge of $17.8million in 2002 as the cumulative effect of the change in accountingprinciple.  An additional $39.3 milliontransitional impairment charge pertained to the Specialty Avionics Group and isincluded in the loss from discontinued operations.

 

The SFAS No. 142 goodwillimpairment model is a two-step process. First, it requires a comparison of the book value of net assets to thefair value of the reporting units that have goodwill assigned to them.  If the fair value is determined to be lessthan book value, a second step is performed to compute the amount of theimpairment.  In this process, a fairvalue for goodwill is estimated, based in part on the fair value of thereporting unit used in the first step, and is compared to its carryingvalue.  The amount by which carryingvalue exceeds fair value represents the amount of goodwill impairment.  SFAS No. 142 requires goodwill to be testedfor impairment annually at the same time every year, and when an event occursor circumstances change such that it is reasonably possible that impairment mayexist.  We have selected October 31stas our annual testing date.

 

We estimate the fair valuesof our reporting units using a discounted cash flow approach, takinginto consideration projections based on the individual characteristics of thereporting units, historical trends, market multiples for comparable businessesand independent appraisals.  The forecasts of future cash flows are basedon our best estimate of future revenues and operating costs, based primarily onexisting backlog, expected future bookings and general market conditions.  Changes in these forecasts could cause aparticular reporting unit to either pass or fail the first step in the goodwillimpairment mode, which could significantly change the amount of impairmentrecorded.

 

As a result of our firstrequired annual testing, as of October 31, 2002, we recorded an additional$7.7 million pre-tax impairment charge pertaining to the Specialty AvionicsGroup which is reflected as a component of the net loss from discontinuedoperations.  The charge was primarilythe result of using lower cash flow forecasts for the commercial aircraftportion of our business.

 

Goodwill pertaining tocontinuing and discontinued operations with an aggregate book value of $277.1million remains as of as of December 31, 2002 and will be subjectimpairment testing in October 2003, or sooner, if additional events occuror circumstances change such that it is reasonably possible that furtherimpairment may exist.

** **

**Valuationof long-lived assets and other intangible assets. **Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” we review long-lived assets and other identifiableintangible assets for impairment when events or changes in circumstancesindicate that the carrying value of an asset may not be recoverable.  Factors we consider important, which couldtrigger an impairment review, include significant:

 

•                  underperformancerelative to expected future operating results;

 

•                  changesin the manner of our use of the acquired assets;

 

•                  changesin our business strategy; or

 

•                  negativeaerospace industry or global economic conditions.

 

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Our impairment review consists of comparing the sum ofthe expected undiscounted future cash flows resulting from the use of the assetto the carrying value of the assets. When we determine that the carrying value may not be recoverable, werecord an impairment loss equal to the excess of the asset’s carrying valueover its fair value.  We measure fairvalue based on a projected discounted cash flow method using a discount rate webelieve to be commensurate with the risk inherent in our current businessmodel.  Net long-lived assets andintangible assets, excluding goodwill, amounted to $65.2 million as ofDecember 31, 2002.

** **

**Accountingfor income taxes.**  Aspart of the process of preparing our financial statements, we are required toestimate our income taxes in each of the jurisdictions in which weoperate.  This process involvesestimating our actual current tax exposure together with assessing permanentand temporary differences resulting from differing treatment of items, such asamortization of assets and other nondeductible expenses, for tax and accountingpurposes.  These differences result indeferred tax assets and liabilities, which are included within our statement offinancial position.  We must then assessthe likelihood that our deferred tax assets will be recovered from futuretaxable income and, to the extent we believe that recovery is not likely, wemust establish a valuation allowance which increases our provision for incometaxes in our statement of operations.

 

We have $22.6 million of deferred tax assets as ofDecember 31, 2002, which includes $12.2 million of federal and state losscarryforwards.  Based on our estimatesof taxable income by jurisdiction and the periods over which our deferred taxassets will be recoverable, we believe it is more likely than not that we willgenerate taxable income in future periods sufficient to realize the tax benefitassociated with these assets.  As aresult, we have not established a valuation allowance reducing our deferred taxassets as of December 31, 2002.  Inthe event actual results differ from our estimates or we adjust these estimatesin future periods, we would need to establish a valuation allowance in theperiod such determination is made, which would increase our provision forincome taxes.

** **

**Revenueand profit recognition under long-term contracts. **Because of relatively long production cycles, aportion of our revenues and profits are recognized underpercentage-of-completion method of accounting using total contract price,actual costs incurred to date and an estimate of the completion costs for eachcontract.  We use this method becausereasonably accurate estimates of the revenue and costs applicable to thevarious stages of a contract can be made. Recognized revenues and profits on each contract are subject torevisions as the contract progresses towards completion.  Revisions to revenue and profit estimatesare made in the period in which the facts that give rise to the revision becomeknown.  Provisions for estimated losseson uncompleted contracts are fully recognized in the period in which suchlosses are determined.  Approximately28.9% of our revenues and 25.2% of our gross profit during the year endedDecember 31, 2002 was recognized under the percentage-of-completion methodof accounting.

** **

**Litigation. **We evaluate contingenciesin accordance with SFAS No. 5, “Accounting for Contingencies.”  We establish reserves for estimated losscontingencies when it is our assessment that a loss is probable and the amountof the loss can be reasonably estimated. Revisions to contingent liabilities are charged against income in theperiod in which different facts or information becomes known or circumstanceschange that affect the previous assumptions with respect to the likelihood oramount of loss.  Reserves for contingentliabilities are based upon our assumptions and estimates, advice of legalcounsel or other third parties regarding the probable outcomes of thematter.  Should the outcome differ fromthe assumptions and estimates, revisions to the estimated reserves forcontingent liabilities would be required.

 

As described in “Item 3. Legal Proceedings” and Note13 accompanying our financial statements included in this report, we areinvolved in legal proceedings for which no reserves for estimated loss contingencieshave been established.  Our currentevaluation of these matters is that it is probable we will

 

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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.**  Asdescribed in “—Restructuring, Asset Impairment and Other Related Charges,” werecorded charges totaling $17.2 million during 2002 and $25.9 million during2001 in response to the adverse aerospace industry impact the acts, and ongoingthreats, of global terrorism and the current weak global economic conditionsare having on our businesses.  Thesecharges are based on our present estimates of the impact these events arehaving on our businesses and the future recovery of the aerospaceindustry.  Actual results and futurerecovery could differ from these estimates, potentially resulting in furtherrestructuring, asset impairment and other related charges.

 

**RecentlyIssued Accounting Pronouncements**

 

**SFAS No.145**

 

In May 2002, the Financial Accounting StandardsBoard issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment ofSFAS No. 13, and Technical Corrections.” Among other things, SFAS No. 145 rescinds various pronouncementsregarding early extinguishment of debt and allows extraordinary accountingtreatment for early extinguishment only when the provisions of AccountingPrinciples Board Opinion No. 30, “Reporting the Results of Operations–Reportingthe Effects of Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regarding earlyextinguishment of debt are generally effective for fiscal years beginning January 1,2003.  We believe this new standard willnot have an impact on our business, consolidated financial position, results ofoperations or cash flow.

 

**SFAS No.146**

 

In June 2002, the Financial Accounting StandardsBoard issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  SFAS No. 146supersedes previous accounting guidance, principally Emerging Issues Task ForceIssue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”

 

SFAS No. 146 requires that the liability for costsassociated with an exit or disposal activity be initially measured at fairvalue and recognized when the liability is incurred.  In periods subsequent to initial measurement, changes to theliability are measured using the credit-adjusted risk-free rate that was usedin the initial measurement of the liability recorded.  The cumulative effect of a change resulting from revisions toeither the timing or the amount of estimated cash flows is recognized as anadjustment to the liability in the period of the change and charged to the sameline items in the statement of operations used when the related costs wereinitially recognized.  Under EITF No.94-3, a liability for an exit cost was recognized at the date of a company’scommitment to an exit plan.

 

The provisions of SFAS No. 146 are required to beapplied prospectively to exit or disposal activities initiated afterDecember 31, 2002.  We believe SFASNo. 146 may affect the timing of recognizing future restructuring costs, aswell as the amounts recognized, depending on the nature of the exit or disposalactivity and the timing of the related estimated cash flows.

 

**FIN No.45**

 

In November 2002, the Financial AccountingStandards Board issued Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees of

 

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Indebtedness of Others.”  FINNo. 45 elaborates on the disclosures to be made by a guarantor in its interimand annual financial statements about its obligations under certain guaranteesthat it has issued.  The interpretationalso clarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The initialrecognition and initial measurement provisions of FIN No. 45 are applicable tous on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  However, thedisclosure requirements in FIN No. 45 are effective for our financialstatements for periods ending after December 15, 2002.

 

We are not a party to any agreement in which it is aguarantor of indebtedness of others therefore the interpretation is notexpected to have a material effect on our financial position, results ofoperations or cash flows.  We haveadopted the disclosure requirements of this interpretation as ofDecember 31, 2002.

 

**SFAS No.148**

 

In December 2002, the Financial AccountingStandards Board issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  In addition, SFAS No. 148amends the disclosure requirements of SFAS 123, “Accounting for Stock-BasedCompensation,” to require disclosure in both interim and annual financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.

 

For non-compensatory stock options, we have elected tocontinue to account for our stock-based compensation plan under APB Opinion No.25, “Accounting for Stock Issued to Employees,” and disclose pro forma effectof the plan on net income as provided by SFAS No. 123, “Accounting forStock-Based Compensation.”  Therefore,at this time, adoption of this statement will not have a material impact on ourfinancial position, results of operations or cash flows.

 

The SFAS No. 148 pro forma disclosures were effectivefor our fiscal year ended December 31, 2002 and for interim financialstatements beginning in 2003.  The proforma disclosures are in the notes accompanying the financial statementsincluded in this report.

 

**FIN No.46**

 

In January 2003, the Financial AccountingStandards Board issued Interpretation No. 46, “Consolidation of VariableInterest Entities.”  FIN No. 46addresses consolidation by business enterprises of variable interest entities(formerly special purpose entities or “SPEs”). We do not have any variable interest entities as defined in FIN No. 46.

 

**Forward-LookingStatements and Risk Factors**

 

**SpecialNote Regarding Forward-Looking Statements**

 

All statements other than statements of historicalfacts included in this report, including statements about our futureperformance and liquidity and future industry performance, are consideredforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Thesestatements are subject to known and unknown risks, uncertainties and otherfactors, which are difficult to predict. Some of those risks are specifically described below, but we are alsovulnerable to a variety of elements that affect many businesses, such as:

 

•                  fuelprices and general economic conditions that affect demand for aircraft and airtravel, which in turn affect demand for our products and services;

 

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

 

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

 

•                  priceand availability of raw materials, component parts and electrical energy;

 

•                  liabilityand other claims asserted against us that exceeds our insurance coverage;

 

•                  theability to attract and retain qualified personnel;

 

•                  labordisturbances;

 

•                  changesin operating strategy, or our acquisition and capital expenditure plans; and

 

•                  therisks described below.

 

Changes in such factors could cause our actual resultsto differ materially from those expressed or implied in this report.  Although we believe that the expectationsreflected in such statements are reasonable, we can give no assurance that suchexpectations will prove to be correct. We undertake no obligation to release publicly any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  You should not rely on our forward-lookingstatements as if they were certainties.

 

**RiskFactors**

** **

**Substantial Leverage.**  Our substantial levels of debt couldadversely affect our financial health and prevent us from fulfilling ourobligations under the debt agreements.

 

As of December 31, 2002, we had totalconsolidated indebtedness of approximately $381.0 million and we had $33.6million of additional revolving line of credit borrowings available under oursenior bank credit facility (as amended in March 2003), subject tocustomary funding conditions.  We alsohad $37.0 million of mandatorily redeemable preferred stock as of December 31,2002.  The senior bank credit facilityand the indenture under which our notes are issued each also permit us to incursignificant amounts of additional debt and to secure that debt with some of ourassets.

 

The amount of debt we carry could have importantconsequences:

 

•                  Itmay limit the cash flow available for general corporate purposes andacquisitions.  Interest payments on ourdebt were $27.6 million for the year ended December 31, 2002.  Earnings from continuing operations wereinsufficient to cover fixed charges by $10.4 million for the year endedDecember 31, 2002.

 

•                  Itmay limit our ability to obtain additional debt financing in the future forworking capital, capital expenditures or acquisitions.

 

•                  Itmay limit our flexibility in reacting to competitive and other changes in theindustry and economic conditions generally.

 

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

 

•                  Itmay limit our ability to respond to changes in our markets or exploit businessopportunities.

** **

**Restrictive Covenants.**  Our operations and those of our subsidiariesare restricted by the terms of our senior credit facility and seniorsubordinated notes indenture.

 

Our senior credit facility and the indenture underwhich our senior subordinated notes are issued limit our flexibility inoperating our businesses, including our ability and the ability of oursubsidiaries to:

 

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•                  incurdebt;

 

•                  issuepreferred stock;

 

•                  repurchasecapital stock or subordinated debt;

 

•                  enterinto transactions with affiliates;

 

•                  enterinto sale and leaseback transactions;

 

•                  createliens or allow them to exist;

 

•                  paydividends or other distributions;

 

•                  makeinvestments;

 

•                  sellassets; and

 

•                  enterinto mergers and consolidations.

 

In addition, our senior bank credit facility requiresthat we satisfy several tests of financial condition, including minimum levelsof EBITDA and interest and fixed charges coverage and maximum permitted levelsof leverage and senior debt.  Ourability to do so can be affected by events beyond our control, and we cannot besure that we will meet those tests.  Ourfailure to do so could result in a default under our senior bank creditfacility, which would permit the lenders to terminate their commitments andaccelerate all debt and would trigger an event of default under the seniorsubordinated notes indenture.  Althoughwe were in compliance with these covenants as of December 31, 2002, wehave required amendments on several occasions in recent years to avoidpotential defaults and we may not be able to comply with these tests in thefuture.

 

The senior bank credit facility is secured bysubstantially all our material assets. If we default under our senior debt agreements, the lenders could chooseto declare all outstanding amounts immediately due and payable, and seekforeclosure of the assets we granted to them as collateral.

** **

**Potential Inability to Service Debt.**  We will require a significant amount of cashto service our debt and to fund our operations and planned capitalexpenditures.  Our ability to generatecash depends on cash flows from our subsidiaries and many factors beyond ourcontrol.

 

After the repayment of $130.0 million of debt inconnection with the sale of the Specialty Avionics Group, we will be requiredto repay $16.8 million of senior bank credit facility borrowings in 2003 and2004 and substantial amounts thereafter. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources and —Disclosure ofContractual Obligations 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 September 2004.  This, to an extent, is subject to generaleconomic, financial, competitive, legislative, regulatory and other factorsthat are beyond our control.

 

We cannot assure you that our operating cash flow willbe sufficient to meet our anticipated future operating and capital expendituresand debt payments as they become due or that future borrowings will beavailable to us for such purposes.  Ifour cash flow in future periods is lower than we expect, we might be forced toreduce or delay acquisitions or capital expenditures, sell assets and/or reduceoperating expenses in order to make all required debt service payments.  Alternatively, we may have to refinance allor a portion of our debt on or before maturity.  A reduction in our operating expenses might reduce importantefforts, such as selling and marketing programs, management information systemupgrades and new product development. In addition, we may not be able to refinance our debt on commerciallyreasonable terms or at all.

 

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For example, we reported a net loss of $71.8 millionfor the year ended December 31, 2002 and $19.1 million for the same periodin 2001.  The 2002 loss includes $17.8million as a result of a cumulative effect of change in accounting principle, a$41.4 million loss attributable to discontinued operations and $17.2 million ofpre-tax restructuring and long-lived asset impairment charges we recordedresulting from our restructuring activities. The 2001 loss includes $20.1 million of additional restructuring chargesand an $8.6 million goodwill impairment charge.  Our restructuring activities were implemented in response to theadverse impact the events described in “—Aerospace Industry Risks” below arehaving on our business.

** **

**Aerospace Industry Risks.**  The aerospace industry is cyclical andaffected by many factors beyond our control, including geo-political and globaleconomic conditions.

 

We compete in the aircraft products and servicesmarket of the aerospace industry.  Themarket for our products and services is largely driven by demand in the civilaircraft markets, principally for business, VIP and head-of-state aircraft and,to a lesser extent, commercial and regional aircraft.  The September 11, 2001 terrorist attack on the UnitedStates, ongoing concerns about global terrorism, the current Middle-Eastern militaryconflicts, the Severe Acute Respiratory Syndrome (SARS) epidemic and weakglobal economic conditions are all adversely impacting the aerospace industryand our business.

 

Based on industry and market data, we believe thebusiness, VIP and head-of-state aircraft portion of our business willexperience weakness throughout 2003 as evidenced by various manufacturers’announced plans to temporarily suspend production at various times throughoutthe year in response to the weak demand for new aircraft.  We believe aircraft deliveries may reflect amodest recovery in 2004 and show continuing recovery thereafter.  We also believe the commercial aircraftportion of our business will experience significant weakness during 2003 and2004, with potential recovery not expected to occur until at least 2005.  Our beliefs are based on the assumptions wewill experience economic recovery and there are no further negativegeo-political developments affecting our industry.

 

Further or prolonged decreases in demand for newbusiness, VIP and head-of-state and commercial aircraft, as well as relatedcomponent parts (which occur for a variety of reasons, including thosedescribed above), would result in additional decreases in demand for ourproducts and services, and, correspondingly, our revenues, thereby adverselyaffecting our financial condition.  Inaddition, further deterioration or prolonged decreases in demand could resultin further restructurings of our business.

** **

**Concentration of Key Customers.**  We receive a significant portion of ourrevenues from a small group of key customers, and we are vulnerable to changesin their economic condition and purchasing plans.

 

A significant decline in business from any one of ourkey customers could have a material adverse effect on our business.  Our three largest customers accounted for56.3% of our consolidated revenues from continuing operations for the yearended December 31, 2002 as follows: Textron (which includes Cessna) –23.5%; Bombardier – 17.4%; and Boeing – 15.4%. Some of our customers also have the in-house capabilities to perform theservices and provide many of the products we offer and, accordingly, coulddiscontinue outsourcing their business to us.

 

In addition, significant portions of our revenues fromour major customers are pursuant to contracts that may include a variety ofterms favorable to the customer.  Suchterms may include our agreement to one or more of the following:

 

•                  thecustomer is not required to make purchases, and may terminate such contracts atany time;

 

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

 

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•                  ona prospective basis, we must extend to the customers any reductions in pricesor lead times that we provide to other customers;

 

•                  wemust match other suppliers’ price reductions or delete the affected productsfrom the contract; and

 

•                  wemust grant irrevocable non-exclusive worldwide licenses to use our designs,tooling and other intellectual property rights to products sold to a customerif we default, or suffer a bankruptcy filing, or transfer our manufacturingrights to a third party.

 

**Intangible Asset Impairment.**  Our total assets include a substantialamount of intangible assets.  Thewrite-off of a significant portion of intangible assets would negatively affectour results of operations.

 

As of December 31, 2002, goodwill and otherintangible assets represented approximately 41.1% of our total assets.  Intangible assets consist of goodwill andother 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.  Goodwill isnot amortized but is subject to annual testing for impairment.  Identifiable intangible assets with finitelives are amortized over their individual useful lives and are also subject toannual impairment testing.  Simplystated, if the carrying value of the asset exceeds the estimated undiscountedfuture cash flows from the operating activities of the related business,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.  We have recorded goodwill asset impairment charges fromcontinuing operations totaling $8.6 million during the year endedDecember 31, 2001.  In addition, werecorded a transitional goodwill impairment charge of $17.8 million fromcontinuing operations as of January 1, 2002 in connection with theadoption of SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

Any future impairment testing resulting in thewrite-off of a significant portion of goodwill or identifiable intangibleassets will have an adverse impact on our results of operations and totalcapitalization, the effect of which could be material.

 

**Competition. **Weoperate in a highly competitive industry and compete against a number ofcompanies, some of which have significantly greater financial, technologicaland marketing resources than we do.

 

We operate in highly competitive markets within theaerospace industry.  Our competitorsinclude business aircraft manufacturers, independent completion andmodification companies and other independent service organizations, includingsome of our customers, many of whom may have significantly greater financial,technological, manufacturing and marketing resources than we do.  The niche markets within the aerospaceindustry that we serve are relatively fragmented, with several competitorsoffering the same products and services we provide.  Due to the global nature of the aerospace industry, competitioncomes from both U.S. and foreign companies.

 

We believe our ability to compete depends on highproduct performance, short lead-time and timely delivery, competitive pricing,superior customer service and support and continued certification undercustomer quality requirements and assurance programs.  There can be no assurance that we will be able to competesuccessfully with respect to these factors in the future.

 

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

 

We consider and take advantage of selected opportunitiesto grow by acquiring other businesses whose operations or product linescomplement our existing businesses.  Ourability to implement this growth strategy will depend on finding suitableacquisition candidates at acceptable prices and obtaining

 

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the required financing.  Anyacquisition we may make in the future could be subject to a number of risks,including:

 

•                  ourability to integrate the operations and personnel of the acquired company;

 

•                  ourfailure to identify liabilities of the acquired company for which we may beresponsible as a successor owner or operator;

 

•                  theloss of key personnel in the acquired company; and

 

•                  theimpact on our financial position, results of operations and cash flowsresulting from additional acquisition indebtedness.

 

Our inability to adequately manage these or otherrisks could have an adverse effect on our business.

 

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

 

The aerospace industry is highly regulated in theUnited States by the Federal Aviation Administration to ensure that aviationproducts and services meet stringent safety and performance standards.  The FAA prescribes standards and licensingrequirements for aircraft components, issues designated alteration stationauthorizations, and licenses private repair stations.  We hold various FAA authorizations and licenses, including aDesignated Alteration Station authorization, which gives one of oursubsidiaries the authority to certify some aircraft design modifications onbehalf of the FAA.  Our business dependson our continuing access to, or use of, these FAA authorizations and licenses,and our employment of, or access to, FAA-certified individual engineeringprofessionals.

 

We cannot assure you that we will continue to haveadequate access to those authorizations, licenses and certified professionals,the loss or unavailability of which could adversely affect our operations.  The FAA could also change its policiesregarding the delegation of inspection and certification responsibilities toprivate companies, which could adversely affect our business.

 

**Environmental Risks and Regulation.**  Some of our operations and facilitiesgenerate waste or have done so in the past, which may result in unknown futureliabilities for environmental remediation.

 

Environmental laws, particularly the federalComprehensive Environmental Response, Compensation and Liability Act(“CERCLA”), may impose strict, retroactive and joint and several liability uponpersons responsible for releases or potential releases of hazardous substancesand other parties who have some relationship to a site or a source of waste,such as a current or former owner or operator of real property or a party whoarranges to transport wastes to a third-party site.  We have sent waste to treatment, storage or disposal facilitiesthat have been designated as National Priority List (more commonly known asSuperfund) sites under CERCLA or equivalent listings under state laws.  We have received requests for information orallegations of potential responsibility from the U.S. Environmental ProtectionAgency regarding our use of several of these sites.  Given the potentially retroactive nature of environmentalliability, it is possible that we will receive additional notices of potentialliability relating to current or former activities.  We may incur costs in the future for prior waste disposal by usor former owners of our subsidiaries or our facilities.  Some of our operations are also located onproperties that are contaminated to varying degrees.  We may incur costs in the future to address existing or futurecontamination.  If we incur significantcosts in connection with these or other environmental issues, our business andfinancial condition could be adversely affected.

 

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

 

Our business exposes us to possible claims for damagesresulting from the manufacture, installation and use of our products.  Many factors beyond our control could leadto such claims, such as the failure of an aircraft on which our products havebeen installed, the reliability and skill of the operators of such aircraft andthe maintenance performed on such aircraft. We carry aircraft products and grounding liability insurance for thispurpose, but we cannot assure you that our insurance coverage will be adequateto cover claims that may arise or that we will be able to renew our coverage inthe future at commercially 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 market data we use in this report isbased on the good faith estimates of our management, which estimates are basedprimarily upon internal management information and, to the extent available,independent industry publications and other publicly availableinformation.  However, the nature of theaerospace industry and competition in our markets results in limitedavailability of reliable, independent data. Although we believe that the sources we have used are reliable, we donot guarantee, and have not independently verified, the accuracy andcompleteness of the information.

** **

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

 

Our success and growth depends in large part on theskills and efforts of our management team and on our ability to attract andretain qualified personnel experienced in the various operations of ourbusiness.  The loss of key personnel,including our founder, R. Jack DeCrane, combined with the failure to attractadditional qualified personnel for whatever reason, could delay implementationof our business plan or otherwise adversely affect our operations.  We do not have employment contracts with ourkey personnel, other than Mr. DeCrane. We do not carry key man life insurance on any members of our managementteam.

 

**ITEM 7A****.****                                            QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to various market risks, includinginterest rates and changes in foreign currency exchange rates.  Market risk is the potential loss arisingfrom 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 structureis comprised of long-term variable and fixed-rate debt.

 

Market risk related to our variable-rate debt isestimated as the potential decrease in pre-tax earnings resulting from anincrease in interest rates.  Theinterest rates applicable to variable-rate debt are, at our option, based ondefined margins over the current prime rate or LIBOR.  At December 31, 2002, the current prime rate was 4.75% andthe current LIBOR was 1.95%.  Based on$270.2 million of variable-rate debt outstanding as of December 31, 2002,a hypothetical one percent rise in interest rates, to 5.75% for prime rateborrowings and 2.95% for LIBOR borrowings, would reduce our pre-tax earnings by$2.7 million annually.

 

To limit a portion of our exposure related to risinginterest rates, we have entered into an interest rate swap contract toeffectively convert $4.5 million of variable-rate industrial revenue bonds to4.2% fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the

 

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amount of future cash flows associated with interest payments on thisportion of our variable-rate debt. Market risk related to this interest rate swap contract is estimated asthe potential higher interest expense we will incur if the variable interestrate decreases below the 4.2% fixed rate. Based on the $4.5 million of variable-rate debt converted to fixed-ratedebt outstanding as of December 31, 2002, a hypothetical one percentdecrease in the variable interest rate to 3.2%, would reduce our pre-taxearnings by less than $0.1 million annually.

 

The estimated fair value of our $100.0 millionfixed-rate long-term debt decreased $53.5 million, or 57.2%, to approximately$40.0 million at December 31, 2002 from $93.5 million at December 31,2001.  We believe the decrease isattributable to the overall deterioration of the aerospace industry’s financialcondition following the events of September 11th and itsaftermath.  Subsequent toDecember 31, 2002, the estimated fair value increased by $10.0 million toapproximately $50.0 million as of March 20, 2003.  Although we cannot be certain, we believethe increase may be a result of our announcement that we had entered into adefinitive agreement to sell the Specialty Avionics Group.  Market risk related to our fixed-rate debtis deemed to be the potential increase in fair value resulting from a decreasein interest rates.  For example, a hypotheticalten percent decrease in the interest rates, from 12.0% to 10.8%, would increasethe fair value of our fixed-rate debt by approximately $7.0 million.

** **

**Foreign Currency Exchange Rate Risk.**  Our foreign customers are located in variousparts of the world, primarily Canada, the Far and Middle East and WesternEurope, and we have subsidiaries with manufacturing facilities in Mexico.  To limit our foreign currency exchange raterisk related to sales to our customers, orders are almost always valued andsold in U.S. dollars.  We have enteredinto forward foreign exchange contracts in the past, primarily to limit theSpecialty Avionics Group’s exposure related to foreign inventory procurementand operating costs.  While we have notentered into any such contracts since 1998, we may do so in the futuredepending on the volume of non-U.S. dollar denominated transactions and ourassessment of future foreign exchange rate trends.

 

**ITEM 8****.****                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Our consolidated financial statements, supplementaryfinancial information and financial statement schedules are included in aseparate section at the end of this report.  The financial statements, supplementary information and schedulesare listed in the index on page F-1 of this report and are incorporated hereinby reference.

 

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

 

None.

 

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**PART III**

 

**ITEM 10****.****                                              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Directorsand Executive Officers**

 

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

 
| **Name**                 |   | **Age** |   | **DeCrane Holdings**                                                 |   | **DeCrane Aircraft**                                                               |
|--------------------------|--------|---------|--------|----------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|
|                     |   |    |   |                                                                 |   |                                                                               |
| R. Jack DeCrane (1)      |   | 56      |   | Vice Chairman of the  Board of Directors and Chief Executive Officer |   | Director and Chief  Executive Officer                                              |
|                     |   |    |   |                                                                 |   |                                                                               |
| Richard J. Kaplan        |   | 60      |   | Director, Chief  Financial Officer and Assistant Secretary           |   | Director, Senior Vice  President, Chief Financial Officer, Secretary and Treasurer |
|                     |   |    |   |                                                                 |   |                                                                               |
| Robert G. Martin         |   | 65      |   | —                                                               |   | Senior Vice President  and Group President                                         |
|                     |   |    |   |                                                                 |   |                                                                               |
| Jeffrey A. Nerland       |   | 45      |   | —                                                               |   | Senior Vice President  and Group President                                         |
|                     |   |    |   |                                                                 |   |                                                                               |
| Thompson Dean            |   | 45      |   | Chairman of the Board  of Directors                                  |   | Chairman of the Board of  Directors                                                |
|                     |   |    |   |                                                                 |   |                                                                               |
| James A. Quella          |   | 53      |   | Director                                                             |   | Director                                                                           |
|                     |   |    |   |                                                                 |   |                                                                               |
| Susan C. Schnabel (1)(2) |   | 41      |   | Director                                                             |   | Director                                                                           |
|                     |   |    |   |                                                                 |   |                                                                               |
| Albert E. Suter (1)(2)   |   | 67      |   | Director                                                             |   | Director                                                                           |

 

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(1)                                  Memberof the Compensation Committee; Ms. Schnabel serves as the committee’schairperson.

 

(2)                                  Memberof the Audit Committee; Mr. Suter serves as the committee’s chairman.

 

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

* *

*RichardJ. 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 Holdings sinceMarch 1999.  In August 2002,Mr. Kaplan was appointed Chief Financial Officer and Assistant Secretary ofDeCrane Holdings.  From April 1998to March 1999, he served as Executive Vice President and Chief OperatingOfficer of Developers Diversified Realty Corporation.  From 1977 to 1998, he was a partner with Price Waterhouse LLP,having joined the firm in 1964.  Hebecame a director of DeCrane Aircraft and DeCrane Holdings in 2000.

* *

*RobertG. Martin* has been our Senior Vice President and President ofthe Systems Integration Group since October 1999.  Mr. Martin also served as President of PATSsince we acquired it in January 1999 through December 2002 and asPresident of Aerospace Display Systems from September 1992 untilOctober 1999.

 

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*JeffreyA. Nerland* has been our Senior Vice President and Presidentof the Cabin Management Group since December 2001.  From January 1999 untilDecember 2001, Mr. Nerland served as Vice President, Business Development,and was appointed Senior Vice President in March 2001.  Mr. Nerland also served as President of theCabin Management Group’s Seating Division from June 2000 throughDecember 2001.  From July 1994through December 1998, he was President of The Nerland Group and a partnerwith Budetti, Harrison, Nerland and Associates, a consulting and interimmanagement firm.

* *

*ThompsonDean* has been a director of DeCrane Aircraft and DeCraneHoldings in 1998.  Mr. Dean also servedare President of DeCrane Holdings from its inception in 1998 throughAugust 2002.  Mr. Dean has alsobeen the Managing Partner of DLJ Merchant Banking, Inc. sinceNovember 1995.  InNovember 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin& Jenrette, Inc.  As a result, DLJMerchant Banking, Inc. became an indirect affiliate of Credit Suisse FirstBoston, Inc. and Credit Suisse Group. Mr. Dean serves as a director of AKI Holding Corp., Amatek HoldingsS.A., Arcade Holding Corporation, Manufacturers’ Services Limited, MuellerHoldings, Inc., and Von Hoffman Holdings, Inc.

* *

*JamesA. Quella* has been a director of DeCrane Aircraft and DeCraneHoldings since February 2003.  Mr.Quella has also been a Managing Director and Operating Partner of DLJ MerchantBanking, Inc. since July 2000.  InNovember 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin& Jenrette, Inc.  As a result, DLJMerchant Banking, Inc. and Donaldson, Lufkin & Jenrette SecuritiesCorporation became indirect affiliates of Credit Suisse First Boston, Inc. andCredit Suisse Group.  Previously, Mr.Quella was a Managing Director with GH Ventures Partners LLC fromJanuary 2000 through July 2000 and Vice Chairman of Mercer ManagementConsulting, Inc. from 1997 through 1999. Mr. Quella serves as a director of Advanstar, Inc., AdvanstarCommunications Inc., Merrill Corporation and Von Hoffman Holdings, Inc.

* *

*SusanC. Schnabel* has been a director of DeCrane Aircraft andDeCrane Holdings since 1998.  Ms.Schnabel has also been a Managing Director of DLJ Merchant Banking, Inc. sinceJanuary 1998.  InNovember 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin& Jenrette, Inc.  As a result, DLJMerchant Banking, Inc. and Donaldson, Lufkin & Jenrette SecuritiesCorporation became indirect affiliates of Credit Suisse First Boston, Inc. andCredit Suisse Group.  Ms. Schnabelserves as a director of Environmental Systems Products Holdings, Inc., Noveon,Inc. and Shoppers Drug Mart, Inc.

* *

*AlbertE. Suter* has been adirector of DeCrane Aircraft and DeCrane Holdings since May 2002.  Mr. Suter is a Senior Advisor and RetiredVice Chairman and Chief Operating Officer of Emerson Electric Co., amanufacturer of electrical, electromechanical and electronic products andsystems.  Mr. Suter has served Emersonin various capacities since 1989.  Mr.Suter serves as a director of Furniture Brands International, Inc.

 

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**ITEM 11****.****                                  EXECUTIVECOMPENSATION**

 

**SummaryCompensation Table**

 

The following table describes all annual compensationawarded to, earned by or paid to our Chief Executive Officer and the four mosthighly compensated executive officers other than the Chief Executive Officerfor the three years ended December 31, 2002.

 
|                                   |   |       | **Annual Compensation** |      | **All Other Compensation** |                                    |
|----------------------------------------|--------|------------|-------------------------|-----------|----------------------------|-----------------------------------------|
| **Name**                               |   |       |                    |      |                       | **Securities  Underlying  Options (1)** |   | **Other (2)** |   |
| **Year**                               |   | **Salary** |                    | **Bonus** |
|                                   |   |       | ** **              |      | ** **                 |                                    | ** ** |   | ** ** |   | ** ** |
| R. Jack DeCrane (3)                    |   | 2002       |                    | $         | 355,144                    |                                    | $ | 750,000 |   | — |   | $ | 19,477 |   |
| *Chief Executive Officer and Director* |   | 2001       |                    | 352,906   |                       | 1,290,000                               |   | — |   | 15,741 |   |
|                                   |   | 2000       |                    | 341,381   |                       | 1,100,000                               |   | 2,981 |   | 48,979 |   |
|                                   |   |       |                    |      |                       |                                    |   |   |   |   |   |
| Richard J. Kaplan (4)                  |   | 2002       |                    | 212,200   |                       | 330,000                                 |   | — |   | 9,029 |   |
| *Senior Vice President and Director*   |   | 2001       |                    | 212,200   |                       | 470,000                                 |   | — |   | 5,809 |   |
|                                   |   | 2000       |                    | 207,293   |                       | 400,000                                 |   | 4,093 |   | 25,721 |   |
|                                   |   |       |                    |      |                       |                                    |   |   |   |   |   |
| Robert G. Martin (5)                   |   | 2002       |                    | 222,789   |                       | 300,000                                 |   | — |   | 6,500 |   |
| *Senior Vice President*                |   | 2001       |                    | 222,789   |                       | 403,639                                 |   | — |   | 6,275 |   |
|                                   |   | 2000       |                    | 216,300   |                       | 384,000                                 |   | 3,229 |   | 5,100 |   |
|                                   |   |       |                    |      |                       |                                    |   |   |   |   |   |
| Jeffrey A. Nerland (6)                 |   | 2002       |                    | 210,000   |                       | 225,000                                 |   | — |   | 6,507 |   |
| *Senior Vice President*                |   | 2001       |                    | 191,794   |                       | 290,000                                 |   | — |   | 5,541 |   |
|                                   |   | 2000       |                    | 185,338   |                       | 250,000                                 |   | 5,344 |   | 5,024 |   |
|                                   |   |       |                    |      |                       |                                    |   |   |   |   |   |
| Jeffrey F. Smith (7)                   |   | 2002       |                    | 212,181   |                       | 275,000                                 |   | — |   | 4,565 |   |
| *Senior Vice President*                |   | 2001       |                    | 212,003   |                       | 490,000                                 |   | — |   | 5,250 |   |
|                                   |   | 2000       |                    | 206,063   |                       | 249,000                                 |   | 3,000 |   | 5,250 |   |
|                                        |        |            |                         |           |                            |                                         |  |  |  |  |  |  |  |  |

 

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(1)                      Number ofshares of common stock of DeCrane Holdings issuable upon exercise of optionsgranted pursuant to our management incentive plan during the applicable fiscalyear.

 

(2)                      Comprised ofrelocation costs, life insurance premiums and matching contributions to the401(k) Retirement Plan.

 

(3)                      Mr. DeCranealso serves as Vice Chairman of the Board of Directors of DeCrane Holdings andwas appointed its Chief Executive Officer in August 2002.

 

(4)                      Mr. Kaplanalso served as Assistant Treasurer and Assistant Secretary (principalaccounting officer) of DeCrane Holdings from March 1999 untilAugust 2002 when he was appointed its Chief Financial Officer andAssistant Secretary.

 

(5)                      Mr. Martinserved as President of PATS since we acquired it in January 1999 throughDecember 2002.  InOctober 1999, Mr. Martin also became our Senior Vice President and GroupPresident of Systems Integration.

 

(6)                      Mr. Nerlandserved as Vice President, Business Development, from January 1999 throughDecember 2001 and was appointed Senior Vice President inMarch 2001.  In December 2001,Mr. Nerland became our President of the Cabin Management Group.

 

(7)                      Mr. Smithwas our Senior Vice President and President of the Specialty Avionics Groupfrom October 1999 until he resigned his positions on May 23, 2003 inconnection with the sale of the Specialty Avionics Group.  Prior to October 1999, Mr. Smith wasPresident of our Avtech subsidiary.

 

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**StockOption Grants in Last Fiscal Year**

 

During the fiscal year ended December 31, 2002,no options to purchase shares of DeCrane Holdings common stock were grantedpursuant to the management incentive plan. See “—Employment Agreements and Compensation Arrangements–IncentivePlans.”

 

**AggregatedOption Exercises in Last Fiscal Year and Fiscal Year-End Option Values**

 

No stock options were exercised by our executiveofficers during the year ended December 31, 2002.  The following table sets forth informationabout the stock options held by the executive officers named below as ofDecember 31, 2002.

 
| **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                                                                            |   | — / —                                                                                     |   |
| 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                                                                          |   | — / —                                                                                     |   |
| Jeffrey  F. Smith                |   |                                                                                   |   |                                                                                                |   |
| Exercisable  at $23.00 per share |   | 6,029 / 12,243                                                                         |   | — / —                                                                                     |   |
| Exercisable  at $35.00 per share |   | 990 /2,010                                                                             |   | — / —                                                                                     |   |

 

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(1)                                  Unexercisedoptions had an exercise price above fair market value as of December 31,2002.  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, 2002, 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 Compensation Committee of our Board of Directorsmakes decisions regarding officer compensation.  Jack DeCrane, chief executive officer of DeCrane Aircraft andDeCrane Holdings, participates in those discussions as a member of theCommittee.

 

55

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**EmploymentAgreements and Compensation Arrangements**

 

**R. JackDeCrane**

 

On July 17, 1998, the Compensation Committee ofour Board of Directors approved a three-year employment agreement betweenDeCrane Aircraft and R. Jack DeCrane, replacing his prior employment agreementthat was to expire on September 1, 1998. Mr. DeCrane’s employment agreement was amended on May 5, 2000 toprovide for a term through June 30, 2001, which term shall automaticallyextend for additional one year periods unless terminated by either party givingthe other party notice of termination prior to April 1st of theyear prior to the year in which the agreement would otherwise terminate and hastherefore 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 agreement also provides that ifspecified change-of-control events occur, and Mr. DeCrane’s employment isterminated by us for any reason other than for cause or as a result of hisdeath or disability, or by Mr. DeCrane for “good reason,” as defined in theagreement, then we will pay Mr. DeCrane a lump sum in cash within fifteendays.  The amount of that payment willbe $1.00 less than three times the sum of Mr. DeCrane’s average base salaryplus bonus for the five calendar years preceding his termination date andaccrued 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 31of the year he turns 65, plus the vested and unvested amounts credited to himunder any of our deferred compensation plans and the amount required to becredited during the year of his termination; and outplacement consulting servicesto aid Mr. DeCrane with re-employment. We will reduce these payments to the extent necessary to ensuredeductibility for tax purposes.

 

**Changeof Control Agreements**

 

In August 2002, we entered into change of controlagreements with each of our executive officers, other than Mr. DeCrane, whoseabove described employment agreement contains provisions concerning change ofcontrol.  The agreements, which replacedearlier agreements which had expired, provide that, for a term of two yearsfrom the effective date, should a change of control, as defined, occur duringthe term of the agreement and the executive officer’s employment shall beinvoluntarily terminated for any reason on a date which is less than two yearsafter the date of the change of control, other than for cause, death ordisability or terminated by the officer for good reason, DeCrane Aircraft isrequired to pay such executive a lump sum equal to his then salary plus averageannual bonus over the last five years, equal to twenty four months compensationless the number of months elapsed from the date of the change of control to theemployment termination date.

 

**401(k)Retirement Plan**

 

Substantially all of our full-time employees areeligible to participate in one of the 401(k) retirement plans we sponsor.  The 401(k) plans allow employees asparticipants to defer, on a pre-tax basis, a portion of their salary andaccumulate 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 a participant following termination of employment,normal retirement or in the event of disability or death.

 

**IncentivePlans**

 

Our management incentive plan provides for theissuance of options to purchase the common stock of DeCrane Holdings asincentive compensation to designated executive personnel and other keyemployees of DeCrane Aircraft and its subsidiaries.  The Compensation Committee of the Board of Directors of DeCraneHoldings administers the management incentive plan.  The plan provides for the granting of options to purchase 356,257common shares and expires in 2009. Substantially all of the options awarded become fully vested andexercisable eight years from the date of grant but vesting and exercise can beaccelerated based upon future attainment of defined performance criteria.  As of December 31, 2002, 32% of theoptions granted pursuant to the plan are vested and exercisable.  We believe the per share exercise price ofthe options granted approximated the fair market value of the underlying commonstock on each of the grant dates.

 

From time-to-time, we have permitted designatedexecutive personnel and other key employees to purchase shares of common stockof DeCrane Holdings.  Prior to theJuly 30, 2002 enactment of the Sarbanes-Oxley Act of 2002, a portion ofthe purchase price was in certain instances, loaned to the participants byDeCrane Aircraft.  This arrangement wasmade available to persons and in amounts determined by the CompensationCommittee of the Board of Directors.  InDecember 1999, management purchased 171,295 shares of DeCrane Holdingscommon stock for $23.00 per share.  Thetotal purchase price was $3.9 million, of which one-half was paid in cash andone-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, 2002enactment of the Sarbanes-Oxley Act, we have discontinued making new loans toparticipants as mandated by the Act. Loans originated prior to and outstanding as of the effective date ofthe Act will be repaid in accordance with their terms, as permitted by theAct.  Upon termination of employment ofany purchaser by us without cause, DeCrane Holdings has the right to purchase,and the purchaser has the right to cause DeCrane Holdings to purchase, suchpurchased stock at its then fair market value or, if we terminate the purchaserwith cause or the purchaser terminates employment, the purchase price is the lowerof $23.00 per share or its then fair market value.

 

Our cash incentive bonus plan provides for theallocation of a bonus pool each year for incentive compensation to designatedexecutive personnel and certain other employees of DeCrane Aircraft and itssubsidiaries.  The bonus pool, which isapproved by the compensation committee, is adjusted each year based on AdjustedEBITDA and cash flow, 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 1999 through December 2002, wehad a deferred compensation plan in which certain designated executive officersand key employees were permitted to defer a portion of their compensationearned.  DeCrane Aircraft investedamounts deferred and participants were fully vested in the amounts representingthe fair market value of their investment accounts.  We made no contributions on behalf of the participants and theinvested assets are subject to the claims of our general creditors.  The plan was terminated in January 2003and the fair market values of the individual investment accounts on thetermination date were distributed to the individual participants.

 

57

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**Directors**

 

**Selectionof Directors and Term of Office**

 

DLJ Merchant Banking Partners II, L.P. is entitled toselect all members of the Board of Directors of DeCrane Holdings and DeCraneAircraft as described in “Certain Relationships and RelatedTransactions—Investors’ Agreement.”  Atleast one of such directors selected by DLJ Merchant Banking on each board mustbe an independent director.  Mr. Suteris an independent director.  Alldirectors hold office until their successor is designated and qualified.

 

**Directors’Compensation**

 

The directors of DeCrane Holdings and DeCrane Aircraftgenerally do not receive annual fees or fees for attending meetings of theBoard of Directors or committees thereof. However, Albert E. Suter, an independent director not affiliated withany investor in DeCrane Holdings, receives a director’s fee of $50,000 peryear.  In addition, the Board ofDirectors of DeCrane Holdings authorized the issuance of options to purchase7,500 shares of DeCrane Holdings common stock to Mr. Suter under the same termsas the management incentive plan.  See“Certain Relationships and Related Transactions—Transactions with Managementand Others–Recent Transactions” for additional information.  Also, Mr. Suter is reimbursed forout-of-pocket expenses.  We expect tocontinue these policies.

 

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**ITEM 12****.****                                              SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

**SecurityOwnership of Certain Beneficial Owners and Management**

 

**DeCraneHoldings**

 

As of March 28, 2003, DeCrane Holdings has thefollowing securities issued and outstanding:

 

•                  4,116,627shares of common stock, which is owned by 37 stockholders; and

 

•                  342,417shares of non-voting 14% Senior Redeemable Exchangeable Preferred Stock Due2009, which is owned by 18 stockholders.

 

The following table sets forth the beneficialownership of DeCrane Holdings’ voting and non-voting securities as ofMarch 28, 2003 by its principal owners and its executive officers anddirectors.

 
|                                                                                                    |   | **Common Stock (2)**                       |   | **14% Senior Redeemable  Preferred Stock** |   |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **Name of  Beneficial Owner (1)**                                                                       |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                             |   | **Number  of  Shares** |   | **Percentage** |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| DLJ  Merchant Banking Partners II, L.P.   and affiliates (3)  Eleven Madison Avenue, New York, NY 10010 |   | 4,179,530                                  |   | 95.4                                       | %      | 340,000 |   | 99.3 | % |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| Thompson  Dean (4)  c/o Credit Suisse First Boston  Eleven Madison Avenue, New York, NY 10010           |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| James  A. Quella (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)                                                                                    |   | 6,204                                      |   |                                       | *      | — |   | — |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| R.  Jack DeCrane (6)                                                                                    |   | 95,755                                     |   | 2.3                                        | %      | — |   | — |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| Richard  J. Kaplan (7)                                                                                  |   | 33,698                                     |   |                                       | *      | — |   | — |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| Robert  G. Martin (8)                                                                                   |   | 11,520                                     |   |                                       | *      | — |   | — |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey  A. Nerland (9)                                                                                 |   | 12,156                                     |   |                                       | *      | — |   | — |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey  F. Smith (10)                                                                                  |   | 16,173                                     |   |                                       | *      | — |   | — |   |
|                                                                                                    |   |                                       |   |                                       |   |   |   |   |   |
| All  directors and named executive officers as a group (nine persons)                                   |   | 175,506                                    |   | 4.2                                        | %      | — |   | — |   |

 

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*                             Lessthan 1.0%

 

(1)                      Each personwho has the power to vote and direct the disposition of shares is deemed to bea beneficial owner of those shares.

 

(2)                      The commonstock columns reflect the number of shares owned and the total percentageownership in the manner required by Securities and Exchange Commissionrules.  The entries for each holderassumes, if applicable, that the particular holder, and no one else, fullyexercises all rights under warrants to purchase common stock and common stockwhich may be acquired upon the exercise of

 

59

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stock options andwhich are exercisable, or will be exercisable, prior to 60 days fromMarch 28, 2003.

 

(3)                      Reflects3,913,044 shares of common stock, warrants to purchase an additional 266,486shares of common stock and preferred stock held directly by DLJ MerchantBanking Partners II, L.P. and the following affiliated 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 of each ofthe investors is Eleven Madison Avenue, New York, New York 10010.

 

(4)                      Mr. Dean,Mr. Quella and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., anaffiliate of DLJ Merchant Banking Partners II, L.P. and directors of DeCraneAircraft.  The DLJ entities areaffiliates of, and commonly collectively referred to as, Credit Suisse FirstBoston.  See “Item 13. CertainRelationships and Related Transactions—Transactions with Management and Others”for additional information.  The sharedata shown for these individuals excludes shares shown as held by the DLJaffiliates separately listed in this table; Mr. Dean, Mr. Quella and Ms.Schnabel disclaim beneficial ownership of those shares.

 

(5)                      Includes2,500 shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28,2003.

 

(6)                      Includes36,253 shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28,2003.

 

(7)                      Includes10,812 shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28,2003.

 

(8)                      Includes6,944 shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28,2003.

 

(9)                      Includes5,291 shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28,2003.

 

(10)                Includes 7,019shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28,2003.

 

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**DeCraneAircraft**

 

As of March 28, 2003, DeCrane Aircraft has thefollowing securities issued and outstanding:

 

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

 

•                  250,000shares of non-voting 16% Senior Redeemable Exchangeable Preferred Stock Due2009, which are owned by nine stockholders.

 

The following table sets forth the beneficialownership of DeCrane Aircraft’s voting and non-voting securities as ofMarch 28, 2003 by its principal owners and its executive officers anddirectors.

 
|                                                                                                         |   | **Common Stock (2)**                       |   | **16% Senior Redeemable  Preferred Stock** |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **Name of  Beneficial Owner (1)**                                                                            |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                             |   | **Number  of  Shares** |   | **Percentage** |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| DeCrane  Holdings Co.  c/o DLJ Merchant Banking Partners II, L.P.  Eleven Madison Avenue, New York, NY 10010 |   | 100                                        |   | 100.0                                      | %      | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| 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                |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| James  A. Quella (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)  One Post Office Square, Boston, MA 02109            |   | —                                     |   | —                                     |   | 50,000 |   | 20.0 | % |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| Albert  E. Suter                                                                                             |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| R.  Jack DeCrane                                                                                             |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| Richard  J. Kaplan                                                                                           |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| Robert  G. Martin                                                                                            |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey  A. Nerland                                                                                          |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey  F. Smith                                                                                            |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| All  directors and named executive officers as a group (nine persons)                                        |   | —                                     |   | —                                     |   | — |   | — |   |

 

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(1)                                  Eachperson who has the power to vote and direct the disposition of shares is deemedto be a beneficial owner of those shares.

 

(2)                                  Thecommon stock columns reflect the number of shares owned and the totalpercentage ownership in the manner required by Securities and ExchangeCommission rules.  The entries for eachholder assumes, if applicable, that the particular holder, and no one else,fully exercises all rights under warrants to purchase common stock and commonstock which may be acquired upon the exercise of

 

61

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stock options and which are exercisable, or will beexercisable, prior to 60 days from March 28, 2003.

 

(3)                                  Reflectspreferred stock held by the following investors affiliated with DLJ MerchantBanking Partners II, L.P.:

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

 

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

 

(4)                                  Mr.Dean, Mr. Quella and Ms. Schnabel are officers of DLJ Merchant Banking, Inc.,an affiliate of DLJ Merchant Banking Partners II, L.P. and directors of DeCraneHoldings Co.  The DLJ entities areaffiliates of, and commonly collectively referred to as, Credit Suisse FirstBoston.  See “Item 13. CertainRelationships and Related Transactions—Transactions with Management and Others”for additional information.  The sharedata shown for these individuals excludes shares shown as held by the DLJaffiliates and DeCrane Holdings Co. separately listed in this table; Mr. Dean,Mr. Quella and Ms. Schnabel disclaim beneficial ownership of those shares.

 

(5)                                  Reflectspreferred stock held by the following investors related to Putnam InvestmentManagement, Inc.:

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

 

The address of each ofthe investors is One Post Office Square, Boston, MA 02109.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

We have a Management Incentive Stock Option Plan underwhich shares of DeCrane Holdings common stock are authorized for issuance toemployees and directors in exchange for their services.  In 1999, we also granted DeCrane Holdingsincentive common stock options to non-employees in exchange for consulting andadvisory services.  Our ManagementIncentive Stock Option Plan and the stock options awarded to non-employees areapproved by our security holders.  Thefollowing table provides aggregate information regarding the shares of DeCraneHoldings common stock that may be issued upon the exercise of the options as ofDecember 31, 2002.

 
| **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                     |   | 293,461                                                                                             |       | $                                                                                  | 24.58      |                                                                                                                                                  | 53,544 |   |
| Incentive  stock options granted to non-employees           |   | 44,612                                                                                              |       | 23.00                                                                              |       | —                                                                                                                                                |   |
| Equity  compensation plans not approved by security holders |   | —                                                                                              |       | —                                                                             |       | —                                                                                                                                                |   |
| Total                                                       |   | 338,073                                                                                             |       | 24.37                                                                              |       | 53,544                                                                                                                                                |   |
|                                                             |        |                                                                                                     |            |                                                                                    |            |                                                                                                                                                       |        |  |

 

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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****.****                                              CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

**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, CreditSuisse Group and its Credit Suisse First Boston, Inc. subsidiary acquiredDonaldson, Lufkin & Jenrette, Inc. Upon completion of the acquisition, Donaldson, Lufkin & Jenrette,Inc. was renamed Credit Suisse First Boston (USA), Inc.  The combined operations are commonlyreferred to collectively as Credit Suisse First Boston or CSFB.

 

**Transactionswith Management 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 and syndication ofour senior bank credit facility and as a lender thereunder.  Credit Suisse First Boston Corporation,referred to herein as CSFB Corporation and formerly known as Donaldson, Lufkin& Jenrette Securities Corporation, is the sole market-maker for our seniorsubordinated notes.  In addition,DeCrane Aircraft is obligated to pay CSFB Corporation an annual advisory fee,currently in the amount of $350,000 per year. We may from time to time enter into other investment bankingrelationships with CSFB Corporation or one of its affiliates pursuant to whichthey will receive customary fees and will be entitled to reimbursement for allreasonable disbursements and out-of-pocket expenses incurred in connectiontherewith.  We expect that any sucharrangement will include provisions for the indemnification of CSFB Corporationagainst liabilities, including liabilities under the federal securities laws.

 

**Investors’Agreement**

 

Investors owing 96.7% ofDeCrane Holdings’ issued and outstanding common stock and common stock warrantsand options, all of DeCrane Holdings’ preferred stock and all of DeCraneAircraft’s preferred and common stock, have entered into an Amended andRestated Investors’ Agreement, dated October 6, 2000, among DeCraneHoldings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds andentities, Putnam Investment Management, Inc. and affiliated funds and entitiesand all management investors.  Investorswho own DeCrane Holdings’ warrants to purchase 159,794 shares of common stockare not parties to the Investors’ Agreement. The agreement provides that:

 

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

 

•                  Transfersof the shares by the parties to the agreement are restricted.

 

•                  Partiesto the agreement may participate in some specific kinds of sales of shares byDLJ affiliates.

 

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

 

63

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

 

•                  Theholders of Class B warrants to purchase 139,357 shares of DeCrane Holdingscommon stock may request two demand registrations together with all or anycommon stock held by them, which are immediately exercisable subject tocustomary deferral and cutback provisions.

 

•                  Theparties to the agreement are entitled to unlimited piggyback registrationrights, subject to customary cutback provisions, and excluding registrations ofshares issuable in connection with any employee stock options, employee benefitplan or an acquisition.

 

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

 

•                  Anyperson acquiring shares of common stock or preferred stock who is required bythe terms of the Investors’ Agreement or any employment agreement or stockpurchase, option, stock option or other compensation plan to become a partythereto shall execute an agreement to become bound by the Investors’ Agreement.

 

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

 

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

 

**TransactionsDuring 2002 and 2003**

 

Securities and Exchange Commission rules require webriefly describe transactions, or series of similar transactions, withspecified persons (as defined in the rules) and involving amounts exceeding$60,000, which have occurred since January 1, 2002, the beginning of ourmost recent fiscal year.  Thesetransactions are briefly described below and are also described in the notesaccompanying our financial statements included in this report.

 

#### ***Year Ended December 31, 2002***

 

The following transactions occurred during the yearended December 31, 2002:

 

•                  DeCraneHoldings repurchased 18,308 shares of its common stock from Charles H. Becker,a former DeCrane Aircraft executive officer, for $0.5 million ($27.00 per share)in January 2002.  In connectionwith the repurchase, DeCrane Aircraft’s $0.2 million loan to Mr. Beckercollateralized by the repurchased common stock was repaid, plus accruedinterest.  Mr. Becker also elected toexercise 9,120 vested stock options on a cashless basis and received $36,000for the net difference between the $27.00 per share repurchase price and the$23.00 per share option exercise price. DeCrane Aircraft funded DeCrane Holdings’ cash requirements for thetransactions.

 

•                  DeCraneAircraft further amended its senior credit facility in March 2002.  Credit Suisse First Boston receivedcustomary fees and reimbursement of expenses in connection with obtaining theamendment.

 

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•                  Mr.Suter, a director, purchased 3,704 shares of DeCrane Holdings common stock for$0.1 million and was granted options to purchase an additional 7,500 commonshares, all at $27.00 per share, in May and June 2002.  The shares purchased and options grantedwere under the same terms as the management incentive plan, which also pertainsto independent non-management directors. DeCrane Holdings contributed the net proceeds to DeCrane Aircraft.

 

•                  DLJMerchant Banking and affiliates purchased 217,392 shares of DeCrane Holdingscommon stock for $5.0 million ($23.00 per share) in September 2002 andDeCrane Holdings, in turn, contributed the net proceeds to the paid-in capitalof DeCrane Aircraft.

 

•                  CSFBCorporation received a $350,000 annual advisory fee.

 

CSFB and affiliated funds and entities were paid anaggregate of $2.0 million in connection with the above transactions.

 

#### ***January 1, 2003 to thePresent***

#### ** **

The following transactions occurred during the periodfrom January 1, 2003 to the date of this report:

 

•                  DeCraneAircraft sold its Specialty Avionics Group on May 23, 2003.  CSFB Corporation served as DeCraneAircraft’s financial advisors for the transaction and received customary feesand reimbursement of expenses in connection with the transaction.

 

•                  Inconnection with DeCrane Aircraft’s sale of its Specialty Avionics Group,DeCrane Aircraft further amended its senior credit facility inMarch 2003.  Credit Suisse FirstBoston received customary fees and reimbursement of expenses in connection withobtaining the amendment.

 

•                  CSFBCorporation has received $175,000 of its $350,000 annual advisory fee for 2003.

 

CSFB and affiliated funds and entities were paid anaggregate of $2.7 million in connection with the above transactions.

 

**Indebtednessof Executive Officers and Directors**

 

The following table sets forth all indebtedness owedto us by our executive officers and directors that individually exceeds $60,000as required by Securities and Exchange Commission rules.  All indebtedness set forth below resultsfrom purchases of DeCrane Holdings common stock in transactions consummatedprior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002 andis payable to DeCrane Aircraft. Beginning July 30, 2002, we no longer provide loans to directors orexecutive officers as mandated by the Act. The indebtedness, plus accrued interest, is payable upon the sale of theDeCrane Holdings stock held as collateral for each of the loans.  See “Item 10. Directors and ExecutiveOfficers of the Registrant” for information regarding each individual’srelationship with DeCrane Aircraft and DeCrane Holdings.

 
| **Name**             |   | **Number  of Shares  Held as  Collateral (1)** |   | **Interest  Rate (2)** |   | **Total Indebtedness to DeCrane Aircraft  as of December 31, 2002** |    |
|----------------------|--------|------------------------------------------------|--------|------------------------|--------|--------------------------------------------------------------------------|---------|
| **Principal (3)**    |   | **Accrued  Interest (4)**                      |   | **Total (5)**          |   |
|                 |   |                                           |   |                   |   |                                                                     |    |   |   |   |   |
| R.  Jack DeCrane     |   | 56,521                                         |   | 5.74                   | %      | $                                                                        | 649,991 |   | $ | 119,806 |   | $ | 769,797 |   |
| Richard  J. Kaplan   |   | 21,739                                         |   | 5.74                   |   | 249,998                                                                  |    | 46,079 |   | 296,077 |   |
| Robert  G. Martin(6) |   | 4,347                                          |   | 5.74                   |   | 49,990                                                                   |    | 9,214 |   | 59,204 |   |
| Jeffrey  A. Nerland  |   | 6,521                                          |   | 5.74                   |   | 74,991                                                                   |    | 13,822 |   | 88,813 |   |
|                      |        |                                                |        |                        |        |                                                                          |         |  |  |  |  |  |  |  |

 

----

(1)                                  Reflectsthe number of shares of DeCrane Holdings common stock held by DeCrane Aircraftas collateral for the loans.

 

65

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(2)                                  Reflectsthe applicable federal rate of interest charged on the loans.  Interest is compounded annually.

 

(3)                                  Reflectsthe original principal amount of the loans.

 

(4)                                  Reflectsaccrued interest payable through December 31, 2002.

 

(5)                                  Reflectsthe maximum amount of indebtedness during the year ended December 31,2002.

 

(6)                                  Totalindebtedness exceeds $60,000 as of the filing date of this report.

 

**ITEM 14****.****                                              CONTROLSAND PROCEDURES**

 

**Evaluation of disclosure controls and procedures.**  Our Chief Executive Officer and ChiefFinancial Officer have evaluated our disclosure controls and procedures within90 days of the initial filing of this report on April 15, 2003.  These controls and procedures are designedto ensure that all of the information required to be disclosed by us in ourperiodic reports filed with the Securities and Exchange Commission (the“Commission”) is recorded, processed, summarized and reported within the timeperiods specified by the Commission and that the information is communicated tothe Chief Executive Officer and Chief Financial Officer on a timely basis.  Based on their evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were suitable and effective.

 

**Changes in internal controls.**  Subsequent to the date of their evaluationand prior to the initial filing of this report, there have been no significantchanges in our internal controls or in other factors that could significantlyaffect the internal controls, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

**PART IV**

 

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

 

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

 

**1.****                                      FinancialStatements**

 

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

 

**2.****                                      FinancialStatement Schedules**

 

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

 

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**3.****                                      Exhibits**

 

The following exhibits are filed as part of thisreport.

 
| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                      |
|---------------------|--------|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                         |
| 2.1                 |   | (18)                  |   | 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)                   |   | Bylaws of DeCrane  Holdings Co.                                                                                                                                                                                                                                                                                                                              |
| 3.1.2               |   | (1)                   |   | Certificate of  Incorporation of DeCrane Holdings Co.                                                                                                                                                                                                                                                                                                        |
| 3.1.2.1             |   | (11)                  |   | Certificate of  Amendment of Certificate of Incorporation of DeCrane Holdings Co. dated  May 8, 2000                                                                                                                                                                                                                                                    |
| 3.2.1               |   | (1)                   |   | Certificate of  Incorporation of DeCrane Aircraft Holdings, Inc.                                                                                                                                                                                                                                                                                             |
| 3.2.1.1             |   | (15)                  |   | Certificate of  Amendment of Certificate of Incorporation of   DeCrane Aircraft Holdings, Inc. dated October 17, 2001                                                                                                                                                                                                                              |
| 3.2.2               |   | (1)                   |   | Bylaws of DeCrane  Aircraft Holdings, Inc.                                                                                                                                                                                                                                                                                                                   |
| 3.3.1               |   | (10)                  |   | Certificate of  Formation and Certificate of Merger of   Aerospace Display Systems, LLC                                                                                                                                                                                                                                                                 |
| 3.3.2               |   | (10)                  |   | Limited Liability  Company Operating Agreement for   Aerospace Display Systems, LLC                                                                                                                                                                                                                                                                     |
| 3.3.2.1             |   | (18)                  |   | Amendment No. 1 to  Limited Liability Company Agreement of Aerospace Display Systems, LLC dated  March 9, 2003                                                                                                                                                                                                                                          |
| 3.4.1               |   | (1)                   |   | Articles of  Incorporation of Audio International, Inc.                                                                                                                                                                                                                                                                                                      |
| 3.4.2               |   | (1)                   |   | Amended & Restated  Bylaws of Audio International, Inc.                                                                                                                                                                                                                                                                                                  |
| 3.5.1               |   | (1)                   |   | Articles of  Incorporation of Avtech Corporation                                                                                                                                                                                                                                                                                                             |
| 3.5.2               |   | (1)                   |   | Bylaws of Avtech  Corporation                                                                                                                                                                                                                                                                                                                                |
| 3.7.1               |   | (16)                  |   | Certificate of  Formation and Certificate of Merger of Dettmers Industries, LLC                                                                                                                                                                                                                                                                    |
| 3.7.2               |   | (16)                  |   | Limited Liability  Company Operating Agreement of Dettmers Industries, LLC                                                                                                                                                                                                                                                                         |
| 3.10.1              |   | (1)                   |   | Articles of  Incorporation of Hollingsead International, Inc.                                                                                                                                                                                                                                                                                                |
| 3.10.2              |   | (1)                   |   | Bylaws of Hollingsead  International Inc.                                                                                                                                                                                                                                                                                                                    |
| 3.11.1              |   | (1)                   |   | Articles of  Incorporation of Tri-Star Electronics International, Inc.                                                                                                                                                                                                                                                                                       |
| 3.11.2              |   | (1)                   |   | Bylaws of Tri-Star  Electronics International, Inc.                                                                                                                                                                                                                                                                                                          |
| 3.12.1              |   | (1)                   |   | Articles of  Incorporation of PATS, Inc.                                                                                                                                                                                                                                                                                                                     |
| 3.12.2              |   | (1)                   |   | Bylaws of PATS, Inc.                                                                                                                                                                                                                                                                                                                                         |
| 3.12.3              |   | (1)                   |   | Amendment to Articles  of Incorporation of PATS, Inc.                                                                                                                                                                                                                                                                                                        |
| 3.12.4              |   | (1)                   |   | Amendment to Bylaws of  PATS, Inc.                                                                                                                                                                                                                                                                                                                           |
| 3.17.1              |   | (3)                   |   | Articles of  Incorporation of PPI Holdings, Inc.                                                                                                                                                                                                                                                                                                             |
| 3.17.2              |   | (3)                   |   | Bylaws of PPI Holdings,  Inc.                                                                                                                                                                                                                                                                                                                                |
| 3.18.1              |   | (3)                   |   | Articles of  Incorporation of Precision Pattern, Inc.                                                                                                                                                                                                                                                                                                        |

 

67

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                            |
|---------------------|--------|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.18.2              |   | (3)                   |   | Bylaws of Precision  Pattern, Inc.                                                                                                                                                                                 |
| 3.19.1              |   | (10)                  |   | Certificate of  Formation and Certificate of Merger for   Custom Woodwork & Plastics, LLC                                                                                                                 |
| 3.19.2              |   | (10)                  |   | Limited Liability  Company Operating Agreement for   Custom Woodwork & Plastics, LLC                                                                                                                      |
| 3.20.1              |   | (4)                   |   | Articles of  Incorporation of PCI Newco, Inc. (formerly   PCI Acquisition Co., Inc.)                                                                                                                          |
| 3.20.1.1            |   | (16)                  |   | Certificate of  Amendment of Articles of Incorporation of   PCI Acquisition Co., Inc. (changing its name to PCI Newco, Inc.)                                                                                  |
| 3.20.2              |   | (4)                   |   | Bylaws of PCI Newco,  Inc. (formerly PCI Acquisition Co., Inc.)                                                                                                                                                    |
| 3.22.1              |   | (5)                   |   | Articles of  Incorporation DAH-IP Holdings, Inc.                                                                                                                                                                   |
| 3.22.2              |   | (5)                   |   | Bylaws of DAH-IP  Holdings, Inc.                                                                                                                                                                                   |
| 3.23.1              |   | (5)                   |   | Articles of  Incorporation of DAH-IP Infinity, Inc.                                                                                                                                                                |
| 3.23.2              |   | (5)                   |   | Bylaws of DAH-IP  Infinity, Inc.                                                                                                                                                                                   |
| 3.24.1              |   | (5)                   |   | Certificate of Limited  Partnership of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co.,  L.P.)                                                                                                        |
| 3.24.1.1            |   | (16)                  |   | Certificate of  Amendment of the Certificate of Limited Partnership of DAH-IP Acquisition  Co., L.P. (changing its name to The Infinity Partners, LTD.)                                                            |
| 3.24.2              |   | (5)                   |   | Limited Partnership  Agreement of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co.,  L.P.) among DAH-IP Holdings, Inc., the General Partner, and DeCrane Aircraft Holdings,  Inc., the Limited Partner |
| 3.24.3              |   | (5)                   |   | Assignment of  Partnership Interest in The Infinity Partners, LTD. (formerly DAH-IP  Acquisition Co., L.P.) by DeCrane Aircraft Holdings, Inc. to DAH-IP Infinity,  Inc.                                           |
| 3.25.1              |   | (8)                   |   | Certificate of  Formation and Certificate of Amendment of   Carl F. Booth & Co., LLC                                                                                                                      |
| 3.25.2              |   | (8)                   |   | Limited Liability  Company Agreement of Carl F. Booth & Co., LLC                                                                                                                                               |
| 3.26.1              |   | (10)                  |   | Restated Articles of  Incorporation of ERDA, Inc.                                                                                                                                                                  |
| 3.26.1.1            |   | (17)                  |   | Articles of Amendment  amending the Restated Articles of Incorporation of ERDA, Inc. (changing its  name to DeCrane Aircraft Seating Company, Inc.                                                                 |
| 3.26.2              |   | (10)                  |   | Bylaws of ERDA, Inc.  (formerly ERDA Acquisition Co., Inc.)                                                                                                                                                        |
| 3.27.1              |   | (12)                  |   | Articles of  Incorporation of Coltech, Inc.                                                                                                                                                                        |
| 3.27.2              |   | (12)                  |   | Bylaws of Coltech, Inc.                                                                                                                                                                                            |
| 3.29.1              |   | (13)                  |   | Certificate of Limited  Partnership of DeCrane Aircraft Furniture Co., LP                                                                                                                                          |
| 3.29.2              |   | (13)                  |   | Limited Partnership  Agreement of DeCrane Aircraft Furniture Co., LP                                                                                                                                               |
| 3.30.1              |   | (17)                  |   | Certificate of  Formation of DeCrane Cabin Interiors, LLC                                                                                                                                                          |
| 3.30.2              |   | (17)                  |   | Limited Liability  Company Agreement of DeCrane Cabin Interiors, LLC                                                                                                                                               |
| 4.1                 |   | (1)                   |   | Indenture dated  October 5, 1998 between DeCrane Aircraft and  State Street Bank and Trust Company                                                                                                       |
| 4.1.1               |   | (1)                   |   | Supplemental Indenture  dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other  guarantors under the Indenture, DeCrane Aircraft and State Street Bank and  Trust Company                    |

 

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                      |
|---------------------|--------|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                         |
| 4.1.2               |   | (2)                   |   | Supplemental Indenture  to be dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern,  Inc., the other guarantors under the Indenture, DeCrane Aircraft and State  Street Bank and Trust Company                                                              |
| 4.1.3               |   | (12)                  |   | Supplemental Indenture  to be dated August 5, 1999 among CWP Acquisition, Inc. d/b/a Custom  Woodwork & Plastics, Inc., the other guarantors under the Indenture,  DeCrane Aircraft and State Street Bank and Trust Company                                         |
| 4.1.4               |   | (12)                  |   | Supplemental Indenture  to be dated October 6, 1999 among PCI Acquisition Co., Inc. d/b/a PCI  Newco, Inc., the other guarantors under the Indenture, DeCrane Aircraft and  State Street Bank and Trust Company                                                         |
| 4.1.5               |   | (12)                  |   | Supplemental Indenture  to be dated October 8, 1999 among International Custom Interiors, Inc.,  the other guarantors under the Indenture, DeCrane Aircraft and State Street  Bank and Trust Company                                                                    |
| 4.1.6               |   | (12)                  |   | Supplemental Indenture  to be dated December 17, 1999 among DAH-IP Acquisition, L.P. d/b/a  Infinity Partners, L.P., DAH-IP Holdings, Inc., DAH-IP Infinity, Inc., the  other guarantors under the Indenture, DeCrane Aircraft and State Street Bank  and Trust Company |
| 4.1.7               |   | (12)                  |   | Supplemental Indenture  to be dated May 11, 2000 among Booth Acquisition, LLC, the other  guarantors under the Indenture, DeCrane Aircraft and State Street Bank and  Trust Company                                                                                     |
| 4.1.8               |   | (12)                  |   | Supplemental Indenture  to be dated June 16, 2000 among DeCrane Aircraft Furniture Co., L.P.,  the other guarantors under the Indenture, DeCrane Aircraft and State Street  Bank and Trust Company                                                                      |
| 4.1.9               |   | (12)                  |   | Supplemental Indenture  to be dated June 30, 2000 among ERDA, Inc., the other guarantors under  the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                                                 |
| 4.1.10              |   | (12)                  |   | Supplemental Indenture  to be dated August 31, 2000 among Coltech, Inc., the other guarantors  under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                                            |
| 4.3                 |   | (1)                   |   | Form of Class A Warrant  for the Purchase of 155,000 Shares of Common Stock of DeCrane Holdings Co. at  an exercise price of $.01 per share                                                                                                                                  |
| 4.3.1               |   | (10)                  |   | Form of Class B Warrant  for the Purchase of 139,357 Shares of Common Stock of DeCrane Holdings Co. at  an exercise price of $.01 per share                                                                                                                                  |
| 4.3.2               |   | (16)                  |   | 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                 |   | (16)                  |   | Certificate of  Amendment amending the Certificate of Designations, Preferences and Rights of  14% Senior Redeemable Exchangeable Preferred Stock due 2008, effective  October 2, 1998                                                                                  |
| 4.5                 |   | (1a)                  |   | Form of DeCrane  Aircraft 12% Senior Subordinated Notes due 2008                                                                                                                                                                                                             |
| 4.5.1               |   | (10)                  |   | Amendment No. 1 to the  Certificate of Designations, Preferences and Rights of 14% Senior Redeemable  Exchangeable Preferred Stock due 2008, effective June 29, 2000                                                                                                    |

 

69

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                            |
|---------------------|--------|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                               |
| 4.6                 |   | (10a)                 |   | Certificate of  Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable  Preferred Stock due 2009                                                                                                                                               |
| 4.6.1               |   | (12a)                 |   | Amendment to the  Certificate of Designations, Preferences and Rights of 16% Senior Redeemable  Exchangeable Preferred Stock due 2009 dated October 5, 2000                                                                                                   |
| 4.7                 |   | (10a)                 |   | 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               |   | (12a)                 |   | 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                |   | (10)                  |   | Securities Purchase  Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings,  Inc., DeCrane Holdings Co. and the purchasers named therein                                                                                                        |
| 10.2                |   | (12)                  |   | Amended and Restated  Investors’ Agreement dated as of October 6, 2000 by and among DeCrane  Holdings Co., DeCrane Aircraft Holdings, Inc. and the stockholders named  therein                                                                           |
| 10.5                |   | (1)                   |   | Tax Sharing Agreement  dated March 15, 1993 between DeCrane Aircraft and several subsidiaries                                                                                                                                                                 |
| 10.6 **             |   | (1)                   |   | Employment Agreement  dated July 17, 1998 between DeCrane Aircraft Holdings, Inc. and R. Jack  DeCrane                                                                                                                                                        |
| 10.6.1 **           |   | (13)                  |   | First Amendment to  Employment Agreement dated May 5, 2000 between DeCrane Aircraft  Holdings, Inc. and R. Jack DeCrane                                                                                                                                       |
| 10.7 **             |   | (1)                   |   | 401(k) Salary Reduction  Non-Standardized Adoption Agreement dated April 30, 1992 between  the Company and The Lincoln National Life Insurance Company                                                                                                   |
| 10.8                |   | (1)                   |   | Form of Subscription  Agreement for DeCrane Holdings Co. common and preferred stock by certain  members of Global Technology Partners LLC                                                                                                                          |
| 10.10               |   | (1)                   |   | Credit Agreement dated  August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor  by merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.                                                                                              |
| 10.10.1             |   | (1)                   |   | First Amendment to  Credit Agreement dated January 22, 1999                                                                                                                                                                                                   |
| 10.10.2             |   | (6)                   |   | Second Amended and  Restated Credit Agreement dated as of December 17, 1999 among  DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital  Funding, Inc., as syndication agent, and Bank One NA, as administrative agent               |
| 10.10.3             |   | (9)                   |   | Third Amended and  Restated Credit Agreement dated as of May 11, 2000 among DeCrane  Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc.,  as syndication agent, and Bank One NA, as administrative agent                          |
| 10.10.3.1           |   | (12)                  |   | First Amendment to the  Third Amended and Restated Credit Agreement dated as of June 30, 2000  among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ  Capital Funding, Inc., as syndication agent, and Bank One NA, as  administrative agent |

 

70

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                          |
|---------------------|--------|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                                                             |
| 10.10.4             |   | (14)                  |   | Increased Commitments  Agreement, dated as of April 27, 2001, pursuant to Third Amended and  Restated Credit Agreement, dated as of May 11, 2000, as amended by the  First Amendment to the Third Amended and Restated Credit Agreement, dated as  of June 30, 2000                               |
| 10.10.5             |   | (16)                  |   | 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             |   | (18)                  |   | 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  |
| 10.11               |   | (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                                                                                                                                                                                                    |
| 10.19 **            |   | (5)                   |   | Amended Management  Incentive Stock Option Plan                                                                                                                                                                                                                                                                  |
| 10.20 **            |   | (5)                   |   | Amended Stock  Subscription Agreement                                                                                                                                                                                                                                                                            |
| 10.21 **            |   | (5)                   |   | Amended Incentive Bonus  Plan                                                                                                                                                                                                                                                                                    |
| 10.22 **            |   | (7)                   |   | Executive Deferred  Compensation Plan                                                                                                                                                                                                                                                                            |
| 10.23 **            |   | (18)                  |   | Form of Change of  Control Agreements between DeCrane Aircraft Holdings, Inc. and certain  executives                                                                                                                                                                                                            |
| 21.1                |   | (17)                  |   | List of Subsidiaries of  Registrant                                                                                                                                                                                                                                                                              |
| 31.1                |   | *                     |   | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            |
| 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                                                                                                                                                                              |

 

----

*                                         Filedherewith.

 

**                                  Denotesmanagement contracts and compensatory plans and arrangements required to befiled as exhibits to this report.

 

(1)                                  Filedas an exhibit to our Registration Statement (Registration No. 333-70363) onForm S-1 (Amendment No. 1) filed with the Commission on March 3,1999.

 

(1a)                            Filedas an exhibit to the Registration Statement of DeCrane Aircraft Holdings, Inc.(Registration No. 333-70365) on Form S-1 (Amendment No. 1) filed with theCommission on March 3, 1999 and incorporated by reference herein.

 

71

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(2)                                  Filedas an exhibit to our Registration Statement (Registration No. 333-70363) on FormS-1 (Amendment No. 2) filed with the Commission on April 23, 1999.

 

(3)                                  Filedas an exhibit to our Registration Statement (Registration No. 333-70363) onForm S-1 (Amendment No. 3) filed with the Commission on May 6, 1999.

 

(4)                                  Filedas an exhibit to our Form 8-K dated August 5, 1999 filed with theCommission on October 19, 1999.

 

(5)                                  Filedas an exhibit to our Form 8-K dated December 17, 1999 filed with theCommission on December 31, 1999.

 

(6)                                  Filedas an exhibit to our Form 10-K dated December 31, 1999 filed with theCommission on March 30, 2000.

 

(7)                                  Filedas an exhibit to our Form 10-Q dated March 31, 2000 filed with theCommission on May 9, 2000.

 

(8)                                  Filedas an exhibit to our Form 8-K dated May 11, 2000 filed with the Commissionon May 25, 2000.

 

(9)                                  Filedas an exhibit to our Form 8-K (Amendment No. 1) dated May 11, 2000 filedwith the Commission on June 16, 2000.

 

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

 

(10a)                      Filed as anexhibit to the Form 8-K (Amendment No. 1) dated June 30, 2000 of DeCraneAircraft Holdings, Inc. filed with the Commission on August 2, 2000and incorporated herein by reference.

 

(11)                            Filedas an exhibit to our Form 10-Q dated June 30, 2000 filed with theCommission on August 14, 2000.

 

(12)                            Filedas an exhibit to our Form 10-Q dated September 30, 2000 filed withthe Commission on November 14, 2000.

 

(12a)                      Filed as anexhibit to the Form 10-Q dated September 30, 2000 of DeCrane AircraftHoldings, Inc. filed with the Commission on November 14, 2000 andincorporated herein by reference.

 

(13)                            Filedas an exhibit to our Form 10-K dated December 31, 2000 filed with theCommission on March 30, 2001.

 

(14)                            Filedas an exhibit to our Form 10-Q dated March 31, 2001 filed with theCommission on May 14, 2001.

 

(15)                            Filedas an exhibit to our Form 10-Q dated September 30, 2001 filed with theCommission on November 13, 2001.

 

(16)                            Filedas an exhibit to our Form 10-K dated December 31, 2001 filed with the Commissionon March 27, 2002.

 

(17)                            Filedas an exhibit to our Form 10-Q dated March 31, 2002 filed with theCommission on May 13, 2002.

 

(18)                            Filedas an exhibit to our Form 10-K dated December 31, 2002 filed with theCommission on April 15, 2003.

 

72

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**(b)****                                  Reportsof Form 8-K Filed During the Quarter Ended December 31, 2002**

 

On November 26, 2002 we filed a Form 8-K CurrentReport regarding a meeting held with our bondholders on that day.  A copy of the slide presentation given tothe bondholders during the meeting is filed as an exhibit.

 

In addition, on March 17, 2003 we also filed aForm 8-K Current Report regarding DeCrane Aircraft entering into a definitiveagreement to sell its Specialty Avionics Group.  The text of the press release is contained in the filing.

 

**SIGNATURES**

 

Pursuant to the requirements of Section 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused thisamended report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
| **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:                                  | October 9, 2003      |   |   |   |

 

73

----

 

**Indexto Consolidated Financial Statements and Financial Statement Schedules**

 

**Consolidated Financial Statements**

 
| Report  of Independent Accountants                                                                                         |
|----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                       |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                         |
|                                                                                                                       |
| Consolidated  Statements of Operations for the years ended  December 31, 2002, 2001 and 2000                          |
|                                                                                                                       |
| Consolidated Statements of  Stockholders’ Equity (Deficit) for the years ended  December 31, 2002, 2001 and 2000 |
|                                                                                                                       |
| Consolidated Statements of  Cash Flows for the years ended  December 31, 2002, 2001 and 2000                          |
|                                                                                                                       |
| Notes to  Consolidated Financial Statements                                                                                |

 

 

**Consolidated Financial Statement Schedules**

 
| For  the years ended December 31, 2002, 2001 and 2000: |
|-------------------------------------------------------------|
|                                                        |
| II – Valuation and  Qualifying Accounts                |

 

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

 

F-1

----

 

**REPORTOF INDEPENDENT****ACCOUNTANTS**

 

 

To the Board of Directorsand Stockholders of

DeCrane Holdings Co.

 

In our opinion, the consolidated financial statementslisted in the accompanying index present fairly, in all material respects, thefinancial position of DeCrane Holdings Co. and its subsidiary atDecember 31, 2002 and 2001, and the results of their operations and cashflows for each of the three years in the period ended December 31, 2002 inconformity with accounting principles generally accepted in the United Statesof America.  In addition, in ouropinion, the financial statement schedule listed in the accompanying indexpresents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financialstatements.  These financial statementsand financial statement schedule are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our report dated February 18, 2003, weexpressed substantial doubt about the Company’s ability to continue as a goingconcern.  This doubt was based on thefact that the Company would be in default of its senior credit facility unlessit consummated the sale of its Specialty Avionics Group prior toJune 30, 2003.  As discussedin Notes 2 and 10, the sale was consummated on May 23, 2003 thusalleviating our doubt about its ability to continue as a going concern.

 

As discussed in Note 7, the Company adopted Statementof Financial Accounting Standards No. 142, “Goodwill and Other IntangibleAssets.”  Accordingly, the Companyceased amortizing goodwill as of January 1, 2002.

 

 

PRICEWATERHOUSECOOPERSLLP

Los Angeles, California

 

February 18,2003, except for Notes 2 and 10,which are as of May 23, 2003

 

F-2

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**ConsolidatedBalance Sheets**

 
|                                                                                                                                                                                       |   | **December 31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|
| **(In thousands, except share data)**                                                                                                                                                      |   | **2002**              | ** ** | **2001** | ** ** |
|                                                                                                                                                                                       |   |                  |       |   |   |
| **Assets**                                                                                                                                                                                 |   |                  |       |   |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| Current  assets:                                                                                                                                                                           |   |                  |       |   |   |
| Cash  and cash equivalents                                                                                                                                                                 |   | $                     | 12,421     |   | $ | 9,478 |   |
| Accounts  receivable, net                                                                                                                                                                  |   | 26,354                |       | 41,899 |   |
| Inventories                                                                                                                                                                                |   | 59,300                |       | 61,433 |   |
| Deferred  income taxes                                                                                                                                                                     |   | 16,430                |       | 6,193 |   |
| Prepaid  expenses and other current assets                                                                                                                                                 |   | 1,724                 |       | 1,727 |   |
| Current  assets of discontinued operations                                                                                                                                                 |   | 160,741               |       | 50,635 |   |
| Total  current assets                                                                                                                                                                      |   | 276,970               |       | 171,365 |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| Property  and equipment, net                                                                                                                                                               |   | 36,139                |       | 42,660 |   |
| Goodwill                                                                                                                                                                                   |   | 196,430               |       | 210,948 |   |
| Other  assets, principally intangibles, net                                                                                                                                                |   | 39,428                |       | 48,934 |   |
| Long-lived  assets of discontinued operations                                                                                                                                              |   | —                |       | 171,804 |   |
| Total  assets                                                                                                                                                                              |   | $                     | 548,967    |   | $ | 645,711 |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and  Stockholders’ Equity (Deficit)**                                                                                           |   |                  |       |   |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                      |   |                  |       |   |   |
| Current  portion of long-term debt                                                                                                                                                         |   | $                     | 16,317     |   | $ | 13,332 |   |
| Accounts  payable                                                                                                                                                                          |   | 13,055                |       | 14,512 |   |
| Accrued  liabilities                                                                                                                                                                       |   | 31,494                |       | 52,921 |   |
| Income  taxes payable                                                                                                                                                                      |   | —                |       | 103 |   |
| Current  liabilities of discontinued operations                                                                                                                                            |   | 19,928                |       | 8,841 |   |
| Total  current liabilities                                                                                                                                                                 |   | 80,794                |       | 89,709 |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| Long-term  debt                                                                                                                                                                            |   | 364,700               |       | 385,936 |   |
| Deferred  income taxes                                                                                                                                                                     |   | 27,077                |       | 19,121 |   |
| Other  long-term liabilities                                                                                                                                                               |   | 7,364                 |       | 6,620 |   |
| Long-term  liabilities of discontinued operations                                                                                                                                          |   | —                |       | 13,695 |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| Commitments  and contingencies (Note 13)                                                                                                                                                   |   |                  |       |   |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| Minority  interest in preferred stock of subsidiary                                                                                                                                        |   | 34,081                |       | 28,240 |   |
| Mandatorily  redeemable preferred stock                                                                                                                                                    |   | 62,222                |       | 54,223 |   |
|                                                                                                                                                                                       |   |                  |       |   |   |
| Stockholders’  equity (deficit):                                                                                                                                                      |   |                  |       |   |   |
| Undesignated  preferred stock, $.01 par value, 1,140,000 shares authorized; none issued and  outstanding as of December 31, 2002 and 2001                                             |   | —                |       | — |   |
| Common  stock, $.01 par value, 10,000,000 shares authorized; 4,116,627 and 3,914,274  shares issued and outstanding as of December 31, 2002 and  December 31, 2001, respectively |   | 41                    |       | 39 |   |
| Additional  paid-in capital                                                                                                                                                                |   | 72,125                |       | 75,542 |   |
| Notes  receivable for shares sold                                                                                                                                                          |   | (2,591                | )          | (2,668 | ) |
| Accumulated  deficit                                                                                                                                                                       |   | (96,485               | )          | (24,658 | ) |
| Accumulated  other comprehensive loss                                                                                                                                                      |   | (361                  | )          | (88 | ) |
| Total  stockholders’ equity (deficit)                                                                                                                                                 |   | (27,271               | )          | 48,167 |   |
| Total  liabilities, mandatorily redeemable preferred stock and stockholders’ equity  (deficit)                                                                                        |   | $                     | 548,967    |   | $ | 645,711 |   |

 

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

 

F-3

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatements of Operations**

 
|                                                                        |   | **Year Ended December 31,** |       |
|-----------------------------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                                         |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                        |   |                             |       |   |   |   |   |
| Revenues                                                                    |   | $                                | 229,841    |   | $ | 272,112 |   | $ | 236,501 |   |
| Cost  of sales                                                              |   | 170,485                          |       | 196,866 |   | 155,134 |   |
| Gross  profit                                                               |   | 59,356                           |       | 75,246 |   | 81,367 |   |
|                                                                        |   |                             |       |   |   |   |   |
| Operating  expenses:                                                        |   |                             |       |   |   |   |   |
| Selling,  general and administrative expenses                               |   | 40,318                           |       | 45,429 |   | 33,345 |   |
| Impairment  of goodwill                                                     |   | —                           |       | 8,583 |   | — |   |
| Amortization  of goodwill and other intangible assets                       |   | 3,540                            |       | 12,436 |   | 10,628 |   |
| Total  operating expenses                                                   |   | 43,858                           |       | 66,448 |   | 43,973 |   |
|                                                                        |   |                             |       |   |   |   |   |
| Income  from operations                                                     |   | 15,498                           |       | 8,798 |   | 37,394 |   |
|                                                                        |   |                             |       |   |   |   |   |
| Other  expenses:                                                            |   |                             |       |   |   |   |   |
| Interest  expense                                                           |   | 25,376                           |       | 29,645 |   | 27,181 |   |
| Minority  interest in preferred stock of subsidiary                         |   | 5,841                            |       | 5,061 |   | 2,274 |   |
| Other  expenses, net                                                        |   | 505                              |       | 634 |   | 277 |   |
|                                                                        |   |                             |       |   |   |   |   |
| Income  (loss) from continuing operations before provision for income taxes |   | (16,224                          | )          | (26,542 | ) | 7,662 |   |
| Provision  for income taxes (benefit)                                       |   | (3,621                           | )          | (3,933 | ) | 4,607 |   |
|                                                                        |   |                             |       |   |   |   |   |
| Income  (loss) from continuing operations                                   |   | (12,603                          | )          | (22,609 | ) | 3,055 |   |
|                                                                        |   |                             |       |   |   |   |   |
| Income  (loss) from discontinued operations, net of tax                     |   | (41,396                          | )          | 3,546 |   | (1,727 | ) |
| Cumulative  effect of change in accounting principle                        |   | (17,828                          | )          | — |   | — |   |
|                                                                        |   |                             |       |   |   |   |   |
| Net  income (loss)                                                          |   | (71,827                          | )          | (19,063 | ) | 1,328 |   |
|                                                                        |   |                             |       |   |   |   |   |
| Noncash  preferred stock dividend accretion                                 |   | (7,999                           | )          | (6,971 | ) | (6,074 | ) |
|                                                                        |   |                             |       |   |   |   |   |
| Net  loss applicable to common stockholders                                 |   | $                                | (79,826    | ) | $ | (26,034 | ) | $ | (4,746 | ) |

 

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

 

F-4

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatements of****Stockholders’ Equity**

 
|                                                                                                    |   | **Common  Stock** |       | **Additional  Paid-in  Capital** |       | **Notes  Receivable  For Shares  Sold** |       | **Accumulated  Deficit** |       | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------|------------|----------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|---------------------------------------------|--------|-----------|--------|
| **(In thousands, except share data)**                                                                   |   | **Shares**        | ** ** | **Amount**                       | ** ** | ** **                              | ** ** | ** **               | ** ** | ** **                                  |
|                                                                                                    |   |              |       |                             |       |                                    |       |                     |       |                                        |   |      |   |   |   |
| Balance, December 31, 1999                                                                         |   | 3,571,827         |       | $                                | 36         |                                    | $          | 75,944                   |       | $                                           | (2,468 | )         | $      | (6,923 | ) | $ | 6 |   | $ | 66,595 |   |
| Comprehensive income (loss):                                                                            |   |              |       |                             |       |                                    |       |                     |       |                                        |   |      |   |   |   |
| Net income                                                                                              |   | —            |       | —                           |       | —                                  |       | —                   |       | 1,328                                       |   | —    |   | 1,328 |   |
| Translation adjustment                                                                                  |   | —            |       | —                           |       | —                                  |       | —                   |       | —                                      |   | (6        | )      | (6 | ) |
|                                                                                                    |   |              |       |                             |       |                                    |       |                     |       |                                        |   |      |   | 1,322 |   |
| Sale of common stock, net of stock repurchased and  canceled                                            |   | 342,447           |       | 3                                |       | 7,848                                   |       | 51                       |       | —                                      |   | —    |   | 7,902 |   |
| Value of warrants issued with sale of preferred  stock by subsidiary                                    |   | —            |       | —                           |       | 4,019                                   |       | —                   |       | —                                      |   | —    |   | 4,019 |   |
| Noncash dividend accretion on preferred stock                                                           |   | —            |       | —                           |       | (6,074                                  | )          | —                   |       | —                                      |   | —    |   | (6,074 | ) |
| Compensatory stock option expense                                                                       |   | —            |       | —                           |       | 561                                     |       | —                   |       | —                                      |   | —    |   | 561 |   |
| Notes receivable interest accrued                                                                       |   | —            |       | —                           |       | —                                  |       | (135                     | )          | —                                      |   | —    |   | (135 | ) |
| Balance, December 31, 2000                                                                         |   | 3,914,274         |       | 39                               |       | 82,298                                  |       | (2,552                   | )          | (5,595                                      | )      | —    |   | 74,190 |   |
| Comprehensive income (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 income (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 | ) |

 

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

 

F-5

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**ConsolidatedStatements of C****ashFlows**

 
|                                                                                      |   | **Year Ended December 31,** |       |
|-------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                                                       |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                                      |   |                             |       |   |   |   |   |
| **Cash flows from operating activities:**                                                 |   |                             |       |   |   |   |   |
| Net  income (loss)                                                                        |   | $                                | (71,827    | ) | $ | (19,063 | ) | $ | 1,328 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                             |       |   |   |   |   |
| Net (income)  loss from discontinued operations                                           |   | 41,396                           |       | (3,546 | ) | 1,727 |   |
| Cumulative  effect of change in accounting principle                                      |   | 17,828                           |       | — |   | — |   |
| Depreciation  and amortization                                                            |   | 13,304                           |       | 22,582 |   | 17,344 |   |
| Noncash  portion of restructuring, asset impairment and other related charges             |   | 11,456                           |       | 19,558 |   | — |   |
| Minority  interest in preferred stock of subsidiary                                       |   | 5,841                            |       | 5,061 |   | 2,274 |   |
| Deferred  income taxes                                                                    |   | 690                              |       | 2,322 |   | 6,260 |   |
| Other,  net                                                                               |   | 110                              |       | 389 |   | 471 |   |
| Changes  in assets and liabilities, net of effect from acquisitions:                      |   |                             |       |   |   |   |   |
| Accounts  receivable                                                                      |   | 14,969                           |       | (5,508 | ) | 1,644 |   |
| Inventories                                                                               |   | (4,792                           | )          | (10,427 | ) | (13,377 | ) |
| Prepaid  expenses and other assets                                                        |   | 155                              |       | (2,126 | ) | 2,147 |   |
| Accounts  payable                                                                         |   | (1,458                           | )          | 409 |   | 71 |   |
| Accrued  liabilities                                                                      |   | (16,418                          | )          | (7,321 | ) | (13,523 | ) |
| Income  taxes payable                                                                     |   | 438                              |       | 3 |   | 792 |   |
| Other  long-term liabilities                                                              |   | 28                               |       | (400 | ) | (758 | ) |
| Net  cash provided by operating activities                                                |   | 11,720                           |       | 1,933 |   | 6,400 |   |
|                                                                                      |   |                             |       |   |   |   |   |
| **Cash flows from investing activities:**                                                 |   |                             |       |   |   |   |   |
| Cash  paid for acquisitions, net of cash acquired                                         |   | (5,890                           | )          | (13,529 | ) | (79,440 | ) |
| Capital  expenditures                                                                     |   | (4,356                           | )          | (10,191 | ) | (20,193 | ) |
| Other,  net                                                                               |   | —                           |       | 636 |   | 71 |   |
| Net  cash used for investing activities                                                   |   | (10,246                          | )          | (23,084 | ) | (99,562 | ) |
|                                                                                      |   |                             |       |   |   |   |   |
| **Cash flows from financing activities:**                                                 |   |                             |       |   |   |   |   |
| Senior  term debt borrowings                                                              |   | —                           |       | 20,000 |   | 55,000 |   |
| Senior  revolving line of credit borrowings (repayments), net                             |   | (6,000                           | )          | (400 | ) | 12,400 |   |
| Proceeds  from sale of preferred stock of subsidiary                                      |   | —                           |       | — |   | 24,924 |   |
| Proceeds  from sale of common stock                                                       |   | 5,000                            |       | — |   | 7,902 |   |
| Other  long-term borrowings                                                               |   | 1,145                            |       | 2,797 |   | 3,451 |   |
| Principal  payments on term debt, capitalized leases and other debt                       |   | (13,534                          | )          | (9,139 | ) | (5,460 | ) |
| Deferred  financing costs                                                                 |   | (1,656                           | )          | (767 | ) | (1,900 | ) |
| Repurchase  of common stock and options                                                   |   | (368                             | )          | — |   | (50 | ) |
| Net  cash provided by (used for) financing activities                                     |   | (15,413                          | )          | 12,491 |   | 96,267 |   |
|                                                                                      |   |                             |       |   |   |   |   |
| Net  cash provided by (used for) discontinued operations                                  |   | 16,882                           |       | 10,432 |   | (3,298 | ) |
|                                                                                      |   |                             |       |   |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                     |   | 2,943                            |       | 1,772 |   | (193 | ) |
| Cash  and cash equivalents at beginning of period                                         |   | 9,478                            |       | 7,706 |   | 7,899 |   |
| Cash  and cash equivalents at end of period                                               |   | $                                | 12,421     |   | $ | 9,478 |   | $ | 7,706 |   |

 

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

 

F-6

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

 

**Notesto Consolidated Financial Statements**

 

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

 

**Descriptionof the Business**

 

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

 

The Company is a provider of products and services tothe business, VIP and head-of-state aircraft market within the aerospaceindustry.  The Company’s businesses areorganized into two separate operating groups: Cabin Management and SystemsIntegration.  The Company also had athird strategic business, its Specialty Avionics Group, which it sold in 2003(Note 2).

 

**Basis ofPresentation**

 

The consolidated financial statements include theaccounts of the Company and all wholly-owned subsidiaries and a majority-ownedpartnership.  All intercompany accountsand transactions have been eliminated. Certain reclassifications have been made to prior years’ financial statementsto conform to the current year presentation, principally to reflect the SpecialtyAvionics Group as a discontinued operation.

 

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

 

**FinancialCondition and Liquidity**

 

The September 11, 2001 terrorist attack on theUnited States, ongoing concerns about global terrorism, the currentMiddle-Eastern military conflicts, the Severe Acute Respiratory Syndrome (SARS)epidemic and weak global economic conditions are all adversely impactingthe aerospace industry.  In response,the Company implemented restructuring programs in 2001 and 2002 designed toreduce costs and conserve working capital (Note 3).  The Company reported losses for the two years endedDecember 31, 2002, primarily resulting from charges associated withthese restructuring activities, as well as the impairment of goodwill.

 

During the fourth quarter of fiscal 2002, the Companyfurther assessed its long-term business strategies in light of currentaerospace industry conditions.  Inaddition, the Company subsequently determined that it would likely not be incompliance with its senior credit facility’s financial covenants in 2003.  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.

 

F-7

----

 

On March 14, 2003, the Company entered into adefinitive agreement to sell its equity interests in the subsidiariescomprising the Specialty Avionics Group for $140,000,000 in cash and receivedrequisite lender approval on March 28, 2003 to amend the senior creditfacility to permit the sale.  The salewas consummated on May 23, 2003 and, as required by the senior creditfacility amendment, $130,000,000 of the proceeds was used to repay seniorcredit facility borrowings.  The sale ofthe Specialty Avionics Group and resulting reduction in borrowings reduced theCompany’s future senior credit facility principal payments obligations by$11,434,000 for 2003, $39,190,000 for 2004 and $79,376,000 for 2005 and2006.  The senior credit facilityamendment also relaxes various financial covenants for 2003 and beyond,decreases by $10,000,000 the maximum permitted revolving line of creditborrowings to $40,000,000, increases the prime rate and LIBOR interest marginsby 1.5% and permits the issuance of specified types of additional indebtednessand the repurchase of a portion of the Company’s 12% senior subordinated noteswith the proceeds from the sale of junior securities.

 

The Company’s results in 2003 continue to be affectedby weak customer demand.  The Company’sbusiness is concentrated among a limited number of aircraft manufacturers andtemporary suspensions in their production have caused its revenues todecline.  Further or prolonged decreasesin demand for new business, VIP and head-of-state and commercial aircraft, aswell as related component parts, would result in additional decreases in demandfor the Company’s products and services, and, correspondingly, its revenues,thereby adversely affecting its financial condition.  In addition, further deterioration or prolonged decreases indemand could result in additional restructurings of the Company’s business.

 

Company management believes expected operating cashflows, together with borrowings under the senior credit facility, will besufficient to meet the Company’s future short- and long-term operatingexpenses, working capital requirements, capital expenditures and debt serviceobligations for the next twelve months. However, the Company’s ability to comply with its debt financialcovenants, pay principal or interest and satisfy its other debt obligationswill depend on its future operating performance as well as competitive,legislative, regulatory, business and other factors beyond the Company’scontrol.  Although Company managementcannot be certain, management expects the Company to be in compliance with therevised financial covenants through the end of the year based on the currentoperating plan.

 

**Inventories**

 

Inventories are stated atthe lower of cost, as determined under the first-in, first-out (“FIFO”) method,or market.  Costs include materials,labor, including direct engineering labor, tooling costs and manufacturingoverhead.  In accordance with industrypractice, inventoried costs also include amounts relating to programs andcontracts with long production cycles that will be recovered from futuresales.  Periodic assessments areperformed to ensure recoverability of the program costs and adjustments aremade, if necessary, to reduce inventoried costs to estimated realizable value.

 

F-8

----

 

**Property and Equipment**

 

Property and equipmentfor companies acquired are stated at fair value as of the date the acquisitionoccurred and at cost for all subsequent additions.  Property and equipment are depreciated using the straight-linemethod over their estimated useful lives. Useful lives for machinery and equipment range from three to twentyyears.  Building and building improvementsare depreciated using the straight-line method over their estimated usefullives of forty years.  Leaseholdimprovements are amortized using the straight-line method over their estimateduseful lives or remaining lease term, whichever is less.  Expenditures for maintenance and repairs areexpensed as incurred.  The costs forimprovements are capitalized.  Uponretirement or disposal, the cost and accumulated depreciation of property andequipment are reduced and any gain or loss is recorded in income or expense.

 

**Goodwill**

 

Prior to January 1,2002, goodwill was amortized on a straight-line basis over thirty years fromthe 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 amortizedbut instead subject to annual impairment testing with a loss charged tooperations in the period in which impairment occurs (Note 7).

 

**Other Assets**

 

Identifiable finite-livedintangible assets are amortized on a straight-line basis over their estimateduseful lives, ranging from three to fifteen years.  Deferred financing costs are amortized using either thestraight-line or effective interest method, over the term of the related debt.

 

**Impairment of Goodwill**

 

Effective January 1,2002 the Company adopted and began testing goodwill for impairment inaccordance 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, onOctober 31st of each year, or when events or changes incircumstances indicate the carrying amount may not be recoverable.  The goodwill impairment model is a two-stepprocess.  First, it requires acomparison of the book value of net assets to the fair value of the relatedoperations that have goodwill assigned to them.  If the fair value is determined to be less than book value, asecond step is performed to compute the amount of the impairment.  In this process, a fair value for goodwillis estimated, based in part on the fair value of the operations used in thefirst step, and is compared to its carrying value.  The amount by which carrying value exceeds fair value representsthe amount of goodwill impairment.  As aresult of the 2002 impairment testing, the Company recorded a $7,672,000pre-tax charge relating to its Specialty Avionics Group.

 

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, the Companyrecorded an $8,583,000 pre-tax charge to operations to reflect the impairmentloss resulting from its restructuring program to close a manufacturing facility(Notes 3 and 7).

 

F-9

----

 

**Impairment of Long-Lived Assets andOther Intangible Assets**

 

In accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” theCompany reviews long-lived assets held for use and intangible assets, otherthan goodwill, for impairment when events or changes in circumstances indicatethe carrying amount of an asset may not be recoverable.  In the event the sum of the expectedundiscounted future cash flows resulting from the use of the asset is less thanthe carrying value of the asset, an impairment loss equal to the excess of theasset’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$3,931,000 during 2002 to reflect the impairment of long-lived assets.  The impairment losses are described in Note3.

 

**Product Warranty Obligations**

 

The Company sells someproducts to customers with various repair or replacement warranties.  The terms of the warranties vary accordingto the customer and/or product involved. The most common warranty periods are generally one to five years fromthe earlier of the date of delivery to the customer or six to twelve monthsfrom the date of manufacture.

 

Provisions for estimatedfuture warranty costs are made in the period corresponding to the sale of theproduct and such costs have been within management’s expectations.  Classification between current and long-termwarranty obligations is estimated based on historical trends.

 

**Income Taxes**

 

Deferred income taxes aredetermined using the liability method. A deferred tax asset or liability is determined based on the differencebetween the financial statement and tax basis of assets and liabilities asmeasured by the enacted tax rates that will be in effect when these differencesreverse.  Deferred tax expense is the resultof changes in the deferred tax asset or liability.  If necessary, valuation allowances are established to reducedeferred tax assets to their expected realizable values.

 

**Derivative Financial Instruments**

 

Effective January 1,2001, the Company adopted and began accounting for derivative financialinstruments in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  The adoption did not havea material impact on the Company’s business, consolidated financial position,results of operations or cash flows. SFAS No. 133 requires companies to record derivatives on the balancesheet 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

----

 

The Company does not usederivative financial instruments for trading purposes but only to manage therisk that changes in interest rates would have on future interest payments fora portion of its variable-rate debt.  Asof December 31, 2002, the Company has an interest rate swap contract to effectivelyconvert $4,500,000 of variable-rate debt to 4.2% fixed-rate debt until maturityin 2008.  The contract is considered tobe a hedge against changes in the amount of future cash flows associated withinterest payments on this variable-rate debt.  As a result, the interest rate swap contract is reflected at fairvalue and the related loss of $361,000 on this contract is deferred instockholders’ equity as a component of comprehensive income (loss).  The deferred loss will be recognized infuture periods as interest expense as the related fixed-rate interest paymentsare made.  In the unlikely event thatthe counterparty fails to perform under the contract, the Company bears thecredit risk that payments due to the Company may not be collected.

 

**Fair Value of Financial Instruments**

 

All financial instrumentsare held for purposes other than trading. The estimated fair value of the Company’s long-term debt is based oneither quoted market prices or current rates for similar issues for debt of thesame remaining maturities.  Theestimated fair value of the Company’s $100,000,000 senior subordinated debt wasapproximately $40,000,000 as of December 31, 2002 and $93,500,000 as ofDecember 31, 2001.  All othernon-derivative financial instruments as of December 31, 2002 and 2001approximate their carrying amounts either because of the short maturity of theinstrument, or based on their effective interest rates compared to currentmarket rates for similar long-term debt or obligations.

 

**Foreign Currency Translation andTransactions**

 

The financial statementsof the Company’s U.K. and Swiss subsidiaries have been translated into U.S.dollars from their functional currencies, pounds sterling and Swiss francs,respectively, in the consolidated financial statements.  Assets and liabilities have been translatedat the exchange rate on the balance sheet date and income statement amountshave been translated at average exchange rates in effect during the period.  The net translation adjustment is reflectedas a component of accumulated comprehensive income or loss within stockholders’equity.

 

Realized foreign currencyexchange gains, which pertain to the Specialty Avionics Group and are includedin “discontinued operations” caption in the consolidated statements of operations,were $194,000 for the year ended December 31, 2002, $103,000 for the yearended December 31, 2001 and $351,000 for the year ended December 31,2000.

 

F-11

----

 

**Revenue Recognition**

 

Revenues from the sale ofmanufactured products, except for products manufactured under long-termcontracts, are recognized upon shipment of product to the customer providedthat the Company has received a signed purchase order, the price is fixed,title has transferred, collection of the resulting receivables is probable andthere are no remaining significant obligations.

 

Revenues for productsmanufactured 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, and depreciationcosts.  Selling, general, andadministrative costs are charged to expense as incurred.

 

Percentage-of-completionis measured using an estimate of direct labor incurred to date to totalexpected direct labor for each contract. This method is used because management considers expended direct laborto be the best available measure of progress on these contracts.  Provisions for estimated losses onuncompleted contracts are made in the period in which such losses are determined.  Management believes that the Company willnot incur any losses on uncompleted contracts as of December 31, 2002.

 

Measuring a contract’spercentage-of-completion requires management to make estimates.  As a result, it is reasonably possible thatfactors may cause management to change its revenue and cost estimates, therebyaltering estimated profitability.  Thesefactors include, but are not limited to, changes in contract scope, materialand labor efficiencies, contract penalty provisions, if any, and final contractsettlements.  Revisions to revenue andprofit estimates are made in the period in which the facts that give rise tothe revision become known.

 

The asset “Costs andestimated earnings in excess of billings” represents revenues recognized inexcess of amounts billed on uncompleted contracts and is reflected as acomponent of inventory.  Conversely, theliability “Billings in excess of costs and estimated earnings” representsbillings in excess of revenues recognized on uncompleted contracts and isreflected as an accrued liability. Unbilled revenues are expected to be billed and collected during thesucceeding twelve-month period.

 

**Research and Development Costs**

 

Research and developmentcosts are expensed as incurred.  Suchcosts were $56,000 for the year ended December 31, 2002, $698,000 for theyear ended December 31, 2001 and $1,615,000 for the year endedDecember 31, 2000.

 

F-12

----

 

**Stock Option Plan**

 

In December 2002,the Financial Accounting Standards Board issued SFAS No. 148, “Accounting forStock-Based Compensation—Transition and Disclosure.”  SFAS No. 148 provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation.  The Company haselected to continue account of stock-based compensation as prescribed by SFASNo. 123, “Accounting for Stock-Based Compensation.”

 

SFAS No. 148 also amendsthe disclosure requirements of SFAS 123, to require disclosure in both interimand annual financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  SFAS No. 148 is effective forthe Company’s fiscal year ended December 31, 2002 and for interimfinancial statements beginning in 2003.

 

The Company has onestock-based employee compensation plan, which is more fully described in Note15.  As permitted under SFAS No. 123,the Company measures compensation expense related to the employee stock option planutilizing the intrinsic value method as prescribed by Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  No stock-basedemployee compensation cost is reflected in net income (loss), as all optionsgranted under the plan had an exercise price equal to the value of theunderlying common stock on the date of grant. The following table illustrates the effect on net income if the Companyhad applied the fair value recognition provisions of SFAS No. 123 tostock-based employee compensation.

 
|                                                                                                                                           |   | **Year Ended December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                                                                                                            |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                                                                                           |   |                             |       |   |   |   |   |
| Net  income (loss), as reported                                                                                                                |   | $                                | (71,827    | ) | $ | (19,063 | ) | $ | 1,328 |   |
| Less  total stock-based employee compensation expense determined under the fair  value based method for all awards, net of related tax effects |   | (376                             | )          | (392 | ) | (439 | ) |
| Pro  forma net income (loss)                                                                                                                   |   | $                                | (72,203    | ) | $ | (19,455 | ) | $ | 889 |   |

 

The effect of applyingSFAS No. 123 may not be representative of the pro forma effect in futureyears since additional options may be granted during those future years.  The assumptions underlying the computationsof the fair value of the options are described in Note 15.

 

**Statements of Cash Flows**

 

For purposes of thestatements of cash flows, cash equivalents include short-term, highly liquidinvestments with maturities of three months or less at the time of purchase.

 

F-13

----

 

**Recent Accounting Pronouncements**

 

*SFAS No. 145*

 

In May 2002, theFinancial Accounting Standards Board issued SFAS No. 145, “Rescission of SFASNos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescindsvarious pronouncements regarding early extinguishment of debt and allowsextraordinary accounting treatment for early extinguishment only when theprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations–Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met.  SFAS No. 145provisions regarding early extinguishment of debt are generally effective forfiscal years beginning January 1, 2003. The Company believes this new standard will not have an impact on itsbusiness, consolidated financial position, results of operations or cash flow.

 

*SFAS No. 146*

 

In June 2002, theFinancial Accounting Standards Board issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 supersedes previous accounting guidance, principallyEmerging Issues Task Force Issue No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).”

 

SFAS No. 146 requiresthat the liability for costs associated with an exit or disposal activity beinitially measured at fair value and recognized when the liability isincurred.  In periods subsequent toinitial measurement, changes to the liability are measured using thecredit-adjusted risk-free rate that was used in the initial measurement of theliability recorded.  The cumulativeeffect of a change resulting from revisions to either the timing or the amountof estimated cash flows is recognized as an adjustment to the liability in theperiod of the change and charged to the same line items in the statement ofoperations used when the related costs were initially recognized.  Under EITF No. 94-3, a liability for an exitcost was recognized at the date of a company’s commitment to an exit plan.

 

The provisions of SFASNo. 146 are required to be applied prospectively to exit or disposal activitiesinitiated after December 31, 2002. The Company believes SFAS No. 146 may affect the timing of recognizing futurerestructuring costs, as well as the amounts recognized, depending on the natureof the exit or disposal activity and the timing of the related estimated cashflows.

 

*FIN No. 45*

 

In November 2002,the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by a guarantor inits interim and annual financial statements about its obligations under certainguarantees that it has issued.  Theinterpretation also clarifies that a guarantor is required to recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN No. 45are applicable to the Company on a prospective basis to guarantees issued ormodified after December 31, 2002. However, the disclosure requirements in FIN No. 45 are effective for theCompany’s financial statements for periods ending after December 15, 2002.

 

F-14

----

 

The Company is not aparty to any agreement in which it is a guarantor of indebtedness of otherstherefore the interpretation is not expected to have a material effect on theCompany’s financial position, results of operations or cash flows.  The disclosure requirements of thisinterpretation have been adopted by the Company as of December 31, 2002.

 

*FIN No. 46*

 

In January 2003, theFinancial Accounting Standards Board issued Interpretation No. 46,“Consolidation of Variable Interest Entities.” FIN No. 46 addresses consolidation by business enterprises of variableinterest entities (formerly special purpose entities or “SPEs”).  The Company does not have any variableinterest entities as defined in FIN No. 46.

 

**Note 2.****                                  Acquisitionsand Dispositions**

 

**Disposition of Specialty AvionicsGroup**

 

On March 14, 2003,the Company entered into a definitive agreement to sell its equity interests inthe subsidiaries comprising its Specialty Avionics Group to Wings Holdings,Inc., an affiliate of Odyssey Investment Partners, LLC, for $140,000,000 incash.  The sale was consummated onMay 23, 2003.  The selling price issubject to a post-closing adjustment related to the amount of working capitalat closing.  Proceeds of $130,000,000from the sale were used to repay senior credit facility borrowings (Note10).  The sale of the Specialty AvionicsGroup is not expected to affect the operations of the remaining operatinggroups.

 

Based upon the fair valueof the group implied in the definitive agreement, the Company determined thatthe carrying value of the group’s net assets was not fully recoverable.  As required by SFAS No. 142, the Companyrecorded a goodwill impairment charge of $7,500,000 during the three monthsended March 31, 2003 to reduce the carrying value to the estimatednet realizable value established by the definitive agreement.  The Company recorded a modest $689,000 gain,net of tax, on the sale during the second quarter of fiscal 2003, based on theactual financial position of the group on the date of sale.  The ultimate gain or loss on the sale issubject to finalizing the post-closing adjustment, which is not expected to bematerial, if any.

 

As a result of the sale,the Specialty Avionics Group is presented as a discontinued operation in theaccompanying consolidated financial statements.  The financial statements for prior periods have been reclassifiedto segregate the group’s assets and liabilities, results of operations and cashflows for all periods.

 

In accordance with theFinancial Accounting Standards Board’s Emerging Issues Task Force Issue No.87-24, “Allocation of Interest to Discontinued Operations,” as amended,interest expense includes interest on debt that is to be assumed by the buyeras well as interest on the $130,000,000 of debt that was required to be repaidas a result of the sale.  Interestexpense was based on the historical interest rates charged during each of the periods.  In addition, and also in accordance withEITF 87-24, costs and expenses exclude the allocation of general corporateoverhead.

 

F-15

----

 

The following tablessummarize the financial position, results operations and cash flows of theSpecialty Avionics Group.

 
|                                        |   | **December 31,** |       |
|---------------------------------------------|--------|-----------------------|------------|
| **(In  thousands)**                         |   | **2002**              | ** ** | **2001** | ** ** |
|                                        |   |                  |       |   |   |
| Assets:                                     |   |                  |       |   |   |
| Current  assets                             |   | $                     | 41,614     |   | $ | 50,635 |   |
| Property  and equipment, net                |   | 15,744                |       | 18,413 |   |
| Other  assets, principally intangibles, net |   | 103,383               |       | 153,391 |   |
| Total  assets                               |   | 160,741               |       | 222,439 |   |
|                                        |   |                  |       |   |   |
| Liabilities:                                |   |                  |       |   |   |
| Current  liabilities                        |   | 8,288                 |       | 8,841 |   |
| Long-term  liabilities                      |   | 11,640                |       | 13,695 |   |
| Total  liabilities                          |   | 19,928                |       | 22,536 |   |
|                                        |   |                  |       |   |   |
| Net  assets of the Specialty Avionics Group |   | $                     | 140,813    |   | $ | 199,903 |   |

 
|                                                  |   | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                   |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                  |   |                             |       |   |   |   |   |
| Results  of Operations:                               |   |                             |       |   |   |   |   |
| Revenues                                              |   | $                                | 95,789     |   | $ | 123,240 |   | $ | 110,878 |   |
|                                                  |   |                             |       |   |   |   |   |
| Operating  expenses:                                  |   |                             |       |   |   |   |   |
| Costs  and expenses                                   |   | 75,031                           |       | 97,320 |   | 88,963 |   |
| Impairment  of goodwill                               |   | 7,672                            |       | — |   | — |   |
| Amortization  of goodwill and other intangible assets |   | 2,228                            |       | 7,484 |   | 7,320 |   |
| Total  operating expenses                             |   | 84,931                           |       | 104,804 |   | 96,283 |   |
|                                                  |   |                             |       |   |   |   |   |
| Income  from operations                               |   | 10,858                           |       | 18,436 |   | 14,595 |   |
|                                                  |   |                             |       |   |   |   |   |
| Other  expenses:                                      |   |                             |       |   |   |   |   |
| Interest  expense:                                    |   |                             |       |   |   |   |   |
| Debt  required to be repaid with proceeds from sale   |   | 7,720                            |       | 8,439 |   | 13,337 |   |
| Debt  obligations assumed by the buyer                |   | 798                              |       | 917 |   | 1,105 |   |
| Other  expenses, net                                  |   | 439                              |       | 413 |   | 205 |   |
|                                                  |   |                             |       |   |   |   |   |
| Pre-tax  income (loss)                                |   | 1,901                            |       | 8,667 |   | (52 | ) |
| Provision  for income taxes                           |   | (3,975                           | )          | (5,121 | ) | (1,675 | ) |
|                                                  |   |                             |       |   |   |   |   |
| Income  before change in accounting principle         |   | (2,074                           | )          | 3,546 |   | (1,727 | ) |
| Cumulative  effect of change in accounting principle  |   | (39,322                          | )          | — |   | — |   |
| Net  income (loss) from discontinued operations       |   | $                                | (41,396    | ) | $ | 3,546 |   | $ | (1,727 | ) |

 

F-16

----

 
|                                                     |   | **Year Ended December 31,** |       |
|----------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                      |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                     |   |                             |       |   |   |   |   |
| Cash  Flows Provided By (Used For):                      |   |                             |       |   |   |   |   |
| Operating  activities                                    |   | $                                | 18,598     |   | $ | 12,996 |   | $ | 10,383 |   |
| Investing  activities                                    |   | (1,073                           | )          | (1,708 | ) | (12,602 | ) |
| Financing  activities                                    |   | (815                             | )          | (1,094 | ) | (611 | ) |
| Net  (increase) decrease in cash and cash equivalents    |   | 125                              |       | 177 |   | (474 | ) |
| Effect  of foreign currency translation on cash          |   | 47                               |       | 61 |   | 6 |   |
| Net  cash provided by (used for) discontinued operations |   | $                                | 16,882     |   | $ | 10,432 |   | $ | (3,298 | ) |

 

**Acquisitions Completed During 2000**

 

During the year endedDecember 31, 2000, the Company acquired:

 

*CabinManagement Group*

 

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

 

•                  allof the common stock of ERDA, Inc. (subsequently renamed DeCrane AircraftSeating Co., Inc.), a Wisconsin-based designer and manufacturer of aircraftseating, on June 30, 2000; and

 

*Specialty Avionics Group (Discontinued Operation)*

 

•                  allof the common stock of Coltech, Inc., an Arizona-based designer andmanufacturer of audio components for commercial and business, VIP andhead-of-state aircraft, on August 31, 2000.

 

The consolidatedfinancial statements reflect the acquired companies subsequent to theirrespective acquisition dates.  Theaggregate purchase price for the acquisitions was $59,363,000 in cash, pluscontingent consideration totaling a maximum of $2,000,000 payable over threeyears based on future attainment of defined performance criteria.  The aggregate purchase price includes$3,511,000 of acquisition related costs. The acquisitions were accounted for as purchases and the assets acquiredand liabilities assumed have been recorded at their estimated fair values.  As a result, identifiable intangible assets,principally FAA certifications, totaling $18,936,000 were recorded and the$41,622,000 difference between the aggregate purchase price and the fair valueof the net assets acquired was recorded as goodwill.

 

Identifiable intangibleassets are being amortized on a straight-line basis over their estimated usefullives, ranging from seven to fifteen years. Prior to the January 1, 2002 adoption of SFAS No. 142(Note 7), goodwill was being amortized on a straight-line basis overthirty years.  Contingent considerationtotaling $2,000,000 was earned during the three years ended December 31,2002 resulting in a corresponding increase in goodwill.

 

The acquisitions werefunded with borrowings under the Company’s senior credit facility and proceedsfrom the sale of common and preferred stock as described in Note 12.

 

F-17

----

 

**Contingent Acquisition ConsiderationPaid for All Acquisitions**

 

Prior to the year 2000,six additional companies were acquired in transactions in which the sellerswere entitled to contingent consideration payments based upon their respectivelevels of attainment of defined performance criteria.  Based upon the level of attainment of defined performancecriteria during the three years ended December 31, 2002, the Companyrecorded contingent consideration payable of $600,000 in 2002, $700,000 in 2001and $20,154,000 in 2000 resulting in a corresponding increase in goodwill.  As of December 31, 2002, there are noremaining contingent consideration payment obligations.

 

During 2001, the Companysettled its asserted claims against the sellers of two companies acquired in2000 for breach of representation and warranty provisions contained in thepurchase agreements.  The Companyreceived $3,718,000 from the sellers upon entering into the settlement agreements,which also provided that the Company pay in 2002 a minimum of $3,125,000 ofpreviously contingent consideration for the year ended December 31, 2001which was reflected as an accrued liability as of December 31, 2001.

 

**Unaudited Pro Forma Information**

 

Unaudited pro formaconsolidated results of operations are presented in the table below for theyear ended December 31, 2000.  Theresults of operations reflect the Company’s acquisitions, excluding the companyacquired by the Specialty Avionics Group, as if all of these transactions wereconsummated as of January 1, 2000.

 
| **(Unaudited,  in thousands)**                                                                             |   | **Pro Forma  Year Ended  December 31,  2000** | ** ** |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|------------|
|                                                                                                       |   |                                               |       |
| Revenues                                                                                                   |   | $                                                  | 255,531    |   |
| Income  from continuing operations before cumulative effect of change in accounting  principle, net of tax |   | 1,057                                              |       |
| Net  loss                                                                                                  |   | (670                                               | )          |
|                                                                                                            |        |                                                    |            |  |

 

The pro forma results ofoperations do not purport to represent what actual results would have been ifthe transactions described above occurred on such dates or to project theresults of operations for any future period. The above information reflects adjustments for inventory, depreciation,amortization, general and administrative expenses and interest expense based onthe new cost basis and debt and capital structure of the Company following theacquisitions.

 

During 2002, threecustomers accounted for more than 10% of the Company’s consolidated revenues(Note 17).  If the Company had completedits 2000 acquisitions at the beginning of 2000, unaudited pro forma revenues fromthese customers for year ended December 31, 2000 would have been asfollows: Bombardier – $61,589,000; Boeing – $29,618,000; and Textron –$51,401,000.  Complete loss of any ofthe customers identified above could have a significant adverse impact on theresults of operations expected in future periods.

 

F-18

----

 

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

 

During the two yearsended December 31, 2002, the Company recorded restructuring, assetsimpairment and other related charges as follows:

 
|                                           |   | **Year Ended December 31,** |       |
|------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                            |   | **2002**                         | ** ** | **2001** | ** ** |
|                                           |   |                             |       |   |   |
| Nature  of charges:                            |   |                             |       |   |   |
| Asset  Realignment Restructuring               |   | $                                | 6,901      |   | $ | 28,658 |   |
| Seat  Manufacturing Facilities Restructuring   |   | 6,294                            |       | — |   |
| Other  asset impairment related charges        |   | 12,048                           |       | — |   |
| Total  pre-tax charges                         |   | $                                | 25,243     |   | $ | 28,658 |   |
|                                           |   |                             |       |   |   |
| Business  segment recording the charges:       |   |                             |       |   |   |
| Cabin  Management                              |   | $                                | 13,195     |   | $ | 22,309 |   |
| Systems  Integration                           |   | 4,060                            |       | 3,525 |   |
| Total  continuing operations                   |   | 17,255                           |       | 25,834 |   |
| Discontinued  operations (Specialty Avionics)  |   | 7,988                            |       | 2,824 |   |
| Total  pre-tax charges                         |   | $                                | 25,243     |   | $ | 28,658 |   |
|                                           |   |                             |       |   |   |
| Charged  to operations:                        |   |                             |       |   |   |
| Cost  of sales                                 |   | $                                | 10,676     |   | $ | 13,557 |   |
| Selling,  general and administrative expenses  |   | 6,579                            |       | 3,694 |   |
| Impairment  of goodwill                        |   | —                           |       | 8,583 |   |
| Discontinued  operations (Specialty Avionics)  |   | 7,988                            |       | 2,824 |   |
| Total  pre-tax charges                         |   | $                                | 25,243     |   | $ | 28,658 |   |
|                                           |   |                             |       |   |   |
| Components  of charges:                        |   |                             |       |   |   |
| Continuing  operations:                        |   |                             |       |   |   |
| Noncash  charges                               |   | $                                | 11,456     |   | $ | 19,558 |   |
| Cash  charges                                  |   | 5,799                            |       | 6,276 |   |
| Total  continuing operations                   |   | 17,255                           |       | 25,834 |   |
| Discontinued  operations (Specialty Avionics): |   |                             |       |   |   |
| Noncash  charges                               |   | 7,988                            |       | 2,500 |   |
| Cash  charges                                  |   | —                           |       | 324 |   |
| Total  discontinued operations                 |   | 7,988                            |       | 2,824 |   |
| Total  pre-tax charges                         |   | $                                | 25,243     |   | $ | 28,658 |   |

 

**Asset Realignment Restructuring**

 

During the second quarterof 2001, the Company’s Cabin Management Group adopted a restructuring programto realign production programs between its manufacturing facilities.  In response to the adverse impact on theaerospace industry resulting from the September 11th terroristattack and its aftermath, as well as the weakening of global economicconditions, the Company announced and implemented a further 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.

 

F-19

----

 

The restructuring, asset impairment and other relatedcharges are comprised of the following:

 

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

 

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

 

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

 

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

 

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

 

The components of therestructuring, assets impairment and other related charges are as follows:

 
| **(In  thousands)**                        |   | **Balance at  Beginning of  the Year** | ** ** | **Total  Charges** | ** ** | **Amounts Incurred** | ** ** | **Balance at  End of  the Year** | ** ** |
|--------------------------------------------|--------|----------------------------------------|------------|--------------------|------------|----------------------|------------|----------------------------------|------------|
| **Noncash**                                |   | **Cash**                               |
|                                       |   |                                   |       |               |       |                 |       |                             |       |   |   |
| *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      |                 |       |                             |       |   |   |   |

 

F-20

----

 
|                                                   |   | **Balance at  Beginning of  the Year** |               |        |                          |     |   |   |    | **Balance at  End of  the Year** |   |
|--------------------------------------------------------|--------|----------------------------------------|--------------------|-------------|-------------------------------|----------|--------|--------|---------|----------------------------------|--------|
|                                                   |   |                                   | **Total  Charges** |        | **Amounts** **Incurred** |     |   |
| **(In  thousands)**                                    |   | ** **                             | ** **         | **Noncash** | ** **                    | **Cash** |   |   |
|                                                   |   |                                   |               |        |                          |     |   |   |    |                             |   |
| *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 |   |

 

This restructuringprogram was completed during the fourth quarter of fiscal 2002.  From the inception of this restructuringprogram in 2001, severance and other compensation costs of approximately$2,024,000 have been paid to manufacturing and administrative employeesterminated at the manufacturing facilities closed.  Since the September 11th terrorist attack, theCompany has, in addition to the positions eliminated as a result of the 2002plant closures described below, reduced its total workforce by approximately500 employees, or 18.5%, as of December 2002 pursuant to thisrestructuring program, of which approximately 260 employees had separated as ofDecember 31, 2001.

 

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, futurecash payments extend beyond this date due to lease payments on the vacatedfacility and the incurrence of other exit costs.  Future cash payments will be funded from existing cash balancesand internally generated cash from operations.

 

**Seat Manufacturing FacilitiesRestructuring**

 

During the first quarterof fiscal 2002, the Company announced it would consolidate the production offour seating and related manufacturing facilities into two, resulting in thepermanent closure of two facilities. This program was designed to improve manufacturing efficiencies and tofurther reduce costs and conserve working capital.  In connection with this restructuring program, the Companyrecorded pre-tax charges to operations totaling $6,294,000 during 2002 forrestructuring, asset impairment and other related charges.  The charges are comprised of the following:

 

•                  *Inventory and Accounts Receivable Write-Downs.*  Inconnection with the consolidation of all production, the Company willdiscontinue manufacturing certain products, principally those whichoverlap.  Inventory and certainreceivables related to the discontinued products were written down to netrealizable value.

 

F-21

----

 

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

 

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

 

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

 

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

 

The components of therestructuring, assets impairment and other related charges are as follows:

 
| **(In  thousands)**                               |       | **Total  Charges** |       | **Amounts Incurred** |       | **Balance at  December 31,  2002** |   |
|---------------------------------------------------|------------|--------------------|------------|----------------------|------------|-----------------------------------------|--------|
|                                              | ** ** | **Noncash**        | ** ** | **Cash**             | ** ** | ** **                              |
|                                              |       |               |       |                 |       |                                    |   |   |   |
| 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      |                 |       |                                    |   |   |   |   |

 

This restructuringprogram was completed during the second quarter of fiscal 2002.  The remaining balance of restructuring costsincludes lease termination and other exit costs.  The manufacturing facilities were closed during June 2002;however, future cash payments extend beyond this date due to lease payments onthe vacated facilities and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

**Other Asset Impairment RelatedCharges**

 

Due to continued weaknessin the commercial aircraft portion of our business, in the fourth quarter offiscal 2002 the Company recorded a pre-tax charge of $12,048,000 for additionalasset impairments.  Of this amount,$7,672,000 related to the Company’s annual goodwill impairment testing pursuantto SFAS No. 142 (Note 7) and $4,376,000 related to inventories and wascharged to cost of goods sold.  Chargestotaling $7,988,000 pertained to discontinued operations.

 

F-22

----

 

**Note 4.****                                  AccountsReceivable**

 

The Company ispotentially subject to concentrations of credit risk as the Company reliesheavily on customers operating in the domestic and foreign business, VIP andhead-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 maintainsreserves for potential credit losses and generally, such losses have beenwithin management’s expectations.

 

Accounts receivable arenet of an allowance for doubtful accounts of $1,205,000 as ofDecember 31, 2002 and $2,108,000 as of December 31, 2001.

 

**Note 5.****                                  Inventories**

 

Inventories are comprisedof the following as of December 31, 2002 and 2001:

 
|                                                                         |   | **December 31,** |       |
|------------------------------------------------------------------------------|--------|-----------------------|------------|
| **(In  thousands)**                                                          |   | **2002**              | ** ** | **2001** | ** ** |
|                                                                         |   |                  |       |   |   |
| Raw  materials                                                               |   | $                     | 28,911     |   | $ | 35,989 |   |
| Work-in-process:                                                             |   |                  |       |   |   |
| Direct  and indirect manufacturing costs                                     |   | 6,843                 |       | 7,365 |   |
| Program  costs, principally engineering costs                                |   | 14,769                |       | 10,974 |   |
| Finished  goods                                                              |   | 4,773                 |       | 1,433 |   |
| Costs  and estimated earnings in excess of billings on uncompleted contracts |   | 4,004                 |       | 5,672 |   |
| Total  inventories                                                           |   | $                     | 59,300     |   | $ | 61,433 |   |

 

Periodic assessments areperformed to ensure recoverability of the program costs and adjustments aremade, if necessary, to reduce inventoried costs to estimated realizablevalue.  In connection with the AssetRealignment Restructuring, the Company elected to cancel several productdevelopment programs to conserve working capital (Note 3) and, as a result,$7,908,000 of previously inventoried costs related to these programs werecharged to cost of sales in 2001; no adjustments were required during the yearsended December 31, 2002 and 2000.

 

Total costs and estimatedearnings on all uncompleted contracts as of December 31, 2002 and 2001 arecomprised of the following:

 
|                                                                          |   | **December 31,** |       |
|-------------------------------------------------------------------------------|--------|-----------------------|------------|
| **(In  thousands)**                                                           |   | **2002**              | ** ** | **2001** | ** ** |
|                                                                          |   |                  |       |   |   |
| Costs  incurred on uncompleted contracts                                      |   | $                     | 49,572     |   | $ | 46,757 |   |
| Estimated  earnings recognized                                                |   | 63,699                |       | 50,413 |   |
| Total  costs and estimated earnings                                           |   | 113,271               |       | 97,170 |   |
| Less  billings to date                                                        |   | (109,880              | )          | (102,653 | ) |
| Net                                                                           |   | $                     | 3,391      |   | $ | (5,483 | ) |
|                                                                          |   |                  |       |   |   |
| Balance  sheet classification:                                                |   |                  |       |   |   |
| Asset  – Costs and estimated earnings in excess of billings              |   | $                     | 4,004      |   | $ | 5,672 |   |
| Liability  – Billings in excess of costs and estimated earnings (Note 9) |   | (613                  | )          | (11,155 | ) |
| Net                                                                           |   | $                     | 3,391      |   | $ | (5,483 | ) |

 

F-23

----

 

Revenues and earnings forproducts manufactured under long-term contracts are recognized under thepercentage-of-completion method using total contract price, actual costs incurredto date and an estimate of the completion costs for each contract.  Provisions for estimated losses onuncompleted contracts are made in the period in which such losses aredetermined.  The Company recorded aprovision for estimated losses totaling $2,577,000 during 2002 relating touncompleted contracts at the furniture manufacturing facility permanentlyclosed.

 

**Note 6.****                                  Propertyand Equipment**

 

Property and equipmentincludes the following as of December 31, 2002 and 2001:

 
|                                                     |   | **December 31,** |       |
|----------------------------------------------------------|--------|-----------------------|------------|
| **(In thousands)**                                       |   | **2002**              | ** ** | **2001** | ** ** |
|                                                     |   |                  |       |   |   |
| Land,  buildings and leasehold improvements              |   | $                     | 24,733     |   | $ | 23,197 |   |
| Machinery  and equipment                                 |   | 14,160                |       | 16,176 |   |
| Computer  equipment and software, furniture and fixtures |   | 13,208                |       | 13,351 |   |
| Tooling                                                  |   | 4,043                 |       | 4,001 |   |
| Total  cost                                              |   | 56,144                |       | 56,725 |   |
| Accumulated  depreciation and amortization               |   | (20,005               | )          | (14,065 | ) |
| Net  property and equipment                              |   | $                     | 36,139     |   | $ | 42,660 |   |

 

Included above are ownedland and buildings held for sale related to a manufacturing facility theCompany closed during 2002 (Note 3). The cost of the land and buildings is $2,820,000 and the correspondingaccumulated depreciation and amortization is $31,000 as of December 31,2002.

 

Property and equipmentunder capital leases included above consists of the following as ofDecember 31, 2002 and 2001:

 
|                                                     |   | **December 31,** |       |
|----------------------------------------------------------|--------|-----------------------|------------|
| **(In  thousands)**                                      |   | **2002**              | ** ** | **2001** | ** ** |
|                                                     |   |                  |       |   |   |
| Land,  buildings and leasehold improvements              |   | $                     | 3,558      |   | $ | 4,388 |   |
| Machinery  and equipment                                 |   | 922                   |       | 866 |   |
| Computer  equipment and software, furniture and fixtures |   | 1,435                 |       | 1,427 |   |
| Total  cost                                              |   | 5,915                 |       | 6,681 |   |
| Accumulated  depreciation and amortization               |   | (1,423                | )          | (1,626 | ) |
| Net  property and equipment                              |   | $                     | 4,492      |   | $ | 5,055 |   |

 

Depreciation of propertyand equipment under capital leases is included in depreciation expense in theconsolidated financial statements.

 

F-24

----

 

**Note 7.****                                  Goodwill**

 

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

 

•                  *Reassessmentof Useful Lives of Intangible Assets.*  The reassessment of the useful lives of intangible assetsacquired on or before June 30, 2001 (Note 8) was completed during thefirst quarter of fiscal 2002.  Theremaining useful lives were deemed appropriate.

 

•                  *Reclassificationof 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.

 

•                  *Discontinuanceof 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.

 

During 2002, the Companycompleted the transitional impairment testing of goodwill recorded as ofJanuary 1, 2002 as required under SFAS No. 142.  Fair value of each reporting unit was determined using adiscounted cash flow approach taking into consideration projections based onthe individual characteristics of the reporting units, historical trends,market multiples for comparable businesses and independent appraisals.  Unallocated goodwill was allocated to thereporting units for impairment testing purposes.  The results indicated that the carrying value of goodwill wasimpaired.  The resulting impairment wasprimarily attributable to a change in the evaluation criteria for goodwillutilized under previous accounting guidance to the fair value approachstipulated in SFAS No. 142.  Inaccordance with the transitional provision of SFAS No. 142, the Companyrecorded a $17,828,000 noncash write-down of goodwill (net of $878,000 incometax 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.

 

Reported income (loss)from continuing operations, net of tax and before the cumulative effect of thechange in accounting principle, adjusted to reflect the discontinuance ofperiodic goodwill and assembled workforce amortization charges, is as follows:

 
|                                                                |   | **Year Ended December 31,** |       |
|---------------------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                                 |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                |   |                             |       |   |   |   |   |
| Reported  income (loss) from continuing operations, net of tax      |   | $                                | (12,603    | ) | $ | (22,609 | ) | $ | 3,055 |   |
| Add  back goodwill and assembled workforce amortization, net of tax |   | —                           |       | 6,681 |   | 5,720 |   |
| Adjusted  income (loss) from continuing operations                  |   | $                                | (12,603    | ) | $ | (15,928 | ) | $ | 8,775 |   |

 

F-25

----

 

Changes in the carryingamount of goodwill, by business segment (Note 17), for the two years endedDecember 31, 2002 are as follows:

 
|                                                                                                     |   | **Continuing Operations**    |       | **Discontinued**                | ** ** |
|----------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|---------------------------------|------------|
| **(In  thousands)**                                                                                      |   | **Cabin  Management  Group** | ** ** | **Systems  Integration  Group** | ** ** | **Corporate** | ** ** | **Total** | ** ** | **Specialty  Avionics  Group** |   |
|                                                                                                     |   |                         |       |                            |       |   |   |   |   |   |   |
| Balance,  December 31, 2000                                                                         |   | $                            | 187,797    |                            | $          | 32,982 |   | $ | 4,105 |   | $ | 224,884 |   | $ | 131,472 |   |
| Amortization  during the period                                                                          |   | (6,640                       | )          | (1,180                          | )          | (149 | ) | (7,969 | ) | (4,709 | ) |
| Impairment  charge                                                                                       |   | (5,058                       | )          | (3,525                          | )          | — |   | (8,583 | ) | — |   |
| Contingent  consideration earned, including acquisition related expenses                                 |   | 3,832                        |       | —                          |       | — |   | 3,832 |   | — |   |
| Cash  received from sellers, net of additional liabilities recorded, upon  settlement of asserted claims |   | (1,216                       | )          | —                          |       | — |   | (1,216 | ) | — |   |
| Foreign  currency translation                                                                            |   | —                       |       | —                          |       | — |   | — |   | (268 | ) |
| 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 |   |

 

In 2001, the Companyrecorded impairment charges total $8,583,000 in connection with its AssetRealignment Restructuring program.  Thischarge is included as a component of income from continuing operations.  During the fourth quarter of fiscal 2002,the Company performed its annual impairment testing and recorded an additional$7,672,000 impairment charge related to the Specialty Avionics Group.  The charge results from a decrease in fairvalue due to further weakness during 2002 in the commercial aircraft portion ofour business.  This charge is includedas a component of income (loss) from discontinued operations.

 

**Note 8.****                                  OtherAssets, Principally Intangibles**

 

Other assets arecomprised of the following as of December 31, 2002 and 2001:

 
|                                                     |   | **December 31,** |       |
|----------------------------------------------------------|--------|-----------------------|------------|
| **(In  thousands)**                                      |   | **2002**              | ** ** | **2001** | ** ** |
|                                                     |   |                  |       |   |   |
| Identifiable  intangible assets with finite useful lives |   | $                     | 29,106     |   | $ | 36,785 |   |
| Deferred  financing costs                                |   | 9,168                 |       | 10,204 |   |
| Other  non-amortizable assets                            |   | 1,154                 |       | 1,945 |   |
| Total  other assets                                      |   | $                     | 39,428     |   | $ | 48,934 |   |

 

F-26

----

 

**Identifiable Intangible Assets withFinite Useful Lives**

 

Identifiable intangibleassets with finite useful lives are comprised of the following as ofDecember 31, 2002 and 2001:

 
|                            |   | **December 31, 2002** |       | **December 31, 2001**    |       |
|---------------------------------|--------|----------------------------|------------|-------------------------------|------------|
| **(In  thousands)**             |   | **Cost**                   | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|                            |   |                       |       |                          |       |   |   |   |   |   |   |   |   |
| FAA  certifications             |   | $                          | 22,272     |                          | $          | (4,737 | ) | $ | 17,535 |   | $ | 22,272 |   | $ | (3,253 | ) | $ | 19,019 |   |
| Engineering  drawings           |   | 7,645                      |       | (1,776                        | )          | 5,869 |   | 7,645 |   | (1,266 | ) | 6,379 |   |
| Assembled  workforce            |   | —                     |       | —                        |       | — |   | 7,657 |   | (2,706 | ) | 4,951 |   |
| Other  identifiable intangibles |   | 11,345                     |       | (5,643                        | )          | 5,702 |   | 10,533 |   | (4,097 | ) | 6,436 |   |
| Total  identifiable intangibles |   | $                          | 41,262     |                          | $          | (12,156 | ) | $ | 29,106 |   | $ | 48,107 |   | $ | (11,322 | ) | $ | 36,785 |   |

 

Estimated annualamortization expense for all identifiable intangible assets with finite usefullives for the five-year period ending December 31, 2007 is as follows:2003 – $3,644,000; 2004 – $3,644,000; 2005 – $3,477,000; 2006 – $2,275,000; and2007 – $2,175,000.

 

Effective January 1,2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”and the provisions of SFAS No. 141, “Business Combinations,” which were requiredto be adopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncementsresulted in the following:

 

•                  *Reassessmentof Useful Lives of Intangible Assets.*  The reassessment of the useful lives of intangible assetsacquired on or before June 30, 2001 was completed during the first quarterof fiscal 2002.  The remaining usefullives were deemed appropriate.

 

•                  *Reclassificationof 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.

 

**Note 9.****                                  AccruedLiabilities**

 

Accrued liabilities arecomprised of the following as of December 31, 2002 and 2001:

 
|                                                                         |   | **December 31,** |       |
|------------------------------------------------------------------------------|--------|-----------------------|------------|
| **(In thousands)**                                                           |   | **2002**              | ** ** | **2001** | ** ** |
|                                                                         |   |                  |       |   |   |
| Salaries,  wages, compensated absences and payroll related taxes             |   | $                     | 9,212      |   | $ | 15,307 |   |
| Billings  in excess of costs and estimated earnings on uncompleted contracts |   | 613                   |       | 11,155 |   |
| Acquisition  related contingent consideration                                |   | 600                   |       | 6,904 |   |
| Accrued  interest                                                            |   | 7,465                 |       | 4,692 |   |
| Customer  advances and deposits                                              |   | 4,662                 |       | 3,260 |   |
| Other  accrued liabilities                                                   |   | 8,942                 |       | 11,603 |   |
| Total  accrued liabilities                                                   |   | $                     | 31,494     |   | $ | 52,921 |   |

 

F-27

----

 

**Accrued Product Warranty Obligations**

 

The following tablereflects the accrued product warranty obligation activity during the threeyears ended December 31, 2002.

 
|                                                           |   | **Year Ended December 31,** |       |
|----------------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                            |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                           |   |                             |       |   |   |   |   |
| Accrual  activity during the year:                             |   |                             |       |   |   |   |   |
| Accrual  at beginning of the year                              |   | $                                | 2,642      |   | $ | 2,640 |   | $ | 2,889 |   |
| Accruals  for warranties issued during the period              |   | 763                              |       | 602 |   | 924 |   |
| Change  in accrual estimate related to pre-existing warranties |   | 481                              |       | (482 | ) | (1,157 | ) |
| Settlements  made (in cash or in kind) during the period       |   | (200                             | )          | (118 | ) | (16 | ) |
| Accrual  at end of the year                                    |   | $                                | 3,686      |   | $ | 2,642 |   | $ | 2,640 |   |
|                                                           |   |                             |       |   |   |   |   |
| Classification  at end of the year:                            |   |                             |       |   |   |   |   |
| Current  liability                                             |   | $                                | 2,801      |   | $ | 2,531 |   | $ | 2,183 |   |
| Long-term  liability                                           |   | 885                              |       | 111 |   | 457 |   |
| Total                                                          |   | $                                | 3,686      |   | $ | 2,642 |   | $ | 2,640 |   |

 

**Note 10.****                           Long-TermDebt**

 

Long-term debt includesthe following amounts as of December 31, 2002 and 2001:

 
|                                                                                  |   | **December 31,** |       |
|---------------------------------------------------------------------------------------|--------|-----------------------|------------|
| **(In  thousands)**                                                                   |   | **2002**              | ** ** | **2001** | ** ** |
|                                                                                  |   |                  |       |   |   |
| Senior  credit facility:                                                              |   |                  |       |   |   |
| Term  loans                                                                           |   | $                     | 264,200    |   | $ | 275,706 |   |
| Revolving  line of credit                                                             |   | 6,000                 |       | 12,000 |   |
| 12%  senior subordinated notes                                                        |   | 100,000               |       | 100,000 |   |
| Capital  lease obligations and term debt financing, secured by property and equipment |   | 10,330                |       | 10,647 |   |
| Other  indebtedness                                                                   |   | 487                   |       | 915 |   |
| Total  long-term debt                                                                 |   | 381,017               |       | 399,268 |   |
| Less  current portion                                                                 |   | (16,317               | )          | (13,332 | ) |
| Long-term  debt, less current portion                                                 |   | $                     | 364,700    |   | $ | 385,936 |   |

 

F-28

----

 

**Senior Credit Facility**

 

During 2002, the Companyamended certain of the terms of its senior credit facility.  The amendment combined two $25,000,000working capital and acquisitions lines of credit into a single $50,000,000working capital line of credit, increased the prime rate and LIBOR interestmargins by 50 basis points and amended certain financial covenants, principallythrough December 31, 2003.  During2001, the Company borrowed $20,000,000 under its term loan senior creditfacility and used the net proceeds to repay amounts then outstanding under theacquisition revolving line of credit.

 

The senior creditfacility provides for term loan borrowings in the initial principal amount of$290,000,000 and a revolving line of credit for borrowings up to an aggregateprincipal amount of $50,000,000 for working capital and to financeacquisitions.  Principal payments forterm loan borrowings are due in increasing amounts over the next four years andall borrowings under the revolving loan facility must be repaid bySeptember 30, 2004.  Loans underthe senior credit facility generally bear interest based on a margin over, atthe Company’s option, prime rate or LIBOR. The margins applicable to portions of amounts borrowed may varydepending upon the Company’s consolidated debt leverage ratio.  Currently, the applicable margins are 2.50to 3.25 for prime rate borrowings and 3.75% to 4.50% for LIBOR borrowings.  The weighted-average interest rate on allsenior credit facility borrowings outstanding was 5.97% as of December 31,2002.  Borrowings under the seniorcredit facility are secured by 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.

 

As of December 31,2002, the Company had an irrevocable standby letter of credit in the amount of$400,000 issued and outstanding under its senior credit facility, which reducesborrowings available under the revolving line credit.

 

On March 28, 2003the Company received requisite lender approval to amend its senior creditfacility to permit the sale of its Specialty Avionics Group, provided that netproceeds of at least $130,000,000 from the sale are used to repay senior creditfacility borrowings.  Upon consummationof the sale on May 23, 2003, the Company repaid $130,000,000 of seniorcredit borrowings with the estimated net proceeds from the sale.  The Company may be required to repayadditional borrowings upon final determination of the net proceeds from thesale.

 

The amendment alsorevised various financial covenants (which the Company would otherwise have notbeen able to meet as of March 31, 2003), decreases by $10,000,000 themaximum permitted revolving line of credit borrowings to $40,000,000, increasesthe prime rate and LIBOR interest margins by 1.5% and permits the issuancespecified types of additional indebtedness and the repurchase of a portion ofthe Company’s 12% senior subordinated notes with the proceeds from the sale ofjunior securities.

 

F-29

----

 

**12% Senior Subordinated Notes**

 

The senior subordinatednotes mature on September 30, 2008 and interest is payable semi-annuallyon March 30, and September 30, of each year.  The senior subordinated notes are unsecuredgeneral obligations of the Company and are subordinated in right of payment tosubstantially all existing and future senior indebtedness of the Company,including senior credit facility indebtedness. Prior to maturity, the Company may redeem all or some of the seniorsubordinated notes at defined redemption prices, which may include apremium.  In the event of a change incontrol, the holders may require the Company to repurchase the seniorsubordinated notes for a redemption price that may also include a premium.  The Company is subject to restrictivecovenants, including the payment of dividends in cash.

 

**Other Indebtedness**

 

As of December 31,2002, other indebtedness reflects acquisition financing payable to sellers inconnection with their respective acquisitions. The debt is non-interest bearing; original issue discounts rangingbetween 10.5% and 12.5% are being amortized over their terms.

 

**Aggregate Maturities**

 

The total annualmaturities of long-term debt outstanding as of December 31, 2002 are asfollows:

 
| **(In  thousands)**              |   |    |    |
|----------------------------------|--------|---------|---------|
|                             |   |    |    |
| Year  ending December 31,   |   |    |    |
| 2003                             |   | $       | 16,297  |   |
| 2004                             |   | 53,967  |    |
| 2005                             |   | 97,742  |    |
| 2006                             |   | 107,090 |    |
| 2007                             |   | 650     |    |
| 2008  and thereafter             |   | 105,299 |    |
| Total  aggregate maturities      |   | 381,045 |    |
| Less  unamortized debt discounts |   | (28     | )       |
| Total  long-term debt            |   | $       | 381,017 |   |

 

F-30

----

 

**Note 11.****                           IncomeTaxes**

 

The components of income(loss) before income taxes and cumulative effect of change in accountingprinciple are as follows:

 
|                                      |   | **Year Ended December 31,** |       |
|-------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                       |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                      |   |                             |       |   |   |   |   |
| Reported  by:                             |   |                             |       |   |   |   |   |
| Continuing  operations                    |   | $                                | (16,224    | ) | $ | (26,542 | ) | $ | 7,662 |   |
| Discontinued  operations                  |   | 1,901                            |       | 8,667 |   | (52 | ) |
| Total                                     |   | $                                | (14,323    | ) | $ | (17,875 | ) | $ | 7,610 |   |
|                                      |   |                             |       |   |   |   |   |
| Taxed  under the following jurisdictions: |   |                             |       |   |   |   |   |
| Domestic                                  |   | $                                | (13,222    | ) | $ | (17,297 | ) | $ | 7,775 |   |
| Foreign                                   |   | (1,101                           | )          | (578 | ) | (165 | ) |
| Total                                     |   | $                                | (14,323    | ) | $ | (17,875 | ) | $ | 7,610 |   |

 

The provisions for income taxes (benefit) are asfollows:

 
|                            |   | **Year Ended December 31,** | ** ** |
|---------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**             |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                            |   |                             |       |   |   |   |   |
| Current:                        |   |                             |       |   |   |   |   |
| U.S.  federal                   |   | $                                | —     |   | $ | 62 |   | $ | 370 |   |
| State  and local                |   | 255                              |       | 1,133 |   | 671 |   |
| Foreign                         |   | 67                               |       | 30 |   | 120 |   |
| Total  current                  |   | 322                              |       | 1,225 |   | 1,161 |   |
|                            |   |                             |       |   |   |   |   |
| Deferred:                       |   |                             |       |   |   |   |   |
| U.S.  federal                   |   | (144                             | )          | 545 |   | 4,599 |   |
| State  and local                |   | 463                              |       | (464 | ) | 557 |   |
| Foreign                         |   | (287                             | )          | (118 | ) | (35 | ) |
| Total  deferred                 |   | 32                               |       | (37 | ) | 5,121 |   |
|                            |   |                             |       |   |   |   |   |
| Total  provision:               |   |                             |       |   |   |   |   |
| U.S.  federal                   |   | (144                             | )          | 607 |   | 4,969 |   |
| State  and local                |   | 718                              |       | 669 |   | 1,228 |   |
| Foreign                         |   | (220                             | )          | (88 | ) | 85 |   |
| Total  provision                |   | $                                | 354        |   | $ | 1,188 |   | $ | 6,282 |   |
|                            |   |                             |       |   |   |   |   |
| Allocation  of total provision: |   |                             |       |   |   |   |   |
| Continuing  operations          |   | $                                | (3,621     | ) | $ | (3,933 | ) | $ | 4,607 |   |
| Discontinued  operations        |   | 3,975                            |       | 5,121 |   | 1,675 |   |
| Total  provision                |   | $                                | 354        |   | $ | 1,188 |   | $ | 6,282 |   |

 

F-31

----

 

The provision for incometaxes differs from the amount of income tax determined by applying theapplicable U.S. statutory federal rate to the income (loss) before income taxesand cumulative effect of change in accounting principle as a result of thefollowing differences:

 
|                                                                                        |   | **Year Ended December 31,** |       |
|---------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                                                         |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                                        |   |                             |       |   |   |   |   |
| Income  tax (benefit) at U.S. statutory rates                                               |   | $                                | (5,013     | ) | $ | (6,256 | ) | $ | 2,664 |   |
| Tax  effect of increases (decreases) resulting from:                                        |   |                             |       |   |   |   |   |
| Amortization  of assets and other expenses not deductible for income tax purposes           |   | 2,927                            |       | 5,477 |   | 2,247 |   |
| Minority  interest in preferred stock of subsidiary not deductible for income tax  purposes |   | 2,044                            |       | 1,771 |   | 796 |   |
| State  income taxes, net of federal benefit                                                 |   | 467                              |       | 265 |   | 798 |   |
| Lower  tax rates on earnings of foreign subsidiaries and foreign sales corporation          |   | (8                               | )          | (57 | ) | (214 | ) |
| Other,  net                                                                                 |   | (63                              | )          | (12 | ) | (9 | ) |
| Income  tax at effective rates                                                              |   | $                                | 354        |   | $ | 1,188 |   | $ | 6,282 |   |

 

Deferred tax liabilities (assets) are comprised of thefollowing as of December 31, 2002 and 2001:

 
|                               |   | **December 31,** |       |
|------------------------------------|--------|-----------------------|------------|
| **(In  thousands)**                |   | **2002**              | ** ** | **2001** | ** ** |
|                               |   |                  |       |   |   |
| Gross  deferred tax liabilities:   |   |                  |       |   |   |
| Intangible  assets                 |   | $                     | 31,267     |   | $ | 31,849 |   |
| Program  costs                     |   | 6,168                 |       | 4,839 |   |
| Property  and equipment            |   | 3,119                 |       | 3,461 |   |
| Other                              |   | 56                    |       | 322 |   |
| Gross  deferred tax liabilities    |   | 40,610                |       | 40,471 |   |
|                               |   |                  |       |   |   |
| Gross  deferred tax (assets):      |   |                  |       |   |   |
| Loss  carryforwards                |   | (12,173               | )          | (8,980 | ) |
| Accrued  liabilities               |   | (6,797                | )          | (7,732 | ) |
| Inventory                          |   | (4,252                | )          | (3,130 | ) |
| Other                              |   | (832                  | )          | (1,095 | ) |
| Gross  deferred tax (assets)       |   | (24,054               | )          | (20,937 | ) |
| Net  deferred tax liability        |   | $                     | 16,556     |   | $ | 19,534 |   |
|                               |   |                  |       |   |   |
| Balance  sheet classification:     |   |                  |       |   |   |
| Continuing  operations:            |   |                  |       |   |   |
| Noncurrent  deferred tax liability |   | $                     | 27,077     |   | $ | 19,121 |   |
| Current  deferred tax asset        |   | (16,430               | )          | (6,193 | ) |
| Net  continuing operations         |   | 10,647                |       | 12,928 |   |
|                               |   |                  |       |   |   |
| Discontinued  operations:          |   |                  |       |   |   |
| Noncurrent  deferred tax liability |   | 12,110                |       | 14,476 |   |
| Current  deferred tax asset        |   | (6,201                | )          | (7,870 | ) |
| Net  discontinued operations       |   | 5,909                 |       | 6,606 |   |
| Net  deferred tax liability        |   | $                     | 16,556     |   | $ | 19,534 |   |

 

F-32

----

 

As of December 31,2002, the Company has total loss carryforwards of approximately $30,782,000 forfederal income tax purposes and $21,268,000 for state income tax purposes,including federal loss carryforwards acquired in acquisitions.  The Company expects that federal losscarryforwards acquired in an acquisition totaling approximately $12,600,000will transfer to the buyer in connection with the sale of the SpecialtyAvionics Group described in Note 2.  Theloss carryforwards are not subject to limitations on their annual utilization(“Section 382 limitation,” as defined in the Internal Revenue Code) andtherefore are available for utilization in 2002.  The federal and state loss carryforwards expire in varyingamounts commencing in 2011 and continuing through 2022.  Management believes that it is more likelythan not that the Company will generate taxable income sufficient to realizethe tax benefit associated with the future deductible deferred tax assets andloss carryforwards prior to their expiration.

 

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

 

**Note 12.****                           CapitalStructure**

 

**Mandatorily Redeemable PreferredStock**

 

The table belowsummarizes mandatorily redeemable preferred stock issued during the three yearsended December 31, 2002.

 
|                                                      |   | **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, 1999                          |   | —                                    |       | $                                             | —     |   | $ | — |   | $ | — |   | 342,417 |   | $ | 41,178 |   |
|                                                      |   |                                      |       |                                          |       |   |   |   |   |   |   |   |   |
| Sale  of preferred stock                                  |   | 250,000                                   |       | 25,000                                        |       | (4,019 | ) | 20,981 |   | — |   | — |   |
| Issuance  costs                                           |   | —                                    |       | —                                        |       | (76 | ) | (76 | ) | — |   | — |   |
| Accrued  dividends and redemption value accretion         |   | 20,400                                    |       | 2,040                                         |       | 234 |   | 2,274 |   | — |   | — |   |
| Noncash  dividend accretion                               |   | —                                    |       | —                                        |       | — |   | — |   | — |   | 6,074 |   |
| Balance,  December 31, 2000                          |   | 270,400                                   |       | 27,040                                        |       | (3,861 | ) | 23,179 |   | 342,417 |   | 47,252 |   |
|                                                      |   |                                      |       |                                          |       |   |   |   |   |   |   |   |   |
| Accrued  dividends and redemption value accretion         |   | 45,930                                    |       | 4,593                                         |       | 468 |   | 5,061 |   | — |   | — |   |
| Noncash  dividend accretion                               |   | —                                    |       | —                                        |       | — |   | — |   | — |   | 6,971 |   |
| Balance,  December 31, 2001                          |   | 316,330                                   |       | 31,633                                        |       | (3,393 | ) | 28,240 |   | 342,417 |   | 54,223 |   |
|                                                      |   |                                      |       |                                          |       |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                      |   |                                      |       |                                          |       |   |   |   |   |   |   |   |   |
| Per  share liquidation value as of December 31, 2002 |   |                                      |       | $                                             | 100.00     |   |   |   |   |   |   |   | $ | 181.72 |   |

 

F-33

----

 

DeCrane Aircraft’s 16%preferred stock is reflected as minority interest in preferred stock ofsubsidiary in the consolidated financial statements.

 

On June 30, 2000,250,000 shares of DeCrane Aircraft 16% preferred stock and warrants to purchase139,357 shares of DeCrane Holdings common stock were sold for $25,000,000 toDLJ affiliates (Note 16).  The proceedsfrom the sale were used to fund, in part, the ERDA acquisition (subsequentlyrenamed DeCrane Aircraft Seating Co.). A portion of the proceeds from the sale totaling $4,019,000 wereascribed to the value of the DeCrane Holdings common stock warrants issued andwas credited to additional paid-in capital. The corresponding reduction in redemption value of the preferred stock,and related issuance costs, are recorded as an issuance discount and are beingamortized using the effective interest method through the preferred stockmandatory redemption date.

 

Since the common stock ofDeCrane Holdings is privately-held, there is no established public tradingmarket for its shares upon which to base the value ascribed to the warrantsissued.  As a result, the Company, withassistance from its financial advisors for the transaction, determined the fairvalue of the warrants issued based on the aggregate enterprise value of DeCraneHoldings.  Enterprise value was computedbased upon a multiple of Adjusted EBITDA, as defined in Note 17 of thesefinancial statements, and the multiple is based upon comparable data from otherpublicly-held companies as well as publicly available information onprivately-held companies.

 

Additional terms of thepreferred stock and common stock warrants are described below.

 

*DeCrane Aircraft 16% MandatorilyRedeemable Preferred Stock*

 

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

 

Holders of the preferredstock are entitled to receive, when, as and if declared, dividends at a rateequal to 16% per annum.  Prior toJune 30, 2005, DeCrane Aircraft may, at its option, pay dividends eitherin cash or by the issuance of additional shares of preferred stock.  Since the preferred stock issuance date onJune 30, 2000, DeCrane Aircraft has elected to issue additional shares inlieu of cash dividend payments; such shares are reflected as a component ofminority interest in preferred stock of subsidiary.  The preferred stock is mandatorily redeemable onMarch 31, 2009.  Upon theoccurrence of a change in control, as defined, each holder has the right torequire DeCrane Aircraft to redeem all or part of such holder’s shares at aprice equal to 101% of the liquidation preference, plus accrued and unpaid cashdividends.

 

F-34

----

 

*DeCrane Holdings 14% MandatorilyRedeemable Preferred Stock*

 

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

 

Holders of the preferredstock are entitled to receive, when, as and if declared, dividends at a rateequal to 14% per annum.  Prior toSeptember 30, 2005, dividends are not paid in cash but instead accrete tothe liquidation value of the preferred stock, which, in turn, increases theredemption 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 Preferred Stock**

 

The Company is authorizedto issue 2,500,000 shares of $.01 par value preferred stock of which 1,360,000are designated 14% Senior Redeemable Exchangeable Preferred Stock Due 2009;1,140,000 shares remain undesignated as of December 31, 2002 and 2001.

 

**Common Stock**

 

DeCrane Holdings isauthorized to issue 10,000,000 shares of $.01 par value common stock, of which4,116,627 shares are issued and outstanding as of December 31, 2002 and3,914,274 shares at December 31, 2001. As of December 31, 2002, a total of 855,020 shares of common stockare reserved for issuance upon exercise of all warrants and stock options.

 

During the three yearsended December 31, 2002, DeCrane Holdings sold:

 

•                  326,087shares to DLJ and its affiliates for $7,500,000 in May 2000 and used theproceeds to fund a portion of the Carl F. Booth acquisition;

 

•                  20,707shares to DeCrane Aircraft management for $476,000 during 2000; and

 

•                  221,096shares to DLJ and its affiliates and a director for $5,100,000 inSeptember 2002 and used the proceeds to fund working capital requirements.

 

During the three yearsended December 31, 2002, DeCrane Holdings also repurchased and canceled:

 

•                  4,347shares from a former member of DeCrane Aircraft management for its original$23.00 per share issuance price in June 2000; and

 

•                  18,743shares from former members of DeCrane Aircraft management at $27.00 per sharein January 2002.

 

F-35

----

 

Also during 2002, theformer DeCrane Aircraft management members elected to exercise 9,252 vestedstock options on a cashless basis.  The$14,000 income tax benefit associated with the stock options exercised was alsocredited to additional paid-in capital.

 

Expenses related tocommon stock transactions total $24,000 in 2000 and $100,000 in 2002 and werecharged to additional paid-in capital.

 

**Notes Receivable for Shares Sold**

 

During 1998 and 1999,DeCrane Holdings sold mandatorily redeemable preferred and common stock inthree transactions in which one-half of the purchase price was paid in cash andone-half was loaned to the purchasers by DeCrane Aircraft, with interest at thethen applicable federal rates.  Theloans bear interest at rates ranging between 4.33% and 5.74%.  The loans, plus accrued interest, arepayable upon the sale of the stock and are collateralized by such stock.  The resulting notes receivable, plus accruedinterest, are classified as a reduction of stockholders’ equity in theconsolidated statement of financial position. The three transactions, which were based on the fair market value of theunderlying securities as determined by the Board of Directors, resulted inloans for one-half of the total purchase price, were as follows:

 

•                  inDecember 1998, a group of related party investors (Note 16) purchasedmandatorily redeemable preferred and common stock for $704,000;

 

•                  inOctober 1999, the same group of investors purchased additional shares ofcommon stock for $250,000; and

 

•                  inDecember 1999, DeCrane Aircraft’s management purchased common stock for$3,940,000.

 

During 2000, a notereceivable totaling $51,000, including accrued interest, was canceled inconjunction with the repurchase of the common stock that collateralized thenote for its original $23.00 per share issuance price.  During 2002, a note receivable totaling$200,000, plus accrued interest, was repaid in connection with the repurchaseof the common stock collateralizing the note receivable.

 

F-36

----

 

**Common Stock Warrants**

 

Common stock warrantsissued during the three years ended December 31, 2002 are summarized inthe table below.

 
|                                                       |   | **$.01 Warrants**     |       |                  |       |                 |       |
|------------------------------------------------------------|--------|-----------------------|------------|-----------------------|------------|----------------------|------------|
| **(Number of  shares, except per share data)**             |   | **Class A  Warrants** | ** ** | **Class B  Warrants** | ** ** | **$22.31  Warrants** | ** ** | **Total** | ** ** |
|                                                       |   |                  |       |                  |       |                 |       |   |   |
| Balance,  December 31, 1999                           |   | 155,000               |       | —                |       | 155,000              |       | 310,000 |   |
|                                                       |   |                  |       |                  |       |                 |       |   |   |
| Issued  with sale of DeCrane Aircraft 16% preferred stock: |   |                  |       |                  |       |                 |       |   |   |
| Issued  with the sale of preferred stock                   |   | —                |       | 139,357               |       | —               |       | 139,357 |   |
| Issued  pursuant to anti-dilution provisions               |   | —                |       | —                |       | 4,794                |       | 4,794 |   |
| Balance,  December 31, 2000, 2001 and 2002            |   | 155,000               |       | 139,357               |       | 159,794              |       | 454,151 |   |
|                                                       |   |                  |       |                  |       |                 |       |   |   |
| Warrants  exercisable at:                                  |   |                  |       |                  |       |                 |       |   |   |
| December 31,  2000                                    |   | 155,000               |       | 69,679                |       | 159,794              |       | 384,473 |   |
| December 31,  2001 and 2002                           |   | 155,000               |       | 139,357               |       | 159,794              |       | 454,151 |   |
|                                                       |   |                  |       |                  |       |                 |       |   |   |
| Other  information:                                        |   |                  |       |                  |       |                 |       |   |   |
| Exercise  price per share                                  |   | $                     | 0.01       |                  | $          | .01                  |       | $ | 22.31 |   |   |   |
| Expiration  date                                           |   | Aug. 28, 2009         |       | Jun. 30, 2010         |       | Sept. 30, 2008       |       |   |   |
|                                                            |        |                       |            |                       |            |                      |            |  |  |  |  |  |

 

All common stock warrantsare subject to adjustment for anti-dilution and have demand registrationsrights.

 

The Class B warrants weresold in June 2000 in connection with DeCrane Aircraft’s sale of 16%preferred stock.  A portion of theproceeds from the sale totaling $4,019,000 were allocated to the warrants andcredited to additional paid-in capital. Prior to July 1, 2001, warrants to purchase 69,678 shares of commonstock were cancelable upon redemption of the preferred stock and as a result,were not exercisable until on or after that date.  The issuance of the Class B warrants resulted in the exerciseprice and number of shares of common stock represented by the $22.31 warrantsto be adjusted pursuant to their anti-dilution provisions.

 

F-37

----

 

**Note 13.****                           Commitmentsand Contingencies**

 

**Litigation**

 

As part of itsinvestigation of the crash of Swissair Flight 111 off the Canadian coast onSeptember 2, 1998, the Canadian Transportation Safety Board (the“CTSB”) initially notified the Company that it recovered burned wire that wasattached to the in-flight entertainment system installed on some of Swissair’saircraft by one of the Company’s subsidiaries. The Company’s subsidiary has worked vigorously over the last five yearswith the CTSB investigators in the fact-finding investigation of thiscatastrophic incident.  OnMarch 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.

 

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

 

Boeing and Swissair havemade a claim (but have not commenced litigation) against the Company tocontribute to the amounts paid to settle the cases.  As there is no litigation pending, no discovery has been taken byeither side as to liability for the crash. The Company believes that it is not responsible for the crash and, inany event, it maintains insurance for such matters.  The Company further believes that any loss it may sustain uponthe ultimate resolution of this matter, if any, will not exceed the amount ofinsurance coverage maintained. Accordingly, no accrual for loss has been recorded.

 

The Company and itssubsidiaries are also involved in other routine legal and administrative proceedingsincident to the normal conduct of business. Management believes the ultimate disposition of all such matters willnot have a material adverse effect on the Company’s business, consolidatedfinancial position, results of operations or cash flows.

 

**LeaseCommitments**

 

The Company leases someof its facilities and equipment under capital and operating leases.  Some of the leases require payment ofproperty taxes and include escalation clauses. Future minimum capital and operating lease commitments undernon-cancelable leases are as follows as of December 31, 2002:

 
| **(In  thousands)**                            |   | **Capital  Leases** |   | **Operating  Leases** |   |
|------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                           |   |                |   |                  |   |
| Year  ending December 31,                 |   |                |   |                  |   |
| 2003                                           |   | $                   | 1,015  |                  | $      | 1,761 |   |
| 2004                                           |   | 884                 |   | 1,623                 |   |
| 2005                                           |   | 766                 |   | 1,591                 |   |
| 2006                                           |   | 567                 |   | 1,428                 |   |
| 2007                                           |   | 497                 |   | 1,144                 |   |
| 2008  and thereafter                           |   | 1,995               |   | 7,885                 |   |
| Total  minimum payments required               |   | 5,724               |   | $                     | 15,432 |   |
| Less  amount representing future interest cost |   | (1,717              | )      |                  |   |
| Recorded  obligation under capital leases      |   | $                   | 4,007  |                  |   |   |

 

F-38

----

 

Total rental expensecharged to operations was $3,083,000 for the year ended December 31, 2002,$2,982,000 for the year ended December 31, 2001 and $3,096,000 for theyear ended December 31, 2000.

 

**Note 14.****                           ConsolidatedStatements of Cash Flows**

 

The following informationsupplements the Company’s consolidated statements of cash flows.

 
|                                                                                                             |   | **Year Ended December 31,** |       |
|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|
| **(In  thousands)**                                                                                              |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                                                             |   |                             |       |   |   |   |   |
| Components  of cash paid for acquisitions:                                                                       |   |                             |       |   |   |   |   |
| Fair  value of assets acquired                                                                                   |   | $                                | —     |   | $ | — |   | $ | 83,270 |   |
| Liabilities  assumed                                                                                             |   | —                           |       | — |   | (34,132 | ) |
| Cash  paid                                                                                                       |   | —                           |       | — |   | 49,138 |   |
| Less  cash acquired                                                                                              |   | —                           |       | — |   | (173 | ) |
| Net  cash paid for acquisitions                                                                                  |   | —                           |       | — |   | 48,965 |   |
|                                                                                                             |   |                             |       |   |   |   |   |
| Contingent  consideration paid for previously completed acquisitions                                             |   | 5,826                            |       | 17,075 |   | 29,825 |   |
| Cash  purchase price reductions received as a result of settling asserted claims  against the sellers (Note 2)   |   | —                           |       | (3,718 | ) | — |   |
| Additional  acquisition related expenses                                                                         |   | 64                               |       | 172 |   | 650 |   |
| Total  cash paid for acquisitions                                                                                |   | $                                | 5,890      |   | $ | 13,529 |   | $ | 79,440 |   |
|                                                                                                             |   |                             |       |   |   |   |   |
| Noncash  investing and financing transactions:                                                                   |   |                             |       |   |   |   |   |
| 14%  mandatorily redeemable preferred stock liquidation value accretion in lieu of  cash dividend payments       |   | $                                | 7,999      |   | $ | 6,971 |   | $ | 6,074 |   |
| 16%  mandatorily redeemable preferred stock dividends paid by the issuance of  additional shares                 |   | 5,373                            |       | 4,593 |   | 2,040 |   |
| Capital  expenditures financed with capital lease obligations                                                    |   | 67                               |       | 4,376 |   | 105 |   |
| Additional  acquisition contingent consideration earned and recorded as a liability                              |   | 600                              |       | 3,825 |   | 20,154 |   |
| Interest  accrued during the period on loans to stockholders for the purchase of  DeCrane Holdings capital stock |   | 123                              |       | 116 |   | 135 |   |
|                                                                                                             |   |                             |       |   |   |   |   |
| Paid  in cash:                                                                                                   |   |                             |       |   |   |   |   |
| Interest                                                                                                         |   | $                                | 27,619     |   | $ | 34,904 |   | $ | 38,055 |   |
| Income  taxes paid (refunded), net                                                                               |   | (91                              | )          | 1,161 |   | 578 |   |

 

F-39

----

 

**Note 15.****                           EmployeeBenefit Plans**

 

**Stock Based Incentive Compensation**

 

*Management Incentive Stock OptionPlan*

 

DeCrane Holding’s Boardof Directors has approved a management incentive plan which provides for theissuance of options to purchase the common stock of DeCrane Holdings asincentive compensation to designated executive personnel and other keyemployees of the Company and its subsidiaries. The Compensation Committee of the Board of Directors of DeCrane Holdingsadministers 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 aregranted at 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.

 

During 2000, options topurchase 80,623 shares were granted under the plan, of which 15,828 sharesvested immediately.  An additional36,832 shares from the 1999 (inception of the plan) and 2000 grants vestedbased on the attainment of year 2000 performance criteria.  During 2001, no options were granted underthe plan and no additional shares from the 1999 and 2000 grants vested based onthe required year 2001 performance criteria. During 2002, options to purchase 15,000 shares, with vesting over athree year period from the grant date, were granted under the plan and noadditional shares from prior year grants vested based on the required year 2002performance criteria.

 

The per share exerciseprice of the options granted was equal to the fair market value of the commonstock on each of the grant dates and, accordingly, no compensation expense wasrecognized during the three years ended December 31, 2002.

 

*Incentive Stock Options Granted toOthers*

 

In July 1999, agroup of related party investors, including two individuals who were thenserving as directors, were granted options as compensation for consultingservices.  Options were granted topurchase 44,612 shares of DeCrane Holdings common stock at an exercise price of$23.00 per share, equal to the fair market value of the common stock on thegrant date.  The options vest over athree-year period, are subject to acceleration if DLJ and its affiliates sellany of their shares of common stock, and expire in 2009.  The options are fully vested as ofDecember 31, 2002.

 

F-40

----

 

*Summary of All Stock Options*

 

The following tablesummarizes all stock option activity during the three years endedDecember 31, 2002.

 
|                                          |   | **Year Ended December 31,** |       |
|-----------------------------------------------|--------|----------------------------------|------------|
|                                          |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                          |   | **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 |   | 363,353                          |       | $ | 24.82 |   | 386,869 |   | $ | 24.86 |   | 327,534 |   | $ | 23.00 |   |
| Granted                                       |   | 15,000                           |       | 27.00 |   | — |   | — |   | 80,623 |   | 31.94 |   |
| Exercised                                     |   | (9,252                           | )          | 23.00 |   | — |   | — |   | — |   | — |   |
| Canceled                                      |   | (31,028                          | )          | 31.32 |   | (23,516 | ) | 25.55 |   | (21,288 | ) | 23.00 |   |
| Options  outstanding at end of the year       |   | 338,073                          |       | 24.37 |   | 363,353 |   | 24.82 |   | 386,869 |   | 24.86 |   |
|                                          |   |                             |       |   |   |   |   |   |   |   |   |   |   |
| Options  exercisable at end of the year       |   | 138,546                          |       | 23.66 |   | 139,051 |   | 23.82 |   | 124,395 |   | 24.07 |   |
|                                               |        |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31,2002, options to purchase 53,544 common shares remained available for grantunder the Management Incentive Stock Option Plan.  The following table summarizes information about stock optionsoutstanding and stock options exercisable as of December 31, 2002.

 
|                       |   | **All Options Outstanding**                           |   | **Number  of Shares  Exercisable  as of  December 31,  2002** |       |
|----------------------------|--------|-------------------------------------------------------|--------|--------------------------------------------------------------------|------------|
|                       |   | **Number  of Shares  as of  December 31,  2002** |   | **Weighted-Average  Remaining  Contractual Life**                  | ** ** | ** ** |
|                       |   |                                                  |   |                                                               |       |   |   |
| Per  share exercise price: |   |                                                  |   |                                                               |       |   |   |
| $23.00                     |   | 294,527                                               |   | 6.95 years                                                         |       | 130,946 |   |
| $27.00                     |   | 7,500                                                 |   | 9.35 years                                                         |       | — |   |
| $35.00                     |   | 36,046                                                |   | 7.93 years                                                         |       | 7,600 |   |
| Total                      |   | 338,073                                               |   | 7.11 years                                                         |       | 138,546 |   |

 

For compensatory stockoptions granted to non-employees, the Company recognized compensation expenseof $138,000 for the year ended December 31, 2002, $215,000 for the yearended December 31, 2001 and $561,000 for the year ended December 31,2000.

 

F-41

----

 

For non-compensatorystock options granted to employees, the Company uses APB Opinion No. 25 toaccount for stock-based compensation and, accordingly, no compensation expensewas recognized during the three years ended December 31, 2002.  The Company has adopted the disclosure-onlyprovisions of SFAS No. 123, as amended by SFAS No. 148 (Note 1).  For the purposes of the pro forma disclosurepresented in Note 1, the estimated fair value of the options is amortized overthe options’ vesting period.  The effectof applying SFAS No. 123 may not be representative of the pro forma effectin future years since additional options may be granted during those futureyears.

 

The fair value of theoptions was determined using the following assumptions:

 
|                                                              |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                              |   |     |   |     |   |     |   |
| Compensatory options (1):                                         |   |     |   |     |   |     |   |
| Risk  free interest rates                                         |   | 5.13     | %      | 5.35     | %      | 5.23     | %      |
| Expected  dividend yield                                          |   | —   |   | —   |   | —   |   |
| Expected  life                                                    |   | 10 years |   | 10 years |   | 10 years |   |
| Expected  stock price volatility                                  |   | —   |   | —   |   | —   |   |
|                                                              |   |     |   |     |   |     |   |
| Non-compensatory  options granted to employees and directors (2): |   |     |   |     |   |     |   |
| Risk  free interest rates                                         |   | —   |   | —   |   | 5.5%-6.7 | %      |
| Expected  dividend yield                                          |   | —   |   | —   |   | —   |   |
| Expected  life                                                    |   | —   |   | —   |   | 8 years  |   |
| Weighted-average  fair value of options granted (per share)       |   | $        | 10.96  |     | $      | —   |   | $ | 9.48 |   |
|                                                                   |        |          |        |          |        |          |        |  |  |  |

 

----

(1)                                  Usingthe Black Scholes option valuation model.

 

(2)                                  Usingthe minimum value method.

 

The Black-Scholes optionvaluation model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable.  In addition, option valuation models requirethe input of highly subjective assumptions including the expected stock pricevolatility.  Because the Company’semployee stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models, as well as the minimum value method, do not necessarilyprovide a reliable single measure of its employee stock options.  The Company determines the fair value of itscommon shares 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 itsfinancial statements, and the multiple is based upon comparable data from otherpublicly-held companies as well as publicly available information onprivately-held companies.

 

The minimum value method,which is an acceptable method for non-public companies, excludes stock pricevolatility.

 

F-42

----

 

**Management Stock Purchases**

 

Beginning inDecember 1999, DeCrane Holding’s Board of Directors has permitteddesignated executive personnel and other key employees to purchase shares ofcommon stock of DeCrane Holdings, with a portion of the purchase price to beloaned to the participants by DeCrane Aircraft.  In December 1999, management purchased 171,295 shares ofDeCrane Holdings’ common stock for $23.00 per share.  The total purchase price was approximately $3,900,000, of whichone-half was paid in cash and one-half was loaned to management by DeCraneAircraft as described in Note 12.  In2000, management purchased an additional 20,707 shares for $23.00 per share incash pursuant to the plan’s antidilution provisions.  Dilution resulted from the issuance of the DeCrane Holdingscommon stock warrants in connection with the sale of DeCrane Aircraft’s 16%preferred stock.

 

**401(k)Retirement Plan**

 

Substantially alldomestic employees are eligible to participate in one of the 401(k) retirementplans the Company sponsors, which are defined contribution plans satisfying therequirements of the Employee Retirement Income Security Act of 1974.  The Company’s expense related to itsmatching contributions to these plans totaled $1,007,000 for the year ended December 31,2002, $1,767,000 for the year ended December 31, 2001 and $1,988,000 forthe year ended December 31, 2000.

 

**Note 16.****                            RelatedParty Transactions and Investors’ Agreement**

 

**RelatedParty Transactions**

 

The Company’stransactions with related parties included in the consolidated financial statementsare summarized in the table below.

 
|                                             |   | **Year Ended December 31,** |       |
|--------------------------------------------------|--------|----------------------------------|------------|
| **(In thousands)**                               |   | **2002**                         | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                             |   |                             |       |   |   |   |   |
| CSFB  / DLJ:                                     |   |                             |       |   |   |   |   |
| Transaction  financing fees and expenses         |   | $                                | 1,627      |   | $ | 520 |   | $ | 1,703 |   |
| Management  fees:                                |   |                             |       |   |   |   |   |
| Charged  to operations during the period         |   | 350                              |       | 300 |   | 300 |   |
| Payable  as of period end                        |   | 125                              |       | 375 |   | 75 |   |
|                                             |   |                             |       |   |   |   |   |
| Global  Technology Partners, LLC:                |   |                             |       |   |   |   |   |
| Promissory  notes:                               |   |                             |       |   |   |   |   |
| Receivable  as of period end, including interest |   | 567                              |       | 542 |   | 518 |   |
|                                                  |        |                                  |            |  |  |  |  |  |  |  |

 

Each related party isdescribed below.

 

F-43

----

 

*CSFB / DLJ*

 

DLJ Merchant BankingPartners II, L.P. and affiliated funds own 85.1% of DeCrane Holdings commonstock and 99.3% of its preferred stock, and 80.0% of DeCrane Aircraft’spreferred stock, all on a fully diluted basis. In November 2000, DLJ Merchant Banking Partners II, L.P. andaffiliated funds became indirect affiliates of Credit Suisse Group and CreditSuisse First Boston, Inc.

 

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

 

DLJ is represented on theBoard of Directors of both DeCrane Holdings and DeCrane Aircraft.  In addition, Credit Suisse First BostonCorporation (formerly Donaldson, Lufkin & Jenrette Securities Corporation)is involved in market-making activities for DeCrane Holding’s Class A $22.31common stock warrants and DeCrane Aircraft’s senior subordinated notes and mayhold such securities from time to time. A DLJ affiliate is also paid fees for arranging the syndicate of lendersproviding DeCrane Aircraft’s senior credit facility.

 

*Global Technology Partners, LLC*

 

Members of GlobalTechnology own 1.5% of DeCrane Holdings common stock and 0.7% of its preferredstock, all on a fully diluted basis, and had two members on the Company’s Boardof 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**

 

Investors owing 96.7% ofDeCrane Holdings’ issued and outstanding common stock and common stock warrantsand options, all of DeCrane Holdings’ preferred stock and all of DeCraneAircraft’s preferred and common stock, have entered into an Amended andRestated Investors’ Agreement, dated October 6, 2000, among DeCraneHoldings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds andentities, Putnam Investment Management, Inc. and affiliated funds and entitiesand all management investors.  Investorswho own DeCrane Holdings’ warrants to purchase 159,794 shares of common stockare not parties to the Investors’ Agreement. The agreement provides that:

 

•                  Theparties to the agreement shall vote their shares to cause DLJ Merchant BankingPartners, II, L.P. to select all members of the Board of Directors ofDeCrane Holdings and DeCrane Aircraft, thereby giving them control over theCompany’s operations.  At least one ofsuch directors on each board shall be an independent director.

 

•                  Transfersof the shares by the parties to the agreement are restricted.

 

•                  Partiesto the agreement may participate in some specific kinds of sales of shares byDLJ affiliates.

 

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

 

F-44

----

 

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

 

•                  Theholders of Class B warrants to purchase 139,357 shares of DeCrane Holdingscommon stock may request two demand registrations together with all or anycommon stock held by them, which are immediately exercisable subject tocustomary deferral and cutback provisions.

 

•                  Theparties to the agreement are entitled to unlimited piggyback registrationrights, subject to customary cutback provisions, and excluding registrations ofshares issuable in connection with any employee stock options, employee benefitplan or an acquisition.

 

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

 

•                  Anyperson acquiring shares of common stock or preferred stock who is required bythe terms of the Investors’ Agreement or any employment agreement or stockpurchase, option, stock option or other compensation plan to become a partythereto shall execute an agreement to become bound by the Investors’ Agreement.

 

**Note 17.****                                   BusinessSegment Information**

 

The Company supplies products and services to thebusiness, VIP and head-of-state aircraft market within the aerospaceindustry.  The Company’s subsidiariesare organized into two groups, each of which is a strategic business thatdevelops, manufactures and sells distinct products and services.  The groups and a description of theirbusinesses are as follows:

 

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

 

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

 

In prior periods, theCompany’s Specialty Avionics Group was a third strategic business for whichsegment information was provided.  As aresult of the sale of the Specialty Avionics Group, this group is reflected asa discontinued operation and segment information for prior periods has beenrestated.

 

F-45

----

 

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

 

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

 

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

 

The accounting policiesof the groups are substantially the same as those described in the summary ofsignificant accounting policies (Note 1). Some transactions are recorded at the Company’s corporate headquartersand are not allocated to the groups, such as most of the Company’s cash andcash equivalents, debt and related net interest expense, corporate headquarterscosts and income taxes.

 

F-46

----

 

**Summary of Business by Segment**

 
|                                          |   | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------|--------|-----------------------------------|------------|
| **(In thousands)**                            |   | **2002**                          | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                          |   |                              |       |   |   |   |   |
| Revenues:                                     |   |                              |       |   |   |   |   |
| Cabin  Management                             |   | $                                 | 172,832    |   | $ | 206,052 |   | $ | 174,796 |   |
| Systems  Integration                          |   | 58,051                            |       | 67,528 |   | 62,965 |   |
| Inter-group  elimination (1)                  |   | (1,042                            | )          | (1,468 | ) | (1,260 | ) |
| Consolidated  totals                          |   | $                                 | 229,841    |   | $ | 272,112 |   | $ | 236,501 |   |
|                                          |   |                              |       |   |   |   |   |
| Revenues  from significant customers (2):     |   |                              |       |   |   |   |   |
| Cabin  Management                             |   | $                                 | 94,014     |   | $ | 108,737 |   | $ | 107,194 |   |
| Systems  Integration                          |   | 35,388                            |       | 46,138 |   | 31,750 |   |
| Consolidated  totals                          |   | $                                 | 129,402    |   | $ | 154,875 |   | $ | 138,944 |   |
|                                          |   |                              |       |   |   |   |   |
| Adjusted  EBITDA (as defined):                |   |                              |       |   |   |   |   |
| Cabin  Management                             |   | $                                 | 32,644     |   | $ | 45,554 |   | $ | 46,041 |   |
| Systems  Integration                          |   | 18,084                            |       | 17,152 |   | 15,026 |   |
| Corporate  (3)                                |   | (6,072                            | )          | (7,125 | ) | (6,969 | ) |
| Inter-group  elimination (4)                  |   | 9                                 |       | (62 | ) | 198 |   |
| Consolidated  totals (5)                      |   | $                                 | 44,665     |   | $ | 55,519 |   | $ | 54,296 |   |
|                                          |   |                              |       |   |   |   |   |
| Depreciation  and amortization:               |   |                              |       |   |   |   |   |
| Cabin  Management                             |   | $                                 | 6,695      |   | $ | 14,607 |   | $ | 9,477 |   |
| Systems  Integration                          |   | 2,956                             |       | 4,346 |   | 4,682 |   |
| Corporate                                     |   | 961                               |       | 1,411 |   | 927 |   |
| Consolidated  totals (6)                      |   | $                                 | 10,612     |   | $ | 20,364 |   | $ | 15,086 |   |
|                                          |   |                              |       |   |   |   |   |
| Total  assets (as of period end):             |   |                              |       |   |   |   |   |
| Cabin  Management                             |   | $                                 | 281,655    |   | $ | 311,476 |   | $ | 307,241 |   |
| Systems  Integration                          |   | 62,437                            |       | 76,312 |   | 86,602 |   |
| Corporate  (7)                                |   | 44,247                            |       | 35,627 |   | 36,302 |   |
| Inter-group  elimination (8)                  |   | (113                              | )          | (143 | ) | (333 | ) |
| Continuing  operations                        |   | 388,226                           |       | 423,272 |   | 429,812 |   |
| Discontinued  operations (Specialty Avionics) |   | 160,741                           |       | 222,439 |   | 234,442 |   |
| Consolidated  totals                          |   | $                                 | 548,967    |   | $ | 645,711 |   | $ | 664,254 |   |
|                                          |   |                              |       |   |   |   |   |
| Capital  expenditures:                        |   |                              |       |   |   |   |   |
| Cabin  Management                             |   | $                                 | 3,829      |   | $ | 6,579 |   | $ | 14,896 |   |
| Systems  Integration                          |   | 478                               |       | 3,371 |   | 1,612 |   |
| Corporate                                     |   | 49                                |       | 241 |   | 3,685 |   |
| Consolidated  totals (9)                      |   | $                                 | 4,356      |   | $ | 10,191 |   | $ | 20,193 |   |

 

----

The notes appear on the next page.

 

F-47

----

 

**Summary of Business by GeographicalArea**

 
|                                                      |   | **Year Ended  December 31,** |    |
|-----------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                        |   | **2002**                          |    | **2001** |   | **2000** | ** ** |
|                                                      |   |                              |    |   |   |   |   |
| Consolidated  net revenues to unaffiliated customers (10) |   |                              |    |   |   |   |   |
| United  States                                            |   | $                                 | 222,401 |   | $ | 268,981 |   | $ | 236,283 |   |
| Mexico                                                    |   | 7,440                             |    | 3,131 |   | 218 |   |
| Consolidated  totals                                      |   | $                                 | 229,841 |   | $ | 272,112 |   | $ | 236,501 |   |
|                                                      |   |                              |    |   |   |   |   |
| Consolidated  long-lived assets (11):                     |   |                              |    |   |   |   |   |
| United  States                                            |   | $                                 | 34,420  |   | $ | 40,369 |   | $ | 35,950 |   |
| Mexico                                                    |   | 1,719                             |    | 2,291 |   | 2,167 |   |
| Consolidated  totals                                      |   | $                                 | 36,139  |   | $ | 42,660 |   | $ | 38,117 |   |

 

----

**Notes**

 

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

 

(2)                                  Threecustomers each accounted for more than 10% of the Company’s consolidatedrevenues during the three years ended December 31, 2002 as shown in thetable below.  Complete loss of any ofthese customers could have a significant adverse impact on the results ofoperations expected in future periods.

 
|                 |   | **Year Ended December 31,** |    |
|----------------------|--------|----------------------------------|---------|
| **(In  thousands)**  |   | **2002**                         |    | **2001** |   | **2000** |   |
|                 |   |                             |    |   |   |   |   |
| Textron  (a)         |   | $                                | 54,017  |   | $ | 55,522 |   | $ | 50,352 |   |
| Bombardier  (b)      |   | 39,958                           |    | 55,517 |   | 59,974 |   |
| Boeing  (b)          |   | 35,427                           |    | 43,836 |   | 28,618 |   |
| Consolidated  totals |   | $                                | 129,402 |   | $ | 154,875 |   | $ | 138,944 |   |

 

----

(a)                                  Alloperating groups derived revenues from Textron during each of the periodsexcept for the Systems Integration Group during 2000.

 

(b)                                 Alloperating groups derived revenues from Boeing and Bombardier during each of theperiods.

 

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

 

(4)                                  Reflectselimination of the effect of inter-group profits in inventory.

 

F-48

----

 

 

(5)                                  Thetable below reconciles the financial measure Adjusted EBITDA, as defined, tonet income (loss).

 
|                                                       |   | **Year Ended December 31,** |    |
|------------------------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                                         |   | **2002**                         |    | **2001** |   | **2000** | ** ** |
|                                                       |   |                             |    |   |   |   |   |   |   |   |
| Consolidated  Adjusted EBITDA (as defined)                 |   | $                                | 44,665  |   | $ | 55,519 |   | $ | 54,296 |   |
| Restructuring,  asset impairment and other related charges |   | (17,255                          | )       | (25,834 | ) | — |   |
| Depreciation  and amortization of long-lived assets (6)    |   | (10,612                          | )       | (20,364 | ) | (15,086 | ) |
| Acquisition  related charges not capitalized               |   | (1,162                           | )       | (308 | ) | (1,255 | ) |
| Other  noncash charges                                     |   | (138                             | )       | (215 | ) | (561 | ) |
| Interest  expense                                          |   | (25,376                          | )       | (29,645 | ) | (27,181 | ) |
| Minority  interest in preferred stock of subsidiary        |   | (5,841                           | )       | (5,061 | ) | (2,274 | ) |
| Other  expenses, net                                       |   | (505                             | )       | (634 | ) | (277 | ) |
| Provision  for income (taxes) benefit                      |   | 3,621                            |    | 3,933 |   | (4,607 | ) |
| Income  (loss) from discontinued operations, net of tax    |   | (41,396                          | )       | 3,546 |   | (1,727 | ) |
| Cumulative  effect of change in accounting principle       |   | (17,828                          | )       | — |   | — |   |
| Net  income (loss)                                         |   | $                                | (71,827 | ) | $ | (19,063 | ) | $ | 1,328 |   |

 

(6)                                  Reflectsdepreciation and amortization of long-lived assets, goodwill (for periods priorto the January 1, 2002 adoption of SFAS No. 142), other intangible assetsand deferred financing costs, which are classified as a component of interestexpense, as follows:

 
|                                                |   | **Year Ended December 31,** |   |
|-----------------------------------------------------|--------|----------------------------------|--------|
| **(In  thousands)**                                 |   | **2002**                         |   | **2001** |   | **2000** |   |
|                                                |   |                             |   |   |   |   |   |
| Depreciation  and amortization of long-lived assets |   | $                                | 10,612 |   | $ | 20,364 |   | $ | 15,086 |   |
| Amortization  of deferred financing costs           |   | 2,692                            |   | 2,218 |   | 2,258 |   |
| Consolidated  depreciation and amortization         |   | $                                | 13,304 |   | $ | 22,582 |   | $ | 17,344 |   |

 

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

 

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

 

(9)                                  Reflectscapital expenditures paid in cash. Excludes capital expenditures financed with capital lease obligations of$67,000 for the year ended December 31, 2002, $4,376,000 for the yearended December 31, 2001 and $105,000 for the year ended December 31,2000.

 

(10)                            Allocatedon the basis of the location of the subsidiary originating the sale.

 

(11)                            Allocatedon the basis of the location of the subsidiary and consists of the Company’sproperty and equipment.  Corporatelong-lived assets are included with the United States assets.

 

F-49

----

 

**Note 18.         Supplemental Condensed ConsolidatingFinancial Information**

 

In conjunction with the 12% senior subordinated notesdescribed in Note 10, the following condensed consolidating financialinformation is presented segregating DeCrane Aircraft, as the issuer, and theguarantor and non-guarantor subsidiaries. The accompanying financial information in the guarantor subsidiariescolumn reflects the financial position, results of operations and cash flowsfor those subsidiaries guaranteeing the notes. DeCrane Holdings is not a guarantor of the notes and is thereforereflected in the non-guarantor subsidiary column with DeCrane Aircraft’snon-guarantor subsidiaries.

 

The guarantor subsidiaries are wholly-ownedsubsidiaries of DeCrane Aircraft and their guarantees are full andunconditional on a joint and several basis. There are no restrictions on the ability of the guarantor subsidiariesto transfer funds to the issuer in the form of cash dividends, loans oradvances.  Separate financial statementsof the guarantor subsidiaries are not presented because management believesthat such financial statements would not be material to investors.  Investments in subsidiaries in the followingcondensed consolidating financial information are accounted for under theequity method of accounting. Consolidating adjustments include the following:

 

(1)                                  Eliminationof investments in subsidiaries.

 

(2)                                  Eliminationof intercompany accounts.

 

(3)                                  Eliminationof equity in earnings of subsidiaries.

 

F-50

----

 

**Balance Sheets**

 
|                                                                                                |   | **December 31, 2002** |       |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------|------------|
| **(In  thousands)**                                                                                 |   | **Issuer**                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                                                                                |   |                       |       |   |   |   |   |   |   |   |   |
| **Assets**                                                                                          |   |                       |       |   |   |   |   |   |   |   |   |
|                                                                                                |   |                       |       |   |   |   |   |   |   |   |   |
| Current  assets:                                                                                    |   |                       |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                                                                          |   | $                          | 12,343     |   | $ | 78 |   | $ | — |   | $ | — |   | $ | 12,421 |   |
| Accounts  receivable, net                                                                           |   | —                     |       | 26,354 |   | — |   | — |   | 26,354 |   |
| Inventories                                                                                         |   | —                     |       | 59,300 |   | — |   | — |   | 59,300 |   |
| Other  current assets                                                                               |   | 17,711                     |       | 443 |   | — |   | — |   | 18,154 |   |
| Assets  of discontinued operations                                                                  |   | —                     |       | 166,507 |   | 5,197 |   | (10,963 | )(1) | 160,741 |   |
| Total  current assets                                                                               |   | 30,054                     |       | 252,682 |   | 5,197 |   | (10,963 | ) | 276,970 |   |
|                                                                                                |   |                       |       |   |   |   |   |   |   |   |   |
| Property  and equipment, net                                                                        |   | 2,485                      |       | 33,654 |   | — |   | — |   | 36,139 |   |
| Other  assets, principally intangibles, net                                                         |   | 11,708                     |       | 224,150 |   | — |   | — |   | 235,858 |   |
| Investments  in subsidiaries                                                                        |   | 348,559                    |       | — |   | 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-51

----

 
|                                                                                     |   | **December 31, 2001** |       |
|------------------------------------------------------------------------------------------|--------|----------------------------|------------|
| **(In  thousands)**                                                                      |   | **Issuer**                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                       |       |   |   |   |   |   |   |   |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Current  assets:                                                                         |   |                       |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                                                               |   | $                          | 9,641      |   | $ | (163 | ) | $ | — |   | $ | — |   | $ | 9,478 |   |
| Accounts  receivable, net                                                                |   | —                     |       | 41,899 |   | — |   | — |   | 41,899 |   |
| Inventories                                                                              |   | —                     |       | 61,433 |   | — |   | — |   | 61,433 |   |
| Other  current assets                                                                    |   | 7,283                      |       | 637 |   | — |   | — |   | 7,920 |   |
| Assets  of discontinued operations                                                       |   | —                     |       | 46,947 |   | 3,688 |   | — |   | 50,635 |   |
| Total  current assets                                                                    |   | 16,924                     |       | 150,753 |   | 3,688 |   | — |   | 171,365 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Property  and equipment, net                                                             |   | 3,355                      |       | 39,305 |   | — |   | — |   | 42,660 |   |
| Other  assets, principally intangibles, net                                              |   | 15,348                     |       | 244,534 |   | — |   | — |   | 259,882 |   |
| Assets  of discontinued operations                                                       |   | —                     |       | 180,279 |   | 12,222 |   | (20,697 | )(1) | 171,804 |   |
| Investments  in subsidiaries                                                             |   | 400,151                    |       | — |   | 102,478 |   | (502,629 | )(1) | — |   |
| Intercompany  receivables                                                                |   | 259,995                    |       | 121,030 |   | 4,300 |   | (385,325 | )(2) | — |   |
| Total  assets                                                                            |   | $                          | 695,773    |   | $ | 735,901 |   | $ | 122,688 |   | $ | (908,651 | ) | $ | 645,711 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and  Stockholders’ Equity**   |   |                       |       |   |   |   |   |   |   |   |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Current  liabilities:                                                                    |   |                       |       |   |   |   |   |   |   |   |   |
| Current  portion of long-term debt                                                       |   | $                          | 11,839     |   | $ | 1,493 |   | $ | — |   | $ | — |   | $ | 13,332 |   |
| Other  current liabilities                                                               |   | 24,849                     |       | 42,687 |   | — |   | — |   | 67,536 |   |
| Liabilities  of discontinued operations                                                  |   | —                     |       | 7,728 |   | 1,113 |   | — |   | 8,841 |   |
| Total  current liabilities                                                               |   | 36,688                     |       | 51,908 |   | 1,113 |   | — |   | 89,709 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Long-term  debt, less current portion                                                    |   | 376,392                    |       | 9,544 |   | — |   | — |   | 385,936 |   |
| Intercompany  payables                                                                   |   | 127,222                    |       | 258,071 |   | 32 |   | (385,325 | )(2) | — |   |
| Other  long-term liabilities                                                             |   | 24,753                     |       | 988 |   | — |   | — |   | 25,741 |   |
| Liabilities  of discontinued operations                                                  |   | —                     |       | 15,327 |   | (1,632 | ) | — |   | 13,695 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Minority  interest in preferred stock of subsidiary                                      |   | 28,240                     |       | — |   | — |   | — |   | 28,240 |   |
| Mandatorily  redeemable 14% preferred stock                                              |   | —                     |       | — |   | 54,223 |   | — |   | 54,223 |   |
|                                                                                     |   |                       |       |   |   |   |   |   |   |   |   |
| Stockholders’  equity:                                                              |   |                       |       |   |   |   |   |   |   |   |   |
| Paid-in  capital                                                                         |   | 119,801                    |       | 336,986 |   | 88,353 |   | (472,227 | )(1) | 72,913 |   |
| Retained  earnings (deficit)                                                             |   | (17,323                    | )          | 63,165 |   | (19,401 | ) | (51,099 | )(1) | (24,658 | ) |
| Accumulated  other comprehensive loss                                                    |   | —                     |       | (88 | ) | — |   | — |   | (88 | ) |
| Total  stockholders’ equity                                                         |   | 102,478                    |       | 400,063 |   | 68,952 |   | (523,326 | ) | 48,167 |   |
| Total  liabilities, mandatorily redeemable preferred stock and stockholders’ equity |   | $                          | 695,773    |   | $ | 735,901 |   | $ | 122,688 |   | $ | (908,651 | ) | $ | 645,711 |   |

 

F-52

----

 

**Statements of Operations**

 
|                                                 |   | **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                                |       | 29,112 |   | — |   | — |   | 40,318 |   |
| 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                                |       | 33,589 |   | — |   | — |   | 45,429 |   |
| 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-53

----

 
|                                                |   | **Year Ended December 31, 2000** |       |
|-----------------------------------------------------|--------|---------------------------------------|------------|
| **(In  thousands)**                                 |   | **Issuer**                            | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** | ** ** |
|                                                |   |                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                     | —     |   | $ | 236,501 |   | $ | — |   | $ | — |   | $ | 236,501 |   |
| Cost  of sales                                      |   | —                                |       | 155,134 |   | — |   | — |   | 155,134 |   |
|                                                |   |                                  |       |   |   |   |   |   |   |   |   |
| Gross  profit                                       |   | —                                |       | 81,367 |   | — |   | — |   | 81,367 |   |
|                                                |   |                                  |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses       |   | 10,958                                |       | 22,387 |   | — |   | — |   | 33,345 |   |
| Amortization  of intangible assets                  |   | 276                                   |       | 10,352 |   | — |   | — |   | 10,628 |   |
| Interest  expense                                   |   | 27,527                                |       | (346 | ) | — |   | — |   | 27,181 |   |
| Minority  interest in preferred stock of subsidiary |   | —                                |       | — |   | 2,274 |   | — |   | 2,274 |   |
| Intercompany  charges                               |   | (20,214                               | )          | 20,214 |   | — |   | — |   | — |   |
| Equity  in earnings of subsidiaries                 |   | (8,931                                | )          | (681 | ) | (3,602 | ) | 13,214 | (3) | — |   |
| Other  expenses, net                                |   | 336                                   |       | (59 | ) | — |   | — |   | 277 |   |
| Provision  for income taxes (benefit)               |   | (13,554                               | )          | 18,161 |   | — |   | — |   | 4,607 |   |
| (Income)  loss from discontinued operations         |   | —                                |       | 2,408 |   | (681 | ) | — |   | 1,727 |   |
|                                                |   |                                  |       |   |   |   |   |   |   |   |   |
| Net  income                                         |   | $                                     | 3,602      |   | $ | 8,931 |   | $ | 2,009 |   | $ | (13,214 | ) | $ | 1,328 |   |

 

F-54

----

 

**Statements of Cash Flows**

 
|                                                                          |   | **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:**                                     |   |                                  |       |   |   |   |   |   |   |   |   |
| Senior  revolving line of credit repayments, net                              |   | (6,000                                | )          | — |   | — |   | — |   | (6,000 | ) |
| Capital  contribution to subsidiary of net proceeds from sale of common stock |   | 5,000                                 |       | — |   | 5,000 |   | (5,000 | )(1) | 5,000 |   |
| Other  long-term borrowings                                                   |   | —                                |       | 1,145 |   | — |   | — |   | 1,145 |   |
| Principal  payments on long-term debt, capitalized leases and other debt      |   | (11,895                               | )          | (1,639 | ) | — |   | — |   | (13,534 | ) |
| Deferred  financing costs                                                     |   | (1,656                                | )          | — |   | — |   | — |   | (1,656 | ) |
| Repurchase  of common stock and options                                       |   | (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-55

----

 
|                                                  |   | **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:**             |   |                                  |       |   |   |   |   |   |   |   |   |
| Debt  financing for acquisitions                      |   | 20,000                                |       | — |   | — |   | — |   | 20,000 |   |
| Other  borrowings                                     |   | —                                |       | 2,797 |   | — |   | — |   | 2,797 |   |
| Principal  payments on long-term debt and leases      |   | (8,203                                | )          | (936 | ) | — |   | — |   | (9,139 | ) |
| Senior  revolving line of credit repayments, net      |   | (400                                  | )          | — |   | — |   | — |   | (400 | ) |
| 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-56

----

 
|                                                                      |   | **Year Ended December 31, 2000** |       |
|---------------------------------------------------------------------------|--------|---------------------------------------|------------|
| **(In  thousands)**                                                       |   | **Issuer**                            | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated  Total** |   |
|                                                                      |   |                                  |       |   |   |   |   |   |   |   |   |
| **Cash flows from operating activities:**                                 |   |                                  |       |   |   |   |   |   |   |   |   |
| Net  income                                                               |   | $                                     | 3,602      |   | $ | 8,931 |   | $ | 2,009 |   | $ | (13,214 | )(3) | $ | 1,328 |   |
| Noncash  adjustments:                                                     |   |                                  |       |   |   |   |   |   |   |   |   |
| (Income)  loss from discontinued operations                               |   | —                                |       | 2,408 |   | (681 | ) | — |   | 1,727 |   |
| Equity  in earnings of subsidiaries                                       |   | (8,931                                | )          | (681 | ) | (3,602 | ) | 13,214 | (3) | — |   |
| Other  noncash adjustments                                                |   | 9,092                                 |       | 14,983 |   | 2,274 |   | — |   | 26,349 |   |
| Changes  in working capital                                               |   | (5,454                                | )          | (17,550 | ) | — |   | — |   | (23,004 | ) |
| Net  cash provided by (used for) operating activities                     |   | (1,691                                | )          | 8,091 |   | — |   | — |   | 6,400 |   |
|                                                                      |   |                                  |       |   |   |   |   |   |   |   |   |
| **Cash flows from investing activities:**                                 |   |                                  |       |   |   |   |   |   |   |   |   |
| Cash  paid for acquisitions, net of cash acquired                         |   | (89,838                               | )          | 10,398 |   | — |   | — |   | (79,440 | ) |
| Investment  in subsidiary                                                 |   | —                                |       | — |   | (7,902 | ) | 7,902 | (1) | — |   |
| Capital  expenditures and other                                           |   | (3,614                                | )          | (16,508 | ) | — |   | — |   | (20,122 | ) |
| Net  cash used for investing activities                                   |   | (93,452                               | )          | (6,110 | ) | (7,902 | ) | 7,902 |   | (99,562 | ) |
|                                                                      |   |                                  |       |   |   |   |   |   |   |   |   |
| **Cash flows from financing activities:**                                 |   |                                  |       |   |   |   |   |   |   |   |   |
| Debt  financing for acquisitions                                          |   | 55,000                                |       | — |   | — |   | — |   | 55,000 |   |
| Proceeds  from sale of preferred stock and warrants                       |   | 24,924                                |       | — |   | — |   | — |   | 24,924 |   |
| Senior  revolving line of credit borrowings, net                          |   | 12,400                                |       | — |   | — |   | — |   | 12,400 |   |
| Capital  contribution to subsidiary of proceeds from sale of common stock |   | 7,902                                 |       | — |   | 7,902 |   | (7,902 | )(1) | 7,902 |   |
| Other  borrowings                                                         |   | —                                |       | 3,451 |   | — |   | — |   | 3,451 |   |
| Principal  payments on long-term debt and leases                          |   | (3,419                                | )          | (2,041 | ) | — |   | — |   | (5,460 | ) |
| Deferred  financing costs                                                 |   | (1,900                                | )          | — |   | — |   | — |   | (1,900 | ) |
| Other,  net                                                               |   | (50                                   | )          | — |   | — |   | — |   | (50 | ) |
| Net  cash provided by financing activities                                |   | 94,857                                |       | 1,410 |   | 7,902 |   | (7,902 | ) | 96,267 |   |
| Net  cash used for discontinued operations                                |   | —                                |       | (3,298 | ) | — |   | — |   | (3,298 | ) |
| Net  increase (decrease) in cash and equivalents                          |   | (286                                  | )          | 93 |   | — |   | — |   | (193 | ) |
| Cash  and equivalents at beginning of period                              |   | 7,839                                 |       | 60 |   | — |   | — |   | 7,899 |   |
| Cash  and equivalents at end of period                                    |   | $                                     | 7,553      |   | $ | 153 |   | $ | — |   | $ | — |   | $ | 7,706 |   |

 

F-57

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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, 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                          |   |
|                                                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year Ended December 31, 2000 (1)**                              |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance  for doubtful accounts                                       |   | $                                    | 1,713  |                              | $      | 7                               |   | $              | 223    | (4)                            | $      | (407 | ) | $ | 1,536 |   |
| Reserve  for excess, slow moving and potentially obsolete material     |   | 5,229                                |   | 631                               |   | 215                             | (4)    | (2,862         | )      | 3,213                          |   |

 

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(1)               Excludes amountsattributable to the Specialty Avionics Group which is classified asdiscontinued operation.

 

(2)               Excludes $7,241,000of other asset impairment related charges resulting from the 2002 and 2001restructuring programs.

 

(3)               Excludes$12,155,000 of inventory and capitalized program cost write-offs resulting fromthe 2001 restructuring program.

 

(4)               Attributable to companiesacquired.  Reflects historical amountsused to determine the fair value of assets acquired.

 

F-58

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