** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

** **

**ANNUAL REPORT PURSUANT TO SECTION13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002**

 

**COMMISSION FILE NUMBER 333-70363**

 

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**DECRANE HOLDINGS CO.**

(Exactname 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 TO SECTION 12(b) OF THE ACT:                                                                            |
|                                                                                                                                    |
| **None**                                                                                                                                |
|                                                                                                                                    |
| SECURITIES REGISTERED  PURSUANT TO SECTION 12(g) OF THE ACT:                                                                            |
|                                                                                                                                    |
| **None**                                                                                                                                |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. ý YES o NO

 

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

 

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter:$2.6 million

 

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

 

The number of shares ofCommon Stock outstanding on March 28, 2003 was 4,116,627.

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

None.

 

 

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**Tableof Contents**

 
| **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**                                                                                             |
| **Certifications**                                                                                         |
|                                                                                                       |
| **Index  to Financial Statements, Supplementary Financial Information and Financial  Statement Schedules** |

 

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*Allstatements other than statements of historical facts included in this reportare considered forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements 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.**                                         DESCRIPTION OFBUSINESS

** **

**Company Overview**

** **

DeCrane Holdings Co., aDelaware corporation founded in 1998, is a holding company and does not have anymaterial operations or assets other than its ownership of all of the commonstock of DeCrane Aircraft Holdings, Inc. DeCrane Holdings and DLJ Merchant Banking Partners II, L.P. andaffiliated entities acquired DeCrane Aircraft in August 1998.  DeCrane Aircraft is the predecessor ofDeCrane Holdings.  As used in thisreport, unless the context indicates otherwise, “DeCrane” and “we,” “us,”“our,” and similar terms collectively refer to the combined businesses of DeCraneHoldings, DeCrane Aircraft and all of DeCrane Aircraft’s subsidiaries.

 

DeCrane AircraftHoldings, Inc., a Delaware corporation founded in 1989, is a leading providerof integrated assemblies, sub-assemblies and component parts to the aerospaceindustry.  Since our founding in 1989,we have experienced both internal growth and external growth by identifyingfragmented, high-growth niche segments within the aerospace industry andacquiring market-leading companies in those niches.  We have assembled product capability within three specific segmentsof the aerospace industry: cabin management for corporate, VIP andhead-of-state aircraft; specialty aviation electronic components, commonlyreferred to as avionics; and systems integration.  Within these markets, our customers include original manufacturersof aircraft and related avionics equipment, commonly referred to as OEM’s,major components suppliers, aircraft repair and modification centers andcommercial airlines.

 

**Our Operating Groups**

** **

We are organized intothree operating groups, consistent with the segments in which we operate: CabinManagement, Specialty Avionics and Systems Integration.  Through our operating groups, we offer acomplete line of cabinetry, galleys, seating and cabin management systems forcorporate, VIP and head-of-state aircraft, as well as specialty avionicscomponents and systems integration services.

 

On March 14, 2003 weentered into a definitive agreement to sell our Specialty Avionics Group for$140.0 million in cash.  The sale isexpected to close prior to June 30, 2003 and is subject to customary closingconditions, including financing and the receipt of regulatory and otherthird-party approvals.  The sale of ourSpecialty Avionics Group is not expected to affect the operations of ourremaining operating groups.  See “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Overview” for additional information.

 

Our historical financialposition and results of operations have also been affected by our history ofacquisitions.  Our acquisitions aredescribed in “—Other Information–Acquisitions” below.

 

**1**

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**Cabin Management Group**

** **

DeCrane’s CabinManagement Group contributed approximately 53% of our revenues for the yearended December 31, 2002.

 

***BusinessDescription***

*** ***

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

 

The Cabin ManagementGroup introduced the concept of modularity to the corporate, VIP andhead-of-state aircraft market by offering totally integrated interiorproducts.  In our view, one of thegreatest challenges facing the industry’s aircraft manufacturers is minimizingthe lead-time necessary to complete an unfinished “green” aircraft.  We also believe our distinctive approach ofdelivering integrated assemblies and sub-assemblies addresses this challenge byproviding our customers with entire pre-engineered, pre-wired and pre-plumbedmodular cabin interiors and management systems ready for final integration intothe aircraft.  We believe our totallyintegrated interior products enable our customers to reduce their lead times,supplier base and overall costs.

 

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

 

•                  *Building Critical Mass in Cabin Interior Furnishings,Cabin Management Systems and Seating for the Corporate, VIP and Head-of-StateAircraft Markets.*  Our CabinManagement Group is aggressively focused on broadening and deepening its productofferings to the corporate, VIP and head-of-state aircraft markets.  As a result of this strategy, we haveincreased revenue content per plane with our existing customer base and havesuccessfully attracted new customers.

 

•                  *Developing Capabilities to Provide Modular “TotalCabin Solutions” to the Corporate, 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 corporate/VIP/head-of-state aircraft cabin interiors to itscustomers.

 

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

 

2

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***Productsand Services***

 

Our Cabin ManagementGroup designs, engineers and manufactures a full line of customized, pre-fitproducts and provides related services. Approximately 53% of our Cabin Management Group’s revenues in 2002 werefrom two customers, Textron and Bombardier. Our products and services are in four broad categories, as summarizedbelow.

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

 

Our interior furnishingsproducts and services provided approximately 33% of our consolidated revenuesin 2002 and 2001 and 32% in 2000.

 

***Competition***

*** ***

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

 
| *Interior  Furnishings* |                                                                            | *Cabin  Management Systems* |
|-------------------------|---------------------------------------------------------------------------------|-----------------------------|
| **•**              | BE Aerospace                                                                    |                        | **•** | DPI Labs |
| **•**              | C & D Interiors                                                             |                        | **•** | Honeywell Cabin  Management Systems and Services |
| **•**              | Global Technology                                                               |                        | **•** | IEC, International |
| **•**              | Hiller                                                                          |                        | **•** | Rockwell Collins /  Airshow |
| **•**              | The Nordam Group                                                                |                        |   |   |
| **•**              | Independent completion  centers                                                 |                        | *Composite  Components* |
| **•**              | Corporate, VIP and  head-of-state aircraft manufacturers and completion centers |                        | **•** | AAR |
|                    |                                                                            | **•**                  | Fibre Art |
|                    |                                                                            |                        | **•** | Plastic Fab |
| *Seating*               |                                                                            | **•**                  | Scale Composite Works |
| **•**              | BE Aerospace                                                                    |                        | **•** | The Nordam Group |
| **•**              | Fisher (Germany)                                                                |                        |   |   |

* *

 

** **

**3**

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**Specialty Avionics Group**

 

DeCrane’s SpecialtyAvionics Group contributed approximately 29% of our revenues for the year endedDecember 31, 2002.  As described in“Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations—Overview,” on March 14, 2003 we entered into adefinitive agreement to sell our Specialty Avionics Group.

 

***BusinessDescription***

*** ***

Our Specialty AvionicsGroup supplies aircraft avionics components to the commercial and militaryaircraft markets as well as to several avionics systems suppliers includingHoneywell and Rockwell Collins.  Wefocus on assembling design, engineering and manufacturing capabilities acrossseveral specialty avionics product categories, including cockpit and cabinaudio management systems, flight deck visual display and communication systems,power and control devices, and specialty interconnect solutions such ascontacts, connectors and various harness assemblies.  Our Specialty Avionics Group is also a leading manufacturer ofhigh quality electrical contacts for military and aviation applications.

 

Through its strong focuson building integrated solutions, we believe our Specialty Avionics Group hasachieved solid positions in many product categories within the avionicscomponents market.  Today, we believe weare the world’s largest supplier of power and signal contacts to the aircraftmarket, with almost twice the number of FAA approved parts as our nearestcompetitor.  In addition, our dichroicliquid crystal display devices, commonly referred to as LCD’s, are found onmost, if not all, commercial aircraft produced today, making us the largestsupplier of dichroic LCD devices to commercial aircraft OEM’s.  Our Specialty Avionics Group has leveragedits reputation as a high quality manufacturer of avionics products and contactsto build a broader customer base and to deepen its relationships with existingcustomers.

 

The strategic objectivesof our Specialty Avionics Group are well aligned with our overall corporatestrategy of capturing and maintaining number 1 or 2 market share in high growthsegments of the avionics component market. In pursuing our objectives for the group, we have been guided by threestrategic principles:

 

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

 

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

 

•                  *Maintain Technologically Superior ProductOfferings. *The specialtyavionics market is a highly specialized and highly technical business.  It is imperative that we remain abreast oftechnological innovations and incorporate them into our products and services.

 

***Productsand Services***

*** ***

Our Specialty AvionicsGroup designs, engineers and manufactures electronic components, electronicdisplay devices and interconnect components and assemblies.  Approximately 15% of our Specialty AvionicsGroup’s revenues in 2002 were from Boeing. The products we offer are described below.

 

4

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*Cockpitand Cabin Audio, Communication, Lighting and Power and Control Devices.*  OurSpecialty Avionics Group is a leading manufacturer of cockpit audio, lightingand power and control devices, including selective calling system decoders,used in commercial, regional and corporate, VIP and head-of-stateaircraft.  We also manufacture a varietyof other commercial aircraft safety system components, including warning tonegenerators, temperature and de-icing monitoring systems, steep approachmonitors and low voltage power supplies for traffic collision avoidancesystems.  These products have providedapproximately 13% of our consolidated revenues 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. We supply precision-machined contacts for use in connectors found invirtually every electronic and electrical system on a commercial aircraft.  We sell contacts directly to aircraft andrelated electronics manufacturers and through our private labeling programs toseveral major connector manufacturers who sell connectors to the same marketsunder their brand name.  Our contactsare also widely used in military aircraft as well as a variety of commercialand defense telecommunication and data communication applications.

 

*Connectorsand Harness Assemblies.* Electronic and electrical connectors link wires and devices in avionicssystems, and permit their assembly, installation, repair and removal.  Our connectors are specially manufactured tomeet the critical performance requirements demanded by manufacturers andrequired in the harsh environment of an operating aircraft.  We produce connectors that are used inaircraft galleys, flight decks and control panels in the passenger cabin, inaddition to producing wire harness assemblies for use in cabin avionicssystems, including wire, connectors, contacts and hardware.  We typically sell our harness assemblies tomanufacturers of aircraft electronic systems.

 

*LiquidCrystal Display Devices. *Wemanufacture a wide variety of displays in both dichroic and twisted nematicformats, as well as LCD modules used in commercial and military aircraft.  LCD modules are liquid crystal displayspackaged with a backlight source, and additional mechanical and electroniccomponents that are plug-and-play ready for our customers’ instrument displayapplications.  Dichroic displays performbest in situations with high ambient lighting and low backlighting.  Twisted nematic displays are suited forsituations where a strong backlight is required.  Our LCD products are used in a variety of flight deckapplications such as auto pilot flight control systems, fuel quantityindicators, exhaust gas temperature indicators, airborne communications,navigation and safety systems and transportation signage.  Dichroic and 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.  We also manufacture a variety of electronicclock instruments for commercial and military aircraft, including fixed wingand rotary wing, all of which use our LCD devices.

 

*Wire Marking and Crimping Equipment.*  We design and manufacture surface preparationand wire marking systems.  Our productsinclude laser and inkjet marking systems, atmospheric plasma systems andautomatic crimping systems.  Ourproducts are used in the aerospace, defense, medical device and biomedicalindustries, principally wire and cable fabricators, wire processors, fiberoptics manufacturers and consumer-based products manufacturers.

 

***Competition***

*** ***

The markets served by ourSpecialty Avionics Group are fragmented, with several competitors offeringsimilar products and services.  Due tothe global nature of the aerospace industry, competition comes from both U.S.and foreign companies.  Our SpecialtyAvionics Group generally faces competition from large, diversified companiesthat produce a broad range of products. We believe that the principal competitive factors in the markets weserve are product innovations, technological superiority and

 

5

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performance,quality, price, timely deliveries and overall customer service.  Our principal competitors are summarizedbelow.

* *
| *Cockpit  and Cabin Audio, Communication, Lighting and Power and Control Devices* |                                   | *Connector  and Harness Assemblies* |
|-----------------------------------------------------------------------------------|----------------------------------------|-------------------------------------|
|                                                                              | **•**                             | AMP (connectors)                    |
| **•**                                                                        | Baker Electronics                      |                                | **•** | Carlyle (harness  assemblies) |
| **•**                                                                        | Diehl GmbH (Germany)                   |                                | **•** | Electronic Cable  Specialists (harness assemblies) |
| **•**                                                                        | Gables Engineering                     |                                | **•** | ITT Cannon (connectors) |
| **•**                                                                        | Korry                                  |                                | **•** | Radiall S.A. (France)  (connectors) |
| **•**                                                                        | Team (France)                          |                                |   |   |
|                                                                              |                                   |                                | *Liquid  Crystal Displays and Chronometers* |
| *Electrical  Contacts*                                                            |                                   | **•**                          | Air Precision |
| **•**                                                                        | Deutsch                                |                                | **•** | Davtron |
| **•**                                                                        | Lemco                                  |                                | **•** | DCI (LCD’s only) |
| **•**                                                                        | Several small contact  blank suppliers |                                | **•** | Electronique Martin  (LCD’s only) |
|                                                                              |                                   |                                | **•** | Smiths Group |

** **

**Systems Integration Group**

** **

DeCrane’s SystemsIntegration Group contributed approximately 18% of our revenues for the yearended December 31, 2002.

 

***BusinessDescription***

*** ***

Our Systems IntegrationGroup provides aircraft retrofit, completion and refurbishment solutions, fromconceptual design to Federal Aviation Administration certification, includingengineering, manufacturing and installation. Our largest business is the design, production and installation ofauxiliary fuel systems, which extend the range of an aircraft.  Our Systems Integration Group has anexclusive long-term contract with Boeing Business Jet to design, manufactureand install auxiliary fuel systems on the BBJ, a Boeing 737-700IGW, and theBBJ2, a Boeing 737-800, and is one of only three world-wide approved BBJ/BBJ2service centers.  We also focus onregulatory authority safety mandates and believe we are the major supplier ofintegration kits for smoke detection and fire suppression in the cargohold.  We also perform structural,avionics and mechanical systems modifications and FAA certification of thosemodifications before returning an aircraft to service.  During 2002, we delivered our firstcorporate/VIP/head-of-state aircraft interior completion on a BBJ2 aircraft andare under contract to perform an interior completion on a BBJ aircraft fordelivery in 2003.

 

The aerospace industry ishighly regulated in the United States by the FAA and similar regulatoryagencies abroad, such as the European Joint Aviation Authorities (commonlyreferred to as the JAA), to ensure that aviation products and services meetstringent safety and performance standards. There are a limited number of companies that have the necessaryDesignated Alteration Station authorization to offer aircraft certification onbehalf of the FAA.  Our SystemsIntegration Group is authorized to provide the full spectrum of services, fromdesign to FAA certification, needed for timely retrofitting of an aircraft,thus providing a significant competitive advantage.

 

Our Systems IntegrationGroup has adopted a two-pronged strategic 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

 

6

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aggressive internalproduct development, our Systems Integration Group has become one of the fewnon-OEM related operations with the authority to provide alteration servicesand to offer FAA certification of aircraft that undergo overhaul.  This certification ability represents asignificant competitive advantage, as we can offer all the products andservices required to re-commission an aircraft in a timely and cost efficientmanner.  We believe we have developedthe most comprehensive offering in retrofitting aircraft with auxiliary fuelsystems in the 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 mandaterequiring cockpit door video surveillance on every commercial aircrafttraveling in U.S. domestic airspace in 2003. 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 andis combined with state-of-the-art extreme low light cameras and 5.6” videomonitors with existing FAA approvals. We believe we will obtain rapid FAA approval of our Sentry OneTM systemonce the final specific requirements of the safety mandate are determined.

 

•                  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.

 

***Productsand Services***

*** ***

Our Systems IntegrationGroup provides auxiliary fuel systems, auxiliary power units and systemintegration services, including engineering, kit manufacturing, installationand certification.  Customers includeBoeing (Boeing Business Jet, Boeing’s Commercial Airplane Group and BoeingIntegrated Defense Systems), Bombardier, Cessna, Gulfstream, Honeywell,Raytheon and Rockwell Collins. Approximately 56% of our Systems Integration Group’s revenues in 2002were from Boeing.  The products andservices we provide are described below.

 

*AuxiliaryFuel Systems and Power Units.*  We design, engineer, manufacture and install auxiliary fuelsystems for corporate, 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 11% of our consolidated revenues in 2002.

 

*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,these products are essential components of the installation kits used in oursystems integration operations.

 

7

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

 

***Competition***

*** ***

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

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

** **

**Other Information**

** **

**Acquisitions**

** **

***CompaniesAcquired by DeCrane Aircraft***

*** ***

During the five yearsended December 31, 2002, DeCrane Aircraft has acquired the stock or assets ofeight significant businesses, as such term is defined by Securities andExchange Commission rules, as follows:

 

*CabinManagement Group*

 

•                  allof the common stock of Precision Pattern, Inc., a Kansas-based designer andmanufacturer of interior furniture components for corporate, 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 corporate, 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 corporate, VIP and head-of-state aircraft, onOctober 6, 1999;

 

8

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

 

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

 

•                  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;

 

*SpecialtyAvionics Group*

 

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

 

*SystemsIntegration Group*

 

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

 

All of the acquisitionswere accounted for as purchases.  Weintend to use the acquired assets to manufacture products similar to those previouslymanufactured by the companies prior to their acquisition.  Our financial statements reflect theacquired companies subsequent to their respective acquisition dates.  As a result, our historical financialstatements do not reflect the financial position and results of operations ofour current businesses and capital structure. Our acquisitions are described in Note 3 accompanying our financialstatements included in this report.

 

***DeCraneHoldings’ Acquisition of DeCrane Aircraft***

*** ***

DeCrane Holdings Co. andDLJ Merchant Banking Partners II, L.P. and affiliated entities acquired all ofthe stock of DeCrane Aircraft in August 1998 for $186.3 million.  This acquisition is referred to in thisreport as the DLJ acquisition.  As aresult, DeCrane Aircraft is the predecessor of DeCrane Holdings.

 

In November 2000, CreditSuisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking PartnersII, L.P. and other entities affiliated with Donaldson Lufkin & Jenrette,Inc. became indirect affiliates of Credit Suisse First Boston, Inc. and CreditSuisse Group.  The combined operationsof the DLJ entities and Credit Suisse First Boston are commonly referred tocollectively as Credit Suisse First Boston. See “Item 13. Certain Relationships and Related Transactions—Acquisitionof Donaldson, Lufkin & Jenrette, Inc. by Credit Suisse Group” foradditional information.

 

**Customers**

** **

We estimate that in 2002,we sold our products and services to approximately 1,500 customers.  Our primary customers include manufacturersof aircraft and related avionics equipment, airlines, aircraft componentmanufacturers and distributors, and aircraft repair and modification companies.

 

9

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Each of the followingcustomers accounted for 10% or more of our consolidated revenues for the yearended December 31, 2002:

 
| **Significant  Customers**         |   | **Cabin  Management  Group** |   | **Specialty  Avionics  Group** |   | **Systems  Integration  Group** |   | **Consolidated  Total(1)** |   |
|------------------------------------|--------|------------------------------|--------|--------------------------------|--------|---------------------------------|--------|----------------------------|--------|
|                               |   |                         |   |                           |   |                            |   |                       |   |
| Percent  of consolidated revenues: |   |                         |   |                           |   |                            |   |                       |   |
| Textron(2)                         |   | 16.6                         | %      | 0.8                            | %      | —                          | %      | 17.4                       | %      |
| Boeing(3)                          |   | 1.0                          |   | 4.5                            |   | 9.9                             |   | 15.4                       |   |
| Bombardier                         |   | 11.3                         |   | 1.9                            |   | 1.0                             |   | 14.2                       |   |
| Consolidated  revenues             |   | 28.9                         | %      | 7.2                            | %      | 10.9                            | %      | 47.0                       | %      |
|                               |   |                         |   |                           |   |                            |   |                       |   |
| Percent  of group revenues(4):     |   |                         |   |                           |   |                            |   |                       |   |
| Textron(2)                         |   | 31.3                         | %      | 2.6                            | %      | 0.1                             | %      |                       |   |
| Boeing(3)                          |   | 1.9                          |   | 15.3                           |   | 55.7                            |   |                       |   |
| Bombardier                         |   | 21.4                         |   | 6.5                            |   | 5.4                             |   |                       |   |
| Group  revenues                    |   | 54.6                         | %      | 24.4                           | %      | 61.2                            | %      |                       |   |

 

----

(1)                      Historicaldata for the three years ended December 31, 2002 is presented in Note 16accompanying our financial statements included in this report.

 

(2)                      IncludesCessna.

 

(3)                      Reflectsonly our direct revenues from Boeing. Excludes revenues from components our Specialty Avionics Group providesindirectly to Boeing through its sales to other Boeing suppliers.  Our Systems Integration Group’s revenuesfrom Boeing result from auxiliary fuel systems for the Boeing Business Jet.

 

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

 

Complete loss of any ofthe customers identified above could have a significant adverse impact on ourresults of operations expected in future periods.

 

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

 

•                  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.

 

10

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**Backlog**

** **

As of December 31, 2002,we had an aggregate sales order backlog of $105.6 million compared to $149.9million as of December 31, 2001, as follows:

 
|                 |   | **December 31,** |    |
|----------------------|--------|------------------|---------|
| **(In thousands)**   |   | **2002**         |    | **2001** |   |
|                 |   |             |    |   |   |
| Cabin  Management    |   | $                | 31,679  |   | $ | 43,653 |   |
| Specialty  Avionics  |   | 38,760           |    | 50,410 |   |
| Systems  Integration |   | 35,126           |    | 55,865 |   |
| Consolidated  totals |   | $                | 105,565 |   | $ | 149,928 |   |

 

Orders are usually filledwithin twelve months; however, backlog totaling $12.8 million as of December31, 2002 is scheduled for delivery in 2004 and beyond.  Orders may be subject to cancellation by thecustomer prior to shipment.  The levelof unfilled orders at any given date will be materially affected by when wereceive orders and how fast we fill them. Period-to-period comparisons of backlog figures may not bemeaningful.  For that reason, ourbacklogs do not necessarily accurately predict actual shipments or sales forany future period.

 

As described in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Industry Overview and Trends,” the acts, and ongoing threats, ofglobal terrorism and the current military conflicts, SARS epidemic and weakglobal economic conditions are all adversely impacting air travel and, in turn,the aerospace industry and our business. We are not able to predict the continuing impact these events will havein future periods.  However, given themagnitude of 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 ourSpecialty Avionics Group; 313 in our Systems Integration Group; and 13 in ourcorporate office.  None of our employeesare 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.

 

**Research and Development**

** **

We continually evaluateopportunities to improve our product offerings and develop new products thatincorporate new technologies to meet the demands of our customers and theFAA.  Total expenditures were $2.5million for the year ended December 31, 2002, $3.7 million during the yearended December 31, 2001 and $4.6 million during the year ended December31, 2000.

 

**Financial Information About Geographic Areas**

** **

Financial informationabout our revenues and assets by geographic area are included in Note 16accompanying our financial statements included in this report.

 

**Seasonality**

** **

Our businesses generallyare not seasonal in nature.

 

11

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**Sales and Marketing**

** **

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

 

Our Specialty AvionicsGroup utilizes a dedicated sales force, distributors and independent salesrepresentatives to execute its sales and marketing strategy.  We have distributors that purchase, stockand resell several of our product lines.

 

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

 

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

 

**Raw Materials and Component Parts**

** **

The components wemanufacture require the use of various raw materials including gold, aluminum,copper, rhodium, plating chemicals, LCD glass, 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 increases in raw materials prices in our product sale prices.  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.

 

**Intellectual Property and Proprietary Information**

** **

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

 

**Government Regulation**

** **

***FederalAviation Administration***

*** ***

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

 

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

 

12

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Each type of aircraftoperated by airlines in the United States must possess an FAA type certificate,generally held by the aircraft manufacturer, indicating that the type designmeets applicable airworthiness standards. When someone else develops a major modification to an aircraft alreadytype-certificated, that person must obtain an FAA-issued Supplemental TypeCertificate for the modification. Historically, we have obtained several hundred of these SupplementalType Certificates, most of which we obtained on behalf of our customers as partof our systems integration services. Some of these certificates we obtain were or eventually will betransferred to our customers.  As ofDecember 31, 2002, we own and/or manage on behalf of our customersapproximately 300 Supplemental Type Certificates.  Many are multi-aircraft certificates, which apply to all of theaircraft of a single type.  We foreseethe need to obtain additional Supplemental Type Certificates so that we canexpand the services we provide and the customers we serve and believe we willbe able to obtain such certificates as the need arises.

 

Supplemental TypeCertificates can be issued for proposed aircraft modifications directly by theFAA, or on behalf of the FAA by a Designated Alteration Station.  The FAA designates what types ofSupplemental Type Certificates can be issued by each Designated AlterationStation.  A subsidiary within ourSystems Integration Group is an FAA-authorized Designated Alteration Stationand can directly issue many of the Supplemental Type Certificates our customersand we require for our systems integration operations.

 

After obtaining aSupplemental Type Certificate, a manufacturer must apply for a PartsManufacturer Approval from the FAA, or a supplement to an existing PartsManufacturer Approval, which permits the holder to manufacture and sellinstallation kits according to the approved design and data package.  We have nine Parts Manufacturer Approvalsand over 215 supplements to those approvals. In general, each initial Parts Manufacturer Approval is an approval of amanufacturing or modification facility’s production quality controlsystem.  Each Parts ManufacturerApproval supplement authorizes the manufacture of a particular part inaccordance with the requirements of the corresponding Supplemental TypeCertificate.  We routinely apply for andreceive such Parts Manufacturer Approval supplements.  In order to perform the actual installations of a modification,we are also required to have FAA approval. This authority is contained either in our Parts Manufacturer Approvalsand related supplements, or in our repair station certificates.  In order for a company to perform most kindsof repair, engineering, installation or other services on aircraft, itsfacility must be designated as an FAA-authorized repair station.  As of December 31, 2002, we had nineauthorized repair stations and employed over 120 FAA certified representatives.

 

***OccupationalSafety and Health Administration***

*** ***

Our manufacturing operationsin the United States are subject to a variety of worker and community safetylaws.  The Occupational Safety andHealth Act of 1970 mandates general requirements for safe workplaces for allemployees.  In addition, OSHA providesspecial procedures and measures for the handling of hazardous and toxicsubstances and has established specific safety standards for workplaces engagedin the treatment, disposal or storage of hazardous waste.  We believe that our operations are inmaterial compliance with OSHA’s health and safety requirements.

 

**Environmental Matters**

** **

Our facilities andoperations are subject to various federal, state, local, and foreignenvironmental laws and regulations, including those relating to discharges toair, water, and land, the handling and disposal of solid and hazardous waste,and the cleanup of properties affected by hazardous substances.  In addition, some environmental laws, suchas the federal Comprehensive Environmental Response, Compensation and LiabilityAct, as amended (“CERCLA”) and similar state laws, impose strict liability uponpersons responsible for releases or potential releases of hazardoussubstances.  That liability generally isretroactive, and may create “joint and several” liability among multipleparties who have 

 

13

----

 

somerelationship to a site or a source of waste. We have sent waste to treatment, storage, or disposal facilities thathave been designated as National Priority List sites under CERCLA or equivalentlistings under state laws.  We havereceived CERCLA requests for information or allegations of potentialresponsibility from the Environmental Protection Agency regarding our use ofseveral of those sites.  In addition,some of our operations are located on properties that are contaminated tovarying degrees.

 

We have not incurred, nordo we expect to incur, liabilities in any significant amount as a result of theforegoing matters, because in these cases other entities have been heldprimarily responsible, the levels of contamination are sufficiently low so asnot to require remediation, or we are indemnified against such costs.  In most cases, we do not believe that wehave any material liability for past waste disposal.  However, in a few cases, we do not have sufficient information toassess our potential liability, if any. It is possible, given the potentially retroactive nature ofenvironmental liability, that we will receive additional notices of potential liabilityrelating to current or former activities.

 

Some of our manufacturingprocesses create wastewater that requires chemical treatment, and one of ourfacilities was cited for excessive quantity and strength of itswastewater.  The costs associated withremedying that failure were not material.

 

We believe that we havebeen and are in substantial compliance with environmental laws and regulationsand that we have no liabilities under environmental laws and regulations,except for liabilities which we do not expect would likely have a material adverseeffect on our business, financial position, results of operations or cashflows.  However, some risk ofenvironmental liability is inherent in the nature of our business, and we mightin the future incur material costs to meet current or more stringentcompliance, cleanup, or other obligations pursuant to environmental laws andregulations.

 

**ITEM 2.**                                         PROPERTIES

** **

We operate in a number ofmanufacturing, engineering and office facilities in the United States andabroad.  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 the252,000 square feet of facilities used by the Specialty Avionics Group, anadditional 32,000 square feet of owned facilities not in use and subleased toothers will be transferred to the buyer in connection with our sale of thegroup in 2003.  The sale of theSpecialty Avionics Group will not have an impact on the utilization of ourremaining facilities.

 

14

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**ITEM 3.**                                         LEGALPROCEEDINGS

 

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

 

Families of most of the229 persons who died aboard the flight have filed actions in federal and statecourts against us, our subsidiary, and many other unaffiliated parties,including Swissair and Boeing (“Passenger Actions”).  The Passenger Actions claim negligence, strict liability, andbreach of warranty relating to the installation and testing of the in-flightentertainment system.  The PassengerActions seek damages and costs in an unstated amount.  All of the Passenger Actions have been transferred to the UnitedStates District Court for the Eastern District of Pennsylvania and assignedunder MDL Case No. 1269 for coordinated or consolidated pre-trialproceedings.  Most of the PassengerActions have been settled by Boeing and Swissair.  Boeing and Swissair have advised us that they intend to seekcontribution from our subsidiary.  We donot believe, based, in part, on information received from independent fire andsafety experts retained by us, that the installation of the equipment installedby our subsidiary impacted the operation or safety of the aircraft.  Accordingly, we continue to defend theclaims.

 

We are party to otherlitigation incident to the normal course of business.  We do not believe that the outcome of all such matters in whichwe are currently involved will have a material adverse effect on our business,financial position, results of operations or cash flows.

 

**ITEM4.**                                         SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

** **

None.

 

15

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**PART II**

** **

**ITEM 5.**              MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

** **

**Market Information**

** **

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

 

**Holders**

** **

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

 

**Dividends**

** **

We have not paiddividends to date on our common stock and do not anticipate paying any cashdividends in the foreseeable future. The terms of our senior credit facility and senior subordinated noteindenture restrict our ability to pay dividends if we do not meet certainfinancial criteria.

 

**Recent Sale of Unregistered Securities**

** **

During the year endedDecember 31, 2002, we sold unregistered shares of our common stock ($.01 parvalue) in two separate cash transactions:

 

•                  Sold3,704 shares to a director for $0.1 million, or $27.00 per share, on June 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 shareswere exempt from the registration requirements of the Securities Act of 1933under Section 4(2) as transactions by an issuer not involving any publicoffering.

 

16

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**ITEM 6.**                                         SELECTEDFINANCIAL DATA

** **
|                                                                                                                          |   | **Year Ended December 31,(1)** |    |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                                                          |   |                           |    |   |   |   |   |   |   | **1998** |   |
| **(In thousands)**                                                                                                            |   | **2002**                       |    | **2001** |   | **2000** |   | **1999** |   | **Four Months  Ended  December 31,  1998** |   | **Eight Months  Ended  August 31,  1998** |   |
|                                                                                                                          |   |                           |    |   |   |   |   |   |   |   |   | **(Predecessor)(2)** |   |
|                                                                                                                          |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| **Statement  of Operations Data:**                                                                                            |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                                                      |   | $                              | 325,630 |   | $ | 395,352 |   | $ | 347,379 |   | $ | 244,048 |   | $ | 60,356 |   | $ | 90,077 |   |
| Cost of sales(3)                                                                                                              |   | 233,950                        |    | 279,681 |   | 232,048 |   | 165,871 |   | 42,739 |   | 60,101 |   |
| Gross profit                                                                                                                  |   | 91,680                         |    | 115,671 |   | 115,331 |   | 78,177 |   | 17,617 |   | 29,976 |   |
| Selling, general  and administrative expenses(4)                                                                              |   | 51,884                         |    | 59,934 |   | 45,394 |   | 40,157 |   | 10,274 |   | 19,351 |   |
| Impairment of  goodwill(5)                                                                                                    |   | 7,672                          |    | 8,583 |   | — |   | — |   | — |   | — |   |
| Amortization of  intangible assets(6)                                                                                         |   | 5,768                          |    | 19,920 |   | 17,948 |   | 13,073 |   | 3,148 |   | 1,347 |   |
| Operating income                                                                                                              |   | 26,356                         |    | 27,234 |   | 51,989 |   | 24,947 |   | 4,195 |   | 9,278 |   |
| Interest expense                                                                                                              |   | 33,894                         |    | 39,001 |   | 41,623 |   | 27,903 |   | 6,867 |   | 2,350 |   |
| Minority  interest in preferred stock of subsidiary(7)                                                                        |   | 5,841                          |    | 5,061 |   | 2,274 |   | — |   | — |   | — |   |
| Other expenses,  net(8)                                                                                                       |   | 944                            |    | 1,047 |   | 482 |   | 447 |   | 335 |   | 847 |   |
| Income (loss)  before provision for income taxes, cumulative effect of change in accounting  principle and extraordinary item |   | (14,323                        | )       | (17,875 | ) | 7,610 |   | (3,403 | ) | (3,007 | ) | 6,081 |   |
| Provision for  income taxes (benefit)(9)                                                                                      |   | 354                            |    | 1,188 |   | 6,282 |   | 952 |   | (2,668 | ) | 2,892 |   |
| Income (loss)  before cumulative effect of change in accounting principle and extraordinary  item                             |   | (14,677                        | )       | (19,063 | ) | 1,328 |   | (4,355 | ) | (339 | ) | 3,189 |   |
| Cumulative  effect of change in accounting principle(10)                                                                      |   | (57,150                        | )       | — |   | — |   | — |   | — |   | — |   |
| Extraordinary  loss from debt refinancing(11)                                                                                 |   | —                         |    | — |   | — |   | — |   | (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:**                                                                                                    |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| Cash flows from  operating activities                                                                                         |   | $                              | 30,318  |   | $ | 14,929 |   | $ | 16,783 |   | $ | 15,200 |   | $ | 1,008 |   | $ | 3,014 |   |
| Cash flows from  investing activities                                                                                         |   | (11,319                        | )       | (24,792 | ) | (112,164 | ) | (152,774 | ) | (186,939 | ) | (87,378 | ) |
| Cash flows from  financing activities                                                                                         |   | (16,228                        | )       | 11,397 |   | 95,656 |   | 142,052 |   | 189,268 |   | 89,871 |   |
| EBITDA(12)                                                                                                                    |   | 70,018                         |    | 88,791 |   | 80,992 |   | 56,526 |   | 13,476 |   | 13,743 |   |
| Depreciation and  amortization(13)                                                                                            |   | 17,119                         |    | 32,376 |   | 27,187 |   | 19,186 |   | 4,604 |   | 4,358 |   |
| Capital  expenditures:                                                                                                        |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| Paid in cash(14)                                                                                                              |   | 5,429                          |    | 11,899 |   | 22,689 |   | 7,262 |   | 1,813 |   | 1,745 |   |
| Financed with  capital lease obligations                                                                                      |   | 264                            |    | 4,438 |   | 109 |   | 1,711 |   | 48 |   | 116 |   |
|                                                                                                                          |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| **Other  Operating Data:**                                                                                                    |   |                           |    |   |   |   |   |   |   |   |   |   |   |
| Bookings(15)                                                                                                                  |   | $                              | 281,267 |   | $ | 366,983 |   | $ | 359,975 |   | $ | 252,100 |   | $ | 54,021 |   | $ | 94,439 |   |
| Backlog at end  of period(16)                                                                                                 |   | 105,565                        |    | 149,928 |   | 178,297 |   | 156,100 |   | 75,388 |   | 84,184 |   |

 
|                                  |   | **As of December 31, (in thousands)(1)** |   |
|---------------------------------------|--------|------------------------------------------|--------|
| **(In thousands)**                    |   | **2002**                                 |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                  |   |                                     |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**               |   |                                     |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents             |   | $                                        | 12,612 |   | $ | 9,794 |   | $ | 8,199 |   | $ | 7,918 |   | $ | 3,518 |   |
| Working capital                       |   | 88,689                                   |   | 81,656 |   | 61,398 |   | 32,412 |   | 49,277 |   |
| Total assets                          |   | 548,967                                  |   | 645,711 |   | 664,254 |   | 531,842 |   | 330,575 |   |
| Total debt(17)                        |   | 381,707                                  |   | 400,250 |   | 383,279 |   | 315,651 |   | 186,765 |   |
| Mandatorily redeemable securities(18) |   | 96,303                                   |   | 82,463 |   | 70,431 |   | 41,178 |   | 35,884 |   |
| Stockholders’ equity (deficit)   |   | (28,584                                  | )      | 46,153 |   | 72,503 |   | 65,063 |   | 61,879 |   |
|                                       |        |                                          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanyingNotes to Selected Financial Data.

 

17

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**Notes toSelected Financial Data:**

 

(1)                      Reflects theresults of operations and financial position of companies we acquired for allperiods subsequent to their respective acquisition dates as follows:

 
| **Company Acquired**                                                               |   | **Date Acquired** |
|------------------------------------------------------------------------------------|--------|-------------------|
|                                                                               |   |              |
| •      Coltech                                       |   | 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                                        |   | June 26, 1998     |

 

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

 

(3)                      Includescharges to reflect:

 

•                  anoncash inventory write-down of $7.2 million, a $2.6 million charge forestimated losses on uncompleted long-term contracts and $1.2 million of othercharges during the twelve months ended December 31, 2002 related to ourrestructuring activities;

 

•                  anoncash inventory write-down of $4.2 million, a noncash write-off of $7.9million of product development costs and charges totaling $3.9 million for therealignment of production programs between facilities during the twelve monthsended December 31, 2001 related to our restructuring;

 

•                  anoncash inventory write-down of $6.0 million during the twelve months endedDecember 31, 1999 related to our Systems Integration Group restructuring;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 $4.4 million during the four monthsended December 31, 1998 in connection with the DLJ acquisition, collectivelyreferred to as noncash acquisition charges.

 

(4)                      Includescharges of:

 

•                  $6.5million during the year ended December 31, 2002 related to restructuring, assetimpairment and other charges related to our restructuring activities, $3.9million of which was a noncash asset impairment write-down;

 

•                  $4.0million during the year ended December 31, 2001 related to restructuring andasset impairment charges, $1.3 million of which was a noncash asset impairmentwrite-down;

 

•                  $3.9million during the year ended December 31, 1999 related to our SystemsIntegration Group’s restructuring and asset impairment charges, $1.3 million ofwhich was a 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.

 

18

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(5)                      Reflectsnoncash goodwill impairment charges resulting from:

 

•                  ourannual impairment testing during the year ended December 31, 2002 as requiredby SFAS No. 142 “Goodwill and Other Intangible Assets,” which was effectiveJanuary 1, 2002; and

•                  ourrestructuring during the year ended December 31, 2001.

 

(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.  Starting January 1, 2002, goodwill is nolonger amortized but instead subject to annual impairment testing with a losscharged to operations in the period in which impairment occurs as described inNote 5.

 

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

 

(8)                      For theeight months ended August 31, 1998, reflects a $0.6 million charge for costsincurred in connection with a debt offering terminated as a result of the DLJacquisition.

 

(9)                      For the fourmonths ended December 31, 1998, includes a $2.6 million benefit from thereduction of the deferred tax valuation allowance.  The provision for income taxes differs from the amount determinedby applying the applicable U.S. statutory federal rate to the income beforeincome taxes primarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill impairment charges andamortization (for periods prior to January 1, 2002) and minority interest inpreferred stock of subsidiary.  The differencein the effective tax rates between periods is mostly a result of therelationship of non-deductible expenses to income before income taxes.

 

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

 

(11)                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.

 

(12)                We define 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.  EBITDA, as defined, is the primarymeasurement we use to evaluate our operating groups’ performance and isconsistent with the manner in which our lenders and ultimate investors measureour overall performance.  The tablebelow reconciles EBITDA to consolidated operating income.

 
|                                                       |   | **Year Ended December 31,** |   |
|------------------------------------------------------------|--------|-----------------------------|--------|
|                                                       |   |                        |   |   |   |   |   |   |   | **1998** |   |
| **(In thousands)**                                         |   | **2002**                    |   | **2001** |   | **2000** |   | **1999** |   | **Four Months  Ended  December 31,  1998** |   | **Eight Months  Ended  August 31,  1998** |   |
|                                                       |   |                        |   |   |   |   |   |   |   |   |   | **(Predecessor)** |   |
| Consolidated EBITDA                                        |   | $                           | 70,018 |   | $ | 88,791 |   | $ | 80,992 |   | $ | 56,526 |   | $ | 13,476 |   | $ | 13,743 |   |
| Depreciation and amortization                              |   | (17,119                     | )      | (32,376 | ) | (27,187 | ) | (19,186 | ) | (4,604 | ) | (4,358 | ) |
| Restructuring, asset impairment and other related  charges |   | (25,243                     | )      | (28,658 | ) | — |   | (9,935 | ) | — |   | — |   |
| Acquisition related charges:                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition related charges not capitalized                |   | (1,162                      | )      | (308 | ) | (1,255 | ) | (709 | ) | (229 | ) | (107 | ) |
| Noncash inventory related charges (Note 3)                 |   | —                      |   | — |   | — |   | (1,606 | ) | (4,448 | ) | — |   |
| Other noncash charges                                      |   | (138                        | )      | (215 | ) | (561 | ) | (143 | ) | — |   | — |   |
| Consolidated operating income                              |   | $                           | 26,356 |   | $ | 27,234 |   | $ | 51,989 |   | $ | 24,947 |   | $ | 4,195 |   | $ | 9,278 |   |

 

19

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EBITDA is not ameasure of performance or financial condition under accounting principles generallyaccepted in the United States of America. EBITDA is not intended to represent cash flow from operations and shouldnot be considered as an alternative to income from operations or net incomecomputed in accordance with generally accepted accounting principles, as anindicator of our operating performance, as an alternative to cash flow fromoperating activities or as a measure of liquidity.  The funds depicted by EBITDA are not available for our discretionaryuse due to funding requirements for working capital, capital expenditures, debtservice, income taxes and other commitments and contingencies.  We believe that EBITDA is a standard measureof performance commonly reported and widely used by analysts, investors andother interested parties in the financial markets.  However, not all companies calculate EBITDA using the samemethod, and the EBITDA numbers we report may not be comparable to EBITDAreported by other companies.

 

(13)                Reflectsdepreciation and amortization of plant and equipment, goodwill (for periodsprior to the January 1, 2002 adoption of SFAS No. 142) and other intangibleassets.  Excludes amortization ofdeferred financing costs and debt discounts that are classified as a componentof interest expense.

 

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

 

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

 

(16)                Backlog representsthe total invoice value of unfilled purchase orders at the end of the period.Orders may be subject to cancellation by the customer prior to shipment. Thelevel of unfilled orders at any given date during the year will be materiallyaffected by the timing of our receipt of orders and the speed with which thoseorders are filled.

 

(17)                Total debt isdefined as long-term debt, including current portion, and short-termborrowings.

 

(18)                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 stock ofsubsidiary in our consolidated financial statements.

 

20

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**ITEM 7.**             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

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

 

**Overview**

** **

Our historical financialstatements include the financial position and results of operations of ourSpecialty Avionics Group.  On March 14,2003, we entered into a definitive agreement to sell this group for$140,000,000 in cash, with the net proceeds from the sale going to repayborrowings under DeCrane’s senior credit facility.  The sale is expected to be consummated prior to June 30, 2003 andis subject to customary closing conditions, including financing and the receiptof regulatory and other third-party approvals. The sale of our Specialty Avionics Group is not expected to affect theoperations of our remaining operating groups. See “—Liquidity and Capital Resources” below for additional information.

 

Our financial positionand results of operations have also been affected by our history ofacquisitions.  As a result, ourhistorical financial statements do not reflect the financial position andresults of operations of our current businesses.  Our most recent acquisitions, which affect the comparability ofthe historical financial condition and results of operations described herein,are within our Cabin Management Group and include Carl F. Booth & Co.,acquired on May 11, 2000, and DeCrane Aircraft Seating Co. (formerly ERDA),acquired on June 30, 2000.  Ourhistorical financial statements reflect the financial position and results ofoperations of the acquired businesses subsequent to their respectiveacquisition dates.

 

**Industry Overview 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: commercial,regional and corporate, VIP and head-of-state aircraft.  The September 11, 2001 terrorist attack onthe United 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 impactingair travel and, in turn, the aerospace industry and our business.

 

In response to theseadverse conditions, we announced and implemented a restructuring plan inDecember 2001 designed to reduce expenses and conserve working capital.  This plan includes permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  During the first quarter offiscal 2002, we also announced we would consolidate the production of fourCabin Management manufacturing facilities into two facilities, resulting in thepermanent closure of two additional facilities.  During the second quarter of fiscal 2002, we also announced wewould permanently close the temporarily idled manufacturing facility.  See “—Restructuring, Asset Impairment andOther Related Charges” below for additional information.

 

The commercial aircraftportion of our business experienced significant weakness in 2002 and we believethis condition will continue into 2003 and 2004, with potential recovery notexpected to occur until 2005.  Thecorporate, VIP and head-of-state aircraft portion of our business alsoexperienced growing weakness during 2002 and this trend is likely to worsen in2003.  However, we believe the potentialexists for corporate, VIP and head-of-state aircraft deliveries to recovermodestly in 2004 and reflect growing strength in 2005.

 

21

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**Results of Operations**

** **

Our results of operationsfor the years ended December 31, 2002 and 2001 have been affected byrestructuring, asset impairment and other related charges relating to ourrestructuring activities.  Theserestructuring charges, which affect the comparability of our reported resultsof operations between periods, are more fully described in “—Restructuring,Asset Impairment and Other Related Charges” below.

 

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

** **

**Revenues.* ***Revenuesdecreased $69.8 million, or 17.6%, to $325.6 million for the year endedDecember 31, 2002 from $395.4 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 | )% |
| Specialty  Avionics      |   | (27.5                              | )      | (22.3 | ) |
| Systems  Integration     |   | (9.5                               | )      | (14.0 | ) |
| Inter-group  elimination |   | 0.4                                |   |   |   |
| Total                    |   | $                                  | (69.8  | ) |   |   |

 

*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 adverse impact of weak globaleconomic conditions on the corporate, VIP and head-of-state aircraft market in2002 versus 2001 as follows:

 

•                  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.

 

*SpecialtyAvionics.*  Revenuesdecreased by $27.5 million, or 22.3% compared to the prior year, due todecreases in commercial aircraft production affecting the following productlines:

 

•                  a$16.9 million volume decrease in interconnect products; and

 

•                  a$10.6 million decrease in cockpit audio, communications, lighting and power andcontrol devices revenues.

 

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

 

•                  a$7.5 million decrease in the commercial aircraft systems integrationengineering services we provide in the aftermath of September 11th;and

 

•                  a$2.0 million decrease resulting from reduced production and delivery ofcorporate, VIP and head-of-state aircraft auxiliary fuel systems due to theadverse impact of weak global economic conditions on the demand for those typesof aircraft.

 

22

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**Grossprofit.**  Gross profitdecreased $24.0 million, or 20.7%, to $91.7 million for the year ended December31, 2002 from $115.7 million for the same period last year.  By segment, gross profit changed as follows:

 
|                     |   | **Increase (Decrease)  From 2001** |   |
|--------------------------|--------|------------------------------------|--------|
| **(In millions)**        |   | **Am****ount**                     |   | **Percent** |   |
|                     |   |                               |   |   |   |
| Cabin  Management        |   | $                                  | (10.7  | ) | (21.7 | )% |
| Specialty  Avionics      |   | (8.1                               | )      | (20.0 | ) |
| Systems  Integration     |   | (5.3                               | )      | (20.3 | ) |
| Inter-group  elimination |   | 0.1                                |   |   |   |
| Total                    |   | $                                  | (24.0  | ) |   |   |

 

Gross profit is reducedby restructuring, asset impairment and other related charges totaling $11.0million for the year ended December 31, 2002 and $16.1 million for the yearended December 31, 2001.  Excluding thesecharges, gross profit decreased $29.1 million, or 22.1%, to $102.7 million forthe year ended December 31, 2002 compared to $131.8 million for the sameperiod last year and gross profit as a percent of revenues was 31.5% for theyear ended December 31, 2002 compared to 33.3% for the same period lastyear.

 

*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 corporate,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.

 

*SpecialtyAvionics.*  Grossprofit decreased by $8.1 million, or 20.0% compared to the prior year, due to:

 

•                  a$5.1 million decrease related to lower volume for our cockpit audio,communications, lighting and power and control devices products;

 

•                  a$3.0 million decrease caused by lower volume for our interconnect products.

 

*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 $8.0 million, or 13.4%, to $51.9 million for the year ended December31, 2002, from $59.9 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 | )% |
| Specialty  Avionics  |   | (2.9                               | )      | (20.3 | ) |
| Systems  Integration |   | (2.1                               | )      | (22.0 | ) |
| Corporate            |   | (1.1                               | )      |   |   |
| Total                |   | $                                  | (8.0   | ) |   |   |

 

23

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SG&A expenses includerestructuring, asset impairment and other related charges of $6.5 million forthe year ended December 31, 2002 and $4.0 million for the year ended December31, 2001.  Excluding these charges,SG&A expenses decreased $10.5 million, or 18.8%, to $45.4 million for theyear ended December 31, 2002 compared to $55.9 million for the same period lastyear and SG&A expenses as a percent of revenues were 13.9% for the yearended December 31, 2002 compared to 14.1% for the same period last year.

 

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

 

•                  a$4.8 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$2.9 million increase caused by charges relating to our 2001 and 2002restructuring activities.

 

*SpecialtyAvionics.*  SG&Aexpenses decreased by $2.9 million, or 20.3% compared to the prior year, dueto:

 

•                  a$2.5 million decreased in expenses as a result of lower labor and employeebenefit costs resulting from workforce reductions implemented during the fourthquarter of fiscal 2001; and

 

•                  a$0.4 million decrease caused by restructuring charges relating to our 2001restructuring activities.

 

*Systems Integration. *SG&A expenses decreased by $2.1 million, or 22.0%compared to the prior year, due to lower labor and employee benefit costsresulting from workforce reductions implemented during the fourth quarter offiscal 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 thefourth fiscal quarter of 2002, a $7.7 million charge was recorded the reflectthe additional impairment of goodwill in connection with the annual impairmenttesting provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets”.  The additional impairmentresults from continued weakness in the commercial aircraft portion of ourbusiness and pertains to our Specialty Avionics Group.

 

In 2001, an $8.6 millionimpairment charge was recognized pursuant to the provisions of SFASNo. 121, “Accounting for Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of,” to reflect the impairment resulting fromour restructuring.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $15.3 million to$17.1 million for the year ended December 31, 2002 compared to $32.4 millionfor the same period last year, primarily resulting from the adoption of newaccounting standards.

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, “Goodwill andOther Intangible Assets” and the provisions of SFAS No. 141,“Business Combinations,” which were required to be adopted concurrent with theadoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-livedasset and, as a result, the recording of periodic goodwill amortization chargeswas discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating toacquired assembled workforce intangibles not meeting the criteria forrecognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $14.3 million forthe year ended December 31, 2001,******which includes $1.6 million of assembledworkforce amortization, now deemed part of goodwill.

 

24

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Excluding the effect ofthe accounting change, depreciation and amortization decreased $1.0 million asa result of lower depreciable costs resulting from the impairment of long-livedassets recorded during the fourth quarter of fiscal 2001 and 2002, partiallyoffset by additional depreciation resulting from capital expenditures duringthe period.

 

**EBITDAand Operating income.** EBITDA decreased $18.8 million, or 21.1%, to $70.0 million for the yearended December 31, 2002, from $88.8 million for the same period last year.  Operating income decreased $0.8 million to$26.4 million for the year ended December 31, 2002, from $27.2 million for thesame period last year.  EBITDA andoperating income changed as follows:

 
|                                                       |   | **Increase (Decrease)  From 2001** |       |
|------------------------------------------------------------|--------|------------------------------------|------------|
| **(In millions)**                                          |   | **Amount**                         |       | **Percent** |   |
|                                                       |   |                               | ** ** |   | ** ** |
| EBITDA:                                                    |   |                               |       |   |   |
| Cabin  Management                                          |   | $                                  | (12.9      | ) | (28.3 | )% |
| Specialty  Avionics                                        |   | (7.9                               | )          | (23.8 | ) |
| Systems  Integration                                       |   | 0.9                                |       | 5.4 |   |
| Corporate                                                  |   | 1.0                                |       | 14.8 |   |
| Inter-group  elimination                                   |   | 0.1                                |       |   |   |
| Total  EBITDA                                              |   | (18.8                              | )          |   |   |
|                                                       |   |                               |       |   |   |
| Depreciation  and amortization                             |   | 15.3                               |       |   |   |
| Restructuring,  asset impairment and other related charges |   | 3.5                                |       |   |   |
| Other  noncash and acquisition related charges             |   | (0.8                               | )          |   |   |
| Total  operating income                                    |   | $                                  | (0.8       | ) |   |   |

 

*CabinManagement.*  EBITDAdecreased by $12.9 million, or 28.3% compared to the prior year, primarily dueto:

 

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

 

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

 

*SpecialtyAvionics.*  EBITDAdecreased by $7.9 million, or 23.8% compared to the prior year, primarily dueto:

 

•                  a$9.1 million decrease related to lower demand for our commercial aircraftproducts; offset by

 

•                  a$1.2 million increase resulting from the effect of cost reduction programsimplemented in 2001 and 2002.

 

*SystemsIntegration. *EBITDAincreased by $0.9 million, or 5.4% compared to the prior year, primarily theresult of reduced SG&A spending resulting from workforce reductions.

 

*Corporate. *EBITDA increased $1.0 million, or 14.8%compared to the prior year, due to principally to reduced SG&A spending.

 

**Interestexpense.**  Interestexpense decreased $5.1 million, or 13.1%, to $33.9 million for the year endedDecember 31, 2002 compared to $39.0 million for the same period last year duealmost entirely to lower average interest rates charged by our lenders.

 

25

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**Minorityinterest in preferred stock of subsidiary.**  Minorityinterest increased $0.7 million to $5.8 million for the year ended December 31,2002 compared to $5.1 million for the same period last year.  Minority interest reflects accrueddividends, which are compounded quarterly, and redemption value accretionduring 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.

 

**Lossbefore cumulative effect of change in accounting principle. **Loss before cumulative effect of change in accounting principle decreased$4.4 million to a net loss of $14.7 million for the year ended December 31,2002, compared to a net loss of $19.1 million for the same period last year.

 

**Cumulativeeffect of change in accounting principle. **The $57.2million charge to reflect the cumulative effect of change in accountingprinciple for the year ended December 31, 2002 was a result of transitionalgoodwill impairment charges recognized upon initial adoption of SFAS No. 142,“Goodwill and Other Intangible Assets.”

 

**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 $19.1 million for the same periodlast year.  The increase over the prioryear is primarily a result of the cumulative effect of change in accountingprinciple.

 

**Netloss applicable to common stockholders.**  Net loss applicable to common stockholdersincreased $53.8 million to a net loss of $79.8 million for the year endedDecember 31, 2002 compared to a net loss of $26.0 million for the same periodlast year.  The increase in the net lossapplicable to our common stockholders is attributable to:

 

•                  a$57.2 million charge to reflect the cumulative effect of the change inaccounting principle; 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; offset by

 

•                  a$4.4 million decrease in our net loss before the cumulative effect of change inaccounting principle, which is net of a $0.7 million increase in the charge forminority interest in preferred stock of subsidiary.

 

**Bookings. **Bookings decreased $85.7million, or 23.4%, to $281.3 million for the year ended December 31, 2002compared to $367.0 million for the same period last year.  The decrease in bookings for 2002 is due todecreases in orders for all three of our business segments.

 

**Backlog at end of period.**  Backlog decreased $44.3 million to $105.6million as of December 31, 2002 compared to $149.9 million as ofDecember 31, 2001.

 

As described in“—Industry Overview and Trends,” the acts, and ongoing threats, of globalterrorism and the current military conflicts, SARS epidemic and weak globaleconomic conditions are having an adverse impact on our business, resulting inthe decrease in bookings during 2002 and related backlog at the end of theperiod.  In addition, we believe that someof our customers have substantially reduced their order lead times which mayhave adversely affected bookings during the period.

 

26

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

 

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

** **

**Revenues.* ***Revenuesincreased $48.0 million, or 13.8%, to $395.4 million for the year endedDecember 31, 2001 from $347.4 million for the year ended December 31,2000.  By segment, revenues changed asfollows:

 
|                     |   | **Increase (Decrease)  From 2000** |   |
|--------------------------|--------|------------------------------------|--------|
| **(In millions)**        |   | **Amount**                         |   | **Percent** |   |
|                     |   |                               |   |   |   |
| Cabin  Management        |   | $                                  | 31.3   |   | 17.9 | % |
| Specialty  Avionics      |   | 12.3                               |   | 11.1 |   |
| Systems  Integration     |   | 4.6                                |   | 7.2 |   |
| Inter-group  elimination |   | (0.2                               | )      |   |   |
| Total                    |   | $                                  | 48.0   |   |   |   |

 

*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.

 

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

 

•                  a$8.5 million increase in cockpit audio, communications, lighting and power andcontrol devices revenues; and

 

•                  a$3.8 million revenue increase resulting from higher volume for our interconnectproducts.

 

*SystemsIntegration.*  Revenuesincreased by $4.6 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$4.7 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 profitincreased $0.4 million, or 0.3%, to $115.7 million for the year ended December31, 2001, from $115.3 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 | )% |
| Specialty  Avionics      |   | 6.5                                |   | 19.0 |   |
| Systems  Integration     |   | 3.5                                |   | 15.7 |   |
| Inter-group  elimination |   | (0.1                               | )      |   |   |
| Total                    |   | $                                  | 0.4    |   |   |   |

 

Grossprofit for the year ended December 31, 2001 is reduced by $16.1 million ofrestructuring and asset impairment charges relating to our 2001restructuring.  Excluding these charges,gross profit increased $16.5 million, or 14.3%, to $131.8 million for the yearended December 31, 2001 and gross profit as a percent of revenues of 33.3% forthe year ended December 31, 2001 is comparable to 33.2% for the same periodlast year.

 

27

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*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 corporate, 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 forcorporate, VIP and head-of-state aircraft furniture.

 

*SpecialtyAvionics.*  Grossprofit increased by $6.5 million, or 19.0% over the prior year, due to:

 

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

 

•                  a$4.4 million increase related to a shift in product mix to items with highermargins; offset by

 

•                  a$2.5 million decrease caused by 2001 restructuring charges relating to excessinventory write-downs.

 

*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 results subsequentto our fourth quarter 1999 restructuring; offset by

 

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

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesincreased $14.5 million, or 31.9%, to $59.9 million for the year ended December31, 2001, from $45.4 million for the same period last year. By segment,SG&A expenses changed as follows:

 
|                 |   | **Increase (Decrease)  From 2000** |   |
|----------------------|--------|------------------------------------|--------|
| **(In millions)**    |   | **Amount**                         |   | **Percent** |   |
|                 |   |                               |   |   |   |
| Cabin  Management    |   | $                                  | 10.3   |   | 65.0 | % |
| Specialty  Avionics  |   | 2.5                                |   | 20.4 |   |
| Systems  Integration |   | 1.1                                |   | 12.5 |   |
| Corporate            |   | 0.6                                |   | 7.6 |   |
| Total                |   | $                                  | 14.5   |   |   |   |

 

SG&Aexpenses for the year ended December 31, 2001 includes $4.0 million ofrestructuring and asset impairment charges relating to our 2001restructuring.  Excluding these charges,SG&A expenses increased $10.5 million, or 23.1%, to $55.9 million for theyear ended December 31, 2001 and SG&A expenses as a percent of revenuesincreased to 14.1% for the year ended December 31, 2001 compared to 13.1%for the same period last year.

 

28

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

 

•                  a$3.6 million increase caused by 2001 restructuring and asset impairment chargesrelating to severance, lease termination and other related costs;

 

•                  a$3.6 million increase in expenses to support increased production and newprograms; and

 

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

 

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

 

•                  a$2.1 million increase in labor and employee benefit costs in support of revenuegrowth; and

 

•                  a$0.4 million increase caused by 2001 restructuring charges relating toseverance and other related compensation costs.

 

*SystemsIntegration. *SG&Aexpenses increased by $1.1 million, or 52.4% 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 $.6 million, or 7.6% 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.

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense, which includesamortization of goodwill and identifiable intangible assets, increased $5.2million, or 19.1%, 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.

 

**EBITDAand Operating income.** EBITDA increased $7.8 million to $88.8 million, or 9.6%, for the yearended December 31, 2001, from $81.0 million for the same period last year.  EBITDA as a percent of revenues decreased to22.5% for the year ended December 31, 2001, from 23.3% for the same period lastyear.

 

Operating incomedecreased $24.8 million to $27.2 million for the year ended December 31,2001, from $52.0 million for the same period last year.  Operating income for the year ended December31, 2001 is reduced by $28.7 million of restructuring and asset impairmentcharges, $22.1 million of which are noncash charges.  Excluding these restructuring and asset impairment charges, operatingincome increased $3.9 million, or 7.5%, over the prior year.

 

29

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EBITDA and operatingincome changed as follows:

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

 

*CabinManagement.*  EBITDAdecreased by $0.5 million, or 1.1% compared to the prior year, primarily dueto:

 

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

 

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

 

*SpecialtyAvionics.*  EBITDAincreased by $6.6 million, or 24.6% over the prior year, due to higher demandfor our commercial aircraft products prior to the September 11thterrorist attack.

 

*SystemsIntegration. *EBITDAincreased by $2.1 million, or 14.1% over the prior year, due principally tohigher auxiliary fuel systems revenues and favorable manufacturingefficiencies.

 

**Interestexpense.**  Interestexpense was $39.0 million for the year ended December 31, 2001 compared to$41.6 million for the year ended December 31, 2000, a reduction of $2.6 milliondue to the following:

 

•                  a$4.4 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 for thesame 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 the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization and minorityinterest in preferred stock of subsidiary. The difference in the effective tax rates between periods is mostly aresult of the relationship of non-deductible expenses to income before incometaxes.

 

**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.

 

30

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**Netloss applicable to common stockholders.**  Net loss applicable to common stockholdersincreased $21.3 million to a net loss of $26.0 million for the year endedDecember 31, 2001 compared to a net loss of $4.7 million for the sameperiod last year.  The increase in thenet loss applicable to our 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 on June30, 2000; and

 

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

 

**Bookings. **Bookings increased $7.0million, or 1.9%, to $367.0 million for the year ended December 31, 2001compared to $360.0 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

 

•                  a$15.5 million decrease resulting from the adverse impact the events ofSeptember 11th and its aftermath and the weakening global economicconditions are having on our businesses.

 

**Backlog at end of period.**  Backlog decreased $28.4 million to $149.9million as of December 31, 2001 compared to $178.3 million as of December31, 2000.  The decrease in backlog for2001 primarily results 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 andOther Related Charges**

** **

The following discussionshould be read in conjunction with Note 2 accompanying our financial statementsincluded in this report.

 

During the years endedDecember 31, 2002 and 2001, we recorded restructuring, asset impairment andother related pre-tax charges, principally related to two restructuringplans.  These charges, and the effectthese charges had on our reported results of operations for the periods, aresummarized below along with comparative information for the year endedDecember 31, 2000.

 
|                                                           |   | **Year Ended December 31,** |   |
|----------------------------------------------------------------|--------|-----------------------------|--------|
| **(In millions)**                                              |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                           |   |                        |   |   |   |   |   |
| Nature of charges:                                             |   |                        |   |   |   |   |   |
| 2001 Asset Realignment Restructuring                           |   | $                           | 6.9    |   | $ | 28.7 |   | $ | — |   |
| 2002 Seat Manufacturing Facilities Restructuring               |   | 6.3                         |   | — |   | — |   |
| Other asset impairment related charges                         |   | 12.0                        |   | — |   | — |   |
| Total pre-tax charges                                          |   | $                           | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                                           |   |                        |   |   |   |   |   |
| Charged to operations:                                         |   |                        |   |   |   |   |   |
| Cost of sales                                                  |   | $                           | 11.0   |   | $ | 16.1 |   | $ | — |   |
| Selling, general and administrative expenses                   |   | 6.5                         |   | 4.0 |   | — |   |
| Impairment of goodwill                                         |   | 7.7                         |   | 8.6 |   | — |   |
| Total pre-tax charges                                          |   | $                           | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                                           |   |                        |   |   |   |   |   |
| Components of charges:                                         |   |                        |   |   |   |   |   |
| Noncash charges                                                |   | $                           | 19.4   |   | $ | 22.1 |   | $ | — |   |
| Cash charges                                                   |   | 5.8                         |   | 6.6 |   | — |   |
| Total pre-tax charges                                          |   | $                           | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                                           |   |                        |   |   |   |   |   |
| As reported:                                                   |   |                        |   |   |   |   |   |
| Gross profit                                                   |   | $                           | 91.7   |   | $ | 115.7 |   | $ | 115.3 |   |
| Selling, general and administrative expenses                   |   | 51.9                        |   | 59.9 |   | 45.4 |   |
| Impairment of goodwill                                         |   | 7.7                         |   | 8.6 |   | — |   |
| Operating income                                               |   | 26.4                        |   | 27.2 |   | 52.0 |   |
| Income (loss) before taxes and change in accounting  principle |   | (14.3                       | )      | (17.9 | ) | 7.6 |   |
|                                                           |   |                        |   |   |   |   |   |
| As adjusted:                                                   |   |                        |   |   |   |   |   |
| Gross profit                                                   |   | $                           | 102.7  |   | $ | 131.8 |   | $ | 115.3 |   |
| Selling, general and administrative expenses                   |   | 45.4                        |   | 55.9 |   | 45.4 |   |
| Impairment of goodwill                                         |   | —                      |   | — |   | — |   |
| Operating income                                               |   | 51.6                        |   | 55.9 |   | 52.0 |   |
| Income (loss) before taxes and change in accounting  principle |   | 10.9                        |   | 10.8 |   | 7.6 |   |

 

**2001 Asset Realignment Restructuring**

** **

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

 

32

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

 

Due to the ongoingweakness of the corporate, VIP and head-of-state aircraft market, we decidedduring the second quarter of fiscal 2002 to permanently close the temporarilyidled manufacturing facility.  Inconnection with this decision, we recorded additional pre-tax charges tooperations totaling $6.9 million during the year ended December 31, 2002, ofwhich $3.8 million were noncash charges, for restructuring, asset impairmentcharges and other related expenses. During 2002, we paid $4.6 million of costs related to this restructuringin cash and a $0.1 million restructuring reserve remained at December 31, 2002solely for the remaining lease termination and other related costs.  The restructuring plan relating to leasedfacilities was completed during the second quarter of fiscal 2002; however,future cash payments extend beyond this date due to lease payments on thevacated facilities and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

**2002 Seat Manufacturing Facilities Restructuring**

** **

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

 

The restructuring, assetimpairment and other related expenses are comprised of charges for currentasset write-downs, the impairment of long-lived assets, severance and leasetermination costs and other restructuring-related expenses pertaining to FAAretesting and recertification, moving, transportation and travel costs andshutdown and startup costs.

 

The restructuring planwas substantially completed during the second quarter of fiscal 2002.  A $0.1 million restructuring reserve remainsat December 31, 2002 for lease termination and other related costs.  The manufacturing facilities were closedduring June 2002; however, future cash payments extend beyond this date due tolease payments on the vacated facilities and the incurrence of other exitcosts.  Future cash payments will befunded from existing cash balances and internally generated cash from operations.

 

**Other Asset Impairment Related Charges**

** **

Due to continued weaknessin the commercial aircraft portion of our business, in the fourth quarter offiscal 2002 we recorded a pre-tax charge of $12,048,000 for additional assetimpairments.  Of this amount, $7,672,000related to our annual goodwill impairment testing pursuant to SFAS No. 142 and$4,376,000 related to inventories and was charged to cost of goods sold.

 

33

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**Liquidity and Capital Resources**

** **

We are a holding companyand have no direct material operations. Our only asset is our ownership of allof the common stock of DeCrane Aircraft, and our only material liability is ourguarantee of the DeCrane Aircraft senior credit facility.  Our principal liquidity needs are for incometaxes and, beginning in 2005, the payment cash dividends on our preferredstock.

 

Our only source of cashis dividends from DeCrane Aircraft.  Thesenior credit facility and senior subordinated notes described below are obligationsof DeCrane Aircraft and impose limitations on its ability to pay dividends tous.  We believe that DeCrane Aircrafts’debt instruments will permit it to supply us with sufficient cash to meet thecash needs referred to above for several years.  However, if that is not the case, we would not be able to satisfythose needs, 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 on acceptableterms, or at all.

 

DeCrane Aircrafts’principal cash needs are for debt service, working capital, capitalexpenditures and strategic acquisitions, as well as to provide us with cash tofinance our needs.  Its principalsources of liquidity are expected to be cash flow from operations and thirdparty borrowings, principally under its senior credit facility.

 

Net cash provided byoperating activities was $30.3 million for the year ended December 31, 2002 andconsisted of $30.8 million of cash provided by operations after adding backdepreciation, amortization, the noncash portion of our restructuring and assetimpairment charges and other noncash items, $0.4 million used for workingcapital, and $0.1 million used for other liabilities.  The following factors contributed to the $0.4 million workingcapital increase:

 

•                  a$18.5 million decrease in accounts payable and accrued expenses, primarilyresulting from reduced purchasing commensurate with lower revenues; and

 

•                  a$1.4 million inventory increase; offset by

 

•                  a$19.1 million accounts receivable decrease resulting from decreased revenues aswell as timing differences relating to progress and final billings on long-termcontracts; and further offset by

 

•                  a$0.4 million increase in income taxes payable.

 

We expect moderateworking capital growth during 2003.

 

Net cash used forinvesting activities was $11.3 million for the year ended December 31, 2002 andconsisted of:

 

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

 

•                  $5.4million for capital expenditures.

 

We anticipate spendingapproximately $5.0 to $6.0 million for capital expenditures in 2003.  As of December 31, 2002, there are noremaining contingent consideration payment obligations.

 

Net cash used forfinancing activities was $16.2 million for the year ended December 31,2002.  Cash of $22.3 million was usedfor net repayments of our revolving line of credit borrowings under our seniorcredit facility, principal payments on our term debt, capitalized leaseobligations and other debt, financing costs associated with amending our seniorcredit facility and the repurchase of stock and options from former managementmembers.  Cash of $6.1 million wasprovided by $5.0 million of proceeds from the sale of common stock and $1.1 millionof additional long-term borrowings.

 

34

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At December 31, 2002, oursenior credit facility borrowings totaling $270.2 million are at variableinterest rates based on defined margins over the current prime rate orLIBOR.  We also had $100.0 million of12% senior subordinated notes and other indebtedness totaling $11.5 millionoutstanding as of the end of the year. The total annual maturities of all of our indebtedness outstanding as ofDecember 31, 2002 are as follows: 2003 – $16.9 million; 2004 – $54.0 million;2005 – $97.8 million; 2006 – $107.1 million; 2007 – $0.6 million; and 2008 andthereafter – $105.3 million.  The seniorcredit facility and senior subordinated notes indenture impose restrictive andfinancial covenants on us.  In March2003, terms and financial covenants contained in our senior credit facilitywere amended as described below.

 

At December 31, 2002, wehad $88.7 million of working capital and had $43.6 million of borrowings availableunder our revolving line of credit.

 

As described in“—Industry Overview and Trends,” the acts, and ongoing threats, of globalterrorism and the current military conflicts, SARS epidemic and weak globaleconomic conditions are all adversely impacting our business.  In response, we implemented restructuringplans in 2001 and 2002, as described in “—Restructuring, Asset Impairment andOther Related Charges,” designed to reduce costs and conserve working capital.

 

During the fourth quarterof fiscal 2002, we further assessed our long-term business strategies in lightof current aerospace industry conditions. In addition, we subsequently determined that we would likely not be incompliance with our senior credit facility’s financial covenants in 2003.  We believe that as the aerospace industryrecovers, the demand for our Cabin Management and Systems Integration groups’products and services for corporate, VIP and head-of-state aircraft will returnto historical levels and, accordingly, we decided to focus our resources inthese market segments.  To accomplishthis objective, we embarked on a plan to sell our Specialty Avionics Group,which is highly dependent on the commercial airline industry.

 

In March 2003, we enteredinto a definitive agreement to sell our Specialty Avionics Group and receivedrequisite lender approval to amend the senior credit facility to permit thesale.  The amendment provides that theestimated net proceeds of $132.0 million from the sale will be used to repayborrowings under our senior credit facility. The amendment also relaxes various financial covenants for 2003 andbeyond, 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 additional indebtedness and the repurchaseof a portion of our 12% senior subordinated notes.

 

The amended senior creditfacility also provides that an event of default will occur if the sale is notconsummated by or is terminated for any reason prior toJune 30, 2003.  If an event ofdefault should occur, the lenders may, at that date, cease to provideadditional borrowings and may accelerate repayment of all borrowings then outstanding.  If the lenders took such action, that wouldbe an event of default under our other debt agreements, permitting thoselenders to accelerate repayment of all such debt, as well.  In such event, we would require alternatesources of capital, which we may not be able to obtain.  As a result, there are doubts about ourability to continue as a going concern.

 

We are working diligentlyto close the sale, which is subject to customary closing conditions, includingbuyer financing and the need to obtain third party consents, and expect thesale will be consummated prior to June 30, 2003.  We expect to be in compliance with the revised financialcovenants through 2003 based on our current operating plan and our ability torespond to further adverse changes in our business through additional costreduction measures.  We expect tocontinue conducting our operations in the ordinary course of business.

 

Although we cannot becertain and provided that the sale of the Specialty Avionics Group describedabove will be consummated prior to June 30, 2003, we believe our operating cashflows, together with borrowings under our senior credit facility, will besufficient to meet our future short- and long-term

 

35

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operatingexpenses, working capital requirements, capital expenditures and debt serviceobligations for the next twelve months.  However, our ability to pay principal or interest, to comply with ourdebt financial covenants or refinance our debt and to satisfy our other debtobligations will depend on our future operating performance as well ascompetitive, legislative, regulatory, business and other factors beyond ourcontrol.

 

In addition, we arecontinually considering acquisitions that complement or expand our existingbusinesses or that may enable us to expand into new markets.  Future acquisitions may require additionaldebt, equity financing or both.  We maynot be able to obtain any additional financing on acceptable terms.

 

**Disclosure of Contractual Obligations and Commitments**

** **

The following table summarizesour known obligations to make future cash payments as of December 31, 2002, aswell an estimate of the periods during which these payments are expected to bemade.

 
|                                                           |   |      |       | **Years Ending December 31,** |       |
|----------------------------------------------------------------|--------|-----------|------------|-------------------------------|------------|
| **(In millions)**                                              |   | **Total** | ** ** | **2003**                      | ** ** | **2004  and****2005** | ** ** | **2006  and****2007** | ** ** | **2008  and****Beyond** | ** ** |
|                                                           |   |      |       |                          |       |   |   |   |   |   |   |
| Long-term debt:                                                |   |      |       |                          |       |   |   |   |   |   |   |
| Senior credit facility                                         |   | $         | 270.2      |                          | $          | 14.7 |   | $ | 149.4 |   | $ | 106.1 |   | $ | — |   |
| 12% senior subordinated notes                                  |   | 100.0     |       | —                        |       | — |   | — |   | 100.0 |   |
| Capital lease obligations                                      |   | 4.2       |       | 0.7                           |       | 1.2 |   | 0.7 |   | 1.6 |   |
| Other indebtedness                                             |   | 7.3       |       | 1.5                           |       | 1.2 |   | 0.9 |   | 3.7 |   |
| Total long-term debt                                           |   | 381.7     |       | 16.9                          |       | 151.8 |   | 107.7 |   | 105.3 |   |
|                                                           |   |      |       |                          |       |   |   |   |   |   |   |
| Operating lease obligations                                    |   | 25.4      |       | 3.2                           |       | 6.1 |   | 5.2 |   | 10.9 |   |
| Mandatorily redeemable preferred stock redemption obligations: |   |      |       |                          |       |   |   |   |   |   |   |
| DeCrane Aircraft preferred stock                               |   | 37.0      |       | —                        |       | — |   | — |   | 37.0 |   |
| DeCrane Holdings preferred stock                               |   | 62.2      |       | —                        |       | — |   | — |   | 62.2 |   |
| Total obligations                                              |   | $         | 506.3      |                          | $          | 20.1 |   | $ | 157.9 |   | $ | 112.9 |   | $ | 215.4 |   |

 

The senior creditfacility obligations reflected above are prior to the effect of the March 2003amendment and application of the estimated net proceeds of $132.0 million fromthe pending sale of our Specialty Avionics Group as required by theamendment.  Assuming the pending sale ofour Specialty Avionics Group were to have been consummated on December 31,2002, our obligations would 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 |   | $ | 149.4 |   | $ | 106.1 |   | $ | — |   |
| Assumed debt repayment  |   | (132.0    | )          | (11.4                         | )          | (70.1 | ) | (50.5 | ) | — |   |
| As adjusted             |   | $         | 138.2      |                          | $          | 3.3 |   | $ | 79.3 |   | $ | 55.6 |   | $ | — |   |
|                    |   |      |       |                          |       |   |   |   |   |   |   |
| Total obligations:      |   |      |       |                          |       |   |   |   |   |   |   |
| As reported             |   | $         | 506.3      |                          | $          | 20.1 |   | $ | 157.9 |   | $ | 112.9 |   | $ | 215.4 |   |
| Assumed debt repayment  |   | (132.0    | )          | (11.4                         | )          | (70.1 | ) | (50.5 | ) | — |   |
| As adjusted             |   | $         | 374.3      |                          | $          | 8.7 |   | $ | 87.8 |   | $ | 62.4 |   | $ | 215.4 |   |

 

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**Disclosure About Off-Balance Sheet Commitments andIndemnities**

** **

During our normal courseof business, we have entered into agreements containing indemnities pursuant towhich we may be required to make payments in the future.  These indemnities are in connection withfacility leases and liabilities for specified claims arising from investmentbanking services our financial advisors provide to us.  The duration of these indemnities,commitments and guarantees varies, and in certain cases, is indefinite.  Substantially all of these indemnitiesprovide no limitation on the maximum potential future payments we could beobligated to make and is not quantifiable. We have not recorded any liability for these indemnities as of December31, 2002 since no claims have been asserted to date.

 

In connection with thepending sale of our Specialty Avionics Group, we will also be makingindemnities to the buyer with respect to a number of customary, and certainother specific, representations and warranties.   Our indemnities with respect to some of these matters will belimited in terms of duration with the maximum of potential future paymentscapped at $14.0 million, while others will have no limitations.

 

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

 

**Critical Accounting Policies**

** **

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

 

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

 

**Allowancefor uncollectible accounts receivable.**  Accounts receivable are reduced by an allowancefor amounts that are deemed uncollectible. The estimated allowance for uncollectible amounts is based primarily onour evaluation of the financial condition of each of our customers and theirpayment history.  We also provide anallowance based on the age of all receivables for which we have not establisheda 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 corporate, VIP and head-of-state andcommercial aircraft industry throughout the world and are being adverselyimpacted by the acts, and ongoing threats, of global terrorism and the currentmilitary conflicts, SARS epidemic and weak global economic conditions.  Accounts receivable of $40.7 million isreduced by an allowance for uncollectible accounts of $1.8 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 industrypractice, we defer these costs in inventory. Program costs are charged to cost of sales over the production cycle ofthe program.  Periodically, we assess the

 

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recoverabilityof the deferred program costs based on existing order backlog and our estimateof future orders.  We reduce thedeferred program costs to estimated realizable value in the period in whichrecoverability becomes uncertain.  As ofDecember 31, 2002, we have $14.8 million of deferred program costs included inwork-in-process inventory.

 

**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,including future orders, are less favorable than we projected, we may provideadditional allowances, reducing our gross profit in future periods.  Inventories of $86.5 million were reduced byan allowance for excess and obsolete inventory of $5.7 million as of December31, 2002.

 

**Goodwillimpairment.**  On January 1, 2002, we began accounting forgoodwill under Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets.”  SFAS No.142 requires an impairment-only approach to accounting for goodwill.  Because of our history of acquisitions,goodwill constitutes a significant portion of our long-term assets.  As a result of the adoption of SFAS No. 142,we recorded a transitional goodwill impairment charge of $57.2 million in 2002as the cumulative effect of the change in accounting principle.

 

TheSFAS No. 142 goodwill impairment model is a two-step process.  First, it requires a comparison of the bookvalue of net assets to the fair value of the reporting units that have goodwillassigned to them.  If the fair value isdetermined to be less than book value, a second step is performed to computethe amount of the impairment.  In thisprocess, a fair value for goodwill is estimated, based in part on the fair valueof the reporting 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 an impairmentmay exist.  We have selected October 31stas our annual testing date.

 

Weestimate the fair values of our reporting units using a discounted cash flowapproach, taking into consideration projections based on the individualcharacteristics of the reporting units, historical trends, market multiples forcomparable businesses and independent appraisals.  The forecasts of futurecash flows are based on our best estimate of future revenues and operatingcosts, based primarily on existing backlog, expected future bookings andgeneral market conditions.  Changes inthese forecasts could cause a particular reporting unit to either pass or failthe first step in the goodwill impairment mode, which could significantlychange the amount of impairment recorded.

 

Asa result of our first required annual testing, as of October 31, 2002, werecorded an additional $7.7 million pre-tax impairment charge tooperations.  The charge was primarilythe result of using lower cash flow forecasts for the commercial aircraftportion of our business.  Goodwill withan aggregate book value of $277.1 million remains as of December 31, 2002 andwill be subject impairment testing in 2003.

 

**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;

 

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•                  changesin our business strategy; or

 

•                  negativeaerospace industry or global economic conditions.

 

Our impairment reviewconsists of comparing the sum of the expected undiscounted future cash flowsresulting from the use of the asset to the carrying value of the assets.  When we determine that the carrying valuemay not be recoverable, we record an impairment loss equal to the excess of theasset’s carrying value over its fair value. We measure fair value based on a projected discounted cash flow methodusing a discount rate we believe to be commensurate with the risk inherent inour current business model.  Netlong-lived assets and intangible assets, excluding goodwill, amounted to $103.6million as of December 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 we operate.  This process involves estimating our actualcurrent tax exposure together with assessing permanent and temporarydifferences resulting from differing treatment of items, such as amortizationof 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 ofdeferred tax assets as of December 31, 2002, which includes $12.2 million offederal and state loss carryforwards. Based on our estimates of taxable income by jurisdiction and the periodsover which our deferred tax assets will be recoverable, we believe it is morelikely than not that we will generate taxable income in future periodssufficient to realize the tax benefit associated with these assets.  As a result, we have not established avaluation allowance reducing our deferred tax assets as of December 31, 2002.  In the event actual results differ from ourestimates or we adjust these estimates in future periods, we would need toestablish a valuation allowance in the period such determination is made, whichwould increase our provision for income 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.  Approximately20.4% of our revenues and 16.3% of our gross profit during the year endedDecember 31, 2002 was recognized under the percentage-of-completion method ofaccounting.

 

**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.

 

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As described in “Item 3.Legal Proceedings” and Note 12 accompanying our financial statements includedin this report, we are involved in legal proceedings for which no reserves forestimated loss contingencies have been established as of December 31,2002.  Our current evaluation of thesematters is that it is probable we will prevail and therefore are not requiredto accrue estimated losses in accordance with SFAS No. 5.  However, there is a possibility that we mayultimately be required to pay all or a portion of the contingent liabilitiesrelated to these matters, which may have an adverse impact on our business,financial position, results of operations or cash flows in future periods.

 

**Restructuringof our businesses.**  Asdescribed in “—Restructuring, Asset Impairment and Other Related Charges,” werecorded charges totaling $25.2 million during 2002 and $28.7 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.

 

**Recently Issued 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 a Business,and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”are met.  SFAS No. 145 provisionsregarding early extinguishment of debt are generally effective for fiscal yearsbeginning January 1, 2003.  We believethis new standard will not have an impact on our business, consolidatedfinancial 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.  Webelieve SFAS No. 146 may affect the timing of recognizing future restructuringcosts, as well as the amounts recognized, depending on the nature of the exitor disposal activity and the timing of the related estimated cash flows.

 

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**FIN No. 45**

** **

In November 2002, theFinancial 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 us on a prospective basis to guarantees issued or modifiedafter December 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 anyagreement in which it is a guarantor of indebtedness of others therefore theinterpretation is not expected to have a material effect on our financialposition, results of operations or cash flows. We have adopted the disclosure requirements of this interpretation as ofDecember 31, 2002.

 

**SFAS No. 148**

** **

In December 2002, theFinancial 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.  In addition,SFAS No. 148 amends the disclosure requirements of SFAS 123, “Accounting forStock-Based Compensation,” to require disclosure in both interim and annualfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.

 

SFAS No. 148 is effectivefor our fiscal year ended December 31, 2002 and for interim financialstatements beginning in 2003.  SFAS No.148 is not expected to have a significant effect on our financial position,results of operations or cash flows.

 

**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”).  We do not have any variable interestentities as defined in FIN No. 46.

 

**Forward-Looking Statements and Risk Factors**

** **

**Special Note Regarding Forward-Looking Statements**

** **

All statements other thanstatements of historical facts included in this report 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;

 

•                  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;

 

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•                  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 factorscould cause our actual results to differ materially from those expressed orimplied in this report.  Although webelieve that the expectations reflected in such statements are reasonable, we cangive no assurance that such expectations will prove to be correct.  We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.  You should notrely on our forward-looking statements as if they were certainties.

 

**Risk Factors**

** **

**Liquidity. **An event of default under our senior creditfacility will occur if we do not consummate the sale of our Specialty AvionicsGroup prior to June 30, 2003, accelerating the repayment of substantially allof our indebtedness and raising substantial doubt about our ability to continueas a going concern.

 

If the sale is notconsummated and an event of default should occur, the lenders may, at thatdate, cease to provide additional borrowings and may accelerate repayment ofall borrowings then outstanding.  If thelenders took such action, that would be an event of default under our other debtagreements, permitting those lenders to accelerate repayment of all such debt,as well.  In such event, we wouldrequire alternate sources of capital, which we may not be able to obtain.

 

Our financial statementsdo not reflect any adjustments that may result from the outcome of theseuncertainties.

 

**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 total consolidated indebtedness of approximately $381.7 million, and wehad $43.6 million of additional revolving line of credit borrowings availableunder our senior credit facility.  Inorder to borrow those funds, we will have to satisfy funding conditions of thekind usually imposed in similar agreements. The senior credit facility and the indenture under which our seniorsubordinated notes are issued each also permit us to incur significant amountsof additional debt and to secure that debt with some of our assets.

 

The amount of debt wecarry could have important consequences:

 

•                  Itmay limit the cash flow available for general corporate purposes andacquisitions.  Interest payments on ourdebt were $28.4 million for the year ended December 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.

 

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•                  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 creditfacility and the indenture under which our senior subordinated notes are issuedlimit our flexibility in operating our businesses, including our ability andthe ability of our subsidiaries to:

 

•                  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 seniorcredit facility requires that we satisfy several tests of financialcondition.  Our ability to do so can beaffected by events beyond our control, and we cannot assure you that we willmeet those tests.  Our failure to do socould result in a default under our senior credit facility or the notes.

 

**Potential Inability to Service Debt.**  We will require a significant amount of cashto service our debt.  Our ability togenerate cash depends on cash flows from our subsidiaries and many factorsbeyond our control.

 

Our ability to satisfyour debt obligations and to fund our operations and planned capitalexpenditures will depend on our ability to generate cash in the future.  This, to an extent, is subject to generaleconomic, financial, competitive, legislative, regulatory and other factorsthat are beyond our control.

 

We cannot assure you thatour operating cash flow will be sufficient to meet our anticipated futureoperating and capital expenditures and debt payments as they become due or thatfuture borrowings will be available to us for such purposes.  If our cash flow is lower than we expect, wemight be forced to reduce or delay acquisitions or capital expenditures, sellassets and/or reduce operating expenses in order to make all required debtservice payments.  Alternatively, we mayhave to refinance all or a portion of our debt on or before maturity.  A reduction in our operating expenses mightreduce important efforts, such as selling and marketing programs, managementinformation system upgrades and new product development.  In addition, we may not be able to refinanceour debt on commercially reasonable terms or at all.

 

For example, we reportedlosses of $14.7 million for the year ended December 31, 2002 and $19.1 millionfor the same period in 2001.  The lossesinclude pre-tax restructuring charges of $25.2 in 2002 and $28.7 million in2001 we recorded as a result of restructuring plans we implemented in responseto

 

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the adverse impact theevents described in “—Aerospace Industry Risks” below are having on ourbusiness.

 

**Aerospace Industry Risks.**  The aerospace industry is cyclical andaffected by many factors beyond our control, including the financial conditionof the commercial airline industry and global economic conditions.

 

We compete in theaircraft products and services market of the aerospace industry.  The market for our products and services islargely driven by demand in the three civil aircraft markets: commercial,regional and corporate, VIP and head-of-state aircraft.   The September 11, 2001 terrorist attack onthe United 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 impactingair travel and, in turn, the aerospace industry and our business.

 

Based on industry andmarket data, we believe the commercial aircraft portion of our business willexperience significant weakness during 2003 and 2004, with potential recoverynot expected to occur until 2005.  Wealso believe the corporate, VIP and head-of-state aircraft portion of ourbusiness will experience growing weakness during 2003 with aircraft deliveriespossibly recovering in 2004 and continuing recovery thereafter.

 

Further or prolongeddecreases in demand for new aircraft, both commercial and corporate, VIP andhead-of-state, as well as related component parts, would result in additionaldecreases in demand for our products and services, and, correspondingly, ourrevenues, thereby adversely affecting our financial condition.  In addition, further deterioration orprolonged decreases in demand could result in further restructurings of ourbusiness.

 

**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 inbusiness from any one of our key customers could have a material adverse effecton our business.  Our three largestcustomers accounted for 47.0% of our consolidated revenues for the year endedDecember 31, 2002 as follows: Textron (which includes Cessna) – 17.4%; Boeing –15.4%; and Bombardier – 14.2%.  Some ofour customers also have the in-house capabilities to perform the services andprovide many of the products we offer and, accordingly, could discontinueoutsourcing their business to us.

 

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

 

•                  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;

 

•                  ona prospective basis, we must extend to the customers any reductions in prices orlead 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.

 

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**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.

 

At December 31, 2002,goodwill and other intangible assets represented approximately 60% of our totalassets.  Intangible assets consist ofgoodwill and other identifiable intangible assets associated with ouracquisitions, representing the excess of cost over the fair value of tangibleassets we have acquired.  We may not beable to realize the value of these assets. Goodwill in not amortized but is subject to annual testing forimpairment.  Identifiable intangibleassets with finite lives are amortized over their individual useful lives andare also subject to annual impairment testing. Simply stated, if the carrying value of the asset exceeds the estimatedundiscounted future cash flows from operating activities of the relatedbusiness, an 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 totaling $16.3million during the two years ended December 31, 2002.  In addition, we recorded a transitional goodwill impairmentcharge of $57.2 million as of January 1, 2002 in connection with the adoptionof SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

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

 

**Competition. **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 corporate aircraft manufacturers, independent completion and modificationcompanies, major airlines and other independent service organizations,including some of our customers, many of whom may have significantly greaterfinancial, 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 posecertain risks.

 

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

 

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

 

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

 

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

 

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

 

Federal and state laws,particularly the federal Comprehensive Environmental Response, Compensation andLiability Act (“CERCLA”), impose strict, retroactive and joint and severalliability upon persons responsible for releases or potential releases ofhazardous substances and other parties who have some relationship to a site ora source of waste.  We have sent wasteto treatment, storage or disposal facilities that have been designated asNational Priority List sites under CERCLA or equivalent listings under statelaws.  We have received requests forinformation or allegations of potential responsibility from the U.S.Environmental Protection Agency regarding our use of several of thesesites.  Given the potentiallyretroactive nature of environmental liability, it is possible that we willreceive additional notices of potential liability relating to current or formeractivities.  We may incur costs in thefuture for prior waste disposal by us or former owners of our subsidiaries orour facilities.  Some of our operationsare located on properties that are contaminated to varying degrees.  In addition, some of our manufacturingprocesses create wastewater that requires chemical treatment, and one of ourfacilities has been cited for excessive quantity and strength of itswastewater.  We may incur costs in thefuture to address existing or future contamination.  If we incur significant costs in connection with these or otherenvironmental issues, our business and financial condition could be adverselyaffected.

 

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

 

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

 

**Industry and Market Data. **We cannot guarantee theaccuracy and completeness of the industry and market data and trends wedescribe in this report and rely upon in preparing our operating forecasts.

 

The industry and marketdata we use is based on the good faith estimates of our management, whichestimates are based primarily upon internal management information and, to theextent available, independent industry publications and other publiclyavailable information.  However, thenature of the

 

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aerospaceindustry and competition in our markets results in limited availability ofreliable, independent data.  Although webelieve that the sources we have used are reliable, we do not guarantee, andhave not independently verified, the accuracy and completeness of the information.

 

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

 

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

 

**ITEM7A.**                                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

** **

We are exposed to variousmarket risks, including interest rates and changes in foreign currency exchangerates.  Market risk is the potentialloss arising from adverse changes in prevailing market rates and prices.  From time to time, we use derivativefinancial instruments to manage and reduce risks associated with thesefactors.  We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

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

 

Market risk related toour variable-rate debt is estimated as the potential decrease in pre-taxearnings resulting from an increase in interest rates.  The interest rates applicable tovariable-rate debt are, at our option, based on defined margins over thecurrent prime rate or LIBOR.  AtDecember 31, 2002, the current prime rate was 4.75% and the current LIBOR was1.95%.  Based on $270.2 million ofvariable-rate debt outstanding as of December 31, 2002, a hypothetical onepercent rise in interest rates, to 5.75% for prime rate borrowings and 2.95%for LIBOR borrowings, would reduce our pre-tax earnings by $2.7 millionannually.

 

To limit our exposurerelated to rising interest rates, we have entered into an interest rate swapcontract to effectively convert $4.5 million of variable-rate industrialrevenue bonds to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedgeagainst changes in the amount of future cash flows associated with interestpayments on this portion of our variable-rate debt.  Market risk related to this interest rate swap contract isestimated as the potential higher interest expense we will incur if thevariable interest rate decreases below the 4.2% fixed rate.  Based on the $4.5 million of variable-ratedebt converted to fixed-rate debt outstanding as of December 31, 2002, ahypothetical one percent decrease in the variable interest rate to 3.2%, wouldreduce our pre-tax earnings by less than $0.1 million annually.

 

The estimated fair valueof our $100.0 million fixed-rate long-term debt decreased $53.5 million, or57.2%, to approximately $40.0 million at December 31, 2002 from $93.5 millionat December 31, 2001.  We believe thedecrease is attributable to the overall deterioration of the aerospaceindustry’s financial condition following the events of September 11thand its aftermath.  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 believe the increase may be aresult of our announcement that we have entered into a definitive agreement tosell our Specialty Avionics Group. Market risk related to our fixed-rate debt is deemed to be the potentialincrease in fair value resulting from a decrease in interest rates.  For example, a hypothetical ten percentdecrease in the interest rates, from 12.0% to 10.8%, would increase the fairvalue of our fixed-rate debt by approximately $7.0 million.

 

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**Foreign Currency Exchange Rate Risk.**  Our foreign customers are located in variousparts of the world, primarily Western Europe, the Far East and Canada, and wehave subsidiaries with manufacturing facilities in Switzerland and Mexico.  To limit our foreign currency exchange raterisk related to sales to our customers, orders are primarily valued and sold inU.S. dollars.  From time to time we haveentered into forward foreign exchange contracts to limit our exposure relatedto foreign inventory procurement and operating costs.  While we have not entered into any such contracts since 1998, wemay do so in the future depending on our assessment of future foreign exchangerate trends.

 

**ITEM 8.**                                         FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

** **

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

 

**ITEM 9.**              CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

** **

None.

 

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**PARTIII**

** **

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

** **

**Directors and Executive Officers**

** **

The following table setsforth certain information concerning each person who is currently a director orexecutive officer of DeCrane Holdings and its wholly-owned subsidiary, DeCraneAircraft.

 

 
| **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                                          |   |
|                    |   |    |   |                                                                   |   |                                                                                 |   |
| Jeffrey F. Smith        |   | 42      |   | —                                                                 |   | 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)                      Member ofthe Compensation Committee; Ms. Schnabel serves as the committee’s chairperson.

 

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

 

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

 

*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 Holdingssince March 1999.  In August 2002, Mr.Kaplan was appointed Chief Financial Officer and Assistant Secretary of DeCraneHoldings.  From April 1998 to March1999, he served as Executive Vice President and Chief Operating Officer ofDevelopers Diversified Realty Corporation. From 1977 to 1998, he was a partner with Price Waterhouse LLP, havingjoined the firm in 1964.  He became adirector of DeCrane Aircraft and DeCrane Holdings in 2000.

 

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*RobertG. Martin* has been our Senior Vice President and President ofthe Systems Integration Group since October 1999.  Mr. Martin also served as President of PATS since we acquired itin January 1999 through December 2002 and as President of Aerospace DisplaySystems from September 1996 until October 1999.

 

*JeffreyA. Nerland* has been our Senior Vice President and Presidentof the Cabin Management Group since December 2001.  From January 1999 until December 2001, Mr. Nerland served as VicePresident, Business Development, and was appointed Senior Vice President inMarch 2001.  From July 1994 throughDecember 1998, he was President of The Nerland Group and a partner withBudetti, Harrison, Nerland and Associates, a consulting and interim managementfirm.

 

*JeffreyF. Smith* has been our Senior Vice President and President ofthe Specialty Avionics Group since October 1999 and President of Avtech sincewe acquired it in June 1998. Previously, he has served in various capacities with Avtech since 1989.

 

*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 through August2002.  Mr. Dean has also been theManaging Partner of DLJ Merchant Banking, Inc. since November 1995.  In November 2000, Credit Suisse FirstBoston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking, Inc.became an indirect affiliate of Credit Suisse First Boston, Inc. and CreditSuisse Group.  Mr. Dean serves as adirector of AKI Holding Corp., Amatek Holdings S.A., Arcade HoldingCorporation, Manufacturers’ Services Limited, Mueller Holdings, Inc., and VonHoffman Holdings, Inc.

 

*James A. Quella*has been a director of DeCrane Aircraft and DeCrane Holdings since February2003.  Mr. Quella has also been aManaging Director and Operating Partner of DLJ Merchant Banking, Inc. sinceJuly 2000.  In November 2000, CreditSuisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking, Inc. andDonaldson, Lufkin & Jenrette Securities Corporation became indirectaffiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group.  Previously, Mr. Quella was a ManagingDirector with GH Ventures Partners LLC from January 2000 through July 2000 andVice Chairman of Mercer Management Consulting, Inc. from 1997 through1999.  Mr. Quella serves as a directorof Advanstar Holdings, 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.  In November 2000, CreditSuisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking, Inc. andDonaldson, Lufkin & Jenrette Securities Corporation became indirectaffiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group.  Ms. Schnabel serves as a director ofEnvironmental Systems Products Holdings, Inc., Noveon, Inc. and Shoppers DrugMart, Inc.

 

*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 and systems.  Mr. Suter has served Emerson in variouscapacities since 1989.  Mr. Suter servesas a director of Furniture Brands International, Inc.

 

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**Selectionof Directors and Term of Office**

 

DLJ Merchant BankingPartners II, L.P. is entitled to select all members of the Board of Directorsof DeCrane Holdings and DeCrane Aircraft as described in “Item 13. CertainRelationships and Related Transactions—Investors’ Agreement.”  At least one of such directors selected byDLJ Merchant Banking on each board must be an independent director.  Mr. Suter is an independent director.  All directors hold office until theirsuccessor is designated and qualified.

 

**ITEM 11.**                                  EXECUTIVECOMPENSATION

 

**Summary Compensation Table**

 

The following tabledescribes all annual compensation awarded to, earned by or paid to our ChiefExecutive Officer and the four most highly compensated executive officers otherthan the Chief Executive Officer for the three years ended December 31, 2002.

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

 

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(5)                      Mr. Martinserved as President of PATS since we acquired it in January 1999 throughDecember 2002.  In October 1999, Mr.Martin also became our Senior Vice President and Group President of SystemsIntegration.

 

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

 

(7)                      Mr. Smithhas been our Senior Vice President and President of the Specialty AvionicsGroup since October 1999.  Prior toOctober 1999, Mr. Smith was President of our Avtech subsidiary.

 

**StockOption Grants in Last Fiscal Year**

 

During the fiscal yearended December 31, 2002, no options to purchase shares of DeCrane Holdingscommon stock were granted pursuant to the management incentive plan.  See “—Employment Agreements and CompensationArrangements – Incentive Plans.”

 

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

 

No stock options wereexercised by our executive officers during the year ended December 31,2002.  The following table sets forthinformation about the stock options held by the executive officers named belowas of December 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    |   | 36,253 / 73,605                                                                        |   | $                                                                                                  |  — / — |   |
| Richard J. Kaplan  |   | 10,812 / 21,950                                                                        |   | — /—                                                                                     |                  |
| Robert G. Martin   |   | 6,944 / 14,098                                                                         |   | — /—                                                                                     |                  |
| Jeffrey A. Nerland |   | 5,291 / 10,741                                                                         |   | — /—                                                                                     |                  |
| Jeffrey F. Smith   |   | 7,019 / 14,253                                                                         |   | — / —                                                                                    |                  |
|                    |        |                                                                                        |        |                                                                                                    |                       |  |

 

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(1)                      Unexercisedoptions had an exercise price above fair market value as of December 31, 2002.

 

**CompensationCommittee Interlocks and Insider Participation**

 

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

 

**EmploymentAgreements and Compensation Arrangements**

 

**R. Jack DeCrane**

 

On July 17, 1998, theCompensation Committee of our Board of Directors approved a three-yearemployment agreement between DeCrane Aircraft and R. Jack DeCrane, replacinghis prior employment agreement that was to expire on September 1, 1998.  Mr. DeCrane’s employment agreement wasamended on May 5, 2000 to provide for a term through June 30, 2001, which termshall automatically extend for additional one year periods unless terminated byeither party giving the other party notice of termination prior to April 1stof the year prior to the year in which the agreement would otherwiseterminate.  Mr. DeCrane’s employmentagreement provides for various benefits, including an initial salary of$310,000, which is subject to annual review and increase, but not a decrease,and an annual bonus, currently determined pursuant to the performance-basedcash incentive bonus plan.

 

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

 

**Change of Control Agreements**

 

In August 2002, weentered into change of control agreements with each of our executive officers,other than Mr. DeCrane, whose above described employment agreement containsprovisions concerning change of control. The agreements, which replaced earlier agreements which had expired,provide that, for a term of two years from the effective date, should a changeof control, as defined, occur during the term of the agreement and theexecutive officer’s employment shall be involuntarily terminated for any reasonon a date which is less than two years after the date of the change of control,other than for cause, death or disability, DeCrane Aircraft is required to paysuch executive his then salary plus average annual bonus over the last fiveyears, equal to twenty four months compensation less the number of monthselapsed from the date of the change of control to the employment terminationdate.

 

**401(k) Retirement Plan**

 

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

 

**Incentive Plans**

 

Our management incentiveplan provides for the issuance of options to purchase the common stock ofDeCrane Holdings as incentive compensation to designated executive personneland other key employees of DeCrane Aircraft and its subsidiaries.  The Compensation Committee of the Board ofDirectors 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.  At December 31, 2002, 32% of the optionsgranted 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.

 

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

 

Our cash incentive bonusplan provides for the allocation of a bonus pool each year for incentivecompensation to designated executive personnel and certain other employees ofDeCrane Aircraft and its subsidiaries. The bonus pool, which is approved by the compensation committee, isadjusted each year based on EBITDA and cash flow, as defined, generated by therelevant participant’s operating unit. Bonus payments are generally made in the quarter following the end ofthe year or period to which they pertain.

 

**Deferred Compensation Plan**

 

From December 1999through December 2002, we had a deferred compensation plan in which certaindesignated executive officers and key employees were permitted to defer aportion of their compensation earned. DeCrane Aircraft invested amounts deferred and participants were fullyvested in the amounts representing the fair market value of their investmentaccounts.  We made no contributions onbehalf of the participants and the invested assets are subject to the claims ofour general creditors.  The plan wasterminated in January 2003 and the fair market values of the individualinvestment accounts on the termination date were distributed to the individualparticipants.

 

**Directors’ Compensation**

 

The directors of DeCraneHoldings and DeCrane Aircraft generally do not receive annual fees or fees forattending meetings of the Board of Directors or committees thereof.  However, Albert E. Suter, an independentdirector not affiliated with any investor in DeCrane Holdings, receives a director’sfee of $50,000 per year.  In addition,the Board of Directors of DeCrane Holdings authorized the issuance of optionsto purchase 7,500 shares of DeCrane Holdings common stock to Mr. Suter underthe same terms as the management incentive plan.  See “Item 13. Certain Relationships and RelatedTransactions—Transactions with Management and Others – Transactions During 2001and 2002” for additional information. Also, Mr. Suter is reimbursed for out-of-pocket expenses.  We expect to continue these policies.

 

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**ITEM12.**                                  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

**Security Ownership of Certain Beneficial Owners andManagement**

 

**DeCrane Holdings**

 

As of March 28, 2003,DeCrane Holdings has the following 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 setsforth the beneficial ownership of DeCrane Holdings’ voting and non-votingsecurities as of March 28, 2003 by its principal owners and its executiveofficers and directors.

 
|                                                                                                 |   | **Common Stock(2)**                        |   | **14% Senior Redeemable  Preferred Stock** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **Name of  Beneficial Owner (1)**                                                                    |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                             |   | **Number  of  Shares** |   | **Percentage** |   |
|                                                                                                 |   |                                       |   |                                       |   |   |   |   |   |
| DLJ  Merchant Banking Partners II, L.P. and affiliates(3)  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     |   | —                                     |   | —                                     |   | — |   | — |   |
| Putnam  Investment Management, Inc.  and affiliates(5)  One Post Office Square, Boston, MA 02109     |   | 27,871                                     |   |                                       | *      | — |   | — |   |
| Albert  E. Suter(6)                                                                                  |   | 6,204                                      |   |                                       | *      | — |   | — |   |
| R.  Jack DeCrane(7)                                                                                  |   | 95,755                                     |   | 2.3                                        | %      | — |   | — |   |
| Richard  J. Kaplan(8)                                                                                |   | 33,698                                     |   |                                       | *      | — |   | — |   |
| Robert  G. Martin(9)                                                                                 |   | 11,520                                     |   |                                       | *      | — |   | — |   |
| Jeffrey  A. Nerland(10)                                                                              |   | 12,156                                     |   |                                       | *      | — |   | — |   |
| Jeffrey  A. Smith(11)                                                                                |   | 16,173                                     |   |                                       | *      | — |   | — |   |
| All  directors and named executive officers as a group (nine persons)                                |   | 175,506                                    |   | 4.2                                        | %      | — |   | — |   |

 

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*                             Less than1.0%

 

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

 

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(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, fully exercisesall rights under warrants to purchase common stock and common stock which maybe acquired upon the exercise of stock options and which are exercisable, orwill be exercisable, prior to 60 days from March 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 Millennium  Partners, L.P.          |
|------------|-------------------------------------------|--------|------------|-----------------------------------------|
| **•** | DLJ Diversified  Partners-A, L.P.         |   | **•** | DLJ Millennium  Partners-A, L.P.        |
| **•** | DLJ EAB Partners, L.P.                    |   | **•** | DLJ Offshore Partners  II, C.V.         |
| **•** | DLJ ESC II, L.P.                          |   | **•** | DLJIP II Holdings, L.P.                 |
| **•** | DLJ First ESC L.P.                        |   | **•** | DLJMB Funding II, Inc.                  |
| **•** | DLJ Investment  Partners, L.P.            |   | **•** | MBP II Plan Investors                   |
| **•** | DLJ Investment Partners  II, L.P.         |   | **•** | UK Investment Plan 1997  Partners, Inc. |
| **•** | DLJ Merchant Banking  Partners II-A, L.P. |   |       |                                    |

 

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 DLJ affiliatesseparately listed in this table; Mr. Dean, Mr. Quella and Ms. Schnabel disclaimbeneficial ownership of those shares.

 

(5)                      Reflectswarrants to purchase shares of common stock held by the following investorsrelated to Putnam Investment Management, Inc.:

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

 

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

 

(6)                      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.

 

(7)                      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.

 

(8)                      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.

 

(9)                      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.

 

(10)                Includes 5,291shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28, 2003.

 

(11)                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.

 

56

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**DeCrane Aircraft**

 

As of March 28, 2003,DeCrane Aircraft has the following 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 setsforth the beneficial ownership of DeCrane Aircraft’s voting and non-votingsecurities as of March 28, 2003 by its principal owners and its executiveofficers and directors.

 
|                                                                                                         |   | **Common Stock(2)**                        |   | **16% Senior Redeemable  Preferred Stock** |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **Name of  Beneficial Owner(1)**                                                                             |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                             |   | **Number  of  Shares** |   | **Percentage** |   |
|                                                                                                         |   |                                       |   |                                       |   |   |   |   |   |
| DeCrane  Holdings Co.  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  A. Smith                                                                                            |   | —                                     |   | —                                     |   | — |   | — |   |
| All  directors and named executive officers as a group (nine persons)                                        |   | —                                     |   | —                                     |   | — |   | — |   |

 

----

(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

 

57

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stockoptions and which are exercisable, or will be exercisable, prior to 60 daysfrom March 28, 2003.

 

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

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

 

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 DeCraneHoldings Co.  The DLJ entities areaffiliates of, and commonly collectively referred to as, Credit Suisse FirstBoston.  See “Item 13. Certain Relationshipsand Related Transactions—Transactions with Management and Others” foradditional information.  The share datashown for these individuals excludes shares shown as held by the DLJ affiliatesand DeCrane Holdings Co. separately listed in this table; Mr. Dean, Mr. Quellaand 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 High Yield Trust                            |
|------------|------------------------------------------------------|--------|------------|----------------------------------------------------|
| **•** | Putnam Fund Trust –  Putnam High Yield Trust II |   | **•** | Putnam Strategic Income  Fund                      |
| **•** | Putnam High Yield  Advantage Fund                    |   | **•** | Putnam Variable Trust -  Putnam VT High Yield Fund |

 

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

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

** **

We have a ManagementIncentive Stock Option Plan under which shares of DeCrane Holdings common stockare authorized for issuance to employees and directors in exchange for theirservices.  In 1999, we also grantedDeCrane Holdings incentive common stock options to non-employees in exchangefor consulting and advisory services. Our Management Incentive Stock Option Plan and the stock options awardedto non-employees are approved by our security holders.  The following table provides aggregateinformation regarding the shares of DeCrane Holdings common stock that may beissued upon the exercise of the options as of December 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 |   |

 

58

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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 14 accompanying our financial statementsincluded in this report.

** **

**ITEM13.**                                  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

** **

**Transactions with Management and Others**

** **

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

** **

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

** **

**Arrangements With 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 a $350,000 annualadvisory fee.  We may from time to timeenter into other investment banking relationships with CSFB Corporation or oneof its affiliates pursuant to which they will receive customary fees and willbe entitled to reimbursement for all reasonable disbursements and out-of-pocketexpenses incurred in connection therewith. We expect that any such arrangement will include provisions for theindemnification of CSFB Corporation against liabilities, including liabilitiesunder 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.  The investors who own DeCrane Holdings’ warrants to purchase159,794 shares of common stock are 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.

 

•                  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

 

59

----

 

common shares held bythose affiliates, which are immediately exercisable subject to customarydeferral 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 the holder to purchase one share of common stock at anexercise price of not less than $0.01 per share subject to customaryantidilution provisions and other customary terms.  The warrants are exercisable at any time prior to 5:00 p.m. NewYork City time on August 28, 2009, subject to applicable federal and statesecurities laws.

 

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

 

**Transactions During 2002 and 2003**

 

Securities and ExchangeCommission rules require we briefly describe transactions, or series of similartransactions, with specified persons (as defined in the rules) and involvingamounts exceeding $60,000, which have occurred since January 1, 2002, thebeginning of our most recent fiscal year. These transactions are briefly described below and are also described inthe notes accompanying our financial statements included in this report.

 

•                  DeCraneHoldings repurchased 18,308 shares of its common stock from a former DeCraneAircraft executive officer for $0.5 million ($27.00 per share) in January2002.  In connection with therepurchase, DeCrane Aircraft’s $0.2 million loan to the executive officercollateralized by the repurchased common stock was repaid, plus accrued interest.  The former executive officer 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 amended its senior credit facility in March 2002.  Credit Suisse First Boston, as successor toDLJ Capital Funding, Inc., received customary fees and reimbursement ofexpenses in connection with obtaining the amendment.

 

•                  Mr.Suter purchased 3,704 shares of DeCrane Holdings common stock for $0.1 millionand was granted options to purchase an additional 7,500 common shares, all at$27.00 per share, in May and June 2002. The shares purchased and options granted were under the same terms asthe management incentive plan, which also pertains to independentnon-management directors.  DeCraneHoldings contributed the net proceeds to DeCrane Aircraft.

 

60

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

 

•                  DeCraneAircraft entered into a definitive agreement to sell its Specialty AvionicsGroup on March 14, 2003.  CSFBCorporation served as DeCrane Aircraft’s financial advisors for the transactionand will receive customary fees and reimbursement of expenses upon closing ofthe transaction.  The closing isexpected to occur before June 30, 2003.

 

•                  Inconnection with DeCrane Aircraft’s sale of its Specialty Avionics Group,DeCrane Aircraft further amended its senior credit facility in March 2003.  Credit Suisse First Boston receivedcustomary fees and reimbursement of expenses in connection with obtaining theamendment.

 

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

** **

**Indebtedness of Executive Officers and Directors**

** **

The following table setsforth all indebtedness owed to us by our executive officers and directors thatindividually exceeds $60,000 as required by Securities and Exchange Commissionrules.  All indebtedness set forth belowresults from purchases of DeCrane Holdings common stock in transactionsconsummated prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of2002 and is 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 |   |
| Jeffrey  F. Smith    |   | 8,695                                         |   | 5.74                  |   | 99,992                                                              |    | 18,430 |   | 118,422 |   |

 

----

(1)                      Reflects thenumber of shares of DeCrane Holdings common stock held by DeCrane Aircraft ascollateral for the loans.

 

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

 

(3)                      Reflects theoriginal principal amount of the loans.

 

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

 

(5)                      Reflects themaximum amount of indebtedness during the year ended December 31, 2002.

 

(6)                      Total indebtednessexceeds $60,000 as of the filing date of this report.

** **

**ITEM 14.**                                  CONTROLS ANDPROCEDURES

** **

**Evaluation of disclosure controls andprocedures.**  Our ChiefExecutive Officer and Chief Financial Officer have evaluated our disclosurecontrols and procedures within 90 days of the filing of this report.  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

 

61

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“Commission”)is recorded, processed, summarized and reported within the time periodsspecified by the Commission and that the information is communicated to theChief 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 evaluation,there have been no significant changes in our internal controls or in otherfactors that could significantly affect the internal controls, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

** **

**PART IV**

** **

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

** **

**(a)       List of Documents Filed as Part of thisReport**

** **

**1.         Financial Statements**

 

Our consolidatedfinancial statements filed with this report are included in a separate sectionat the end of this report and are listed in an index on page F-1.

** **

**2.         Financial Statement Schedules**

 

Our consolidatedfinancial statement schedules filed with this report are included in a separatesection at the end of this report and are listed in an index on page F-1.

** **

**3.         Exhibits**

 

The following exhibitsare filed as part of this report.

 
| **Exhibit Number** |   | **Filing Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                 |
|--------------------|--------|----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                 |   |                                                                                                                                                                                                                                                                                                                                                    |
| 2.1                |   | *                    |   | 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                                                                                                                                                                                                                                                                |

 

62

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| 3.3.2.1  |   | *    |   | 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.                                                                                                   |
| 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.) |

 

63

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| 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                                                                              |
| 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                                                                                      |

 

64

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| 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                                           |
| 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                                                                                                         |

 

65

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| 10.6.1 ** |   | (13) |   | First Amendment to  Employment Agreement dated May 5, 2000 between DeCrane Aircraft Holdings,  Inc. and R. Jack DeCrane                                                                                                                                                                                     |
|-----------|--------|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.7 **   |   | (1)  |   | 401(k) Salary Reduction  Non-Standardized Adoption Agreement dated April 30, 1992 between  the Company and The Lincoln National Life Insurance Company                                                                                                                                            |
| 10.8      |   | (1)  |   | Form of Subscription  Agreement for DeCrane Holdings Co. common and preferred stock by certain  members of Global Technology Partners LLC                                                                                                                                                                   |
| 10.10     |   | (1)  |   | Credit Agreement dated  August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by  merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.                                                                                                                                            |
| 10.10.1   |   | (1)  |   | First Amendment to  Credit Agreement dated January 22, 1999                                                                                                                                                                                                                                                 |
| 10.10.2   |   | (6)  |   | Second Amended and  Restated Credit Agreement dated as of December 17, 1999 among  DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital  Funding, Inc., as syndication agent, and Bank One NA, as administrative agent                                                        |
| 10.10.3   |   | (9)  |   | Third Amended and  Restated Credit Agreement dated as of May 11, 2000 among DeCrane Aircraft  Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as  syndication agent, and Bank One NA, as administrative agent                                                                        |
| 10.10.3.1 |   | (12) |   | First Amendment to the  Third Amended and Restated Credit Agreement dated as of June 30, 2000 among  DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital  Funding, Inc., as syndication agent, and Bank One NA, as administrative agent                                                |
| 10.10.4   |   | (14) |   | Increased Commitments  Agreement, dated as of April 27, 2001, pursuant to Third Amended and Restated  Credit Agreement, dated as of May 11, 2000, as amended by the First Amendment  to the Third Amended and Restated Credit Agreement, dated as of June 30, 2000                                          |
| 10.10.5   |   | (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   |   | *    |   | 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  |
| 10.19 **  |   | (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 **  |   | *    |   | Form of Change of  Control Agreements between DeCrane Aircraft Holdings, Inc. and certain  executives                                                                                                                                                                                                       |
| 21.1      |   | (17) |   | List of Subsidiaries of  Registrant                                                                                                                                                                                                                                                                         |

 

66

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| 99.1 |   | * |   | Chief Executive Officer  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
|------|--------|---|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 99.2 |   | * |   | Chief Financial Officer  Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

----

*          Filed herewith.

**        Denotes managementcontracts and compensatory plans and arrangements required to be filed asexhibits to this report.

(1)        Filed as an exhibit to ourRegistration Statement (Registration No. 333-70363) on Form S-1 (AmendmentNo. 1) filed with the Commission on March 3, 1999.

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

(2)        Filed as an exhibit to ourRegistration Statement (Registration No. 333-70363) on Form S-1 (AmendmentNo. 2) filed with the Commission on April 23, 1999.

(3)        Filed as an exhibit to ourRegistration Statement (Registration No. 333-70363) on Form S-1 (AmendmentNo. 3) filed with the Commission on May 6, 1999.

(4)        Filed as an exhibit to ourForm 8-K dated August 5, 1999 filed with the Commission onOctober 19, 1999.

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

(6)        Filed as an exhibit to ourForm 10-K dated December 31, 1999 filed with the Commission onMarch 30, 2000.

(7)        Filed as an exhibit to ourForm 10-Q dated March 31, 2000 filed with the Commission onMay 9, 2000.

(8)        Filed as an exhibit to ourForm 8-K dated May 11, 2000 filed with the Commission onMay 25, 2000.

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

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

(10a)    Filed as an exhibit to theForm 8-K (Amendment No. 1) dated June 30, 2000 of DeCrane Aircraft Holdings,Inc. filed with the Commission on August 2, 2000 and incorporatedherein by reference.

(11)      Filed as an exhibit to ourForm 10-Q dated June 30, 2000 filed with the Commission onAugust 14, 2000.

(12)      Filed as an exhibit to ourForm 10-Q dated September 30, 2000 filed with the Commission onNovember 14, 2000.

 

67

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(12a)    Filed as an exhibit to theForm 10-Q dated September 30, 2000 of DeCrane Aircraft Holdings, Inc.filed with the Commission on November 14, 2000 and incorporatedherein by reference.

(13)      Filed as an exhibit to ourForm 10-K dated December 31, 2000 filed with the Commission onMarch 30, 2001.

(14)      Filed as an exhibit to ourForm 10-Q dated March 31, 2001 filed with the Commission onMay 14, 2001.

(15)      Filed as an exhibit to ourForm 10-Q dated September 30, 2001 filed with the Commission onNovember 13, 2001.

(16)      Filed as an exhibit to ourForm 10-K dated December 31, 2001 filed with the Commission onMarch 27, 2002.

(17)      Filed as an exhibit to ourForm 10-Q dated March 31, 2002 filed with the Commission onMay 13, 2002.

** **

**(b)       Reports of Form 8-K Filed During the QuarterEnded December 31, 2002**

 

On November 26, 2002 wefiled a Form 8-K Current Report regarding a meeting held with our bondholderson that day.  A copy of the slidepresentation given to the bondholders during the meeting is filed as an exhibit.

 

In addition, on March 17,2003 we also filed a Form 8-K Current Report regarding DeCrane Aircraftentering into a definitive agreement to sell its Specialty Avionics Group.  The text of the press release is containedin the filing.

 

68

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**SIGNATURES**

 

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

 

 

**DECRANEHOLDINGS CO. (Registrant)**

 

 
| By:    | /s/  R. Jack DeCrane |   | By:    | /s/  Richard J. Kaplan                     |
|--------|---------------------------|--------|--------|-------------------------------------------------|
|   | R. Jack DeCrane           |   |   | Richard J. Kaplan                               |
|   | Chief Executive Officer   |   |   | Chief Financial Officer  andAssistant Secretary |
|   |                      |   |   |                                            |   |
|   |                      |   |   |                                            |   |
| Date:  | April 15, 2003            |   |   |                                            |   |
|        |                           |        |        |                                                 |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| By:    | /s/  Thompson Dean             |   | By:    | /s/  R. Jack DeCrane                |
|--------|-------------------------------------|--------|--------|------------------------------------------|
|   | Thompson Dean                       |   |   | R. Jack DeCrane                          |
|   | Chairman of the Board  of Directors |   |   | Vice Chairman of the  Board of Directors |
|   |                                |   |   |                                     |
|   |                                |   |   |                                     |
| By:    | /s/  Richard J. Kaplan         |   | By:    | /s/  James A. Quella                |
|   | Richard J. Kaplan                   |   |   | James A. Quella                          |
|   | Director                            |   |   | Director                                 |
|   |                                |   |   |                                     |
|   |                                |   |   |                                     |
| By:    | /s/  Susan C. Schnabel         |   | By:    | /s/  Albert E. Suter                |
|   | Susan C. Schnabel                   |   |   | Albert E. Suter                          |
|   | Director                            |   |   | Director                                 |
|   |                                |   |   |                                     |
|   |                                |   |   |                                     |
| Date:  | April 15, 2003                      |   |   |                                     |

 

69

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**CERTIFICATIONS**

** **

**Chief Executive Officer Certification**

 

I, R. JackDeCrane, certify that:

 

1.                           I havereviewed this annual report on Form 10-K of DeCrane Holdings Co.;

 

2.                           Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                           Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                           Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                           designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b)                          evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this annual report (the “Evaluation Date”);and

 

c)                           presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                           all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)                          any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officer and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: April 15,  2003 |                      |
|-----------------------|---------------------------|
|                  |                      |
|                  | /s/  R. Jack DeCrane |
|                  | R. Jack DeCrane           |
|                  | Chief Executive  Officer  |

** **

**70**

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**Chief Financial Officer Certification**

 

I, Richard J.Kaplan, certify that:

 

1.                           I havereviewed this annual report on Form 10-K of DeCrane Holdings Co.;

 

2.                           Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                           Basedon my knowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                           Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)                           designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b)                          evaluated the effectivenessof the registrant’s disclosure controls and procedures as of a date within 90days prior to the filing date of this annual report (the “Evaluation Date”);and

 

c)                           presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                           Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                           all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b)                          any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                           Theregistrant’s other certifying officer and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: April 15,  2003 |                                              |
|-----------------------|---------------------------------------------------|
|                  |                                              |
|                  | /s/  Richard J. Kaplan                       |
|                  | Richard J.  Kaplan                                |
|                  | Chief Financial  Officer and  Assistant Secretary |

 

71

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**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  Supplementary Financial Information**                                                                 |
| Selected  Quarterly Financial Data (Unaudited)                                                                        |
|                                                                                                                  |
| **Consolidated  Financial Statement Schedules**                                                                       |
| For the years ended  December 31, 2002, 2001 and 2000:                                                                |
| II –  Valuation and Qualifying Accounts                                                                          |

 

All other schedules areomitted because they are either not applicable or the required information isshown in the consolidated financial statements or notes thereto.

 

F-1

----

 

**REPORTOF INDEPENDENT ACCOUNTANTS**

 

 

To the Board of Directors

and Stockholder of

DeCrane Holdings Co.

 

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of DeCrane HoldingsCo. and its subsidiary at December 31, 2002 and 2001, and the results of theiroperations and cash flows for each of the three years in the period endedDecember 31, 2002 in conformity with accounting principles generally acceptedin the United States of America.  Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, the information setforth therein when 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.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Company willcontinue as a going concern.  Asdiscussed in the notes 1 and 18, the Company will be in default of variousfinancial covenants contained in its senior credit facility on June 30, 2003unless it successfully consummates the sale of its Specialty Avionics Groupprior to that date, which raises substantial doubt about its ability tocontinue as a going concern. Management’s plans and expectations in regard to these matters are alsodescribed in Note 1.  The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of these uncertainties.

 

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

 

 

PRICEWATERHOUSECOOPERSLLP

Los Angeles, California

February 18, 2003, exceptfor Note 18,

which is as of March 28,2003

 

F-2

----

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

** **

**Consolidated Balance Sheets**

** **
|                                                                                                                                                                            |   | **December 31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
| **(In thousands, except share data)**                                                                                                                                           |   | **2002**         |    | **2001** |   |
|                                                                                                                                                                            |   |             |    |   |   |
| **Assets**                                                                                                                                                                      |   |             |    |   |   |
|                                                                                                                                                                            |   |             |    |   |   |
| Current assets:                                                                                                                                                                 |   |             |    |   |   |
| Cash and cash equivalents                                                                                                                                                       |   | $                | 12,612  |   | $ | 9,794 |   |
| Accounts receivable, net                                                                                                                                                        |   | 38,982           |    | 58,451 |   |
| Inventories                                                                                                                                                                     |   | 80,802           |    | 86,498 |   |
| Deferred income taxes                                                                                                                                                           |   | 22,631           |    | 14,063 |   |
| Prepaid expenses and other current assets                                                                                                                                       |   | 2,816            |    | 2,559 |   |
| Total current assets                                                                                                                                                            |   | 157,843          |    | 171,365 |   |
|                                                                                                                                                                            |   |             |    |   |   |
| Property and equipment, net                                                                                                                                                     |   | 51,883           |    | 61,073 |   |
| Other assets, principally goodwill and other  intangibles, net                                                                                                                  |   | 339,241          |    | 413,273 |   |
| Total assets                                                                                                                                                                    |   | $                | 548,967 |   | $ | 645,711 |   |
|                                                                                                                                                                            |   |             |    |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**                                                                                |   |             |    |   |   |
|                                                                                                                                                                            |   |             |    |   |   |
| Current liabilities:                                                                                                                                                            |   |             |    |   |   |
| Current portion of long-term debt                                                                                                                                               |   | $                | 16,859  |   | $ | 13,899 |   |
| Accounts payable                                                                                                                                                                |   | 17,239           |    | 19,051 |   |
| Accrued liabilities                                                                                                                                                             |   | 35,056           |    | 56,626 |   |
| Income taxes payable                                                                                                                                                            |   | —           |    | 133 |   |
| Total current liabilities                                                                                                                                                       |   | 69,154           |    | 89,709 |   |
|                                                                                                                                                                            |   |             |    |   |   |
| Long-term debt                                                                                                                                                                  |   | 364,848          |    | 386,351 |   |
| Deferred income taxes                                                                                                                                                           |   | 39,187           |    | 33,597 |   |
| Other long-term liabilities                                                                                                                                                     |   | 8,059            |    | 7,438 |   |
|                                                                                                                                                                            |   |             |    |   |   |
| Commitments and contingencies (Note 12)                                                                                                                                         |   |             |    |   |   |
|                                                                                                                                                                            |   |             |    |   |   |
| 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                                                                                                                                            |   | (1,674           | )       | (2,102 | ) |
| Total stockholders’ equity (deficit)                                                                                                                                       |   | (28,584          | )       | 46,153 |   |
| 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**

----

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

** **

**Consolidated Statements of Operations**

** **
|                                                                                                      |   | **Year Ended December 31,** |    |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
| **(In thousands)**                                                                                        |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Revenues                                                                                                  |   | $                           | 325,630 |   | $ | 395,352 |   | $ | 347,379 |   |
| Cost of sales                                                                                             |   | 233,950                     |    | 279,681 |   | 232,048 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Gross profit                                                                                              |   | 91,680                      |    | 115,671 |   | 115,331 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Operating expenses:                                                                                       |   |                        |    |   |   |   |   |
| Selling, general  and administrative expenses                                                             |   | 51,884                      |    | 59,934 |   | 45,394 |   |
| Impairment of  goodwill                                                                                   |   | 7,672                       |    | 8,583 |   | — |   |
| Amortization of  goodwill and other intangible assets                                                     |   | 5,768                       |    | 19,920 |   | 17,948 |   |
| Total operating  expenses                                                                                 |   | 65,324                      |    | 88,437 |   | 63,342 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Income from  operations                                                                                   |   | 26,356                      |    | 27,234 |   | 51,989 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Other expenses:                                                                                           |   |                        |    |   |   |   |   |
| Interest expense                                                                                          |   | 33,894                      |    | 39,001 |   | 41,623 |   |
| Minority  interest in preferred stock of subsidiary                                                       |   | 5,841                       |    | 5,061 |   | 2,274 |   |
| Other expenses,  net                                                                                      |   | 944                         |    | 1,047 |   | 482 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Income (loss) before  provision for income taxes and cumulative effect of change in accounting  principle |   | (14,323                     | )       | (17,875 | ) | 7,610 |   |
| Provision for income taxes                                                                                |   | 354                         |    | 1,188 |   | 6,282 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle                                 |   | (14,677                     | )       | (19,063 | ) | 1,328 |   |
| Cumulative effect of change in accounting principle                                                       |   | (57,150                     | )       | — |   | — |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| 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

----

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

** **

**Consolidated Statements of Stockholders’ Equity**(Deficit)

** **
|                                                                                                    |   | **Common Stock** |   | **Additional  Paid-in** |   | **Notes  Receivable  For Shares** |   | **Accumulated** |   | **Accumulated  Other  Comprehensive** |   |     |   |
|---------------------------------------------------------------------------------------------------------|--------|------------------|--------|-------------------------|--------|-----------------------------------|--------|-----------------|--------|---------------------------------------|--------|----------|--------|
| **(In thousands, except share data)**                                                                   |   | **Shares**       |   | **Amount**              |   | **Capital**                       |   | **Sold**        |   | **Deficit**                           |   | **Loss** |   | **Total** |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Balance, December 31, 1999                                                                              |   | 3,571,827        |   | $                       | 36     |                              | $      | 75,944          |   | $                                     | (2,468 | )        | $      | (6,923 | ) | $ | (1,526 | ) | $ | 65,063 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Comprehensive income (loss):                                                                            |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Net income                                                                                              |   | —           |   | —                  |   | —                            |   | —          |   | 1,328                                 |   | —   |   | 1,328 |   |
| Translation adjustment                                                                                  |   | —           |   | —                  |   | —                            |   | —          |   | —                                |   | (161     | )      | (161 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   | 1,167 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Sale of common stock, net of stock repurchased and  canceled                                            |   | 342,447          |   | 3                       |   | 7,848                             |   | 51              |   | —                                |   | —   |   | 7,902 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Value of warrants issued with sale of preferred  stock by subsidiary                                    |   | —           |   | —                  |   | 4,019                             |   | —          |   | —                                |   | —   |   | 4,019 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Noncash dividend accretion on preferred stock                                                           |   | —           |   | —                  |   | (6,074                            | )      | —          |   | —                                |   | —   |   | (6,074 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Compensatory stock option expense                                                                       |   | —           |   | —                  |   | 561                               |   | —          |   | —                                |   | —   |   | 561 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Notes receivable interest accrued                                                                       |   | —           |   | —                  |   | —                            |   | (135            | )      | —                                |   | —   |   | (135 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Balance, December 31, 2000                                                                              |   | 3,914,274        |   | 39                      |   | 82,298                            |   | (2,552          | )      | (5,595                                | )      | (1,687   | )      | 72,503 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Comprehensive income (loss):                                                                            |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Net income                                                                                              |   | —           |   | —                  |   | —                            |   | —          |   | (19,063                               | )      | —   |   | (19,063 | ) |
| Translation adjustment                                                                                  |   | —           |   | —                  |   | —                            |   | —          |   | —                                |   | (327     | )      | (327 | ) |
| Unrealized loss on interest rate swap contract                                                          |   | —           |   | —                  |   | —                            |   | —          |   | —                                |   | (88      | )      | (88 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   | (19,478 | ) |
| Noncash dividend accretion on preferred stock                                                           |   | —           |   | —                  |   | (6,971                            | )      | —          |   | —                                |   | —   |   | (6,971 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Compensatory stock option expense                                                                       |   | —           |   | —                  |   | 215                               |   | —          |   | —                                |   | —   |   | 215 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Notes receivable interest accrued                                                                       |   | —           |   | —                  |   | —                            |   | (116            | )      | —                                |   | —   |   | (116 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Balance, December 31, 2001                                                                              |   | 3,914,274        |   | 39                      |   | 75,542                            |   | (2,668          | )      | (24,658                               | )      | (2,102   | )      | 46,153 |   |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Comprehensive income (loss):                                                                            |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| Net loss                                                                                                |   | —           |   | —                  |   | —                            |   | —          |   | (71,827                               | )      | —   |   | (71,827 | ) |
| Translation adjustment                                                                                  |   | —           |   | —                  |   | —                            |   | —          |   | —                                |   | 701      |   | 701 |   |
| Unrealized loss on interest rate swap contract                                                          |   | —           |   | —                  |   | —                            |   | —          |   | —                                |   | (273     | )      | (273 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   | (71,399 | ) |
|                                                                                                    |   |             |   |                    |   |                              |   |            |   |                                  |   |     |   |   |   |
| 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 | ) | $ | (1,674 | ) | $ | (28,584 | ) |
|                                                                                                         |        |                  |        |                         |        |                                   |        |                 |        |                                       |        |          |        |  |  |  |  |  |  |  |  |  |

 

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

 

F-5

----

 

**DECRANE HOLDINGS CO. AND SUBSIDIARY**

** **

**Consolidated Statements of Cash Flows**

** **
|                                                                                      |   | **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: |   |                        |    |   |   |   |   |
| Cumulative effect of change in accounting principle                                       |   | 57,150                      |    | — |   | — |   |
| Depreciation and amortization                                                             |   | 19,811                      |    | 34,594 |   | 29,445 |   |
| Noncash portion of restructuring, asset impairment  and other related charges             |   | 19,444                      |    | 22,058 |   | — |   |
| Minority interest in preferred stock of subsidiary                                        |   | 5,841                       |    | 5,061 |   | 2,274 |   |
| Deferred income taxes                                                                     |   | 32                          |    | (37 | ) | 5,121 |   |
| Other, net                                                                                |   | 386                         |    | 689 |   | 773 |   |
| Changes in assets and liabilities, net of effect  from acquisitions:                      |   |                        |    |   |   |   |   |
| Accounts receivable                                                                       |   | 19,136                      |    | (5,085 | ) | 1,036 |   |
| Inventories                                                                               |   | (1,351                      | )       | (11,990 | ) | (14,321 | ) |
| Prepaid expenses and other assets                                                         |   | (69                         | )       | (2,278 | ) | 2,048 |   |
| Accounts payable                                                                          |   | (1,906                      | )       | (1,248 | ) | 2,259 |   |
| Accrued liabilities                                                                       |   | (16,617                     | )       | (7,615 | ) | (12,973 | ) |
| Income taxes payable                                                                      |   | 399                         |    | 64 |   | 583 |   |
| Other long-term liabilities                                                               |   | (111                        | )       | (221 | ) | (790 | ) |
| Net cash provided by operating activities                                                 |   | 30,318                      |    | 14,929 |   | 16,783 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| **Cash flows from investing  activities:**                                                |   |                        |    |   |   |   |   |
| Cash paid for acquisitions, net of cash acquired                                          |   | (5,890                      | )       | (13,529 | ) | (89,546 | ) |
| Capital expenditures                                                                      |   | (5,429                      | )       | (11,899 | ) | (22,689 | ) |
| Other, net                                                                                |   | —                      |    | 636 |   | 71 |   |
| Net cash used for investing activities                                                    |   | (11,319                     | )       | (24,792 | ) | (112,164 | ) |
|                                                                                      |   |                        |    |   |   |   |   |
| **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 the 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 ther debt                        |   | (14,150                     | )       | (10,076 | ) | (5,824 | ) |
| Deferred financing costs                                                                  |   | (1,656                      | )       | (767 | ) | (1,900 | ) |
| Repurchase of common stock and options                                                    |   | (368                        | )       | — |   | — |   |
| Other, net                                                                                |   | (199                        | )       | (157 | ) | (297 | ) |
| Net cash provided by financing activities                                                 |   | (16,228                     | )       | 11,397 |   | 95,656 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| Effect of foreign currency translation on cash                                            |   | 47                          |    | 61 |   | 6 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| Net increase in cash and cash equivalents                                                 |   | 2,818                       |    | 1,595 |   | 281 |   |
| Cash and cash equivalents at beginning of period                                          |   | 9,794                       |    | 8,199 |   | 7,918 |   |
| Cash and cash equivalents at end of period                                                |   | $                           | 12,612  |   | $ | 9,794 |   | $ | 8,199 |   |

 

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

 

F-6

----

 

**DECRANEHOLDINGS CO. AND SUBSIDIARY**

** **

**Notes toConsolidated Financial Statements**

 

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

 

**Description of the Business**

 

DeCrane Holdings Co.(“DeCrane Holdings”) is a holding company and does not have any materialoperations or assets other than its ownership of all of the common stock ofDeCrane Aircraft Holdings, Inc. (“DeCrane Aircraft”). References to the“Company” include both DeCrane Holdings and DeCrane Aircraft.

 

The Company is a leadingprovider of integrated assemblies, sub-assemblies and component parts to theaerospace industry. The Company’s businesses are organized into three separateoperating groups: Cabin Management, Specialty Avionics and Systems Integration.

 

**Basis of Presentation**

 

The consolidatedfinancial statements include the accounts of the Company and all wholly-ownedsubsidiaries and a majority-owned partnership. All intercompany accounts and transactions have been eliminated.  Certain reclassifications have been made toprior years’ financial statements to conform to the current year presentation.

 

Preparation of theseconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the Company to makeestimates and judgments that affect the reported amounts of assets, liabilitiesand disclosure of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting periods. Actual results could differ from those estimates.

 

**Financial Condition and Liquidity**

 

The Company’sconsolidated financial statements are prepared assuming that it is a goingconcern, which contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. The September 11, 2001 terrorist attack on the United States,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 air travel and, in turn,the aerospace industry and the Company’s business.  In response, the Company implemented restructuringplans in 2001 and 2002 designed to reduce costs and conserve working capital(Note 2).  The Company reported lossesfor the two years ended December 31, 2002, primarily resulting from chargesassociated with these restructuring activities, as well as the impairment ofgoodwill.

 

During the fourth quarterof fiscal 2002, the Company further assessed its long-term business strategiesin light of current aerospace industry conditions.  In addition, the Company subsequently determined that it would likelynot be in compliance with its senior credit facility’s financial covenants in2003.  The Company believes that as theaerospace industry recovers, the demand for its Cabin Management and SystemsIntegration groups’ products and services for corporate, VIP and head-of-stateaircraft will return to historical levels and, accordingly, the Company decidedto focus its resources in these market segments.  To accomplish this objective, the Company embarked on a plan tosell its Specialty Avionics Group, which is highly dependent on the commercialairline industry.

 

F-7

----

 

As described in Note 18,in March 2003 the Company entered into a definitive agreement to sell itsSpecialty Avionics Group and received requisite lender approval to amend itssenior credit facility to permit the sale. The amendment also relaxes the financial covenants for 2003 and beyondprovided senior credit facility borrowings are reduced with the estimated netproceeds of $132,000,000 from the sale.

 

The amended senior creditfacility also provides that an event of default will occur if the sale is notconsummated by or is terminated for any reason prior toJune 30, 2003.  If an event ofdefault should occur, the lenders may, at that date, cease to provideadditional borrowings and may accelerate repayment of all borrowings thenoutstanding.  If the lenders took suchaction, that would be an event of default under the Company’s other debtagreements, permitting those lenders to accelerate repayment of all such debt,as well.  In such event, the Companywould require alternate sources of capital, which the Company may not be ableto obtain.

 

Companymanagement is working diligently to close the sale, which is subject tocustomary closing conditions, including buyer financing and the need to obtainthird party consents, and expects the sale will be consummated prior to June30, 2003.  Company management expects tobe in compliance with the revised financial covenants through 2003 based on itscurrent operating plan and its ability to respond to further adverse changes inthe Company’s business through additional cost reduction measures.  The Company expects to continue conductingits operations in the ordinary course of business.

 

Although we cannot becertain and provided that the sale of the Specialty Avionics Group describedabove will be consummated prior to June 30, 2003, we believe our operating cashflows, together with borrowings under our senior credit facility, will besufficient to meet our future short- and long-term operating expenses, workingcapital requirements, capital expenditures and debt service obligations for thenext twelve months.

 

**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 and contractswith long production cycles that will be recovered from future sales.  Periodic assessments are performed to ensurerecoverability of the program costs and adjustments are made, if necessary, toreduce inventoried costs to estimated realizable value.

 

**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 buildingimprovements are depreciated using the straight-line method over theirestimated useful lives of forty years. Leasehold improvements are amortized using the straight-line method overtheir estimated useful 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.

 

F-8

----

 

**Goodwill**

 

Prior to January 1, 2002,goodwill was amortized on a straight-line basis over thirty years from the datethe acquisition occurred.  Additionalgoodwill resulting from contingent consideration payments subsequent to theacquisition date was amortized prospectively over the remaining period of theinitial thirty-year term.  StartingJanuary 1, 2002, goodwill is no longer amortized but instead subject to annualimpairment testing with a loss charged to operations in the period in whichimpairment 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, 2002the Company adopted and began testing goodwill for impairment in accordancewith SFAS No. 142, “Goodwill and Other Intangible Assets” as described in Note7.  As required by SFAS No. 142, the Companytests goodwill for impairment annually, on October 31st of eachyear, or when events or changes in circumstances indicate the carrying amountmay not be recoverable.  The goodwillimpairment model is a two-step process. First, it requires a comparison of the book value of net assets to thefair value of the related operations 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 theoperations used in the first step, and is compared to its carrying value.  The amount by which carrying value exceedsfair value represents the amount of goodwill impairment.  As a result of the 2002 impairment testing,the Company recorded a $7,672,000 pre-tax charge to operations.

 

Prior to adoption of SFASNo. 142, impairment testing was in accordance with SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of.”  In 2001, the Companyrecorded a $8,583,000 pre-tax charge to reflect the impairment loss resultingfrom its restructuring plan to close a manufacturing facility (Notes 2 and 7).

 

**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 Note2.

 

F-9

----

 

**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 theresult of changes in the deferred tax asset or liability.  If necessary, valuation allowances areestablished to reduce deferred 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.

 

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.  AtDecember 31, 2002, the Company has an interest rate swap contract toeffectively convert $4,500,000 of variable-rate debt to 4.2% fixed-rate debtuntil maturity in 2008.  The contract isconsidered to be a hedge against changes in the amount of future cash flowsassociated with interest payments on this variable-rate debt.  As a result, the interest rate swap contractis reflected at fair value and the related loss of $361,000 on this contract isdeferred in stockholders’ equity as a component of comprehensive income(loss).  The deferred loss will berecognized in future periods as interest expense as the related fixed-rate interestpayments are made.  In the unlikelyevent that the counterparty fails to perform under the contract, the Companybears the credit risk that payments due to the Company may not be collected.

 

F-10

----

 

**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 at December 31, 2002 and $93,500,000 atDecember 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 theperiod.  The net translation adjustmentis reflected as a component of accumulated comprehensive income or loss withinstockholders’ equity.

 

Realized foreign currencyexchange gains included in “other expenses, net” caption in the consolidatedstatements of operations were $194,000 for the year ended December 31, 2002,$103,000 for the year ended December 31, 2001 and $351,000 for the year endedDecember 31, 2000.

 

**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,product returns are reasonably estimable and there are no remaining significantobligations.  Provision for futurereturns is recorded based on historical experience at the time revenue isrecognized.

 

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.

 

F-11

----

 

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 aredetermined.  Management believes thatthe Company will not incur any losses on uncompleted contracts atDecember 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 $2,490,000 for the year ended December 31, 2002, $3,697,000 for theyear ended December 31, 2001 and $4,630,000 for the year ended December 31,2000.

 

**Stock Option Plan**

 

As permitted under SFASNo. 123, “Accounting for Stock-Based Compensation,” the Company measurescompensation expense related to the employee stock option plan utilizing theintrinsic value method as prescribed by Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees.”

 

**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-12

----

 

**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–eporting 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.  TheCompany 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.

 

F-13

----

 

*FIN No. 45*

 

In November 2002, theFinancial 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 or modifiedafter December 31, 2002.  However, thedisclosure requirements in FIN No. 45 are effective for the Company’s financialstatements for periods ending after December 15, 2002.

 

The Company 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.

* *

*SFAS No. 148*

 

In December 2002, theFinancial Accounting Standards Board issued SFAS No. 148, “Accounting forStock-Based Compensation—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.

 

SFAS No. 148 is effectivefor the Company’s fiscal year ended December 31, 2002 and for interim financialstatements beginning in 2003.  SFAS No.148 is not expected to have a significant effect on the Company’s financialposition, results of operations or cash flows.

* *

*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.

 

F-14

----

 

**Note 2.          Restructuring,Asset Impairment and Other Related Charges**

 

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

 
|                                             |   | **Year Ended December 31,** |   |
|--------------------------------------------------|--------|-----------------------------|--------|
| **(In thousands)**                               |   | **2002**                    |   | **2001** |   |
|                                             |   |                        |   |   |   |
| Nature of charges:                               |   |                        |   |   |   |
| 2001 Asset Realignment Restructuring             |   | $                           | 6,901  |   | $ | 28,658 |   |
| 2002 Seat Manufacturing Facilities Restructuring |   | 6,294                       |   | — |   |
| Other asset impairment related charges           |   | 12,048                      |   | — |   |
| Total pre-tax charges                            |   | $                           | 25,243 |   | $ | 28,658 |   |
|                                             |   |                        |   |   |   |
| Charged to operations:                           |   |                        |   |   |   |
| Cost of sales                                    |   | $                           | 10,992 |   | $ | 16,057 |   |
| Selling, general and administrative expenses     |   | 6,579                       |   | 4,018 |   |
| Impairment of goodwill                           |   | 7,672                       |   | 8,583 |   |
| Total pre-tax charges                            |   | $                           | 25,243 |   | $ | 28,658 |   |
|                                             |   |                        |   |   |   |
| Components of charges:                           |   |                        |   |   |   |
| Noncash charges                                  |   | $                           | 19,444 |   | $ | 22,058 |   |
| Cash charges                                     |   | 5,799                       |   | 6,600 |   |
| Total pre-tax charges                            |   | $                           | 25,243 |   | $ | 28,658 |   |

** **

**2001 Asset Realignment Restructuring**

 

During the second quarterof 2001, the Company’s Cabin Management Group adopted a restructuring plan torealign production programs between its manufacturing facilities.  In response to the adverse impact on the aerospaceindustry resulting from the September 11th terrorist attack and itsaftermath, as well as the weakening of global economic conditions, the Companyannounced and implemented a further restructuring plan in December 2001designed to reduce costs and conserve working capital.  This plan included permanently closing onemanufacturing facility and idling a second facility for an indefinite period,curtailing several product development programs and instituting workforcereductions.  Due to the ongoing weaknessof the corporate, VIP and head-of-state aircraft market, the Company decidedduring the second quarter of fiscal 2002 to permanently close the temporarilyidled manufacturing facility.  This planprimarily affected the Company’s Cabin Management and Specialty AvionicsGroups.

 

The restructuring, assetimpairment and other related charges are comprised of the following:

 

•                  *Impairment of Long-Lived Assets.*  In 2001, the restructuring plan resulted inthe 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.

 

F-15

----

 

•                  *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.

 

**•**                  *LeaseTermination and Other Related Costs.* Lease termination and otherrelated costs are comprised of the net losses expected to be incurred under theexisting long-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-16

----

 
| **(In thousands)**                                     |   | **Balance at  Beginning of  the Year** |   | **Total  Charges** |   | **Amounts Incurred** |   | **Balance at  End of  the Year** |    |
|--------------------------------------------------------|--------|----------------------------------------|--------|--------------------|--------|----------------------|--------|----------------------------------|---------|
| **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 restructuring planwas completed during the fourth quarter of fiscal 2002.  From the inception of this restructuringplan 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, the Companyhas, in addition to the positions eliminated as a result of the 2002 plantclosures described above, reduced its total workforce by approximately 500employees, or 18.5%, as of December 2002 pursuant to this restructuring plan,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 plan related to leasedfacilities was completed during the second quarter of fiscal 2002; however,future cash 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.

 

**2002 Seat Manufacturing Facilities Restructuring**

 

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 plan was designed to improve manufacturing efficiencies and tofurther reduce costs and conserve working capital.  In connection with this restructuring plan, the Company recordedpre-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-17

----

 

•                  *Impairment of Long-Lived Assets.*  The restructuring plan 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 werecharged to expense as incurred.

 

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 restructuring planwas 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 Related Charges**

 

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.

 

F-18

----

 

**Note 3.          Acquisitions**

 

**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, on May 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

* *

*SpecialtyAvionics Group*

 

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

 

The consolidatedfinancial statements reflect the acquired companies subsequent to their respectiveacquisition dates.  The aggregatepurchase price for the acquisitions was $59,363,000 in cash, plus contingentconsideration totaling a maximum of $2,000,000 payable over three years basedon future attainment of defined performance criteria.  The aggregate purchase price includes $3,511,000 of acquisitionrelated costs.  The acquisitions wereaccounted for as purchases and the assets acquired and liabilities assumed havebeen recorded at their estimated fair values. As a result, identifiable intangible assets, principally FAAcertifications, totaling $18,936,000 were recorded and the $41,622,000difference between the aggregate purchase price and the fair value of the netassets 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 over thirty years.  Contingent consideration totaling $2,000,000was earned during the three years ended December 31, 2002 resulting in acorresponding increase in goodwill.

 

The acquisitions werefunded with borrowings under the Company’s senior credit facility and proceeds fromthe sale of common and preferred stock as described in Note 11.

 

F-19

----

 

**Contingent Acquisition Consideration Paid for AllAcquisitions**

 

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 Company recordedcontingent consideration payable of $600,000 in 2002, $700,000 in 2001 and$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 Company received$3,718,000 from the sellers upon entering into the settlement agreements, whichalso provided that the Company pay in 2002 a minimum of $3,125,000 ofpreviously contingent consideration for the year ended December 31, 2001 whichwas 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 as if all of thesetransactions were consummated as of January 1, 2000.

** **
| **(Unaudited, in thousands*****)***                                  |   | **Pro Forma  Year Ended  December 31,  2000** | ** ** |
|----------------------------------------------------------------------|--------|-----------------------------------------------|------------|
|                                                                 |   |                                          |       |
| Revenues                                                             |   | $                                             | 371,584    |   |
| EBITDA, as defined (Note 16)                                         |   | 89,160                                        |       |
| Net loss before cumulative effect of change in  accounting principle |   | (79                                           | )          |
|                                                                      |        |                                               |            |  |

 

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 16).  If the Company had completedits 2000 acquisitions at the beginning of 2000, unaudited pro forma revenuesfrom these customers for year ended December 31, 2000 would have been asfollows: Bombardier – $65,746,000; Boeing – $53,735,000; and Textron –$53,669,000.  Complete loss of any ofthe customers identified above could have a significant adverse impact on theresults of operations expected in future periods.

 

F-20

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**Note 4.          AccountsReceivable**

 

The Company ispotentially subject to concentrations of credit risk as the Company reliesheavily on customers operating in the domestic and foreign corporate, VIP andhead-of-state and commercial aircraft industries.  Generally, the Company does not require collateral or othersecurity to support accounts receivable subject to credit risk.  Under certain circumstances, deposits orcash-on-delivery terms are required. The Company maintains reserves for potential credit losses andgenerally, such losses have been within management’s expectations.

 

Accounts receivable arenet of an allowance for doubtful accounts of $1,758,000 atDecember 31, 2002 and $2,647,000 at December 31, 2001.

 

**Note5.          Inventories**

 

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

 
|                                                                         |   | **December 31,** |   |
|------------------------------------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                                                           |   | **2002**         |   | **2001** |   |
|                                                                         |   |             |   |   |   |
| Raw materials                                                                |   | $                | 39,765 |   | $ | 50,503 |   |
| Work-in-process:                                                             |   |             |   |   |   |
| Direct and indirect manufacturing costs                                      |   | 14,641           |   | 16,260 |   |
| Program costs, principally engineering costs                                 |   | 14,769           |   | 10,974 |   |
| Finished goods                                                               |   | 7,623            |   | 3,089 |   |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |   | 4,004            |   | 5,672 |   |
| Total inventories                                                            |   | $                | 80,802 |   | $ | 86,498 |   |

 

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 2001restructuring, $7,908,000 of previously inventoried program costs weredetermined to be unrecoverable and were charged to cost of sales in 2001; noadjustments were required during the years ended 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 8) |   | (613             | )      | (11,155 | ) |
| Net                                                                           |   | $                | 3,391  |   | $ | (5,483 | ) |

** **

**F-21**

----

 

Revenues and earnings forproducts manufactured under long-term contracts are recognized under the percentage-of-completionmethod using total contract price, actual costs incurred to date and anestimate of the completion costs for each contract.  Provisions for estimated losses on uncompleted contracts are madein the period in which such losses are determined.  The Company recorded a provision for estimated losses totaling$2,577,000 during 2002 relating to uncompleted contracts at the furnituremanufacturing facility permanently closed.

 

**Note6.          Property and Equipment**

 

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

** **
|                                                     |   | **December 31,** |   |
|----------------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                                       |   | **2002**         |   | **2001** |   |
|                                                     |   |             |   |   |   |
| Land, buildings and leasehold improvements               |   | $                | 36,342 |   | $ | 34,795 |   |
| Machinery and equipment                                  |   | 29,586           |   | 30,311 |   |
| Computer equipment and software, furniture and  fixtures |   | 17,804           |   | 17,396 |   |
| Tooling                                                  |   | 6,152            |   | 6,052 |   |
| Total cost                                               |   | 89,884           |   | 88,554 |   |
| Accumulated depreciation and amortization                |   | (38,001          | )      | (27,481 | ) |
| Net property and equipment                               |   | $                | 51,883 |   | $ | 61,073 |   |

 

Included above areowned land and buildings held for sale related to a manufacturing facility theCompany closed during 2002 (Note2).  Thecost of the land and buildings is $2,820,000 and the corresponding accumulateddepreciation and amortization is $31,000 as of December 31, 2002.

 

Property and equipment undercapital leases included above consists of the following as of December 31, 2002and 2001:

** **
|                                                     |   | **December 31,** |   |
|----------------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                                       |   | **2002**         |   | **2001** |   |
|                                                     |   |             |   |   |   |
| Land, buildings and leasehold improvements               |   | $                | 3,558  |   | $ | 4,388 |   |
| Machinery and equipment                                  |   | 1,337            |   | 1,281 |   |
| Computer equipment and software, furniture and  fixtures |   | 2,040            |   | 1,836 |   |
| Total cost                                               |   | 6,935            |   | 7,505 |   |
| Accumulated depreciation and amortization                |   | (2,092           | )      | (2,193 | ) |
| Net property and equipment                               |   | $                | 4,843  |   | $ | 5,312 |   |

 

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

 

F-22

----

 

**Note 7.          OtherAssets**

 

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

 
|                                                     |   | **December 31,** |    |
|----------------------------------------------------------|--------|------------------|---------|
| **(In thousands)**                                       |   | **2002**         |    | **2001** | ** ** |
|                                                     |   |             |    |   |   |
| Goodwill                                                 |   | $                | 277,152 |   | $ | 337,443 |   |
| Identifiable  intangible assets with finite useful lives |   | 51,732           |    | 63,648 |   |
| Deferred  financing costs                                |   | 9,168            |    | 10,204 |   |
| Other  non-amortizable assets                            |   | 1,189            |    | 1,978 |   |
| Total other  assets                                      |   | $                | 339,241 |   | $ | 413,273 |   |

** **

**SFAS No. 141 and 142 Adopted as of January 1, 2002**

 

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 was completed during the first quarter offiscal 2002.  The remaining useful liveswere 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.

 

•                  *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 $57,150,000 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.

 

F-23

----

 

Reported income (loss),net of tax before the cumulative effect of the change in accounting principle,adjusted to reflect the discontinuance of periodic goodwill and assembledworkforce amortization charges, is as follows:

** **
|                                                                |   | **Year Ended December 31,** |    |
|---------------------------------------------------------------------|--------|-----------------------------|---------|
| **(In thousands)**                                                  |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                                                |   |                        |    |   |   |   |   |
| Reported income (loss)                                              |   | $                           | (14,677 | ) | $ | (19,063 | ) | $ | 1,328 |   |
| Add back goodwill and assembled workforce  amortization, net of tax |   | —                      |    | 11,573 |   | 10,492 |   |
| Adjusted income (loss)                                              |   | $                           | (14,677 | ) | $ | (7,490 | ) | $ | 11,820 |   |

** **

**Goodwill**

** **

Changes in the carryingamount of goodwill, by business segment (Note 16), for the two years endedDecember 31, 2002 are as follows:

 
| **(In thousands)**                                                                                       |   | **Cabin  Management  Group** |    | **Specialty  Avionics  Group** |   | **Systems  Integration  Group** |   | **Corporate** |   | **Consolidated  Total** |   |
|----------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|--------------------------------|--------|---------------------------------|--------|---------------|--------|-------------------------|--------|
|                                                                                                     |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Balance, December 31, 2000                                                                               |   | $                            | 187,797 |                           | $      | 131,472                         |   | $             | 32,982 |                    | $      | 4,105 |   | $ | 356,356 |   |
| Amortization during the  period                                                                          |   | (6,640                       | )       | (4,709                         | )      | (1,180                          | )      | (149          | )      | (12,678                 | )      |
| 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                           | )      | —                          |   | —        |   | (268                    | )      |
| Balance, December 31, 2001                                                                               |   | 178,715                      |    | 126,495                        |   | 28,277                          |   | 3,956         |   | 337,443                 |   |
|                                                                                                     |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Adoption of SFAS 141 and  142:                                                                           |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Reclassification of  intangible assets                                                                   |   | 3,076                        |    | 1,221                          |   | 386                             |   | 120           |   | 4,803                   |   |
| Transitional impairment  charge                                                                          |   | (8,463                       | )       | (39,322                        | )      | (7,881                          | )      | (2,362        | )      | (58,028                 | )      |
| Contingent consideration  earned, including acquisition related expenses                                 |   | 606                          |    | —                         |   | —                          |   | —        |   | 606                     |   |
| Impairment charge                                                                                        |   | —                       |    | (7,672                         | )      | —                          |   | —        |   | (7,672                  | )      |
| Balance, December 31, 2002                                                                               |   | $                            | 173,934 |                           | $      | 80,722                          |   | $             | 20,782 |                    | $      | 1,714 |   | $ | 277,152 |   |

 

F-24

----

 

In 2001, the Companyrecorded impairment charges total $8,583,000 in connection with itsrestructuring plan.  During the fourthquarter of fiscal 2002, the Company performed its annual impairment testing andrecorded an additional $7,672,000 impairment charge.  The charge results from a decrease in fair value due to furtherweakness during 2002 in the commercial aircraft portion of our business.  These charges are included as a component ofincome from operations.

** **

**Identifiable Intangible Assets with Finite UsefulLives**

 

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             |   | $                     | 45,816 |                          | $      | (11,539 | ) | $ | 34,277 |   | $ | 45,816 |   | $ | (8,485 | ) | $ | 37,331 |   |
| Engineering drawings           |   | 14,621                |   | (3,791                        | )      | 10,830 |   | 14,617 |   | (2,816 | ) | 11,801 |   |
| Assembled workforce            |   | —                |   | —                        |   | — |   | 11,499 |   | (4,535 | ) | 6,964 |   |
| Other identifiable intangibles |   | 13,105                |   | (6,480                        | )      | 6,625 |   | 12,293 |   | (4,741 | ) | 7,552 |   |
| Total identifiable intangibles |   | $                     | 73,542 |                          | $      | (21,810 | ) | $ | 51,732 |   | $ | 84,225 |   | $ | (20,577 | ) | $ | 63,648 |   |

 

Estimated annualamortization expense for all identifiable intangible assets with finite usefullives for the five-year period ending December 31, 2006 is as follows:2003 – $5,845,000; 2004 – $5,792,000; 2005 – $5,625,000; 2006 – $4,423,000; and2007 – $4,323,000.

 

**Note8.          Accrued Liabilities**

 

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             |   | $                | 11,213 |   | $ | 17,179 |   |
| 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                                               |   | 4,723            |   | 3,260 |   |
| Other accrued liabilities                                                    |   | 10,442           |   | 13,436 |   |
| Total accrued liabilities                                                    |   | $                | 35,056 |   | $ | 56,626 |   |

** **

**F-25**

----

 

**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                               |   | $                           | 3,348  |   | $ | 3,346 |   | $ | 3,595 |   |
| Accruals for warranties issued during the period               |   | 1,443                       |   | 921 |   | 1,286 |   |
| Change in accrual estimate related to pre-existing  warranties |   | 481                         |   | (482 | ) | (1,157 | ) |
| Settlements made (in cash or in kind) during the  period       |   | (880                        | )      | (437 | ) | (378 | ) |
| Accrual at end of the year                                     |   | $                           | 4,392  |   | $ | 3,348 |   | $ | 3,346 |   |
|                                                           |   |                        |   |   |   |   |   |
| Classification at end of the year:                             |   |                        |   |   |   |   |   |
| Current liability                                              |   | 2,991                       |   | 2,721 |   | 2,373 |   |
| Long-term liability                                            |   | 1,401                       |   | 627 |   | 973 |   |
| Total                                                          |   | $                           | 4,392  |   | $ | 3,348 |   | $ | 3,346 |   |

 

**Note9.          Long-Term Debt**

** **

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 |   | 10,509           |    | 10,745 |   |
| Other indebtedness                                                                    |   | 998              |    | 1,799 |   |
| Total long-term debt                                                                  |   | 381,707          |    | 400,250 |   |
| Less current portion                                                                  |   | (16,859          | )       | (13,899 | ) |
| Long-term debt, less current portion                                                  |   | $                | 364,848 |   | $ | 386,351 |   |

 

F-26

----

 

**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 by September30, 2004.  Loans under the senior creditfacility generally bear interest based on a margin over, at the Company’soption, prime rate or LIBOR.  Themargins applicable to portions of amounts borrowed may vary depending upon theCompany’s consolidated debt leverage ratio. Currently, the applicable margins are 2.50 to 3.25 for prime rateborrowings and 3.75% to 4.50% for LIBOR borrowings.  The weighted-average interest rate on all senior credit facilityborrowings outstanding was 5.97% as of December 31, 2002.  Borrowings under the senior credit facilityare secured by substantially all of the assets of the Company.  The Company is subject to certain commitmentfees under the facility as well as the maintenance of certain financial ratios,cash flow results and other restrictive covenants, including the payment ofdividends 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 is senior credit facility, which reducesborrowings available under the revolving line credit.

 

On March 28, 2003, theCompany received requisite lender approval to further amend the terms of itssenior credit facility (Note 18).

** **

**12% Senior Subordinated Notes**

 

The senior subordinatednotes mature on September 30, 2008 and interest is payable semi-annually onMarch 30, and September 30, of each year. The senior subordinated notes are unsecured general obligations of theCompany and are subordinated in right of payment to substantially all existingand future senior indebtedness of the Company, including senior credit facilityindebtedness.  Prior to maturity, theCompany may redeem all or some of the senior subordinated notes at definedredemption prices, which may include a premium.  In the event of a change in control, the holders may require theCompany to repurchase the senior subordinated notes for a redemption price thatmay also include a premium.  The Companyis subject to restrictive covenants, including the payment of dividends incash.

 

F-27

----

 

**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 annual maturitiesof long-term debt outstanding as of December 31, 2002 are as follows:

 
| **(In thousands)**              |   |    |    |
|---------------------------------|--------|---------|---------|
|                            |   |    |    |
| Year ending December 31,        |   |    |    |
| 2003                            |   | $       | 16,887  |   |
| 2004                            |   | 54,043  |    |
| 2005                            |   | 97,766  |    |
| 2006                            |   | 107,090 |    |
| 2007                            |   | 650     |    |
| 2008 and thereafter             |   | 105,299 |    |
| Total aggregate maturities      |   | 381,735 |    |
| Less unamortized debt discounts |   | (28     | )       |
| Total long-term debt            |   | $       | 381,707 |   |

 

**Note10.       Income Taxes**

 

Income (loss) beforeincome taxes and cumulative effect of change in accounting principle was taxedunder the following jurisdictions:

** **
|               |   | **Year Ended December 31,** |    |
|--------------------|--------|-----------------------------|---------|
| **(In thousands)** |   | **2002**                    |    | **2001** |   | **2000** |   |
|               |   |                        |    |   |   |   |   |
| Domestic           |   | $                           | (13,222 | ) | $ | (17,297 | ) | $ | 7,775 |   |
| Foreign            |   | (1,101                      | )       | (578 | ) | (165 | ) |
| Total              |   | $                           | (14,323 | ) | $ | (17,875 | ) | $ | 7,610 |   |

 

F-28

----

 

The provisions for incometaxes (benefit) are as follows:

 
|               |   | **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 |   |

 

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 |   |

** **

**F-29**

----

 

Deferred tax liabilities(assets) are comprised of the following 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:     |   |             |   |   |   |
| Noncurrent deferred tax liability |   | $                | 39,187 |   | $ | 33,597 |   |
| Current deferred tax asset        |   | (22,631          | )      | (14,063 | ) |
| Net deferred tax liability        |   | $                | 16,556 |   | $ | 19,534 |   |

 

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 18. The loss carryforwards are not subject to limitations on their annualutilization (“Section 382 limitation,” as defined in the Internal Revenue Code)and therefore 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.

** **

**F-30**

----

 

**Note11.       Capital Structure**

** **

**Mandatorily Redeemable Preferred Stock**

 

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 |   |

 

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

 

On June 30, 2000, 250,000shares of DeCrane Aircraft 16% preferred stock and warrants to purchase 139,357shares of DeCrane Holdings common stock were sold for $25,000,000 to DLJaffiliates (Note 15).  The proceeds fromthe sale were used to fund, in part, the ERDA acquisition (subsequently renamedDeCrane Aircraft Seating Co.).  Aportion of the proceeds from the sale totaling $4,019,000 were ascribed to thecommon stock warrants and was credited to additional paid-in capital.  The corresponding reduction in redemptionvalue of the preferred stock, and related issuance costs, are recorded as anissuance discount and are being amortized using the effective interest methodthrough the preferred stock mandatory redemption date.

 

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

** **

**F-31**

----

 

*DeCrane Aircraft 16% Mandatorily Redeemable PreferredStock*

 

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 to June30, 2005, DeCrane Aircraft may, at its option, pay dividends either in cash orby 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 in lieuof cash dividend payments; such shares are reflected as a component of minorityinterest 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.

* *

*DeCrane Holdings 14% Mandatorily Redeemable PreferredStock*

 

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 to the liquidationvalue of the preferred stock, which, in turn, increases the redemptionobligation.  The preferred stock ismandatorily redeemable on September 30, 2009. Upon the occurrence of a change in control, as defined, each holder hasthe right to require DeCrane Holdings to redeem all or part of such holder’sshares at a price equal to 101% of the liquidation preference plus accrued andunpaid 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 stock arereserved for issuance upon exercise of all warrants and stock options.

 

F-32

----

 

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

 

•      326,087 shares to DLJ and its affiliatesfor $7,500,000 in May 2000 and used the proceeds to fund a portion of the CarlF. Booth acquisition;

 

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

 

•      221,096 shares to DLJ and its affiliatesand a director for $5,100,000 in September 2002 and used the proceeds to fundworking capital requirements.

 

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

 

•      4,347 shares from a former member ofDeCrane Aircraft management for its original $23.00 per share issuance price inJune 2000; and

 

•      18,743 shares from former members ofDeCrane Aircraft management at $27.00 per share in January 2002.

 

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:

 

•      in December 1998, a group of related partyinvestors (Note 15) purchased mandatorily redeemable preferred and common stockfor $704,000;

 

•      in October 1999, the same group ofinvestors purchased additional shares of common stock for $250,000; and

 

•      in December 1999, DeCrane Aircraft’smanagement purchased common stock for $3,940,000.

 

F-33

----

 

During 2000, a notereceivable totaling $51,000, including accrued interest, was canceled inconjunction with the repurchase of the common stock that collateralized thenote.  During 2002, a note receivabletotaling $200,000, plus accrued interest, was repaid in connection with the repurchaseof the common stock collateralizing the note receivable.

 

**CommonStock Warrants**

 

Common stock warrantsissued during the three years ended December 31, 2002 are summarized in thetable 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% preferredstock.  A portion of the proceeds fromthe sale totaling $4,019,000 were allocated to the warrants and credited toadditional paid-in capital.  Prior toJuly 1, 2001, warrants to purchase 69,678 shares of common stock werecancelable upon redemption of the preferred stock and as a result, were notexercisable until on or after that date. The issuance of the Class B warrants resulted in the exercise price andnumber of shares of common stock represented by the $22.31 warrants to beadjusted pursuant to their anti-dilution provisions.

 

F-34

----

 

**Note 12.       Commitments and 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 four yearswith the CTSB investigators in the fact-finding investigation of thiscatastrophic incident.  On March 27,2003, the CTSB released its final report on its investigation.  This report indicated that the CTSB wasunable to conclusively determine the cause of the fire which led to the crashof the aircraft.

 

Families of most of the229 persons who died aboard the flight have filed actions in federal and statecourts against the subsidiary, the Company, and many other unaffiliatedparties, including Swissair and Boeing (“Passenger Actions”).  The Passenger Actions claim negligence,strict liability, and breach of warranty relating to the installation andtesting of the in-flight entertainment system. The Passenger Actions seek damages and costs in an unstated amount.  All of the Passenger Actions have beentransferred to the United States District Court for the Eastern District ofPennsylvania and assigned under MDL Case No. 1269 for coordinated or consolidatedpre-trial proceedings.  Most of thePassenger Actions have been settled by Boeing and Swissair.  Boeing and Swissair have advised the Companythat they intend to seek contribution from the Company’s subsidiary.  The Company, based in part on informationreceived from independent fire and safety experts retained by it, does notbelieve that the installation of the equipment installed by its subsidiaryimpacted the operation or safety of the aircraft.  Accordingly, the Company continues to defend the claims.

 

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

 

**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                                          |   | $                   | 1,108  |                  | $      | 3,167 |   |
| 2004                                          |   | 966                 |   | 3,085                 |   |
| 2005                                          |   | 790                 |   | 3,030                 |   |
| 2006                                          |   | 567                 |   | 2,726                 |   |
| 2007                                          |   | 497                 |   | 2,479                 |   |
| 2008 and thereafter                           |   | 1,995               |   | 10,953                |   |
| Total minimum payments required               |   | 5,923               |   | $                     | 25,440 |   |
| Less amount representing future interest cost |   | (1,737              | )      |                  |   |
| Recorded obligation under capital leases      |   | $                   | 4,186  |                  |   |   |

 

F-35

----

 

Total rental expensecharged to operations was $4,393,000 for the year ended December 31, 2002,$4,232,000 for the year ended December 31, 2001 and $3,903,000 for the yearended December 31, 2000.

 

**Note 13.       Consolidated Statements 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                                                                                   |   | $                            | — |   | $ | — |   | $ | 94,155 |   |
| Liabilities assumed                                                                                             |   | —                       |   | — |   | (34,792 | ) |
| Cash paid                                                                                                       |   | —                       |   | — |   | 59,363 |   |
| Less cash acquired                                                                                              |   | —                       |   | — |   | (292 | ) |
| Net cash paid for acquisitions                                                                                  |   | —                       |   | — |   | 59,071 |   |
|                                                                                                            |   |                         |   |   |   |   |   |
| 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 3)   |   | —                       |   | (3,718 | ) | — |   |
| Additional acquisition related expenses                                                                         |   | 64                           |   | 172 |   | 650 |   |
| Total cash paid for acquisitions                                                                                |   | $                            | 5,890  |   | $ | 13,529 |   | $ | 89,546 |   |
|                                                                                                            |   |                         |   |   |   |   |   |
| 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                                                   |   | 264                          |   | 4,438 |   | 109 |   |
| Additional acquisition contingent consideration  recorded                                                       |   | 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                                                                                                        |   | $                            | 28,417 |   | $ | 35,821 |   | $ | 39,160 |   |
| Income taxes paid (refunded), net                                                                               |   | (91                          | )      | 1,161 |   | 578 |   |

 

F-36

----

 

**Note 14.       Employee Benefit Plans**

 

**StockBased Incentive Compensation**

 

*ManagementIncentive Stock Option Plan*

 

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 the grantingof options to purchase a maximum of 356,257 common shares prior to expirationin 2009.  The options are granted atfair 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.

 

*IncentiveStock Options Granted to Others*

 

In July 1999, a group ofrelated party investors, including two individuals who were then serving asdirectors, were granted options as compensation for consulting services.  Options were granted to purchase 44,612 sharesof DeCrane Holdings common stock at an exercise price of $23.00 per share,equal to the fair market value of the common stock on the grant date.  The options vest over a three-year period,are subject to acceleration if DLJ and its affiliates sell any of their sharesof common stock, and expire in 2009. The options are fully vested as of December 31, 2002.

 

F-37

----

 

*Summaryof 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 grant under theManagement Incentive Stock Option Plan. The following table summarizes information about stock optionsoutstanding and stock options exercisable at December 31, 2002.

 
|                                             |   | **All  Options Outstanding**                      |   | **Number  of Shares  Exercisable  as of  December 31,  2001** |   |
|--------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------------------|--------|
| **Number  of Shares  as of  December 31,  2001** |   | **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 year endedDecember 31, 2001 and $561,000 for the year ended December 31, 2000.  For non-compensatory stock options, theCompany uses APB Opinion No. 25 to account for stock-based compensation and,accordingly, no compensation expense was recognized during the three yearsended December 31, 2002.  The Companyhas adopted the disclosure-only provisions of SFAS No. 123.

 

F-38

----

 

For the three years endedDecember 31, 2002, net income (loss), pro forma for the effect of applyingthe fair value method to the options granted, would have been as follows:

** **
|                                                        |   | **Year  Ended December 31,** |    |
|-------------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands, except per share  data)**                  |   | **2002**                     |    | **2001** |   | **2000** |   |
|                                                        |   |                         |    |   |   |   |   |
| Net income (loss):                                          |   |                         |    |   |   |   |   |
| As reported                                                 |   | $                            | (71,827 | ) | $ | (19,063 | ) | $ | 1,328 |   |
| Pro forma                                                   |   | (72,203                      | )       | (19,455 | ) | 889 |   |
|                                                        |   |                         |    |   |   |   |   |
| Weighted-average fair value of options granted (per  share) |   | 10.96                        |    | — |   | 9.48 |   |
|                                                             |        |                              |         |  |  |  |  |  |  |  |

 

For the purposes of thepro forma disclosure, 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   |   | —   |   | —   |   | —   |   |
|                              |   |     |   |     |   |     |   |
| Employee and director options(2): |   |     |   |     |   |     |   |
| Risk free interest rates          |   | —   |   | —   |   | 5.5-6.7  | %      |
| Expected dividend yield           |   | —   |   | —   |   | —   |   |
| Expected life                     |   | —   |   | —   |   | 8 years  |   |

 

----

(1)        Using the Black Scholes option valuationmodel.

 

(2)        Using the 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 minimum value method,which is an acceptable method for non-public companies, excludes stock pricevolatility.

 

F-39

----

 

**ManagementStock Purchases**

 

Beginning in December1999, DeCrane Holding’s Board of Directors has permitted designated executivepersonnel and other key employees to purchase shares of common stock of DeCraneHoldings, with a portion of the purchase price to be loaned to the participantsby DeCrane Aircraft.  In December 1999,management purchased 171,295 shares of DeCrane Holdings’ common stock for$23.00 per share.  The total purchaseprice was approximately $3,900,000, of which one-half was paid in cash andone-half was loaned to management by DeCrane Aircraft as described in Note11.  In 2000, management purchased anadditional 20,707 shares for $23.00 per share in cash pursuant to the plan’santidilution provisions.  Dilutionresulted from the issuance of the DeCrane Holdings common stock warrants inconnection 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 $1,469,000 for the year endedDecember 31, 2002, $2,272,000 for the year ended December 31, 2001 and $2,203,000for the year ended December 31, 2000.

 

**Note 15.       Related Party Transactions**

 

The Company’stransactions with related parties included in the consolidated financialstatements are 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-40

----

 

**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. and affiliatedfunds became indirect affiliates of Credit Suisse Group and Credit Suisse FirstBoston, 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.

 

**GlobalTechnology 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 the purchase price for such sharesto the members at rates ranging between 4.33% and 5.44%.  The loans, plus accrued interest, arepayable from the proceeds from the sale of the stock and are collateralized bysuch stock.

 

F-41

----

 

**Note 16.       Business Segment Information**

 

The Company suppliesproducts and services to the aerospace industry.  The Company’s subsidiaries are organized into three groups, eachof which are strategic businesses that develop, manufacture and sell distinct productsand services.  The groups and adescription of their businesses are as follows:

 

•      *CabinManagement –* provides interior cabin components for the corporate,VIP and head-of-state aircraft market, including cabin interior furnishings,cabin management systems, seating and composite components;

 

•      *SpecialtyAvionics –* designs, engineers and manufactures electroniccomponents, display devices and interconnect components and assemblies; and

 

•      *SystemsIntegration –*manufacturers auxiliary fuel systems and auxiliarypower units, provides system integration services, provides corporate, VIP andhead-of-state aircraft completion and refurbishment services and is a BoeingBusiness Jet authorized service center.

 

Management utilizes morethan one measurement to evaluate group performance and allocate resources,however, management considers EBITDA to be the primary measurement of overalleconomic returns and cash flows. Management defines EBITDA as earnings before interest, income taxes,depreciation and amortization, restructuring, asset impairment and otherrelated charges, acquisition related charges not capitalized and other noncashand nonoperating charges.  This isconsistent with the manner in which the Company’s lenders and ultimateinvestors measure its overall performance.

 

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-42

----

 

**Summaryof Business by Segment**

** **
|                                    |   | **Year  Ended December 31,** |    |
|-----------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                      |   | **2002**                     |    | **2001** |   | **2000** |   |
|                                    |   |                         |    |   |   |   |   |
| Revenues:                               |   |                         |    |   |   |   |   |
| Cabin Management                        |   | $                            | 172,832 |   | $ | 206,052 |   | $ | 174,796 |   |
| Specialty Avionics                      |   | 95,789                       |    | 123,240 |   | 110,878 |   |
| Systems Integration                     |   | 58,051                       |    | 67,528 |   | 62,965 |   |
| Inter-group elimination(1)              |   | (1,042                       | )       | (1,468 | ) | (1,260 | ) |
| Consolidated totals                     |   | $                            | 325,630 |   | $ | 395,352 |   | $ | 347,379 |   |
|                                    |   |                         |    |   |   |   |   |
| Revenues from significant customers(2): |   |                         |    |   |   |   |   |
| Cabin Management                        |   | $                            | 94,014  |   | $ | 108,737 |   | $ | 107,194 |   |
| Specialty Avionics                      |   | 23,356                       |    | 35,115 |   | 30,542 |   |
| Systems Integration                     |   | 35,388                       |    | 46,138 |   | 31,750 |   |
| Consolidated totals                     |   | $                            | 152,758 |   | $ | 189,990 |   | $ | 169,486 |   |
|                                    |   |                         |    |   |   |   |   |
| EBITDA:                                 |   |                         |    |   |   |   |   |
| Cabin Management                        |   | $                            | 32,644  |   | $ | 45,554 |   | $ | 46,041 |   |
| Specialty Avionics                      |   | 25,353                       |    | 33,272 |   | 26,696 |   |
| 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)                  |   | $                            | 70,018  |   | $ | 88,791 |   | $ | 80,992 |   |
|                                    |   |                         |    |   |   |   |   |
| Depreciation and amortization:          |   |                         |    |   |   |   |   |
| Cabin Management                        |   | $                            | 6,695   |   | $ | 14,607 |   | $ | 9,477 |   |
| Specialty Avionics                      |   | 6,507                        |    | 12,012 |   | 12,101 |   |
| Systems Integration                     |   | 2,956                        |    | 4,346 |   | 4,682 |   |
| Corporate                               |   | 961                          |    | 1,411 |   | 927 |   |
| Consolidated totals(6)                  |   | $                            | 17,119  |   | $ | 32,376 |   | $ | 27,187 |   |
|                                    |   |                         |    |   |   |   |   |
| Total assets (as of period end):        |   |                         |    |   |   |   |   |
| Cabin Management                        |   | $                            | 281,655 |   | $ | 311,476 |   | $ | 307,241 |   |
| Specialty Avionics                      |   | 154,540                      |    | 214,569 |   | 227,093 |   |
| Systems Integration                     |   | 62,437                       |    | 76,312 |   | 86,602 |   |
| Corporate(7)                            |   | 50,448                       |    | 43,497 |   | 43,651 |   |
| Inter-group elimination(8)              |   | (113                         | )       | (143 | ) | (333 | ) |
| Consolidated totals                     |   | $                            | 548,967 |   | $ | 645,711 |   | $ | 664,254 |   |
|                                    |   |                         |    |   |   |   |   |
| Capital expenditures:                   |   |                         |    |   |   |   |   |
| Cabin Management                        |   | $                            | 3,829   |   | $ | 6,579 |   | $ | 14,896 |   |
| Specialty Avionics                      |   | 1,073                        |    | 1,708 |   | 2,496 |   |
| Systems Integration                     |   | 478                          |    | 3,371 |   | 1,612 |   |
| Corporate                               |   | 49                           |    | 241 |   | 3,685 |   |
| Consolidated totals(9)                  |   | $                            | 5,429   |   | $ | 11,899 |   | $ | 22,689 |   |

 

----

The notes appear on thenext page.

 

F-43

----

 

**Summaryof Business by Geographical Area**

** **
|                                                      |   | **Year  Ended December 31,** |    |
|-----------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                                        |   | **2002**                     |    | **2001** |   | **2000** |   |
|                                                      |   |                         |    |   |   |   |   |
| Consolidated net revenues to unaffiliated  customers(10): |   |                         |    |   |   |   |   |
| United States                                             |   | $                            | 322,811 |   | $ | 391,296 |   | $ | 344,150 |   |
| Western Europe                                            |   | 2,819                        |    | 4,056 |   | 3,229 |   |
| Consolidated totals                                       |   | $                            | 325,630 |   | $ | 395,352 |   | $ | 347,379 |   |
|                                                      |   |                         |    |   |   |   |   |
| Consolidated long-lived assets(11):                       |   |                         |    |   |   |   |   |
| United States                                             |   | $                            | 48,000  |   | $ | 56,218 |   | $ | 54,566 |   |
| Western Europe                                            |   | 2,164                        |    | 2,564 |   | 2,758 |   |
| Mexico                                                    |   | 1,719                        |    | 2,291 |   | 2,167 |   |
| Consolidated totals                                       |   | $                            | 51,883  |   | $ | 61,073 |   | $ | 59,491 |   |

 

----

**Notes**

 

(1)       Inter-group sales areaccounted for at prices comparable to sales to unaffiliated customers, and areeliminated in consolidation.

 

(2)       Three customers eachaccounted for more than 10% of the Company’s consolidated revenues during thethree years ended December 31, 2002 as shown in the table below.  Complete loss of any of these customerscould have a significant adverse impact on the results of operations expectedin future periods.

 
|                |   | **Year  Ended December 31,** |    |
|---------------------|--------|------------------------------|---------|
| **(In thousands)**  |   | **2002**                     |    | **2001** |   | **2000** |   |
|                |   |                         |    |   |   |   |   |   |   |   |
| Textron(a)          |   | $                            | 56,563  |   | $ | 58,192 |   | $ | 52,620 |   |
| Boeing(b)           |   | 50,065                       |    | 70,257 |   | 52,735 |   |
| Bombardier(b)       |   | 46,130                       |    | 61,541 |   | 64,131 |   |
| Consolidated totals |   | $                            | 152,758 |   | $ | 189,990 |   | $ | 169,486 |   |

 

----

(a)     All operating groups derived revenues fromTextron during each of the periods except for the Systems Integration Groupduring 2000.

 

(b)     All operating groups derived revenues fromBoeing and Bombardier during each of the periods.

 

(3)       Reflects the Company’scorporate headquarters costs and expenses not allocated to the groups.

 

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

 

F-44

----

 

(5)       The table below reconcilesEBITDA to consolidated income from operations and income (loss) before incometaxes.

** **
|                                                       |   | **Year  Ended December 31,** |    |
|------------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                                         |   | **2002**                     |    | **2001** |   | **2000** |   |
|                                                       |   |                         |    |   |   |   |   |   |   |   |
| Consolidated EBITDA                                        |   | $                            | 70,018  |   | $ | 88,791 |   | $ | 80,992 |   |
| Depreciation and amortization(6)                           |   | (17,119                      | )       | (32,376 | ) | (27,187 | ) |
| Restructuring, asset impairment and other related  charges |   | (25,243                      | )       | (28,658 | ) | — |   |
| Acquisition related charges not capitalized                |   | (1,162                       | )       | (308 | ) | (1,255 | ) |
| Other noncash charges                                      |   | (138                         | )       | (215 | ) | (561 | ) |
| Consolidated income from operations                        |   | 26,356                       |    | 27,234 |   | 51,989 |   |
|                                                       |   |                         |    |   |   |   |   |
| Interest expense                                           |   | (33,894                      | )       | (39,001 | ) | (41,623 | ) |
| Minority interest in preferred stock of subsidiary         |   | (5,841                       | )       | (5,061 | ) | (2,274 | ) |
| Other expenses, net                                        |   | (944                         | )       | (1,047 | ) | (482 | ) |
| Consolidated income (loss) before income taxes             |   | $                            | (14,323 | ) | $ | (17,875 | ) | $ | 7,610 |   |

 

(6)       Reflects depreciation and amortization oflong-lived assets, goodwill (for periods prior to the January 1, 2002 adoptionof SFAS No. 142) and other intangible assets. Excludes amortization of deferred financing costs, which are classifiedas a component of interest expense.  Thetable below reconciles depreciation and amortization of long-lived assets toconsolidated depreciation and amortization.

** **
|                                               |   | **Year  Ended December 31,** |   |
|----------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                 |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                               |   |                         |   |   |   |   |   |   |   |   |
| Depreciation and amortization of long-lived assets |   | $                            | 17,119 |   | $ | 32,376 |   | $ | 27,187 |   |
| Amortization of deferred financing costs           |   | 2,692                        |   | 2,218 |   | 2,258 |   |
| Consolidated depreciation and amortization         |   | $                            | 19,811 |   | $ | 34,594 |   | $ | 29,445 |   |

 

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

 

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

 

(9)       Reflects capital expenditures paid incash.  Excludes capital expendituresfinanced with capital lease obligations of $264,000 for the year ended December31, 2002, $4,438,000 for the year ended December 31, 2001 and $109,000 for theyear ended December 31, 2000.

 

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

 

(11)     Allocated on the basis of the location ofthe subsidiary and consists of the Company’s property and equipment.  Corporate long-lived assets are includedwith the United States assets.

 

F-45

----

 

**Note 17.       Supplemental Condensed ConsolidatingFinancial Information**

 

In conjunctionwith the 12% senior subordinated notes described in Note 9, the followingcondensed consolidating financial information is presented segregating DeCraneAircraft, as the issuer, and guarantor and non-guarantor subsidiaries.  The accompanying financial information inthe guarantor subsidiaries column reflects the financial position, results ofoperations and cash flows for those subsidiaries guaranteeing the senior creditfacility and the notes.  DeCraneHoldings in not a guarantor of the notes and is therefore reflected in thenon-guarantor subsidiary column with DeCrane Aircraft’s non-guarantorsubsidiaries.

 

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

 

(1)       Elimination of investments insubsidiaries.

 

(2)       Elimination of intercompany accounts.

 

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

 

(4)       Elimination of equity in earnings ofsubsidiaries.

 

F-46

----

 

**BalanceSheets**

 
|                                                                                               |   | **December  31, 2002** |    |
|----------------------------------------------------------------------------------------------------|--------|------------------------|---------|
| **(In thousands)**                                                                                 |   | **Issuer**             |    | **Guarantor****Subsidiaries** |   | **Non-Guarantor****Subsidiaries** |   | **Consolidating****Adjustments** |   | **Consolidated****Total** |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                                         |   |                   |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                                    |   |                   |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |   | $                      | 12,343  |   | $ | 146 |   | $ | 123 |   | $ | — |   | $ | 12,612 |   |
| Accounts receivable, net                                                                           |   | —                 |    | 37,822 |   | 1,160 |   | — |   | 38,982 |   |
| Inventories                                                                                        |   | —                 |    | 79,360 |   | 1,442 |   | — |   | 80,802 |   |
| Other current assets                                                                               |   | 23,912                 |    | 1,244 |   | 291 |   | — |   | 25,447 |   |
| Total current assets                                                                               |   | 36,255                 |    | 118,572 |   | 3,016 |   | — |   | 157,843 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Property and equipment, net                                                                        |   | 2,485                  |    | 47,232 |   | 2,166 |   | — |   | 51,883 |   |
| Other assets, principally intangibles, net                                                         |   | 11,708                 |    | 327,518 |   | 15 |   | — |   | 339,241 |   |
| Investments in subsidiaries                                                                        |   | 351,502                |    | 10,963 |   | 37,903 |   | (400,368 | )(1) | — |   |
| Intercompany receivables                                                                           |   | 273,178                |    | 172,389 |   | 5,740 |   | (451,307 | )(2) | — |   |
| Total assets                                                                                       |   | $                      | 675,128 |   | $ | 676,674 |   | $ | 48,840 |   | $ | (851,675 | ) | $ | 548,967 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| **Liabilities, Mandatorily Redeemable  Preferred Stock and Stockholders’ Equity (Deficit)**   |   |                   |    |   |   |   |   |   |   |   |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Current portion of long-term debt                                                                  |   | $                      | 15,337  |   | $ | 1,516 |   | $ | 6 |   | $ | — |   | $ | 16,859 |   |
| Other current liabilities                                                                          |   | 16,786                 |    | 34,284 |   | 1,225 |   | — |   | 52,295 |   |
| Total current liabilities                                                                          |   | 32,123                 |    | 35,800 |   | 1,231 |   | — |   | 69,154 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Long-term debt, less current portion                                                               |   | 355,568                |    | 9,280 |   | — |   | — |   | 364,848 |   |
| Intercompany payables                                                                              |   | 172,389                |    | 278,918 |   | — |   | (451,307 | )(2) | — |   |
| Other long-term liabilities                                                                        |   | 45,655                 |    | 1,535 |   | 56 |   | — |   | 47,246 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Minority interest in preferred stock of subsidiary                                                 |   | 34,081                 |    | — |   | — |   | — |   | 34,081 |   |
| Mandatorily redeemable preferred stock                                                             |   | —                 |    | — |   | 62,222 |   | — |   | 62,222 |   |
|                                                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Stockholders’ equity (deficit):                                                               |   |                   |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                                    |   | 118,621                |    | 337,592 |   | 87,606 |   | (474,244 | )(1) | 69,575 |   |
| Retained earnings (deficit)                                                                        |   | (83,309                | )       | 13,910 |   | (100,962 | ) | 73,876 |  (1) | (96,485 | ) |
| Accumulated other comprehensive loss                                                               |   | —                 |    | (361 | ) | (1,313 | ) | — |   | (1,674 | ) |
| Total stockholders’ equity (deficit)                                                          |   | 35,312                 |    | 351,141 |   | (14,669 | ) | (400,368 | ) | (28,584 | ) |
| Total liabilities, mandatorily redeemable preferred  stock and stockholders’ equity (deficit) |   | $                      | 675,128 |   | $ | 676,674 |   | $ | 48,840 |   | $ | (851,675 | ) | $ | 548,967 |   |

 

F-47

----

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

 

F-48

----

 

**Statementsof Operations**

 
|                                                |   | **Year  Ended December 31, 2002** |    |
|-----------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                  |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                 | —  |   | $ | 321,634 |   | $ | 9,325 |   | $ | (5,329 | )(3) | $ | 325,630 |   |
| Cost of sales                                       |   | —                            |    | 231,284 |   | 7,995 |   | (5,329 | )(3) | 233,950 |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                            |    | 90,350 |   | 1,330 |   | — |   | 91,680 |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses        |   | 8,334                             |    | 42,265 |   | 1,285 |   | — |   | 51,884 |   |
| Impairment of goodwill                              |   | —                            |    | 7,672 |   | — |   | — |   | 7,672 |   |
| Amortization of intangible assets                   |   | —                            |    | 5,767 |   | 1 |   | — |   | 5,768 |   |
| Interest expense                                    |   | 28,303                            |    | 5,585 |   | 6 |   | — |   | 33,894 |   |
| Minority interest in preferred stock of subsidiary  |   | —                            |    | — |   | 5,841 |   | — |   | 5,841 |   |
| Intercompany charges                                |   | (24,309                           | )       | 24,309 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                  |   | 52,890                            |    | 9,535 |   | 65,986 |   | (128,411 | )(4) | — |   |
| Other expenses (income), net                        |   | 495                               |    | 209 |   | 240 |   | — |   | 944 |   |
| Provision for income taxes (benefit)                |   | (1,211                            | )       | 1,785 |   | (220 | ) | — |   | 354 |   |
| Cumulative effect of change in accounting principle |   | 1,484                             |    | 46,113 |   | 9,553 |   | — |   | 57,150 |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                            |   | $                                 | (65,986 | ) | $ | (52,890 | ) | $ | (81,362 | ) | $ | 128,411 |   | $ | (71,827 | ) |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                |   | **Year  Ended December 31, 2001** |    |
| **(In thousands)**                                  |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                 | —  |   | $ | 391,677 |   | $ | 11,322 |   | $ | (7,647 | )(3) | $ | 395,352 |   |
| Cost of sales                                       |   | —                            |    | 277,414 |   | 9,914 |   | (7,647 | )(3) | 279,681 |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |
| Gross profit                                        |   | —                            |    | 114,263 |   | 1,408 |   | — |   | 115,671 |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses        |   | 9,390                             |    | 49,764 |   | 780 |   | — |   | 59,934 |   |
| Impairment of goodwill                              |   | —                            |    | 8,583 |   | — |   | — |   | 8,583 |   |
| Amortization of intangible assets                   |   | 202                               |    | 19,313 |   | 405 |   | — |   | 19,920 |   |
| Interest expense                                    |   | 37,796                            |    | 1,187 |   | 18 |   | — |   | 39,001 |   |
| Minority interest in preferred stock of subsidiary  |   | —                            |    | — |   | 5,061 |   | — |   | 5,061 |   |
| Intercompany charges                                |   | (23,815                           | )       | 23,815 |   | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                  |   | (4,894                            | )       | (115 | ) | 14,002 |   | (8,993 | )(4) | — |   |
| Other expenses (income), net                        |   | 361                               |    | 508 |   | 178 |   | — |   | 1,047 |   |
| Provision for income taxes (benefit)                |   | (5,038                            | )       | 6,314 |   | (88 | ) | — |   | 1,188 |   |
|                                                |   |                              |    |   |   |   |   |   |   |   |   |
| Net income (loss)                                   |   | $                                 | (14,002 | ) | $ | 4,894 |   | $ | (18,948 | ) | $ | 8,993 |   | $ | (19,063 | ) |
|                                                     |        |                                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-49

----

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

 

F-50

----

 

**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    | ) | $ | (52,890 | ) | $ | (81,362 | ) | $ | 128,411 | (4) | $ | (71,827 | ) |
| Noncash adjustments:                                                          |   |                              |       |   |   |   |   |   |   |   |   |
| Equity in earnings of subsidiaries                                            |   | 52,890                            |       | 9,535 |   | 65,986 |   | (128,411 | )(4) | — |   |
| Other noncash adjustments                                                     |   | 5,542                             |       | 81,077 |   | 16,045 |   | — |   | 102,664 |   |
| Changes in working capital                                                    |   | 31,114                            |       | (30,912 | ) | (721 | ) | — |   | (519 | ) |
| Net cash provided by (used for) operating activities                          |   | 23,560                            |       | 6,810 |   | (52 | ) | — |   | 30,318 |   |
| **Cash flows from investing  activities:**                                    |   |                              |       |   |   |   |   |   |   |   |   |
| Cash paid for acquisitions, netof cash acquired                               |   | (5,890                            | )          | — |   | — |   | — |   | (5,890 | ) |
| Investment in subsidiary                                                      |   | —                            |       | — |   | (4,632 | ) | 4,632 | (1) | — |   |
| Capital expenditures                                                          |   | (49                               | )          | (5,263 | ) | (117 | ) | — |   | (5,429 | ) |
| Net cash used for investing activities                                        |   | (5,939                            | )          | (5,263 | ) | (4,749 | ) | 4,632 |   | (11,319 | ) |
| **Cash flows from financing  activities:**                                    |   |                              |       |   |   |   |   |   |   |   |   |
| Net senior credit facility borrowings                                         |   | (6,000                            | )          | — |   | — |   | — |   | (6,000 | ) |
| Capital contribution to subsidiary of net proceeds  from sale of common stock |   | 4,632                             |       | — |   | 4,632 |   | (4,632 | ) | 4,632 |   |
| Other long-term borrowings                                                    |   | —                            |       | 1,145 |   | — |   | — |   | 1,145 |   |
| Principal payments on long-term debt, capitalized  leases and other debt      |   | (11,895                           | )          | (2,255 | ) | — |   | — |   | (14,150 | ) |
| Deferred financing costs                                                      |   | (1,656                            | )          | — |   | — |   | — |   | (1,656 | ) |
| Other, net                                                                    |   | —                            |       | (199 | ) | — |   | — |   | (199 | ) |
| Net cash provided by (used for) financing activities                          |   | (14,919                           | )          | (1,309 | ) | 4,632 |   | (4,632 | ) | (16,228 | ) |
|                                                                          |   |                              |       |   |   |   |   |   |   |   |   |
| Effect of foreign currency translation on cash                                |   | —                            |       | — |   | 47 |   | — |   | 47 |   |
|                                                                          |   |                              |       |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and equivalents                               |   | 2,702                             |       | 238 |   | (122 | ) | — |   | 2,818 |   |
| Cash and equivalents at beginning of period                                   |   | 9,641                             |       | (92 | ) | 245 |   | — |   | 9,794 |   |
|                                                                          |   |                              |       |   |   |   |   |   |   |   |   |
| Cash and equivalents at end of period                                         |   | $                                 | 12,343     |   | $ | 146 |   | $ | 123 |   | $ | — |   | $ | 12,612 |   |

 

F-51

----

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

 

F-52

----

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

 

F-53

----

 

**Note 18.       Subsequent Events**

 

On March 14, 2003the Company entered into a definitive agreement to sell its Specialty AvionicsGroup to Odyssey Investment Partners, LLC for $140,000,000 in cash.  The estimated net proceeds of $132,000,000from the sale will be used to repay borrowings under the Company’s seniorcredit facility.  The sale is expectedto be consummated prior to June 30, 2003 and is subject to customary closingconditions, including financing and the receipt of regulatory and otherthird-party approvals.

 

On March 28, 2003the Company received requisite lender approval to amend its senior creditfacility to permit the above described sale of its Specialty AvionicsGroup.  The amendment also revisesvarious financial covenants (which the Company would otherwise have not beenable 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 issuance ofadditional indebtedness and the repurchase of a portion of the Company’s 12%senior subordinated notes.

 

The amendment alsoprovides that an event of default will occur if the sale is not consummated byor is terminated for any reason prior to June 30, 2003.  If an event of default occurs, the creditagreement provides that the lenders may, at that date, cease to provideadditional revolving credit facility borrowings and may accelerate repayment ofall borrowings then outstanding.  If thelenders took such action, that would be an event of default under the Company’sother debt agreements, permitting those lenders to accelerate repayment of allsuch debt, as well.

 

F-54

----

 

**ConsolidatedSupplementary Financial Information**

** **

**Selected Quarterly Financial Data(Unaudited)**

 

Unauditedcondensed quarterly data for the two years ended December 31, 2002 aresummarized in the tables below.

** **
|                                                                      |   | **Year  Ended December 31, 2002** |   |
|---------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands)**                                                        |   | **1st**                           |   | **2nd** |   | **3rd** |   | **4th** |   |
|                                                                      |   |                              |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                  |   | $                                 | 86,163 |   | $ | 86,332 |   | $ | 79,621 |   | $ | 73,514 |   |
| Gross profit                                                              |   | 25,715                            |   | 21,838 |   | 25,583 |   | 18,544 |   |
| EBITDA, as defined (Note 16)                                              |   | 17,321                            |   | 18,089 |   | 18,849 |   | 15,759 |   |
| Income (loss) before cumulative effect of change in  accounting principle |   | (984                              | )      | (3,365 | ) | 1,044 |   | (11,372 | ) |
| Cumulative effect of change in accounting principle                       |   | (57,150                           | )      | — |   | — |   | — |   |
| Net income (loss)                                                         |   | (58,134                           | )      | (3,365 | ) | 1,044 |   | (11,372 | ) |

 

During 2002, theCompany recorded restructuring, asset impairment and other related chargespertaining to a further restructuring pursuant to a plan commenced in 2001 anda 2002 seat manufacturing facilities restructuring in response to the ongoingweakness of the corporate, VIP and head-of-state aircraft market.  The charges totaled $25,243,000 for theyear, of which $19,444,000 were noncash charges, and were charged to operationsduring the year as follows: 1st Quarter – $4,043,000; 2nd Quarter – $7,666,000;3rd Quarter – $1,486,000; and 4th Quarter –$12,048,000.  In accordance with thetransitional provisions of SFAS No. 142, the Company also recorded a$57,150,000 noncash write-down of goodwill as of January 1, 2002 as acumulative effect of a change in accounting principle.

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

 

During the secondquarter of 2001, the Company adopted a restructuring plan to realign productionprograms between its manufacturing facilities and recorded restructuring chargesaggregating $3,902,000 related to this restructuring.  During the fourth quarter of 2001, the Company announced andimplemented a further restructuring plan in response to the adverse impact onthe aerospace industry resulting from the September 11th terroristattack and further weakening of global economic conditions.  As a result, additional restructuring andasset impairment charges aggregating $24,756,000 were recorded in the fourthquarter.  Restructuring and assetimpairment charges totaled $28,658,000 for the year, of which $22,058,000 werenoncash charges.

 

F-55

----

 

**ConsolidatedFinancial Statement Schedules**

** **

**ScheduleII – 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**                                      |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for doubtful accounts                                       |   | $                                    | 2,647  |                              | $      | 1,287                           |   | $              | — |                           | $      | 2,176 |   | $ | 1,758 |   |
| Reserve for excess, slow moving and potentially  obsolete material(1) |   | 7,436                                |   | 3,704                             |   | —                          |   | 5,396          |   | 5,744                          |   |
|                                                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year Ended December 31, 2001**                                      |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for doubtful accounts                                       |   | $                                    | 1,902  |                              | $      | 2,418                           |   | $              | — |                           | $      | 1,673 |   | $ | 2,647 |   |
| Reserve for excess, slow moving and potentially  obsolete material(2) |   | 6,380                                |   | 1,829                             |   | —                          |   | 773            |   | 7,436                          |   |
|                                                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year Ended December 31, 2000**                                      |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for doubtful accounts                                       |   | $                                    | 1,966  |                              | $      | 120                             |   | $              | 223    | (3)                            | $      | 407 |   | $ | 1,902 |   |
| Reserve for excess, slow moving and potentially  obsolete material(3) |   | 7,766                                |   | 1,261                             |   | 215                             | (3)    | 2,862          |   | 6,380                          |   |

 

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(1)       Excludes $7,241,000 of other assetimpairment related charges resulting from the 2002 and 2001 restructuringplans.

 

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

 

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

 

F-56

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