**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

** **

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

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

 

**COMMISSIONFILE NUMBER 000-22371**

 

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**DECRANE AIRCRAFT HOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     |   | **34-1645569**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |
| **2361  Rosecrans Avenue, Suite 180**                            |
| **El  Segundo, California 90245**                                |
| **(310)  725-9123**                                              |
| (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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. ý** **YES  o NO

 

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

 

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

 

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

 

The number of shares ofCommon Stock outstanding on March 25, 2004 was 100.

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

None.

 

 

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**Table ofContents**

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

 

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*Allstatements other than statements of historical facts included in this reportare considered forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks,uncertainties and other factors, which are difficult to predict.  Changes in such factors could cause actualresults to differ materially from those contemplated in such forward-lookingstatements as we describe in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Forward-Looking Statements and Risk Factors.”  Although we believe that the expectationsreflected in such forward-looking statements are reasonable, we can give noassurance that such expectations will prove to be correct.  We undertake no obligation to releasepublicly any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

** **

**PART I**

**ITEM 1**.                                         BUSINESS

**Company Overview**

** **

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

** **

**Our Operating Groups**

** **

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

 

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

 

**Cabin Management Group**

** **

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

 

1

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***BusinessDescription***

*** ***

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

 

The Cabin ManagementGroup introduced the concept of modularity to the business, VIP andhead-of-state aircraft market by offering totally integrated interiorproducts.  In our view, one of thegreatest challenges facing the industry’s aircraft manufacturers is minimizingthe production cycle time necessary to complete an unfinished “green”aircraft.  We believe our distinctiveapproach of delivering integrated assemblies and sub-assemblies addresses thischallenge by providing our customers with entire pre-engineered, pre-wired andpre-plumbed modular cabin interiors and management systems ready for finalintegration into the aircraft.  Webelieve our totally integrated interior products enable our customers to reducetheir lead times, supplier base and overall costs.

 

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

 

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

 

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

 

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

 

***Productsand Services***

*** ***

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

 

2

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*Interior Furnishings*

•      entertainment and refreshment centers

•      conference tables

•      hi-low dining and coffee tables

•      end tables

•      cabinets

•      arm and side ledges

•      galleys

•      lavatories

•      vanities

•      room enclosures

•      cabinetry refurbishment services

•      veneers

* *

*Seating*

•      executive track and swivel seats

•      jump-seats

•      divans, including models that convert tobeds or contain storable tables

•      upholstery services

* *

*Cabin Management Systems*

•      in-flight entertainment systems

•      in-flight data network and communicationsystems

•      cabin controls

•      switches, controls and lighting

 

*CompositeComponents*

•      sound-dampening side walls and headliners

•      environmental (HVAC) ducting

•      passenger service units

•      closets

 

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

 

***Competition***

*** ***

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

 

*Interior Furnishings*

•      BE Aerospace

•      C & D Interiors

•      Global Technology

•      Hiller Aircraft

•      The Nordam Group

•      Independent completion centers

•      Business, VIP and head-of-state aircraftmanufacturers and completion centers

 

*Seating*

•      BE Aerospace

•      Fisher (Germany)

•      IPECO

 

*Cabin Management Systems*

•      DPI Labs

•      Honeywell Cabin Management Systems andServices

•      IEC, International

•      Rockwell Collins / Airshow

 

*Composite Components*

•      AAR

•      Fibre Art

•      Plastic Fab

•      Scale Composite Works

•      The Nordam Group

3

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**Systems Integration Group**

** **

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

 

***BusinessDescription***

*** ***

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

 

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

 

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

 

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

 

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

 

•                  *Target Development of Specialty Products and ServicesRelating to Regulatory Authority Mandates.*  Consistent with its first strategic imperative, our SystemsIntegration Group is also growing its capabilities in providing solution “kits”in response to FAA and JAA mandated aircraft upgrades.  Our Systems Integration Group hasdemonstrated the ability to identify and quickly respond to probable newregulatory authority mandates.  Forexample:

 

•                  Manydomestic commercial airlines believe the FAA will issue a safety mandaterequiring cockpit door video surveillance on every commercial aircrafttraveling in U.S. domestic airspace by no later than a specific compliancedate.  In response, we consulted withcommercial airlines and developed what we believe to be a low-cost, highquality cockpit

 

4

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

 

•                  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 50% of our Systems Integration Group’s revenues in 2003were from Boeing.  The products andservices we provide are described below.

 

*AuxiliaryFuel Systems and Power Units.*  We design, engineer, manufacture and install auxiliary fuelsystems for business, VIP, head-of-state and commercial aircraft.  Our unique design and construction have madeus a leader in the auxiliary fuel system market.  We also manufacture auxiliary power units, which provide groundpower to corporate jets made by Bombardier, Cessna, Gulfstream, Learjet andRaytheon.  These products and servicesprovided approximately 16% of our consolidated revenues during 2003, 15% during2002 and 14% during 2001.

 

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

 

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

 

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

 

5

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***Competition***

*** ***

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

 

*Auxiliary Fuel Systems and PowerUnits*

•      Marshalls (United Kingdom)

•      Pfalz Flugewerke (Germany)

 

*Auxiliary Power Units (IntegrationOnly)*

•      Honeywell

•      Sundstrand

 

*Aircraft Modification Services*

•      Associated Air Center

•      Jet Aviation (United States andSwitzerland)

•      Lufthansa Technik (Germany)

* *

*Cabin and Flight Deck SystemsIntegration and Retrofit and Refurbishment Services*

•      ARINC

•      Aviation Sales

•      Boeing Aircraft Services

•      Flight Structures

•      In-house engineering departments ofcommercial airlines

•      Numerous independent airframe maintenanceand modification companies

** **

**Other Information**

** **

**Acquisitions and Dispositions**

** **

***Dispositionof the Specialty Avionics Group***

*** ***

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

 

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

 

***CompaniesAcquired by DeCrane Aircraft***

*** ***

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

 

*CabinManagement Group*

 

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

 

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

 

6

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

 

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

 

•                  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

 

*SystemsIntegration Group*

 

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

 

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

 

**Customers**

** **

We estimate that ourCabin Management Group currently sells its products and services to approximately800 customers and our Systems Integration Group sells its products and servicesto approximately 200 customers.  Ourprimary customers include manufacturers of business, VIP and head-of-stateaircraft, airlines and aircraft repair and modification companies.

 

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

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

 

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

 

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

 

(2)                      IncludesCessna.

 

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

 

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

 

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

 

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**Backlog**

** **

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

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

 

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

 

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

 

**Employees**

** **

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

 

**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 research and development expensewas $10.4 million for the year ended December 31, 2003, $0.1 million for theyear ended December 31, 2002 and $0.7 million during the year endedDecember 31, 2001.

 

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

 

**Financial Information About Geographic Areas**

** **

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

 

9

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**Seasonality**

** **

Our businesses generallyare not seasonal in nature.

 

**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 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 aluminum,hardwoods and plastics.  Theavailability and prices of these materials may fluctuate.  The cost of such raw materials is asignificant component in, and part of, the sales price of many of ourproducts.  Although some of ourcontracts have prices tied to raw materials prices, we cannot always recoverraw material price increases in our product sale price.  We also purchase a variety of manufacturedsub-component parts from various suppliers. Raw materials and component parts are generally available from multiplesuppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials andcomponent parts may affect our ability to meet customer production needs.

 

**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.

 

10

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Each type of aircraftoperated by airlines in the United States must possess an FAA type certificate,generally held by the aircraft manufacturer, indicating that the type designmeets applicable airworthiness standards. When someone else develops a major modification to an aircraft 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, 2003, 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.  Two subsidiaries within ourSystems Integration Group are FAA-authorized Designated Alteration Stations andcan directly issue many of the Supplemental Type Certificates our customers andwe require for our systems integration operations.

 

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

 

***OccupationalSafety and Health Administration***

*** ***

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

 

**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

 

11

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

 

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

 

We believe that we haveno liabilities under environmental laws and regulations, except for liabilitieswhich we do not expect would likely have a material adverse effect on ourbusiness, financial position, results of operations or cash flows.  However, some risk of environmentalliability is inherent in the nature of our business, and we might in the futureincur material costs to meet current or more stringent compliance, cleanup, orother obligations pursuant to environmental laws and regulations.

 

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

 

**ITEM 2**.                                         PROPERTIES

** **

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

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

 

**ITEM 3**.                                         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 attached to thein-flight entertainment system installed on some of Swissair’s aircraft by oneof our subsidiaries.  Our subsidiary hasworked vigorously over the last five years with the CTSB investigators in thefact-finding investigation of this catastrophic incident.  On March 27, 2003, the CTSB released itsfinal report on its investigation.  Thisreport indicated that the CTSB was unable to conclusively determine the causeof the fire which led to the crash of the aircraft.

 

12

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

 

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

 

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

** **

None.

 

**PART II**

** **

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

** **

**Market Information**

** **

There is no establishedpublic trading market for our shares.

 

**Holders**

** **

As of March 29, 2004,DeCrane Holdings is our only common stockholder.

 

**Dividends**

** **

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

 

**Recent Sale of Unregistered Securities**

** **

None.

 

13

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**ITEM 6**.                                         SELECTEDFINANCIAL DATA

** **
|                                                            |   | **Year Ended  December 31, (1)** |       |
|-----------------------------------------------------------------|--------|----------------------------------|------------|
| **(In thousands)**                                              |   | **2003**                         | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| **Statement of Operations Data:**                               |   |                             |       |   |   |   |   |   |   |   |   |
| Revenues                                                        |   | $                                | 170,109    |   | $ | 229,841 |   | $ | 272,112 |   | $ | 236,501 |   | $ | 131,547 |   |
| Cost of sales (2)                                               |   | 134,953                          |       | 170,485 |   | 196,866 |   | 155,134 |   | 90,103 |   |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Gross profit                                                    |   | 35,156                           |       | 59,356 |   | 75,246 |   | 81,367 |   | 41,444 |   |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses (3)               |   | 24,896                           |       | 40,262 |   | 44,731 |   | 31,730 |   | 23,465 |   |
| Research and  development expenses (4)                          |   | 10,440                           |       | 56 |   | 698 |   | 1,615 |   | 3,347 |   |
| Impairment of  goodwill (5)                                     |   | 34,000                           |       | — |   | 8,583 |   | — |   | — |   |
| Amortization of  intangible assets (6)                          |   | 3,651                            |       | 3,540 |   | 12,436 |   | 10,628 |   | 5,938 |   |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Operating income  (loss)                                        |   | (37,831                          | )          | 15,498 |   | 8,798 |   | 37,394 |   | 8,694 |   |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Interest expense  (7)                                           |   | 26,219                           |       | 25,376 |   | 29,645 |   | 27,181 |   | 15,889 |   |
| Loss on  extinguishment of debt (8)                             |   | 1,439                            |       | — |   | — |   | — |   | — |   |
| Other expenses,  net                                            |   | 945                              |       | 505 |   | 634 |   | 277 |   | 855 |   |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations before income taxes   |   | (66,434                          | )          | (10,383 | ) | (21,481 | ) | 9,936 |   | (8,050 | ) |
| Provision for  income taxes (benefit) (9)                       |   | (13,496                          | )          | (3,621 | ) | (3,933 | ) | 4,607 |   | (2,102 | ) |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Income (loss)  from continuing operations                       |   | (52,938                          | )          | (6,762 | ) | (17,548 | ) | 5,329 |   | (5,948 | ) |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Income (loss)  from discontinued operations, net of tax (10)    |   | (6,621                           | )          | (41,396 | ) | 3,546 |   | (1,727 | ) | 1,578 |   |
| Cumulative  effect of changes in accounting principles (11)     |   | (13,764                          | )          | (17,828 | ) | — |   | — |   | — |   |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                               |   | $                                | (73,323    | ) | $ | (65,986 | ) | $ | (14,002 | ) | $ | 3,602 |   | $ | (4,370 | ) |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| Net income  (loss) applicable to common stockholder             |   | $                                | (80,077    | ) | $ | (71,827 | ) | $ | (19,063 | ) | $ | 1,328 |   | $ | (4,370 | ) |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Restructuring,  asset impairment and other related charges (12) |   | $                                | 41,886     |   | $ | 17,255 |   | $ | 25,834 |   | $ | — |   | $ | 9,935 |   |
| Depreciation and  amortization (13)                             |   | 9,781                            |       | 10,612 |   | 20,364 |   | 15,086 |   | 8,315 |   |
| Capital  expenditures:                                          |   |                             |       |   |   |   |   |   |   |   |   |
| Paid in cash                                                    |   | 4,797                            |       | 4,356 |   | 10,191 |   | 20,193 |   | 4,077 |   |
| Financed with  capital lease obligations                        |   | 14                               |       | 67 |   | 4,376 |   | 105 |   | 1,012 |   |
| Ratio of  earnings to fixed charges (14):                       |   |                             |       |   |   |   |   |   |   |   |   |
| Ratio                                                           |   | —                           |       | — |   | — |   | 1.4 | x | — |   |
| Deficiency of  earnings to fixed charges                        |   | $                                | 66,434     |   | $ | 10,383 |   | $ | 21,481 |   | $ | — |   | $ | 8,050 |   |
|                                                            |   |                             |       |   |   |   |   |   |   |   |   |
| **Other Operating Data:**                                       |   |                             |       |   |   |   |   |   |   |   |   |
| Bookings (15)                                                   |   | $                                | 161,306    |   | $ | 197,132 |   | $ | 252,800 |   | $ | 238,546 |   | $ | 170,547 |   |
| Backlog at end  of period (16)                                  |   | 58,002                           |       | 66,805 |   | 99,518 |   | 118,830 |   | 107,634 |   |

 
|                                    |   | **As of  December 31, (1)** | ** ** |
|-----------------------------------------|--------|-----------------------------|------------|
| **(In thousands)**                      |   | **2003**                    | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** | **1999** | ** ** |
|                                    |   |                        |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                 |   |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents              |   | $                           | 6,936      |   | $ | 12,421 |   | $ | 9,478 |   | $ | 7,706 |   | $ | 7,899 |   |
| Working capital  (17)                   |   | 37,904                      |       | 196,176 |   | 81,656 |   | 61,398 |   | 32,412 |   |
| Total assets  (17)                      |   | 303,876                     |       | 548,967 |   | 645,711 |   | 664,254 |   | 531,842 |   |
| Total debt (18)                         |   | 269,406                     |       | 381,017 |   | 399,268 |   | 381,513 |   | 314,936 |   |
| Mandatorily  redeemable securities (19) |   | 40,835                      |       | 34,081 |   | 28,240 |   | 23,179 |   | — |   |
| Stockholder’s  equity (deficit)    |   | (45,181                     | )          | 34,951 |   | 102,390 |   | 121,442 |   | 107,773 |   |
|                                         |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying Notes to Selected Financial Data.

 

14

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**Notes to Selected Financial Data:**

 

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

 

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

 
| **Company  Acquired** |                                         | **Date  Acquired** |              |
|-----------------------|----------------------------------------------|--------------------|-------------------|
|                  |                                         |               |              |
| •                | DeCrane Aircraft Seating Co. (formerly ERDA) |               | June 30, 2000     |   |
| •                | Carl F. Booth & Co.                      |               | May 11, 2000      |   |
| •                | Infinity                                     |               | December 17, 1999 |   |
| •                | International Custom Interiors               |               | October 8, 1999   |   |
| •                | PCI NewCo                                    |               | October 6, 1999   |   |
| •                | Custom Woodwork                              |               | August 5, 1999    |   |
| •                | Precision Pattern                            |               | April 23, 1999    |   |
| •                | PATS                                         |               | January 22, 1999  |   |

 

(2)                      Includescharges to reflect:

 

•                  ourrestructuring activities as follows:

 

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

 

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

 

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

 

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

 

•                  costof sales based on the purchase accounting write-up to fair value of inventoryacquired of $1.6 million during the twelve months ended December 31, 1999 inconnection with the Precision Pattern and Custom Woodworks acquisitions.

 

(3)                      Includescharges to reflect our restructuring activities as follows:

 

•                  $0.6million during the year ended December 31, 2003;

 

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

 

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

 

•                  $3.9million during the year ended December 31, 1999, $1.3 million of which was anoncash asset impairment write-down.

 

(4)                      Reflectsresearch and development expenses and, commencing January 1, 2003, includesproduct development costs.  In 2003, weelected to change our accounting policy and discontinue the use of programaccounting, which resulted in product development costs being expensed asincurred.  See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” foradditional information.

 

15

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(5)                      Reflectsnoncash goodwill impairment charges, including charges resulting from our restructuringactivities.

 

(6)                      For the fiveyears ended December 31, 2003, reflects the amortization of identifiableintangible assets.  For periods prior toJanuary 1, 2002, also reflects the amortization of goodwill as follows: 2001 —$9.1 million; 2000 — $7.8 million; and 1999 — $3.8 million.  Starting January 1, 2002, goodwill isno longer amortized but instead subject to annual impairment testing with aloss charged to operations in the period in which impairment occurs, asrequired by SFAS No. 142, “Goodwill and Other Intangible Assets.”

 

(7)                      Excludesinterest expense attributable to the Specialty Avionics Group, which isclassified as a component of the income or loss from discontinued operations,as described in Note 10 below.

 

(8)                      Reflects thewrite-off of deferred financing costs associated with debt repaid during theyear ended December 31, 2003.

 

(9)                      For the yearended December 31, 2003, includes a $19.5 million charge resulting fromestablishing a net deferred tax asset valuation allowance.  Excluding the effect of the valuationallowances, 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 income taxes and non-deductibleexpenses, principally goodwill impairment charges and amortization (for periodsprior to January 1, 2002).  Thedifference in the effective tax rates between periods is mostly a result of therelationship of non-deductible expenses to the loss before income taxes.

 

(10)                Reflects the netincome or loss of the Specialty Avionics Group, which was sold on May 23, 2003and therefore classified as a discontinued operation during the periods.  Includes charges to reflect:

 

•                  a$39.3 million noncash charge during the year ended December 31, 2002 to reflectthe cumulative effect of the change in accounting principle for the impairmentof goodwill upon adoption of SFAS No. 142 on January 1, 2002; and

 

•                  interestexpense attributable to the Specialty Avionics Group as follows:

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

 

Interest expenseon first-lien credit facility debt required to be repaid reflects allocatedinterest expense attributable to the debt which was required to be repaid withthe proceeds from the sale.  Theallocation is based upon $130.7 million of debt repaid and the historicalinterest rates charged during each of the periods.  Interest expense for 2003 is through May 23, 2003, the date ofsale.

 

(11)                Reflects:

 

•                  a$13.8 million noncash charge to reflect the cumulative effect on prior years ofchanging our accounting policy and discontinuing the use of programaccounting.  See “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” foradditional information.

 

•                  a$17.8 million noncash charge, net of $0.9 million tax benefit, for theimpairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002.

 

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

 

16

----

 

(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, which are classified as a component of interestexpense.

 

(14)                For the purposesof calculating the ratio of earning to fixed charges, earnings represent netincome or loss from continuing operations before income taxes, extraordinaryitems and fixed charges.  Fixed chargesconsist of:

 

•                  interest;

 

•                  amortizationof debt expense and discount or premium relating to any indebtedness; and

 

•                  one-thirdof rental expenses under operating leases which is considered to be areasonable approximation of the interest portion of such expense.

 

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

 

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

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

 

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

 

(19)                Reflectsmandatorily redeemable 16% preferred stock.

 

17

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

** **

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

 

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

 

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

 

**Results of Operations**

** **

**Performance Measures**

** **

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

** **

**Restructuring, Asset Impairment andOther Charges.**  Ourresults of operations have been affected by restructuring, impairment and otherrelated charges relating to a series of restructuring activities.  These charges, which affect thecomparability of our reported results of operations between periods, are morefully described in “—Restructuring, Asset Impairment and Other Related Charges”and “—Goodwill Impairment Charges” below.

 

**Change in Accounting Principle.**  Inventories are stated at the lower of costor market.  Costs include materials,labor, including direct engineering labor, tooling costs and manufacturingoverhead.  As described below, measurementof the costs of inventories associated with products manufactured for deliveryunder production-type contracts in prior periods was made pursuant to the useof program accounting.  As such, thecost of inventories included certain deferred program costs, which wereprincipally comprised of engineering costs.

 

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The events of September 11, 2001 and its aftermathhave impacted the predictability of demand for our business, VIP andhead-of-state aircraft products.  Theability to make reliable estimates of future demand for these products iscritical to the use of program accounting and the deferral of engineering andproduction costs.  Under programaccounting, certain product development costs incurred in connection withspecific contracted programs were deferred and charged to cost of sales whenrevenues from the sale of products related to the program were recorded.  Because of the changing economic conditionsaffecting the markets we serve, demand for our products has exhibited anincreased degree of volatility not seen in the past.  In order to improve the reliability of our financial reporting,we decided to discontinue the use of program accounting which requires us tomake long-term estimates of future sales for each program.  Therefore, product development costs notspecifically reimbursable through contractual terms or recoverable through firmorders will no longer be deferred and included in program inventory.

 

We concluded that the new method of accounting forprogram costs is preferable based, in part, on the aforementioned improvementin the reliability of our financial reporting. This new accounting method will also have the advantage of enhancing investorunderstanding of our performance since cash flows from operations will now moreclosely align with Adjusted EBITDA, our primary measurement of overall economicperformance and return on invested capital.

 

This change in accounting policy was made afterconcluding the 2003 fiscal year but has been applied retroactively to thebeginning of the year, January 1, 2003, as required by generally acceptedaccounting principles.  As a result ofthe change, program-related product development costs are now classified as acomponent of research and development expenses in the consolidated financialstatements for 2003 rather than classified as a component of inventorycost.  The effect of this accountingchange was to increase the Company’s net loss by $17,942,000 through a chargefor the cumulative effect of a change in accounting principle in 2003 of$13,764,000 and increase by $4,178,000 the reported loss from continuingoperations.

 

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

 
|                             |   | **Year Ended  December 31,** |       |
|----------------------------------|--------|------------------------------|------------|
| **(In millions)**                |   | **2002**                     | ** ** | **2001** | ** ** |
|                             |   |                         |       |   |   |
| As reported:                     |   |                         |       |   |   |
| Loss from  continuing operations |   | $                            | (6.8       | ) | $ | (17.5 | ) |
| Net loss                         |   | (66.0                        | )          | (14.0 | ) |
|                             |   |                         |       |   |   |
| Pro forma:                       |   |                         |       |   |   |
| Loss from  continuing operations |   | $                            | (9.7       | ) | $ | (19.4 | ) |
| Net loss                         |   | (69.0                        | )          | (15.9 | ) |

 

**Revenues.* ***Revenuesdecreased $59.7 million, or 26.0%, to $170.1 million for the year endedDecember 31, 2003 from $229.8 million for the year ended December 31,2002.  By segment, revenues changed asfollows:

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

 

20

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*CabinManagement. *Revenuesdecreased by $53.8 million, or 31.1% compared to the prior year.  The decrease, which is across substantiallyall of our product and services categories, is caused by the ongoing adverseimpact of weak global economic conditions which reduces the affordability ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide.  As a result,the manufacturers of these aircraft have experienced a decrease in orders fornew aircraft which, in turn, reduces the orders our customers place withus.  The 2003 decrease consists of:

 

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

 

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

 

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

 

•                  a$1.0 million increase in other product and services revenues.

 

Therevenue decrease was caused by lower order volume (as described above) from ourcustomers as opposed to a loss of customers or price reductions.

 

Revenuesfrom Textron and Bombardier, our principal customers, decreased $44.6 millioncompared to the prior year as a result of the decrease in orders and resultinglower production of aircraft they are experiencing during the economicdownturn.  Both companies temporarilysuspended production of various aircraft models for several weeks during fiscal2003 in response to their low order backlog. We also experienced similar volume decreases from our other customersduring the period.

 

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

 

•                  a$8.6 million decrease resulting from reduced demand for almost all of ourproducts and services as a result of reduced production and delivery ofbusiness, VIP and head-of-state aircraft; offset by

 

•                  a$0.1 million increase in the commercial aircraft systems integrationengineering services; and

 

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

 

**Grossprofit.**  Gross profitdecreased $24.2 million, or 40.8%, to $35.2 million for the year ended December31, 2003 from $59.4 million for the same period in the prior year.  By segment, gross profit changed as follows:

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

 

*CabinManagement.*  Grossprofit decreased by $20.2 million, or 52.2% compared to the prior year, primarilydue to:

 

•                  a$20.1 million decrease resulting from lower volume for our business, VIP andhead-of-state aircraft furniture and seating products; and

 

•                  a$1.2 million decrease in gross profit related to lower volume for our cabinmanagement and entertainment systems; offset by

 

•                  a$1.1 million increase from our other products and services.

 

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*SystemsIntegration.*  Grossprofit decreased by $4.0 million, or 19.7% compared to the prior year, primarilydue to:

 

•                  a$7.0 million decrease resulting from lower revenues and unfavorable overheadabsorption as a result of lower production and a change in product deliverymix; and

 

•                  a$0.3 million decrease in the commercial aircraft systems integration engineeringservices provided; offset by

 

•                  a$3.3 million decrease in restructuring charges incurred in 2003 as compared tothose recorded in 2002 related to our restructuring activities.

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $15.4 million, or 38.2%, to $24.9 million for the year ended December31, 2003, from $40.3 million for the same period in the prior year.  By segment, SG&A expenses changed as follows:

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

 

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

 

•                  a$6.0 million decrease in restructuring charges incurred in 2003 as compared tothose recorded in 2002 related to our restructuring activities; and

 

•                  a$5.2 million decrease in expenses resulting from cost reduction measuresimplemented in response to lower sales volume resulting from the weak demandfor our products and services.

 

*Systems Integration. *SG&A expenses decreased by $2.8 million, or 36.6%compared to the prior year, due to lower labor and employee benefit costsresulting from workforce reductions in 2003.

 

**Research and developmentexpenses. **Researchand development expenses were $10.4 million for the year ended December 31,2003 compared to $0.1 million in the prior year.  As more fully described in “—Change in Accounting Principle,” weelected to change our accounting policy for product development costs incurredfor long-term programs after concluding the 2003 fiscal year but retroactivelyapplied the change to the beginning of the year, January 1, 2003.  Commencing January 1, 2003, such costs areclassified as a component of research and development expenses.  Expenses would have been $5.0 million in2002 if the new accounting policy had been in effect during that year.

 

*Cabin Management. *R&D expenses were $8.1million for the year ended December 31, 2003, principally incurred for thedevelopment our new single-design seat technology and new interior furnishingcomponents for a major customer’s new model of aircraft they recentlyintroduced.

 

*Systems Integration. *R&D expenses were $2.3million for the year ended December 31, 2003, principally for development ofseveral new products.

 

**Impairment of goodwill. **During the year endedDecember 31, 2003, a $34.0 million charge was recorded to reflect theadditional impairment of goodwill in connection with the impairment testingprovision of SFAS No. 142, “Goodwill and Other Intangible Assets.”  The additional impairment results fromcontinuing weak global economic conditions which reduces the affordability ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide.  The impairment

 

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

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense decreased $0.8 million to$9.8 million for the year ended December 31, 2003 from $10.6 million for thesame period in the prior year, primarily resulting from reduced capitalexpenditures and a lower depreciable base resulting from impairment chargesrecorded during 2002 as follows.

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

 

**AdjustedEBITDA. **As described above in “—Performance Measures–AdjustedEBITDA,” we use this financial measure to evaluate the core economicperformance of our operating segments. The notes to our financial statements include additional informationabout Adjusted EBITDA, and should be read in conjunction with the discussionspresented herein.  The notes to ourfinancial statements also include a reconciliation of Adjusted EBITDA to netincome (loss), a GAAP financial measure, to clarify the differences betweenthese two measures.

 

*Cabin Management. *Adjusted EBITDA decreased by $23.6 million, or 72.5%,to $9.0 million for the year ended December 31, 2003 compared to $32.6 millionfor the same period in the prior yearprimarily due to:

 

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

 

•                  an$8.1 million increase in research and development expenses;

 

•                  a$1.1 million decrease in gross profit related our cabin management andentertainment systems; and

 

•                  a$0.8 million decrease in gross profit related to our other products andservices.

 

*Systems Integration. *Adjusted EBITDA decreased by $7.1 million, or 39.1%,to $11.0 million for the year ended December 31, 2003 compared to $18.1 millionfor the same period in the prior year due to lower sales volume and a $2.3million increase in research and development expenses, partially offset byreduced SG&A spending resulting from workforce reductions.

 

**Operatingincome (loss).** Operating income decreased $53.3 million to a loss of $37.8 million forthe year ended December 31, 2003, from operating income of $15.5 million forthe same period in the prior year.  Bysegment, operating income changed as follows:

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

 

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*CabinManagement. *Operatingincome decreased by $51.2 million, or 401.8% compared to the prior year, dueto:

 

•                  a$34.0 million goodwill impairment charge in 2003;

 

•                  a$20.1 million decrease in gross profit, primarily due to lower revenues relatedto our furniture and seating operations; and

 

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

 

•                  a$6.0 million decrease in restructuring charges incurred in 2003 as compared tothose recorded in 2002 related to our restructuring activities; and

 

•                  a$5.0 million decrease in expenses resulting from cost reduction measuresimplemented in response to lower sales volume resulting from the weak globaleconomic conditions.

 

*Systems Integration.*Operating incomedecreased by $3.6 million, or 32.3% compared to the prior year, due to:

 

•                  a$7.0 million decrease in gross profit resulting from lower revenues andunfavorable overhead absorption as a result of lower production and a change inproduct delivery mix;

 

•                  a$2.3 million increase in research and development expenses; and

 

•                  a$0.3 million decrease in gross profit in the commercial aircraft systemsintegration engineering services provided; offset by

 

•                  a$3.0 million decrease in restructuring charges incurred in 2003 as compared tothose recorded in 2002 related to our restructuring activities; and

 

•                  a$3.0 million decrease in expenses resulting from cost reduction measuresimplemented in response to lower sales volume resulting from the weak globaleconomic conditions.

 

**Interestexpense.**  Interestexpense increased $0.8 million, or 3.3%, to $26.2 million for the year endedDecember 31, 2003 compared to $25.4 million for the same period in the prioryear.  The increase is attributable to a1.5% increase in interest rate margins charged by our lenders pursuant to theMarch 28, 2003 first-lien bank credit facility amendment, partially offset bylower principal balances outstanding during 2003 compared to the prior year.

 

**Loss on extinguishment of debt. **Loss on extinguishment ofdebt was $1.4 million for the year ended December 31, 2003 and reflects thewrite-off of deferred financing costs attributable to debt repaid during theyear.

 

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

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

 

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

 

As of December 31, 2003,we had net deferred tax assets of $19.5 million, prior to recording a valuationallowance; net deferred tax liabilities existed in prior periods.  The change to a net asset position

 

24

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was primarily caused bythe $34.0 million goodwill impairment charge recorded during fiscal 2003.  SFAS No. 109, “Accounting for Income Taxes,”requires the recognition of a deferred tax asset for the future income taxbenefit of goodwill deductions that will be taken for income tax purposes (i.e.the goodwill that has been written off in the financial statements for bookpurposes will continue to be amortized and deducted for tax purposes and,accordingly, represents a new deferred tax asset).

 

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

 

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

 

**Loss from continuing operations.**  The loss from continuing operationsincreased $46.1 million to a loss of $52.9 million for the year ended December31, 2003 compared to a loss of $6.8 million for the same period in the prioryear, primarily due to:

 

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

 

•                  a$1.4 million increase in loss on extinguishment of debt; and

 

•                  a$1.3 million increase in interest and other expenses (net); offset by

 

•                  a$9.9 million increase in income tax benefit.

 

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

 

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

 

•                  theresult of operations of the Specialty Avionics Group through May 22, 2003compared to a full year of operating results included in the prior year.

 

**Cumulative effect of change inaccounting principle.** The $13.8 million charge during the year ended December 31, 2003 was toreflect the cumulative effect on continuing operations of the change inaccounting for product development costs. See “—Change in Accounting for Product Development Costs” for additionalinformation.

 

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

 

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**Netloss.**  Net lossincreased $7.3 million to a net loss of $73.3 million for the year endedDecember 31, 2003 compared to a net loss of $66.0 million for the sameperiod in the prior year.  The decreaseis attributable to:

 

•                  anincrease in loss from continuing operations of $46.1 million; offset by

 

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

 

•                  adecrease in cumulative effect of change in accounting principle of $4.0million.

 

**Netloss applicable to common stockholder.**  Net loss applicable to DeCrane Holdings, ourcommon stockholder, increased $8.3 million to a net loss of $80.1 million forthe year ended December 31, 2003 compared to a net loss of $71.8 millionfor the same period in the prior year. The increase in the net loss applicable to our common stockholder isattributable to:

 

•                  a$7.3 million increase in our net loss; offset by

 

•                  a$1.0 million increase in accrued 16% mandatorily redeemable preferred stockdividends resulting from the quarterly compounding of accrued dividends.

 

**Bookings. **Bookings decreased $35.8million, or 18.2%, to $161.3 million for the year ended December 31, 2003compared to $197.1 million for the same period in the prior year.  The decrease in bookings for 2003 is due todecreases in orders for all of our business segments.

 

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

 

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

 

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

 

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

** **

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

Therevenue decrease was caused by lower order volume from our customers as opposedto a loss of customers or price reductions. The decrease in order volume is attributable to weak global economicconditions and the impact these conditions are having on manufacturers ofbusiness, VIP and head-of-state aircraft and therefore demand for the productsand services we provide to them.  Weakglobal economic conditions have reduced the amount of discretionary incomeavailable to purchase and operate these types of aircraft.  As a result, the manufacturers of theseaircraft have experienced a decrease in orders for new aircraft which, in turn,reduces the orders our customers place with us.

 

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

 

*SystemsIntegration.*  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 integration andengineering services we provide resulting from the aftermath of September 11th,and resulting down-turn in the commercial airline industry; the airlineindustry’s corresponding reduction in the size of its operating fleet and thedelay or postponement retrofit and refurbishment programs for the remainingoperational fleet reduced demand for our integration and engineering services;and

 

•                  a$2.0 million decrease resulting from reduced demand for our business, VIP andhead-of-state aircraft products and services due to the adverse impact weakglobal economic conditions are having on the demand for those types of aircraftas follows:

 

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

 

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

 

**Grossprofit.**  Gross profitdecreased $15.9 million, or 21.1%, to $59.3 million for the year ended December31, 2002 from $75.2 million for the same period in the prior year.  By segment, gross profit changed as follows:

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

 

27

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

 

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

 

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

 

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

 

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

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $4.4 million, or 10.0%, to $40.3 million for the year ended December31, 2002, from $44.7 million for the same period in the prior year.  By segment, SG&A expenses changed asfollows:

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

* *

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

 

•                  a$4.0 million decrease in expenses as a result of cost reduction measuresimplemented in 2001 and 2002 in response to lower sales volume resulting fromthe weak global economic conditions; offset by

 

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

 

*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.

 

**Research and developmentexpenses. **Researchand development expenses were $0.1 million for the year ended December 31, 2002compared to $0.7 million in the prior year. As more fully described in “—Change in Accounting Principle,” we electedto change our accounting policy for product development costs incurred forlong-term programs.  Commencing January1, 2003, such costs are classified as a component of result, research anddevelopment expenses.  Expenses would havebeen $5.0 million in 2002 and $11.7 million in 2001 if the new accounting policyhad been in effect during those years.

 

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

 

28

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

29

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

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

 

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

 

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

 

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

 

•                  a$5.0 million decrease in goodwill impairment; and

 

•                  a$6.7 million decrease in amortization of intangibles.

 

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

 

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

 

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

 

•                  a$3.5 million decrease in goodwill impairment; and

 

•                  a$0.9 million decrease in amortization of intangibles.

 

*Corporate. *Operating income increased $2.5 millioncompared to the prior year, due to principally to reduced SG&A spending.

 

**Interestexpense.**  Interestexpense decreased $4.3 million, or 14.4%, to $25.4 million for the year endedDecember 31, 2002 compared to $29.7 million for the same period in the prioryear due almost entirely to lower average interest rates charged by ourlenders.

 

**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).  The differencein the effective tax rates between periods is mostly the result of the adoptionof SFAS No. 142.

 

30

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**Lossfrom continuing operations. **Lossfrom continuing operations decreased $10.8 million to a loss of $6.8 millionfor the year ended December 31, 2002, compared to a loss of $17.6 million forthe same period in the prior year.  Thedecrease in loss from continuing operations is attributable to:

 

•                  an$8.9 million decrease in amortization of goodwill and intangible assetsresulting from the adoption of SFAS No. 142, “Goodwill and Other IntangibleAssets,” on January 1, 2002;

 

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

 

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

 

•                  an$11.0 million loss increase principally resulting from reduced profits causedby lower revenues.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Netincome (loss).**  Netloss increased $52.0 million to a net loss of $66.0 million for the year endedDecember 31, 2002 compared to a net loss of $14.0 million for the same periodin the prior year.  The increase overthe prior year is a result of a $10.7 million decrease in loss from continuingoperations offset by an increase in loss from discontinued operations of $44.9million and the cumulative effect of change in accounting principle of $17.8million.

 

**Netincome (loss) applicable to common stockholder.**  Net loss applicable to DeCrane Holdings, ourcommon stockholder, increased $52.7 million to a net loss of $71.8 million forthe year ended December 31, 2002 compared to a net loss of $19.1 million forthe same period in the prior year.  Theincrease in the net loss applicable to our common stockholder is attributableto:

 

•                  a$52.0 million net loss increase; and

 

•                  a$0.7 million increase in accrued 16% mandatorily redeemable preferred stockdividends resulting from the quarterly compounding of accrued dividends.

 

31

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

 

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

 

**Restructuring, Asset Impairment and Other RelatedCharges**

** **

The following discussionshould be read in conjunction with Note 3 accompanying our financial statementsincluded in this report.

 

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

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

 

32

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**Seating Product Line and Furniture ManufacturingFacilities Restructuring**

** **

During the second quarterof fiscal 2003, we consolidated our seating product line offerings and adopteda restructuring plan to down-size a furniture manufacturing facility in responseto continuing weakness in the business, VIP and head-of-state aircraftmarket.  These actions were designed toreduce engineering, production and inventory carrying costs by supporting fewerproduct offerings and achieve profitability at the furniture manufacturingfacility based on its lower production levels. In connection with these actions, we recorded pre-tax charges tooperations totaling $7.1 million during the second quarter of fiscal 2003, ofwhich $3.6 million were noncash charges. The charges are comprised of the write-off of excess and obsoleteinventory costs related to the discontinued product offerings, leasetermination and related charges, and severance and other compensationcosts.  These restructuring activitieswere completed by the end of fiscal 2003.

 

**Asset Realignment Restructuring**

** **

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

 

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

 

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

 

**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 program was designed to improvemanufacturing efficiencies and to further reduce costs and conserve workingcapital.  In connection with theserestructuring activities, we recorded pre-tax charges to operations totaling$6.3 million during the year ended December 31, 2002, of which $3.6 millionwere noncash charges, for restructuring, asset impairment and other relatedrestructuring charges.

 

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

 

33

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travel costs and shutdownand startup costs.  These restructuringactivities were substantially completed during the second quarter of fiscal2002.

 

**Adjustment of Previous Restructuring Charge**

** **

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

 

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

 

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

 

**Goodwill Impairment Charges**

** **

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

 

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

 

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

 

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

 

**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 to cost of goods sold of $4.3 millionrelated to inventories.  Of this amount,charges totaling $0.3 million pertained to discontinued operations.

 

34

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**Goodwill Impairment Charges**

** **

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

 

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

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

 

----

 

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

 

(b)       Reflects a goodwillimpairment charge recorded (before $0.9 million of income tax benefit) duringthe year ended December 31, 2002 as the cumulative effect of change inaccounting principle in accordance with the transitional provisions of adoptingSFAS No. 142, “Goodwill and Other Intangible Assets.”

 

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

 

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

 

•      *Discontinuance of Goodwill Amortization.*  Goodwill is deemed to be an indefinite-livedasset.  As a result, and in accordancewith SFAS No. 142, the recording of periodic goodwill amortization charges wasdiscontinued effective January 1, 2002.

 

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

 

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

 

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

 

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

 

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

 

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**Liquidity and Capital Resources**

** **

Our principal cash needsare for debt service, working capital, capital expenditures and strategicacquisitions, as well as to provide DeCrane Holdings with cash to finance itsneeds, which consists primarily of cash dividends on its preferred stockbeginning in 2005, if declared.  Ourprincipal sources of liquidity are expected to be cash flow from operations,potential capital market transactions and third party borrowings, principallyunder our first-lien credit facility.

 

**Cash Flows During the Year Ended December 31, 2003**

** **

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

 

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

 

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

 

•      a $1.5 million decrease in customer deposits dueto lower order activity;

 

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

 

•      a $4.3 million decrease in other accruedliabilities;

 

•      a $1.1 million decrease in income taxes payabledue to lower levels of taxable income; and

 

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

 

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

 

•      a $2.5 million decrease in accounts payablecommensurate with lower purchasing volume.

 

Net cash provided byinvesting activities was $130.0 million for the year ended and consisted of:

 

•      net proceeds of $132.2 million from the sale ofthe Specialty Avionics Group; and

 

•      net proceeds of $3.2 million from the sale ofproperty and equipment, principally from the sale of facilities vacatedpursuant to our restructuring activities; offset by

 

•      capital expenditures of $4.8 million; and

 

•      payment of $0.6 million of contingent acquisitionconsideration.

 

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

 

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

 

•      repay $183.7 million first-line term debt;

 

•      repay $6.0 million of revolving line of creditborrowings;

 

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

 

•      pay $6.6 million of debt issuance costs.

 

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

 

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

 

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

 

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

 

**Financial Condition and Liquidity**

 

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

 

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

 

In March 2003, we amendedthe first-lien credit facility to permit the sale Specialty Avionics Group andwe consummated the sale on May 23, 2003. As required by the amendment, we used $130.7 million of the proceedsfrom the sale to repay first-lien credit facility borrowings.  The amendment also relaxed various financialcovenants for 2003 and beyond, decreased by $10.0 million the revolving line ofcredit commitment, increased the prime rate and LIBOR interest margins by 1.5%and permits the issuance of specified types of additional indebtedness and therepurchase of up to $20.0 million aggregate principal amount of our 12%subordinated notes with the proceeds from the sale of junior securities.  Junior securities means: (i) subordinatednotes issued by us that are unsecured and do not provide for any scheduledredemptions or prepayments or any sinking fund installment payments ormaturities prior to the termination of the first-lien credit facility, or otherindebtedness subordinated in right of payment to our obligations under thefirst-lien credit facility, and whose material terms are satisfactory to thelenders; and (ii) equity securities issued by us.

 

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

 

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

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

 

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

 

We continue to explorethe possible restructuring of our other debt and equity instruments that wouldimprove our liquidity and reduce our cash needs. We have not entered into anycommitments to do so and cannot assure you that we will be able to do so in thefuture.

 

**Disclosure of Contractual Obligations and Commitments**

** **

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

 

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|                                                              |   |      |       | **Years Ending December 31,** |       |
|-------------------------------------------------------------------|--------|-----------|------------|-------------------------------|------------|
| **(In millions)**                                                 |   | **Total** |       | **2004**                      |       | **2005  and  2006** |   | **2007  and  2008** |   | **2009  and  Beyond** |   |
|                                                              |   |      | ** ** |                          | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Long-term debt (a):                                               |   |      |       |                          |       |   |   |   |   |   |   |
| First-lien term debt (b)                                          |   | $         | 80.5       |                          | $          | — |   | $ | 15.0 |   | $ | 65.5 |   | $ | — |   |
| Second-lien term debt (c)                                         |   | 80.1      |       | —                        |       | — |   | 80.1 |   | — |   |
| 12% subordinated notes (d)                                        |   | 100.0     |       | —                        |       | — |   | 100.0 |   | — |   |
| Capital lease obligations (e)                                     |   | 3.4       |       | 0.5                           |       | 0.9 |   | 0.6 |   | 1.4 |   |
| Other indebtedness (e)                                            |   | 5.4       |       | 0.7                           |       | 1.7 |   | 0.6 |   | 2.4 |   |
| Total long-term debt                                              |   | 269.4     |       | 1.2                           |       | 17.6 |   | 246.8 |   | 3.8 |   |
|                                                              |   |      |       |                          |       |   |   |   |   |   |   |
| Other long-term liabilities                                       |   | 5.5       |       | —                        |       | 3.8 |   | 1.7 |   | — |   |
| Operating lease obligations                                       |   | 14.7      |       | 2.9                           |       | 5.0 |   | 2.4 |   | 4.4 |   |
| Mandatorily redeemable preferred stock  redemption obligation (f) |   | 43.3      |       | —                        |       | — |   | — |   | 43.3 |   |
| Total obligations as of December 31, 2003                         |   | $         | 332.9      |                          | $          | 4.1 |   | $ | 26.4 |   | $ | 250.9 |   | $ | 51.5 |   |

 

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(a)       Excludes interest payments.

 

(b)       The first-lien term debtbears interest at variable rates and therefore the amount of future interestpayments are uncertain.  The debt bearsinterest based on a margin over, at our option, the prime rate or LIBOR.  The margins applicable to portions ofamounts borrowed vary depending on our consolidated debt leverage ratio.  Currently, the applicable margins are 4.00to 4.75 for prime rate borrowings and 5.25% to 6.0% for LIBOR borrowings.  The weighted-average interest rate on allfirst-lien debt was 6.85% as of December 31, 2003.

 

(c)       The second-lien term debtis comprised of $70.0 million of fixed rate debt and $10.0 million of variablerate debt.  The fixed rate debt bearsinterest at 15%; 12% payable quarterly in cash and 3% pay-in-kind or “accreted”interest, payable at maturity.  Thevariable rate debt bears cash interest, at our option, at the prime rate plus7.5% or LIBOR plus 8.5%, plus 3% pay-in-kind interest payable at maturity.  The weighted-average interest rate on allsecond-lien debt was 14.71% as of December 31, 2003.  All of the second-lien debt matures on June30, 2008, at which time the cash payment obligation will be $91.7 million,including the 3% pay-in-kind interest obligation.

 

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

 

(e)       Interest is generallypayable monthly.

 

(f)        Dividends accrue quarterlyat a 16% annual rate.  Prior to June 30,2005, we may, at our option, pay dividends either in cash or by the issuance ofadditional shares of preferred stock. Since the issuance of the preferred stock in June 2000, we have electedto issue additional shares in lieu of cash dividend payments and may continueto do so until June 2005, after which time we are required to pay quarterlydividends in cash, if declared.  If weelect to continue issuing additional shares until June 2005, our mandatoryredemption obligation on March 31, 2009, the mandatory redemption date, will be$54.8 million and our annual cash dividend payment obligation will be $8.8million, payable quarterly, commencing September 2005, if declared.

 

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

** **

We are a wholly-ownedsubsidiary of DeCrane Holdings, whose capital structure also includesmandatorily redeemable preferred stock. Since we are DeCrane Holdings’ only operating subsidiary and source ofcash, we may be required to fund DeCrane Holdings’ redemption obligation in thefuture, subject to limitations contained in our first-lien credit agreement,second-lien term notes and the subordinated notes indenture.

 

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The DeCrane Holdingspreferred stock has a total redemption value of $71.4 million as of December31, 2003 and the preferred stock is mandatorily redeemable on September 30,2009.

 

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

 

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

 

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

 

**Critical Accounting Policies and Estimates**

** **

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

 

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

 

**Allowancefor uncollectible accounts receivable.**  Accounts receivable are reduced by anallowance for amounts that are deemed uncollectible.  The estimated allowance for uncollectible amounts is basedprimarily on our evaluation of the financial condition of each of our customersand their payment history.  We alsoprovide an allowance based on the age of all receivables for which we have notestablished a customer-specific allowance. Generally, we do not require collateral or other security to supportaccounts receivable, however, under certain circumstances, we require depositsor cash-on-delivery terms.  While ourlosses have been within our expectations, a deterioration of our customers’financial condition may require that we provide additional allowances, reducingour operating income in future periods. Our customers operate in the business, VIP and head-of-state andcommercial aircraft industry throughout the world and are being adverselyimpacted by the acts and ongoing threats of global terrorism, the currentmilitary conflicts, health epidemics and weak global economic conditions.  Accounts receivable of $22.7 million isreduced by an allowance for uncollectible accounts of $1.3 million as ofDecember 31, 2003.

 

**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

 

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

 

**Goodwillimpairment.**  On 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.

 

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

 

Weestimate the fair values of our reporting units using a discounted cash 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 based onour estimate of aircraft deliveries and general market conditions.  Changes in these forecasts could cause aparticular reporting unit to either pass or fail the first step in the goodwillimpairment mode, which could significantly change the amount of impairmentrecorded.  Since we began testinggoodwill for impairment in 2002, we have recorded impairment charges totaling$107.3 million, which includes $41.5 million recorded during 2003.

 

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

 

**Valuationof long-lived assets and other intangible assets. **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:

 

•      underperformance relative to expected futureoperating results;

 

•      changes in the manner of our use of the acquiredassets;

 

•      changes in our business strategy; or

 

•      negative aerospace industry or global economicconditions.

 

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

 

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method using a discountrate we believe to be commensurate with the risk inherent in our currentbusiness model.  Net long-lived assetsand intangible assets, excluding goodwill, amounted to $56.4 million as of December 31,2003.

 

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

 

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

 

In the event actualresults differ from our estimates or we adjust these estimates in futureperiods, we would need to establish an additional valuation allowance in theperiod such determination is made, which would increase our provision forincome taxes.

 

**Revenueand profit recognition under long-term contracts. **Because of relatively long production cycles, aportion of our revenues and profits are recognized underpercentage-of-completion method of accounting using total contract price,actual costs incurred to date and an estimate of the completion costs for eachcontract.  We use this method because reasonablyaccurate estimates of the revenue and costs applicable to the various stages ofa contract can be made.  Recognizedrevenues and profits on each contract are subject to revisions as the contractprogresses towards completion. Revisions to revenue and profit estimates are made in the period inwhich the facts that give rise to the revision become known.  Provisions for estimated losses onuncompleted contracts are fully recognized in the period in which such lossesare determined.  Approximately 16.7% ofour revenues and 41.4% of our gross profit during the year ended December 31,2003 was recognized under the percentage-of-completion method of accounting.

 

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

 

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

 

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

 

**Recently Issued Accounting Pronouncements**

** **

**SFAS No. 150**

** **

In May 2003, theFinancial Accounting Standards Board issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 establishesstandards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification of financialinstruments within its scope as a liability, including financial instrumentsissued in the form of shares that are mandatorily redeemable, because thosefinancial instruments are deemed to be, in essence, obligations of the issuer.  We will be required to reclassify the 16%mandatorily redeemable preferred stock as a liability commencing January 1,2004 and reflect quarterly dividend and redemption value accretion as a chargeagainst pre-tax income in future periods.

 

**Forward-Looking Statements and Risk Factors**

** **

**Special Note Regarding Forward-Looking Statements**

** **

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

 

•      fuel prices and general economic conditions thataffect demand for aircraft and air travel, which in turn affect demand for ourproducts and services;

 

•      acts, and ongoing threats, of global terrorism,military conflicts and health epidemics that affect demand for aircraft and airtravel, which in turn affect demand for our products and services;

 

•      inflation, and other general changes in costs ofgoods and services;

 

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

 

•      liability and other claims asserted against usthat exceeds our insurance coverage;

 

•      the ability to attract and retain qualifiedpersonnel;

 

•      labor disturbances;

 

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•      changes in operating strategy, or our acquisitionand capital expenditure plans; and

 

•      the risks described below.

 

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

 

**Risk Factors**

** **

**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, 2003,we had total consolidated indebtedness of approximately $269.4 million and wehad $23.8 million of additional revolving line of credit borrowings availableunder our first-lien credit facility, subject to customary fundingconditions.  We also had $43.3 millionof mandatorily redeemable preferred stock as of December 31, 2003.  The first-lien credit facility, second-lienterm debt and the indenture under which our subordinated notes are issued eachalso permit us to incur significant amounts of additional debt and to securethat debt with some of our assets.

 

The amount of debt wecarry could have important consequences:

 

•      It may limit the cash flow available for generalcorporate purposes and acquisitions. Interest payments on our debt were $26.0 million for the year endedDecember 31, 2003.  Earnings fromcontinuing operations were insufficient to cover fixed charges by $66.4 millionfor the year ended December 31, 2003.

 

•      It may limit our ability to obtain additionaldebt financing in the future for working capital, capital expenditures oracquisitions.

 

•      It may limit our flexibility in reacting tocompetitive and other changes in the industry and economic conditionsgenerally.

 

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

 

•      It may limit our ability to respond to changes inour markets or exploit business opportunities.

 

**Restrictive Covenants.**  Our operations and those of our subsidiariesare restricted by the terms of our first-lien credit facility, second-lien termdebt and subordinated notes indenture.

 

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

 

•      incur debt;

 

•      issue preferred stock;

 

•      repurchase capital stock or subordinated debt;

 

•      enter into transactions with affiliates;

 

•      enter into sale and leaseback transactions;

 

•      create liens or allow them to exist;

 

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•      pay dividends or other distributions;

 

•      make investments;

 

•      sell assets; and

 

•      enter into mergers and consolidations.

 

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

 

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

 

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

 

We will be required torepay $18.8 million of debt through 2006 and substantial amountsthereafter.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources and —Disclosure of Contractual Obligations andCommitments” for additional information. Our ability to satisfy our debt obligations and to fund our operationsand planned capital expenditures will depend on our ability to generate cash inthe future and access to our revolving credit facility, which will terminate inMarch 2006.  During 2003, we used $19.1million of cash for operations.  This, toan extent, is subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control.

 

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

 

We reported a net loss of$73.3 million for the year ended December 31, 2003 and $66.0 million for thesame period in 2002.  The 2003 lossincludes $13.8 million as a result of a cumulative effect of change inaccounting principle, a $6.6 million loss attributable to discontinuedoperations and $49.4 million of pre-tax restructuring and long-lived assetimpairment charges we recorded resulting from our restructuringactivities.  The 2002 loss includes$17.8 million as a result of a cumulative effect of change in accountingprinciple, a $41.4 million loss attributable to discontinued operations and$17.2 million of pre-tax restructuring and long-lived asset impairment chargeswe recorded resulting from our restructuring activities.  Our restructuring activities were implementedin response to the adverse impact the events described in “—Aerospace IndustryRisks” below are having on our business.

 

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

 

We compete in theaircraft products and services market of the aerospace industry.  The market for our products and services islargely driven by demand in the civil aircraft markets, principally for business,VIP and head-of-state aircraft and, to a lesser extent, commercial and regionalaircraft.  The September 11, 2001terrorist attack on the United States, ongoing concerns about global terrorism,the current Middle-Eastern military conflicts, health epidemics and weak globaleconomic conditions are all adversely impacting the aerospace industry and ourbusiness.

 

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

 

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

 

**Concentration of Key Customers.**  We receive a significant portion of 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 46.4% of our consolidated revenues for the year endedDecember 31, 2003 as follows: Boeing – 17.5%; Textron (which includes Cessna) –16.3%; and Bombardier – 12.6%.  Some ofour customers also have the in-house capabilities to perform the services andprovide many of the products we offer and, accordingly, could discontinueoutsourcing their business to us.

 

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

 

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

 

•      we make substantial expenditures to developproducts for customers that we may not recoup if we do not receive sufficientorders;

 

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

 

•      we must match other suppliers’ price reductionsor delete the affected products from the contract; and

 

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

 

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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.

 

As of December 31, 2003,goodwill and other intangible assets represented approximately 61.8% of ourtotal assets.  Intangible assets consistof goodwill and other identifiable intangible assets associated with 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. Since our January 1, 2002 adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets,” goodwill is not amortized but is instead subject to annualtesting for impairment.  Identifiableintangible assets with finite lives are amortized over their individual usefullives and are also subject to annual impairment testing.  Simply stated, if the carrying value of theasset exceeds the estimated undiscounted future cash flows from the operatingactivities of the related business, impairment is deemed to have occurred.  In this event, the amount is written downaccordingly.  Under current accountingrules, this would result in a charge against income from operations.  Sincewe began testing goodwill for impairment in 2002, we have recorded impairmentcharges totaling $107.3 million, which includes $41.5 million recorded during2003.

 

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

 

**Competition. **We operate in a highlycompetitive industry and compete against a number of companies, some of whichhave significantly greater financial, technological and marketing resourcesthan we do.

 

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

 

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

 

**Growth Strategy.**  Our acquisition of other companies may 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:

 

•      our ability to integrate the operations andpersonnel of the acquired company;

 

•      our failure to identify liabilities of theacquired company for which we may be responsible as a successor owner oroperator;

 

•      the loss of key personnel in the acquiredcompany; and

 

•      the impact on our financial position, results ofoperations and cash flows resulting from additional acquisition indebtedness.

 

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

 

**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 adverselyaffect our business.

 

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

 

Environmental laws,particularly the federal Comprehensive Environmental Response, Compensation andLiability Act (“CERCLA”), may impose strict, retroactive and joint and severalliability upon persons responsible for releases or potential releases ofhazardous substances and other parties who have some relationship to a site ora source of waste, such as a current or former owner or operator of realproperty or a party who arranges to transport wastes to a third-partysite.  We have sent waste to treatment,storage or disposal facilities that have been designated as National PriorityList (more commonly known as Superfund) sites under CERCLA or equivalentlistings under state laws.  We havereceived requests for information or allegations of potential responsibilityfrom the U.S. Environmental Protection Agency regarding our use of several ofthese sites.  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 also located on properties that may be contaminated to varying degrees.  We may incur costs in the future to addressexisting or future contamination.  If weincur significant costs in connection with these or other environmental issues,our business and financial condition could be adversely affected.

 

**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 an aircrafton which our products have been installed, the reliability and skill of theoperators of such aircraft and the maintenance performed on such aircraft.  We carry aircraft products and groundingliability insurance for this purpose, but we cannot assure you that ourinsurance coverage will be adequate to cover claims that may arise or that wewill be able to renew our coverage in the future at commercially reasonablerates.

 

**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.

 

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The industry and marketdata we use in this report is based on the good faith estimates of our management,which estimates are based primarily upon internal management information and,to the extent available, independent industry publications and other publiclyavailable information.  However, thenature of the aerospace industry and competition in our markets results inlimited availability of reliable, independent data.  Although we believe that the sources we have used are reliable,we do not guarantee, and have not independently verified, the accuracy andcompleteness of the information.

 

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

 

Our success and growthdepends in large part on the skills and efforts of our management team and onour ability to attract and retain qualified personnel experienced in the variousoperations of our business.  The loss ofkey personnel, including our founder, R. Jack DeCrane, combined with thefailure to attract additional qualified personnel for whatever reason, coulddelay implementation of our business plan or otherwise adversely affect ouroperations.  We do not have employmentcontracts with our key personnel, other than Mr. DeCrane.  We do not carry key man life insurance onany members of our management team.

 

**ITEM7A.**           QUANTITATIVE ANDQUALITATIVE 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.  As ofDecember 31, 2003, the current prime rate was 4.00% and the current LIBOR was1.16%.  Based on $90.5 million ofvariable-rate debt outstanding as of December 31, 2003, a hypothetical onepercent rise in interest rates, to 5.00% for prime rate borrowings and 2.12%for LIBOR borrowings, would reduce our pre-tax earnings by $0.9 millionannually.  As of December 31, 2002, thecurrent prime rate was 4.75% and the current LIBOR was 1.95%.  Based on $270.2 million of variable-ratedebt outstanding as of December 31, 2002, a hypothetical one percent rise ininterest rates, to 5.75% for prime rate borrowings and 2.95% for LIBOR borrowings,would reduce our pre-tax earnings by $2.7 million annually.

 

To limit a portion of ourexposure related to rising interest rates, we have entered into an interestrate swap contract to effectively convert our variable-rate industrial revenuebonds to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedge against changes in theamount of future cash flows associated with interest payments on this portionof our variable-rate debt.  Market riskrelated to this interest rate swap contract is estimated as the potentialhigher interest expense we will incur if the variable interest rate decreasesbelow the 4.2% fixed rate.  Based on the$3.1 million of variable-rate debt converted to fixed-rate debt outstanding asof December 31 2003, a hypothetical one percent decrease in the variableinterest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1million annually.

 

The estimated fair valueof our $100.0 million fixed-rate long-term debt increased $5.0 million, or12.5%, to approximately $45.0 million as of December 31, 2003 from $40.0million as of December 31, 2002. Although we cannot be certain, we believe the increase may have been aresult of the sale of the Specialty Avionics Group.  Market risk related to our fixed-rate debt is deemed to be thepotential

 

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increase in fair valueresulting from a decrease in interest rates. For example, a hypothetical ten percent decrease in the interest rates,from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt byapproximately $7.0 million.

 

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

 

**ITEM 8**.              FINANCIAL STATEMENTSAND 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.

 

**ITEM 9A**.           CONTROLS AND PROCEDURES

** **

The management of DeCraneAircraft Holdings, Inc. (the “Company”), under the supervision and with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, conducted an evaluation of the Company’s “disclosure controls andprocedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of theend of the period covered by this report. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of the end of the period covered by this report.

 

There was no change inthe Company’s internal control over financial reporting identified in connectionwith the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or15d-15 that occurred during the Company’s last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

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**PART III**

** **

**ITEM 10**.           DIRECTORS AND EXECUTIVEOFFICERS 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 Aircraft and its parent company, DeCrane Holdings.

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

 

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

 

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

 

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

 

*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.

 

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

 

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*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 AerospaceDisplay Systems from September 1992 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.  Mr. Nerland also served asPresident of the Cabin Management Group’s Seating Division from June 2000through December 2001.  FromJuly 1994 through December 1998, he was President of The Nerland Group anda partner with Budetti, Harrison, Nerland and Associates, a consulting andinterim management firm.

 

*ThompsonDean* has been a director of DeCrane Aircraft and DeCraneHoldings since 1998.  Mr. Dean alsoserved as President of DeCrane Holdings from its inception in 1998 throughAugust 2002.  Mr. Dean has also been theManaging Partner of DLJ Merchant Banking, Inc. since November 1995.  In November 2000, Credit Suisse First Boston,Inc. acquired Donaldson, Lufkin & Jenrette, Inc.  As a result, DLJ Merchant Banking, Inc. became an indirectaffiliate of Credit Suisse First Boston, Inc. and Credit Suisse Group.  Mr. Dean serves as a director of AKI HoldingCorp., Amatek Holdings S.A., Arcade Holding Corporation, Manufacturers’Services Limited, Mueller Holdings, Inc., 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 andsystems.  Mr. Suter has served Emersonin various capacities since 1989.  Mr.Suter serves as a director of Furniture Brands International, Inc. and TKAluminum, Ltd.

 

**Audit Committee Financial Expert**

** **

The entire board ofdirectors of DeCrane Aircraft and DeCrane Holdings serves as each Company’saudit committee.  The board of directorshas carefully considered the definition of “audit committee financial expert”adopted by the United States Securities and Exchange Commission and hasdetermined that Mr. Kaplan is an audit committee financial expert.  Mr. Kaplan is not independent under Rule10a-3.

 

**Code of Ethics**

** **

DeCrane Aircraft andDeCrane Holdings has adopted a Code of Ethics applicable to its Chief ExecutiveOfficer, Chief Financial Officer and all employees performing accounting functions.  A copy of the Code of Ethics is available,without charge, upon written request to the Chief Financial Officer of DeCraneAircraft at 2361 Rosecrans Avenue, Suite 180, El Segundo, CA 90245.

 

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**ITEM 11**.           EXECUTIVE COMPENSATION

** **

**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 31,2003.  Columns and tables have beenomitted, as permitted by Securities and Exchange Commission rules, becausethere has been no compensation awarded to, earned by or paid to any of thenamed executive officers required to be reported in the omitted column or tableduring any of the years in the three year period ended December 31, 2003.

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

 

----

(1)       Number of shares of commonstock of DeCrane Holdings issuable upon exercise of options granted pursuant toour management incentive plan during the applicable fiscal year.

 

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

 

(3)       Mr. DeCrane also serves asVice Chairman of the Board of Directors of DeCrane Holdings and was appointedits Chief Executive Officer in August 2002.

 

(4)       Mr. Kaplan also served asAssistant Treasurer and Assistant Secretary (principal accounting officer) ofDeCrane Holdings from March 1999 until August 2002 when he was appointed itsChief Financial Officer and Assistant Secretary.

 

(5)       Mr. Mann has served as ourVice President, Tax and SEC Compliance, since January 1, 2000.

 

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

 

54

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(7)       Mr. Nerland served as VicePresident, Business Development, from January 1999 through December 2001 andwas appointed Senior Vice President in March 2001.  In December 2001, Mr. Nerland became our President of the CabinManagement Group.

 

**Stock Option Grants in Last Fiscal Year**

** **

During the fiscal year endedDecember 31, 2003, no options to purchase shares of DeCrane Holdings commonstock were granted pursuant to the management incentive plan.  See “—Employment Agreements and CompensationArrangements—Incentive Plans.”

 

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

** **

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

 
| **Name**                         |   | **Number of  Securities Underlying  Unexercised Options  Exercisable / Unexercisable** |   | **Value of Unexercised  In-the-Money Options  at Fiscal Year End (1)  Exercisable / Unexercisable** |            |
|----------------------------------|--------|----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|-----------------|
|                             |   |                                                                                   |   |                                                                                                |            |
| R.  Jack DeCrane                 |   |                                                                                   |   |                                                                                                |            |   |
| Exercisable  at $23.00 per share |   | 36,253 / 73,605                                                                        |   | $                                                                                                   | — / — |   |   |
| Richard  J. Kaplan               |   |                                                                                   |   |                                                                                                |            |   |
| Exercisable  at $23.00 per share |   | 9,840 / 19,976                                                                         |   | –– / ––                                                                         |            |   |
| Exercisable  at $35.00 per share |   | 972 / 1,974                                                                            |   | –– / ––                                                                         |            |   |
| James  E. Mann                   |   |                                                                                   |   |                                                                                                |            |   |
| Exercisable  at $23.00 per share |   | 644  / 1,306                                                                      |   | –– / ––                                                                         |            |   |
| Exercisable  at $35.00 per share |   | 330 / 670                                                                              |   | –– / ––                                                                         |            |   |
| Robert  G. Martin                |   |                                                                                   |   |                                                                                                |            |   |
| Exercisable  at $23.00 per share |   | 5,954 / 12,088                                                                         |   | –– / ––                                                                         |            |   |
| Exercisable  at $35.00 per share |   | 990 / 2,010                                                                            |   | –– / ––                                                                         |            |   |
| Jeffrey  A. Nerland              |   |                                                                                   |   |                                                                                                |            |   |
| Exercisable  at $23.00 per share |   | 3,641 / 7,391                                                                          |   | –– / ––                                                                         |            |   |
| Exercisable  at $35.00 per share |   | 1,650 / 3,350                                                                          |   | –– / ––                                                                         |            |   |
|                                  |        |                                                                                        |        |                                                                                                     |                 |  |  |

 

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

 

**Compensation Committee Interlocks and InsiderParticipation**

** **

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

 

55

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**Employment Agreements and Compensation Arrangements**

** **

**R. Jack DeCrane**

** **

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

 

The employment agreementalso provides that if specified change-of-control events occur, and Mr.DeCrane’s employment is terminated by us for any reason other than for cause oras a result of his death or disability, or by Mr. DeCrane for “good reason,” asdefined in the agreement, then we will pay Mr. DeCrane a lump sum in cashwithin fifteen days.  The amount of thatpayment will be $1.00 less than three times the sum of Mr. DeCrane’s averagebase salary plus bonus for the five calendar years preceding his terminationdate and accrued but unpaid salary and bonus through the termination date.  Mr. DeCrane will also receive other specifiedbenefits, including continued coverage under our welfare plans for up to twoyears; 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, and Mr. Mann.  The agreements, which replaced earlieragreements which had expired, provide that, for a term of two years from theeffective date, should a change of control, as defined, occur during the termof the agreement and the executive officer’s employment shall be involuntarilyterminated for any reason on a date which is less than two years after the dateof the change of control, other than for cause, death or disability orterminated by the officer for good reason, DeCrane Aircraft is required to paysuch executive a lump sum equal to his then salary plus average annual bonusover the last five years, equal to twenty four months compensation less the numberof months elapsed from the date of the change of control to the employmenttermination date.

 

**401(k) Retirement Plan**

** **

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

 

56

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

 

**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 of DeCrane Holdings administers the management incentive plan.  The plan provides for the granting ofoptions to purchase 356,257 common shares and expires in 2009.  Substantially all of the options awardedbecome fully vested and exercisable eight years from the date of grant butvesting and exercise can be accelerated based upon future attainment of definedperformance criteria.  As ofDecember 31, 2003, 34% of the options granted pursuant to the plan arevested and exercisable.  We believe theper share exercise price of the options granted approximated the fair marketvalue of the underlying common stock on each of the grant dates.

 

From time-to-time, we havepermitted 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.

 

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

 

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

 

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

 

**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

 

57

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

 

**Directors**

** **

**Selection of Directors and Term of Office**

** **

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

 

**Directors’ Compensation**

** **

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

 

**ITEM 12**.           SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT

** **

**Security Ownership of Certain Beneficial Owners andManagement**

** **

**DeCrane Aircraft**

** **

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

 

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

 

•      250,000 shares of non-voting 16% SeniorRedeemable Exchangeable Preferred Stock Due 2009, which are owned by sevenstockholders.

 

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

 
|                                                                                                              |   | **Common Stock (2)** |   | **16% Senior Redeemable** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|---------------------------|--------|
|                                                                                                              |   | **Number**           |   |                      |   | **Preferred Stock** |   |
|                                                                                                              |   | **of Shares,**       |   |                      |   | **Number** |   |   |   |
|                                                                                                              |   | **Partially**        |   |                      |   | **of** |   |   |   |
| **Name of  Beneficial Owner (1)**                                                                                 |   | **Diluted**          |   | **Percentage**            |   | **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 | % |

 

58

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|                                                                                                                        |   | **Common Stock (2)** |   | **16% Senior Redeemable** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------|--------|---------------------------|--------|
|                                                                                                                        |   | **Number**           |   |                      |   | **Preferred Stock** |   |
|                                                                                                                        |   | **of Shares,**       |   |                      |   | **Number** |   |   |   |
|                                                                                                                        |   | **Partially**        |   |                      |   | **of** |   |   |   |
| **Name of  Beneficial Owner (1)**                                                                                           |   | **Diluted**          |   | **Percentage**            |   | **Shares** |   | **Percentage** |   |
|                                                                                                                        |   |                 |   |                      |   |   |   |   |   |
| Thompson  Dean (4)  c/o Credit Suisse First Boston Eleven Madison Avenue, New York, NY 10010                                |   | —               |   | —                    |   | — |   | — |   |
| Susan  C. Schnabel (4)  c/o Credit Suisse First Boston Eleven Madison Avenue, New York, NY 10010                            |   | —               |   | —                    |   | — |   | — |   |
| Putnam  Investment Management, Inc.  and affiliates (5)  One Post Office Square, Boston, MA 02109                           |   | —               |   | —                    |   | 29,000 |   | 11.6 | % |
| Neon  Capital Limited.  c/o Deutsche Bank (Cayman) Limited  P.O. Box 1984, George Town  Cayman Islands, British West Indies |   | —               |   | —                    |   | 21,000 |   | 8.4 | % |
| Albert  E. Suter                                                                                                            |   | —               |   | —                    |   | — |   | — |   |
| R.  Jack DeCrane                                                                                                            |   | —               |   | —                    |   | — |   | — |   |
| Richard  J. Kaplan                                                                                                          |   | —               |   | —                    |   | — |   | — |   |
| James  E. Mann                                                                                                              |   | —               |   | —                    |   | — |   | — |   |
| Robert  G. Martin                                                                                                           |   | —               |   | —                    |   | — |   | — |   |
| Jeffrey  A. Nerland                                                                                                         |   | —               |   | —                    |   | — |   | — |   |
| All  directors and named executive officers as a group (eight persons)                                                      |   | —               |   | —                    |   | — |   | — |   |

 

----

(1)       Each person who has thepower to vote and direct the disposition of shares is deemed to be a beneficialowner of those shares.

 

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

 

(3)       Reflects preferred stockheld by the following investors affiliated with DLJ Merchant Banking PartnersII, L.P.:

 

•      DLJInvestment Partners, L.P.

•      DLJInvestment Partners II, L.P.

•      DLJIPII Holdings, L.P.

 

The address of each ofthe investors is Eleven Madison Avenue, New York, New York 10010.

 

(4)       Mr. Dean and Ms. Schnabelare officers of DLJ Merchant Banking, Inc., an affiliate of DLJ MerchantBanking Partners II, L.P. and directors of DeCrane Holdings Co.  The DLJ entities are affiliates of, andcommonly collectively referred to as, Credit Suisse First Boston.  See “Item 13. Certain Relationships andRelated Transactions—Transactions with Management and Others” for additionalinformation.  The share data shown forthese individuals excludes shares shown as held

 

59

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by the DLJaffiliates and DeCrane Holdings Co. separately listed in this table; Mr. Deanand Ms. Schnabel disclaim beneficial ownership of those shares.

 

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

 

•      PutnamFund Trust - Putnam High Yield Trust II

•      PutnamHigh Yield Trust

•      PutnamVariable Trust – Putnam VT High Yield Fund

 

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

 

**DeCrane Holdings**

** **

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

 

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

 

•      342,417 shares of non-voting 14% SeniorRedeemable Exchangeable Preferred Stock Due 2009, which is owned by 18stockholders.

 

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

 
|                                                                                                   |   | **Common Stock (2)** |   | **14% Senior Redeemable** |    |
|--------------------------------------------------------------------------------------------------------|--------|----------------------|--------|---------------------------|---------|
|                                                                                                   |   | **Number**           |   |                      |    | **Preferred Stock** |   |
|                                                                                                   |   | **of Shares,**       |   |                      |    | **Number** |   |   |   |
|                                                                                                   |   | **Partially**        |   |                      |    | **of** |   |   |   |
| **Name of  Beneficial Owner (1)**                                                                      |   | **Diluted**          |   | **Percentage**            |    | **Shares** |   | **Percentage** |   |
|                                                                                                   |   |                 |   |                      |    |   |   |   |   |
| DLJ  Merchant Banking Partners II, L.P.  and affiliates (3)  Eleven Madison Avenue, New York, NY 10010 |   | 4,179,530            |   | 97.7                      | %       | 340,000 |   | 99.3 | % |
| Thompson  Dean (4)  c/o Credit Suisse First Boston  Eleven Madison Avenue, New York, NY 10010          |   | —               |   | —                    |    | — |   | — |   |
| Susan  C. Schnabel (4)  c/o Credit Suisse First Boston  Eleven Madison Avenue, New York, NY 10010      |   | —               |   | —                    |    | — |   | — |   |
| Albert  E. Suter (5)                                                                                   |   | 8,704                |   |                      | *  | — |   | — |   |
| R.  Jack DeCrane (6)                                                                                   |   | 36,253               |   |                      | *  | — |   | — |   |
| Richard  J. Kaplan (7)                                                                                 |   | 10,812               |   |                      | *  | — |   | — |   |
| James  E. Mann (8)                                                                                     |   | 974                  |   |                      | *  | — |   | — |   |
| Robert  G. Martin (9)                                                                                  |   | 6,944                |   |                      | *  | — |   | — |   |
| Jeffrey  A. Nerland (10)                                                                               |   | 5,291                |   |                      | *  | — |   | — |   |
| All  directors and named executive officers as a group (eight persons)                                 |   | 68,978               |   | 1.7                       | %       | — |   | — |   |

 

----

*          Less than 1.0%

 

(1)       Each person who has thepower to vote and direct the disposition of shares is deemed to be a beneficialowner of those shares.

 

(2)       The common stock columnsreflect the number of shares owned and the total percentage ownership in themanner required by Securities and Exchange Commission rules.  The entries for each holder

 

60

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assumes, ifapplicable, that the particular holder, and no one else, fully exercises allrights under warrants to purchase common stock and common stock which may beacquired upon the exercise of stock options and which are exercisable, or willbe exercisable, prior to 60 days from March 15, 2004.

 

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

 

•      DLJDiversified Partners, L.P.

•      DLJDiversified Partners-A, L.P.

•      DLJEAB Partners, L.P.

•      DLJESC II, L.P.

•      DLJFirst ESC L.P.

•      DLJInvestment Partners, L.P.

•      DLJInvestment Partners II, L.P.

•      DLJMerchant Banking Partners II-A, L.P.

•      DLJ Millennium Partners, L.P.

•      DLJ Millennium Partners-A, L.P.

•      DLJ Offshore Partners II, C.V.

•      DLJIP II Holdings, L.P.

•      DLJMB Funding II, Inc.

•      MBP II Plan Investors

•      UK Investment Plan 1997 Partners, Inc.

 

The address of each ofthe investors is Eleven Madison Avenue, New York, New York 10010.

 

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

 

(5)       Includes 2,500 shares thatmay be acquired upon the exercise of stock options that are exercisable or willbecome exercisable prior to 60 days from March 15, 2004.

 

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

 

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

 

(8)       Includes 974 shares thatmay be acquired upon the exercise of stock options that are exercisable or willbecome exercisable prior to 60 days from March 15, 2004.

 

(9)       Includes 6,944 shares thatmay be acquired upon the exercise of stock options that are exercisable or willbecome exercisable prior to 60 days from March 15, 2004.

 

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

 

**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, 2003.

 

61

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

 

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

 

**ITEM 13**.           CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS

** **

**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.

 

**Transactions with Management and Others**

** **

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

 

**Investors’ Agreement**

** **

Investors owing 96.6% ofDeCrane Holdings’ issued and outstanding common stock and common stock warrantsand options, all of DeCrane Holdings’ preferred stock and all of DeCraneAircraft’s preferred and common stock, have entered into an Amended andRestated Investors’ Agreement, dated October 6, 2000, among DeCrane HoldingsCo., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities,Putnam Investment Management, Inc. and affiliated funds and entities and all

 

62

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managementinvestors.  Investors who own DeCraneHoldings’ warrants to purchase 159,794 shares of common stock are not partiesto the Investors’ Agreement.  Theagreement provides that:

 

•      The parties to the agreement shall vote theirshares to cause DLJ Merchant Banking Partners, II, L.P. to select allmembers of the Board of Directors of DeCrane Holdings and DeCrane Aircraft andat least one of such directors on each board shall be an independent director.

 

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

 

•      Parties to the agreement may participate in somespecific kinds of sales of shares by DLJ affiliates.

 

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

 

•      The DLJ affiliates may request six demandregistrations with respect to all or any of the DeCrane Holdings common stock,preferred stock and Class A warrants to purchase 155,000 common shares held bythose affiliates, which are immediately exercisable subject to customarydeferral and cutback provisions.

 

•      The holders of Class B warrants to purchase139,357 shares of DeCrane Holdings common stock may request two demandregistrations together with all or any common stock held by them, which areimmediately exercisable subject to customary deferral and cutback provisions.

 

•      The parties to the agreement are entitled tounlimited piggyback registration rights, subject to customary cutbackprovisions, and excluding registrations of shares issuable in connection withany employee stock options, employee benefit plan or an acquisition.

 

•      DeCrane Holdings will indemnify the stockholdersagainst some liabilities and expenses, including liabilities under theSecurities Act.

 

•      Any person acquiring shares of common stock orpreferred stock who is required by the terms of the Investors’ Agreement or anyemployment agreement or stock purchase, option, stock option or othercompensation plan to become a party thereto shall execute an agreement tobecome bound by the Investors’ Agreement.

 

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 state securitieslaws.

 

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

 

**Transactions During 2003 and 2004**

** **

Securities and ExchangeCommission rules require we briefly describe transactions, or series of similartransactions, with specified persons (as defined in the rules) and involvingamounts exceeding $60,000, which have occurred since January 1, 2003, thebeginning of our most recent fiscal year. These transactions are briefly described below and are also described inthe notes accompanying our financial statements included in this report.

 

63

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

#### ** **

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

 

•      DeCrane Aircraft sold its Specialty AvionicsGroup on May 23, 2003.  CSFB Corporationserved as DeCrane Aircraft’s financial advisors for the transaction andreceived customary fees and reimbursement of expenses in connection with thetransaction.

 

•      DeCrane Aircraft amended its first-lien creditfacility in connection with the sale of its Specialty Avionics Group in March2003 and in connection with issuance of second-lien term debt in December2003.  Credit Suisse First Bostonreceived customary fees and reimbursement of expenses in connection withobtaining these amendments.  CreditSuisse First Boston was also paid an annual fee for serving as administrativeagent for the first-lien credit facility and second-lien term debt.

 

•      DeCrane Aircraft paid Credit Suisse First Bostona fee for arranging the syndication of its second-lien term debt in December2003.

 

•      CSFB Corporation received an annual advisory fee.

 

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

 

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

#### ** **

The followingtransactions occurred during the period from January 1, 2004 to the date ofthis report:

 

•      CSFB Corporation has received $87,500 of itsannual advisory fee for 2004.

 

•      CSFB Corporation has also received $375,000 foradditional financial advisory services.

 

**Indebtedness of Executive Officers and Directors**

** **

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

 

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

 

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

 

64

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

 

----

(1)       Reflects the number ofshares of DeCrane Holdings common stock held by DeCrane Aircraft as collateralfor the loans.

 

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

 

(3)       Reflects the originalprincipal amount of the loans.

 

(4)       Reflects accrued interestpayable through December 29, 2003, the date the stock was surrendered.

 

**ITEM 14**.           PRINCIPAL ACCOUNTINGFEES AND SERVICES

** **

**Principal Audit and Non-Audit Fees and Services**

** **

The aggregate fees billedby PricewaterhouseCoopers LLP (“PWC”), our independent accountants, in fiscalyears 2003 and 2002 were as follows:

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

 

----

(1)       Reflects fees for theaudits of our annual financial statements included in our Form 10-K’s and thereview of the quarterly financial statements included in our Form 10-Q’s forfiscal years 2003 and 2002.

 

(2)       Includes fees for duediligence related to acquisitions, stand-alone audits of acquisition targetsand dispositions, employee benefit plan audits and consents related to SECfilings.

 

(3)       Reflects fees for federal,state, local and foreign tax compliance, advisory (including due diligencerelated to acquisitions and dispositions) and planning services.

 

The Audit Committee hasconcluded the provision of the non-audit services listed above is compatiblewith maintaining the independence of PricewaterhouseCoopers LLP.

 

**Pre-approval Policies and Procedures**

** **

The Board of Directors,acting as the audit committee, has adopted policies and procedures forpre-approving all non-audit work performed by PWC after January 1, 2003.  Specifically, the policies and proceduresprohibit PWC from performing any services for the Company or its subsidiarieswithout the

 

65

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prior approval of theaudit committee, except that the audit committee pre-approved the use of PWCfor tax compliance, advisory and planning services.

 

All of the services providedby PWC in 2003 were approved by the audit committee pursuant to the approvalpolicies described above.  None of suchservices were approved pursuant to the procedures described in Rule2-01(c)(7)(i)(C) of Regulation S-X, which waives the general requirement forpre-approval in certain circumstances.

 

**PART IV**

** **

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

** **

**(a)**       List of Documents Filed asPart of this Report

** **

**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 StatementSchedules

** **

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                 |   | (17)                  |   | Stock Purchase  Agreement dated as of March 14, 2003 among Wings Holdings, Inc. and DeCrane  Aircraft Holdings, Inc. and DeCrane Holdings Co. relating to the purchase and  sale of 100% of the Common Stock of Avtech Corporation and Tri-Star  Electronics International, Inc. and 100% of the Membership Interest of  Aerospace Display Systems, LLC |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.2.1               |   | (1)                   |   | Certificate of  Incorporation of DeCrane Aircraft Holdings, Inc.                                                                                                                                                                                                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.2.1.1             |   | (14)                  |   | Certificate of  Amendment of Certificate of Incorporation of DeCrane Aircraft Holdings, Inc.  dated October 17, 2001                                                                                                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.2.2               |   | *                     |   | Bylaws of DeCrane  Aircraft Holdings, Inc., as amended on February 2, 2004                                                                                                                                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.3.1               |   | (1)                   |   | Articles of  Incorporation of Audio International, Inc.                                                                                                                                                                                                                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.3.2               |   | (1)                   |   | Amended & Restated  Bylaws of Audio International, Inc.                                                                                                                                                                                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.4.1               |   | (1)                   |   | Articles of  Incorporation of Hollingsead International, Inc.                                                                                                                                                                                                                                                                                           |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.4.2               |   | (1)                   |   | Bylaws of Hollingsead  International Inc.                                                                                                                                                                                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.5.1               |   | *                     |   | Certificate of  Formation and Certificate of Merger for PATS Aircraft, LLC                                                                                                                                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.5.2               |   | *                     |   | Limited Liability Company  Operating Agreement for PATS Aircraft, LLC                                                                                                                                                                                                                                                                                   |

 

66

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                            |
|---------------------|--------|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.6.1               |   | (3)                   |   | Articles of  Incorporation of PPI Holdings, Inc.                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.6.2               |   | (3)                   |   | Bylaws of PPI Holdings,  Inc.                                                                                                                                                                                      |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.7.1               |   | (3)                   |   | Articles of  Incorporation of Precision Pattern, Inc.                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.7.2               |   | (3)                   |   | Bylaws of Precision  Pattern, Inc.                                                                                                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.8.1               |   | (9)                   |   | Certificate of  Formation and Certificate of Merger for Custom Woodwork & Plastics, LLC                                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.8.2               |   | (9)                   |   | Limited Liability  Company Operating Agreement for Custom Woodwork & Plastics, LLC                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.9.1               |   | (4)                   |   | Articles of  Incorporation of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.)                                                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.9.1.1             |   | (15)                  |   | Certificate of  Amendment of Articles of Incorporation of PCI Acquisition Co., Inc. (changing  its name to PCI Newco, Inc.)                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.9.2               |   | (4)                   |   | Bylaws of PCI Newco,  Inc. (formerly PCI Acquisition Co., Inc.)                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.10.1              |   | (5)                   |   | Articles of  Incorporation DAH-IP Holdings, Inc.                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.10.2              |   | (5)                   |   | Bylaws of DAH-IP  Holdings, Inc.                                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.11.1              |   | (5)                   |   | Articles of  Incorporation of DAH-IP Infinity, Inc.                                                                                                                                                                |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.11.2              |   | (5)                   |   | Bylaws of DAH-IP  Infinity, Inc.                                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.1              |   | (5)                   |   | Certificate of Limited  Partnership of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co.,  L.P.)                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.1.1            |   | (15)                  |   | Certificate of  Amendment of the Certificate of Limited Partnership of DAH-IP Acquisition  Co., L.P. (changing its name to The Infinity Partners, LTD.)                                                            |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.2              |   | (5)                   |   | Limited Partnership  Agreement of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co.,  L.P.) among DAH-IP Holdings, Inc., the General Partner, and DeCrane Aircraft  Holdings, Inc., the Limited Partner |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.3              |   | (5)                   |   | Assignment of  Partnership Interest in The Infinity Partners, LTD. (formerly DAH-IP  Acquisition Co., L.P.) by DeCrane Aircraft Holdings, Inc. to DAH-IP Infinity,  Inc.                                           |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.13.1              |   | (7)                   |   | Certificate of  Formation and Certificate of Amendment of Carl F. Booth & Co., LLC                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.13.2              |   | (7)                   |   | Limited Liability  Company Agreement of Carl F. Booth & Co., LLC                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.14.1              |   | (9)                   |   | Restated Articles of  Incorporation of ERDA, Inc.                                                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.14.1.1            |   | (16)                  |   | Articles of Amendment  amending the Restated Articles of Incorporation of ERDA, Inc. (changing its  name to DeCrane Aircraft Seating Company, Inc.)                                                                |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.14.2              |   | (9)                   |   | Bylaws of ERDA, Inc.  (formerly ERDA Acquisition Co., Inc.)                                                                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.15.1              |   | (16)                  |   | Certificate of  Formation of DeCrane Cabin Interiors, LLC                                                                                                                                                          |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.15.2              |   | (16)                  |   | Limited Liability  Company Agreement of DeCrane Cabin Interiors, LLC                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.16.1              |   | *                     |   | Certificate of  Incorporation of DeCrane Cabin Interiors – Canada, Inc.                                                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.16.2              |   | *                     |   | Bylaws of DeCrane Cabin  Interiors – Canada, Inc.                                                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                               |
| 4.1                 |   | (1)                   |   | Indenture dated October  5, 1998 between DeCrane Aircraft and State Street Bank and Trust Company                                                                                                                  |

 

67

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                           |
|---------------------|--------|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.1               |   | *                     |   | Supplemental Indenture  dated December 11, 2003 among PATS Aircraft, LLC, the other guarantors under  the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                                     |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.2               |   | (2)                   |   | Supplemental Indenture  dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern, Inc., the  other guarantors under the Indenture, DeCrane Aircraft and State Street Bank  and Trust Company                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.3               |   | (11)                  |   | Supplemental Indenture  dated August 5, 1999 among CWP Acquisition, Inc. d/b/a Custom Woodwork &  Plastics, Inc., the other guarantors under the Indenture, DeCrane Aircraft  and State Street Bank and Trust Company                                         |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.4               |   | (11)                  |   | Supplemental Indenture  dated October 6, 1999 among PCI Acquisition Co., Inc. d/b/a PCI Newco, Inc.,  the other guarantors under the Indenture, DeCrane Aircraft and State Street  Bank and Trust Company                                                         |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.5               |   | (11)                  |   | Supplemental Indenture  dated December 17, 1999 among DAH-IP Acquisition, L.P. d/b/a Infinity  Partners, L.P., DAH-IP Holdings, Inc., DAH-IP Infinity, Inc., the other  guarantors under the Indenture, DeCrane Aircraft and State Street Bank and  Trust Company |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.6               |   | (11)                  |   | Supplemental Indenture  dated May 11, 2000 among Booth Acquisition, LLC, the other guarantors under  the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                                      |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.7               |   | (11)                  |   | Supplemental Indenture  dated June 30, 2000 among ERDA, Inc., the other guarantors under the  Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.8               |   | (18)                  |   | Supplemental Indenture  dated June 17, 2003 among DeCrane Cabin Interiors, LLC, the other guarantors  under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                               |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.1.9               |   | *                     |   | Supplemental Indenture  dated January 1, 2004 among DeCrane Cabin Interiors — Canada, Inc., the other  guarantors under the Indenture, DeCrane Aircraft and State Street Bank and  Trust Company                                                             |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.2                 |   | (1)                   |   | A/B Exchange  Registration Rights Agreement among DeCrane Aircraft Holdings, Inc., the  subsidiary guarantors, and DLJ Securities Corporation                                                                                                                     |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.5                 |   | (1)                   |   | Form of DeCrane  Aircraft 12% Senior Subordinated Notes due 2008                                                                                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.6                 |   | (9)                   |   | Certificate of  Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable  Preferred Stock due 2009                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.6.1               |   | (11)                  |   | Amendment to the  Certificate of Designations, Preferences and Rights of 16% Senior Redeemable  Exchangeable Preferred Stock due 2009 dated October 5, 2000                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 4.7                 |   | (9)                   |   | 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               |   | (11)                  |   | Amendment No. 1 to the  Senior Preferred Stock Registration Rights Agreement dated as of June 30,  2000 among DeCrane Aircraft Holdings, Inc. and the Holders of Senior  Preferred Stock dated October 6, 2000                                                    |
|                |   |                  |   |                                                                                                                                                                                                                                                              |
| 10.1                |   | (9)                   |   | Securities Purchase  Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc.,  DeCrane Holdings Co. and the purchasers named therein                                                                                                            |

 

68

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                     |
|---------------------|--------|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.2                |   | (11)                  |   | Amended and Restated  Investors’ Agreement dated as of October 6, 2000 by and among DeCrane  Holdings Co., DeCrane Aircraft Holdings, Inc. and the stockholders named  therein                                                                                                                         |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.5                |   | (1)                   |   | Tax Sharing Agreement  dated March 15, 1993 between DeCrane Aircraft and several subsidiaries                                                                                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.6 **             |   | (1)                   |   | Employment Agreement  dated July 17, 1998 between DeCrane Aircraft Holdings, Inc. and R. Jack  DeCrane                                                                                                                                                                                                      |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.6.1 **           |   | (12)                  |   | First Amendment to  Employment Agreement dated May 5, 2000 between DeCrane Aircraft Holdings,  Inc. and R. Jack DeCrane                                                                                                                                                                                     |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.7 **             |   | (1)                   |   | 401(k) Salary Reduction  Non-Standardized Adoption Agreement dated April 30, 1992 between  the Company and The Lincoln National Life Insurance Company                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.8                |   | (1)                   |   | Form of Subscription  Agreement for DeCrane Holdings Co. common and preferred stock by certain  members of Global Technology Partners LLC                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10               |   | (1)                   |   | Credit Agreement dated  August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by  merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.1             |   | (1)                   |   | First Amendment to Credit  Agreement dated January 22, 1999                                                                                                                                                                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.2             |   | (6)                   |   | Second Amended and  Restated Credit Agreement dated as of December 17, 1999 among  DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital  Funding, Inc., as syndication agent, and Bank One NA, as administrative agent                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.3             |   | (8)                   |   | Third Amended and  Restated Credit Agreement dated as of May 11, 2000 among DeCrane Aircraft  Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as  syndication agent, and Bank One NA, as administrative agent                                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.3.1           |   | (11)                  |   | First Amendment to the  Third Amended and Restated Credit Agreement dated as of June 30, 2000 among  DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital  Funding, Inc., as syndication agent, and Bank One NA, as administrative agent                                                |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.4             |   | (13)                  |   | Increased Commitments  Agreement, dated as of April 27, 2001, pursuant to Third Amended and Restated  Credit Agreement, dated as of May 11, 2000, as amended by the First Amendment  to the Third Amended and Restated Credit Agreement, dated as of June 30, 2000                                          |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.5             |   | (15)                  |   | Second Amendment to the  Third Amended and Restated Credit Agreement dated as of March 19, 2002 among  DeCrane Aircraft Holdings, Inc., the lenders listed therein, Credit Suisse  First Boston (as successor to DLJ Capital Funding, Inc.) as syndication  agent, and Bank One NA, as administrative agent |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.6             |   | (17)                  |   | Third Amendment to the  Third Amended and Restated Credit Agreement dated as of March 31, 2003 among  DeCrane Aircraft Holdings, Inc., the lenders listed therein, Credit Suisse  First Boston (as successor to DLJ Capital Funding, Inc.) as syndication  agent, and Bank One NA, as administrative agent  |

 

69

----

 
| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit Description**                                                                                                                                                                                                                                                                                     |
|---------------------|--------|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.7             |   | *                     |   | Fourth Amendment to the  Third Amended and Restated Credit Agreement dated as of December 10, 2003  among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit  Suisse First Boston (as successor to DLJ Capital Funding, Inc.), as  syndication and administrative agent for the lenders |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.11               |   | (1)                   |   | General Terms Agreement  between The Boeing Company and PATS, Inc. dated February 17, 1998                                                                                                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.11.1             |   | (1)                   |   | Special Business  Provisions between The Boeing Company and PATS, Inc. dated February 17, 1998                                                                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.11.2             |   | (1)                   |   | Letter Agreement  between The Boeing Company and DeCrane Aircraft Holdings, Inc. dated January  15, 1999                                                                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.11.3             |   | (19)                  |   | Addendum 6-5723-03-064  to the Special Business Provisions between The Boeing Company and PATS, Inc.  dated April 16, 2003                                                                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.12               |   | *                     |   | Credit Agreement dated  as of December 22, 2003 among DeCrane Aircraft Holdings, Inc., the lenders  listed therein and Credit Suisse First Boston (acting through its Cayman  Islands Branch), as syndication and administrative agent for the lenders                                                      |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.19 **            |   | (5)                   |   | Amended Management  Incentive Stock Option Plan                                                                                                                                                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.20 **            |   | (5)                   |   | Amended Stock  Subscription Agreement                                                                                                                                                                                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.21 **            |   | (5)                   |   | Amended Incentive Bonus  Plan                                                                                                                                                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.23 **            |   | (17)                  |   | Form of Change of  Control Agreements between DeCrane Aircraft Holdings, Inc. and certain  executives                                                                                                                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 12.1                |   | *                     |   | Computation of Earnings  to Fixed Charges Ratios                                                                                                                                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 18                  |   | *                     |   | Letter regarding change  in accounting principle effective January 1, 2003                                                                                                                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 21.1                |   | *                     |   | List of Subsidiaries of  Registrant                                                                                                                                                                                                                                                                         |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 31.1                |   | *                     |   | Chief Executive Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 31.2                |   | *                     |   | Chief Financial Officer  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 32                  |   | *                     |   | Chief Executive Officer  and Chief Financial Officer Certifications Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                              |

 

----

*          Filed herewith.

 

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

 

(1)        Filed as an exhibit to ourRegistration Statement (Registration No. 333-70365) on Form S-1 (AmendmentNo. 1) filed with the Commission on March 3, 1999.

 

(2)        Filed as an exhibit to ourRegistration Statement (Registration No. 333-70365) on Form S-1 (AmendmentNo. 2) filed with the Commission on April 23, 1999.

 

(3)        Filed as an exhibit to ourRegistration Statement (Registration No. 333-70365) on Form S-1 (AmendmentNo. 3) filed with the Commission on May 6, 1999.

 

70

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(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 8-K dated May 11, 2000 filed with the Commission on May 25, 2000.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(17)      Filed as an exhibit to ourForm 10-K dated December 31, 2002 filed with the Commission onApril 15, 2003.

 

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

 

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

 

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

 

**(b)**       Reports of Form 8-K FiledDuring the Quarter Ended December 31, 2003

** **

On November 26, 2003 wefiled a Form 8-K Current Report regarding the Company receiving commitmentsfrom financial institutions for an $80.0 million syndicated second-lien termloan.

 

On December 11, 2003 wefiled a Form 8-K Current Report regarding the Company receiving requisitelender approval to permit the $80.0 million syndicated second-lien term loan.

 

On December 22, 2003 wefiled a Form 8-K Current Report regarding the Company completing the $80.0million syndicated second-lien term loan financing.

 

71

----

 

**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.

 

 
| **DECRANE  AIRCRAFT HOLDINGS, INC. (Registrant)** |                      |   |
|---------------------------------------------------|---------------------------|--------|
|                                              |                      |   |   |   |
| By:                                               | /s/  R. Jack DeCrane |   | By: | /s/  Richard J. Kaplan |
|                                              | R. Jack DeCrane           |   |   | Richard J. Kaplan |
|                                              | Chief Executive Officer   |   |   | Senior Vice President,  Chief Financial  Officer, Secretary and Treasurer |
|                                              |                      |   |   |   |
| Date:                                             | March 25, 2004            |   |   |   |

 

 

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 |   | Director          |
|   |                                |   |              |
| By:    | /s/   Richard J. Kaplan        |   | By:               | /s/  Susan C. Schnabel |
|   | Richard J. Kaplan                   |   | Susan C. Schnabel |
|   | Director                            |   | Director          |
|   |                                |   |              |
| By:    | /s/  Albert E. Suter           |   |              |                        |
|   | Albert E. Suter                     |   |              |
|   | Director                            |   |              |
|   |                                |   |              |
| Date:  | March 25, 2004                      |   |              |

 

72

----

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

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

 

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 AUDITORS**

 

 

To the Board of Directorsand Stockholder of

DeCrane AircraftHoldings, Inc.

 

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of DeCrane AircraftHoldings, Inc. and its subsidiaries at December 31, 2003 and 2002, and theresults of their operations and cash flows for each of the three years in theperiod ended December 31, 2003 in conformity with accounting principlesgenerally accepted in the United States of America.  In addition, in our opinion, the financial statement schedulelisted in the accompanying index presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

As discussed in Note 1,the Company decided to discontinue the use of program accounting for the costsof products manufactured for delivery under production-type contracts in2003.  As a result, certain deferredprogram costs are no longer included in inventory commencing January 1, 2003.

 

As discussed in Note 7,in 2002 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.

 

 
| PRICEWATERHOUSECOOPERS  LLP |
|-----------------------------|
| Los Angeles, California     |
|                        |
| March 25, 2004              |

 

F-2

----

 

**DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

 
|                                                                                                                                                         |   | **December  31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
| **(In thousands, except share data)**                                                                                                                        |   | **2003**          |       | **2002** |   |
|                                                                                                                                                         |   |              |       |   |   |
| **Assets**                                                                                                                                                   |   |              | ** ** |   | ** ** |
|                                                                                                                                                         |   |              |       |   |   |
| Current  assets:                                                                                                                                             |   |              |       |   |   |
| Cash  and cash equivalents                                                                                                                                   |   | $                 | 6,936      |   | $ | 12,421 |   |
| Accounts  receivable, net                                                                                                                                    |   | 21,455            |       | 26,354 |   |
| Inventories                                                                                                                                                  |   | 42,981            |       | 59,300 |   |
| Deferred  income taxes                                                                                                                                       |   | —            |       | 16,430 |   |
| Prepaid  expenses and other current assets                                                                                                                   |   | 1,082             |       | 1,724 |   |
| Assets  of discontinued operations                                                                                                                           |   | —            |       | 160,741 |   |
| Total  current assets                                                                                                                                        |   | 72,454            |       | 276,970 |   |
|                                                                                                                                                         |   |              |       |   |   |
| Property  and equipment, net                                                                                                                                 |   | 30,900            |       | 36,139 |   |
| Goodwill                                                                                                                                                     |   | 162,430           |       | 196,430 |   |
| Other  assets, principally intangibles, net                                                                                                                  |   | 38,092            |       | 39,428 |   |
| Total  assets                                                                                                                                                |   | $                 | 303,876    |   | $ | 548,967 |   |
|                                                                                                                                                         |   |              |       |   |   |
| **Liabilities, Mandatorily Redeemable Preferred Stock and  Stockholder’s Equity (Deficit)**                                                             |   |              | ** ** |   | ** ** |
|                                                                                                                                                         |   |              |       |   |   |
| Current  liabilities:                                                                                                                                        |   |              |       |   |   |
| Current  portion of long-term debt                                                                                                                           |   | $                 | 1,198      |   | $ | 16,317 |   |
| Accounts  payable                                                                                                                                            |   | 15,462            |       | 13,055 |   |
| Accrued  liabilities                                                                                                                                         |   | 17,890            |       | 31,494 |   |
| Liabilities  of discontinued operations                                                                                                                      |   | —            |       | 19,928 |   |
| Total  current liabilities                                                                                                                                   |   | 34,550            |       | 80,794 |   |
|                                                                                                                                                         |   |              |       |   |   |
| Long-term  debt                                                                                                                                              |   | 268,208           |       | 364,700 |   |
| Deferred  income taxes                                                                                                                                       |   | —            |       | 27,077 |   |
| Other  long-term liabilities                                                                                                                                 |   | 5,464             |       | 7,364 |   |
|                                                                                                                                                         |   |              |       |   |   |
| Commitments  and contingencies (Note 13)                                                                                                                     |   |              |       |   |   |
|                                                                                                                                                         |   |              |       |   |   |
| Mandatorily  redeemable preferred stock                                                                                                                      |   | 40,835            |       | 34,081 |   |
|                                                                                                                                                         |   |              |       |   |   |
| Stockholder’s  equity (deficit):                                                                                                                        |   |              |       |   |   |
| Common  stock, $.01 par value, 1,000 shares authorized as of December 31, 2003 and  2002; 100 shares issued and outstanding as of December 31, 2003 and 2002 |   | —            |       | — |   |
| Additional  paid-in capital                                                                                                                                  |   | 112,987           |       | 121,212 |   |
| Notes  receivable for shares sold                                                                                                                            |   | (1,268            | )          | (2,591 | ) |
| Accumulated  deficit                                                                                                                                         |   | (156,632          | )          | (83,309 | ) |
| Accumulated  other comprehensive loss                                                                                                                        |   | (268              | )          | (361 | ) |
| Total  stockholder’s equity (deficit)                                                                                                                   |   | (45,181           | )          | 34,951 |   |
| Total  liabilities, mandatorily redeemable preferred stock and stockholder’s equity  (deficit)                                                          |   | $                 | 303,876    |   | $ | 548,967 |   |

 

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

 

F-3

----

 

**DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

 
|                                                    |   | **Year Ended  December 31,** |    |
|---------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                                      |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                    |   |                         |    |   |   |   |   |
| Revenues                                                |   | $                            | 170,109 |   | $ | 229,841 |   | $ | 272,112 |   |
| Cost  of sales                                          |   | 134,953                      |    | 170,485 |   | 196,866 |   |
|                                                    |   |                         |    |   |   |   |   |
| Gross  profit                                           |   | 35,156                       |    | 59,356 |   | 75,246 |   |
|                                                    |   |                         |    |   |   |   |   |
| Operating  expenses:                                    |   |                         |    |   |   |   |   |
| Selling,  general and administrative expenses           |   | 24,896                       |    | 40,262 |   | 44,731 |   |
| Research  and development expenses                      |   | 10,440                       |    | 56 |   | 698 |   |
| Impairment  of goodwill                                 |   | 34,000                       |    | — |   | 8,583 |   |
| Amortization  of goodwill and other intangible assets   |   | 3,651                        |    | 3,540 |   | 12,436 |   |
| Total  operating expenses                               |   | 72,987                       |    | 43,858 |   | 66,448 |   |
|                                                    |   |                         |    |   |   |   |   |
| Income  (loss) from operations                          |   | (37,831                      | )       | 15,498 |   | 8,798 |   |
|                                                    |   |                         |    |   |   |   |   |
| Other  expenses:                                        |   |                         |    |   |   |   |   |
| Interest  expense                                       |   | 26,219                       |    | 25,376 |   | 29,645 |   |
| Loss  on extinguishment of debt                         |   | 1,439                        |    | — |   | — |   |
| Other  expenses, net                                    |   | 945                          |    | 505 |   | 634 |   |
|                                                    |   |                         |    |   |   |   |   |
| Loss  from continuing operations before income taxes    |   | (66,434                      | )       | (10,383 | ) | (21,481 | ) |
| Income  tax benefit                                     |   | 13,496                       |    | 3,621 |   | 3,933 |   |
|                                                    |   |                         |    |   |   |   |   |
| Loss  from continuing operations                        |   | (52,938                      | )       | (6,762 | ) | (17,548 | ) |
|                                                    |   |                         |    |   |   |   |   |
| Income  (loss) from discontinued operations, net of tax |   | (6,621                       | )       | (41,396 | ) | 3,546 |   |
| Cumulative  effect of changes in accounting principles  |   | (13,764                      | )       | (17,828 | ) | — |   |
|                                                    |   |                         |    |   |   |   |   |
| Net  loss                                               |   | (73,323                      | )       | (65,986 | ) | (14,002 | ) |
|                                                    |   |                         |    |   |   |   |   |
| Accrued  preferred stock dividends                      |   | (6,286                       | )       | (5,373 | ) | (4,593 | ) |
| Preferred  stock redemption value accretion             |   | (468                         | )       | (468 | ) | (468 | ) |
|                                                    |   |                         |    |   |   |   |   |
| Net  loss applicable to common stockholder              |   | $                            | (80,077 | ) | $ | (71,827 | ) | $ | (19,063 | ) |

 

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

 

F-4

----

 

**DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

 

**Consolidated Statements of Stockholder’s Equity(Deficit)**

 
|                                                                                                                                              |   |              |   |        |   | **Additional** |   | **Notes  Receivable** |   |              |   | **Accumulated  Other** |   |      |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|-------------|--------|----------------|--------|-----------------------|--------|-------------------|--------|------------------------|--------|-----------|--------|
|                                                                                                                                              |   | **Common  Stock** |   | **Paid-in** |   | **For Shares** |   | **Accumulated**       |   | **Comprehensive** |   |                   |   |
| **(In thousands, except share data)**                                                                                                             |   | **Shares**        |   | **Amount**  |   | **Capital**    |   | **Sold**              |   | **Deficit**       |   | **Loss**               |   | **Total** |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Balance,  December 31, 2000                                                                                                                       |   | 100               |   | $           | — |           | $      | 127,315               |   | $                 | (2,552 | )                      | $      | (3,321    | )      | $ | — |   | $ | 121,442 |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Comprehensive  loss:                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Net  loss                                                                                                                                         |   | —            |   | —      |   | —         |   | —                |   | (14,002           | )      | —                 |   | (14,002   | )      |
| Unrealized  loss on interest rate swap contract                                                                                                   |   | —            |   | —      |   | —         |   | —                |   | —            |   | (88                    | )      | (88       | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   | (14,090   | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Accrued  preferred stock dividends                                                                                                                |   | —            |   | —      |   | (4,593         | )      | —                |   | —            |   | —                 |   | (4,593    | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Preferred  stock redemption value accretion                                                                                                       |   | —            |   | —      |   | (468           | )      | —                |   | —            |   | —                 |   | (468      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Compensatory  stock option expense                                                                                                                |   | —            |   | —      |   | 215            |   | —                |   | —            |   | —                 |   | 215       |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Notes  receivable interest accrued                                                                                                                |   | —            |   | —      |   | —         |   | (116                  | )      | —            |   | —                 |   | (116      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Balance,  December 31, 2001                                                                                                                       |   | 100               |   | —      |   | 122,469        |   | (2,668                | )      | (17,323           | )      | (88                    | )      | 102,390   |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Comprehensive  loss:                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Net  loss                                                                                                                                         |   | —            |   | —      |   | —         |   | —                |   | (65,986           | )      | —                 |   | (65,986   | )      |
| Unrealized  loss on interest rate swap contract                                                                                                   |   | —            |   | —      |   | —         |   | —                |   | —            |   | (273                   | )      | (273      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   | (66,259   | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Capital  contribution                                                                                                                             |   | —            |   | —      |   | 5,000          |   | —                |   | —            |   | —                 |   | 5,000     |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Return  of capital in connection with the repurchase of common stock, net of related  note receivable repaid and tax benefit of options exercised |   | —            |   | —      |   | (554           | )      | 200                   |   | —            |   | —                 |   | (354      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Accrued  preferred stock dividends                                                                                                                |   | —            |   | —      |   | (5,373         | )      | —                |   | —            |   | —                 |   | (5,373    | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Preferred  stock redemption value accretion                                                                                                       |   | —            |   | —      |   | (468           | )      | —                |   | —            |   | —                 |   | (468      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Compensatory  stock option expense                                                                                                                |   | —            |   | —      |   | 138            |   | —                |   | —            |   | —                 |   | 138       |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Notes  receivable interest accrued                                                                                                                |   | —            |   | —      |   | —         |   | (123                  | )      | —            |   | —                 |   | (123      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Balance,  December 31, 2002                                                                                                                       |   | 100               |   | —      |   | 121,212        |   | (2,591                | )      | (83,309           | )      | (361                   | )      | 34,951    |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Comprehensive  income (loss):                                                                                                                     |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Net  loss                                                                                                                                         |   | —            |   | —      |   | —         |   | —                |   | (73,323           | )      | —                 |   | (73,323   | )      |
| Unrealized  gain on interest rate swap contract                                                                                                   |   | —            |   | —      |   | —         |   | —                |   | —            |   | 93                     |   | 93        |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   | (73,230   | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Common  stock (collateral) surrendered and cancellation of the related notes                                                                      |   | —            |   | —      |   | (1,471         | )      | 1,471                 |   | —            |   | —                 |   | —    |   |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Accrued  preferred stock dividends                                                                                                                |   | —            |   | —      |   | (6,286         | )      | —                |   | —            |   | —                 |   | (6,286    | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Preferred  stock redemption value accretion                                                                                                       |   | —            |   | —      |   | (468           | )      | —                |   | —            |   | —                 |   | (468      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Notes  receivable interest accrued                                                                                                                |   | —            |   | —      |   | —         |   | (148                  | )      | —            |   | —                 |   | (148      | )      |
|                                                                                                                                              |   |              |   |        |   |           |   |                  |   |              |   |                   |   |      |   |
| Balance,  December 31, 2003                                                                                                                       |   | 100               |   | $           | — |           | $      | 112,987               |   | $                 | (1,268 | )                      | $      | (156,632  | )      | $ | (268 | ) | $ | (45,181 | ) |

 

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

 

F-5

----

 

**DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

 
|                                                                                         |   | **Year Ended  December 31,** |       |
|----------------------------------------------------------------------------------------------|--------|------------------------------|------------|
| **(In  thousands)**                                                                          |   | **2003**                     |       | **2002** |   | **2001** |   |
|                                                                                         |   |                         |       |   |   |   |   |
| **Cash flows from operating activities:**                                                    |   |                         | ** ** |   | ** ** |   | ** ** |
| Net  loss                                                                                    |   | $                            | (73,323    | ) | $ | (65,986 | ) | $ | (14,002 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used for) operating  activities: |   |                         |       |   |   |   |   |
| Cumulative  effect of change in accounting principle                                         |   | 13,764                       |       | 17,828 |   | — |   |
| Net  (income) loss from discontinued operations                                              |   | 6,621                        |       | 41,396 |   | (3,546 | ) |
| Loss  on extinguishment of debt                                                              |   | 1,439                        |       | — |   | — |   |
| Noncash  portion of restructuring, asset impairment and other related charges                |   | 37,664                       |       | 11,456 |   | 19,558 |   |
| Depreciation  and amortization                                                               |   | 12,589                       |       | 13,304 |   | 22,582 |   |
| Deferred  income taxes                                                                       |   | (11,461                      | )          | 690 |   | 2,322 |   |
| Other,  net                                                                                  |   | 331                          |       | 110 |   | 389 |   |
| Changes  in assets and liabilities:                                                          |   |                         |       |   |   |   |   |
| Accounts  receivable                                                                         |   | 4,899                        |       | 14,969 |   | (5,508 | ) |
| Inventories                                                                                  |   | (518                         | )          | (4,792 | ) | (10,427 | ) |
| Prepaid  expenses and other assets                                                           |   | 241                          |       | 155 |   | (2,126 | ) |
| Accounts  payable                                                                            |   | 2,407                        |       | (1,458 | ) | 409 |   |
| Accrued  liabilities                                                                         |   | (13,496                      | )          | (16,418 | ) | (7,321 | ) |
| Income  taxes payable                                                                        |   | (1,079                       | )          | 438 |   | 3 |   |
| Other  long-term liabilities                                                                 |   | 834                          |       | 28 |   | (400 | ) |
| Net  cash provided by (used for) operating activities                                        |   | (19,088                      | )          | 11,720 |   | 1,933 |   |
|                                                                                         |   |                         |       |   |   |   |   |
| **Cash flows from investing activities:**                                                    |   |                         | ** ** |   | ** ** |   | ** ** |
| Net  cash proceeds from sale of Specialty Avionics Group                                     |   | 132,223                      |       | — |   | — |   |
| Proceeds  from sale of property and equipment                                                |   | 3,208                        |       | — |   | 636 |   |
| Capital  expenditures                                                                        |   | (4,797                       | )          | (4,356 | ) | (10,191 | ) |
| Cash  paid for acquisitions                                                                  |   | (606                         | )          | (5,890 | ) | (13,529 | ) |
| Net  cash provided by (used for) investing activities                                        |   | 130,028                      |       | (10,246 | ) | (23,084 | ) |
|                                                                                         |   |                         |       |   |   |   |   |
| **Cash flows from financing activities:**                                                    |   |                         | ** ** |   | ** ** |   | ** ** |
| Debt  borrowings:                                                                            |   |                         |       |   |   |   |   |
| First-lien  term debt                                                                        |   | —                       |       | — |   | 20,000 |   |
| Second-lien  term debt                                                                       |   | 80,000                       |       | — |   | — |   |
| Other  secured long-term debt                                                                |   | —                       |       | 1,145 |   | 2,797 |   |
| Capital  contribution                                                                        |   | —                       |       | 5,000 |   | — |   |
| Debt  repayments:                                                                            |   |                         |       |   |   |   |   |
| Revolving  line of credit, net                                                               |   | (6,000                       | )          | (6,000 | ) | (400 | ) |
| First-lien  term debt                                                                        |   | (183,679                     | )          | (11,506 | ) | (7,738 | ) |
| Other  secured long-term debt                                                                |   | (1,876                       | )          | (2,028 | ) | (1,401 | ) |
| Deferred  financing costs                                                                    |   | (6,614                       | )          | (1,656 | ) | (767 | ) |
| Return  of capital in connection with shares repurchased                                     |   | —                       |       | (368 | ) | — |   |
| Net  cash provided by (used for) financing activities                                        |   | (118,169                     | )          | (15,413 | ) | 12,491 |   |
|                                                                                         |   |                         |       |   |   |   |   |
| Net  cash provided by discontinued operations                                                |   | 1,744                        |       | 16,882 |   | 10,432 |   |
|                                                                                         |   |                         |       |   |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                        |   | (5,485                       | )          | 2,943 |   | 1,772 |   |
| Cash  and cash equivalents at beginning of period                                            |   | 12,421                       |       | 9,478 |   | 7,706 |   |
| Cash  and cash equivalents at end of period                                                  |   | $                            | 6,936      |   | $ | 12,421 |   | $ | 9,478 |   |

 

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

 

F-6

----

 

**DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

 

**Notesto Consolidated Financial Statements**

 

**Note 1.**                                  Summary ofSignificant Accounting Policies

 

**Description of the Business**

 

DeCrane AircraftHoldings, Inc. and subsidiaries (the “Company” or “DeCrane Aircraft”) is aprovider of products and services to the business, VIP and head-of-stateaircraft market within the aerospace industry. The Company’s businesses are organized into two separate operatinggroups: Cabin Management and Systems Integration.  The Company also had a third strategic business, its SpecialtyAvionics Group, which it sold in 2003 (Note 2).  The Company is a wholly-owned subsidiary of DeCrane Holdings Co.(“DeCrane Holdings”).

 

**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 and expensesduring the reporting periods.  Actualresults could differ from those estimates.

 

**Change in Accounting Principle**

** **

Inventories are stated at the lower of cost ormarket.  Costs include materials, labor,including direct engineering labor, tooling costs and manufacturingoverhead.  As described below,measurement of the costs of inventories associated with products manufacturedfor delivery under production-type contracts in prior periods was made pursuantto the use of program accounting.  Assuch, the cost of inventories included certain deferred program costs, whichwere principally comprised of engineering costs.

 

The events of September 11, 2001 and its aftermathhave impacted the predictability of demand for the Company’s business, VIP andhead-of-state aircraft products.  Theability to make reliable estimates of future demand for these products iscritical to the use of program accounting and the deferral of engineering andproduction costs.  Under programaccounting, certain product development costs incurred in connection withspecific contracted programs were deferred and charged to cost of sales whenrevenues from the sale of products related to the program were recorded.  Because of the changing economic conditionsaffecting the Company’s markets, demand for the Company’s products hasexhibited an increased degree of volatility not seen in the past.  In order to improve the reliability of itsfinancial reporting, the Company decided to discontinue the use of programaccounting which requires it to make long-term estimates of future sales foreach program.  Therefore, productdevelopment costs not specifically reimbursable through contractual terms orrecoverable through firm orders will no longer be deferred and included inprogram inventory.

 

F-7

----

 

 

The Company concluded that the new method ofaccounting for program costs is preferable based, in part, on theaforementioned improvement in the reliability of its financial reporting.  This new accounting method will also havethe advantage of enhancing investor understanding of the Company’s performancesince cash flows from operations will now more closely align with AdjustedEBITDA, the Company’s primary measurement of overall economic performance andreturn on invested capital.

 

This change in accounting policy was made afterconcluding the 2003 fiscal year but has been applied retroactively to thebeginning of the year, January 1, 2003, as required by generally acceptedaccounting principles.  As a result ofthe change, program-related product development costs are now classified as acomponent of research and development expenses in the consolidated financialstatements for 2003 rather than classified as a component of inventory cost.  The effect of this accounting change was toincrease the Company’s net loss by $17,942,000 through a charge for thecumulative effect of a change in accounting principle in 2003 of $13,764,000and increase by $4,178,000 the reported loss from continuing operations.

 

As a result of thechange, the Company has restated its quarterly results of operations for 2003(Note 19).  The following pro forma datasummarizes the results of operations for the years ended December 31, 2002and 2001 as if the new accounting policy had been in effect during those years.

 
|                             |   | **Year Ended  December 31,** |   |
|----------------------------------|--------|------------------------------|--------|
| **(In  thousands)**              |   | **2002**                     |   | **2001** |   |
|                             |   |                         |   |   |   |
| As  reported:                    |   |                         |   |   |   |
| Loss  from continuing operations |   | $                            | (6,762 | ) | $ | (17,548 | ) |
| Net  loss                        |   | (65,986                      | )      | (14,002 | ) |
|                             |   |                         |   |   |   |
| Pro  forma:                      |   |                         |   |   |   |
| Loss  from continuing operations |   | $                            | (9,738 | ) | $ | (19,423 | ) |
| Net  loss                        |   | (68,962                      | )      | (15,877 | ) |

 

**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.  Prior to January 1, 2003,inventories also included deferred program costs, which were principallycomprised of engineering costs relative to programs and contracts with longproduction cycles.

 

F-8

----

 

**Property and Equipment**

 

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

** **

**Goodwill**

 

Prior to January 1, 2002,goodwill was amortized on a straight-line basis over thirty years 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 is subject to atleast annual impairment testing with a loss charged to operations in the periodin which impairment occurs (Note 7).

** **

**Other Assets**

 

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

** **

**Impairment of Goodwill**

 

Effective January 1, 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, theCompany tests goodwill for impairment annually, on October 31st ofeach year, or when events or changes in circumstances indicate the carryingamount may not be recoverable.  Thegoodwill impairment model is a two-step process.  First, it requires a comparison of the book value of net assetsto the fair value of the related reporting units that have goodwill assigned tothem.  If the fair value is determinedto be less than book value, a second step is performed to compute the amount ofthe impairment.  In this process, a fairvalue for goodwill is estimated, based in part on the fair value of theoperations used in the first step, and is compared to its carrying value.  The amount by which carrying value exceedsfair value represents the amount of goodwill impairment.  As a result of this impairment testing, theCompany recorded pre-tax charges in 2003 of $34,000,000 relating to its CabinManagement Group and $7,500,000 relating to the sale of its Specialty AvionicsGroup.  In 2002, the Company recordedpre-tax charges of $7,672,000 relating to its Specialty Avionics Group.

 

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 be DisposedOf.”  In 2001, the Company recorded an$8,583,000 pre-tax charge to operations to reflect the impairment lossresulting from its restructuring program to close a manufacturing facility(Notes 3 and 7).

 

F-9

----

 

**Impairment of Long-Lived Assets and Other IntangibleAssets**

 

In accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” theCompany reviews long-lived assets held for use and intangible assets, otherthan goodwill, for impairment when events or changes in circumstances indicatethe carrying amount of an asset may not be recoverable.  In the event the sum of the expectedundiscounted future cash flows resulting from the use of the asset is less thanthe carrying value of the asset, an impairment loss equal to the excess of theasset’s carrying value over its fair value is recorded.  Long-lived assets deemed held for sale arestated at the lower of cost or fair value. As a result of two restructuring programs conducted during 2001 and2002, the Company recorded pre-tax charges of $1,320,000 during 2001 and$3,931,000 during 2002 to reflect the impairment of long-lived assets.  The impairment losses are described in Note3.

** **

**Product Warranty Obligations**

 

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

 

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

** **

**Income Taxes**

 

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**

 

The Company accounts forderivative financial instruments in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  SFAS No. 133requires companies to record derivatives on the balance sheet as assets orliabilities, measured at fair value.  Italso requires that gains or losses resulting from changes in the values ofthose derivatives be accounted for depending on the use of the derivative andwhether it qualifies for hedge accounting.

 

F-10

----

 

The Company does not usederivative financial instruments for trading purposes but only to manage therisk that changes in interest rates would have on future interest payments fora portion of its variable-rate debt.  Asof December 31, 2003, the Company has an interest rate swap contract toeffectively convert $3,102,000 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 $268,000 on this contract isdeferred in stockholder’s equity as a component of comprehensive income(loss).  The deferred loss will berecognized in future periods as interest expense as the related fixed-rateinterest payments are made.  In theunlikely event that the counterparty fails to perform under the contract, theCompany bears the credit risk that payments due to the Company may not becollected.

 

**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 subordinated debt wasapproximately $45,000,000 as of December 31, 2003 and $40,000,000 as of December 31,2002.  All other non-derivativefinancial instruments as of December 31, 2003 and 2002 approximate theircarrying amounts either because of the short maturity of the instrument, orbased on their effective interest rates compared to current market rates forsimilar long-term debt or obligations.

 

**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 reasonablyassured and there are no remaining significant obligations.

 

Revenues for productsmanufactured 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.  Costs include all direct material and labor costs and thoseindirect costs related to contract performance, such as indirect labor,supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense asincurred.

 

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

 

F-11

----

 

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. Commencing January 1, 2003, the Company changed its accounting policyfor product developments costs incurred for long-term programs and such costsare also reflected as research and development.  See “—Change in Accounting Principle” for additional information.

 

**Stock Option Plan**

** **

The Company has onestock-based employee compensation plan, which is more fully described in theNote 15.  As permitted under SFAS No.123, “Accounting for Stock-Based Compensation,” the Company measurescompensation expense related to the employee stock option plan utilizing theintrinsic value method as prescribed by Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost isreflected in net income (loss), as all options granted under the plan had anexercise price equal to the value of the underlying common stock on the date ofgrant.

 

The following tableillustrates the effect on net income if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employee compensation.

 
|                                                                                                                                           |   | **Year Ended  December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
| **(In  thousands)**                                                                                                                            |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                                                                                           |   |                         |    |   |   |   |   |
| Net  loss, as reported                                                                                                                         |   | $                            | (73,323 | ) | $ | (65,986 | ) | $ | (14,002 | ) |
| Less  total stock-based employee compensation expense determined under the fair  value based method for all awards, net of related tax effects |   | (324                         | )       | (376 | ) | (392 | ) |
| Pro  forma net loss                                                                                                                            |   | $                            | (73,647 | ) | $ | (66,362 | ) | $ | (14,394 | ) |

 

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

 

F-12

----

 

**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.

 

**Recent Accounting Pronouncements**

** **

*SFAS No. 150*

* *

In May 2003, theFinancial Accounting Standards Board issued SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 establishesstandards for the classification and measurement of certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 requires classification offinancial instruments within its scope as a liability, including financialinstruments issued in the form of shares that are mandatorily redeemable,because those financial instruments are deemed to be, in essence, obligationsof the issuer.  The Company will berequired to reclassify its 16% mandatorily redeemable preferred stock as aliability commencing January 1, 2004 and reflect quarterly dividend andredemption value accretion as a charge against pre-tax income in futureperiods.

 

**Note 2.**                                  Acquisitions andDispositions

** **

**Disposition of Specialty Avionics Group**

** **

During the fourth quarterof fiscal 2002 the Company assessed its long-term business strategies in lightof current aerospace industry conditions. The Company believes that as the aerospace industry recovers, the demandfor its Cabin Management and Systems Integration Groups’ products and servicesfor business, VIP and head-of-state aircraft will return to historical levelsand, accordingly, the Company decided to focus its resources in these marketsegments.  To accomplish this objective,the Company embarked on a plan to sell its Specialty Avionics Group, which ishighly dependent on the commercial airline industry.

 

On March 14, 2003, theCompany entered into a definitive agreement to sell its equity interests in thesubsidiaries comprising its Specialty Avionics Group to Wings Holdings, Inc.,an affiliate of Odyssey Investment Partners, LLC, for $140,000,000 incash.  The sale was consummated on May23, 2003.  Proceeds from the sale of$130,723,000 were used to repay first-lien credit facility borrowings (Note10).  The sale of the Specialty AvionicsGroup is not expected to affect the operations of the Company’s remainingoperating groups.

 

Based upon the fair valueof the group implied in the definitive agreement, the Company determined thatthe carrying value of the group’s net assets was not fully recoverable.  As required by SFAS No. 142, the Companyrecorded a goodwill impairment charge of $7,500,000 in 2003 to reduce thecarrying value to the estimated net realizable value established by thedefinitive agreement.  The Company recordeda modest $72,000 loss on the sale, based on the actual financial position ofthe group on the date of sale.

 

F-13

----

 

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

 

In accordance with theFinancial Accounting Standards Board’s Emerging Issues Task Force Issue No.87-24, “Allocation of Interest to Discontinued Operations,” as amended,interest expense includes interest on debt that is to be assumed by the buyeras well as interest on the $130,723,000 of debt that was required to be repaidas a result of the sale.  Interestexpense was based on the historical interest rates charged during each of theperiods.  In addition, and also inaccordance with EITF 87-24, costs and expenses of the Specialty Avionics Groupexclude the allocation of general corporate overhead.

 

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

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

 

F-14

----

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

 

----

(1)                      Reflects theresults of operations and cash flows through May 23, 2003, the date of sale.

 

F-15

----

 

**Contingent Acquisition Consideration**

 

During the three yearsended December 31, 2000, seven companies were acquired in transactions in whichthe sellers were entitled to contingent consideration payments based upon theirrespective levels of attainment of defined performance criteria.  Based upon the levels of attainment of thedefined performance criteria during the two years ended December 31, 2002, theCompany recorded contingent consideration payable of $600,000 in 2002 and$700,000 in 2001 resulting in a corresponding increase in goodwill.  As of December 31, 2002 and 2003, there areno remaining 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.

 

**Note 3.**                                  Restructuring, AssetImpairment and Other Related Charges

 

During the three yearsended December 31, 2003, the Company recorded restructuring, assets impairmentand other related charges as follows:

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

 

F-16

----

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

 

**Seating Product Line and Furniture ManufacturingFacilities Restructuring**

 

During the second quarterof fiscal 2003, the Company consolidated its seating product line offerings andadopted a restructuring plan to down-size a furniture manufacturing facility inresponse to continuing weakness in the business, VIP and head-of-state aircraftmarket.  These actions were designed toreduce engineering, production and inventory carrying costs by supporting fewerproduct offerings and achieve profitability at the furniture manufacturing facilitybased on its lower production levels. In connection with these actions, the Company recorded pre-tax chargesto operations totaling $7,132,000, comprised of the following:

 

•                  *Lease Termination and Related Charges. *Lease termination charges reflect lease cancellation costs for thefacilities vacated and possession returned to the lessor in connection withdown-sizing a furniture manufacturing facility.  Other related charges include the write-off of leaseholdimprovements related to the vacated facilities.

 

•                  *Excess and Obsolete Inventory Write-Downs. *Inventory was written down by $3,073,000 to reflect its net realizablevalue for quantities on hand exceeding current and forecast order backlogrequirements and obsolete inventory related to the curtailed seatingproduct offerings.

 

•                  *Severance and Other Compensation Costs. *The Company reduced its total workforce at the down-sized facility by49 employees, or 37%, from December 31, 2002 levels.

 

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

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

 

The restructuringactivities were completed during 2003.

 

F-17

----

 

**Asset Realignment Restructuring**

 

During the second quarterof 2001, the Company’s Cabin Management Group adopted a restructuring programto realign production programs between its manufacturing facilities.  In response to the adverse impact on 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 program in December 2001designed to reduce costs and conserve working capital.  This program included permanently closingone manufacturing facility and idling a second facility for an indefiniteperiod, curtailing several product development programs and institutingworkforce reductions.  Due to theongoing weakness of the business, VIP and head-of-state aircraft market, theCompany decided during the second quarter of fiscal 2002 to permanently closethe temporarily idled manufacturing facility. This program primarily affected the Company’s Cabin Management andSpecialty Avionics Groups.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-18

----

 

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

 
|                                                   |   | **Balance at  Beginning of** |   | **Total**   |   | **Amounts  Incurred** |   | **Balance at  End of** |    |
|--------------------------------------------------------|--------|------------------------------|--------|-------------|--------|-----------------------|--------|------------------------|---------|
| **(In thousands)**                                     |   | **the Year**                 |   | **Charges** |   | **Noncash**           |   | **Cash**               |    | **the Year** |   |
|                                                   |   |                         |   |        |   |                  |   |                   |    |   |   |
| *Year  ended December 31, 2002:*                       |   |                         |   |        |   |                  |   |                   |    |   |   |
|                                                   |   |                         |   |        |   |                  |   |                   |    |   |   |
| Severance  and other compensation costs                |   | $                            | 1,185  |        | $      | —                |   | $                      | —  |   | $ | (1,185 | ) | $ | — |   |
| Lease  termination and other related costs             |   | 424                          |   | —      |   | —                |   | (334                   | )       | 90 |   |
| Impairment  of property and equipment                  |   | —                       |   | 2,557       |   | (2,557                | )      | —                 |    | — |   |
| Excess  inventory write-downs                          |   | —                       |   | 1,265       |   | (1,265                | )      | —                 |    | — |   |
| Total                                                  |   | $                            | 1,609  |        | 3,822  |                  | $      | (3,822                 | )       | $ | (1,519 | ) | $ | 90 |   |
|                                                   |   |                         |   |        |   |                  |   |                   |    |   |   |
| Other  restructuring-related charges                   |   |                         |   | 3,079       |   |                  |   |                   |    |   |   |
| Total  pre-tax charges                                 |   |                         |   | $           | 6,901  |                  |   |                   |    |   |   |   |
|                                                   |   |                         |   |        |   |                  |   |                   |    |   |   |
| *Year  ended December 31, 2001:*                       |   |                         |   |        |   |                  |   |                   |    |   |   |
|                                                   |   |                         |   |        |   |                  |   |                   |    |   |   |
| Impairment  of long-lived assets:                      |   |                         |   |        |   |                  |   |                   |    |   |   |
| Goodwill                                               |   | $                            | — |        | $      | 8,583                 |   | $                      | (8,583  | ) | $ | — |   | $ | — |   |
| Property  and equipment                                |   | —                       |   | 1,320       |   | (1,320                | )      | —                 |    | — |   |
| Product  development cost write-offs                   |   | —                       |   | 7,908       |   | (7,908                | )      | —                 |    | — |   |
| Excess  inventory write-downs                          |   | —                       |   | 4,247       |   | (4,247                | )      | —                 |    | — |   |
| Realignment  of production programs between facilities |   | —                       |   | 3,902       |   | —                |   | (3,902                 | )       | — |   |
| Severance  and other compensation costs                |   | —                       |   | 2,024       |   | —                |   | (839                   | )       | 1,185 |   |
| Lease  termination and other related costs             |   | —                       |   | 674         |   | —                |   | (250                   | )       | 424 |   |
| Total                                                  |   | $                            | — |        | $      | 28,658                |   | $                      | (22,058 | ) | $ | (4,991 | ) | $ | 1,609 |   |

 

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

 

This restructuringprogram was completed during the fourth quarter of fiscal 2002.  The remaining balance of restructuring costsincludes lease termination and other exit costs.  The restructuring program related to leased facilities wascompleted during the second quarter of fiscal 2002; however, $90,000 of futurecash payments extend into 2003 due to lease payments on the vacated facilityand the incurrence of other exit costs. No future cash payment obligations related these restructuringactivities remains as of December 31, 2003.

 

F-19

----

 

**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 the permanentclosure of two facilities.  This programwas designed to improve manufacturing efficiencies and to further reduce costsand conserve working capital.  Inconnection with this restructuring program, the Company recorded pre-taxcharges to operations totaling $6,294,000 during 2002 for restructuring, assetimpairment 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.

 

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

 

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

 

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

 

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

 

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

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

 

This restructuringprogram was completed during the second quarter of fiscal 2002.  The remaining balance of restructuring costsincludes lease termination and other exit costs.  The manufacturing facilities were closed during June 2002;however, future cash payments extend beyond this date due to lease payments onthe vacated facilities and the incurrence of other exit costs.  No future cash payment obligations remain asof December 31, 2003.

 

F-20

----

 

**Adjustment of Previous Restructuring Charge**

** **

In December 1999, theCompany initiated a plan to reorganize and restructure the operations of two ofits subsidiaries within the Systems Integration Group.  The restructuring was a result of amanagement decision to exit the manufacturing business at these subsidiariesand consolidate and relocate operations into one facility to more efficientlyand effectively manage the business and be more competitive.

 

In connection with theserestructuring activities, the Company provided for lease termination costsexpected to be incurred over the remaining term of the existing long-term leaseat the facility being vacated following the restructuring. The expected costswere reduced by estimated sublease income which was based on estimated futuremarket rates and anticipated sublease rental periods.

 

During 2003, the initialsublease was canceled and the Company entered into a new subleaseagreement.  Due to the deterioration inmarket rates since 1999, the terms of the new sublease were less favorable thanthe initial one.  As a result, theCompany determined that its remaining accrual for lease termination costs wasinsufficient to cover the net costs expected to be incurred over the remaininglease term.  Consequently, an additional$754,000 was charged to operations during 2003 for these additional costs.  A payment obligation totaling $734,000remains as of December 31, 2003.  Thefuture cash payments will be funded from internally generated cash foroperations.

 

**Goodwill and Other Asset Impairment Related Charges**

** **

During the year endedDecember 31, 2003, the Company recorded $41,500,000 of goodwill impairmentcharges.  Impairment charges totaling$34,000,000 pertained to goodwill impairment testing pursuant to SFAS No. 142(Note 7) and were charged to continuing operations.  The remaining $7,500,000 pertained to thesale of the Specialty Avionics Group and was charged to discontinued operations(Notes 2 and 7).

 

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

 

**Note 4.**                                  Accounts Receivable

** **

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

 

Accounts receivable arenet of an allowance for doubtful accounts of $1,268,000 as ofDecember 31, 2003 and $1,205,000 as of December 31, 2002.

 

F-21

----

 

**Note 5.**                                  Inventories

 

Inventories are comprisedof the following as of December 31, 2003 and 2002:

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

 

As described in Note 1,the Company changed its accounting policy for program costs, electing toexpense such costs as incurred commencing January 1, 2003.

 

Total costs and estimatedearnings on all uncompleted contracts as of December 31, 2003 and 2002 arecomprised of the following:

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

 

**Note 6.**                                  Property andEquipment

 

Property and equipmentincludes the following as of December 31, 2003 and 2002:

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

 

F-22

----

 

Property and equipmentunder capital leases included above consists of the following as of December31, 2003 and 2002:

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

 

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

 

**Note 7.**                                  Goodwill

** **

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

 

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

 

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

 

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

 

During 2002, the Companycompleted the transitional impairment testing of goodwill recorded as ofJanuary 1, 2002 as required under SFAS No. 142.  Fair value of each reporting unit was determined using adiscounted cash flow approach taking into consideration projections based onthe individual characteristics of the reporting units, historical trends,market multiples for comparable businesses and independent appraisals.  Unallocated goodwill was allocated to thereporting units for impairment testing purposes.  The results indicated that the carrying value of goodwill wasimpaired.  The resulting impairment wasprimarily attributable to a change in the evaluation criteria for goodwillutilized under previous accounting guidance to the fair value approachstipulated in SFAS No. 142.  Inaccordance with the transitional provision of SFAS No. 142, the Companyrecorded a $17,828,000 noncash write-down of goodwill (net of $878,000 income taxbenefit) as of January 1, 2002 as a cumulative effect of a change in accountingprinciple.  An additional $39,322,000noncash write-down of goodwill pertained to the Specialty Avionics Group and isincluded in the loss from discontinued operations.

 

F-23

----

 

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

 
|                                                                |   | **Year Ended  December 31,** |    |
|---------------------------------------------------------------------|--------|------------------------------|---------|
| **(In  thousands)**                                                 |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                |   |                         |    |   |   |   |   |
| Reported  loss from continuing operations, net of tax               |   | $                            | (52,938 | ) | $ | (6,762 | ) | $ | (17,548 | ) |
| Add  back goodwill and assembled workforce amortization, net of tax |   | —                       |    | — |   | 6,681 |   |
| Adjusted  loss from continuing operations                           |   | $                            | (52,938 | ) | $ | (6,762 | ) | $ | (10,867 | ) |

 

Changes in the carryingamount of goodwill, by business segment (Note 17), for the two years endedDecember 31, 2003 are as follows:

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

 

During the fourth quarterof fiscal 2002, the Company performed its annual impairment testing andrecorded an additional $7,672,000 impairment charge related to the SpecialtyAvionics Group.  The charge resultedfrom a decrease in fair value due to further weakness during 2002 in thecommercial aircraft portion of our business. This charge is included as a component of income (loss) fromdiscontinued operations.

 

As described in Note 2,on March 14, 2003, the Company entered into a definitive agreement to sell itsequity interests in the subsidiaries comprising its Specialty AvionicsGroup.  Based upon the fair value of thegroup implied in the definitive agreement, the Company determined that thecarrying value of the group’s net assets was not fully recoverable.  As a result, the Company recorded a goodwillimpairment charge of $7,500,000 during the three months ended March 31, 2003 toreduce the carrying value to estimated net realizable value.

 

F-24

----

 

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

 

**Note 8.**                                  Other Assets,Principally Intangibles

 

Other assets arecomprised of the following as of December 31, 2003 and 2002:

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

 

**Identifiable Intangible Assets with Finite UsefulLives**

 

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

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

 

Estimated annualamortization expense for all identifiable intangible assets with finite usefullives for the five-year period ending December 31, 2008 is as follows:2004 – $3,644,000; 2005 – $3,477,000; 2006 – $2,275,000; 2007 – $2,175,000; and2008 – $2,171,000.

 

F-25

----

 

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

 

**Note 9.**                                  Accrued Liabilities

 

Accrued liabilities arecomprised of the following as of December 31, 2003 and 2002:

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

** **

**Accrued Product Warranty Obligations**

 

The following tablereflects the accrued product warranty obligation activity during the threeyears ended December 31, 2003.

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

 

F-26

----

 

**Note 10.**                           Long-Term Debt

** **

Long-term debt includesthe following amounts as of December 31, 2003 and 2002:

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

** **

**First-Lien Credit Facility**

** **

The credit facilityprovides, through a syndicate of lenders, for term debt borrowings in theinitial principal amount of $290,000,000 and a revolving line of credit forworking capital and to finance acquisitions. In March 2003, the credit facility was amended to permit the sale of theSpecialty Avionics Group and, in December 2003, the credit facility was furtheramended to permit the incurrence of $80,000,000 of second-lien term debt.

 

Net proceeds from thesale of the Specialty Avionics Group of $130,723,000 and the net proceeds fromthe second-lien term debt of $74,081,000 were used to repay first-lien creditfacility indebtedness.  As a result ofthe debt repayments, the Company recorded noncash charges of $3,494,000 to reflectthe write-off of deferred financing costs associated with the debt repaid.  In connection with debt repaid with theproceeds from the sale of the Specialty Avionics Group, $2,055,000 of such debtissuance costs were written off and are reflected in the loss from discontinuedoperations; the remaining $1,439,000 is reflected as a loss on theextinguishment of debt.

 

The March 2003 amendmentalso revised various financial covenants (which the Company would otherwisehave not been able to meet as of March 31, 2003), decreased by$10,000,000 the revolving line of credit commitment, increased the prime rateand LIBOR interest margins by 1.5% and permits the repurchase of a portion ofthe Company’s 12% subordinated notes with the proceeds from the sale of juniorsecurities.  The December 2003 amendmentfurther revised various financial covenants to permit the second-lien debt,extended the scheduled repayment dates of the remaining first-lien term debt by12 to 18 months, reduced the revolving credit commitment by an additional$16,000,000 and extended the commitment by 18 months.  Interest rates charged on the first-lien debt remained unchanged.

 

F-27

----

 

The revolving line ofcredit commitment is $24,000,000 as of December 31, 2003 and all borrowings underthe revolving facility must be repaid by March 31, 2006.  Term debt principal payments are due inincreasing amounts commencing December 31, 2005 and continue through December31, 2007.  Loans under the creditfacility generally bear interest based on a margin over, at the Company’soption, prime rate or LIBOR.  Themargins applicable to portions of amounts borrowed vary depending upon theCompany’s consolidated debt leverage ratio. Currently, the applicable margins are 4.00% to 4.75% for prime rate borrowingsand 5.25% to 6.00% for LIBOR borrowings. The weighted-average interest rate on all first-lien credit facilityborrowings outstanding was 6.85% as of December 31, 2003.  Borrowings under this credit facility aresecured by a first lien on 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.  The Company was incompliance with the covenants during the year ended December 31, 2003.

 

As of December 31, 2003,the Company had an irrevocable standby letter of credit in the amount of$250,000 issued and outstanding under the credit facility, which reducesborrowings available under the revolving line credit.

 

**Second-Lien Term Debt**

** **

In December 2003, theCompany received proceeds from second-lien term loans in the aggregate amountof $80,000,000 from a syndicate of lenders and used the net proceeds to repayfirst-lien credit facility indebtedness. The second-lien debt, which is comprised of $70,000,000 of fixed ratedebt and $10,000,000 of floating rate debt, matures on June 30, 2008.

 

The fixed rate debt bearsinterest at 15%; 12% payable quarterly in cash and 3% pay-in-kind or “accreted”interest, payable at maturity.  Thevariable rate debt bears cash interest, at the Company’s option, at prime rateplus 7.5% or LIBOR plus 8.5%, plus 3% pay-in-kind interest.  The weighted-average interest rate on allsecond-lien term debt outstanding was 14.71% as of December 31, 2003.  As of December 31, 2003, $67,000 ofpay-in-kind interest has accreted to the initial principal balance of the termdebt.  The term debt is secured by asecond lien on substantially all of the assets of the Company.  The Company is subject to customary feesunder the agreement as well as the maintenance of certain financial ratios,cash flow results and other restrictive covenants which are similar to thecovenants in the first-lien credit facility. The Company was in compliance with the covenants during the year endedDecember 31, 2003.

 

**12% Subordinated Notes**

** **

The subordinated notesmature on September 30, 2008 and interest is payable semi-annually on March 30,and September 30, of each year.  Thesubordinated notes are unsecured general obligations of the Company and aresubordinated in right of payment to substantially all existing and futuresenior indebtedness of the Company, including first-lien credit facility andsecond-lien term indebtedness.  Prior tomaturity, the Company may redeem all or some of the subordinated notes atdefined redemption prices, which may include a premium.  In the event of a change in control, theholders may require the Company to repurchase the subordinated notes for aredemption price that may also include a premium.  The Company is subject to restrictive covenants, including thepayment of dividends in cash.

 

F-28

----

 

**Aggregate Maturities**

 

The total annualmaturities of long-term debt outstanding as of December 31, 2003 are asfollows:

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

 

**Financial Condition and Liquidity**

 

The acts and ongoingthreats of global terrorism, the current military conflicts, health epidemicsand weak global economic conditions are all adversely impacting the Company’sbusiness.  In response, a series ofrestructuring activities have been implemented as described in Note 3 whichwere designed to reduce costs and conserve working capital.

 

Also, as described above,the first-lien credit facility was amended twice during 2003 and $80,000,000 ofsecond-lien debt was issued with the proceeds thereof used to repay first-lienindebtedness.  These actions, amongother things, resulted in debt maturities being extended and debt covenantsrelaxed.

 

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

 

F-29

----

 

**Note 11.**                           Income Taxes

 

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

 
|                                      |   | **Year Ended  December 31,** |    |
|-------------------------------------------|--------|------------------------------|---------|
| **(In  thousands)**                       |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                      |   |                         |    |   |   |   |   |
| Reported  by:                             |   |                         |    |   |   |   |   |
| Continuing  operations                    |   | $                            | (66,434 | ) | $ | (10,383 | ) | $ | (21,481 | ) |
| Discontinued  operations                  |   | (5,631                       | )       | 1,901 |   | 8,667 |   |
| Total                                     |   | $                            | (72,065 | ) | $ | (8,482 | ) | $ | (12,814 | ) |
|                                      |   |                         |    |   |   |   |   |
| Taxed  under the following jurisdictions: |   |                         |    |   |   |   |   |
| Domestic                                  |   | $                            | (71,657 | ) | $ | (7,381 | ) | $ | (12,236 | ) |
| Foreign                                   |   | (408                         | )       | (1,101 | ) | (578 | ) |
| Total                                     |   | $                            | (72,065 | ) | $ | (8,482 | ) | $ | (12,814 | ) |

 

The provisions for incometaxes (benefit) are as follows:

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

 

F-30

----

 

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)**                                                                |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                                               |   |                         |    |   |   |   |   |
| Income  tax (benefit) at U.S. statutory rates                                      |   | $                            | (25,223 | ) | $ | (2,969 | ) | $ | (4,485 | ) |
| Tax  effect of increases (decreases) resulting from:                               |   |                         |    |   |   |   |   |
| Book  benefit not provided for operating loss carryforwards                        |   | 12,402                       |    | — |   | — |   |
| Amortization  of assets and other expenses not deductible for income tax purposes  |   | 3,422                        |    | 2,927 |   | 5,477 |   |
| State  income taxes, net of federal benefit                                        |   | (3,143                       | )       | 467 |   | 265 |   |
| Lower  tax rates on earnings of foreign subsidiaries and foreign sales corporation |   | (64                          | )       | (8 | ) | (57 | ) |
| Other,  net                                                                        |   | 28                           |    | (63 | ) | (12 | ) |
| Income  tax (benefit) at effective rates                                           |   | $                            | (12,578 | ) | $ | 354 |   | $ | 1,188 |   |

 

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

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

 

F-31

----

 

As of December 31, 2003,the Company had a net deferred tax asset of $19,528,000, prior to recording thevaluation allowance; a net deferred tax liability existed in priorperiods.  The change to a net assetposition was primarily caused by the $34,000,000 goodwill impairment chargerecorded during fiscal 2003.  SFAS No.109, “Accounting for Income Taxes,” requires the recognition of a deferred taxasset for the future income tax benefit of goodwill deductions that will betaken for income tax purposes (i.e. the goodwill that has been written off inthe financial statements for book purposes will continue to be amortized anddeducted for tax purposes and, accordingly, represents a new deferred taxasset).

 

As required by SFAS No.109, the Company evaluated its deferred assets for expected recoverabilitybased on the nature of the item, the associated taxing jurisdictions, theapplicable expiration dates and future taxable income forecasts that wouldimpact utilization.  Since there is noloss carry back potential and the Company does not have any tax planningstrategies to assure recoverability, the only possibility for recovery of thenet deferred assets is future taxable income. Since there have been prior year losses, the Company believes it is notprudent to rely on future income as the means to support the carrying value ofthe net asset.  As a result of theevaluation, the Company recorded a $19,528,000 valuation allowance, eliminatingthe net deferred asset, as of December 31, 2003.

 

The Company had a netdeferred tax liability of $16,556,000 as of December 31, 2002.  The full realization of the deferred taxassets was achieved through the reversal of the deferred tax liabilities infuture periods.  As a result, avaluation allowance was not required for periods ending or prior to December31, 2002.

 

As of December 31, 2003,the Company has total loss carryforwards of approximately $55,472,000 forfederal income tax purposes and $60,985,000 for state income tax purposes.  The loss carryforwards are not subject tolimitations on their annual utilization (“Section 382 limitation,” as definedin the Internal Revenue Code) and therefore are available for utilization in2004 and future periods.  The federaland state loss carryforwards expire in varying amounts commencing in 2011 andcontinuing through 2023.

 

**Note 12.**                           Capital Structure

 

**Mandatorily Redeemable Preferred Stock**

 

The table belowsummarizes mandatorily redeemable preferred stock issued during the three yearsended December 31, 2003.

 
| **(In  thousands, except share data)**            |   | **Number  of  Shares** |   | **Mandatory  Redemption  Value** |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   |
|---------------------------------------------------|--------|------------------------|--------|----------------------------------|--------|-------------------------------------|--------|----------------------|--------|
|                                              |   |                   |   |                             |   |                                |   |                 |   |
| Balance,  December 31, 2000                       |   | 270,400                |   | $                                | 27,040 |                                | $      | (3,861               | )      | $ | 23,179 |   |
|                                              |   |                   |   |                             |   |                                |   |                 |   |
| Accrued  dividends and redemption value accretion |   | 45,930                 |   | 4,593                            |   | 468                                 |   | 5,061                |   |
| Balance,  December 31, 2001                       |   | 316,330                |   | 31,633                           |   | (3,393                              | )      | 28,240               |   |
|                                              |   |                   |   |                             |   |                                |   |                 |   |
| Accrued  dividends and redemption value accretion |   | 53,731                 |   | 5,373                            |   | 468                                 |   | 5,841                |   |
| Balance,  December 31, 2002                       |   | 370,061                |   | 37,006                           |   | (2,925                              | )      | 34,081               |   |
|                                              |   |                   |   |                             |   |                                |   |                 |   |
| Accrued  dividends and redemption value accretion |   | 62,858                 |   | 6,286                            |   | 468                                 |   | 6,754                |   |
| Balance,  December 31, 2003                       |   | 432,919                |   | $                                | 43,292 |                                | $      | (2,457               | )      | $ | 40,835 |   |

 

F-32

----

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.  Thepreferred stock is mandatorily redeemable on March 31, 2009.  Upon the occurrence of a change in control,as defined, each holder has the right to require DeCrane Aircraft to redeem allor part of such holder’s shares at a price equal to 101% of the liquidationpreference, plus accrued and unpaid cash dividends.

 

A portion of the proceedsfrom the sale of the preferred stock was ascribed to the value of the DeCraneHoldings common stock warrants issued in connection with the sale and wascredited to additional paid-in capital. The corresponding reduction in redemption value of the preferred stock,and related issuance costs, are recorded as an issuance discount and are beingamortized using the effective interest method through the preferred stockmandatory redemption date.

 

**Common Stock**

** **

DeCrane Aircraft has 100shares ($.01 par value) issued and outstanding as of December 31, 2003 and2002.  All of the shares are owned byDeCrane Holdings, DeCrane Aircraft’s parent company.

 

During 2002, DeCraneAircraft received additional cash capital contributions from DeCrane Holdingsaggregating $5,000,000 resulting from DeCrane Holdings’ sale of capitalstock.  The proceeds were used to fundworking capital requirements.

 

Also during 2002, DeCraneHoldings repurchased and canceled 18,743 common shares from former members ofthe Company’s management.  The formermanagement members also elected to exercise 9,252 vested stock options on acashless basis.  The $14,000 income taxbenefit associated with the stock options exercised was also credited toadditional paid-in capital.  Inconnection with the repurchase, a note receivable collateralized by therepurchased common stock was repaid. The Company returned $368,000 of paid-in capital to DeCrane Holdings tofund its cash requirements for these transactions.

 

**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 stockholder’s equity in theconsolidated statement of financial position.

 

F-33

----

 

The three transactions,which were based on the fair market value of the underlying securities asdetermined by the Board of Directors, resulted in loans for one-half of thetotal purchase price, were as follows:

 

•                  in December 1998, a group of relatedparty investors (Note 16) purchased mandatorily redeemable preferred and commonstock for $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.

 

During 2002, a notereceivable totaling $200,000, plus accrued interest, was repaid in connectionwith the repurchase of the common stock collateralizing the notereceivable.  During 2003, severalDeCrane Aircraft management members surrendered 107,330 shares of commonstock.  In accordance with the terms ofthe notes evidencing the loans, the Company canceled the notes.  The cancellation of the notes, whichaggregated $1,471,000, including accrued interest, was charged to additionalpaid-in capital.

 

**Note 13.         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 was attachedto the in-flight entertainment system installed on some of Swissair’s aircraftby one of the Company’s subsidiaries. The Company’s subsidiary has worked vigorously over the last five yearswith the CTSB investigators in the fact-finding investigation of thiscatastrophic incident.  On March 27,2003, the CTSB released its final report on its investigation.  This report indicated that the CTSB wasunable to conclusively determine the cause of the fire which led to the crashof the aircraft.

 

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

 

On September 22, 2003,the Company and its insurers entered into an agreement with Boeing, Swissairand each of their respective insurers, in which the Company received a releasefrom those parties and an indemnification by Boeing and Swissair’s insurersagainst claims asserted on behalf of passengers for compensatory damage and byothers for contribution and/or indemnity claims.  Company management believes the agreement adequately protects theCompany from all existing litigation pending against the Company arising fromthis catastrophic incident.  Punitivedamages are not subject to the indemnity; however, while some of the passengeractions originally asserted punitive damages, by virtue of a court order,claims for punitive damages may not be prosecuted.  The aforementioned agreement did not result in the Companyincurring a loss and, accordingly, no charge to operations was required.

 

F-34

----

 

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.

 

**Lease Commitments**

** **

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, 2003:

 
| **(In thousands)**                             |   | **Capital  Leases** |   | **Operating  Leases** |   |
|------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                           |   |                |   |                  |   |
| Year ending  December 31,                      |   |                |   |                  |   |
| 2004                                           |   | $                   | 786    |                  | $      | 2,937 |   |
| 2005                                           |   | 839                 |   | 2,656                 |   |
| 2006                                           |   | 595                 |   | 2,359                 |   |
| 2007                                           |   | 534                 |   | 1,481                 |   |
| 2008                                           |   | 368                 |   | 885                   |   |
| 2009 and  thereafter                           |   | 1,787               |   | 4,403                 |   |
| Total minimum  payments required               |   | 4,909               |   | $                     | 14,721 |   |
| Less amount  representing future interest cost |   | (1,534              | )      |                  |   |
| Recorded  obligation under capital leases      |   | $                   | 3,375  |                  |   |   |

 

Total rental expensecharged to operations was $2,911,000 for the year ended December 31, 2003,$3,083,000 for the year ended December 31, 2002 and $2,982,000 for the yearended December 31, 2001.

 

**Funding of DeCrane Holdings Preferred StockObligations**

** **

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

 

DeCrane Holdings’preferred stock dividends are payable quarterly at a rate of 14% perannum.  Prior to September 30, 2005,dividends are not paid in cash but instead accrete to the liquidation value ofthe preferred stock, which, in turn, increases the redemption obligation.  On or after September 30, 2005, preferredstock dividends are required to be paid in cash, if declared, and the preferredstock is mandatorily redeemable on September 30, 2009.  The DeCrane Holdings preferred stock has atotal redemption value of $71,402,000 as of December 31, 2003, includingaccumulated dividends.

 

F-35

----

 

**Note 14.         Consolidated Statements of Cash Flows**

** **

The following informationsupplements the Company’s consolidated statements of cash flows.

 
|                                                                                                             |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                                                                               |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                                                                             |   |                         |   |   |   |   |   |
| Components of  cash paid for acquisitions:                                                                       |   |                         |   |   |   |   |   |
| Contingent  consideration paid for previously completed acquisitions                                             |   | $                            | 600    |   | $ | 5,826 |   | $ | 17,075 |   |
| Cash purchase  price reductions received as a result of settling asserted claims against the  sellers (Note 2)   |   | —                       |   | — |   | (3,718 | ) |
| Additional  acquisition related expenses                                                                         |   | 6                            |   | 64 |   | 172 |   |
| Total cash paid  for acquisitions                                                                                |   | $                            | 606    |   | $ | 5,890 |   | $ | 13,529 |   |
|                                                                                                             |   |                         |   |   |   |   |   |
| Noncash  investing and financing transactions:                                                                   |   |                         |   |   |   |   |   |
| 16% mandatorily  redeemable preferred stock:                                                                     |   |                         |   |   |   |   |   |
| Dividends paid  by the issuance of additional shares                                                             |   | $                            | 6,286  |   | $ | 5,373 |   | $ | 4,593 |   |
| Redemption value  accretion                                                                                      |   | 468                          |   | 468 |   | 468 |   |
| Capital  expenditures financed with capital lease obligations                                                    |   | 14                           |   | 67 |   | 4,376 |   |
| Additional  acquisition contingent consideration earned and recorded as a liability                              |   | —                       |   | 600 |   | 3,825 |   |
| Interest accrued  during the period on loans to stockholders for the purchase of DeCrane  Holdings capital stock |   | 148                          |   | 123 |   | 116 |   |
|                                                                                                             |   |                         |   |   |   |   |   |
| Paid in cash:                                                                                                    |   |                         |   |   |   |   |   |
| Interest                                                                                                         |   | $                            | 25,973 |   | $ | 27,619 |   | $ | 34,904 |   |
| Income taxes  paid (refunded), net                                                                               |   | (225                         | )      | (91 | ) | 1,161 |   |

 

**Note 15.         Employee Benefit Plans**

** **

**Stock Based Incentive Compensation**

** **

*Management Incentive 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 thegranting of options to purchase a maximum of 356,257 common shares prior toexpiration in 2009.  The options aregranted at fair market value at the date of grant.  Substantially all of the options awarded become fully vested andexercisable eight years from the date of grant but vesting can be acceleratedbased upon future attainment of defined performance criteria.  In addition, the Compensation Committee mayauthorize alternate vesting schedules. The plan also provides for the acceleration of vesting upon theoccurrence of certain events, including, under certain circumstances, a changeof control.

 

F-36

----

 

During 2001, no optionswere granted under the plan and no additional shares from prior year grantsvested based on the required year 2001 performance criteria.  During 2002, options to purchase 15,000shares, with vesting over a three year period from the grant date, were grantedunder the plan and no additional shares from prior year grants vested based onthe required year 2002 performance criteria. During 2003, no options were granted under the plan and no additionalshares from prior year grants vested based on the required year 2003 performancecriteria.

 

The per share exercise priceof the options granted was equal to the fair market value of the common stockon each of the grant dates and, accordingly, no compensation expense wasrecognized during the three years ended December 31, 2003.

 

*Incentive Stock 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, 2003.

 

*Summary of All Stock Options*

* *

The following tablesummarizes all stock option activity during the three years endedDecember 31, 2003.

 
|                                          |   | **Year Ended  December 31,** |   |
|-----------------------------------------------|--------|------------------------------|--------|
|                                          |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                          |   | **Number  of  Shares**       |   | **Weighted-  Average  Exercise  Price** |   | **Number  of  Shares** |   | **Weighted-  Average  Exercise  Price** |   | **Number  of  Shares** |   | **Weighted-  Average  Exercise  Price** |   |
|                                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Options  outstanding at beginning of the year |   | 338,073                      |   | $ | 24.37 |   | 363,353 |   | $ | 24.82 |   | 386,869 |   | $ | 24.86 |   |
| Granted                                       |   | —                       |   | — |   | 15,000 |   | 27.00 |   | — |   | — |   |
| Exercised                                     |   | —                       |   | — |   | (9,252 | ) | 23.00 |   | — |   | — |   |
| Canceled                                      |   | (53,946                      | )      | 26.45 |   | (31,028 | ) | 31.32 |   | (23,516 | ) | 25.55 |   |
| Options  outstanding at end of the year       |   | 284,127                      |   | 23.97 |   | 338,073 |   | 24.37 |   | 363,353 |   | 24.82 |   |
|                                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Options  exercisable at end of the year       |   | 125,185                      |   | 23.56 |   | 138,546 |   | 23.66 |   | 139,051 |   | 23.82 |   |
|                                               |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-37

----

 

 

As of December 31, 2003,options to purchase 107,490 common shares remained available for grant underthe Management Incentive Stock Option Plan. The following table summarizes information about stock optionsoutstanding and stock options exercisable as of December 31, 2003.

 
|                       |   | **All  Options Outstanding** |   | **Number**            |   |
|----------------------------|--------|------------------------------|--------|-----------------------|--------|
|                       |   | **Number**                   |   |                  |   | **of Shares** |   |
|                       |   | **of Shares**                |   |                  |   | **Exercisable** |   |
|                       |   | **as of**                    |   | **Weighted-Average**  |   | **as of** |   |
|                       |   | **December  31,**            |   | **Remaining**         |   | **December  31,** |   |
|                       |   | **2003**                     |   | **Contractual  Life** |   | **2003** |   |
|                       |   |                         |   |                  |   |   |   |
| Per share  exercise price: |   |                         |   |                  |   |   |   |
| $23.00                     |   | 256,081                      |   | 5.94 years            |   | 117,630 |   |
| $27.00                     |   | 7,500                        |   | 8.35 years            |   | 2,500 |   |
| $35.00                     |   | 20,546                       |   | 6.93 years            |   | 5,055 |   |
| Total                      |   | 284,127                      |   | 6.07 years            |   | 125,185 |   |

 

For compensatory stockoptions granted to non-employees, the Company recognized compensation expenseof $138,000 for the year ended December 31, 2002 and $215,000 for the yearended December 31, 2001.

 

For non-compensatorystock options granted to employees, the Company uses APB Opinion No. 25 toaccount for stock-based compensation and, accordingly, no compensation expensewas recognized during the three years ended December 31, 2003.  The Company has adopted the disclosure-onlyprovisions of SFAS No. 123, as amended by SFAS No. 148 (Note 1).  For the purposes of the pro forma disclosurepresented in Note 1, the estimated fair value of the options is amortized overthe options’ vesting period.  The effectof applying SFAS No. 123 may not be representative of the pro forma effectin future years since additional options may be granted during those futureyears.

 

The fair value of theoptions was determined using the following assumptions:

 
|                                                              |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                              |   |     |   |     |   |     |   |
| Compensatory  options (1):                                        |   |     |   |     |   |     |   |
| Risk free  interest rates                                         |   | —   |   | 5.13     | %      | 5.35     | %      |
| Expected  dividend yield                                          |   | —   |   | —   |   | —   |   |
| Expected life                                                     |   | —   |   | 10 years |   | 10 years |   |
| Expected stock  price volatility                                  |   | —   |   | —   |   | —   |   |
|                                                              |   |     |   |     |   |     |   |
| Non-compensatory  options granted to employees and directors (2): |   |     |   |     |   |     |   |
| Risk free  interest rates                                         |   | —   |   | —   |   | —   |   |
| Expected  dividend yield                                          |   | —   |   | —   |   | —   |   |
| Expected life                                                     |   | —   |   | —   |   | —   |   |
| Weighted-average  fair value of options granted (per share)       |   | $        | — |     | $      | 10.96    |   | $ | — |   |
|                                                                   |        |          |        |          |        |          |        |  |  |  |

 

----

(1)       Usingthe Black Scholes option valuation model.

 

(2)       Usingthe minimum value method.

 

F-38

----

 

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, the existingmodels, as well as the minimum value method, do not necessarily provide areliable single measure of its employee stock options.  The Company determines the fair value of itscommon shares as of any given period-end date based on the aggregate enterprisevalue of DeCrane Holdings.  Enterprisevalue is computed based upon a multiple of Adjusted EBITDA, as reflected in itsfinancial statements, and the multiple is based upon comparable data from otherpublicly-held companies as well as publicly available information onprivately-held companies.

 

The minimum value method,which is an acceptable method for non-public companies, excludes stock pricevolatility.

 

**Management Stock 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 Note12.  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 $1,007,000 for the year endedDecember 31, 2002 and $1,767,000 for the year ended December 31, 2001; nomatching contributions were made during the year ended December 31, 2003.

 

F-39

----

 

**Note 16.         Related Party Transactions andInvestors’ Agreement**

** **

**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)**                               |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                             |   |                         |   |   |   |   |   |
| CSFB / DLJ:                                      |   |                         |   |   |   |   |   |
| Transaction and  advisory fees and expenses      |   | $                            | 9,375  |   | $ | 1,627 |   | $ | 520 |   |
| Management fees:                                 |   |                         |   |   |   |   |   |
| Charged to  operations during the period         |   | 350                          |   | 350 |   | 300 |   |
| Payable as of  period end                        |   | —                       |   | 125 |   | 375 |   |
|                                             |   |                         |   |   |   |   |   |
| Global  Technology Partners, LLC:                |   |                         |   |   |   |   |   |
| Promissory  notes:                               |   |                         |   |   |   |   |   |
| Receivable as of  period end, including interest |   | 594                          |   | 567 |   | 542 |   |
|                                                  |        |                              |        |  |  |  |  |  |  |  |

 

Each related party is described below.

 

*CSFB / DLJ*

* *

DLJ Merchant BankingPartners II, L.P. and affiliated funds own 97.1% 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. DLJ Merchant Banking Partners II, L.P. and affiliated funds are indirectaffiliates of Credit Suisse First Boston.

 

DLJ is represented on theBoard of Directors of both DeCrane Holdings and DeCrane Aircraft.  In addition, CSFB is involved inmarket-making activities for DeCrane Holding’s Class A $22.31 common stockwarrants and DeCrane Aircraft’s subordinated notes and may hold such securitiesfrom time to time.  CSFB is paid feesfor serving as the syndication agent and, commencing in 2003, administrativeagent for the lenders providing DeCrane Aircraft’s first-lien credit facilityand second-lien term debt.  In 2003,CSFB also received customary fees and reimbursement of expenses for serving asDeCrane Aircraft’s financial advisors for the sale of the Specialty AvionicsGroup.

 

*Global Technology Partners, LLC*

* *

Members of GlobalTechnology own 1.8% 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 suchshares to 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-40

----

 

**Investors’ Agreement**

** **

Investors owing 96.6% ofDeCrane Holdings’ issued and outstanding common stock and common stock warrantsand options, all of DeCrane Holdings’ preferred stock and all of DeCraneAircraft’s preferred and common stock, have entered into an Amended andRestated Investors’ Agreement, dated October 6, 2000, among DeCrane HoldingsCo., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities,Putnam Investment Management, Inc. and affiliated funds and entities and allmanagement investors.  Investors who ownDeCrane Holdings’ warrants to purchase 159,794 shares of common stock are not partiesto the Investors’ Agreement.  Theagreement provides that:

 

•                  The parties to the agreement shallvote their shares to cause DLJ Merchant Banking Partners, II, L.P. toselect all members of the Board of Directors of DeCrane Holdings and DeCraneAircraft, thereby giving them control over the Company’s operations.  At least one of such directors on each boardshall be an independent director.

 

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

 

•                  Parties to the agreement mayparticipate in some specific kinds of sales of shares by DLJ affiliates.

 

•                  DLJ affiliates may require the otherparties to the agreement to sell shares of DeCrane Holdings’ common stock insome cases should the DLJ affiliates choose to sell any such shares owned bythem.

 

•                  The DLJ affiliates may request sixdemand registrations with respect to all or any of the DeCrane Holdings commonstock, preferred stock and Class A warrants to purchase 155,000 common sharesheld by those affiliates, which are immediately exercisable subject tocustomary deferral and cutback provisions.

 

•                  The holders of Class B warrants topurchase 139,357 shares of DeCrane Holdings common stock may request two demandregistrations together with all or any common stock held by them, which areimmediately exercisable subject to customary deferral and cutback provisions.

 

•                  The parties to the agreement areentitled to unlimited piggyback registration rights, subject to customarycutback provisions, and excluding registrations of shares issuable inconnection with any employee stock options, employee benefit plan or anacquisition.

 

•                  DeCrane Holdings will indemnify thestockholders against some liabilities and expenses, including liabilities underthe Securities Act.

 

•                  Any person acquiring shares of commonstock or preferred stock who is required by the terms of the Investors’Agreement or any employment agreement or stock purchase, option, stock optionor other compensation plan to become a party thereto shall execute an agreementto become bound by the Investors’ Agreement.

 

F-41

----

 

**Note 17.         Business Segment Information**

** **

The Company suppliesproducts and services to the business, VIP and head-of-state aircraft marketwithin the aerospace industry.  TheCompany’s subsidiaries are organized into two groups, each of which is astrategic business that develops, manufactures and sells distinct products andservices.  The groups and a descriptionof their businesses are as follows:

 

•                  *CabinManagement –* manufactures interior cabin components, including cabininterior furnishings, cabin management systems, seating and compositecomponents;

 

•                  *SystemsIntegration –* manufactures auxiliary fuel systems and auxiliarypower units, provides system integration services, provides aircraft completionand refurbishment services and is a Boeing Business Jet authorized servicecenter.

 

In prior periods, theCompany’s Specialty Avionics Group was a third strategic business for whichsegment information was provided.  As aresult of the sale of the Specialty Avionics Group, this group is reflected asa discontinued operation and segment information for prior periods has beenrestated to exclude the group.

 

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

 

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

 

F-42

----

 

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

 

The accounting policiesof the groups are substantially the same as those described in the summary ofsignificant accounting policies (Note 1). Some transactions are recorded at the Company’s corporate headquartersand are not allocated to the groups, such as most of the Company’s cash andcash equivalents, debt and related net interest expense, corporate headquarterscosts and income taxes.

 

**Summary of Business by Segment**

** **
|                                      |   | **Year Ended  December 31,** |    |
|-------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                        |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                      |   |                         |    |   |   |   |   |
| Revenues:                                 |   |                         |    |   |   |   |   |
| Cabin Management                          |   | $                            | 119,000 |   | $ | 172,832 |   | $ | 206,052 |   |
| Systems  Integration                      |   | 51,687                       |    | 58,051 |   | 67,528 |   |
| Inter-group  elimination (1)              |   | (578                         | )       | (1,042 | ) | (1,468 | ) |
| Consolidated  totals                      |   | $                            | 170,109 |   | $ | 229,841 |   | $ | 272,112 |   |
|                                      |   |                         |    |   |   |   |   |
| Revenues from  significant customers (2): |   |                         |    |   |   |   |   |
| Cabin Management                          |   | $                            | 50,297  |   | $ | 94,014 |   | $ | 108,737 |   |
| Systems  Integration                      |   | 28,508                       |    | 35,388 |   | 46,138 |   |
| Consolidated totals                       |   | $                            | 78,805  |   | $ | 129,402 |   | $ | 154,875 |   |
|                                      |   |                         |    |   |   |   |   |
| Adjusted EBITDA  (as defined):            |   |                         |    |   |   |   |   |
| Cabin Management                          |   | $                            | 8,978   |   | $ | 32,644 |   | $ | 45,554 |   |
| Systems  Integration                      |   | 11,020                       |    | 18,084 |   | 17,152 |   |
| Corporate (3)                             |   | (5,488                       | )       | (6,072 | ) | (7,125 | ) |
| Inter-group  elimination (4)              |   | 110                          |    | 9 |   | (62 | ) |
| Consolidated  totals (5)                  |   | 14,620                       |    | 44,665 |   | 55,519 |   |
| Reconciling  items (6)                    |   | (87,943                      | )       | (110,651 | ) | (69,521 | ) |
| Net loss                                  |   | $                            | (73,323 | ) | $ | (65,986 | ) | $ | (14,002 | ) |
|                                      |   |                         |    |   |   |   |   |
| Depreciation and  amortization:           |   |                         |    |   |   |   |   |
| Cabin Management                          |   | $                            | 6,335   |   | $ | 6,695 |   | $ | 14,607 |   |
| Systems  Integration                      |   | 2,770                        |    | 2,956 |   | 4,346 |   |
| Corporate                                 |   | 676                          |    | 961 |   | 1,411 |   |
| Consolidated  totals (7)                  |   | $                            | 9,781   |   | $ | 10,612 |   | $ | 20,364 |   |

 

----

The notes appear on thenext page.

 

F-43

----

 

**Summary of Business by Geographical Area**

** **
|                                                      |   | **Year Ended  December 31,** |    |
|-----------------------------------------------------------|--------|------------------------------|---------|
| **(In thousands)**                                        |   | **2003**                     |    | **2002** |   | **2001** |   |
|                                                      |   |                         |    |   |   |   |   |
| Total assets (as  of period end):                         |   |                         |    |   |   |   |   |
| Cabin Management                                          |   | $                            | 224,116 |   | $ | 281,655 |   | $ | 311,476 |   |
| Systems  Integration                                      |   | 58,395                       |    | 62,437 |   | 76,312 |   |
| Corporate (8)                                             |   | 21,456                       |    | 44,247 |   | 35,627 |   |
| Inter-group  elimination (9)                              |   | (91                          | )       | (113 | ) | (143 | ) |
| Continuing  operations                                    |   | 303,876                      |    | 388,226 |   | 423,272 |   |
| Discontinued  operations (Specialty Avionics)             |   | —                       |    | 160,741 |   | 222,439 |   |
| Consolidated  totals                                      |   | $                            | 303,876 |   | $ | 548,967 |   | $ | 645,711 |   |
|                                                      |   |                         |    |   |   |   |   |
| Capital  expenditures:                                    |   |                         |    |   |   |   |   |
| Cabin Management                                          |   | $                            | 4,216   |   | $ | 3,829 |   | $ | 6,579 |   |
| Systems  Integration                                      |   | 555                          |    | 478 |   | 3,371 |   |
| Corporate                                                 |   | 26                           |    | 49 |   | 241 |   |
| Consolidated  totals (10)                                 |   | $                            | 4,797   |   | $ | 4,356 |   | $ | 10,191 |   |
| Consolidated net  revenues to unaffiliated customers (11) |   |                         |    |   |   |   |   |
| United States                                             |   | $                            | 159,052 |   | $ | 222,401 |   | $ | 268,981 |   |
| Mexico                                                    |   | 11,057                       |    | 7,440 |   | 3,131 |   |
| Consolidated  totals                                      |   | $                            | 170,109 |   | $ | 229,841 |   | $ | 272,112 |   |
|                                                      |   |                         |    |   |   |   |   |
| Consolidated  long-lived assets (12):                     |   |                         |    |   |   |   |   |
| United States                                             |   | $                            | 28,786  |   | $ | 34,420 |   | $ | 40,369 |   |
| Mexico                                                    |   | 2,114                        |    | 1,719 |   | 2,291 |   |
| Consolidated  totals                                      |   | $                            | 30,900  |   | $ | 36,139 |   | $ | 42,660 |   |

 

----

**Notes**

 

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

 

(2)                      Threecustomers each accounted for more than 10% of the Company’s consolidatedrevenues during the three years ended December 31, 2003 as shown in the tablebelow.  Complete loss of any of thesecustomers could have a significant adverse impact on the results of operationsexpected in future periods.

 
|                 |   | **Year Ended  December 31,** |   |
|----------------------|--------|------------------------------|--------|
| **(In thousands)**   |   | **2003**                     |   | **2002** |   | **2001** |   |
|                 |   |                         |   |   |   |   |   |
| Boeing (b)           |   | $                            | 29,815 |   | $ | 35,427 |   | $ | 43,836 |   |
| Textron (a)          |   | 27,578                       |   | 54,017 |   | 55,522 |   |
| Bombardier (b)       |   | 21,412                       |   | 39,958 |   | 55,517 |   |
| Consolidated  totals |   | $                            | 78,805 |   | $ | 129,402 |   | $ | 154,875 |   |

 

All operating groupsderived revenues from each of the customers during each of the years in thethree years ended December 31. 2003.

 

(3)                      Reflects theCompany’s corporate headquarters costs and expenses not allocated to thegroups.

 

(4)                      Reflectselimination of the effect of inter-group profits in inventory.

 

F-44

----

 

(5)                      AdjustedEBITDA (as defined) for the year ended December 31, 2003 was reduced by$8,124,000 for Cabin Management and $2,316,000 for Systems Integration as aresult of the Company’s change in accounting policy for program costs as morefully described in Note 1—Change in Accounting Principle.  

 

(6)                      AdjustedEBITDA (as defined) excludes the following charges reflected in the Company’sfinancial statements which are prepared in accordance with generally acceptedaccounting principles:

 
|                                                       |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------|--------|------------------------------|--------|
| **(In thousands*****)***                                   |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                       |   |                         |   |   |   |   |   |
| Restructuring,  asset impairment and other related charges |   | $                            | 41,886 |   | $ | 17,255 |   | $ | 25,834 |   |
| Depreciation and  amortization of long-lived assets (7)    |   | 9,781                        |   | 10,612 |   | 20,364 |   |
| Acquisition  related charges not capitalized               |   | 784                          |   | 1,162 |   | 308 |   |
| Other noncash  charges                                     |   | —                       |   | 138 |   | 215 |   |
| Interest expense                                           |   | 26,219                       |   | 25,376 |   | 29,645 |   |
| Loss on  extinguishment of debt                            |   | 1,439                        |   | — |   | — |   |
| Other expenses,  net                                       |   | 945                          |   | 505 |   | 634 |   |
| Income tax  benefit                                        |   | (13,496                      | )      | (3,621 | ) | (3,933 | ) |
| (Income) loss  from discontinued operations, net of tax    |   | 6,621                        |   | 41,396 |   | (3,546 | ) |
| Cumulative  effect of change in accounting principle       |   | 13,764                       |   | 17,828 |   | — |   |
| Total  reconciling items                                   |   | $                            | 87,943 |   | $ | 110,651 |   | $ | 69,521 |   |

 

(7)                      Reflectsdepreciation and amortization of long-lived assets, goodwill (for periods priorto the January 1, 2002 adoption of SFAS No. 142), other intangible assets anddeferred financing costs, which are classified as a component of interestexpense, as follows:

 
|                                                |   | **Year Ended  December 31,** |   |
|-----------------------------------------------------|--------|------------------------------|--------|
| **(In thousands)**                                  |   | **2003**                     |   | **2002** |   | **2001** |   |
|                                                |   |                         |   |   |   |   |   |
| Depreciation and  amortization of long-lived assets |   | $                            | 9,781  |   | $ | 10,612 |   | $ | 20,364 |   |
| Amortization of  deferred financing costs           |   | 2,808                        |   | 2,692 |   | 2,218 |   |
| Consolidated  depreciation and amortization         |   | $                            | 12,589 |   | $ | 13,304 |   | $ | 22,582 |   |

 

(8)                      Reflects theCompany’s corporate headquarters assets, excluding investments in and notesreceivable from subsidiaries.

 

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

 

(10)                Reflects capitalexpenditures paid in cash.  Excludescapital expenditures financed with capital lease obligations of $14,000 for theyear ended December 31, 2003, $67,000 for the year ended December 31, 2002 and$4,376,000 for the year ended December 31, 2001.

 

(11)                Allocated on thebasis of the location of the subsidiary originating the sale.

 

(12)                Allocated on thebasis of the location of the subsidiary and consists of the Company’s propertyand equipment.  Corporate long-livedassets are included with the United States assets.

 

F-45

----

 

**Note 18.         Supplemental Condensed ConsolidatingFinancial Information**

** **

In conjunction with the12% subordinated notes described in Note 10, the following condensedconsolidating financial information is presented segregating the Company, asthe issuer, and the 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 notes.  The non-guarantor subsidiaries are companieswithin the Specialty Avionics Group which was sold in May 2003 and is thereforeclassified as a component of discontinued operations.

 

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

 

(1)                      Eliminationof investments in subsidiaries.

 

(2)                      Eliminationof intercompany accounts.

 

(3)                      Eliminationof equity in earnings of subsidiaries.

 

F-46

----

 

**BalanceSheets**

 
|                                                                                                |   | **December  31, 2003** |    |
|-----------------------------------------------------------------------------------------------------|--------|------------------------|---------|
| **(In thousands)**                                                                                  |   | **Issuer**             |    | **Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| **Assets**                                                                                          |   |                   |    |   |   |   |   |   |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| Current assets:                                                                                     |   |                   |    |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                          |   | $                      | 6,540   |   | $ | 396 |   | $ | — |   | $ | 6,936 |   |
| Accounts  receivable, net                                                                           |   | —                 |    | 21,455 |   | — |   | 21,455 |   |
| Inventories                                                                                         |   | —                 |    | 42,981 |   | — |   | 42,981 |   |
| Other current  assets                                                                               |   | 254                    |    | 828 |   | — |   | 1,082 |   |
| Total current  assets                                                                               |   | 6,794                  |    | 65,660 |   | — |   | 72,454 |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| Property and  equipment, net                                                                        |   | 1,047                  |    | 29,853 |   | — |   | 30,900 |   |
| Other assets,  principally goodwill                                                                 |   | 13,615                 |    | 186,907 |   | — |   | 200,522 |   |
| Investments in  subsidiaries                                                                        |   | 85,668                 |    | — |   | (85,668 | )(1) | — |   |
| Intercompany  receivables                                                                           |   | 261,631                |    | 100,642 |   | (362,273 | )(2) | — |   |
| Total assets                                                                                        |   | $                      | 368,755 |   | $ | 383,062 |   | $ | (447,941 | ) | $ | 303,876 |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholder’s Equity (Deficit)**    |   |                   |    |   |   |   |   |   |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| Current  liabilities:                                                                               |   |                   |    |   |   |   |   |   |   |
| Current portion  of long-term debt                                                                  |   | $                      | 11      |   | $ | 1,187 |   | $ | — |   | $ | 1,198 |   |
| Other current  liabilities                                                                          |   | 8,532                  |    | 24,820 |   | — |   | 33,352 |   |
| Total current  liabilities                                                                          |   | 8,543                  |    | 26,007 |   | — |   | 34,550 |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| Long-term debt,  less current portion                                                               |   | 260,654                |    | 7,554 |   | — |   | 268,208 |   |
| Intercompany  payables                                                                              |   | 100,642                |    | 261,631 |   | (362,273 | )(2) | — |   |
| Other long-term  liabilities                                                                        |   | 2,994                  |    | 2,470 |   | — |   | 5,464 |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| Mandatorily  redeemable preferred stock                                                             |   | 40,835                 |    | — |   | — |   | 40,835 |   |
|                                                                                                |   |                   |    |   |   |   |   |   |   |
| Stockholder’s  equity (deficit):                                                               |   |                   |    |   |   |   |   |   |   |
| Paid-in capital                                                                                     |   | 111,719                |    | 151,492 |   | (151,492 | )(1) | 111,719 |   |
| Retained  earnings (deficit)                                                                        |   | (156,632               | )       | (65,824 | ) | 65,824 | (1) | (156,632 | ) |
| Accumulated  other comprehensive loss                                                               |   | —                 |    | (268 | ) | — |   | (268 | ) |
| Total  stockholder’s equity (deficit)                                                          |   | (44,913                | )       | 85,400 |   | (85,668 | ) | (45,181 | ) |
| Total  liabilities, mandatorily redeemable preferred stock and stockholder’s equity  (deficit) |   | $                      | 368,755 |   | $ | 383,062 |   | $ | (447,941 | ) | $ | 303,876 |   |

 

F-47

----

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

 

F-48

----

 

**Statementsof Operations**

 
|                                                 |   | **Year Ended December 31, 2003** |    |
|------------------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                       |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Revenues                                             |   | $                                | —  |   | $ | 170,109 |   | $ | — |   | $ | — |   | $ | 170,109 |   |
| Cost of sales                                        |   | —                           |    | 134,953 |   | — |   | — |   | 134,953 |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Gross profit                                         |   | —                           |    | 35,156 |   | — |   | — |   | 35,156 |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses        |   | 6,948                            |    | 17,948 |   | — |   | — |   | 24,896 |   |
| Research and  development expenses                   |   | —                           |    | 10,440 |   | — |   | — |   | 10,440 |   |
| Impairment of goodwill                               |   | —                           |    | 34,000 |   | — |   | — |   | 34,000 |   |
| Amortization of  intangible assets                   |   | —                           |    | 3,651 |   | — |   | — |   | 3,651 |   |
| Interest expense                                     |   | 25,708                           |    | 511 |   | — |   | — |   | 26,219 |   |
| Loss on  extinguishment of debt                      |   | 1,439                            |    | — |   | — |   | — |   | 1,439 |   |
| Intercompany  charges                                |   | (25,819                          | )       | 25,819 |   | — |   | — |   | — |   |
| Equity in loss  of subsidiaries                      |   | 55,404                           |    | 218 |   | — |   | (55,622 | )(3) | — |   |
| Other expenses,  net                                 |   | 466                              |    | 479 |   | — |   | — |   | 945 |   |
| Provision for  income taxes (benefit)                |   | 9,177                            |    | (22,673 | ) | — |   | — |   | (13,496 | ) |
| Loss from  discontinued operations                   |   | —                           |    | 6,403 |   | 218 |   | — |   | 6,621 |   |
| Cumulative  effect of change in accounting principle |   | —                           |    | 13,764 |   | — |   | — |   | 13,764 |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                | (73,323 | ) | $ | (55,404 | ) | $ | (218 | ) | $ | 55,622 |   | $ | (73,323 | ) |

 
|                                                 |   | **Year Ended  December 31, 2002** |    |
|------------------------------------------------------|--------|-----------------------------------|---------|
| **(In  thousands)**                                  |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Revenues                                             |   | $                                 | —  |   | $ | 229,841 |   | $ | — |   | $ | — |   | $ | 229,841 |   |
| Cost of sales                                        |   | —                            |    | 170,485 |   | — |   | — |   | 170,485 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Gross profit                                         |   | —                            |    | 59,356 |   | — |   | — |   | 59,356 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses        |   | 11,206                            |    | 29,056 |   | — |   | — |   | 40,262 |   |
| Research and  development expenses                   |   | —                            |    | 56 |   | — |   | — |   | 56 |   |
| Amortization of  intangible assets                   |   | —                            |    | 3,540 |   | — |   | — |   | 3,540 |   |
| Interest expense                                     |   | 20,583                            |    | 4,793 |   | — |   | — |   | 25,376 |   |
| Intercompany  charges                                |   | (24,309                           | )       | 24,309 |   | — |   | — |   | — |   |
| Equity in loss  of subsidiaries                      |   | 55,833                            |    | 9,535 |   | — |   | (65,368 | )(3) | — |   |
| Other expenses,  net                                 |   | 495                               |    | 10 |   | — |   | — |   | 505 |   |
| Provision for  income taxes (benefit)                |   | 694                               |    | (4,315 | ) | — |   | — |   | (3,621 | ) |
| Loss from  discontinued operations                   |   | —                            |    | 31,861 |   | 9,535 |   | — |   | 41,396 |   |
| Cumulative  effect of change in accounting principle |   | 1,484                             |    | 16,344 |   | — |   | — |   | 17,828 |   |
|                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                 | (65,986 | ) | $ | (55,833 | ) | $ | (9,535 | ) | $ | 65,368 |   | $ | (65,986 | ) |

 

F-49

----

 
|                                          |   | **Year Ended December 31, 2001** |    |
|-----------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                            |   | **Issuer**                       |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Revenues                                      |   | $                                | —  |   | $ | 272,112 |   | $ | — |   | $ | — |   | $ | 272,112 |   |
| Cost of sales                                 |   | —                           |    | 196,866 |   | — |   | — |   | 196,866 |   |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                           |    | 75,246 |   | — |   | — |   | 75,246 |   |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses |   | 11,840                           |    | 32,891 |   | — |   | — |   | 44,731 |   |
| Research and  development expenses            |   | —                           |    | 698 |   | — |   | — |   | 698 |   |
| Impairment of  goodwill                       |   | —                           |    | 8,583 |   | — |   | — |   | 8,583 |   |
| Amortization of  intangible assets            |   | 202                              |    | 12,234 |   | — |   | — |   | 12,436 |   |
| Interest expense                              |   | 29,357                           |    | 288 |   | — |   | — |   | 29,645 |   |
| Intercompany  charges                         |   | (23,815                          | )       | 23,815 |   | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries           |   | (1,259                           | )       | (115 | ) | — |   | 1,374 | (3) | — |   |
| Other expenses,  net                          |   | 361                              |    | 273 |   | — |   | — |   | 634 |   |
| Provision for  income tax benefit             |   | (2,684                           | )       | (1,249 | ) | — |   | — |   | (3,933 | ) |
| Income from  discontinued operations          |   | —                           |    | (3,431 | ) | (115 | ) | — |   | (3,546 | ) |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Net income  (loss)                            |   | $                                | (14,002 | ) | $ | 1,259 |   | $ | 115 |   | $ | (1,374 | ) | $ | (14,002 | ) |

 

F-50

----

 

**Statementsof Cash Flows**

 
|                                                  |   | **Year Ended  December 31, 2003** |    |
|-------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                    |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from operating activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                              |   | $                                 | (73,323 | ) | $ | (55,404 | ) | $ | (218 | ) | $ | 55,622 | (3) | $ | (73,323 | ) |
| Noncash  adjustments:                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Cumulative  effect of change in accounting principle  |   | —                            |    | 13,764 |   | — |   | — |   | 13,764 |   |
| Loss from  discontinued operations                    |   | —                            |    | 6,403 |   | 218 |   | — |   | 6,621 |   |
| Equity in loss  of subsidiaries                       |   | 55,404                            |    | 218 |   | — |   | (55,622 | )(3) | — |   |
| Other noncash  adjustments                            |   | (6,835                            | )       | 47,397 |   | — |   | — |   | 40,562 |   |
| Changes in  working capital                           |   | 3,441                             |    | (10,153 | ) | — |   | — |   | (6,712 | ) |
| Net cash  provided by (used for) operating activities |   | (21,313                           | )       | 2,225 |   | — |   | — |   | (19,088 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Net proceeds  from sale of Specialty Avionics Group   |   | 132,223                           |    | — |   | — |   | — |   | 132,223 |   |
| Proceeds from  sale of property and equipment         |   | 855                               |    | 2,353 |   | — |   | — |   | 3,208 |   |
| Capital  expenditures                                 |   | (26                               | )       | (4,771 | ) | — |   | — |   | (4,797 | ) |
| Cash paid for  acquisitions                           |   | (606                              | )       | — |   | — |   | — |   | (606 | ) |
| Net cash  provided by (used for) investing activities |   | 132,446                           |    | (2,418 | ) | — |   | — |   | 130,028 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Second-lien term  debt borrowings                     |   | 80,000                            |    | — |   | — |   | — |   | 80,000 |   |
| Revolving line  of credit repayments, net             |   | (6,000                            | )       | — |   | — |   | — |   | (6,000 | ) |
| First-lien debt  repaid                               |   | (183,679                          | )       | — |   | — |   | — |   | (183,679 | ) |
| Other secured  long-term debt repaid                  |   | (643                              | )       | (1,233 | ) | — |   | — |   | (1,876 | ) |
| Deferred  financing costs                             |   | (6,614                            | )       | — |   | — |   | — |   | (6,614 | ) |
| Net cash used  for financing activities               |   | (116,936                          | )       | (1,233 | ) | — |   | — |   | (118,169 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net cash  provided by discontinued operations         |   | —                            |    | 1,744 |   | — |   | — |   | 1,744 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net increase  (decrease) in cash and equivalents      |   | (5,803                            | )       | 318 |   | — |   | — |   | (5,485 | ) |
| Cash and  equivalents at beginning of period          |   | 12,343                            |    | 78 |   | — |   | — |   | 12,421 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and  equivalents at end of period                |   | $                                 | 6,540   |   | $ | 396 |   | $ | — |   | $ | — |   | $ | 6,936 |   |

 

F-51

----

 
|                                                  |   | **Year Ended  December 31, 2002** |    |
|-------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                    |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from operating activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Net loss                                              |   | $                                 | (65,986 | ) | $ | (55,833 | ) | $ | (9,535 | ) | $ | 65,368 | (3) | $ | (65,986 | ) |
| Noncash  adjustments:                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Loss from  discontinued operations                    |   | —                            |    | 31,861 |   | 9,535 |   | — |   | 41,396 |   |
| Equity in loss  of subsidiaries                       |   | 55,833                            |    | 9,535 |   | — |   | (65,368 | )(3) | — |   |
| Other noncash  adjustments                            |   | 5,542                             |    | 37,846 |   | — |   | — |   | 43,388 |   |
| Changes in  working capital                           |   | 28,171                            |    | (35,249 | ) | — |   | — |   | (7,078 | ) |
| Net cash  provided by (used for) operating activities |   | 23,560                            |    | (11,840 | ) | — |   | — |   | 11,720 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired     |   | (5,890                            | )       | — |   | — |   | — |   | (5,890 | ) |
| Capital  expenditures                                 |   | (49                               | )       | (4,307 | ) | — |   | — |   | (4,356 | ) |
| Net cash used  for investing activities               |   | (5,939                            | )       | (4,307 | ) | — |   | — |   | (10,246 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Capital contribution,  net                            |   | 5,000                             |    | — |   | — |   | — |   | 5,000 |   |
| Other secured  long-term borrowings                   |   | —                            |    | 1,145 |   | — |   | — |   | 1,145 |   |
| First-lien debt  repaid                               |   | (11,506                           | )       | — |   | — |   | — |   | (11,506 | ) |
| Revolving line  of credit repayments, net             |   | (6,000                            | )       | — |   | — |   | — |   | (6,000 | ) |
| Other secured debt  repaid                            |   | (389                              | )       | (1,639 | ) | — |   | — |   | (2,028 | ) |
| Deferred  financing costs                             |   | (1,656                            | )       | — |   | — |   | — |   | (1,656 | ) |
| Other, net                                            |   | (368                              | )       | — |   | — |   | — |   | (368 | ) |
| Net cash used  for financing activities               |   | (14,919                           | )       | (494 | ) | — |   | — |   | (15,413 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net cash  provided by discontinued operations         |   | —                            |    | 16,882 |   | — |   | — |   | 16,882 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net increase in  cash and equivalents                 |   | 2,702                             |    | 241 |   | — |   | — |   | 2,943 |   |
| Cash and  equivalents at beginning of period          |   | 9,641                             |    | (163 | ) | — |   | — |   | 9,478 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and  equivalents at end of period                |   | $                                 | 12,343  |   | $ | 78 |   | $ | — |   | $ | — |   | $ | 12,421 |   |
|                                                       |        |                                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-52

----

 
|                                                  |   | **Year Ended  December 31, 2001** |    |
|-------------------------------------------------------|--------|-----------------------------------|---------|
| **(In thousands)**                                    |   | **Issuer**                        |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
| **Cash  flows from operating activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Net income  (loss)                                    |   | $                                 | (14,002 | ) | $ | 1,259 |   | $ | 115 |   | $ | (1,374 | )(3) | $ | (14,002 | ) |
| Noncash  adjustments                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Income from  discontinued operations                  |   | —                            |    | (3,431 | ) | (115 | ) | — |   | (3,546 | ) |
| Equity in  earnings of subsidiaries                   |   | (1,259                            | )       | (115 | ) | — |   | 1,374 | (3) | — |   |
| Other noncash  adjustments                            |   | 3,950                             |    | 40,901 |   | — |   | — |   | 44,851 |   |
| Changes in  working capital                           |   | 16,352                            |    | (41,722 | ) | — |   | — |   | (25,370 | ) |
| Net cash  provided by (used for) operating activities |   | 5,041                             |    | (3,108 | ) | — |   | — |   | 1,933 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired     |   | (13,529                           | )       | — |   | — |   | — |   | (13,529 | ) |
| Capital  expenditures and other                       |   | (241                              | )       | (9,314 | ) | — |   | — |   | (9,555 | ) |
| Net cash used  for investing activities               |   | (13,770                           | )       | (9,314 | ) | — |   | — |   | (23,084 | ) |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**            |   |                              |    |   |   |   |   |   |   |   |   |
| First-lien term  debt borrowings                      |   | 20,000                            |    | — |   | — |   | — |   | 20,000 |   |
| Other secured  long-term borrowings                   |   | —                            |    | 2,797 |   | — |   | — |   | 2,797 |   |
| Revolving line  of credit repayments, net             |   | (400                              | )       | — |   | — |   | — |   | (400 | ) |
| First-lien debt  repaid                               |   | (7,738                            | )       | — |   | — |   | — |   | (7,738 | ) |
| Other secured  long-term debt repaid                  |   | (465                              | )       | (936 | ) | — |   | — |   | (1,401 | ) |
| Deferred  financing costs                             |   | (580                              | )       | (187 | ) | — |   | — |   | (767 | ) |
| Net cash  provided by financing activities            |   | 10,817                            |    | 1,674 |   | — |   | — |   | 12,491 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net cash  provided by discontinued operations         |   | —                            |    | 10,432 |   | — |   | — |   | 10,432 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Net increase  (decrease) in cash and equivalents      |   | 2,088                             |    | (316 | ) | — |   | — |   | 1,772 |   |
| Cash and  equivalents at beginning of period          |   | 7,553                             |    | 153 |   | — |   | — |   | 7,706 |   |
|                                                  |   |                              |    |   |   |   |   |   |   |   |   |
| Cash and  equivalents at end of period                |   | $                                 | 9,641   |   | $ | (163 | ) | $ | — |   | $ | — |   | $ | 9,478 |   |

 

F-53

----

 

**Note 19.         Restated Selected Quarterly FinancialData (Unaudited)**

** **

Unaudited condensedquarterly data for the year ended December 31, 2003 are summarized in thetables below.  As more fully describedin Note 1—Change in Accounting Principle, the Company elected to change itsaccounting policy for program costs after concluding the 2003 fiscal year butretroactively applied the change to the beginning of the year, January 1,2003.  As a result, the condensed quarterlydata are presented on both an “as reported” and “as restated” basis.

 

The “as reported” datafor 2003 reflects the results of operations as originally reported for thefirst three quarters and, for the fourth quarter and resulting year, as wouldhave been reported, prior to the accounting change.  The “as restated” data reflects the accounting change as of thebeginning of the year, January 1, 2003.

 
|                                                |   | **Year Ended  December 31, 2003** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------|
| **(In thousands)**                                  |   | **1st Quarter**                   |   | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |   | **Total** |   |
|                                                |   |                              |   |   |   |   |   |   |   |   |   |
| As reported:                                        |   |                              |   |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                 | 41,900 |   | $ | 44,113 |   | $ | 44,273 |   | $ | 39,823 |   | $ | 170,109 |   |
| Gross profit (loss)                                 |   | 10,997                            |   | (1,270 | ) | 9,221 |   | 9,946 |   | 28,894 |   |
| Loss from continuing operations                     |   | (2,763                            | )      | (40,266 | ) | (2,743 | ) | (2,988 | ) | (48,760 | ) |
| Income (loss) from discontinued operations          |   | (6,397                            | )      | 747 |   | — |   | (971 | ) | (6,621 | ) |
| Net loss                                            |   | (9,160                            | )      | (39,519 | ) | (2,743 | ) | (3,959 | ) | (55,381 | ) |
|                                                |   |                              |   |   |   |   |   |   |   |   |   |
| As restated:                                        |   |                              |   |   |   |   |   |   |   |   |   |
| Revenues                                            |   | $                                 | 41,900 |   | $ | 44,113 |   | $ | 44,273 |   | $ | 39,823 |   | $ | 170,109 |   |
| Gross profit                                        |   | 10,997                            |   | 4,992 |   | 9,221 |   | 9,946 |   | 35,156 |   |
| Loss from continuing operations                     |   | (4,336                            | )      | (37,282 | ) | (4,954 | ) | (6,366 | ) | (52,938 | ) |
| Income (loss) from discontinued operations          |   | (6,397                            | )      | 747 |   | — |   | (971 | ) | (6,621 | ) |
| Cumulative effect of change in accounting principle |   | (13,764                           | )      | — |   | — |   | — |   | (13,764 | ) |
| Net loss                                            |   | (24,497                           | )      | (36,535 | ) | (4,954 | ) | (7,337 | ) | (73,323 | ) |

 

The principal differencesbetween “as reported” and “as restated” are caused by the recognition of the$13,764,000 cumulative effect of the change in accounting principle in the firstquarter and the timing of a write off of previously deferred programcosts.  As part of the Company’s secondquarter restructuring activities, $6,262,000 of program costs that weredeferred under the old accounting policy were written off and charged to costof sales.  Since under the new policy(which was adopted in 2004 and retroactively applied to January 1, 2003) thosecosts are deemed expensed as incurred, the second quarter write off is notrequired in the “as restated” data.

 

F-54

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**DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

** **

**Consolidated Financial Statement Schedules**

** **

**Schedule II – Valuation and Qualifying Accounts**

** **
| **(In thousands)**                                                     |   | **Balance at  Beginning of  Period** |   | **Charged to  Cost and  Expense** |   | **Charged to  Other  Accounts** |   | **Deductions** |   | **Balance at  End of  Period** |   |
|------------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|----------------|--------|--------------------------------|--------|
| **Year  Ended December 31, 2003 (1)**                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for  doubtful accounts                                       |   | $                                    | 1,205  |                              | $      | 670                             |   | $              | — |                           | $      | (607 | ) | $ | 1,268 |   |
| Reserve for  excess, slow moving and potentially obsolete material     |   | 3,759                                |   | 3,199                             |   | —                          |   | (1,744         | )      | 5,214                          |   |
| Deferred tax  asset valuation allowance                                |   | —                               |   | 19,528                            |   | —                          |   | —         |   | 19,528                         |   |
|                                                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year  Ended December 31, 2002 (1)**                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for  doubtful accounts                                       |   | $                                    | 2,108  |                              | $      | 843                             |   | $              | — |                           | $      | (1,746 | ) | $ | 1,205 |   |
| Reserve for  excess, slow moving and potentially obsolete material (2) |   | 2,986                                |   | 3,553                             |   | —                          |   | (2,780         | )      | 3,759                          |   |
|                                                                   |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year  Ended December 31, 2001 (1)**                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for  doubtful accounts                                       |   | $                                    | 1,536  |                              | $      | 2,001                           |   | $              | — |                           | $      | (1,429 | ) | $ | 2,108 |   |
| Reserve for  excess, slow moving and potentially obsolete material (3) |   | 3,213                                |   | 731                               |   | —                          |   | (958           | )      | 2,986                          |   |

 

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(1)       Excludes amounts attributable to theSpecialty Avionics Group which is classified as discontinued operation.

 

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

 

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

 

F-55

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