**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**

 

**FOR THEFISCAL YEAR ENDED DECEMBER 31, 2002**

 

**COMMISSIONFILE NUMBER 000-22371**

 

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| **DECRANE AIRCRAFT HOLDINGS, INC.**                                                 |
|-------------------------------------------------------------------------------------|
| (Exact name of  registrant 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 whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act). o YES ý NO

 

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

 

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

 

The number of shares of Common Stock outstanding onMarch 28, 2003 was 100.

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

None.

 

 

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**Table ofContents**

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

 

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

 

**PART I**

 
| **ITEM 1.** |   | **DESCRIPTION OF BUSINESS** |
|-------------|--------|-----------------------------|

 

**CompanyOverview**

 

DeCrane Aircraft Holdings, Inc., a Delawarecorporation founded in 1989, is a leading provider of integrated assemblies,sub-assemblies and component parts to the aerospace industry.  Since our founding in 1989, we haveexperienced both internal growth and external growth by identifying fragmented,high-growth niche segments within the aerospace industry and acquiringmarket-leading companies in those niches. We have assembled product capability within three specific segments ofthe aerospace industry: cabin management for corporate, VIP and head-of-stateaircraft; specialty aviation electronic components, commonly referred to asavionics; and systems integration. Within these markets, our customers include original manufacturers ofaircraft and related avionics equipment, commonly referred to as OEM’s, majorcomponents suppliers, aircraft repair and modification centers and commercialairlines.

 

**OurOperating Groups**

 

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

 

On March 14, 2003 we entered into a definitiveagreement to sell our Specialty Avionics Group for $140.0 million in cash.  The sale is expected to close prior to June30, 2003 and is subject to customary closing conditions, including financingand the receipt of regulatory and other third-party approvals.  The sale of our Specialty Avionics Group isnot expected to affect the operations of our remaining operating groups.  See “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Overview” foradditional information.

 

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

 

1

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**Cabin Management Group**

 

DeCrane’s Cabin Management Group contributedapproximately 53% of our revenues for the year ended December 31, 2002.

 

***BusinessDescription***

 

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

 

The Cabin Management Group introduced the concept ofmodularity to the corporate, VIP and head-of-state aircraft market by offeringtotally integrated interior products. In our view, one of the greatest challenges facing the industry’saircraft manufacturers is minimizing the lead-time necessary to complete anunfinished “green” aircraft.  We alsobelieve our distinctive approach of delivering integrated assemblies andsub-assemblies addresses this challenge by providing our customers with entirepre-engineered, pre-wired and pre-plumbed modular cabin interiors andmanagement systems ready for final integration into the aircraft.  We believe our totally integrated interiorproducts enable our customers to reduce their lead times, supplier base andoverall costs.

 

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

 

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

 

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

 

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

 

2

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***Products andServices***

 

Our Cabin Management Group designs, engineers andmanufactures a full line of customized, pre-fit products and provides relatedservices.  Approximately 53% of ourCabin Management Group’s revenues in 2002 were from two customers, Textron andBombardier.  Our products and servicesare in four broad categories, as summarized below.

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

 

Our interior furnishings products and servicesprovided approximately 33% of our consolidated revenues in 2002 and 2001 and32% in 2000.

 

***Competition***

 

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

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

 

3

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**Specialty Avionics Group**

 

DeCrane’s Specialty Avionics Group contributedapproximately 29% of our revenues for the year ended December 31, 2002.  As described in “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Overview,”on March 14, 2003 we entered into a definitive agreement to sell ourSpecialty Avionics Group.

 

***BusinessDescription***

 

Our Specialty Avionics Group supplies aircraftavionics components to the commercial and military aircraft markets as well asto several avionics systems suppliers including Honeywell and RockwellCollins.  We focus on assembling design,engineering and manufacturing capabilities across several specialty avionicsproduct categories, including cockpit and cabin audio management systems,flight deck visual display and communication systems, power and controldevices, and specialty interconnect solutions such as contacts, connectors andvarious harness assemblies.  OurSpecialty Avionics Group is also a leading manufacturer of high qualityelectrical contacts for military and aviation applications.

 

Through its strong focus on building integratedsolutions, we believe our Specialty Avionics Group has achieved solid positionsin many product categories within the avionics components market.  Today, we believe we are the world’s largestsupplier of power and signal contacts to the aircraft market, with almost twicethe number of FAA approved parts as our nearest competitor.  In addition, our dichroic liquid crystaldisplay devices, commonly referred to as LCD’s, are found on most, if not all,commercial aircraft produced today, making us the largest supplier of dichroicLCD devices to commercial aircraft OEM’s. Our Specialty Avionics Group has leveraged its reputation as a high qualitymanufacturer of avionics products and contacts to build a broader customer baseand to deepen its relationships with existing customers.

 

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

 

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

 

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

 

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

 

***Products andServices***

 

Our Specialty Avionics Group designs, engineers andmanufactures electronic components, electronic display devices and interconnectcomponents and assemblies. Approximately 15% of our Specialty Avionics Group’s revenues in 2002were from Boeing.  The products we offerare described below.

 

4

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*Cockpitand Cabin Audio, Communication, Lighting and Power and Control Devices.*  OurSpecialty Avionics Group is a leading manufacturer of cockpit audio, lightingand power and control devices, including selective calling system decoders,used in commercial, regional and corporate, VIP and head-of-stateaircraft.  We also manufacture a varietyof other commercial aircraft safety system components, including warning tonegenerators, temperature and de-icing monitoring systems, steep approachmonitors and low voltage power supplies for traffic collision avoidancesystems.  These products have providedapproximately 13% of our consolidated revenues over the last three years.

 

*ElectricalContacts.*  Contactsconduct electronic signals or electricity and are installed at the terminus ofa wire or an electronic or electrical device. We supply precision-machined contacts for use in connectors found invirtually every electronic and electrical system on a commercial aircraft.  We sell contacts directly to aircraft andrelated electronics manufacturers and through our private labeling programs toseveral major connector manufacturers who sell connectors to the same marketsunder their brand name.  Our contactsare also widely used in military aircraft as well as a variety of commercialand defense telecommunication and data communication applications.

 

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

 

*LiquidCrystal Display Devices. *Wemanufacture a wide variety of displays in both dichroic and twisted nematicformats, as well as LCD modules used in commercial and military aircraft.  LCD modules are liquid crystal displayspackaged with a backlight source, and additional mechanical and electronic componentsthat are plug-and-play ready for our customers’ instrument displayapplications.  Dichroic displays performbest in situations with high ambient lighting and low backlighting.  Twisted nematic displays are suited forsituations where a strong backlight is required.  Our LCD products are used in a variety of flight deckapplications such as auto pilot flight control systems, fuel quantityindicators, exhaust gas temperature indicators, airborne communications,navigation and safety systems and transportation signage.  Dichroic and twisted nematic liquid crystaldisplay products are widely used in the aerospace industry because they areeasily adapted to custom design and possess a variety of high performancecharacteristics, including wide viewing angles, high readability in sunlightand the ability to withstand wide temperature fluctuations.  We also manufacture a variety of electronicclock instruments for commercial and military aircraft, including fixed wingand rotary wing, all of which use our LCD devices.

 

*WireMarking and Crimping Equipment.*  We design and manufacture surface preparation and wire markingsystems.  Our products include laser andinkjet marking systems, atmospheric plasma systems and automatic crimpingsystems.  Our products are used in theaerospace, defense, medical device and biomedical industries, principally wireand cable fabricators, wire processors, fiber optics manufacturers andconsumer-based products manufacturers.

 

***Competition***

 

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

 

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performance, quality, price, timely deliveries and overall customerservice.  Our principal competitors aresummarized below.

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

 

**Systems Integration Group**

 

DeCrane’s Systems Integration Group contributedapproximately 18% of our revenues for the year ended December 31, 2002.

 

***BusinessDescription***

 

Our Systems Integration Group provides aircraftretrofit, completion and refurbishment solutions, from conceptual design toFederal Aviation Administration certification, including engineering,manufacturing and installation.  Ourlargest business is the design, production and installation of auxiliary fuelsystems, which extend the range of an aircraft.  Our Systems Integration Group has an exclusive long-term contractwith Boeing Business Jet to design, manufacture and install auxiliary fuelsystems on the BBJ, a Boeing 737-700IGW, and the BBJ2, a Boeing 737-800, and isone of only three world-wide approved BBJ/BBJ2 service centers.  We also focus on regulatory authority safetymandates and believe we are the major supplier of integration kits for smokedetection and fire suppression in the cargo hold.  We also perform structural, avionics and mechanical systemsmodifications and FAA certification of those modifications before returning anaircraft to service.  During 2002, wedelivered our first corporate/VIP/head-of-state aircraft interior completion ona BBJ2 aircraft and are under contract to perform an interior completion on aBBJ aircraft for delivery in 2003.

 

The aerospace industry is highly regulated in theUnited States by the FAA and similar regulatory agencies abroad, such as theEuropean Joint Aviation Authorities (commonly referred to as the JAA), toensure that aviation products and services meet stringent safety andperformance standards.  There are alimited number of companies that have the necessary Designated AlterationStation authorization to offer aircraft certification on behalf of the FAA.  Our Systems Integration Group is authorizedto provide the full spectrum of services, from design to FAA certification,needed for timely retrofitting of an aircraft, thus providing a significantcompetitive advantage.

 

Our Systems Integration Group has adopted atwo-pronged strategic approach to managing its operations:

 

•                  *Develop the Most Comprehensive Integrated RetrofitOffering. *For the lasttwelve years, our Systems Integration Group has focused on developing thecapabilities necessary to provide a fully integrated offering with respect toaircraft refurbishing and aircraft retrofitting with FAA mandated changes andtechnological innovations.  Throughseveral related acquisitions and

 

6

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aggressive internal product development, our SystemsIntegration Group has become one of the few non-OEM related operations with theauthority to provide alteration services and to offer FAA certification ofaircraft that undergo overhaul.  Thiscertification ability represents a significant competitive advantage, as we canoffer all the products and services required to re-commission an aircraft in atimely and cost efficient manner.  Webelieve we have developed the most comprehensive offering in retrofitting aircraftwith auxiliary fuel systems in the industry.

 

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

 

•                  Many domesticcommercial airlines believe the FAA will issue a safety mandate requiringcockpit door video surveillance on every commercial aircraft traveling in U.S.domestic airspace in 2003.  In response,we consulted with commercial airlines and developed what we believe to be alow-cost, high quality cockpit door video surveillance system.  Our Sentry OneTM system is based on anin-house developed camera control unit with integral power supplies and iscombined with state-of-the-art extreme low light cameras and 5.6” videomonitors with existing FAA approvals. We believe we will obtain rapid FAA approval of our Sentry OneTM systemonce the final specific requirements of the safety mandate are determined.

 

•                  We believe theJAA will mandate new fire safety measures for all aircraft in Europe, similarto 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 an aircraft to ensure compliance withthe JAA ruling with minimal downtime.

 

***Products andServices***

 

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

 

*AuxiliaryFuel Systems and Power Units.*  We design, engineer, manufacture and install auxiliary fuelsystems for corporate, VIP, head-of-state and commercial aircraft.  Our unique design and construction have madeus a leader in the auxiliary fuel system market.  We also manufacture auxiliary power units, which provide groundpower to corporate jets made by Bombardier, Cessna, Gulfstream, Learjet andRaytheon.  These products and servicesprovided approximately 11% of our consolidated revenues in 2002.

 

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

 

7

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

 

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

 

***Competition***

 

The markets served by our Systems Integration Groupare fragmented with several competitors offering similar products andservices.  Due to the global nature ofthe aerospace industry, competition comes from both U.S. and foreigncompanies.  Our Systems IntegrationGroup generally faces competition from a group of smaller companies andenterprises, except for the corporate/VIP/head-of-state aircraft manufacturersand independent completion centers.  Webelieve that the principal competitive factors in the markets we serve arequality, price, timely deliveries and overall customer service.  Our principal competitors are summarizedbelow.

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

 

**OtherInformation**

 

**Acquisitions**

 

***Companies Acquiredby DeCrane Aircraft***

 

During the five years ended December 31, 2002, DeCraneAircraft has acquired the stock or assets of eight significant businesses, assuch term is defined by Securities and Exchange Commission rules, as follows:

 

*CabinManagement Group*

 

•                  all of thecommon stock of Precision Pattern, Inc., a Kansas-based designer andmanufacturer of interior furniture components for corporate, VIP andhead-of-state aircraft, on April 23, 1999;

 

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

 

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

 

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

 

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

 

•                  all of thecommon stock of ERDA, Inc. (subsequently renamed DeCrane Aircraft Seating Co.,Inc.), a Wisconsin-based designer and manufacturer of aircraft seating, on June30, 2000;

 

*SpecialtyAvionics Group*

 

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

 

*SystemsIntegration Group*

 

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

 

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

 

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

 

DeCrane Holdings Co. and DLJ Merchant Banking PartnersII, L.P. and affiliated entities acquired all of the stock of DeCrane Aircraftin August 1998 for $186.3 million.  Thisacquisition is referred to in this report as the DLJ acquisition.  As a result of the DLJ acquisition, DeCraneAircraft presents its financial information on a predecessor/successor basis.

 

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

 

**Customers**

 

We estimate that in 2002, we sold our products andservices to approximately 1,500 customers. Our primary customers include manufacturers of aircraft and relatedavionics equipment, airlines, aircraft component manufacturers anddistributors, and aircraft repair and modification companies.

 

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Each of the following customers accounted for 10% ormore of our consolidated revenues for the year ended December 31, 2002:

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

 

----

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

 

(2)                                  IncludesCessna.

 

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

 

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

 

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

 

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

 

•                  the customer isnot required to make purchases, and may terminate such contract at any time;

 

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

 

•                  on a prospectivebasis, we must extend to the customers any reductions in prices or lead timesthat we provide to other customers;

 

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

 

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

 

10

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**Backlog**

 

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

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

 

Orders are usually filled within twelve months;however, backlog totaling $12.8 million as of December 31, 2002 is scheduledfor delivery in 2004 and beyond.  Ordersmay be subject to cancellation by the customer prior to shipment.  The level of unfilled orders at any givendate will be materially affected by when we receive orders and how fast we fillthem.  Period-to-period comparisons ofbacklog figures may not be meaningful. For that reason, our backlogs do not necessarily accurately predictactual shipments or sales for any future period.

 

As described in “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Industry Overview andTrends,” the acts, and ongoing threats, of global terrorism and the currentmilitary conflicts, SARS epidemic and weak global economic conditions are alladversely impacting air travel and, in turn, the aerospace industry and ourbusiness.  We are not able to predictthe continuing 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, 2002, we had 2,176 employees: 1,117in our Cabin Management Group; 733 in our Specialty Avionics Group; 313 in ourSystems Integration Group; and 13 in our corporate office.  None of our employees are subject to acollective bargaining agreement, and we have not experienced any materialbusiness interruption as a result of labor disputes.  We believe that we generally have a good relationship with ouremployees.

 

**Research and Development**

 

We continually evaluate opportunities to improve ourproduct offerings and develop new products that incorporate new technologies tomeet the demands of our customers and the FAA. Total expenditures were $2.5 million for the year ended December 31,2002, $3.7 million during the year ended December 31, 2001 and $4.6million during the year ended December 31, 2000.

 

**Financial Information AboutGeographic Areas**

 

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

 

**Seasonality**

 

Our businesses generally are not seasonal in nature.

 

11

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**Sales and Marketing**

 

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

 

Our Specialty Avionics Group utilizes a dedicatedsales force, distributors and independent sales representatives to execute itssales and marketing strategy.  We havedistributors that purchase, stock and resell several of our product lines.

 

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

 

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

 

**Raw Materials and Component Parts**

 

The components we manufacture require the use ofvarious raw materials including gold, aluminum, copper, rhodium, platingchemicals, LCD glass, hardwoods and plastics. The availability and prices 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 recoverincreases in raw materials prices in our product sale prices.  We also purchase a variety of manufacturedsub-component parts from various suppliers. Raw materials and component parts are generally available from multiplesuppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials andcomponent parts may affect our ability to meet customer production needs.

 

**Intellectual Property and ProprietaryInformation**

 

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

 

**Government Regulation**

 

***Federal AviationAdministration***

 

The aerospace industry is highly regulated in theUnited States by the Federal Aviation Administration and in other countries by similaragencies to ensure that aviation products and services meet stringent safetyand performance standards.  In addition,many of our customers impose their own compliance and quality requirements onus.  The FAA prescribes standards andlicensing requirements for aircraft components, issues designated alterationstation authorizations, and licenses private repair stations.  We hold various FAA approvals and licenses,which may only be used by our subsidiary obtaining such approval.  If material FAA or customer authorizationsor approvals were revoked or suspended, our operations could be adverselyaffected.

 

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

 

12

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Each type of aircraft operated by airlines in theUnited States must possess an FAA type certificate, generally held by theaircraft manufacturer, indicating that the type design meets applicableairworthiness standards.  When someoneelse develops a major modification to an aircraft already type-certificated,that person must obtain an FAA-issued Supplemental Type Certificate for themodification.  Historically, we haveobtained several hundred of these Supplemental Type Certificates, most of whichwe obtained on behalf of our customers as part of our systems integrationservices.  Some of these certificates weobtain were or eventually will be transferred to our customers.  As of December 31, 2002, we own and/ormanage on behalf of our customers approximately 300 Supplemental TypeCertificates.  Many are multi-aircraftcertificates, which apply to all of the aircraft of a single type.  We foresee the need to obtain additionalSupplemental Type Certificates so that we can expand the services we provideand the customers we serve and believe we will be able to obtain suchcertificates as the need arises.

 

Supplemental Type Certificates can be issued forproposed aircraft modifications directly by the FAA, or on behalf of the FAA bya Designated Alteration Station.  TheFAA designates what types of Supplemental Type Certificates can be issued byeach Designated Alteration Station.  Asubsidiary within our Systems Integration Group is an FAA-authorized DesignatedAlteration Station and can directly issue many of the Supplemental TypeCertificates our customers and we require for our systems integrationoperations.

 

After obtaining a Supplemental Type Certificate, amanufacturer must apply for a Parts Manufacturer Approval from the FAA, or asupplement to an existing Parts Manufacturer Approval, which permits the holderto manufacture and sell installation kits according to the approved design anddata package.  We have nine PartsManufacturer Approvals and over 215 supplements to those approvals.  In general, each initial Parts ManufacturerApproval is an approval of a manufacturing or modification facility’sproduction quality control system.  EachParts Manufacturer Approval supplement authorizes the manufacture of aparticular part in accordance with the requirements of the correspondingSupplemental Type Certificate.  Weroutinely apply for and receive such Parts Manufacturer Approvalsupplements.  In order to perform theactual installations of a modification, we are also required to have FAAapproval.  This authority is containedeither in our Parts Manufacturer Approvals and related supplements, or in ourrepair station certificates.  In orderfor a company to perform most kinds of repair, engineering, installation orother services on aircraft, its facility must be designated as anFAA-authorized repair station.  As ofDecember 31, 2002, we had nine authorized repair stations and employed over 120FAA certified representatives.

 

***Occupational Safetyand Health Administration***

 

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

 

**Environmental Matters**

 

Our facilities and operations are subject to variousfederal, state, local, and foreign environmental laws and regulations,including those relating to discharges to air, water, and land, the handlingand disposal of solid and hazardous waste, and the cleanup of propertiesaffected by hazardous substances.  Inaddition, some environmental laws, such as the federal ComprehensiveEnvironmental Response, Compensation and Liability Act, as amended (“CERCLA”)and similar state laws, impose strict liability upon persons responsible forreleases or potential releases of hazardous substances.  That liability generally is retroactive, andmay create “joint and several” liability among multiple parties who have

 

13

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some relationship to a site or a source of waste.  We have sent waste to treatment, storage, ordisposal facilities that have been designated as National Priority List sitesunder CERCLA or equivalent listings under state laws.  We have received CERCLA requests for information or allegationsof potential responsibility from the Environmental Protection Agency regardingour use of several of those sites.  Inaddition, some of our operations are located on properties that arecontaminated to varying degrees.

 

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

 

Some of our manufacturing processes create wastewaterthat requires chemical treatment, and one of our facilities was cited forexcessive quantity and strength of its wastewater.  The costs associated with remedying that failure were notmaterial.

 

We believe that we have been and are in substantialcompliance with environmental laws and regulations and that we have noliabilities under environmental laws and regulations, except for liabilitieswhich we do not expect would likely have a material adverse effect on ourbusiness, financial position, results of operations or cash flows.  However, some risk of 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.

 
| **ITEM 2.** |   | **PROPERTIES** |
|-------------|--------|----------------|

 

We operate in a number of manufacturing, engineeringand office facilities in the United States and abroad.  At December 31, 2002, we utilizedapproximately 1.3 million square feet of floor space, approximately 93% ofwhich is located in the United States. We believe that our facilities are in good condition and are adequate tosupport our operations for the foreseeable future.  Our operating groups’ facilities at December 31, 2002 aresummarized below.

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

 

In addition to the 252,000 square feet of facilitiesused by the Specialty Avionics Group, an additional 32,000 square feet of ownedfacilities not in use and subleased to others will be transferred to the buyerin connection with our sale of the group in 2003.  The sale of the Specialty Avionics Group will not have an impacton the utilization of our remaining facilities.

 

14

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| **ITEM 3.** |   | **LEGAL PROCEEDINGS** |
|-------------|--------|-----------------------|

 

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

 

Families of most of the 229 persons who died aboardthe flight have filed actions in federal and state courts against us, oursubsidiary, and many other unaffiliated parties, including Swissair and Boeing(“Passenger Actions”).  The PassengerActions claim negligence, strict liability, and breach of warranty relating tothe installation and testing of the in-flight entertainment system.  The Passenger Actions seek damages and costsin an unstated amount.  All of thePassenger Actions have been transferred to the United States District Court forthe Eastern District of Pennsylvania and assigned under MDL Case No. 1269 forcoordinated or consolidated pre-trial proceedings.  Most of the Passenger Actions have been settled by Boeing andSwissair.  Boeing and Swissair haveadvised us that they intend to seek contribution from our subsidiary.  We do not believe, based, in part, oninformation received from independent fire and safety experts retained by us,that the installation of the equipment installed by our subsidiary impacted theoperation or safety of the aircraft. Accordingly, we continue to defend the claims.

 

We are party to other litigation incident to thenormal course of business.  We do notbelieve that the outcome of all such matters in which we are currently involvedwill have a material adverse effect on our business, financial position,results of operations or cash flows.

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

 

None.

 

15

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**PART II**

 
| **ITEM 5.** |   | **MARKET FOR REGISTRANT’S COMMON  EQUITY AND RELATED STOCKHOLDER MATTERS** |
|-------------|--------|---------------------------------------------------------------------------------|

 

**Market Information**

 

There is no established public trading market for ourshares.  In August 1998, we sold all ofour issued and outstanding shares to DeCrane Holdings, our parent company, inconnection with the DLJ acquisition.

 

**Holders**

 

As of March 28, 2003, DeCrane Holdings is our onlycommon stockholder.

 

**Dividends**

 

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

 

**Recent Sale of UnregisteredSecurities**

 

None.

 

16

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| **ITEM  6.** |   | **SELECTED FINANCIAL DATA** |
|--------------|--------|-----------------------------|

 
|                                                                                                                          |   | **Year Ended December 31,(1)** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                                          |   |                           |       |   |   |   |   |   |   | **1998** |   |
| **(In thousands)**                                                                                                            |   | **2002**                       |       | **2001** |   | **2000** |   | **1999** |   | **Four Months  Ended  December 31,  1998** |   | **Eight Months  Ended  August 31,  1998** |   |
|                                                                                                                          |   |                           |       |   |   | **(Successor)(2)** |   |   |   |   |   | **(Predecessor)(2)** |   |
| **Statement  of Operations Data:**                                                                                            |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                                                      |   | $                              | 325,630    |   | $ | 395,352 |   | $ | 347,379 |   | $ | 244,048 |   | $ | 60,356 |   | $ | 90,077 |   |
| Cost of sales(3)                                                                                                              |   | 233,950                        |       | 279,681 |   | 232,048 |   | 165,871 |   | 42,739 |   | 60,101 |   |
| Gross profit                                                                                                                  |   | 91,680                         |       | 115,671 |   | 115,331 |   | 78,177 |   | 17,617 |   | 29,976 |   |
| Selling, general  and administrative expenses(4)                                                                              |   | 51,884                         |       | 59,934 |   | 45,394 |   | 40,157 |   | 10,274 |   | 19,351 |   |
| Impairment of  goodwill(5)                                                                                                    |   | 7,672                          |       | 8,583 |   | — |   | — |   | — |   | — |   |
| Amortization of  intangible assets(6)                                                                                         |   | 5,768                          |       | 19,920 |   | 17,948 |   | 13,073 |   | 3,148 |   | 1,347 |   |
| Operating income                                                                                                              |   | 26,356                         |       | 27,234 |   | 51,989 |   | 24,947 |   | 4,195 |   | 9,278 |   |
| Interest expense                                                                                                              |   | 33,894                         |       | 39,001 |   | 41,623 |   | 27,918 |   | 6,852 |   | 2,350 |   |
| Other expenses,  net(7)                                                                                                       |   | 944                            |       | 1,047 |   | 482 |   | 447 |   | 335 |   | 847 |   |
| Income (loss)  before provision for income taxes, cumulative effect of change in accounting  principle and extraordinary item |   | (8,482                         | )          | (12,814 | ) | 9,884 |   | (3,418 | ) | (2,992 | ) | 6,081 |   |
| Provision for  income taxes (benefit)(8)                                                                                      |   | 354                            |       | 1,188 |   | 6,282 |   | 952 |   | (2,668 | ) | 2,892 |   |
| Income (loss)  before cumulative effect of change in accounting principle and extraordinary  item                             |   | (8,836                         | )          | (14,002 | ) | 3,602 |   | (4,370 | ) | (324 | ) | 3,189 |   |
| Cumulative  effect of change in accounting principle(9)                                                                       |   | (57,150                        | )          | — |   | — |   | — |   | — |   | — |   |
| Extraordinary  loss from debt refinancing(10)                                                                                 |   | —                         |       | — |   | — |   | — |   | (2,229 | ) | — |   |
| Net income  (loss)                                                                                                            |   | $                              | (65,986    | ) | $ | (14,002 | ) | $ | 3,602 |   | $ | (4,370 | ) | $ | (2,553 | ) | $ | 3,189 |   |
| Net income  (loss) applicable to common stockholders                                                                          |   | $                              | (71,827    | ) | $ | (19,063 | ) | $ | 1,328 |   | $ | (4,370 | ) | $ | (2,553 | ) | $ | 3,189 |   |
|                                                                                                                          |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| **Other  Financial Data:**                                                                                                    |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash flows from  operating activities                                                                                         |   | $                              | 30,318     |   | $ | 14,929 |   | $ | 16,783 |   | $ | 15,200 |   | $ | 1,008 |   | $ | 3,014 |   |
| Cash flows from  investing activities                                                                                         |   | (11,319                        | )          | (24,792 | ) | (112,164 | ) | (152,774 | ) | (1,813 | ) | (87,378 | ) |
| Cash flows from  financing activities                                                                                         |   | (16,228                        | )          | 11,397 |   | 95,656 |   | 142,052 |   | (1,597 | ) | 89,871 |   |
| EBITDA(11)                                                                                                                    |   | 70,018                         |       | 88,791 |   | 80,992 |   | 56,526 |   | 13,476 |   | 13,743 |   |
| Depreciation and  amortization(12)                                                                                            |   | 17,119                         |       | 32,376 |   | 27,187 |   | 19,186 |   | 4,604 |   | 4,358 |   |
| Capital  expenditures:                                                                                                        |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| Paid in cash(13)                                                                                                              |   | 5,429                          |       | 11,899 |   | 22,689 |   | 7,262 |   | 1,813 |   | 1,745 |   |
| Financed with  capital lease obligations                                                                                      |   | 264                            |       | 4,438 |   | 109 |   | 1,711 |   | 48 |   | 116 |   |
| Ratio of  earnings to fixed charges(14)                                                                                       |   | —                         |       | — |   | 1.2 | x | — |   | — |   | 3.0 | x |
|                                                                                                                          |   |                           | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Other  Operating Data:**                                                                                                    |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| Bookings(15)                                                                                                                  |   | $                              | 281,267    |   | $ | 366,983 |   | $ | 359,975 |   | $ | 252,100 |   | $ | 54,021 |   | $ | 94,439 |   |
| Backlog at end  of period(16)                                                                                                 |   | 105,565                        |       | 149,928 |   | 178,297 |   | 156,100 |   | 75,388 |   | 84,184 |   |

 
|                                   |   | **As of December 31, (in thousands)(1)** |   |
|----------------------------------------|--------|------------------------------------------|--------|
| **(In thousands)**                     |   | **2002**                                 |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                   |   | **(Successor)(2)**                       |   |
| **Balance  Sheet Data:**               |   |                                     |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents             |   | $                                        | 12,612 |   | $ | 9,794 |   | $ | 8,199 |   | $ | 7,918 |   | $ | 3,518 |   |
| Working capital                        |   | 88,689                                   |   | 81,656 |   | 61,398 |   | 32,412 |   | 49,033 |   |
| Total assets                           |   | 548,967                                  |   | 645,711 |   | 664,254 |   | 531,842 |   | 330,927 |   |
| Total debt(17)                         |   | 381,707                                  |   | 400,250 |   | 383,279 |   | 315,651 |   | 186,765 |   |
| Mandatorily  redeemable securities(18) |   | 34,081                                   |   | 28,240 |   | 23,179 |   | — |   | — |   |
| Stockholder’s  equity             |   | 33,638                                   |   | 100,376 |   | 119,755 |   | 106,241 |   | 97,921 |   |
|                                        |        |                                          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying Notes toSelected Financial Data.

 

17

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**Notes to Selected Financial Data:**

 

(1)                                  Reflectsthe results of operations and financial position of companies we acquired forall periods subsequent to their respective acquisition dates as follows:

 
| **Company  Acquired** |                                         | **Date Acquired** |
|-----------------------|----------------------------------------------|-------------------|
|                  |                                         |              |
| •                | Coltech                                      |              | August 31, 2000 |
| •                | DeCrane Aircraft Seating Co. (formerly ERDA) |              | June 30, 2000 |
| •                | Carl F. Booth & Co.                      |              | May 11, 2000 |
| •                | Infinity                                     |              | December 17, 1999 |
| •                | International Custom Interiors               |              | October 8, 1999 |
| •                | PCI NewCo                                    |              | October 6, 1999 |
| •                | Custom Woodwork                              |              | August 5, 1999 |
| •                | Precision Pattern                            |              | April 23, 1999 |
| •                | PATS                                         |              | January 22, 1999 |
| •                | Dettmers                                     |              | June 30, 1998 |
| •                | Avtech                                       |              | June 26, 1998 |

 

(2)                                  Reflectsour results of operations and financial position prior to (predecessor) andsubsequent to (successor) our acquisition by DLJ.

 

(3)                                  Includescharges to reflect:

 

•                  a noncashinventory write-down of $7.2 million, 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 related to our restructuringactivities;

 

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

 

•                  a noncashinventory write-down of $6.0 million during the twelve months endedDecember 31, 1999 related to our Systems Integration Grouprestructuring; and

 

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

 

(4)                                  Includescharges of:

 

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

 

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

 

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

 

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

 

18

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(5)                                  Reflectsnoncash goodwill impairment charges resulting from:

 

•                  our annualimpairment testing during the year ended December 31, 2002 as required by SFASNo. 142 “Goodwill and Other Intangible Assets,” which was effective January 1,2002; and

 

•                  ourrestructuring during the year ended December 31, 2001.

 

(6)                                  Forthe five years ended December 31, 2002, reflects the amortization ofidentifiable intangible assets.  Forperiods prior to January 1, 2002, also reflects the amortization of goodwill.  Starting January 1, 2002, goodwill is nolonger amortized but instead subject to annual impairment testing with a losscharged to operations in the period in which impairment occurs as described inNote 5.

 

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

 

(8)                                  Forthe four months ended December 31, 1998, includes a $2.6 million benefit fromthe reduction of the deferred tax valuation allowance.  The provision for income taxes differs fromthe amount determined by applying the applicable U.S. statutory federal rate tothe income before income taxes primarily due to the effects of state andforeign income taxes and non-deductible expenses, principally goodwillimpairment charges and amortization (for periods prior to January 1,2002).  The difference in the effectivetax rates between periods is mostly a result of the relationship ofnon-deductible expenses to income before income taxes.

 

(9)                                  Reflectsthe noncash charge, net of $0.9 million tax benefit, for the impairment ofgoodwill upon adoption of SFAS No. 142 on January 1, 2002.

 

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

 

(11)                            Wedefine EBITDA as earnings before interest, income taxes, depreciation andamortization, restructuring, asset impairment and other related charges,acquisition related charges not capitalized and other noncash and nonoperatingcharges.  EBITDA, as defined, is theprimary measurement we use to evaluate our operating groups’ performance and isconsistent with the manner in which our lenders and ultimate investors measureour overall performance.  The tablebelow reconciles EBITDA to consolidated operating income.

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

 

EBITDA is not a measure of performance or financialcondition under accounting principles generally accepted in the United Statesof America.  EBITDA is not intended torepresent cash flow from operations and should not be considered as analternative to income from operations or net income computed in accordance withgenerally accepted accounting principles, as an indicator of

 

19

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our operating performance, as an alternative to cashflow from operating activities or as a measure of liquidity.  The funds depicted by EBITDA are notavailable for our discretionary use due to funding requirements for workingcapital, capital expenditures, debt service, income taxes and other commitmentsand contingencies.  We believe thatEBITDA is a standard measure of performance commonly reported and widely usedby analysts, investors and other interested parties in the financialmarkets.  However, not all companiescalculate EBITDA using the same method, and the EBITDA numbers we report maynot be comparable to EBITDA reported by other companies.

 

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

 

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

 

(14)                            Forpurposes of calculating the ratio of earnings to fixed charges, earningsrepresent net income before income taxes, minority interests in the income ofmajority-owned subsidiaries, extraordinary items and fixed charges.  Fixed charges consist of:

 

•                  interest,whether expensed or capitalized;

 

•                  amortization ofdebt expense and discount or premium relating to any indebtedness, whetherexpensed or capitalized; and

 

•                  one-third ofrental expenses under operating leases which is considered to be a reasonableapproximation of the interest portion of such expense.

 

There were deficiencies of earnings to cover fixedcharges of $8.3 million for the year ended December 31, 2002, $12.7 million forthe year ended December 31, 2001, $3.2 million for the year ended December 31,1999 and $2.9 million for the four months ended December 31, 1998.

 

(15)                            Bookingsrepresent the total invoice value of purchase orders received during theperiod.

 

(16)                            Backlogrepresents the total invoice value of unfilled purchase orders at the end ofthe period. Orders may be subject to cancellation by the customer prior toshipment. The level of unfilled orders at any given date during the year willbe materially affected by the timing of our receipt of orders and the speedwith which those orders are filled.

 

(17)                            Totaldebt is defined as long-term debt, including current portion, and short-termborrowings.

 

(18)                            Reflectsmandatorily redeemable 16% preferred stock.

 

20

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| **ITEM  7.** |   | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------------|--------|-------------------------------------------------------------------------------------------------|

 

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

 

**Overview**

 

Our historical financial statements include thefinancial position and results of operations of our Specialty AvionicsGroup.  On March 14, 2003, we enteredinto a definitive agreement to sell this group for $140,000,000 in cash, withthe net proceeds from the sale going to repay borrowings under DeCrane’s seniorcredit facility.  The sale is expectedto be consummated prior to June 30, 2003 and is subject to customary closingconditions, including financing and the receipt of regulatory and otherthird-party approvals.  The sale of ourSpecialty Avionics Group is not expected to affect the operations of ourremaining operating groups.  See“—Liquidity and Capital Resources” below for additional information.

 

Our financial position and results of operations havealso been affected by our history of acquisitions.  As a result, our historical financial statements do not reflectthe financial position and results of operations of our currentbusinesses.  Our most recentacquisitions, which affect the comparability of the historical financialcondition and results of operations described herein, are within our CabinManagement Group and include Carl F. Booth & Co., acquired on May 11, 2000,and DeCrane Aircraft Seating Co. (formerly ERDA), acquired on June 30,2000.  Our historical financialstatements reflect the financial position and results of operations of theacquired businesses subsequent to their respective acquisition dates.

 

**IndustryOverview and Trends**

 

We compete in the aircraft products and servicesmarket of the aerospace industry.  Themarket for our products and services is largely driven by demand in the threecivil aircraft markets: commercial, regional and corporate, VIP andhead-of-state aircraft.  The September11, 2001 terrorist attack on the United States, ongoing concerns about globalterrorism, the current Middle-Eastern military conflicts, the SevereAcute Respiratory Syndrome(SARS) epidemic and weak global economic conditions are all adverselyimpacting air travel and, in turn, the aerospace industry and our business.

 

In response to these adverse conditions, we announcedand implemented a restructuring plan in December 2001 designed to reduceexpenses and conserve working capital. This plan includes permanently closing one manufacturing facility andidling a second facility for an indefinite period, curtailing several productdevelopment programs and instituting workforce reductions.  During the first quarter of fiscal 2002, wealso announced we would consolidate the production of four Cabin Managementmanufacturing facilities into two facilities, resulting in the permanentclosure of two additional facilities. During the second quarter of fiscal 2002, we also announced we wouldpermanently close the temporarily idled manufacturing facility.  See “—Restructuring, Asset Impairment andOther Related Charges” below for additional information.

 

The commercial aircraft portion of our businessexperienced significant weakness in 2002 and we believe this condition willcontinue into 2003 and 2004, with potential recovery not expected to occuruntil 2005.  The corporate, VIP and head-of-stateaircraft portion of our business also experienced growing weakness during 2002and this trend is likely to worsen in 2003. However, we believe the potential exists for corporate, VIP andhead-of-state aircraft deliveries to recover modestly in 2004 and reflectgrowing strength in 2005.

 

21

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**Resultsof Operations**

 

Our results of operations for the years ended December31, 2002 and 2001 have been affected by restructuring, asset impairment and otherrelated charges relating to our restructuring activities.  These restructuring charges, which affectthe comparability of our reported results of operations between periods, aremore fully described in “—Restructuring, Asset Impairment and Other RelatedCharges” below.

 

**Year Ended December 31, 2002 Comparedto Year Ended December 31, 2001**

 

**Revenues.* ***Revenuesdecreased $69.8 million, or 17.6%, to $325.6 million for the year endedDecember 31, 2002 from $395.4 million for the year ended December 31, 2001.  By segment, revenues changed as follows:

 
|                     |   | **Increase (Decrease)  From 2001** |   |
|--------------------------|--------|------------------------------------|--------|
| **(In millions)**        |   | **Amount**                         |   | **Percent** |   |
|                     |   |                               |   |   |   |
| Cabin Management         |   | $                                  | (33.2  | ) | (16.1 | )% |
| Specialty  Avionics      |   | (27.5                              | )      | (22.3 | ) |
| Systems  Integration     |   | (9.5                               | )      | (14.0 | ) |
| Inter-group  elimination |   | 0.4                                |   |   |   |
| Total                    |   | $                                  | (69.8  | ) |   |   |

 

*CabinManagement. *Revenuesdecreased by $33.2 million, or 16.1% compared to the prior year.  The decrease, which is across most of ourproduct and services categories, is caused by the adverse impact of weak globaleconomic conditions on the corporate, VIP and head-of-state aircraft market in2002 versus 2001 as follows:

 

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

 

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

 

•                  a $6.1 milliondecrease in seating products revenues; offset by

 

•                  a $5.1 millionincrease in other product and services revenues.

 

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

 

•                  a $16.9 millionvolume decrease in interconnect products; and

 

•                  a $10.6 milliondecrease in cockpit audio, communications, lighting and power and controldevices revenues.

 

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

 

•                  a $7.5 milliondecrease in the commercial aircraft systems integration engineering services weprovide in the aftermath of September 11th; and

 

•                  a $2.0 milliondecrease resulting from reduced production and delivery of corporate, VIP andhead-of-state aircraft auxiliary fuel systems due to the adverse impact of weakglobal economic conditions on the demand for those types of aircraft.

 

22

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

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

 

Gross profit is reduced by restructuring, assetimpairment and other related charges totaling $11.0 million for the year endedDecember 31, 2002 and $16.1 million for the year ended December 31, 2001.  Excluding these charges, gross profitdecreased $29.1 million, or 22.1%, to $102.7 million for the year endedDecember 31, 2002 compared to $131.8 million for the same period last yearand gross profit as a percent of revenues was 31.5% for the year ended December31, 2002 compared to 33.3% for the same period last year.

 

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

 

•                  a $6.6 millionnet decrease caused by charges related to our 2001 and 2002 restructuringactivities;

 

•                  a $3.8 milliondecrease in profit margins due to lower volume for our corporate, VIP andhead-of-state aircraft furniture and seating products, and

 

•                  a $0.3 milliondecrease in gross profit related to lower volume for our cabin management andentertainment systems.

 

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

 

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

 

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

 

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

 

**Selling,general and administrative expenses.**  Selling, general and administrative expensesdecreased $8.0 million, or 13.4%, to $51.9 million for the year ended December31, 2002, from $59.9 million for the same period last year.  By segment, SG&A expenses changed as follows:

 
|                 |   | **Increase (Decrease)  From 2001** |   |
|----------------------|--------|------------------------------------|--------|
| **(In millions)**    |   | **Amount**                         |   | **Percent** |   |
|                 |   |                               |   |   |   |
| Cabin Management     |   | $                                  | (1.9   | ) | (7.3 | )% |
| Specialty  Avionics  |   | (2.9                               | )      | (20.3 | ) |
| Systems  Integration |   | (2.1                               | )      | (22.0 | ) |
| Corporate            |   | (1.1                               | )      |   |   |
| Total                |   | $                                  | (8.0   | ) |   |   |

 

23

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SG&A expenses include restructuring, assetimpairment and other related charges of $6.5 million for the year endedDecember 31, 2002 and $4.0 million for the year ended December 31, 2001.  Excluding these charges, SG&A expensesdecreased $10.5 million, or 18.8%, to $45.4 million for the year ended December31, 2002 compared to $55.9 million for the same period last year and SG&Aexpenses as a percent of revenues were 13.9% for the year ended December 31,2002 compared to 14.1% for the same period last year.

 

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

 

•                  a $4.8 milliondecrease in expenses as a result of cost reduction measures implemented in 2001and 2002 in response to lower sales volume resulting from the weak globaleconomic conditions; offset by

 

•                  a $2.9 millionincrease caused by charges relating to our 2001 and 2002 restructuringactivities.

 

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

 

•                  a $2.5 milliondecreased in expenses as a result of lower labor and employee benefit costsresulting from workforce reductions implemented during the fourth quarter offiscal 2001; and

 

•                  a $0.4 milliondecrease caused by restructuring charges relating to our 2001 restructuringactivities.

 

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

 

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

 

**Impairmentof goodwill.**  In thefourth fiscal quarter of 2002, a $7.7 million charge was recorded the reflectthe additional impairment of goodwill in connection with the annual impairmenttesting provisions of SFAS No. 142, “Goodwill and Other IntangibleAssets”.  The additional impairmentresults from continued weakness in the commercial aircraft portion of ourbusiness and pertains to our Specialty Avionics Group.

 

In 2001, an $8.6 million impairment charge wasrecognized pursuant to the provisions of SFAS No. 121, “Accounting forImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”to reflect the impairment resulting from our restructuring.

 

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

 

Effective January 1, 2002, we adoptedSFAS No. 142, “Goodwill and Other Intangible Assets” and theprovisions of SFAS No. 141, “Business Combinations,” which wererequired to be adopted concurrent with the adoption ofSFAS No. 142.  Under these newstandards, goodwill is deemed to be an indefinite-lived asset and, as a result,the recording of periodic goodwill amortization charges was discontinuedeffective January 1, 2002.  In addition,SFAS No. 141 requires that intangible assets relating to acquired assembledworkforce intangibles not meeting the criteria for recognition apart fromgoodwill be reclassified to goodwill. Goodwill amortization was $14.3 million for the year ended December 31,2001,******whichincludes $1.6 million of assembled workforce amortization, now deemed part ofgoodwill.

 

24

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Excluding the effect of the accounting change,depreciation and amortization decreased $1.0 million as a result of lowerdepreciable costs resulting from the impairment of long-lived assets recordedduring the fourth quarter of fiscal 2001 and 2002, partially offset byadditional depreciation resulting from capital expenditures during the period.

 

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

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

 

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

 

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

 

•                  a $3.6 million decreaseresulting from lower sales volume for our cabin management and entertainmentsystems.

 

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

 

•                  a $9.1 milliondecrease related to lower demand for our commercial aircraft products; offsetby

 

•                  a $1.2 millionincrease resulting from the effect of cost reduction programs implemented in2001 and 2002.

 

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

 

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

 

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

 

25

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**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 and non-deductibleexpenses, principally goodwill impairment charges and amortization (for periodsprior to the January 1, 2002 adoption of SFAS No. 142).  The difference in the effective tax ratesbetween periods is mostly the result of the adoption of SFAS No. 142.

 

**Lossbefore cumulative effect of change in accounting principle. **Loss before cumulative effect of change in accounting principle decreased$5.2 million to a net loss of $8.8 million for the year ended December 31,2002, compared to a net loss of $14.0 million for the same period last year.

 

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

 

**Netincome (loss).**  Netloss increased $52.0 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 periodlast year.  The increase over the prioryear is primarily a result of the cumulative effect of change in accountingprinciple.

 

**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 last year.  The increasein the net loss applicable to our common stockholder is attributable to:

 

•                  a $57.2 millioncharge to reflect the cumulative effect of the change in accounting principle;and

 

•                  a $0.7 millionincrease in accrued 16% mandatorily redeemable preferred stock dividendsresulting from the quarterly compounding of accrued dividends; offset by

 

•                  a $5.2 milliondecrease in our loss before the cumulative effect of the change in accountingprinciple.

 

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

 

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

 

As described in “—Industry Overview and Trends,” theacts, and ongoing threats, of global terrorism and the current militaryconflicts, SARS epidemic and weak global economic conditions are having anadverse impact on our business, resulting in the decrease in bookings during2002 and related backlog at the end of the period.  In addition, we believe that some of our customers havesubstantially reduced their order lead times which may have adversely affectedbookings during the period.

 

We are not able to predict the continuing impact theseevents will have on bookings and backlog in future periods.  However, given the magnitude of theseevents, the adverse impact could be material.

 

26

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**Year Ended December 31, 2001 Comparedto Year Ended December 31, 2000**

 

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

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

 

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

 

•                  the inclusion of$23.8 million of revenues resulting from our acquisitions of Carl F. Booth& Co. and DeCrane Aircraft Seating Co. in 2000; and

 

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

 

*SpecialtyAvionics.*  Revenuesincreased by $12.3 million, or 11.1% over the prior year, due to:

 

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

 

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

 

*SystemsIntegration.*  Revenuesincreased by $4.6 million, or 7.2% over the prior year, due to:

 

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

 

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

 

**Grossprofit.**  Gross profitincreased $0.4 million, or 0.3%, to $115.7 million for the year ended December31, 2001, from $115.3 million of the same period last year.  By segment, gross profit changed as follows:

 
|                     |   | **Increase  (Decrease)  From 2000** |       |
|--------------------------|--------|-------------------------------------|------------|
| **(In millions)**        |   | **Amount**                          | ** ** | **Percent** | ** ** |
|                     |   |                                |       |   |   |
| Cabin Management         |   | $                                   | (9.5       | ) | (15.9 | )% |
| Specialty  Avionics      |   | 6.5                                 |       | 19.0 |   |
| Systems  Integration     |   | 3.5                                 |       | 15.7 |   |
| Inter-group  elimination |   | (0.1                                | )          |   |   |
| Total                    |   | $                                   | 0.4        |   |   |   |

 

Gross profit for the yearended December 31, 2001 is reduced by $16.1 million of restructuring and assetimpairment charges relating to our 2001 restructuring.  Excluding these charges, gross profitincreased $16.5 million, or 14.3%, to $131.8 million for the year endedDecember 31, 2001 and gross profit as a percent of revenues of 33.3% for theyear ended December 31, 2001 is comparable to 33.2% for the same period lastyear.

 

27

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

 

•                  a $13.6 milliondecrease caused by 2001 restructuring charges relating to the curtailment andresulting write-off of inventoried costs for several product developmentprograms, realignment of production programs between facilities and inventorywrite-downs, and

 

•                  a $4.3 milliondecrease in profit margins associated with higher manufacturing costs forcorporate, VIP and head-of-state aircraft furniture related to large airframemodels; offset by

 

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

 

•                  a $1.3 millionincrease in gross profit related to higher product volume for corporate, VIPand head-of-state aircraft furniture.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

SG&A expenses for theyear ended December 31, 2001 includes $4.0 million of restructuring and assetimpairment charges relating to our 2001 restructuring.  Excluding these charges, SG&A expensesincreased $10.5 million, or 23.1%, to $55.9 million for the year ended December31, 2001 and SG&A expenses as a percent of revenues increased to 14.1% forthe year ended December 31, 2001 compared to 13.1% for the same period lastyear.

 

28

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

 

•                  a $3.6 millionincrease caused by 2001 restructuring and asset impairment charges relating toseverance, lease termination and other related costs;

 

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

 

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

 

*SpecialtyAvionics.*  SG&Aexpenses increased by $2.5 million, or 20.4% over the prior year, due to:

 

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

 

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

 

*SystemsIntegration. *SG&Aexpenses increased by $1.1 million, or 52.4% over the prior year, due to anincrease in expenses associated with refocusing our cabin and flight decksystems integration services to product offerings requiring higher levels ofsales and marketing, program management and customer service support.

 

*Corporate. *SG&A expensesincreased by $.6 million, or 7.6% over the prior year, primarily due toincreased depreciation expense.

 

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

 

**Depreciationand amortization of intangibles.**  Depreciation and amortization expense, which includesamortization of goodwill and identifiable intangible assets, increased $5.2million, or 19.1%, for the year ended December 31, 2001.  The increase results from the inclusion of$2.2 million of depreciation and amortization expense in 2001 from companies weacquired during 2000 and additional depreciation resulting from our capitalexpenditures during the period.

 

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

 

Operating income decreased $24.8 million to $27.2million for the year ended December 31, 2001, from $52.0 million for thesame period last year.  Operating incomefor the year ended December 31, 2001 is reduced by $28.7 million ofrestructuring and asset impairment charges, $22.1 million of which are noncashcharges.  Excluding these restructuringand asset impairment charges, operating income increased $3.9 million, or 7.5%,over the prior year.

 

29

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EBITDA and operating income changed as follows:

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

 

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

 

•                  a $5.5 milliondecrease primarily resulting from higher manufacturing costs for corporate, VIPand head-of-state aircraft furniture related to the large airframe models;offset by

 

•                  a $5.0 millionincrease resulting from our 2000 acquisitions.

 

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

 

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

 

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

 

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

 

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

 

**Provisionfor income taxes.**  Theprovision for income taxes differs from the amount determined by applying theapplicable U.S. statutory federal rate to the income before income taxesprimarily due to the effects of state and foreign income taxes andnon-deductible expenses, principally goodwill amortization.  The difference in the effective tax ratesbetween periods is mostly a result of the relationship of non-deductibleexpenses to income before income taxes.

 

**Netincome (loss).**  Netincome decreased $17.6 million to a net loss of $14.0 million for the yearended December 31, 2001 compared to net income of $3.6 million for thesame period last year.

 

30

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**Netincome (loss) applicable to common stockholder.**  Net income applicable to DeCrane Holdings,our common stockholder, decreased $20.4 million to a net loss of $19.1 millionfor the year ended December 31, 2001 compared to net income of $1.3million for the same period last year. The increase is attributable to:

 

•                  a $17.6 millionnet loss increase; and

 

•                  a $2.8 millionincrease in accrued dividends and redemption value accretion resulting from theissuance of 16% mandatorily redeemable preferred stock on June 30, 2000.

 

**Bookings. **Bookings increased $7.0million, or 1.9%, to $367.0 million for the year ended December 31, 2001compared to $360.0 million for the same period last year.  The increase in bookings for 2001 resultsfrom:

 

•                  a $22.5 millionincrease associated with companies we acquired during 2000 that are includedfor a full year in our 2001 results; offset by

 

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

 

**Backlogat end of period.** Backlog decreased $28.4 million to $149.9 million as ofDecember 31, 2001 compared to $178.3 million as of December 31, 2000.  The decrease in backlog for 2001 primarilyresults from the adverse impact the events of September 11th and itsaftermath and the weakening global economic conditions are having on ourbusinesses.

 

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

 

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

 

During the years ended December 31, 2002 and 2001, werecorded restructuring, asset impairment and other related pre-tax charges,principally related to two restructuring plans.  These charges, and the effect these charges had on our reportedresults of operations for the periods, are summarized below along withcomparative information for the year ended December 31, 2000.

 
|                                                           |   | **Year Ended  December 31,** |   |
|----------------------------------------------------------------|--------|------------------------------|--------|
| **(In millions)**                                              |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                           |   |                         |   |   |   |   |   |
| Nature of  charges:                                            |   |                         |   |   |   |   |   |
| 2001 Asset  Realignment Restructuring                          |   | $                            | 6.9    |   | $ | 28.7 |   | $ | — |   |
| 2002 Seat Manufacturing  Facilities Restructuring              |   | 6.3                          |   | — |   | — |   |
| Other asset  impairment related charges                        |   | 12.0                         |   | — |   | — |   |
| Total pre-tax  charges                                         |   | $                            | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                                           |   |                         |   |   |   |   |   |
| Charged to  operations:                                        |   |                         |   |   |   |   |   |
| Cost of sales                                                  |   | $                            | 11.0   |   | $ | 16.1 |   | $ | — |   |
| Selling, general  and administrative expenses                  |   | 6.5                          |   | 4.0 |   | — |   |
| Impairment of  goodwill                                        |   | 7.7                          |   | 8.6 |   | — |   |
| Total pre-tax  charges                                         |   | $                            | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                                           |   |                         |   |   |   |   |   |
| Components of  charges:                                        |   |                         |   |   |   |   |   |
| Noncash charges                                                |   | $                            | 19.4   |   | $ | 22.1 |   | $ | — |   |
| Cash charges                                                   |   | 5.8                          |   | 6.6 |   | — |   |
| Total pre-tax  charges                                         |   | $                            | 25.2   |   | $ | 28.7 |   | $ | — |   |
|                                                           |   |                         |   |   |   |   |   |
| As reported:                                                   |   |                         |   |   |   |   |   |
| Gross profit                                                   |   | $                            | 91.7   |   | $ | 115.7 |   | $ | 115.3 |   |
| Selling, general  and administrative expenses                  |   | 51.9                         |   | 59.9 |   | 45.4 |   |
| Impairment of  goodwill                                        |   | 7.7                          |   | 8.6 |   | — |   |
| Operating income                                               |   | 26.4                         |   | 27.2 |   | 52.0 |   |
| Income (loss)  before taxes and change in accounting principle |   | (8.5                         | )      | (12.8 | ) | 9.9 |   |
|                                                           |   |                         |   |   |   |   |   |
| As adjusted:                                                   |   |                         |   |   |   |   |   |
| Gross profit                                                   |   | $                            | 102.7  |   | $ | 131.8 |   | $ | 115.3 |   |
| Selling, general  and administrative expenses                  |   | 45.4                         |   | 55.9 |   | 45.4 |   |
| Impairment of  goodwill                                        |   | —                       |   | — |   | — |   |
| Operating income                                               |   | 51.6                         |   | 55.9 |   | 52.0 |   |
| Income (loss)  before taxes and change in accounting principle |   | 16.7                         |   | 15.9 |   | 9.9 |   |

 

**2001 Asset Realignment Restructuring**

 

During the second quarter of fiscal 2001, we adopted arestructuring plan to realign aircraft furniture production programs among ourmanufacturing facilities.  In addition,and in response to the adverse impact on the aerospace industry resulting fromthe September 11th terrorist attack and its aftermath, as well asthe weakening of global economic conditions, we announced and implemented afurther restructuring plan in December 2001 designed to reduce costs andconserve working capital.  This planincluded permanently closing one manufacturing facility and idling a secondfacility for an indefinite period, curtailing several product developmentprograms and instituting workforce reductions. This plan primarily affected our Cabin Management and Specialty AvionicsGroups.

 

32

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

 

Due to the ongoing weakness of the corporate, VIP andhead-of-state aircraft market, we decided during the second quarter of fiscal2002 to permanently close the temporarily idled manufacturing facility.  In connection with this decision, werecorded additional pre-tax charges to operations totaling $6.9 million duringthe year ended December 31, 2002, of which $3.8 million were noncash charges,for restructuring, asset impairment charges and other related expenses.  During 2002, we paid $4.6 million of costsrelated to this restructuring in cash and a $0.1 million restructuring reserveremained at December 31, 2002 solely for the remaining lease termination andother related costs.  The restructuringplan relating to leased facilities was completed during the second quarter offiscal 2002; however, future cash payments extend beyond this date due to leasepayments on the vacated facilities and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

**2002 Seat Manufacturing FacilitiesRestructuring**

 

In 2002, we announced we would consolidate theproduction of four seating and related manufacturing facilities into two,resulting in the permanent closure of two facilities.  This plan was designed to improve manufacturing efficiencies andto further reduce costs and conserve working capital.  In connection with this restructuring plan, we recorded pre-taxcharges to operations totaling $6.3 million during the year ended December 31,2002, of which $3.6 million were noncash charges, for restructuring, assetimpairment and other related restructuring charges.

 

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

 

The restructuring plan was substantially completedduring the second quarter of fiscal 2002. A $0.1 million restructuring reserve remains at December 31, 2002 forlease termination and other related costs. The manufacturing facilities were closed during June 2002; however,future cash payments extend beyond this date due to lease payments on thevacated facilities and the incurrence of other exit costs.  Future cash payments will be funded fromexisting cash balances and internally generated cash from operations.

 

**Other Asset Impairment RelatedCharges**

 

Due to continued weakness in the commercial aircraftportion of our business, in the fourth quarter of fiscal 2002 we recorded apre-tax charge of $12,048,000 for additional asset impairments.  Of this amount, $7,672,000 related to ourannual goodwill impairment testing pursuant to SFAS No. 142 and $4,376,000related to inventories and was charged to cost of goods sold.

 

33

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**Liquidityand Capital Resources**

 

Our principal cash needs are for debt service, workingcapital, capital expenditures and strategic acquisitions, as well as to provideDeCrane Holdings with cash to finance its needs, which consists primarily ofcash dividends on its preferred stock beginning in 2005.  Our principal sources of liquidity areexpected to be cash flow from operations and third party borrowings,principally under our senior credit facility.

 

Net cash provided by operating activities was $30.3million for the year ended December 31, 2002 and consisted of $30.8 million ofcash provided by operations after adding back depreciation, amortization, thenoncash portion of our restructuring and asset impairment charges and othernoncash items, $0.4 million used for working capital, and $0.1 million used forother liabilities.  The followingfactors contributed to the $0.4 million working capital increase:

 

•                  a $18.5 milliondecrease in accounts payable and accrued expenses, primarily resulting fromreduced purchasing commensurate with lower revenues; and

 

•                  a $1.4 millioninventory increase; offset by

 

•                  a $19.1 millionaccounts receivable decrease resulting from decreased revenues as well astiming differences relating to progress and final billings on long-termcontracts; and further offset by

 

•                  a $0.4 millionincrease in income taxes payable.

 

We expect moderate working capital growth during 2003.

 

Net cash used for investing activities was $11.3million for the year ended December 31, 2002 and consisted of:

 

•                  $5.9 million ofcontingent acquisition consideration paid during 2002; and

 

•                  $5.4 million forcapital expenditures.

 

We anticipate spending approximately $5.0 to $6.0million for capital expenditures in 2003. As of December 31, 2002, there are no remaining contingent considerationpayment obligations.

 

Net cash used for financing activities was $16.2million for the year ended December 31, 2002. Cash of $22.3 million was used for net repayments of our revolving lineof credit borrowings under our senior credit facility, principal payments onour term debt, capitalized lease obligations and other debt, financing costsassociated with amending our senior credit facility and the repurchase of stockand options from former management members. Cash of $6.1 million was provided by a $5.0 million capital contributionfrom DeCrane Holdings and $1.1 million of additional long-term borrowings.

 

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

 

At December 31, 2002, we had $88.7 million of workingcapital and had $43.6 million of borrowings available under our revolving lineof credit.

 

34

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As described in “—Industry Overview and Trends,” theacts, and ongoing threats, of global terrorism and the current militaryconflicts, SARS epidemic and weak global economic conditions are all adverselyimpacting our business.  In response, weimplemented restructuring plans in 2001 and 2002, as described in“—Restructuring, Asset Impairment and Other Related Charges,” designed toreduce costs and conserve working capital.

 

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

 

In March 2003, we entered into a definitive agreementto sell our Specialty Avionics Group and received requisite lender approval toamend the senior credit facility to permit the sale.  The amendment provides that the estimated net proceeds of $132.0million from the sale will be used to repay borrowings under our senior creditfacility.  The amendment also relaxes variousfinancial covenants for 2003 and beyond, decreases by $10,000,000 the maximumpermitted revolving line of credit borrowings to $40,000,000, increases theprime rate and LIBOR interest margins by 1.5% and permits the issuance ofadditional indebtedness and the repurchase of a portion of our 12% seniorsubordinated notes.

 

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

 

We are working diligently to close the sale, which issubject to customary closing conditions, including buyer financing and the needto obtain third party consents, and expect the sale will be consummated priorto June 30, 2003.  We expect to be incompliance with the revised financial covenants through 2003 based on ourcurrent operating plan and our ability to respond to further adverse changes inour business through additional cost reduction measures.  We expect to continue conducting our operationsin the ordinary course of business.

 

Although we cannot be certain and provided that thesale of the Specialty Avionics Group described above will be consummated priorto June 30, 2003, we believe our operating cash flows, together with borrowingsunder our senior credit facility, will be sufficient to meet our future short-and long-term operating expenses, working capital requirements, capitalexpenditures and debt service obligations for the next twelve months.  However, our ability to pay principal orinterest, to comply with our debt financial covenants or refinance our debt andto satisfy our other debt obligations will depend on our future operatingperformance as well as competitive, legislative, regulatory, business and otherfactors beyond our control.

 

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

 

35

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**Disclosureof Contractual Obligations and Commitments**

 

The following table summarizes our known obligationsto make future cash payments as of December 31, 2002, as well an estimate ofthe periods during which these payments are expected to be made.

 
|                                                          |   |      |       | **Years  Ending December 31,** |       |
|---------------------------------------------------------------|--------|-----------|------------|--------------------------------|------------|
| **(In millions)**                                             |   | **Total** | ** ** | **2003**                       | ** ** | **2004  and  2005** | ** ** | **2006  and  2007** | ** ** | **2008  and  Beyond** | ** ** |
|                                                          |   |      |       |                           |       |   |   |   |   |   |   |
| Long-term debt:                                               |   |      |       |                           |       |   |   |   |   |   |   |
| Senior credit  facility                                       |   | $         | 270.2      |                           | $          | 14.7 |   | $ | 149.4 |   | $ | 106.1 |   | $ | — |   |
| 12% senior  subordinated notes                                |   | 100.0     |       | —                         |       | — |   | — |   | 100.0 |   |
| Capital lease  obligations                                    |   | 4.2       |       | 0.7                            |       | 1.2 |   | 0.7 |   | 1.6 |   |
| Other  indebtedness                                           |   | 7.3       |       | 1.5                            |       | 1.2 |   | 0.9 |   | 3.7 |   |
| Total long-term  debt                                         |   | 381.7     |       | 16.9                           |       | 151.8 |   | 107.7 |   | 105.3 |   |
|                                                          |   |      |       |                           |       |   |   |   |   |   |   |
| Operating lease  obligations                                  |   | 25.4      |       | 3.2                            |       | 6.1 |   | 5.2 |   | 10.9 |   |
| Mandatorily  redeemable preferred stock redemption obligation |   | 37.0      |       | —                         |       | — |   | — |   | 37.0 |   |
| Total obligations                                             |   | $         | 444.1      |                           | $          | 20.1 |   | $ | 157.9 |   | $ | 112.9 |   | $ | 153.2 |   |

 

The senior credit facility obligations reflected aboveare prior to the effect of the March 2003 amendment and application of theestimated net proceeds of $132.0 million from the pending sale of our SpecialtyAvionics Group as required by the amendment. Assuming the pending sale of our Specialty Avionics Group were to havebeen consummated on December 31, 2002, our obligations would have been asfollows:

 
|                     |   |      |       | **Years  Ending December 31,** |       |
|--------------------------|--------|-----------|------------|--------------------------------|------------|
| **(In millions)**        |   | **Total** | ** ** | **2003**                       | ** ** | **2004  and  2005** | ** ** | **2006  and  2007** | ** ** | **2008  and  Beyond** | ** ** |
|                     |   |      |       |                           |       |   |   |   |   |   |   |
| Senior credit  facility: |   |      |       |                           |       |   |   |   |   |   |   |
| As reported              |   | $         | 270.2      |                           | $          | 14.7 |   | $ | 149.4 |   | $ | 106.1 |   | $ | — |   |
| Assumed debt  repayment  |   | (132.0    | )          | (11.4                          | )          | (70.1 | ) | (50.5 | ) | — |   |
| As adjusted              |   | $         | 138.2      |                           | $          | 3.3 |   | $ | 79.3 |   | $ | 55.6 |   | $ | — |   |
|                     |   |      |       |                           |       |   |   |   |   |   |   |
| Total  obligations:      |   |      |       |                           |       |   |   |   |   |   |   |
| As reported              |   | $         | 444.1      |                           | $          | 20.1 |   | $ | 157.9 |   | $ | 112.9 |   | $ | 153.2 |   |
| Assumed debt  repayment  |   | (132.0    | )          | (11.4                          | )          | (70.1 | ) | (50.5 | ) | — |   |
| As adjusted              |   | $         | 312.1      |                           | $          | 8.7 |   | $ | 87.8 |   | $ | 62.4 |   | $ | 153.2 |   |

 

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

 

We are a wholly-owned subsidiary of DeCrane Holdings,whose capital structure also includes mandatorily redeemable preferredstock.  Since we are DeCrane Holdings’only operating subsidiary and source of cash, we may be required to fundDeCrane Holdings’ redemption obligation in the future.  The DeCrane Holdings preferred stock has atotal redemption value of $62.2 million as of December 31, 2002 and ismandatorily redeemable on September 30, 2009.

 

During our normal course of business, we have enteredinto agreements containing indemnities pursuant to which we may be required tomake payments in the future.  Theseindemnities are in connection with facility leases and liabilities forspecified claims arising from investment banking services our financialadvisors provide to us.  The duration ofthese indemnities, commitments and guarantees varies, and in certain cases, isindefinite.

 

36

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Substantially all of these indemnities provide no limitation on themaximum potential future payments we could be obligated to make and is notquantifiable.  We have not recorded anyliability for these indemnities as of December 31, 2002 since no claims havebeen asserted to date.

 

In connection with the pending sale of our SpecialtyAvionics Group, we will also be making indemnities to the buyer with respect toa number of customary, and certain other specific, representations and warranties.   Our indemnities with respect to some ofthese matters will be limited in terms of duration with the maximum ofpotential future payments capped at $14.0 million, while others will have nolimitations.

 

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

 

**CriticalAccounting Policies**

 

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

 

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

 

**Allowancefor uncollectible accounts receivable.**  Accounts receivable are reduced by anallowance for amounts that are deemed uncollectible.  The estimated allowance for uncollectible amounts is basedprimarily on our evaluation of the financial condition of each of our customersand their payment history.  We alsoprovide an allowance based on the age of all receivables for which we have notestablished a customer-specific allowance. Generally, we do not require collateral or other security to supportaccounts receivable, however, under certain circumstances, we require depositsor cash-on-delivery terms.  While ourlosses have been within our expectations, a deterioration of our customers’financial condition may require that we provide additional allowances, reducingour operating income in future periods. Our customers operate in the corporate, VIP and head-of-state andcommercial aircraft industry throughout the world and are being adverselyimpacted by the acts, and ongoing threats, of global terrorism and the currentmilitary conflicts, SARS epidemic and weak global economic conditions.  Accounts receivable of $40.7 million isreduced by an allowance for uncollectible accounts of $1.8 million as ofDecember 31, 2002.

 

**Work-in-processinventory–deferred program costs.**  We incur product development costs, comprised principally ofengineering costs, relative to programs and contracts with long productioncycles.  In accordance with industrypractice, we defer these costs in inventory. Program costs are charged to cost of sales over the production cycle ofthe program.  Periodically, we assessthe recoverability of the deferred program costs based on existing orderbacklog and our estimate of future orders. We reduce the deferred program costs to estimated realizable value inthe period in which recoverability becomes uncertain.  As of December 31, 2002, we have $14.8 million of deferredprogram costs included in work-in-process inventory.

 

**Allowancefor excess and obsolete inventory. **Inventoriesare reduced by an allowance for estimated excess and obsolete inventory.  The allowance is the difference between thecost of the

 

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inventory and its estimated market value.  Our market value estimates are based upon existing order backlog,our assumptions about market conditions, including future orders and marketpricing.  While our products are notsubject to rapid technological obsolescence, we also consider this factor indetermining our market value estimates. If our customers cancel existing orders or actual market conditions,including future orders, are less favorable than we projected, we may provideadditional allowances, reducing our gross profit in future periods.  Inventories of $86.5 million were reduced byan allowance for excess and obsolete inventory of $5.7 million as of December31, 2002.

 

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

 

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

 

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

 

As a result of our firstrequired annual testing, as of October 31, 2002, we recorded an additional $7.7million pre-tax impairment charge to operations.  The charge was primarily the result of using lower cash flowforecasts for the commercial aircraft portion of our business.  Goodwill with an aggregate book value of$277.1 million remains as of December 31, 2002 and will be subject impairmenttesting in 2003.

 

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

 

•                  underperformancerelative to expected future operating results;

 

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

 

•                  changes in ourbusiness strategy; or

 

•                  negativeaerospace industry or global economic conditions.

 

Our impairment review consists of comparing the sum ofthe expected undiscounted future cash flows resulting from the use of the assetto the carrying value of the assets. When we determine that the carrying value may not be recoverable, werecord an impairment loss equal to the excess of the asset’s

 

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carrying value over its fair value. We measure fair value based on a projected discounted cash flow methodusing a discount rate we believe to be commensurate with the risk inherent inour current business model.  Netlong-lived assets and intangible assets, excluding goodwill, amounted to $103.6million as of December 31, 2002.

 

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

 

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

 

**Revenueand profit recognition under long-term contracts. **Because of relatively long production cycles, aportion of our revenues and profits are recognized underpercentage-of-completion method of accounting using total contract price,actual costs incurred to date and an estimate of the completion costs for eachcontract.  We use this method becausereasonably accurate estimates of the revenue and costs applicable to thevarious stages of a contract can be made. Recognized revenues and profits on each contract are subject torevisions as the contract progresses towards completion.  Revisions to revenue and profit estimatesare made in the period in which the facts that give rise to the revision becomeknown.  Provisions for estimated losseson uncompleted contracts are fully recognized in the period in which suchlosses are determined.  Approximately20.4% of our revenues and 16.3% of our gross profit during the year endedDecember 31, 2002 was recognized under the percentage-of-completion method ofaccounting.

 

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

 

As described in “Item 3. Legal Proceedings” and Note12 accompanying our financial statements included in this report, we areinvolved in legal proceedings for which no reserves for estimated losscontingencies have been established as of December 31, 2002.  Our current evaluation of these matters isthat it is probable we will prevail and therefore are not required to accrueestimated losses in accordance with SFAS No. 5.  However, there is a possibility that we may ultimately berequired to pay all or a

 

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portion of the contingent liabilities related to these matters, whichmay have an adverse impact on our business, financial position, results ofoperations or cash flows in future periods.

 

**Restructuringof our businesses.**  Asdescribed in “—Restructuring, Asset Impairment and Other Related Charges,” werecorded charges totaling $25.2 million during 2002 and $28.7 million during2001 in response to the adverse aerospace industry impact the acts, and ongoingthreats, of global terrorism and the current weak global economic conditionsare having on our businesses.  Thesecharges are based on our present estimates of the impact these events arehaving on our businesses and the future recovery of the aerospaceindustry.  Actual results and futurerecovery could differ from these estimates, potentially resulting in furtherrestructuring, asset impairment and other related charges.

 

**RecentlyIssued Accounting Pronouncements**

 

**SFAS No. 145**

 

In May 2002, the Financial Accounting Standards Boardissued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFASNo. 13, and Technical Corrections.” Among other things, SFAS No. 145 rescinds various pronouncementsregarding early extinguishment of debt and allows extraordinary accountingtreatment for early extinguishment only when the provisions of AccountingPrinciples Board Opinion No. 30, “Reporting the Results of Operations–Reportingthe Effects of Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regarding earlyextinguishment of debt are generally effective for fiscal years beginning January1, 2003.  We believe this new standardwill not have an impact on our business, consolidated financial position,results of operations or cash flow.

 

**SFAS No. 146**

 

In June 2002, the Financial Accounting Standards Boardissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 supersedesprevious accounting guidance, principally Emerging Issues Task Force Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”

 

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

 

The provisions of SFAS No. 146 are required to beapplied prospectively to exit or disposal activities initiated after December31, 2002.  We believe SFAS No. 146 mayaffect the timing of recognizing future restructuring costs, as well as theamounts recognized, depending on the nature of the exit or disposal activityand the timing of the related estimated cash flows.

 

**FIN No. 45**

 

In November 2002, the Financial Accounting StandardsBoard issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”  FIN No. 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.

 

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The interpretation also clarifies that a guarantor is required torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of FINNo. 45 are applicable to us on a prospective basis to guarantees issued ormodified after December 31, 2002. However, the disclosure requirements in FIN No. 45 are effective for ourfinancial statements for periods ending after December 15, 2002.

 

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

 

**SFAS No. 148**

 

In December 2002, the Financial Accounting StandardsBoard issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure.”  SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation,”to require disclosure in both interim and annual financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.

 

SFAS No. 148 is effective for our fiscal year endedDecember 31, 2002 and for interim financial statements beginning in 2003.  SFAS No. 148 is not expected to have asignificant effect on our financial position, results of operations or cashflows.

 

**FIN No. 46**

 

In January 2003, the Financial Accounting StandardsBoard issued Interpretation No. 46, “Consolidation of Variable InterestEntities.”  FIN No. 46 addressesconsolidation by business enterprises of variable interest entities (formerlyspecial purpose entities or “SPEs”).  Wedo not have any variable interest entities as defined in FIN No. 46.

 

**Forward-LookingStatements and Risk Factors**

 

**Special Note RegardingForward-Looking Statements**

 

All statements other than statements of historicalfacts included in this report are considered forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995.  These statements are subject to known andunknown risks, uncertainties and other factors, which are difficult topredict.  Some of those risks arespecifically described below, but we are also vulnerable to a variety of elementsthat affect many businesses, such as:

 

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

 

•                  acts, andongoing threats, of global terrorism, military conflicts and health epidemicsthat affect demand for aircraft and air travel, which in turn affect demand forour products and services;

 

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

 

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

 

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

 

•                  the ability toattract and retain qualified personnel;

 

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•                  labordisturbances;

 

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

 

•                  the risksdescribed below.

 

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

 

**Risk Factors**

 

**Liquidity. **Anevent of default under our senior credit facility will occur if we do not consummatethe sale of our Specialty Avionics Group prior to June 30, 2003, acceleratingthe repayment of substantially all of our indebtedness and raising substantialdoubt about our ability to continue as a going concern.

 

If the sale is not consummated and an event of defaultshould occur, the lenders may, at that date, cease to provide additionalborrowings and may accelerate repayment of all borrowings thenoutstanding.  If the lenders took suchaction, that would be an event of default under our other debt agreements,permitting those lenders to accelerate repayment of all such debt, aswell.  In such event, we would requirealternate sources of capital, which we may not be able to obtain.

 

Our financial statements do not reflect anyadjustments that may result from the outcome of these uncertainties.

 

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

 

As of December 31, 2002, we had total consolidatedindebtedness of approximately $381.7 million, and we had $43.6 million ofadditional revolving line of credit borrowings available under our seniorcredit facility.  In order to borrowthose funds, we will have to satisfy funding conditions of the kind usuallyimposed in similar agreements.  Thesenior credit facility and the indenture under which our senior subordinatednotes are issued each also permit us to incur significant amounts of additionaldebt and to secure that debt with some of our assets.

 

The amount of debt we carry could have importantconsequences:

 

•                  It may limit thecash flow available for general corporate purposes and acquisitions.  Interest payments on our debt were $28.4million for the year ended December 31, 2002.

 

•                  It may limit ourability to obtain additional debt financing in the future for working capital,capital expenditures or acquisitions.

 

•                  It may limit ourflexibility in reacting to competitive and other changes in the industry andeconomic conditions generally.

 

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

 

•                  It may limit ourability to respond to changes in our markets or exploit business opportunities.

 

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

 

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

 

•                  incur debt;

 

•                  issue preferredstock;

 

•                  repurchasecapital stock or subordinated debt;

 

•                  enter intotransactions with affiliates;

 

•                  enter into saleand leaseback transactions;

 

•                  create liens orallow them to exist;

 

•                  pay dividends orother distributions;

 

•                  makeinvestments;

 

•                  sell assets; and

 

•                  enter intomergers and consolidations.

 

In addition, our senior credit facility requires thatwe satisfy several tests of financial condition.  Our ability to do so can be affected by events beyond ourcontrol, and we cannot assure you that we will meet those tests.  Our failure to do so could result in adefault under our senior credit facility or the notes.

 

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

 

Our ability to satisfy our debt obligations and tofund our operations and planned capital expenditures will depend on our abilityto generate cash in the future.  This, toan extent, is subject to general economic, financial, competitive, legislative,regulatory and other factors that are beyond our control.

 

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

 

For example, we reported losses of $8.8 million for theyear ended December 31, 2002 and $14.0 million for the same period in2001.  The losses include pre-taxrestructuring charges of $25.2 in 2002 and $28.7 million in 2001 we recorded asa result of restructuring plans we implemented in response to the adverseimpact the events described in “—Aerospace Industry Risks” below are having onour business.

 

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

 

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We compete in the aircraft products and servicesmarket of the aerospace industry.  Themarket for our products and services is largely driven by demand in the threecivil aircraft markets: commercial, regional and corporate, VIP andhead-of-state aircraft.   The September11, 2001 terrorist attack on the United States, ongoing concerns about globalterrorism, the current Middle-Eastern military conflicts, the SevereAcute Respiratory Syndrome(SARS) epidemic and weak global economic conditions are all adverselyimpacting air travel and, in turn, the aerospace industry and our business.

 

Based on industry and market data, we believe thecommercial aircraft portion of our business will experience significantweakness during 2003 and 2004, with potential recovery not expected to occuruntil 2005.  We also believe thecorporate, VIP and head-of-state aircraft portion of our business willexperience growing weakness during 2003 with aircraft deliveries possiblyrecovering in 2004 and continuing recovery thereafter.

 

Further or prolonged decreases in demand for newaircraft, both commercial and corporate, VIP and head-of-state, as well asrelated component parts, would result in additional decreases in demand for ourproducts and services, and, correspondingly, our revenues, thereby adverselyaffecting our financial condition.  Inaddition, further deterioration or prolonged decreases in demand could result infurther restructurings of our business.

 

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

 

A significant decline in business from any one of ourkey customers could have a material adverse effect on our business.  Our three largest customers accounted for47.0% of our consolidated revenues for the year ended December 31, 2002 asfollows: Textron (which includes Cessna) – 17.4%; Boeing – 15.4%; andBombardier – 14.2%.  Some of ourcustomers 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, significant portions of our revenues fromour major customers are pursuant to contracts that may include a variety ofterms favorable to the customer.  Suchterms may include our agreement to one or more of the following:

 

•                  the customer isnot required to make purchases, and may terminate such contracts at any time;

 

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

 

•                  on a prospectivebasis, we must extend to the customers any reductions in prices or lead timesthat we provide to other customers;

 

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

 

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

 

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

 

At December 31, 2002, goodwill and other intangibleassets represented approximately 60% of our total assets.  Intangible assets consist of goodwill andother identifiable intangible assets associated with our acquisitions,representing the excess of cost over the fair value of tangible assets we haveacquired.

 

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We may not be able to realize the value of these assets.  Goodwill in not amortized but is subject toannual testing for impairment. Identifiable intangible assets with finite lives are amortized overtheir individual useful lives and are also subject to annual impairmenttesting.  Simply stated, if the carryingvalue of the asset exceeds the estimated undiscounted future cash flows fromoperating activities of the related business, an impairment is deemed to haveoccurred.  In this event, the amount iswritten down accordingly.  Under currentaccounting rules, this would result in a charge against income fromoperations.  We have recorded goodwillasset impairment charges totaling $16.3 million during the two years endedDecember 31, 2002.  In addition, werecorded a transitional goodwill impairment charge of $57.2 million as ofJanuary 1, 2002 in connection with the adoption of SFAS No. 142, “Goodwill andOther Intangible Assets.”

 

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

 

**Competition. **We operate in a highly competitive industryand compete against a number of companies, some of which have significantlygreater financial, technological and marketing resources than we do.

 

We operate in highlycompetitive markets within the aerospace industry.  Our competitors include corporate aircraft manufacturers,independent completion and modification companies, major airlines and otherindependent service organizations, including some of our customers, many ofwhom may have significantly greater financial, technological, manufacturing andmarketing resources than we do.  Theniche markets within the aerospace industry that we serve are relativelyfragmented, with several competitors offering the same products and services weprovide.  Due to the global nature ofthe aerospace industry, competition comes from both U.S. and foreign companies.

 

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

 

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

 

We consider and take advantage of selectedopportunities to grow by acquiring other businesses whose operations or productlines complement our existing businesses. Our ability to implement this growth strategy will depend on findingsuitable acquisition candidates at acceptable prices and obtaining the requiredfinancing.  Any acquisition we may makein the future could be subject to a number of risks, including:

 

•                  our ability tointegrate the operations and personnel of the acquired company;

 

•                  our failure toidentify liabilities of the acquired company for which we may be responsible asa successor owner or operator;

 

•                  the loss of keypersonnel in the acquired company; and

 

•                  the impact onour financial position, results of operations and cash flows resulting fromadditional acquisition indebtedness.

 

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

 

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

 

The aerospace industry is highly regulated in theUnited States by the Federal Aviation Administration to ensure that aviationproducts and services meet stringent safety and performance standards.  The FAA prescribes standards and licensingrequirements for aircraft components, issues designated alteration stationauthorizations, and licenses private repair stations.  We hold various FAA authorizations and licenses, including aDesignated Alteration Station authorization, which gives one of

 

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our subsidiaries the authority to certify some aircraft designmodifications on behalf of the FAA.  Ourbusiness depends on our continuing access to, or use of, these FAAauthorizations and licenses, and our employment of, or access to, FAA-certifiedindividual engineering professionals.

 

We cannot assure you that we will continue to haveadequate access to those authorizations, licenses and certified professionals,..the loss or unavailability of which could adversely affect ouroperations.  The FAA could also changeits policies regarding the delegation of inspection and certificationresponsibilities to private companies, which could adversely affect ourbusiness.

 

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

 

Federal and state laws, particularly the federalComprehensive Environmental Response, Compensation and Liability Act(“CERCLA”), impose strict, retroactive and joint and several liability uponpersons responsible for releases or potential releases of hazardous substancesand other parties who have some relationship to a site or a source ofwaste.  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 requests for information orallegations of potential responsibility from the U.S. Environmental ProtectionAgency regarding our use of several of these sites.  Given the potentially retroactive nature of environmental liability,it is possible that we will receive additional notices of potential liabilityrelating to current or former activities. We may incur costs in the future for prior waste disposal by us orformer owners of our subsidiaries or our facilities.  Some of our operations are located on properties that arecontaminated to varying degrees.  Inaddition, some of our manufacturing processes create wastewater that requireschemical treatment, and one of our facilities has been cited for excessivequantity and strength of its wastewater. We may incur costs in the future to address existing or futurecontamination.  If we incur significantcosts in connection with these or other environmental issues, our business andfinancial condition could be adversely affected.

 

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

 

Our business exposes us to possible claims for damagesresulting from the manufacture, installation and use of our products.  Many factors beyond our control could leadto such claims, such as the failure of an aircraft on which our products havebeen installed, the reliability and skill of the operators of such aircraft andthe maintenance performed on such aircraft. We carry aircraft products and grounding liability insurance for thispurpose, but we cannot assure you that our insurance coverage will be adequateto cover claims that may arise or that we will be able to renew our coverage inthe future at commercially reasonable rates.

 

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

 

The industry and market data we use is based on thegood faith estimates of our management, which estimates are based primarilyupon internal management information and, to the extent available, independentindustry publications and other publicly available information.  However, the nature of the aerospaceindustry and competition in our markets results in limited availability ofreliable, independent data.  Although webelieve that the sources we have used are reliable, we do not guarantee, andhave not independently verified, the accuracy and completeness of theinformation.

 

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

 

Our success and growth depends in large part on theskills and efforts of our management team and on our ability to attract andretain qualified personnel experienced in the various operations of ourbusiness.  The loss of key personnel,including our founder, R. Jack DeCrane, combined with the failure

 

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to attract additional qualified personnel for whatever reason, coulddelay implementation of our business plan or otherwise adversely affect ouroperations.  We do not carry key manlife insurance on any members of our management team.

 
| **ITEM  7A.** |   | **QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK** |
|---------------|--------|-----------------------------------------------------------------|

 

We are exposed to various market risks, includinginterest rates and changes in foreign currency exchange rates.  Market risk is the potential loss arisingfrom adverse changes in prevailing market rates and prices.  From time to time, we use derivativefinancial instruments to manage and reduce risks associated with thesefactors.  We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

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

 

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

 

To limit our exposure related to rising interestrates, we have entered into an interest rate swap contract to effectivelyconvert $4.5 million of variable-rate industrial revenue bonds to 4.2%fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the amountof future cash flows associated with interest payments on this portion of ourvariable-rate debt.  Market risk relatedto this interest rate swap contract is estimated as the potential higherinterest expense we will incur if the variable interest rate decreases belowthe 4.2% fixed rate.  Based on the $4.5million of variable-rate debt converted to fixed-rate debt outstanding as ofDecember 31, 2002, a hypothetical one percent decrease in the variable interestrate to 3.2%, would reduce our pre-tax earnings by less than $0.1 millionannually.

 

The estimated fair value of our $100.0 millionfixed-rate long-term debt decreased $53.5 million, or 57.2%, to approximately$40.0 million at December 31, 2002 from $93.5 million at December 31,2001.  We believe the decrease isattributable to the overall deterioration of the aerospace industry’s financialcondition following the events of September 11th and itsaftermath.  Subsequent to December 31,2002, the estimated fair value increased by $10.0 million to approximately$50.0 million as of March 20, 2003. Although we cannot be certain, we believe the increase may be a resultof our announcement that we have entered into a definitive agreement to sellour Specialty Avionics Group.  Marketrisk related to our fixed-rate debt is deemed to be the potential increase infair value resulting from a decrease in interest rates.  For example, a hypothetical ten percentdecrease in the interest rates, from 12.0% to 10.8%, would increase the fairvalue of our fixed-rate debt by approximately $7.0 million.

 

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

 

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| **ITEM  8.** |   | **FINANCIAL STATEMENTS AND SUPPLEMENTARY  DATA** |
|--------------|--------|--------------------------------------------------|

 

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

 
| **ITEM  9.** |   | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|--------------|--------|-------------------------------------------------------------------------------------------|

 

None.

 

**PART III**

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

 

**Directorsand Executive Officers**

 

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

 
| **Name**                |   | **Age** |   | **DeCrane  Aircraft**                                                              |   | **DeCrane  Holdings**                                                |
|-------------------------|--------|---------|--------|------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|
|                    |   |    |   |                                                                               |   |                                                                 |
| R. Jack DeCrane(1)      |   | 56      |   | Director and Chief Executive Officer                                               |   | Vice Chairman of the Board of Directors and Chief  Executive Officer |
|                    |   |    |   |                                                                               |   |                                                                 |
| Richard J. Kaplan       |   | 60      |   | Director, Senior Vice President, Chief Financial  Officer, Secretary and Treasurer |   | Director, Chief Financial Officer and Assistant  Secretary           |
|                    |   |    |   |                                                                               |   |                                                                 |
| Robert G. Martin        |   | 65      |   | Senior Vice President and Group President                                          |   | —                                                               |
|                    |   |    |   |                                                                               |   |                                                                 |
| Jeffrey A. Nerland      |   | 45      |   | Senior Vice President and Group President                                          |   | —                                                               |
|                    |   |    |   |                                                                               |   |                                                                 |
| Jeffrey F. Smith        |   | 42      |   | Senior Vice President and Group President                                          |   | —                                                               |
|                    |   |    |   |                                                                               |   |                                                                 |
| Thompson Dean           |   | 45      |   | Chairman of the Board of Directors                                                 |   | Chairman of the Board of Directors                                   |
|                    |   |    |   |                                                                               |   |                                                                 |
| James A. Quella         |   | 53      |   | Director                                                                           |   | Director                                                             |
|                    |   |    |   |                                                                               |   |                                                                 |
| Susan C. Schnabel(1)(2) |   | 41      |   | Director                                                                           |   | Director                                                             |
|                    |   |    |   |                                                                               |   |                                                                 |
| Albert E. Suter(1)(2)   |   | 67      |   | Director                                                                           |   | Director                                                             |

 

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

 

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

 

*R. JackDeCrane* is the founder of DeCrane Aircraft.  Mr. DeCrane served as President from thetime DeCrane Aircraft was founded in December 1989 until April 1993, when hewas elected to the newly created office of Chief Executive Officer.  In August 2002, Mr. DeCrane was also appointedChief

 

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Executive Officer of DeCrane Holdings. He has served on the board of directors of DeCrane Aircraft and DeCraneHoldings 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.

 

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

 

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

 

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

 

*ThompsonDean* has been a director of DeCrane Aircraft and DeCraneHoldings in 1998.  Mr. Dean also servedare President of DeCrane Holdings from its inception in 1998 through August2002.  Mr. Dean has also been theManaging Partner of DLJ Merchant Banking, Inc. since November 1995.  In November 2000, Credit Suisse 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.

 

*JamesA. Quella* has been a director of DeCrane Aircraft and DeCraneHoldings since February 2003.  Mr.Quella has also been a Managing Director and Operating Partner of DLJ MerchantBanking, Inc. since July 2000.  In November2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin &Jenrette, Inc.  As a result, DLJMerchant Banking, Inc. and Donaldson, Lufkin & Jenrette SecuritiesCorporation became indirect affiliates of Credit Suisse First Boston, Inc. and CreditSuisse Group.  Previously, Mr. Quellawas a Managing Director with GH Ventures Partners LLC from January 2000 throughJuly 2000 and Vice Chairman of Mercer Management Consulting, Inc. from 1997through 1999.  Mr. Quella serves as adirector of Advanstar Holdings, Inc., Merrill Corporation and Von HoffmanHoldings, 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.

 

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*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.

 

**Selectionof Directors and Term of Office**

 

DLJ Merchant Banking Partners II, L.P. is entitled toselect all members of the Board of Directors of DeCrane Holdings and DeCraneAircraft as described in “Item 13. Certain Relationships and RelatedTransactions—Investors’ Agreement.”  Atleast one of such directors selected by DLJ Merchant Banking on each board mustbe an independent director.  Mr. Suteris an independent director.  Alldirectors hold office until their successor is designated and qualified.

 
| **ITEM  11****.** |   | **EXECUTIVE COMPENSATION** |
|-------------------|--------|----------------------------|

 

**SummaryCompensation Table**

 

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

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

 

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

 

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

 

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

 

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(4)                      Mr. Kaplanalso served as Assistant Treasurer and Assistant Secretary (principalaccounting officer) of DeCrane Holdings from March 1999 until August 2002 whenhe was appointed its Chief Financial Officer and Assistant Secretary.

 

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

 

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

 

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

 

**StockOption Grants in Last Fiscal Year**

 

During the fiscal year ended December 31, 2002, nooptions to purchase shares of DeCrane Holdings common stock were grantedpursuant to the management incentive plan. See “—Employment Agreements and Compensation Arrangements – IncentivePlans.”

 

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

 

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

 
| **Name**            |   | **Number of  Securities Underlying  Unexercised Options  Exercisable / Unexercisable** |   | **Value of Unexercised  In-the-Money Options  at Fiscal Year End(1)  Exercisable / Unexercisable** |             |
|---------------------|--------|----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|------------------|
|                |   |                                                                                   |   |                                                                                               |             |
| R. Jack DeCrane     |   | 36,253 / 73,605                                                                        |   | $                                                                                                  | —  / — |   |
| Richard J.  Kaplan  |   | 10,812 / 21,950                                                                        |   | —  / —                                                                                   |             |
| Robert G. Martin    |   | 6,944 / 14,098                                                                         |   | —  / —                                                                                   |             |
| Jeffrey A.  Nerland |   | 5,291 / 10,741                                                                         |   | —  / —                                                                                   |             |
| Jeffrey F. Smith    |   | 7,019 / 14,253                                                                         |   | —  / —                                                                                   |             |
|                     |        |                                                                                        |        |                                                                                                    |                  |  |

 

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

 

**CompensationCommittee Interlocks and Insider Participation**

 

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

 

**EmploymentAgreements and Compensation Arrangements**

 

**R. Jack DeCrane**

 

On July 17, 1998, the Compensation Committee of ourBoard of Directors approved a three-year employment agreement between DeCraneAircraft and R. Jack DeCrane, replacing his prior employment agreement that wasto expire on September 1, 1998.  Mr.DeCrane’s employment agreement was amended on May 5, 2000 to provide for a termthrough June 30, 2001, which term shall automatically extend for additional oneyear periods unless terminated by either party giving the other party notice oftermination prior to April 1st of the year prior to the year inwhich the agreement would otherwise

 

51

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terminate.  Mr. DeCrane’semployment agreement provides for various benefits, including an initial salaryof $310,000, which is subject to annual review and increase, but not adecrease, and an annual bonus, currently determined pursuant to theperformance-based cash incentive bonus plan.

 

The employment agreement also provides that ifspecified change-of-control events occur, and Mr. DeCrane’s employment isterminated by us for any reason other than for cause or as a result of hisdeath or disability, or by Mr. DeCrane for “good reason,” as defined in the agreement,then we will pay Mr. DeCrane a lump sum in cash within fifteen days.  The amount of that payment will be $1.00less than three times the sum of Mr. DeCrane’s average base salary plus bonusfor the five calendar years preceding his termination date and accrued butunpaid salary and bonus through the termination date.  Mr. DeCrane will also receive other specified benefits, includingcontinued coverage under our welfare plans for up to two years; a lump sum paymentin cash equal to any unvested portions of our contributions to him underspecified savings plans, plus two times the amount of our annual contributionson his behalf to those plans; a lump sum payment in cash equal to our matchingcontributions under those savings plans that Mr. DeCrane would have receivedhad he continued maximum participation in the plans until the earlier of twoyears following his termination and December 31 of the year he turns 65, plusthe vested and unvested amounts credited to him under any of our deferredcompensation plans and the amount required to be credited during the year ofhis termination; and outplacement consulting services to aid Mr. DeCrane withre-employment.  We will reduce thesepayments to the extent necessary to ensure deductibility for tax purposes.

 

**Change of Control Agreements**

 

In August 2002, we entered into change of controlagreements with each of our executive officers, other than Mr. DeCrane, whoseabove described employment agreement contains provisions concerning change ofcontrol.  The agreements, which replacedearlier agreements which had expired, provide that, for a term of two yearsfrom the effective date, should a change of control, as defined, occur duringthe term of the agreement and the executive officer’s employment shall be involuntarilyterminated for any reason on a date which is less than two years after the dateof the change of control, other than for cause, death or disability, DeCraneAircraft is required to pay such executive his then salary plus average annualbonus over the last five years, equal to twenty four months compensation lessthe number of months elapsed from the date of the change of control to theemployment termination date.

 

**401(k) Retirement Plan**

 

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

 

**Incentive Plans**

 

Our management incentive plan provides for theissuance of options to purchase the common stock of DeCrane Holdings asincentive compensation to designated executive personnel and other keyemployees of DeCrane Aircraft and its subsidiaries.  The Compensation Committee of the Board of Directors administersthe management incentive plan.  The planprovides for the granting of options to purchase 356,257 common shares andexpires in 2009.  Substantially all ofthe options awarded become fully vested and exercisable eight years from thedate of grant but vesting and exercise can be accelerated based upon futureattainment of defined performance criteria. At December 31, 2002, 32% of the options granted pursuant to the planare vested and exercisable.  We believethe per share exercise price of the

 

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options granted approximated the fair market value of the underlyingcommon stock on each of the grant dates.

 

From time-to-time, we permit designated executivepersonnel and other key employees to purchase shares of common stock of DeCraneHoldings.  Prior to the July 30, 2002enactment of the Sarbanes-Oxley Act of 2002, a portion of the purchase pricewas in certain instances, loaned to the participants by DeCrane Aircraft.  This arrangement was made available topersons and in amounts determined by the Compensation Committee of the Board ofDirectors.  In December 1999, managementpurchased 171,295 shares of DeCrane Holdings common stock for $23.00 pershare.  The total purchase price was$3.9 million, of which one-half was paid in cash and one-half was loaned tomanagement by DeCrane Aircraft with interest at applicable federal rates.  During 2000, an additional 19,707 shares ofDeCrane Holdings common stock was purchased by employees at $23.00 per share,which was paid in cash.  Subsequent tothe July 30, 2002 enactment of the Sarbanes-Oxley Act, we have discontinuedmaking new loans to participants as mandated by the Act.  Loans originated prior to and outstanding asof the effective date of the Act will be repaid in accordance with their terms,as permitted by the Act.

 

Our cash incentive bonus plan provides for theallocation of a bonus pool each year for incentive compensation to designatedexecutive personnel and certain other employees of DeCrane Aircraft and itssubsidiaries.  The bonus pool, which isapproved by the compensation committee, is adjusted each year based on EBITDAand cash flow, as defined, generated by the relevant participant’s operatingunit.  Bonus payments are generally madein the quarter following the end of the year or period to which they pertain.

 

**Deferred Compensation Plan**

 

From December 1999 through December 2002, we had adeferred compensation plan in which certain designated executive officers andkey employees were permitted to defer a portion of their compensationearned.  DeCrane Aircraft investedamounts deferred and participants were fully vested in the amounts representingthe fair market value of their investment accounts.  We made no contributions on behalf of the participants and theinvested assets are subject to the claims of our general creditors.  The plan was terminated in January 2003 andthe fair market values of the individual investment accounts on the terminationdate were distributed to the individual participants.

 

**Directors’Compensation**

 

The directors of DeCrane Holdings and DeCrane Aircraftgenerally do not receive annual fees or fees for attending meetings of theBoard of Directors or committees thereof. However, Albert E. Suter, an independent director not affiliated withany investor in DeCrane Holdings, receives a director’s fee of $50,000 peryear.  In addition, the Board of Directorsof DeCrane Holdings authorized the issuance of options to purchase 7,500 sharesof DeCrane Holdings common stock to Mr. Suter under the same terms as themanagement incentive plan.  See “Item13. Certain Relationships and Related Transactions—Transactions with Managementand Others – Transactions During 2001 and 2002” for additionalinformation.  Also, Mr. Suter isreimbursed for out-of-pocket expenses. We expect to continue these policies.

 

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| **ITEM  12.** |   | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT** |
|---------------|--------|---------------------------------------------------------------------|

 

**SecurityOwnership of Certain Beneficial Owners and Management**

 

**DeCrane Aircraft**

 

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

 

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

 

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

 

The following table sets forth the beneficialownership of DeCrane Aircraft’s voting and non-voting securities as of March28, 2003 by its principal owners and its executive officers and directors.

 
|                                                                                   |   | **Common Stock(2)**                        |   | **16% Senior Redeemable  Preferred Stock** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **Name of  Beneficial Owner(1)**                                                       |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                             |   | **Number  of  Shares** |   | **Percentage** |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| DeCrane Holdings  Co.                                                                  |   | 100                                        |   | 100.0                                      | %      | — |   | — |   |
| c/o DLJ Merchant  Banking Partners II, L.P.  Eleven Madison Avenue, New York, NY 10010 |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| DLJ Merchant  Banking Partners II, L.P. affiliates(3)                                  |   | —                                     |   | —                                     |   | 200,000 |   | 80.0 | % |
| Eleven Madison  Avenue, New York, NY 10010                                             |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Thompson Dean(4)                                                                       |   | —                                     |   | —                                     |   | — |   | — |   |
| c/o Credit Suisse First  Boston  Eleven Madison Avenue, New York, NY 10010             |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| James A.  Quella(4)                                                                    |   | —                                     |   | —                                     |   | — |   | — |   |
| c/o Credit Suisse First  Boston  Eleven Madison Avenue, New York, NY 10010             |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Susan C.  Schnabel(4)                                                                  |   | —                                     |   | —                                     |   | — |   | — |   |
| c/o Credit Suisse First  Boston  Eleven Madison Avenue, New York, NY 10010             |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Putnam  Investment Management, Inc. and affiliates(5)                                  |   | —                                     |   | —                                     |   | 50,000 |   | 20.0 | % |
| One Post Office  Square, Boston, MA 02109                                              |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Albert E. Suter                                                                        |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| R. Jack DeCrane                                                                        |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Richard J.  Kaplan                                                                     |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Robert G. Martin                                                                       |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey A.  Nerland                                                                    |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey A. Smith                                                                       |   | —                                     |   | —                                     |   | — |   | — |   |
|                                                                                   |   |                                       |   |                                       |   |   |   |   |   |
| All directors  and named executive officers as a group (nine persons)                  |   | —                                     |   | —                                     |   | — |   | — |   |

 

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

 

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(2)                                  Thecommon stock columns reflect the number of shares owned and the totalpercentage ownership in the manner required by Securities and ExchangeCommission rules.  The entries for eachholder assumes, if applicable, that the particular holder, and no one else,fully exercises all rights under warrants to purchase common stock and commonstock which may be acquired upon the exercise of stock options and which areexercisable, or will be exercisable, prior to 60 days fromMarch 28, 2003.

 

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

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

 

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

 

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

 

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

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

 

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

 

**DeCrane Holdings**

 

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

 

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

 

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

 

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

 
|                                                                                                  |   | **Common Stock(2)**                        |   | **14% Senior Redeemable  Preferred Stock** |   |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **Name of  Beneficial Owner(1)**                                                                      |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                             |   | **Number  of  Shares** |   | **Percentage** |   |
|                                                                                                  |   |                                       |   |                                       |   |   |   |   |   |
| DLJ Merchant  Banking Partners II, L.P.  and affiliates(3)  Eleven Madison Avenue, New York, NY 10010 |   | 4,179,530                                  |   | 95.4                                       | %      | 340,000 |   | 99.3 | % |
|                                                                                                  |   |                                       |   |                                       |   |   |   |   |
|                                                                                                  |   |                                       |   |                                       |   |   |   |   |   |
| Thompson Dean(4)                                                                                      |   | —                                     |   | —                                     |   | — |   | — |   |
| c/o Credit Suisse First  Boston  Eleven Madison Avenue, New York, NY 10010                            |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                                  |   |                                       |   |                                       |   |   |   |   |   |
| James A.  Quella(4)                                                                                   |   | —                                     |   | —                                     |   | — |   | — |   |
| c/o Credit Suisse First  Boston  Eleven Madison Avenue, New York, NY 10010                            |   |                                       |   |                                       |   |   |   |   |   |

 

55

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|                                                                                             |   | **Common Stock(2)**                        |   | **14% Senior Redeemable  Preferred Stock** |   |
|--------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
| **Name of  Beneficial Owner(1)**                                                                 |   | **Number  of Shares,  Partially  Diluted** |   | **Percentage**                             |   | **Number  of  Shares** |   | **Percentage** |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| Susan C.  Schnabel(4)                                                                            |   | —                                     |   | —                                     |   | — |   | — |   |
| c/o Credit Suisse First  Boston  Eleven Madison Avenue, New York, NY 10010                       |   |                                       |   |                                       |   |   |   |   |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| Putnam  Investment Management, Inc.  and affiliates(5)  One Post Office Square, Boston, MA 02109 |   | 27,871                                     |   |                                       | *      | — |   | — |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| Albert E.  Suter(6)                                                                              |   | 6,204                                      |   |                                       | *      | — |   | — |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| R. Jack  DeCrane(7)                                                                              |   | 95,755                                     |   | 2.3                                        | %      | — |   | — |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| Richard J.  Kaplan(8)                                                                            |   | 33,698                                     |   |                                       | *      | — |   | — |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| Robert G.  Martin(9)                                                                             |   | 11,520                                     |   |                                       | *      | — |   | — |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey A.  Nerland(10)                                                                          |   | 12,156                                     |   |                                       | *      | — |   | — |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| Jeffrey A.  Smith(11)                                                                            |   | 16,173                                     |   |                                       | *      | — |   | — |   |
|                                                                                             |   |                                       |   |                                       |   |   |   |   |   |
| All directors  and named executive officers as a group (nine persons)                            |   | 175,506                                    |   | 4.2                                        | %      | — |   | — |   |

 

----

*                                         Lessthan 1.0%

 

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

 

(2)                                  Thecommon stock columns reflect the number of shares owned and the totalpercentage ownership in the manner required by Securities and ExchangeCommission rules.  The entries for eachholder assumes, if applicable, that the particular holder, and no one else,fully exercises all rights under warrants to purchase common stock and commonstock which may be acquired upon the exercise of stock options and which areexercisable, or will be exercisable, prior to 60 days fromMarch 28, 2003.

 

(3)                                  Reflects3,913,044 shares of common stock, warrants to purchase an additional 266,486shares of common stock and preferred stock held directly by DLJ MerchantBanking Partners II, L.P. and the following affiliated investors:

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

 

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

 

(4)                                  Mr.Dean, Mr. Quella and Ms. Schnabel are officers of DLJ Merchant Banking, Inc.,an affiliate of DLJ Merchant Banking Partners II, L.P. and directors of DeCraneAircraft.  The DLJ entities areaffiliates of, and commonly collectively referred to as, Credit Suisse FirstBoston.  See “Item 13.

 

56

----

 

Certain Relationships and RelatedTransactions—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, Mr. Quella and Ms. Schnabel disclaimbeneficial ownership of those shares.

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

(11)                            Includes7,019 shares that may be acquired upon the exercise of stock options that areexercisable or will become exercisable prior to 60 days from March 28, 2003.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

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

 
| **Plan Category**                                           |   | **Number of  Securities to be Issued  Upon Exercise of  Outstanding Options,  Warrants and Rights** |   | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** | ** ** | **Number of  Securities Remaining  Available for Future  Issuance Under Equity  Compensation Plans  (Excluding Securities  Reflected in Column(1))** | ** ** |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |   |                                                                                                |   |                                                                               |       |                                                                                                                                                 |       |
| Equity compensation plans approved by security holders:     |   |                                                                                                |   |                                                                               |       |                                                                                                                                                 |       |
| Management  Incentive Stock Option Plan                     |   | 293,461                                                                                             |   | $                                                                                  | 24.58      |                                                                                                                                                 | 53,544     |   |
| Incentive stock  options granted to non-employees           |   | 44,612                                                                                              |   | 23.00                                                                              |       | —                                                                                                                                               |       |
| Equity  compensation plans not approved by security holders |   | —                                                                                              |   | —                                                                             |       | —                                                                                                                                               |       |
| Total                                                       |   | 338,073                                                                                             |   |                                                                               | 24.37      |                                                                                                                                                 | 53,544     |   |

 

57

----

 

The provisions of our Management Incentive StockOption Plan and the terms of the options granted to non-employees are describedin Note 14 accompanying our financial statements included in this report.

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

 

**Transactionswith Management and Others**

 

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

 

DLJ Merchant Banking Partners, II, L.P. is anaffiliate of Donaldson, Lufkin & Jenrette, Inc.  In November 2000, Credit Suisse Group and its Credit Suisse FirstBoston, Inc. subsidiary acquired Donaldson, Lufkin & Jenrette, Inc.  Upon completion of the acquisition,Donaldson, Lufkin & Jenrette, Inc. was renamed Credit Suisse First Boston(USA), Inc.  The combined operations arecommonly referred to collectively as Credit Suisse First Boston or CSFB.

 

**Arrangements With Other CSFB / DLJAffiliates**

 

Credit Suisse First Boston, as successor to DLJCapital Funding, Inc., receives customary fees and reimbursement of expenses inconnection with the arrangement and syndication of our senior bank creditfacility and as a lender thereunder. Credit Suisse First Boston Corporation, referred to herein as CSFBCorporation and formerly known as Donaldson, Lufkin & Jenrette SecuritiesCorporation, is the sole market-maker for our senior subordinated notes.  In addition, DeCrane Aircraft is obligatedto pay CSFB Corporation a $350,000 annual advisory fee.  We may from time to time enter into otherinvestment banking relationships with CSFB Corporation or one of its affiliatespursuant to which they will receive customary fees and will be entitled toreimbursement for all reasonable disbursements and out-of-pocket expensesincurred in connection therewith.  Weexpect that any such arrangement will include provisions for theindemnification of CSFB Corporation against liabilities, including liabilitiesunder the federal securities laws.

 

**Investors’ Agreement**

 

Investors owing 96.7% of DeCrane Holdings’ issued andoutstanding common stock and common stock warrants and options, all of DeCraneHoldings’ preferred stock and all of DeCrane Aircraft’s preferred and commonstock, have entered into an Amended and Restated Investors’ Agreement, datedOctober 6, 2000.  The investors who ownDeCrane Holdings’ warrants to purchase 159,794 shares of common stock are notparties to the Investors’ Agreement. The agreement provides that:

 

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

 

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

 

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

 

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

 

•                  The DLJaffiliates may request six demand registrations with respect to all or any ofthe DeCrane Holdings common stock, preferred stock and Class A warrants topurchase 155,000

 

58

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common shares held by those affiliates, which areimmediately exercisable subject to customary deferral and cutback provisions.

 

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

 

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

 

•                  DeCrane Holdingswill indemnify the stockholders against some liabilities and expenses,including liabilities under the Securities Act.

 

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

 

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

 

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

 

**Transactions During 2002 and 2003**

 

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

 

•                  DeCrane Holdingsrepurchased 18,308 shares of its common stock from a former DeCrane Aircraftexecutive officer for $0.5 million ($27.00 per share) in January 2002.  In connection with the repurchase, DeCraneAircraft’s $0.2 million loan to the executive officer collateralized by therepurchased common stock was repaid, plus accrued interest.  The former executive officer also elected toexercise 9,120 vested stock options on a cashless basis and received $36,000for the net difference between the $27.00 per share repurchase price and the$23.00 per share option exercise price. DeCrane Aircraft funded DeCrane Holdings’ cash requirements for thetransactions.

 

•                  DeCrane Aircraftamended its senior credit facility in March 2002.  Credit Suisse First Boston, as successor to DLJ Capital Funding,Inc., received customary fees and reimbursement of expenses in connection withobtaining the amendment.

 

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

 

59

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

 

•                  DeCrane Aircraftentered into a definitive agreement to sell its Specialty Avionics Group onMarch 14, 2003.  CSFB Corporation servedas DeCrane Aircraft’s financial advisors for the transaction and will receivecustomary fees and reimbursement of expenses upon closing of thetransaction.  The closing is expected tooccur before June 30, 2003.

 

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

 

•                  CSFB Corporationreceives a $350,000 annual advisory fee.

 

**Indebtednessof Executive Officers and Directors**

 

The following table sets forth all indebtedness owedto us by our executive officers and directors that individually exceeds $60,000as required by Securities and Exchange Commission rules.  All indebtedness set forth below resultsfrom purchases of DeCrane Holdings common stock in transactions consummatedprior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002 and ispayable to DeCrane Aircraft.  BeginningJuly 30, 2002, we no longer provide loans to directors or executive officers asmandated by the Act.  The indebtedness,plus accrued interest, is payable upon the sale of the DeCrane Holdings stockheld as collateral for each of the loans. See “Item 10. Directors and Executive Officers of the Registrant” forinformation regarding each individual’s relationship with DeCrane Aircraft andDeCrane Holdings.

 
| **Name**             |   | **Number  of Shares  Held as  Collateral(1)** |   | **Interest  Rate(2)** |   | **Total Indebtedness to DeCrane Aircraft  as of December 31, 2002** |    |
|----------------------|--------|-----------------------------------------------|--------|-----------------------|--------|---------------------------------------------------------------------|---------|
| **Principal(3)**     |   | **Accrued  Interest(4)**                      |   | **Total(5)**          |
|                 |   |                                          |   |                  |   |                                                                |    |   |   |   |   |
| R. Jack DeCrane      |   | 56,521                                        |   | 5.74                  | %      | $                                                                   | 649,991 |   | $ | 119,806 |   | $ | 769,797 |   |
| Richard J.  Kaplan   |   | 21,739                                        |   | 5.74                  |   | 249,998                                                             |    | 46,079 |   | 296,077 |   |
| Robert G.  Martin(6) |   | 4,347                                         |   | 5.74                  |   | 49,990                                                              |    | 9,214 |   | 59,204 |   |
| Jeffrey A.  Nerland  |   | 6,521                                         |   | 5.74                  |   | 74,991                                                              |    | 13,822 |   | 88,813 |   |
| Jeffrey F. Smith     |   | 8,695                                         |   | 5.74                  |   | 99,992                                                              |    | 18,430 |   | 118,422 |   |
|                      |        |                                               |        |                       |        |                                                                     |         |  |  |  |  |  |  |  |

 

----

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

 

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

 

(3)                                  Reflectsthe original principal amount of the loans.

 

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

 

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

 

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

 
| **ITEM  14****.** |   | **CONTROLS AND PROCEDURES** |
|-------------------|--------|-----------------------------|

 

**Evaluation of disclosure controls and procedures.**  Our Chief Executive Officer and ChiefFinancial Officer have evaluated our disclosure controls and procedures within90 days of the filing of this report. These controls and procedures are designed to ensure that all of theinformation required to be disclosed by us in our periodic reports filed withthe Securities and Exchange Commission (the

 

60

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“Commission”) is recorded, processed, summarized and reported withinthe time periods specified by the Commission and that the information iscommunicated to the Chief Executive Officer and Chief Financial Officer on atimely basis.  Based on theirevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were suitable and effective.

 

**Changes in internal controls.**  Subsequent to the date of their evaluation,there have been no significant changes in our internal controls or in otherfactors that could significantly affect the internal controls, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

**PART IV**

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

 

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

 

**1.**                                      **Financial Statements**

 

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

 

**2.**                                      **Financial Statement Schedules**

 

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

 

**3.**                                      **Exhibits**

 

The following exhibits are filed as part of thisreport.

 
| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit  Description**                                                                                                                                                                                                                                                                                                                               |
|---------------------|--------|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 2.1                 |   | *                     |   | Stock Purchase Agreement dated as of March 14, 2003  among Wings Holdings, Inc. and DeCrane Aircraft Holdings, Inc. and DeCrane  Holdings Co. relating to the purchase and sale of 100% of the Common Stock of  Avtech Corporation and Tri-Star Electronics International, Inc. and 100% of  the Membership Interest of Aerospace Display Systems, LLC |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.2.1               |   | (1)                   |   | Certificate of Incorporation of DeCrane Aircraft  Holdings, Inc.                                                                                                                                                                                                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.2.1.1             |   | (15)                  |   | Certificate of Amendment of Certificate of  Incorporation of  DeCrane Aircraft  Holdings, Inc. dated October 17, 2001                                                                                                                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.2.2               |   | (1)                   |   | Bylaws of DeCrane Aircraft Holdings, Inc.                                                                                                                                                                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.3.1               |   | (10)                  |   | Certificate of Formation and Certificate of Merger  of  Aerospace Display Systems, LLC                                                                                                                                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.3.2               |   | (10)                  |   | Limited Liability Company Operating Agreement  for  Aerospace Display Systems, LLC                                                                                                                                                                                                                                                                |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.3.2.1             |   | *                     |   | Amendment No. 1 to Limited Liability Company  Agreement of Aerospace Display Systems, LLC dated March 9, 2003                                                                                                                                                                                                                                          |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.4.1               |   | (1)                   |   | Articles of Incorporation of Audio International,  Inc.                                                                                                                                                                                                                                                                                                |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.4.2               |   | (1)                   |   | Amended & Restated Bylaws of Audio  International, Inc.                                                                                                                                                                                                                                                                                            |

 

61

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit  Description**                                                                                                                                                                                           |
|---------------------|--------|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.5.1               |   | (1)                   |   | Articles of Incorporation of Avtech Corporation                                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.5.2               |   | (1)                   |   | Bylaws of Avtech Corporation                                                                                                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.7.1               |   | (16)                  |   | Certificate of Formation and Certificate of Merger  of Dettmers Industries, LLC                                                                                                                          |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.7.2               |   | (16)                  |   | Limited Liability Company Operating Agreement of  Dettmers Industries, LLC                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.10.1              |   | (1)                   |   | Articles of Incorporation of Hollingsead  International, Inc.                                                                                                                                                      |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.10.2              |   | (1)                   |   | Bylaws of Hollingsead International Inc.                                                                                                                                                                           |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.11.1              |   | (1)                   |   | Articles of Incorporation of Tri-Star Electronics  International, Inc.                                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.11.2              |   | (1)                   |   | Bylaws of Tri-Star Electronics International, Inc.                                                                                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.1              |   | (1)                   |   | Articles of Incorporation of PATS, Inc.                                                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.2              |   | (1)                   |   | Bylaws of PATS, Inc.                                                                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.3              |   | (1)                   |   | Amendment to Articles of Incorporation of PATS, Inc.                                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.12.4              |   | (1)                   |   | Amendment to Bylaws of PATS, Inc.                                                                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.17.1              |   | (3)                   |   | Articles of Incorporation of PPI Holdings, Inc.                                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.17.2              |   | (3)                   |   | Bylaws of PPI Holdings, Inc.                                                                                                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.18.1              |   | (3)                   |   | Articles of Incorporation of Precision Pattern, Inc.                                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.18.2              |   | (3)                   |   | Bylaws of Precision Pattern, Inc.                                                                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.19.1              |   | (10)                  |   | Certificate of Formation and Certificate of Merger  for  Custom Woodwork & Plastics,  LLC                                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.19.2              |   | (10)                  |   | Limited Liability Company Operating Agreement  for  Custom Woodwork & Plastics,  LLC                                                                                                                      |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.20.1              |   | (4)                   |   | Articles of Incorporation of PCI Newco, Inc.  (formerly  PCI Acquisition Co., Inc.)                                                                                                                           |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.20.1.1            |   | (16)                  |   | Certificate of Amendment of Articles of  Incorporation of  PCI Acquisition Co.,  Inc. (changing its name to PCI Newco, Inc.)                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.20.2              |   | (4)                   |   | Bylaws of PCI Newco, Inc. (formerly PCI Acquisition  Co., Inc.)                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.22.1              |   | (5)                   |   | Articles of Incorporation DAH-IP Holdings, Inc.                                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.22.2              |   | (5)                   |   | Bylaws of DAH-IP Holdings, Inc.                                                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.23.1              |   | (5)                   |   | Articles of Incorporation of DAH-IP Infinity, Inc.                                                                                                                                                                 |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.23.2              |   | (5)                   |   | Bylaws of DAH-IP Infinity, Inc.                                                                                                                                                                                    |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.24.1              |   | (5)                   |   | Certificate of Limited Partnership of The Infinity  Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.)                                                                                                         |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.24.1.1            |   | (16)                  |   | Certificate of Amendment of the Certificate of  Limited Partnership of DAH-IP Acquisition Co., L.P. (changing its name to The  Infinity Partners, LTD.)                                                            |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.24.2              |   | (5)                   |   | Limited Partnership Agreement of The Infinity  Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) among DAH-IP Holdings,  Inc., the General Partner, and DeCrane Aircraft Holdings, Inc., the Limited  Partner |
|                |   |                  |   |                                                                                                                                                                                                               |
| 3.24.3              |   | (5)                   |   | Assignment of Partnership Interest in The Infinity  Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) by DeCrane Aircraft  Holdings, Inc. to DAH-IP Infinity, Inc.                                            |

 

62

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit  Description**                                                                                                                                                                                                                                               |
|---------------------|--------|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.25.1              |   | (8)                   |   | Certificate of Formation and Certificate of  Amendment of  Carl F. Booth & Co.,  LLC                                                                                                                                                                          |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.25.2              |   | (8)                   |   | Limited Liability Company Agreement of Carl F. Booth  & Co., LLC                                                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.26.1              |   | (10)                  |   | Restated Articles of Incorporation of ERDA, Inc.                                                                                                                                                                                                                       |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.26.1.1            |   | (17)                  |   | Articles of Amendment amending the Restated Articles  of Incorporation of ERDA, Inc. (changing its name to DeCrane Aircraft Seating  Company, Inc.                                                                                                                     |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.26.2              |   | (10)                  |   | Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co.,  Inc.)                                                                                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.27.1              |   | (12)                  |   | Articles of Incorporation of Coltech, Inc.                                                                                                                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.27.2              |   | (12)                  |   | Bylaws of Coltech, Inc.                                                                                                                                                                                                                                                |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.29.1              |   | (13)                  |   | Certificate of Limited Partnership of DeCrane  Aircraft Furniture Co., LP                                                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.29.2              |   | (13)                  |   | Limited Partnership Agreement of DeCrane Aircraft  Furniture Co., LP                                                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.30.1              |   | (17)                  |   | Certificate of Formation of DeCrane Cabin Interiors,  LLC                                                                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 3.30.2              |   | (17)                  |   | Limited Liability Company Agreement of DeCrane Cabin  Interiors, LLC                                                                                                                                                                                                   |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1                 |   | (1)                   |   | Indenture dated October 5, 1998 between DeCrane  Aircraft and  State Street Bank and  Trust Company                                                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.1               |   | (1)                   |   | Supplemental Indenture dated January 22, 1999 among  PATS, Inc. and its subsidiaries, the other guarantors under the Indenture,  DeCrane Aircraft and State Street Bank and Trust Company                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.2               |   | (2)                   |   | Supplemental Indenture to be dated April 23, 1999  among PPI Holdings, Inc., Precision Pattern, Inc., the other guarantors under  the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.3               |   | (12)                  |   | Supplemental Indenture to be dated August 5, 1999  among CWP Acquisition, Inc. d/b/a Custom Woodwork & Plastics, Inc., the  other guarantors under the Indenture, DeCrane Aircraft and State Street Bank  and Trust Company                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.4               |   | (12)                  |   | Supplemental Indenture to be dated October 6, 1999  among PCI Acquisition Co., Inc. d/b/a PCI Newco, Inc., the other guarantors  under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                         |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.5               |   | (12)                  |   | Supplemental Indenture to be dated October 8, 1999  among International Custom Interiors, Inc., the other guarantors under the  Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                    |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.6               |   | (12)                  |   | Supplemental Indenture to be dated December 17, 1999  among DAH-IP Acquisition, L.P. d/b/a Infinity Partners, L.P., DAH-IP  Holdings, Inc., DAH-IP Infinity, Inc., the other guarantors under the  Indenture, DeCrane Aircraft and State Street Bank and Trust Company |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.7               |   | (12)                  |   | Supplemental Indenture to be dated May 11, 2000  among Booth Acquisition, LLC, the other guarantors under the Indenture,  DeCrane Aircraft and State Street Bank and Trust Company                                                                                     |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.8               |   | (12)                  |   | Supplemental Indenture to be dated June 16, 2000  among DeCrane Aircraft Furniture Co., L.P., the other guarantors under the  Indenture, DeCrane Aircraft and State Street Bank and Trust Company                                                                      |
|                |   |                  |   |                                                                                                                                                                                                                                                                   |
| 4.1.9               |   | (12)                  |   | Supplemental Indenture to be dated June 30, 2000  among ERDA, Inc., the other guarantors under the Indenture, DeCrane Aircraft  and State Street Bank and Trust Company                                                                                                |

 

63

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit  Description**                                                                                                                                                                                                                             |
|---------------------|--------|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 4.1.10              |   | (12)                  |   | Supplemental Indenture to be dated August 31, 2000  among Coltech, Inc., the other guarantors under the Indenture, DeCrane  Aircraft and State Street Bank and Trust Company                                                                         |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 4.2                 |   | (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                 |   | (10)                  |   | Certificate of Designations, Preferences and Rights  of 16% Senior Redeemable Exchangeable Preferred Stock due 2009                                                                                                                                  |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 4.6.1               |   | (12)                  |   | Amendment to the Certificate of Designations,  Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock  due 2009 dated October 5, 2000                                                                                          |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 4.7                 |   | (10)                  |   | 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               |   | (12)                  |   | Amendment No. 1 to the Senior Preferred Stock Registration  Rights Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings,  Inc. and the Holders of Senior Preferred Stock dated October 6, 2000                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.1                |   | (10)                  |   | Securities Purchase Agreement dated as of June 30,  2000 among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the  purchasers named therein                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.2                |   | (12)                  |   | Amended and Restated Investors’ Agreement dated as  of October 6, 2000 by and among DeCrane Holdings Co., DeCrane Aircraft  Holdings, Inc. and the stockholders named therein                                                                   |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.5                |   | (1)                   |   | Tax Sharing Agreement dated March 15, 1993 between  DeCrane Aircraft and several subsidiaries                                                                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.6**              |   | (1)                   |   | Employment Agreement dated July 17, 1998 between  DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane                                                                                                                                                |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.6.1**            |   | (13)                  |   | First Amendment to Employment Agreement dated May 5,  2000 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane                                                                                                                               |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.7**              |   | (1)                   |   | 401(k) Salary Reduction Non-Standardized Adoption  Agreement dated April 30, 1992 between the Company and The Lincoln  National Life Insurance Company                                                                                     |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.8                |   | (1)                   |   | Form of Subscription Agreement for DeCrane Holdings  Co. common and preferred stock by certain members of Global Technology  Partners LLC                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.10               |   | (1)                   |   | Credit Agreement dated August 28, 1998 by and among  DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.)  and DLJ Capital Funding, Inc.                                                                                     |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.10.1             |   | (1)                   |   | First Amendment to Credit Agreement dated January  22, 1999                                                                                                                                                                                          |
|                |   |                  |   |                                                                                                                                                                                                                                                 |
| 10.10.2             |   | (6)                   |   | Second Amended and Restated Credit Agreement dated  as of December 17, 1999 among DeCrane Aircraft Holdings, Inc., the  lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and  Bank One NA, as administrative agent |

 

64

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| **Exhibit  Number** |   | **Filing  Reference** |   | **Exhibit  Description**                                                                                                                                                                                                                                                                                    |
|---------------------|--------|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.3             |   | (9)                   |   | Third Amended and Restated Credit Agreement dated as  of May 11, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed  therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as  administrative agent                                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.3.1           |   | (12)                  |   | First Amendment to the Third Amended and Restated  Credit Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings,  Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication  agent, and Bank One NA, as administrative agent                                                |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.4             |   | (14)                  |   | Increased Commitments Agreement, dated as of April  27, 2001, pursuant to Third Amended and Restated Credit Agreement, dated as  of May 11, 2000, as amended by the First Amendment to the Third Amended and  Restated Credit Agreement, dated as of June 30, 2000                                          |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.5             |   | (16)                  |   | Second Amendment to the Third Amended and Restated  Credit Agreement dated as of March 19, 2002 among DeCrane Aircraft Holdings,  Inc., the lenders listed therein, Credit Suisse First Boston (as successor to  DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as  administrative agent |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.10.6             |   | *                     |   | Third Amendment to the Third Amended and Restated  Credit Agreement dated as of March 31, 2003 among DeCrane Aircraft Holdings,  Inc., the lenders listed therein, Credit Suisse First Boston (as successor to  DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as  administrative agent  |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.19**             |   | (5)                   |   | Amended Management Incentive Stock Option Plan                                                                                                                                                                                                                                                              |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.20**             |   | (5)                   |   | Amended Stock Subscription Agreement                                                                                                                                                                                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.21**             |   | (5)                   |   | Amended Incentive Bonus Plan                                                                                                                                                                                                                                                                                |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.22**             |   | (7)                   |   | Executive Deferred Compensation Plan                                                                                                                                                                                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 10.23**             |   | *                     |   | Form of Change of Control Agreements between DeCrane  Aircraft Holdings, Inc. and certain executives                                                                                                                                                                                                        |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 12.1                |   | *                     |   | Computation of Earnings to Fixed Charges Ratios                                                                                                                                                                                                                                                             |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 21.1                |   | (17)                  |   | List of Subsidiaries of Registrant                                                                                                                                                                                                                                                                          |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 99.1                |   | *                     |   | Chief Executive Officer Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                            |
|                |   |                  |   |                                                                                                                                                                                                                                                                                                        |
| 99.2                |   | *                     |   | Chief Financial Officer Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                            |

 

----

*                           Filedherewith.

 

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

 

(1)                    Filed as anexhibit to our Registration Statement (Registration No. 333-70365) on Form S-1(Amendment No. 1) filed with the Commission on March 3, 1999.

 

(2)                    Filed as anexhibit to our Registration Statement (Registration No. 333-70365) on Form S-1(Amendment No. 2) filed with the Commission on April 23, 1999.

 

65

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(3)                    Filed as anexhibit to our Registration Statement (Registration No. 333-70365) on Form S-1(Amendment No. 3) filed with the Commission on May 6, 1999.

 

(4)                    Filed as anexhibit to our Form 8-K dated August 5, 1999 filed with the Commission onOctober 19, 1999.

 

(5)                    Filed as anexhibit to our Form 8-K dated December 17, 1999 filed with the Commission onDecember 31, 1999.

 

(6)                    Filed as anexhibit to our Form 10-K dated December 31, 1999 filed with the Commission onMarch 30, 2000.

 

(7)                    Filed as anexhibit to our Form 10-Q dated March 31, 2000 filed with the Commission on May9, 2000.

 

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

 

(9)                    Filed as anexhibit to our Form 8-K (Amendment No. 1) dated May 11, 2000 filed with theCommission on June 16, 2000.

 

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

 

(11)              Filed as an exhibitto our Form 10-Q dated June 30, 2000 filed with the Commission on August 14,2000.

 

(12)              Filed as an exhibitto our Form 10-Q dated September 30, 2000 filed with the Commission on November14, 2000.

 

(13)              Filed as an exhibitto our Form 10-K dated December 31, 2000 filed with the Commission on March 30,2001.

 

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

 

(15)              Filed as an exhibitto our Form 10-Q dated September 30, 2001 filed with the Commission on November13, 2001.

 

(16)              Filed as an exhibitto our Form 10-K dated December 31, 2001 filed with the Commission on March 27,2002.

 

(17)              Filed as an exhibitto our Form 10-Q dated March 31, 2002 filed with the Commission on May 13,2002.

 

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

 

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

 

In addition, on March 17, 2003 we also filed a Form8-K Current Report regarding DeCrane Aircraft entering into a definitiveagreement to sell its Specialty Avionics Group.  The text of the press release is contained in the filing.

 

66

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 

**DECRANE 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:  | April 15, 2003             |   |   |   |                                   |

 

 

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

 

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

 

67

----

 

**CERTIFICATIONS**

 

**ChiefExecutive Officer Certification**

 

I, R. Jack DeCrane, certify that:

 

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

 

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

 

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

 

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

 

a)                           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

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

 

c)                           presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

a)                           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                          anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

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

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

 

68

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**ChiefFinancial Officer Certification**

 

I, Richard J. Kaplan, certify that:

 

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

 

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

 

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

 

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

 

a)                           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

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

 

c)                           presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

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

 

a)                           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                          anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

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

 
| Date: April 15, 2003 |                                            |
|----------------------|-------------------------------------------------|
|                 |                                            |
|                 |                                            |
|                 | /s/  Richard  J. Kaplan                    |
|                 | Richard J. Kaplan                               |
|                 | Senior Vice President, Chief Financial Officer, |
|                 | Secretary and Treasurer                         |

 

69

----

 

**Index toConsolidated Financial Statements and Financial Statement Schedules**

 
| **Consolidated Financial Statements**                                                                       |
|-------------------------------------------------------------------------------------------------------------|
|                                                                                                        |
| Report of Independent  Accountants                                                                          |
|                                                                                                        |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                               |
|                                                                                                        |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000                 |
|                                                                                                        |
| Consolidated  Statements of Stockholder’s Equity for the years ended December 31, 2002,  2001 and 2000 |
|                                                                                                        |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                 |
|                                                                                                        |
| Notes to  Consolidated Financial Statements                                                                 |
|                                                                                                        |
| **Consolidated  Supplementary Financial Information**                                                       |
|                                                                                                        |
| Selected  Quarterly Financial Data (Unaudited)                                                              |
|                                                                                                        |
| **Consolidated  Financial Statement Schedules**                                                             |
|                                                                                                        |
| For the years ended December 31, 2002, 2001 and  2000:                                                      |
|                                                                                                        |
| II –  Valuation and Qualifying Accounts                                                                |

 

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

 

F-1

----

 

**REPORT OF INDEPENDENT ACCOUNTANTS**

 

 

To the Board of Directorsand Stockholder ofDeCrane Aircraft Holdings, Inc.

 

In our opinion, the consolidated financial statementslisted in the accompanying index present fairly, in all material respects, thefinancial position of DeCrane Aircraft Holdings, Inc. and its subsidiaries atDecember 31, 2002 and 2001, and the results of their operations and cash flowsfor each of the three years in the period ended December 31, 2002 in conformitywith accounting principles generally accepted in the United States ofAmerica.  In addition, in our opinion, thefinancial statement schedule listed in the accompanying index presents fairly,in all material respects, the information set forth therein when read inconjunction with the related consolidated financial statements.  These financial statements and financialstatement schedule are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.  We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern.  As discussed in the notes 1 and 18, theCompany will be in default of various financial covenants contained in itssenior credit facility on June 30, 2003 unless it successfully consummates thesale of its Specialty Avionics Group prior to that date, which raisessubstantial doubt about its ability to continue as a going concern.  Management’s plans and expectations inregard to these matters are also described in Note 1.  The consolidated financial statements do not include anyadjustments that might result from the outcome of these uncertainties.

 

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

 

 

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

February 18, 2003, except for Note 18,

which is as of March 28, 2003

 

F-2

----

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

** **

**Consolidated Balance Sheets**

** **
|                                                                                                                                                         |   | **December 31,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
| **(In thousands, except  share data)**                                                                                                                       |   | **2002**         |    | **2001** |   |
|                                                                                                                                                         |   |             |    |   |   |
| **Assets**                                                                                                                                                   |   |             |    |   |   |
|                                                                                                                                                         |   |             |    |   |   |
| Current assets:                                                                                                                                              |   |             |    |   |   |
| Cash and cash  equivalents                                                                                                                                   |   | $                | 12,612  |   | $ | 9,794 |   |
| Accounts  receivable, net                                                                                                                                    |   | 38,982           |    | 58,451 |   |
| Inventories                                                                                                                                                  |   | 80,802           |    | 86,498 |   |
| Deferred income  taxes                                                                                                                                       |   | 22,631           |    | 14,063 |   |
| Prepaid expenses  and other current assets                                                                                                                   |   | 2,816            |    | 2,559 |   |
| Total current  assets                                                                                                                                        |   | 157,843          |    | 171,365 |   |
|                                                                                                                                                         |   |             |    |   |   |
| Property and  equipment, net                                                                                                                                 |   | 51,883           |    | 61,073 |   |
| Other assets,  principally goodwill and other intangibles, net                                                                                               |   | 339,241          |    | 413,273 |   |
| Total assets                                                                                                                                                 |   | $                | 548,967 |   | $ | 645,711 |   |
|                                                                                                                                                         |   |             |    |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholder’s Equity**                                                                       |   |             |    |   |   |
|                                                                                                                                                         |   |             |    |   |   |
| Current  liabilities:                                                                                                                                        |   |             |    |   |   |
| Current portion  of long-term debt                                                                                                                           |   | $                | 16,859  |   | $ | 13,899 |   |
| Accounts payable                                                                                                                                             |   | 17,239           |    | 19,051 |   |
| Accrued  liabilities                                                                                                                                         |   | 35,056           |    | 56,626 |   |
| Income taxes  payable                                                                                                                                        |   | —           |    | 133 |   |
| Total current  liabilities                                                                                                                                   |   | 69,154           |    | 89,709 |   |
|                                                                                                                                                         |   |             |    |   |   |
| Long-term debt                                                                                                                                               |   | 364,848          |    | 386,351 |   |
| Deferred income  taxes                                                                                                                                       |   | 39,187           |    | 33,597 |   |
| Other long-term  liabilities                                                                                                                                 |   | 8,059            |    | 7,438 |   |
|                                                                                                                                                         |   |             |    |   |   |
| Commitments and  contingencies (Note 12)                                                                                                                     |   |             |    |   |   |
|                                                                                                                                                         |   |             |    |   |   |
| Mandatorily  redeemable preferred stock                                                                                                                      |   | 34,081           |    | 28,240 |   |
|                                                                                                                                                         |   |             |    |   |   |
| Stockholder’s  equity:                                                                                                                                  |   |             |    |   |   |
| Common stock,  $.01 par value, 1,000 shares authorized as of December 31, 2002 and 2001; 100  shares issued and outstanding as of December 31, 2002 and 2001 |   | —           |    | — |   |
| Additional  paid-in capital                                                                                                                                  |   | 121,212          |    | 122,469 |   |
| Notes receivable  for shares sold                                                                                                                            |   | (2,591           | )       | (2,668 | ) |
| Accumulated  deficit                                                                                                                                         |   | (83,309          | )       | (17,323 | ) |
| Accumulated  other comprehensive loss                                                                                                                        |   | (1,674           | )       | (2,102 | ) |
| Total  stockholder’s equity                                                                                                                             |   | 33,638           |    | 100,376 |   |
| Total  liabilities and stockholder’s equity                                                                                                             |   | $                | 548,967 |   | $ | 645,711 |   |

 

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

 

F-3

----

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

** **

**ConsolidatedStatements of Operations**

 
|                                                                                                      |   | **Year Ended December 31,** |    |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
| **(In thousands)**                                                                                        |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Revenues                                                                                                  |   | $                           | 325,630 |   | $ | 395,352 |   | $ | 347,379 |   |
| Cost of sales                                                                                             |   | 233,950                     |    | 279,681 |   | 232,048 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Gross profit                                                                                              |   | 91,680                      |    | 115,671 |   | 115,331 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Operating  expenses:                                                                                      |   |                        |    |   |   |   |   |
| Selling, general  and administrative expenses                                                             |   | 51,884                      |    | 59,934 |   | 45,394 |   |
| Impairment of  goodwill                                                                                   |   | 7,672                       |    | 8,583 |   | — |   |
| Amortization of  goodwill and other intangible assets                                                     |   | 5,768                       |    | 19,920 |   | 17,948 |   |
| Total operating  expenses                                                                                 |   | 65,324                      |    | 88,437 |   | 63,342 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Income from  operations                                                                                   |   | 26,356                      |    | 27,234 |   | 51,989 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Other expenses:                                                                                           |   |                        |    |   |   |   |   |
| Interest expense                                                                                          |   | 33,894                      |    | 39,001 |   | 41,623 |   |
| Other expenses,  net                                                                                      |   | 944                         |    | 1,047 |   | 482 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Income (loss)  before provision for income taxes and cumulative effect of change in  accounting principle |   | (8,482                      | )       | (12,814 | ) | 9,884 |   |
| Provision for  income taxes                                                                               |   | 354                         |    | 1,188 |   | 6,282 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Income (loss)  before cumulative effect of change in accounting principle                                 |   | (8,836                      | )       | (14,002 | ) | 3,602 |   |
| Cumulative  effect of change in accounting principle                                                      |   | (57,150                     | )       | — |   | — |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Net income  (loss)                                                                                        |   | (65,986                     | )       | (14,002 | ) | 3,602 |   |
|                                                                                                      |   |                        |    |   |   |   |   |
| Accrued  preferred stock dividends                                                                        |   | (5,373                      | )       | (4,593 | ) | (2,040 | ) |
| Preferred stock  redemption value accretion                                                               |   | (468                        | )       | (468 | ) | (234 | ) |
|                                                                                                      |   |                        |    |   |   |   |   |
| Net income  (loss) applicable to common stockholder                                                       |   | $                           | (71,827 | ) | $ | (19,063 | ) | $ | 1,328 |   |

 

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

 

F-4

----

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

** **

**ConsolidatedStatements of Stockholder’s Equity**

 
| **(In thousands, except share data)**                                                                                                            |   |       |   | **Additional  Paid-in  Capital** |   | **Notes  Receivable  For Shares  Sold** |   | **Accumulated  Deficit** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Total** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------------------------|--------|---------------------------------------------|--------|-----------|--------|
| **Common  Stock**                                                                                                                                |
| **Shares**                                                                                                                                       |   | **Amount** |
|                                                                                                                                             |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Balance, December 31, 1999                                                                                                                       |   | 100        |   | $                                | — |                                    | $      | 117,158                  |   | $                                           | (2,468 | )         | $      | (6,923 | ) | $ | (1,526 | ) | $ | 106,241 |   |
|                                                                                                                                             |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Comprehensive income (loss):                                                                                                                     |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net income                                                                                                                                       |   | —     |   | —                           |   | —                                  |   | —                   |   | 3,602                                       |   | —    |   | 3,602 |   |
| Translation adjustment                                                                                                                           |   | —     |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (161      | )      | (161 | ) |
|                                                                                                                                             |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   | 3,441 |   |
| Capital contribution, net of common stock repurchased                                                                                            |   | —     |   | —                           |   | 7,851                                   |   | 51                       |   | —                                      |   | —    |   | 7,902 |   |
| Value of warrants issued with sale of preferred stock                                                                                            |   | —     |   | —                           |   | 4,019                                   |   | —                   |   | —                                      |   | —    |   | 4,019 |   |
| Accrued preferred stock dividends                                                                                                                |   | —     |   | —                           |   | (2,040                                  | )      | —                   |   | —                                      |   | —    |   | (2,040 | ) |
| Preferred stock redemption value accretion                                                                                                       |   | —     |   | —                           |   | (234                                    | )      | —                   |   | —                                      |   | —    |   | (234 | ) |
| Compensatory stock option expense                                                                                                                |   | —     |   | —                           |   | 561                                     |   | —                   |   | —                                      |   | —    |   | 561 |   |
| Notes receivable interest accrued                                                                                                                |   | —     |   | —                           |   | —                                  |   | (135                     | )      | —                                      |   | —    |   | (135 | ) |
| Balance, December 31, 2000                                                                                                                       |   | 100        |   | —                           |   | 127,315                                 |   | (2,552                   | )      | (3,321                                      | )      | (1,687    | )      | 119,755 |   |
| Comprehensive income (loss):                                                                                                                     |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                                                                                                                         |   | —     |   | —                           |   | —                                  |   | —                   |   | (14,002                                     | )      | —    |   | (14,002 | ) |
| Translation adjustment                                                                                                                           |   | —     |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (327      | )      | (327 | ) |
| Unrealized loss on interest rate swap contract                                                                                                   |   | —     |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (88       | )      | (88 | ) |
|                                                                                                                                             |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   | (14,417 | ) |
| 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                                     | )      | (2,102    | )      | 100,376 |   |
| Comprehensive income (loss):                                                                                                                     |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   |   |   |
| Net loss                                                                                                                                         |   | —     |   | —                           |   | —                                  |   | —                   |   | (65,986                                     | )      | —    |   | (65,986 | ) |
| Translation adjustment                                                                                                                           |   | —     |   | —                           |   | —                                  |   | —                   |   | —                                      |   | 701       |   | 701 |   |
| Unrealized loss on interest rate swap contract                                                                                                   |   | —     |   | —                           |   | —                                  |   | —                   |   | —                                      |   | (273      | )      | (273 | ) |
|                                                                                                                                             |   |       |   |                             |   |                                    |   |                     |   |                                        |   |      |   | (65,558 | ) |
| 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 | ) | $ | (1,674 | ) | $ | 33,638 |   |

 

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

 

F-5

----

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

** **

**ConsolidatedStatements of Cash Flows**

 
|                                                                                      |   | **Year Ended December 31,** |    |
|-------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
| **(In thousands)**                                                                        |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                                                                      |   |                        |    |   |   |   |   |
| **Cash  flows from operating activities:**                                                |   |                        |    |   |   |   |   |
| Net income  (loss)                                                                        |   | $                           | (65,986 | ) | $ | (14,002 | ) | $ | 3,602 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |                        |    |   |   |   |   |
| Cumulative  effect of change in accounting principle                                      |   | 57,150                      |    | — |   | — |   |
| Depreciation and  amortization                                                            |   | 19,811                      |    | 34,594 |   | 29,445 |   |
| Noncash portion  of restructuring, asset impairment and other related charges             |   | 19,444                      |    | 22,058 |   | — |   |
| Deferred income  taxes                                                                    |   | 32                          |    | (37 | ) | 5,121 |   |
| Other, net                                                                                |   | 386                         |    | 689 |   | 773 |   |
| Changes in  assets and liabilities, net of effect from acquisitions:                      |   |                        |    |   |   |   |   |
| Accounts  receivable                                                                      |   | 19,136                      |    | (5,085 | ) | 1,036 |   |
| Inventories                                                                               |   | (1,351                      | )       | (11,990 | ) | (14,321 | ) |
| Prepaid expenses  and other assets                                                        |   | (69                         | )       | (2,278 | ) | 2,048 |   |
| Accounts payable                                                                          |   | (1,906                      | )       | (1,248 | ) | 2,259 |   |
| Accrued  liabilities                                                                      |   | (16,617                     | )       | (7,615 | ) | (12,973 | ) |
| Income taxes  payable                                                                     |   | 399                         |    | 64 |   | 583 |   |
| Other long-term  liabilities                                                              |   | (111                        | )       | (221 | ) | (790 | ) |
| Net cash  provided by operating activities                                                |   | 30,318                      |    | 14,929 |   | 16,783 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| **Cash  flows from investing activities:**                                                |   |                        |    |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired                                         |   | (5,890                      | )       | (13,529 | ) | (89,546 | ) |
| Capital  expenditures                                                                     |   | (5,429                      | )       | (11,899 | ) | (22,689 | ) |
| Other, net                                                                                |   | —                      |    | 636 |   | 71 |   |
| Net cash used  for investing activities                                                   |   | (11,319                     | )       | (24,792 | ) | (112,164 | ) |
|                                                                                      |   |                        |    |   |   |   |   |
| **Cash  flows from financing activities:**                                                |   |                        |    |   |   |   |   |
| Senior term debt  borrowings                                                              |   | —                      |    | 20,000 |   | 55,000 |   |
| Senior revolving  line of credit borrowings (repayments), net                             |   | (6,000                      | )       | (400 | ) | 12,400 |   |
| Proceeds from  sale of preferred stock and warrants                                       |   | —                      |    | — |   | 24,924 |   |
| Capital  contributions                                                                    |   | 5,000                       |    | — |   | 7,902 |   |
| Other long-term  borrowings                                                               |   | 1,145                       |    | 2,797 |   | 3,451 |   |
| Principal  payments on term debt, capitalized leases and other debt                       |   | (14,150                     | )       | (10,076 | ) | (5,824 | ) |
| Deferred  financing costs                                                                 |   | (1,656                      | )       | (767 | ) | (1,900 | ) |
| Return of  capital in connection with shares repurchased                                  |   | (368                        | )       | — |   | — |   |
| Other, net                                                                                |   | (199                        | )       | (157 | ) | (297 | ) |
| Net cash  provided by financing activities                                                |   | (16,228                     | )       | 11,397 |   | 95,656 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| Effect of  foreign currency translation on cash                                           |   | 47                          |    | 61 |   | 6 |   |
|                                                                                      |   |                        |    |   |   |   |   |
| Net increase in  cash and cash equivalents                                                |   | 2,818                       |    | 1,595 |   | 281 |   |
| Cash and cash  equivalents at beginning of period                                         |   | 9,794                       |    | 8,199 |   | 7,918 |   |
| Cash and cash  equivalents at end of period                                               |   | $                           | 12,612  |   | $ | 9,794 |   | $ | 8,199 |   |

 

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

 

F-6

----

 

**DECRANEAIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES**

 

**Notes toConsolidated Financial Statements**

 

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

 

**Description of the Business**

 

DeCrane Aircraft Holdings, Inc. and subsidiaries (the“Company” or “DeCrane Aircraft”) is a leading provider of integratedassemblies, sub-assemblies and component parts to the aerospace industry.  The Company’s businesses are organized intothree separate operating groups: Cabin Management, Specialty Avionics andSystems Integration.  The Company is awholly-owned subsidiary of DeCrane Holdings Co. (“DeCrane Holdings”).

 

**Basis ofPresentation**

 

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

 

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

 

**Financial Condition and Liquidity**

 

The Company’s consolidated financial statements areprepared assuming that it is a going concern, which contemplates the realizationof assets and the satisfaction of liabilities in the normal course ofbusiness.  The September 11, 2001 terrorist attack on the UnitedStates, ongoing concerns about global terrorism, thecurrent Middle-Eastern military conflicts, the Severe Acute RespiratorySyndrome (SARS) epidemic and weak global economic conditions are all adverselyimpacting air travel and, in turn, the aerospace industry and the Company’s business.  In response, the Company implementedrestructuring plans in 2001 and 2002 designed to reduce costs and conserveworking capital (Note 2).  The Companyreported losses for the two years ended December 31, 2002, primarily resultingfrom charges associated with these restructuring activities, as well as theimpairment of goodwill.

 

During the fourth quarter of fiscal 2002, the Companyfurther assessed its long-term business strategies in light of currentaerospace industry conditions.  Inaddition, the Company subsequently determined that it would likely not be incompliance with its senior credit facility’s financial covenants in 2003.  The Company believes that as the aerospaceindustry recovers, the demand for its Cabin Management and Systems Integrationgroups’ products and services for corporate, VIP and head-of-state aircraftwill return to historical levels and, accordingly, the Company decided to focusits resources in these market segments. To accomplish this objective, the Company embarked on a plan to sell itsSpecialty Avionics Group, which is highly dependent on the commercial airlineindustry.

 

F-7

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As described in Note 18, in March 2003 the Companyentered into a definitive agreement to sell its Specialty Avionics Group andreceived requisite lender approval to amend its senior credit facility topermit the sale.  The amendment alsorelaxes the financial covenants for 2003 and beyond provided senior creditfacility borrowings are reduced with the estimated net proceeds of $132,000,000from the sale.

 

The amended senior credit facility also provides thatan event of default will occur if the sale is not consummated by or isterminated for any reason prior to June 30, 2003.  If an event of default should occur, thelenders may, at that date, cease to provide additional borrowings and mayaccelerate repayment of all borrowings then outstanding.  If the lenders took such action, that wouldbe an event of default under the Company’s other debt agreements, permittingthose lenders to accelerate repayment of all such debt, as well.  In such event, the Company would requirealternate sources of capital, which the Company may not be able to obtain.

 

Company management is working diligently to close the sale, which issubject to customary closing conditions, including buyer financing and the needto obtain third party consents, and expects the sale will be consummated priorto June 30, 2003.  Company managementexpects to be in compliance with the revised financial covenants through 2003based on its current operating plan and its ability to respond to furtheradverse changes in the Company’s business through additional costreduction measures.  The Company expectsto continue conducting its operations in the ordinary course of business.

 

Althoughwe cannot be certain and provided that the sale of the Specialty Avionics Groupdescribed above will be consummated prior to June 30, 2003, we believe ouroperating cash flows, together with borrowings under our senior creditfacility, will be sufficient to meet our future short- and long-term operatingexpenses, working capital requirements, capital expenditures and debt serviceobligations for the next twelve months.

 

**Inventories**

 

Inventories are stated at the lower of cost, asdetermined under the first-in, first-out (“FIFO”) method, or market.  Costs include materials, labor, includingdirect engineering labor, tooling costs and manufacturing overhead.  In accordance with industry practice,inventoried costs also include amounts relating to programs and contracts withlong production cycles that will be recovered from future sales.  Periodic assessments are performed to ensurerecoverability of the program costs and adjustments are made, if necessary, toreduce inventoried costs to estimated realizable value.

 

**Property and Equipment**

 

Property and equipment for companies acquired arestated at fair value as of the date the acquisition occurred and at cost forall subsequent additions.  Property andequipment are depreciated using the straight-line method over their estimateduseful lives.  Useful lives formachinery and equipment range from three to twenty years.  Building and building improvements aredepreciated using the straight-line method over their estimated useful lives offorty years.  Leasehold improvements areamortized using the straight-line method over their estimated useful lives orremaining lease term, whichever is less. Expenditures for maintenance and repairs are expensed as incurred.  The costs for improvements arecapitalized.  Upon retirement ordisposal, the cost and accumulated depreciation of property and equipment arereduced and any gain or loss is recorded in income or expense.

 

F-8

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**Goodwill**

 

Prior to January 1, 2002, goodwill was amortized on astraight-line basis over thirty years from the date the acquisitionoccurred.  Additional goodwill resultingfrom contingent consideration payments subsequent to the acquisition date wasamortized prospectively over the remaining period of the initial thirty-yearterm.  Starting January 1, 2002,goodwill is no longer amortized but instead subject to annual impairmenttesting with a loss charged to operations in the period in which impairmentoccurs (Note 7).

 

**Other Assets**

 

Identifiable finite-lived intangible assets areamortized on a straight-line basis over their estimated useful lives, rangingfrom three to fifteen years.  Deferredfinancing costs are amortized using either the straight-line or effectiveinterest method, over the term of the related debt.

 

**Impairment of Goodwill**

 

Effective January 1, 2002 the Company adopted andbegan testing goodwill for impairment in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets” as described in Note 7.  As required by SFAS No. 142, the Companytests goodwill for impairment annually, on October 31st of eachyear, or when events or changes in circumstances indicate the carrying amountmay not be recoverable.  The goodwillimpairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fairvalue of the related operations that have goodwill assigned to them.  If the fair value is determined to be lessthan book value, a second step is performed to compute the amount of theimpairment.  In this process, a fairvalue for goodwill is estimated, based in part on the fair value of theoperations used in the first step, and is compared to its carrying value.  The amount by which carrying value exceedsfair value represents the amount of goodwill impairment.  As a result of the 2002 impairment testing,the Company recorded a $7,672,000 pre-tax charge to operations.

 

Prior to adoption of SFAS No. 142, impairment testingwas in accordance with SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of.”  In 2001, the Company recorded a $8,583,000pre-tax charge to reflect the impairment loss resulting from its restructuringplan to close a manufacturing facility (Notes 2 and 7).

 

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

 

In accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” the Company reviews long-livedassets held for use and intangible assets, other than goodwill, for impairmentwhen events or changes in circumstances indicate the carrying amount of anasset may not be recoverable.  In theevent the sum of the expected undiscounted future cash flows resulting from theuse of the asset is less than the carrying value of the asset, an impairment lossequal to the excess of the asset’s carrying value over its fair value isrecorded.  Long-lived assets deemed heldfor sale are stated at the lower of cost or fair value.  As a result of two restructuring programs conductedduring 2001 and 2002, the Company recorded pre-tax charges of $1,320,000 during2001 and $3,931,000 during 2002 to reflect the impairment of long-livedassets.  The impairment losses aredescribed in Note 2.

 

F-9

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**Product Warranty Obligations**

 

The Company sells some products to customers withvarious repair or replacement warranties. The terms of the warranties vary according to the customer and/orproduct involved.  The most commonwarranty periods are generally one to five years from the earlier of the dateof delivery to the customer or six to twelve months from the date ofmanufacture.

 

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

 

**Income Taxes**

 

Deferred income taxes are determined using theliability method.  A deferred tax assetor liability is determined based on the difference between the financialstatement and tax basis of assets and liabilities as measured by the enactedtax rates that will be in effect when these differences reverse.  Deferred tax expense is the result ofchanges in the deferred tax asset or liability.  If necessary, valuation allowances are established to reducedeferred tax assets to their expected realizable values.

** **

**Derivative Financial Instruments**

 

Effective January 1, 2001, the Company adopted andbegan accounting for derivative financial instruments in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting forDerivative Instruments and Hedging Activities.”  The adoption did not have a material impact on the Company’sbusiness, consolidated financial position, results of operations or cashflows.  SFAS No. 133 requires companiesto record derivatives on the balance sheet as assets or liabilities, measuredat fair value.  It also requires thatgains or losses resulting from changes in the values of those derivatives beaccounted for depending on the use of the derivative and whether it qualifiesfor hedge accounting.

 

The Company does not use derivative financialinstruments for trading purposes but only to manage the risk that changes ininterest rates would have on future interest payments for a portion of itsvariable-rate debt.  At December 31,2002, the Company has an interest rate swap contract to effectively convert$4,500,000 of variable-rate debt to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedgeagainst changes in the amount of future cash flows associated with interestpayments on this variable-rate debt.  Asa result, the interest rate swap contract is reflected at fair value and therelated loss of $361,000 on this contract is deferred in stockholder’s equityas a component of comprehensive income (loss). The deferred loss will be recognized in future periods as interestexpense as the related fixed-rate interest payments are made.  In the unlikely event that the counterpartyfails to perform under the contract, the Company bears the credit risk thatpayments due to the Company may not be collected.

 

F-10

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**Fair Value of Financial Instruments**

 

All financial instruments are held for purposes otherthan trading.  The estimated fair valueof the Company’s long-term debt is based on either quoted market prices orcurrent rates for similar issues for debt of the same remaining maturities.  The estimated fair value of the Company’s$100,000,000 senior subordinated debt was approximately $40,000,000 at December31, 2002 and $93,500,000 at December 31, 2001.  All other non-derivative financial instruments as of December 31,2002 and 2001 approximate their carrying amounts either because of the short maturityof the instrument, or based on their effective interest rates compared tocurrent market rates for similar long-term debt or obligations.

 

**Foreign Currency Translation andTransactions**

 

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

 

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

** **

**Revenue Recognition**

 

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

 

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

 

F-11

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Percentage-of-completion is measured using an estimateof direct labor incurred to date to total expected direct labor for eachcontract.  This method is used because managementconsiders expended direct labor to be the best available measure of progress onthese contracts.  Provisions forestimated losses on uncompleted contracts are made in the period in which suchlosses are determined.  Managementbelieves that the Company will not incur any losses on uncompleted contracts atDecember 31, 2002.

 

Measuring a contract’s percentage-of-completionrequires management to make estimates. As a result, it is reasonably possible that factors may cause managementto change its revenue and cost estimates, thereby altering estimatedprofitability.  These factors include,but are not limited to, changes in contract scope, material and laborefficiencies, 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 and estimated earnings in excess ofbillings” represents revenues recognized in excess of amounts billed onuncompleted contracts and is reflected as a component of inventory.  Conversely, the liability “Billings inexcess of costs and estimated earnings” represents billings in excess ofrevenues recognized on uncompleted contracts and is reflected as an accruedliability.  Unbilled revenues areexpected to be billed and collected during the succeeding twelve-month period.

 

**Research and Development Costs**

 

Research and development costs are expensed asincurred.  Such costs were $2,490,000for the year ended December 31, 2002, $3,697,000 for the year ended December31, 2001 and $4,630,000 for the year ended December 31, 2000.

 

**Stock Option Plan**

 

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

** **

**Statements of Cash Flows**

 

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

 

F-12

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**Recent Accounting Pronouncements**

 

*SFAS No. 145*

 

In May 2002, the Financial Accounting Standards Boardissued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFASNo. 13, and Technical Corrections.” Among other things, SFAS No. 145 rescinds various pronouncementsregarding early extinguishment of debt and allows extraordinary accountingtreatment for early extinguishment only when the provisions of AccountingPrinciples Board Opinion No. 30, “Reporting the Results of Operations–Reportingthe Effects of Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regarding earlyextinguishment of debt are generally effective for fiscal years beginningJanuary 1, 2003.  The Company believesthis new standard will not have an impact on its business, consolidatedfinancial position, results of operations or cash flow.

 

*SFAS No. 146*

 

In June 2002, the Financial Accounting Standards Boardissued SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 supersedesprevious accounting guidance, principally Emerging Issues Task Force Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”

 

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

 

The provisions of SFAS No. 146 are required to beapplied prospectively to exit or disposal activities initiated after December31, 2002.  The Company believes SFAS No.146 may affect the timing of recognizing future restructuring costs, as well asthe amounts recognized, depending on the nature of the exit or disposalactivity and the timing of the related estimated cash flows.

 

F-13

----

 

*FIN No. 45*

 

In November 2002, the Financial Accounting StandardsBoard issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”  FIN No. 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it hasissued.  The interpretation alsoclarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The initialrecognition and initial measurement provisions of FIN No. 45 are applicable tothe Company on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  However, thedisclosure requirements in FIN No. 45 are effective for the Company’s financialstatements for periods ending after December 15, 2002.

 

The Company is not a party to any agreement in whichit is a guarantor of indebtedness of others therefore the interpretation is notexpected to have a material effect on the Company’s financial position, resultsof operations or cash flows.  Thedisclosure requirements of this interpretation have been adopted by the Companyas of December 31, 2002.

 

*SFAS No. 148*

 

In December 2002, the Financial Accounting StandardsBoard issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transitionand Disclosure.”  SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation,”to require disclosure in both interim and annual financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.

 

SFAS No. 148 is effective for the Company’s fiscalyear ended December 31, 2002 and for interim financial statements beginning in2003.  SFAS No. 148 is not expected tohave a significant effect on the Company’s financial position, results ofoperations or cash flows.

 

*FIN No. 46*

 

In January 2003, the Financial Accounting StandardsBoard issued Interpretation No. 46, “Consolidation of Variable InterestEntities.”  FIN No. 46 addressesconsolidation by business enterprises of variable interest entities (formerlyspecial purpose entities or “SPEs”). The Company does not have any variable interest entities as defined inFIN No. 46.

 

F-14

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**Note 2.**          **Restructuring, Asset Impairment and Other RelatedCharges**

 

During the two years ended December 31, 2002, theCompany recorded restructuring, assets impairment and other related charges asfollows:

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

 

**2001 Asset Realignment Restructuring**

 

During the second quarter of 2001, the Company’s CabinManagement Group adopted a restructuring plan to realign production programsbetween its manufacturing facilities. In response to the adverse impact on the aerospace industry resultingfrom the September 11th terrorist attack and its aftermath, as wellas the weakening of global economic conditions, the Company announced andimplemented a further restructuring plan in December 2001 designed to reducecosts and conserve working capital. This plan included permanently closing one manufacturing facility andidling a second facility for an indefinite period, curtailing several productdevelopment programs and instituting workforce reductions.  Due to the ongoing weakness of thecorporate, VIP and head-of-state aircraft market, the Company decided duringthe second quarter of fiscal 2002 to permanently close the temporarily idledmanufacturing facility.  This planprimarily affected the Company’s Cabin Management and Specialty AvionicsGroups.

 

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

 

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

 

F-15

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•                       *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 costs are comprised of the net lossesexpected to be incurred under the existing long-term lease agreements forfacilities permanently vacated.  Thelosses have been reduced by the expected sublease income.  These expected losses were based onestimated current market rates and anticipated dates that these facilities aresubleased.  If market rates decrease orshould it take longer than expected to sublease these facilities, the actualloss could exceed these estimates.

 

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

 

The components of the restructuring, assets impairmentand other related charges are as follows:

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

 

F-16

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

 

This restructuring plan was completed during thefourth quarter of fiscal 2002.  From theinception of this restructuring plan in 2001, severance and other compensationcosts of approximately $2,024,000 have been paid to manufacturing andadministrative employees terminated at the manufacturing facilitiesclosed.  Since the September 11thterrorist attack, the Company has, in addition to the positions eliminated as aresult of the 2002 plant closures described above, reduced its total workforceby approximately 500 employees, or 18.5%, as of December 2002 pursuant to thisrestructuring plan, of which approximately 260 employees had separated as ofDecember 31, 2001.

 

The remaining balance of restructuring costs includeslease termination and other exit costs. The restructuring plan related to leased facilities was completed duringthe second quarter of fiscal 2002; however, future cash payments extend beyondthis date due to lease payments on the vacated facility and the incurrence ofother exit costs.  Future cash paymentswill be funded from existing cash balances and internally generated cash fromoperations.

 

**2002 Seat Manufacturing FacilitiesRestructuring**

 

During the first quarter of fiscal 2002, the Companyannounced it would consolidate the production of four seating and relatedmanufacturing facilities into two, resulting in the permanent closure of twofacilities.  This plan was designed toimprove manufacturing efficiencies and to further reduce costs and conserveworking capital.  In connection withthis restructuring plan, the Company recorded pre-tax charges to operationstotaling $6,294,000 during 2002 for restructuring, asset impairment and otherrelated charges.  The charges arecomprised of the following:

 

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

 

F-17

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

 

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

 

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

 

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

 

The components of the restructuring, assets impairmentand other related charges are as follows:

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

 

This restructuring plan was completed during thesecond quarter of fiscal 2002.  Theremaining balance of restructuring costs includes lease termination and otherexit costs.  The manufacturingfacilities were closed during June 2002; however, future cash payments extendbeyond this date due to lease payments on the vacated facilities and theincurrence of other exit costs.  Futurecash payments will be funded from existing cash balances and internallygenerated cash from operations.

 

**Other Asset Impairment Related Charges**

 

Due to continued weakness in the commercial aircraftportion of our business, in the fourth quarter of fiscal 2002 the Companyrecorded a pre-tax charge of $12,048,000 for additional asset impairments.  Of this amount, $7,672,000 related to theCompany’s annual goodwill impairment testing pursuant to SFAS No. 142(Note 7) and $4,376,000 related to inventories and was charged to cost ofgoods sold.

 

F-18

----

 

**Note 3.****          Acquisitions**

 

**Acquisitions Completed During 2000**

 

During the year ended December 31, 2000, the Companyacquired:

 

*CabinManagement Group*

 

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

 

•                       all of thecommon stock of ERDA, Inc. (subsequently renamed DeCrane Aircraft Seating Co.,Inc.), a Wisconsin-based designer and manufacturer of aircraft seating, on June30, 2000; and

 

*SpecialtyAvionics Group*

 

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

 

The consolidated financial statements reflect theacquired companies subsequent to their respective acquisition dates.  The aggregate purchase price for theacquisitions was $59,363,000 in cash, plus contingent consideration totaling amaximum of $2,000,000 payable over three years based on future attainment ofdefined performance criteria.  The aggregatepurchase price includes $3,511,000 of acquisition related costs.  The acquisitions were accounted for aspurchases and the assets acquired and liabilities assumed have been recorded attheir estimated fair values.  As aresult, identifiable intangible assets, principally FAA certifications,totaling $18,936,000 were recorded and the $41,622,000 difference between theaggregate purchase price and the fair value of the net assets acquired wasrecorded as goodwill.

 

Identifiable intangible assets are being amortized ona straight-line basis over their estimated useful lives, ranging from seven tofifteen years.  Prior to the January 1,2002 adoption of SFAS No. 142 (Note 7), goodwill was being amortized on a straight-linebasis over thirty years.  Contingentconsideration totaling $2,000,000 was earned during the three years endedDecember 31, 2002 resulting in a corresponding increase in goodwill.

 

The acquisitions were funded with borrowings under theCompany’s senior credit facility, equity contributions from DeCrane Holdingsand the sale of preferred stock as described in Note 11.

 

F-19

----

 

**Contingent Acquisition ConsiderationPaid for All Acquisitions**

** **

Prior to the year 2000, six additional companies were acquiredin transactions in which the sellers were entitled to contingent considerationpayments based upon their respective levels of attainment of definedperformance criteria.  Based upon thelevel of attainment of defined performance criteria during the three yearsended December 31, 2002, the Company recorded contingent consideration payableof $600,000 in 2002, $700,000 in 2001 and $20,154,000 in 2000 resulting in acorresponding increase in goodwill.  Asof December 31, 2002, there are no remaining contingent consideration paymentobligations.

 

During 2001, the Company settled its asserted claimsagainst the sellers of two companies acquired in 2000 for breach ofrepresentation and warranty provisions contained in the purchaseagreements.  The Company received$3,718,000 from the sellers upon entering into the settlement agreements, whichalso provided that the Company pay in 2002 a minimum of $3,125,000 ofpreviously contingent consideration for the year ended December 31, 2001 whichwas reflected as an accrued liability as of December 31, 2001.

 

**Unaudited Pro Forma Information**

 

Unaudited pro forma consolidated results of operationsare presented in the table below for the year ended December 31, 2000.  The results of operations reflect theCompany’s acquisitions as if all of these transactions were consummated as ofJanuary 1, 2000.

** **
| **(Unaudited, in thousands)**                                          |   | **Pro Forma  Year Ended  December 31,  2000** |    |
|------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                   |   |                                          |    |
| Revenues                                                               |   | $                                             | 371,584 |   |
| EBITDA, as  defined (Note 16)                                          |   | 89,160                                        |    |
| Net income  before cumulative effect of change in accounting principle |   | 5,357                                         |    |
|                                                                        |        |                                               |         |  |

 

The pro forma results of operations do not purport torepresent what actual results would have been if the transactions describedabove occurred on such dates or to project the results of operations for any futureperiod.  The above information reflectsadjustments for inventory, depreciation, amortization, general andadministrative expenses and interest expense based on the new cost basis anddebt and capital structure of the Company following the acquisitions.

 

During 2002, three customers accounted for more than10% of the Company’s consolidated revenues (Note 16).  If the Company had completed its 2000 acquisitions at thebeginning of 2000, unaudited pro forma revenues from these customers for yearended December 31, 2000 would have been as follows: Bombardier – $65,746,000;Boeing – $53,735,000; and Textron – $53,669,000.  Complete loss of any of the customers identified above could havea significant adverse impact on the results of operations expected in futureperiods.

 

F-20

----

 

**Note 4.**          **Accounts Receivable**

 

The Company is potentially subject to concentrationsof credit risk as the Company relies heavily on customers operating in thedomestic and foreign corporate, VIP and head-of-state and commercial aircraftindustries.  Generally, the Company doesnot require collateral or other security to support accounts receivable subjectto credit risk.  Under certaincircumstances, deposits or cash-on-delivery terms are required.  The Company maintains reserves for potentialcredit losses and generally, such losses have been within management’sexpectations.

 

Accounts receivable are net of an allowance fordoubtful accounts of $1,758,000 at December 31, 2002 and $2,647,000at December 31, 2001.

 

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

** **

Inventories are comprised of the following as ofDecember 31, 2002 and 2001:

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

 

Periodic assessments are performed to ensurerecoverability of the program costs and adjustments are made, if necessary, toreduce inventoried costs to estimated realizable value.  In connection with the 2001 restructuring,$7,908,000 of previously inventoried program costs were determined to beunrecoverable and were charged to cost of sales in 2001; no adjustments wererequired during the years ended December 31, 2002 and 2000.

 

Total costs and estimated earnings on all uncompletedcontracts as of December 31, 2002 and 2001 are comprised of the following:

 
|                                                                          |   | **December 31,** |   |
|-------------------------------------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                                                            |   | **2002**         |   | **2001** |   |
|                                                                          |   |             |   |   |   |
| Costs incurred  on uncompleted contracts                                      |   | $                | 49,572 |   | $ | 46,757 |   |
| Estimated  earnings recognized                                                |   | 63,699           |   | 50,413 |   |
| Total costs and  estimated earnings                                           |   | 113,271          |   | 97,170 |   |
| Less billings to  date                                                        |   | (109,880         | )      | (102,653 | ) |
| Net                                                                           |   | $                | 3,391  |   | $ | (5,483 | ) |
|                                                                          |   |             |   |   |   |
| Balance sheet  classification:                                                |   |             |   |   |   |
| Asset – Costs  and estimated earnings in excess of billings              |   | $                | 4,004  |   | $ | 5,672 |   |
| Liability –  Billings in excess of costs and estimated earnings (Note 8) |   | (613             | )      | (11,155 | ) |
| Net                                                                           |   | $                | 3,391  |   | $ | (5,483 | ) |

 

F-21

----

 

Revenues and earnings for products manufactured underlong-term contracts are recognized under the percentage-of-completion methodusing total contract price, actual costs incurred to date and an estimate ofthe completion costs for each contract. Provisions for estimated losses on uncompleted contracts are made in theperiod in which such losses are determined. The Company recorded a provision for estimated losses totaling$2,577,000 during 2002 relating to uncompleted contracts at the furnituremanufacturing facility permanently closed.

 

**Note 6.**          **Property and Equipment**

 

Property and equipment includes the following as ofDecember 31, 2002 and 2001:

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

 

Included above are owned land and buildings held forsale related to a manufacturing facility the Company closed during 2002 (Note2).  The cost of the land and buildingsis $2,820,000 and the corresponding accumulated depreciation and amortizationis $31,000 as of December 31, 2002.

 

Property and equipment under capital leases includedabove consists of the following as of December 31, 2002 and 2001:

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

 

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

 

F-22

----

 

**Note 7.**          **Other Assets**

 

Other assets are comprised of the following as ofDecember 31, 2002 and 2001:

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

 

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

 

Effective January 1, 2002, the Company adopted SFASNo. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No.141, “Business Combinations,” which were required to be adopted concurrent withthe adoption of SFAS No. 142.  Adoptionof these accounting pronouncements resulted in the following:

 

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

 

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

 

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

 

During 2002, the Company completed the transitionalimpairment testing of goodwill recorded as of January 1, 2002 as required underSFAS No. 142.  Fair value of eachreporting unit was determined using a discounted cash flow approach taking intoconsideration projections based on the individual characteristics of thereporting units, historical trends, market multiples for comparable businessesand independent appraisals.  Unallocatedgoodwill was allocated to the reporting units for impairment testingpurposes.  The results indicated thatthe carrying value of goodwill was impaired. The resulting impairment was primarily attributable to a change in theevaluation criteria for goodwill utilized under previous accounting guidance tothe fair value approach stipulated in SFAS No. 142.  In accordance with the transitional provision of SFAS No. 142,the Company recorded a $57,150,000 noncash write-down of goodwill (net of$878,000 income tax benefit) as of January 1, 2002 as a cumulative effect of achange in accounting principle.

 

F-23

----

 

Reported income (loss), net of tax before thecumulative effect of the change in accounting principle, adjusted to reflectthe discontinuance of periodic goodwill and assembled workforce amortizationcharges, is as follows:

 
|                                                                |   | **Year Ended December 31,** |   |
|---------------------------------------------------------------------|--------|-----------------------------|--------|
| **(In thousands)**                                                  |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                |   |                        |   |   |   |   |   |
| Reported income  (loss)                                             |   | $                           | (8,836 | ) | $ | (14,002 | ) | $ | 3,602 |   |
| Add back  goodwill and assembled workforce amortization, net of tax |   | —                      |   | 11,573 |   | 10,492 |   |
| Adjusted income  (loss)                                             |   | $                           | (8,836 | ) | $ | (2,429 | ) | $ | 14,094 |   |

 

**Goodwill**

 

Changes in the carrying amount of goodwill, bybusiness segment (Note 16), for the two years ended December 31, 2002 areas follows:

** **
| **(In  thousands)**                                                                                      |   | **Cabin  Management  Group** |    | **Specialty  Avionics  Group** |   | **Systems  Integration  Group** |   | **Corporate** |   | **Consolidated  Total** |   |
|----------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|--------------------------------|--------|---------------------------------|--------|---------------|--------|-------------------------|--------|
|                                                                                                     |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Balance, December  31, 2000                                                                              |   | $                            | 187,797 |                           | $      | 131,472                         |   | $             | 32,982 |                    | $      | 4,105 |   | $ | 356,356 |   |
| Amortization  during the period                                                                          |   | (6,640                       | )       | (4,709                         | )      | (1,180                          | )      | (149          | )      | (12,678                 | )      |
| Impairment  charge                                                                                       |   | (5,058                       | )       | —                         |   | (3,525                          | )      | —        |   | (8,583                  | )      |
| Contingent  consideration earned, including acquisition related expenses                                 |   | 3,832                        |    | —                         |   | —                          |   | —        |   | 3,832                   |   |
| Cash received  from sellers, net of additional liabilities recorded, upon settlement of  asserted claims |   | (1,216                       | )       | —                         |   | —                          |   | —        |   | (1,216                  | )      |
| Foreign currency  translation                                                                            |   | —                       |    | (268                           | )      | —                          |   | —        |   | (268                    | )      |
| Balance, December  31, 2001                                                                              |   | 178,715                      |    | 126,495                        |   | 28,277                          |   | 3,956         |   | 337,443                 |   |
|                                                                                                     |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Adoption of SFAS  141 and 142:                                                                           |   |                         |    |                           |   |                            |   |          |   |                    |   |
| Reclassification  of intangible assets                                                                   |   | 3,076                        |    | 1,221                          |   | 386                             |   | 120           |   | 4,803                   |   |
| Transitional  impairment charge                                                                          |   | (8,463                       | )       | (39,322                        | )      | (7,881                          | )      | (2,362        | )      | (58,028                 | )      |
| Contingent  consideration earned, including acquisition related expenses                                 |   | 606                          |    | —                         |   | —                          |   | —        |   | 606                     |   |
| Impairment  charge                                                                                       |   | —                       |    | (7,672                         | )      | —                          |   | —        |   | (7,672                  | )      |
| Balance,  December 31, 2002                                                                              |   | $                            | 173,934 |                           | $      | 80,722                          |   | $             | 20,782 |                    | $      | 1,714 |   | $ | 277,152 |   |

 

F-24

----

 

In 2001, the Company recorded impairment charges total$8,583,000 in connection with its restructuring plan.  During the fourth quarter of fiscal 2002, the Company performedits annual impairment testing and recorded an additional $7,672,000 impairmentcharge.  The charge results from adecrease in fair value due to further weakness during 2002 in the commercialaircraft portion of our business.  Thesecharges are included as a component of income from operations.

 

**Identifiable Intangible Assets withFinite Useful Lives**

 

Identifiable intangible assets with finite usefullives are comprised of the following as of December 31, 2002 and 2001:

** **
|                            |   | **December 31, 2002** |   | **December 31, 2001**    |   |
|---------------------------------|--------|-----------------------|--------|-------------------------------|--------|
| **(In  thousands)**             |   | **Cost**              |   | **Accumulated  Amortization** |   | **Net** |   | **Cost** |   | **Accumulated  Amortization** |   | **Net** |   |
|                            |   |                  |   |                          |   |   |   |   |   |   |   |   |   |
| FAA  certifications             |   | $                     | 45,816 |                          | $      | (11,539 | ) | $ | 34,277 |   | $ | 45,816 |   | $ | (8,485 | ) | $ | 37,331 |   |
| Engineering  drawings           |   | 14,621                |   | (3,791                        | )      | 10,830 |   | 14,617 |   | (2,816 | ) | 11,801 |   |
| Assembled  workforce            |   | —                |   | —                        |   | — |   | 11,499 |   | (4,535 | ) | 6,964 |   |
| Other  identifiable intangibles |   | 13,105                |   | (6,480                        | )      | 6,625 |   | 12,293 |   | (4,741 | ) | 7,552 |   |
| Total  identifiable intangibles |   | $                     | 73,542 |                          | $      | (21,810 | ) | $ | 51,732 |   | $ | 84,225 |   | $ | (20,577 | ) | $ | 63,648 |   |

 

Estimated annual amortization expense for allidentifiable intangible assets with finite useful lives for the five-yearperiod ending December 31, 2006 is as follows: 2003 – $5,845,000; 2004 –$5,792,000; 2005 – $5,625,000; 2006 – $4,423,000; and 2007 – $4,323,000.

 

**Note 8.**          **Accrued Liabilities**

 

Accrued liabilities are comprised of the following asof December 31, 2002 and 2001:

 
|                                                                         |   | **December 31,** |   |
|------------------------------------------------------------------------------|--------|------------------|--------|
| **(In thousands)**                                                           |   | **2002**         |   | **2001** |   |
|                                                                         |   |             |   |   |   |
| Salaries, wages,  compensated absences and payroll related taxes             |   | $                | 11,213 |   | $ | 17,179 |   |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |   | 613              |   | 11,155 |   |
| Acquisition  related contingent consideration                                |   | 600              |   | 6,904 |   |
| Accrued interest                                                             |   | 7,465            |   | 4,692 |   |
| Customer  advances and deposits                                              |   | 4,723            |   | 3,260 |   |
| Other accrued  liabilities                                                   |   | 10,442           |   | 13,436 |   |
| Total accrued  liabilities                                                   |   | $                | 35,056 |   | $ | 56,626 |   |

 

F-25

----

 

**Accrued Product Warranty Obligations**

 

The following table reflects the accrued productwarranty obligation activity during the three years ended December 31,2002.

 
|                                                           |   | **Year Ended December 31,** |   |
|----------------------------------------------------------------|--------|-----------------------------|--------|
| **(In thousands)**                                             |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                           |   |                        |   |   |   |   |   |
| Accrual activity  during the year:                             |   |                        |   |   |   |   |   |
| Accrual at  beginning of the year                              |   | $                           | 3,348  |   | $ | 3,346 |   | $ | 3,595 |   |
| Accruals for  warranties issued during the period              |   | 1,443                       |   | 921 |   | 1,286 |   |
| Change in  accrual estimate related to pre-existing warranties |   | 481                         |   | (482 | ) | (1,157 | ) |
| Settlements made  (in cash or in kind) during the period       |   | (880                        | )      | (437 | ) | (378 | ) |
| Accrual at end  of the year                                    |   | $                           | 4,392  |   | $ | 3,348 |   | $ | 3,346 |   |
|                                                           |   |                        |   |   |   |   |   |
| Classification  at end of the year:                            |   |                        |   |   |   |   |   |
| Current  liability                                             |   | 2,991                       |   | 2,721 |   | 2,373 |   |
| Long-term  liability                                           |   | 1,401                       |   | 627 |   | 973 |   |
| Total                                                          |   | $                           | 4,392  |   | $ | 3,348 |   | $ | 3,346 |   |

 

**Note 9.**          **Long-Term Debt**

 

Long-term debt includes the following amounts as ofDecember 31, 2002 and 2001:

** **
|                                                                                  |   | **December 31,** |    |
|---------------------------------------------------------------------------------------|--------|------------------|---------|
| **(In thousands)**                                                                    |   | **2002**         |    | **2001** |   |
|                                                                                  |   |             |    |   |   |
| Senior credit  facility:                                                              |   |             |    |   |   |
| Term loans                                                                            |   | $                | 264,200 |   | $ | 275,706 |   |
| Revolving line  of credit                                                             |   | 6,000            |    | 12,000 |   |
| 12% senior  subordinated notes                                                        |   | 100,000          |    | 100,000 |   |
| Capital lease  obligations and term debt financing, secured by property and equipment |   | 10,509           |    | 10,745 |   |
| Other  indebtedness                                                                   |   | 998              |    | 1,799 |   |
| Total long-term  debt                                                                 |   | 381,707          |    | 400,250 |   |
| Less current  portion                                                                 |   | (16,859          | )       | (13,899 | ) |
| Long-term debt,  less current portion                                                 |   | $                | 364,848 |   | $ | 386,351 |   |

 

F-26

----

 

**Senior Credit Facility**

 

During 2002, the Company amended certain of the termsof its senior credit facility.  Theamendment combined two $25,000,000 working capital and acquisitions lines ofcredit into a single $50,000,000 working capital line of credit, increased theprime rate and LIBOR interest margins by 50 basis points and amended certainfinancial covenants, principally through December 31, 2003.  During 2001, the Company borrowed$20,000,000 under its term loan senior credit facility and used the netproceeds to repay amounts then outstanding under the acquisition revolving lineof credit.

 

The senior credit facility provides for term loan borrowingsin the initial principal amount of $290,000,000 and a revolving line of creditfor borrowings up to an aggregate principal amount of $50,000,000 for workingcapital and to finance acquisitions. Principal payments for term loan borrowings are due in increasingamounts over the next four years and all borrowings under the revolving loanfacility must be repaid by September 30, 2004. Loans under the senior credit facility generally bear interest based ona margin over, at the Company’s option, prime rate or LIBOR.  The margins applicable to portions ofamounts borrowed may vary depending upon the Company’s consolidated debtleverage ratio.  Currently, theapplicable margins are 2.50 to 3.25 for prime rate borrowings and 3.75% to4.50% for LIBOR borrowings.  Theweighted-average interest rate on all senior credit facility borrowingsoutstanding was 5.97% as of December 31, 2002. Borrowings under the senior credit facility are secured by substantiallyall of the assets of the Company.  TheCompany is subject to certain commitment fees under the facility as well as themaintenance of certain financial ratios, cash flow results and otherrestrictive covenants, including the payment of dividends in cash.

 

As of December 31, 2002, the Company had an irrevocablestandby letter of credit in the amount of $400,000 issued and outstanding underis senior credit facility, which reduces borrowings available under therevolving line credit.

 

On March 28, 2003, the Company received requisitelender approval to further amend the terms of its senior credit facility (Note18).

 

**12% Senior Subordinated Notes**

 

The senior subordinated notes mature on September 30,2008 and interest is payable semi-annually on March 30, and September 30, ofeach year.  The senior subordinatednotes are unsecured general obligations of the Company and are subordinated inright of payment to substantially all existing and future senior indebtednessof the Company, including senior credit facility indebtedness.  Prior to maturity, the Company may redeemall or some of the senior subordinated notes at defined redemption prices,which may include a premium.  In theevent of a change in control, the holders may require the Company to repurchasethe senior subordinated notes for a redemption price that may also include apremium.  The Company is subject torestrictive covenants, including the payment of dividends in cash.

 

F-27

----

 

**Other Indebtedness**

 

As of December 31, 2002, other indebtedness reflectsacquisition financing payable to sellers in connection with their respectiveacquisitions.  The debt is non-interestbearing; original issue discounts ranging between 10.5% and 12.5% are beingamortized over their terms.

 

**Aggregate Maturities**

 

The total annual maturities of long-term debtoutstanding as of December 31, 2002 are as follows:

 

*(In thousands)*

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

 

**Note10.  Income Taxes**

 

Income (loss) before income taxes and cumulativeeffect of change in accounting principle was taxed under the following jurisdictions:

 
|               |   | **Year Ended December 31,** |   |
|--------------------|--------|-----------------------------|--------|
| **(In thousands)** |   | **2002**                    |   | **2001** |   | **2000** |   |
|               |   |                        |   |   |   |   |   |
| Domestic           |   | $                           | (7,381 | ) | $ | (12,236 | ) | $ | 10,049 |   |
| Foreign            |   | (1,101                      | )      | (578 | ) | (165 | ) |
| Total              |   | $                           | (8,482 | ) | $ | (12,814 | ) | $ | 9,884 |   |

 

F-28

----

 

The provisions for income taxes (benefit) are asfollows:

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

 

The provision for income taxes differs from the amountof income tax determined by applying the applicable U.S. statutory federal rateto the income (loss) before income taxes and cumulative effect of change inaccounting principle as a result of the following differences:

 
|                                                                               |   | **Year Ended December 31,** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------|--------|
| **(In thousands)**                                                                 |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                               |   |                        |   |   |   |   |   |
| Income tax  (benefit) at U.S. statutory rates                                      |   | $                           | (2,969 | ) | $ | (4,485 | ) | $ | 3,459 |   |
| Tax effect of  increases (decreases) resulting from:                               |   |                        |   |   |   |   |   |
| Amortization of  assets and other expenses not deductible for income tax purposes  |   | 2,927                       |   | 5,477 |   | 2,247 |   |
| State income  taxes, net of federal benefit                                        |   | 467                         |   | 265 |   | 798 |   |
| Lower tax rates  on earnings of foreign subsidiaries and foreign sales corporation |   | (8                          | )      | (57 | ) | (214 | ) |
| Other, net                                                                         |   | (63                         | )      | (12 | ) | (8 | ) |
| Income tax at  effective rates                                                     |   | $                           | 354    |   | $ | 1,188 |   | $ | 6,282 |   |

 

F-29

----

 

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

 
|                               |   | **December 31,** |   |
|------------------------------------|--------|------------------|--------|
| **(In thousands)**                 |   | **2002**         |   | **2001** |   |
|                               |   |             |   |   |   |
| Gross deferred  tax liabilities:   |   |             |   |   |   |
| Intangible  assets                 |   | $                | 31,267 |   | $ | 31,849 |   |
| Program costs                      |   | 6,168            |   | 4,839 |   |
| Property and  equipment            |   | 3,119            |   | 3,461 |   |
| Other                              |   | 56               |   | 322 |   |
| Gross deferred  tax liabilities    |   | 40,610           |   | 40,471 |   |
|                               |   |             |   |   |   |
| Gross deferred  tax (assets):      |   |             |   |   |   |
| Loss  carryforwards                |   | (12,173          | )      | (8,980 | ) |
| Accrued  liabilities               |   | (6,797           | )      | (7,732 | ) |
| Inventory                          |   | (4,252           | )      | (3,130 | ) |
| Other                              |   | (832             | )      | (1,095 | ) |
| Gross deferred  tax (assets)       |   | (24,054          | )      | (20,937 | ) |
| Net deferred tax  liability        |   | $                | 16,556 |   | $ | 19,534 |   |
|                               |   |             |   |   |   |
| Balance sheet  classification:     |   |             |   |   |   |
| Noncurrent  deferred tax liability |   | $                | 39,187 |   | $ | 33,597 |   |
| Current deferred  tax asset        |   | (22,631          | )      | (14,063 | ) |
| Net deferred tax  liability        |   | $                | 16,556 |   | $ | 19,534 |   |

 

As of December 31, 2002, the Company has total losscarryforwards of approximately $30,782,000 for federal income tax purposes and$21,268,000 for state income tax purposes, including federal loss carryforwardsacquired in acquisitions.  The Companyexpects that federal loss carryforwards acquired in an acquisition totalingapproximately $12,600,000 will transfer to the buyer in connection with thesale of the Specialty Avionics Group described in Note 18.  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 in2002.  The federal and state losscarryforwards expire in varying amounts commencing in 2011 and continuingthrough 2022.  Management believes thatit is more likely than not that the Company will generate taxable incomesufficient to realize the tax benefit associated with the future deductibledeferred tax assets and loss carryforwards prior to their expiration.

 

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

 

F-30

----

 

**Note 11.  Capital Structure**

 

**Authorized Capital Structure**

 

In October 2001, DeCrane Aircraft amended its articlesof incorporation and reduced its authorized capital structure by eliminatingall previously authorized but never issued cumulative convertible preferredstock and undesignated preferred stock and reduced the number of common sharesauthorized for issuance.  Subsequent tothe amendment, DeCrane Aircraft is authorized to issue 1,000 shares of commonstock ($.01 par value) and 700,000 shares of 16% Senior Redeemable ExchangeablePreferred Stock Due 2009 ($.01 par value).

 

**Mandatorily Redeemable PreferredStock**

 

The table below summarizes mandatorily redeemablepreferred stock issued during the three years ended December 31, 2002.

 
| **(In thousands)**                                |   | **Number  of  Shares** |   | **Mandatory  Redemption  Value** |   | **Unamortized  Issuance  Discount** |   | **Net  Book  Value** |   |
|---------------------------------------------------|--------|------------------------|--------|----------------------------------|--------|-------------------------------------|--------|----------------------|--------|
|                                              |   |                   |   |                             |   |                                |   |                 |   |
| Sale of preferred  stock                          |   | 250,000                |   | $                                | 25,000 |                                | $      | (4,019               | )      | $ | 20,981 |   |
| Issuance costs                                    |   | —                 |   | —                           |   | (76                                 | )      | (76                  | )      |
| Accrued  dividends and redemption value accretion |   | 20,400                 |   | 2,040                            |   | 234                                 |   | 2,274                |   |
| 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 |   |

 

On June 30, 2000, 250,000 shares of DeCrane Aircraft16% preferred stock and warrants to purchase 139,357 shares of DeCrane Holdingscommon stock were sold for $25,000,000 to DLJ affiliates (Note 15).  The proceeds from the sale were used tofund, in part, the ERDA acquisition (subsequently renamed DeCrane AircraftSeating Co.).  A portion of the proceedsfrom the sale totaling $4,019,000 were ascribed to the common stock warrantsand was credited to additional paid-in capital.  The corresponding reduction in redemption value of the preferredstock, and related issuance costs, are recorded as an issuance discount and arebeing amortized using the effective interest method through the preferred stockmandatory redemption date.

 

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

 

F-31

----

 

Holders of the preferred stock are entitled toreceive, when, as and if declared, dividends at a rate equal to 16% perannum.  Prior to June 30, 2005, DeCraneAircraft may, at its option, pay dividends either in cash or by the issuance ofadditional shares of preferred stock. Since the preferred stock issuance date on June 30, 2000, DeCraneAircraft has elected to issue additional shares in lieu of cash dividend payments.  The preferred stock is mandatorilyredeemable on March 31, 2009. Upon the occurrence of a change in control, as defined, each holder hasthe right to require DeCrane Aircraft to redeem all or part of such holder’sshares at a price equal to 101% of the liquidation preference, plus accrued andunpaid cash dividends.

 

**Common Stock**

 

DeCrane Aircraft has 100 shares ($.01 par value)issued and outstanding as of December 31, 2002 and 2001.  All of the shares are owned by DeCraneHoldings, DeCrane Aircraft’s parent company.

 

During 2000 and 2002, DeCrane Aircraft receivedadditional cash capital contributions from DeCrane Holdings aggregating$7,902,000 in 2000 and $5,000,000 in 2002 resulting from DeCrane Holdings’ saleof capital stock.  The proceeds wereused to fund portions of the acquisitions completed during 2000 and to fundworking capital requirements in 2002.

 

Also during 2002, DeCrane Holdings repurchased andcanceled 18,743 common shares from former members of the Company’smanagement.  The former managementmembers also elected to exercise 9,252 vested stock options on a cashlessbasis.  The $14,000 income tax benefitassociated with the stock options exercised was also credited to additionalpaid-in capital.  In connection with therepurchase, a note receivable collateralized by the repurchased common stockwas repaid.  The Company returned$368,000 of paid-in capital to DeCrane Holdings to fund its cash requirementsfor these transactions.

 

**Notes Receivable for Shares Sold**

 

During 1998 and 1999, DeCrane Holdings soldmandatorily redeemable preferred and common stock in three transactions inwhich one-half of the purchase price was paid in cash and one-half was loanedto the purchasers by DeCrane Aircraft, with interest at the then applicable federalrates.  The loans bear interest at ratesranging between 4.33% and 5.74%.  Theloans, plus accrued interest, are payable upon the sale of the stock and arecollateralized by such stock.  Theresulting notes receivable, plus accrued interest, are classified as areduction of stockholder’s equity in the consolidated statement of financialposition.

 

F-32

----

 

The three transactions, which were based on the fairmarket value of the underlying securities as determined by the Board ofDirectors, resulted in loans for one-half of the total purchase price, were asfollows:

 

•                  in December1998, a group of related party investors (Note 15) purchased mandatorilyredeemable preferred and common stock for $704,000;

 

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

 

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

 

During 2000, a note receivable totaling $51,000,including accrued interest, was canceled in conjunction with the repurchase ofthe common stock that collateralized the note for its original $23.00 per shareissuance price.  During 2002, a notereceivable totaling $200,000, plus accrued interest, was repaid in connectionwith the repurchase of the common stock collateralizing the note receivable.

 

**Note12.  Commitments and Contingencies**

 

**Litigation**

 

As part of its investigation of the crash of SwissairFlight 111 off the Canadian coast on September 2, 1998, the CanadianTransportation Safety Board (the “CTSB”) initially notified the Company that itrecovered burned wire that was attached to the in-flight entertainment systeminstalled on some of Swissair’s aircraft by one of the Company’s subsidiaries.  The Company’s subsidiary has workedvigorously over the last four 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.

 

Families of most of the 229 persons who died aboardthe flight have filed actions in federal and state courts against thesubsidiary, the Company, and many other unaffiliated parties, includingSwissair and Boeing (“Passenger Actions”). The Passenger Actions claim negligence, strict liability, and breach ofwarranty relating to the installation and testing of the in-flightentertainment system.  The PassengerActions seek damages and costs in an unstated amount.  All of the Passenger Actions have been transferred to the UnitedStates District Court for the Eastern District of Pennsylvania and assignedunder MDL Case No. 1269 for coordinated or consolidated pre-trialproceedings.  Most of the PassengerActions have been settled by Boeing and Swissair.  Boeing and Swissair have advised the Company that they intend toseek contribution from the Company’s subsidiary.  The Company, based in part on information received fromindependent fire and safety experts retained by it, does not believe that theinstallation of the equipment installed by its subsidiary impacted theoperation or safety of the aircraft. Accordingly, the Company continues to defend the claims.

 

F-33

----

 

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

 

**Lease Commitments**

 

The Company leases some of its facilities andequipment under capital and operating leases. Some of the leases require payment of property taxes and includeescalation clauses.  Future minimumcapital and operating lease commitments under non-cancelable leases are asfollows as of December 31, 2002:

 
| **(In  thousands)**                            |   | **Capital  Leases** |   | **Operating  Leases** |   |
|------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                           |   |                |   |                  |   |
| Year ending  December 31,                      |   |                |   |                  |   |
| 2003                                           |   | $                   | 1,108  |                  | $      | 3,167 |   |
| 2004                                           |   | 966                 |   | 3,085                 |   |
| 2005                                           |   | 790                 |   | 3,030                 |   |
| 2006                                           |   | 567                 |   | 2,726                 |   |
| 2007                                           |   | 497                 |   | 2,479                 |   |
| 2008 and  thereafter                           |   | 1,995               |   | 10,953                |   |
| Total minimum  payments required               |   | 5,923               |   | $                     | 25,440 |   |
| Less amount  representing future interest cost |   | (1,737              | )      |                  |   |
| Recorded  obligation under capital leases      |   | $                   | 4,186  |                  |   |   |

 

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

 

**Funding of DeCrane Holdings PreferredStock Obligations**

 

The Company is a wholly owned subsidiary of DeCraneHoldings whose capital structure also includes mandatorily redeemable preferredstock.  Since the Company is DeCraneHoldings’ only operating subsidiary and source of cash, the Company may berequired to fund DeCrane Holdings’ preferred stock dividend and redemptionobligations in the future.

 

DeCrane Holdings’ preferred stock dividends arepayable quarterly at a rate of 14% per annum. Prior to September 30, 2005, dividends are not paid in cash but insteadaccrete to the liquidation value of the preferred stock, which, in turn,increases the redemption obligation.  Onor after September 30, 2005, preferred stock dividends are required to be paidin cash, if declared.  The DeCraneHoldings preferred stock has a total redemption value of $62,222,000 as ofDecember 31, 2002, including accumulated dividends.

 

F-34

----

 

**Note 13.  ConsolidatedStatements of Cash Flows**

 

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

 
|                                                                                                             |   | **Year Ended December 31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
| **(In thousands)**                                                                                               |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                                                             |   |                        |   |   |   |   |   |
| Components of  cash paid for acquisitions:                                                                       |   |                        |   |   |   |   |   |
| Fair value of  assets acquired                                                                                   |   | $                           | — |   | $ | — |   | $ | 94,155 |   |
| Liabilities  assumed                                                                                             |   | —                      |   | — |   | (34,792 | ) |
| Cash paid                                                                                                        |   | —                      |   | — |   | 59,363 |   |
| Less cash  acquired                                                                                              |   | —                      |   | — |   | (292 | ) |
| Net cash paid  for acquisitions                                                                                  |   | —                      |   | — |   | 59,071 |   |
|                                                                                                             |   |                        |   |   |   |   |   |
| Contingent  consideration paid for previously completed acquisitions                                             |   | 5,826                       |   | 17,075 |   | 29,825 |   |
| Cash purchase  price reductions received as a result of settling asserted claims against the  sellers (Note 3)   |   | —                      |   | (3,718 | ) | — |   |
| Additional  acquisition related expenses                                                                         |   | 64                          |   | 172 |   | 650 |   |
| Total cash paid  for acquisitions                                                                                |   | $                           | 5,890  |   | $ | 13,529 |   | $ | 89,546 |   |
|                                                                                                             |   |                        |   |   |   |   |   |
| Noncash  investing and financing transactions:                                                                   |   |                        |   |   |   |   |   |
| 16% mandatorily  redeemable preferred stock dividends paid by the issuance of additional  shares                 |   | $                           | 5,373  |   | $ | 4,593 |   | $ | 2,040 |   |
| Capital  expenditures financed with capital lease obligations                                                    |   | 264                         |   | 4,438 |   | 109 |   |
| Additional  acquisition contingent consideration recorded                                                        |   | 600                         |   | 3,825 |   | 20,154 |   |
| Interest accrued  during the period on loans to stockholders for the purchase of DeCrane  Holdings capital stock |   | 123                         |   | 116 |   | 135 |   |
|                                                                                                             |   |                        |   |   |   |   |   |
| Paid in cash:                                                                                                    |   |                        |   |   |   |   |   |
| Interest                                                                                                         |   | $                           | 28,417 |   | $ | 35,821 |   | $ | 39,160 |   |
| Income taxes  paid (refunded), net                                                                               |   | (91                         | )      | 1,161 |   | 578 |   |

 

F-35

----

 

**Note 14.  Employee BenefitPlans**

 

**Stock Based Incentive Compensation**

 

*Management Incentive Stock OptionPlan*

 

DeCrane Holding’s Board of Directors has approved amanagement incentive plan which provides for the issuance of options to purchasethe common stock of DeCrane Holdings as incentive compensation to designatedexecutive personnel and other key employees of the Company and itssubsidiaries.  The CompensationCommittee of the Board of Directors of DeCrane Holdings administers the planand makes a determination as to any options to be granted.  The plan provides for the granting ofoptions to purchase a maximum of 356,257 common shares prior to expiration in2009.  The options are granted at fairmarket value at the date of grant.  Substantiallyall of the options awarded become fully vested and exercisable eight years fromthe date of grant but vesting can be accelerated based upon future attainmentof defined performance criteria.  Inaddition, the Compensation Committee may authorize alternate vestingschedules.  The plan also provides forthe acceleration of vesting upon the occurrence of certain events, including,under certain circumstances, a change of control.

 

During 2000, options to purchase 80,623 shares weregranted under the plan, of which 15,828 shares vested immediately.  An additional 36,832 shares from the 1999(inception of the plan) and 2000 grants vested based on the attainment of year2000 performance criteria.  During 2001,no options were granted under the plan and no additional shares from the 1999and 2000 grants vested based on the required year 2001 performancecriteria.  During 2002, options topurchase 15,000 shares, with vesting over a three year period from the grant date,were granted under the plan and no additional shares from prior year grantsvested based on the required year 2002 performance criteria.

 

The per share exercise price of the options grantedwas equal to the fair market value of the common stock on each of the grantdates and, accordingly, no compensation expense was recognized during the threeyears ended December 31, 2002.

 

*Incentive Stock Options Granted toOthers*

 

In July 1999, a group of related party investors,including two individuals who were then serving as directors, were granted optionsas compensation for consulting services. Options were granted to purchase 44,612 shares of DeCrane Holdingscommon stock at an exercise price of $23.00 per share, equal to the fair marketvalue of the common stock on the grant date. The options vest over a three-year period, are subject to accelerationif DLJ and its affiliates sell any of their shares of common stock, and expirein 2009.  The options are fully vestedas of December 31, 2002.

 

F-36

----

 

*Summary of All Stock Options*

 

The following table summarizes all stock optionactivity during the three years ended December 31, 2002.

 
|                                          |   | **Year Ended December 31,** |   |
|-----------------------------------------------|--------|-----------------------------|--------|
|                                          |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                          |   | **Number  of  Shares**      |   | **Weighted-  Average  Exercise  Price** |   | **Number  of  Shares** |   | **Weighted-  Average  Exercise  Price** |   | **Number  of  Shares** |   | **Weighted-  Average  Exercise  Price** |   |
|                                          |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options  outstanding at beginning of the year |   | 363,353                     |   | $ | 24.82 |   | 386,869 |   | $ | 24.86 |   | 327,534 |   | $ | 23.00 |   |
| Granted                                       |   | 15,000                      |   | 27.00 |   | — |   | — |   | 80,623 |   | 31.94 |   |
| Exercised                                     |   | (9,252                      | )      | 23.00 |   | — |   | — |   | — |   | — |   |
| Canceled                                      |   | (31,028                     | )      | 31.32 |   | (23,516 | ) | 25.55 |   | (21,288 | ) | 23.00 |   |
| Options  outstanding at end of the year       |   | 338,073                     |   | 24.37 |   | 363,353 |   | 24.82 |   | 386,869 |   | 24.86 |   |
|                                          |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options  exercisable at end of the year       |   | 138,546                     |   | 23.66 |   | 139,051 |   | 23.82 |   | 124,395 |   | 24.07 |   |
|                                               |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of December 31, 2002, options to purchase 53,544common shares remained available for grant under the Management Incentive StockOption Plan.  The following tablesummarizes information about stock options outstanding and stock optionsexercisable at December 31, 2002.

 
|                                             |   | **All Options Outstanding**                       |   | **Number  of Shares  Exercisable  as of  December 31,  2001** |   |
|--------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------------------|--------|
| **Number  of Shares  as of  December 31,  2001** |   | **Weighted-Average  Remaining  Contractual Life** |
|                                             |   |                                              |   |                                                          |   |   |   |
| Per share  exercise price:                       |   |                                              |   |                                                          |   |   |   |
| $23.00                                           |   | 294,527                                           |   | 6.95 years                                                    |   | 130,946 |   |
| $27.00                                           |   | 7,500                                             |   | 9.35 years                                                    |   | — |   |
| $35.00                                           |   | 36,046                                            |   | 7.93 years                                                    |   | 7,600 |   |
| Total                                            |   | 338,073                                           |   | 7.11 years                                                    |   | 138,546 |   |

 

For compensatory stock options granted tonon-employees, the Company recognized compensation expense of $138,000 for theyear ended December 31, 2002, $215,000 for the year ended December 31, 2001 and$561,000 for the year ended December 31, 2000.  For non-compensatory stock options, the Company uses APB OpinionNo. 25 to account for stock-based compensation and, accordingly, nocompensation expense was recognized during the three years ended December 31,2002.  The Company has adopted thedisclosure-only provisions of SFAS No. 123.

 

F-37

----

 

For the three years ended December 31, 2002, netincome (loss), pro forma for the effect of applying the fair value method tothe options granted, would have been as follows:

 
|                                                        |   | **Year Ended December 31,** |    |
|-------------------------------------------------------------|--------|-----------------------------|---------|
| **(In thousands, except per share data)**                   |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                                        |   |                        |    |   |   |   |   |
| Net income  (loss):                                         |   |                        |    |   |   |   |   |
| As reported                                                 |   | $                           | (65,986 | ) | $ | (14,002 | ) | $ | 3,602 |   |
| Pro forma                                                   |   | (66,362                     | )       | (14,394 | ) | 3,163 |   |
|                                                        |   |                        |    |   |   |   |   |
| Weighted-average  fair value of options granted (per share) |   | 10.96                       |    | — |   | 9.48 |   |
|                                                             |        |                             |         |  |  |  |  |  |  |  |

 

For the purposes of the pro forma disclosure, theestimated fair value of the options is amortized over the options’ vestingperiod.  The effect of applying SFASNo. 123 may not be representative of the pro forma effect in future yearssince additional options may be granted during those future years.

 

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

 
|                               |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                               |   |     |   |     |   |     |   |
| Compensatory  options(1):          |   |     |   |     |   |     |   |
| Risk free  interest rates          |   | 5.13     | %      | 5.35     | %      | 5.23     | %      |
| Expected  dividend yield           |   | —   |   | —   |   | —   |   |
| Expected life                      |   | 10 years |   | 10 years |   | 10 years |   |
| Expected stock  price volatility   |   | —   |   | —   |   | —   |   |
|                               |   |     |   |     |   |     |   |
| Employee and  director options(2): |   |     |   |     |   |     |   |
| Risk free  interest rates          |   | —   |   | —   |   | 5.5-6.7  | %      |
| Expected dividend  yield           |   | —   |   | —   |   | —   |   |
| Expected life                      |   | —   |   | —   |   | 8 years  |   |

 

----

(1)                                  Usingthe Black Scholes option valuation model.

 

(2)                                  Usingthe minimum value method.

 

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

 

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

 

F-38

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**Management Stock Purchases**

 

Beginning in December 1999, DeCrane Holding’s Board ofDirectors has permitted designated executive personnel and other key employeesto purchase shares of common stock of DeCrane Holdings, with a portion of thepurchase price to be loaned to the participants by DeCrane Aircraft.  In December 1999, management purchased171,295 shares of DeCrane Holdings’ common stock for $23.00 per share.  The total purchase price was approximately$3,900,000, of which one-half was paid in cash and one-half was loaned tomanagement by DeCrane Aircraft as described in Note 11.  In 2000, management purchased an additional20,707 shares for $23.00 per share in cash pursuant to the plan’s antidilutionprovisions.  Dilution resulted from theissuance of the DeCrane Holdings common stock warrants in connection with thesale of DeCrane Aircraft’s 16% preferred stock.

 

**401(k) Retirement Plan**

 

Substantially all domestic employees are eligible toparticipate in one of the 401(k) retirement plans the Company sponsors, whichare defined contribution plans satisfying the requirements of the EmployeeRetirement Income Security Act of 1974. The Company’s expense related to its matching contributions to theseplans totaled $1,469,000 for the year ended December 31, 2002, $2,272,000 forthe year ended December 31, 2001 and $2,203,000 for the year ended December 31,2000.

 

**Note 15.  Related PartyTransactions**

 

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

 
|                                             |   | **Year Ended December 31,** |   |
|--------------------------------------------------|--------|-----------------------------|--------|
| **(In thousands)**                               |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                             |   |                        |   |   |   |   |   |
| CSFB / DLJ:                                      |   |                        |   |   |   |   |   |
| Transaction  financing fees and expenses         |   | $                           | 1,627  |   | $ | 520 |   | $ | 1,703 |   |
| Management fees:                                 |   |                        |   |   |   |   |   |
| Charged to  operations during the period         |   | 350                         |   | 300 |   | 300 |   |
| Payable as of  period end                        |   | 125                         |   | 375 |   | 75 |   |
|                                             |   |                        |   |   |   |   |   |
| Global  Technology Partners, LLC:                |   |                        |   |   |   |   |   |
| Promissory  notes:                               |   |                        |   |   |   |   |   |
| Receivable as of  period end, including interest |   | 567                         |   | 542 |   | 518 |   |
|                                                  |        |                             |        |  |  |  |  |  |  |  |

 

Each related party is described below.

 

F-39

----

 

**CSFB / DLJ**

 

DLJ Merchant Banking Partners II, L.P. and affiliatedfunds own 85.1% of DeCrane Holdings common stock and 99.3% of its preferredstock, and 80.0% of DeCrane Aircraft’s preferred stock, all on a fully dilutedbasis.  In November 2000, DLJ MerchantBanking Partners II, L.P. and affiliated funds became indirect affiliates ofCredit Suisse Group and Credit Suisse First Boston, Inc.

 

DLJ affiliated funds were the initial purchasers ofall of DeCrane Aircraft’s 16% preferred stock and DeCrane Holdings common stockwarrants sold during 2000.  Subsequentto the initial purchase, the DLJ affiliated funds sold 20% of the preferredstock and common stock warrants to unaffiliated parties in a privatetransaction.

 

DLJ is represented on the Board of Directors of bothDeCrane Holdings and DeCrane Aircraft. In addition, Credit Suisse First Boston Corporation (formerly Donaldson,Lufkin & Jenrette Securities Corporation) is involved in market-making activitiesfor DeCrane Holding’s Class A $22.31 common stock warrants and DeCraneAircraft’s senior subordinated notes and may hold such securities from time totime.  A DLJ affiliate is also paid feesfor arranging the syndicate of lenders providing DeCrane Aircraft’s seniorcredit facility.

 

**Global Technology Partners, LLC**

 

Members of Global Technology own 1.5% of DeCraneHoldings common stock and 0.7% of its preferred stock, all on a fully dilutedbasis, and had two members on the Company’s Board of Directors from August 1998through July 2000.  DeCrane Aircraftloaned one-half of the purchase price for such shares to the members at ratesranging between 4.33% and 5.44%.  The loans,plus accrued interest, are payable from the proceeds from the sale of the stockand are collateralized by such stock.

 

F-40

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**Note 16.  Business SegmentInformation**

 

The Company supplies products and services to theaerospace industry.  The Company’ssubsidiaries are organized into three groups, each of which are strategicbusinesses that develop, manufacture and sell distinct products andservices.  The groups and a descriptionof their businesses are as follows:

 

•                  *Cabin Management –* provides interior cabincomponents for the corporate, VIP and head-of-state aircraft market, includingcabin interior furnishings, cabin management systems, seating and compositecomponents;

 

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

 

•                  *Systems Integration –*manufacturersauxiliary fuel systems and auxiliary power units, provides system integrationservices, provides corporate, VIP and head-of-state aircraft completion andrefurbishment services and is a Boeing Business Jet authorized service center.

 

Management utilizes more than one measurement toevaluate group performance and allocate resources, however, managementconsiders EBITDA to be the primary measurement of overall economic returns andcash flows.  Management defines 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.  This is consistent with the manner in whichthe Company’s lenders and ultimate investors measure its overall performance.

 

The accounting policies of the groups aresubstantially the same as those described in the summary of significantaccounting policies (Note 1).  Sometransactions are recorded at the Company’s corporate headquarters and are notallocated to the groups, such as most of the Company’s cash and cashequivalents, debt and related net interest expense, corporate headquarterscosts and income taxes.

 

F-41

----

 

**Summary of Business by Segment**

 
|                                     |   | **Year Ended December 31,** |    |
|------------------------------------------|--------|-----------------------------|---------|
| **(In thousands)**                       |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                     |   |                        |    |   |   |   |   |
| Revenues:                                |   |                        |    |   |   |   |   |
| Cabin Management                         |   | $                           | 172,832 |   | $ | 206,052 |   | $ | 174,796 |   |
| Specialty Avionics                       |   | 95,789                      |    | 123,240 |   | 110,878 |   |
| Systems  Integration                     |   | 58,051                      |    | 67,528 |   | 62,965 |   |
| Inter-group  elimination(1)              |   | (1,042                      | )       | (1,468 | ) | (1,260 | ) |
| Consolidated  totals                     |   | $                           | 325,630 |   | $ | 395,352 |   | $ | 347,379 |   |
|                                     |   |                        |    |   |   |   |   |
| Revenues from  significant customers(2): |   |                        |    |   |   |   |   |
| Cabin Management                         |   | $                           | 94,014  |   | $ | 108,737 |   | $ | 107,194 |   |
| Specialty  Avionics                      |   | 23,356                      |    | 35,115 |   | 30,542 |   |
| Systems  Integration                     |   | 35,388                      |    | 46,138 |   | 31,750 |   |
| Consolidated  totals                     |   | $                           | 152,758 |   | $ | 189,990 |   | $ | 169,486 |   |
|                                     |   |                        |    |   |   |   |   |
| EBITDA:                                  |   |                        |    |   |   |   |   |
| Cabin Management                         |   | $                           | 32,644  |   | $ | 45,554 |   | $ | 46,041 |   |
| Specialty  Avionics                      |   | 25,353                      |    | 33,272 |   | 26,696 |   |
| Systems  Integration                     |   | 18,084                      |    | 17,152 |   | 15,026 |   |
| Corporate(3)                             |   | (6,072                      | )       | (7,125 | ) | (6,969 | ) |
| Inter-group  elimination(4)              |   | 9                           |    | (62 | ) | 198 |   |
| Consolidated  totals(5)                  |   | $                           | 70,018  |   | $ | 88,791 |   | $ | 80,992 |   |
|                                     |   |                        |    |   |   |   |   |
| Depreciation and  amortization:          |   |                        |    |   |   |   |   |
| Cabin Management                         |   | $                           | 6,695   |   | $ | 14,607 |   | $ | 9,477 |   |
| Specialty  Avionics                      |   | 6,507                       |    | 12,012 |   | 12,101 |   |
| Systems  Integration                     |   | 2,956                       |    | 4,346 |   | 4,682 |   |
| Corporate                                |   | 961                         |    | 1,411 |   | 927 |   |
| Consolidated  totals(6)                  |   | $                           | 17,119  |   | $ | 32,376 |   | $ | 27,187 |   |
|                                     |   |                        |    |   |   |   |   |
| Total assets (as  of period end):        |   |                        |    |   |   |   |   |
| Cabin Management                         |   | $                           | 281,655 |   | $ | 311,476 |   | $ | 307,241 |   |
| Specialty  Avionics                      |   | 154,540                     |    | 214,569 |   | 227,093 |   |
| Systems  Integration                     |   | 62,437                      |    | 76,312 |   | 86,602 |   |
| Corporate(7)                             |   | 50,448                      |    | 43,497 |   | 43,651 |   |
| Inter-group  elimination(8)              |   | (113                        | )       | (143 | ) | (333 | ) |
| Consolidated  totals                     |   | $                           | 548,967 |   | $ | 645,711 |   | $ | 664,254 |   |
|                                     |   |                        |    |   |   |   |   |
| Capital  expenditures:                   |   |                        |    |   |   |   |   |
| Cabin Management                         |   | $                           | 3,829   |   | $ | 6,579 |   | $ | 14,896 |   |
| Specialty  Avionics                      |   | 1,073                       |    | 1,708 |   | 2,496 |   |
| Systems  Integration                     |   | 478                         |    | 3,371 |   | 1,612 |   |
| Corporate                                |   | 49                          |    | 241 |   | 3,685 |   |
| Consolidated  totals(9)                  |   | $                           | 5,429   |   | $ | 11,899 |   | $ | 22,689 |   |

 

----

The notes appear on the next page.

 

F-42

----

 

**Summary of Business by GeographicalArea**

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

 

----

**Notes**

 

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

 

(2)                      Threecustomers each accounted for more than 10% of the Company’s consolidatedrevenues during the three years ended December 31, 2002 as shown in 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)**   |   | **2002**                    |    | **2001** |   | **2000** |   |
|                 |   |                        |    |   |   |   |   |
| Textron(a)           |   | $                           | 56,563  |   | $ | 58,192 |   | $ | 52,620 |   |
| Boeing(b)            |   | 50,065                      |    | 70,257 |   | 52,735 |   |
| Bombardier(b)        |   | 46,130                      |    | 61,541 |   | 64,131 |   |
| Consolidated  totals |   | $                           | 152,758 |   | $ | 189,990 |   | $ | 169,486 |   |

 

----

(a)                      Alloperating groups derived revenues from Textron during each of the periodsexcept for the Systems Integration Group during 2000.

 

(b)                     All operatinggroups derived revenues from Boeing and Bombardier during each of the periods.

 

(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-43

----

 

(5)                      The table belowreconciles EBITDA to consolidated income from operations and income (loss)before income taxes.

 
|                                                       |   | **Year Ended December 31,** |   |
|------------------------------------------------------------|--------|-----------------------------|--------|
| **(In thousands)**                                         |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                       |   |                        |   |   |   |   |   |
| Consolidated  EBITDA                                       |   | $                           | 70,018 |   | $ | 88,791 |   | $ | 80,992 |   |
| Depreciation and  amortization(6)                          |   | (17,119                     | )      | (32,376 | ) | (27,187 | ) |
| Restructuring,  asset impairment and other related charges |   | (25,243                     | )      | (28,658 | ) | — |   |
| Acquisition  related charges not capitalized               |   | (1,162                      | )      | (308 | ) | (1,255 | ) |
| Other noncash  charges                                     |   | (138                        | )      | (215 | ) | (561 | ) |
| Consolidated income  from operations                       |   | 26,356                      |   | 27,234 |   | 51,989 |   |
|                                                       |   |                        |   |   |   |   |   |
| Interest expense                                           |   | (33,894                     | )      | (39,001 | ) | (41,623 | ) |
| Other expenses,  net                                       |   | (944                        | )      | (1,047 | ) | (482 | ) |
| Consolidated  income (loss) before income taxes            |   | $                           | (8,482 | ) | $ | (12,814 | ) | $ | 9,884 |   |

 

(6)                      Reflectsdepreciation and amortization of long-lived assets, goodwill (for periods priorto the January 1, 2002 adoption of SFAS No. 142) and other intangibleassets.  Excludes amortization ofdeferred financing costs, which are classified as a component of interest expense.  The table below reconciles depreciation andamortization of long-lived assets to consolidated depreciation andamortization.

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

 

(7)                      Reflects theCompany’s corporate headquarters assets, excluding investments in and notesreceivable from subsidiaries.

 

(8)                      Reflectselimination of inter-group receivables and profits in inventory as of periodend.

 

(9)                      Reflectscapital expenditures paid in cash. Excludes capital expenditures financed with capital lease obligations of$264,000 for the year ended December 31, 2002, $4,438,000 for the year endedDecember 31, 2001 and $109,000 for the year ended December 31, 2000.

 

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

 

(11)                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-44

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**Note 17.  SupplementalCondensed Consolidating Financial Information**

 

In conjunction with the senior credit facility and 12%senior subordinated notes described in Note 9, the following condensedconsolidating financial information is presented segregating the Company, asthe issuer, and guarantor and non-guarantor subsidiaries.  The accompanying financial information inthe guarantor subsidiaries column reflects the financial position, results ofoperations and cash flows for those subsidiaries guaranteeing the senior creditfacility and the notes.

 

The guarantor subsidiaries are wholly-ownedsubsidiaries of the Company and their guarantees are full and unconditional ona joint and several basis.  There are norestrictions on the ability of the guarantor subsidiaries to transfer funds tothe issuer in the form of cash dividends, loans or advances.  Separate financial statements of theguarantor subsidiaries are not presented because management believes that suchfinancial statements would not be material to investors.  Investments in subsidiaries in the followingcondensed consolidating financial information are accounted for under theequity method of accounting. Consolidating adjustments include the following:

 

(1)                       Eliminationof investments in subsidiaries.

 

(2)                      Elimination ofintercompany accounts.

 

(3)                      Eliminationof intercompany sales between guarantor and non-guarantor subsidiaries.

 

(4)                      Eliminationof equity in earnings of subsidiaries.

 

F-45

----

 

**Balance Sheets**

 
|                                                                                     |   | **December 31, 2002** |    |
|------------------------------------------------------------------------------------------|--------|-----------------------|---------|
| **(In thousands)**                                                                       |   | **Issuer**            |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                  |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                  |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                  |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                  |    |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                               |   | $                     | 12,343  |   | $ | 146 |   | $ | 123 |   | $ | — |   | $ | 12,612 |   |
| Accounts  receivable, net                                                                |   | —                |    | 37,822 |   | 1,160 |   | — |   | 38,982 |   |
| Inventories                                                                              |   | —                |    | 79,360 |   | 1,442 |   | — |   | 80,802 |   |
| Other current  assets                                                                    |   | 23,912                |    | 1,244 |   | 291 |   | — |   | 25,447 |   |
| Total current  assets                                                                    |   | 36,255                |    | 118,572 |   | 3,016 |   | — |   | 157,843 |   |
|                                                                                     |   |                  |    |   |   |   |   |   |   |   |   |
| Property and  equipment, net                                                             |   | 2,485                 |    | 47,232 |   | 2,166 |   | — |   | 51,883 |   |
| Other assets,  principally intangibles, net                                              |   | 11,708                |    | 327,518 |   | 15 |   | — |   | 339,241 |   |
| Investments in  subsidiaries                                                             |   | 351,502               |    | 10,963 |   | — |   | (362,465 | )(1) | — |   |
| Intercompany  receivables                                                                |   | 273,178               |    | 172,389 |   | 5,740 |   | (451,307 | )(2) | — |   |
| Total assets                                                                             |   | $                     | 675,128 |   | $ | 676,674 |   | $ | 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  |   | $ | 1,516 |   | $ | 6 |   | $ | — |   | $ | 16,859 |   |
| Other current  liabilities                                                               |   | 16,786                |    | 34,284 |   | 1,225 |   | — |   | 52,295 |   |
| Total current  liabilities                                                               |   | 32,123                |    | 35,800 |   | 1,231 |   | — |   | 69,154 |   |
|                                                                                     |   |                  |    |   |   |   |   |   |   |   |   |
| Long-term debt,  less current portion                                                    |   | 355,568               |    | 9,280 |   | — |   | — |   | 364,848 |   |
| Intercompany  payables                                                                   |   | 172,389               |    | 278,918 |   | — |   | (451,307 | )(2) | — |   |
| Other long-term  liabilities                                                             |   | 45,655                |    | 1,535 |   | 56 |   | — |   | 47,246 |   |
|                                                                                     |   |                  |    |   |   |   |   |   |   |   |   |
| 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               | )       | 13,910 |   | (4,477 | ) | (9,433 | )(1) | (83,309 | ) |
| Accumulated  other comprehensive loss                                                    |   | —                |    | (361 | ) | (1,313 | ) | — |   | (1,674 | ) |
| Total  stockholder’s equity                                                         |   | 35,312                |    | 351,141 |   | 9,650 |   | (362,465 | ) | 33,638 |   |
| Total  liabilities, mandatorily redeemable preferred stock and stockholder’s equity |   | $                     | 675,128 |   | $ | 676,674 |   | $ | 10,937 |   | $ | (813,772 | ) | $ | 548,967 |   |
|                                                                                          |        |                       |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-46

----

 
|                                                                                     |   | **December 31, 2001** |    |
|------------------------------------------------------------------------------------------|--------|----------------------------|---------|
| **(In thousands)**                                                                       |   | **Issuer**                 |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| **Assets**                                                                               |   |                       |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current assets:                                                                          |   |                       |    |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                               |   | $                          | 9,641   |   | $ | (92 | ) | $ | 245 |   | $ | — |   | $ | 9,794 |   |
| Accounts  receivable, net                                                                |   | —                     |    | 56,973 |   | 1,478 |   | — |   | 58,451 |   |
| Inventories                                                                              |   | —                     |    | 84,864 |   | 1,634 |   | — |   | 86,498 |   |
| Other current  assets                                                                    |   | 15,153                     |    | 1,138 |   | 331 |   | — |   | 16,622 |   |
| Total current  assets                                                                    |   | 24,794                     |    | 142,883 |   | 3,688 |   | — |   | 171,365 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Property and  equipment, net                                                             |   | 3,355                      |    | 55,152 |   | 2,566 |   | — |   | 61,073 |   |
| Other assets,  principally intangibles, net                                              |   | 15,348                     |    | 388,269 |   | 9,656 |   | — |   | 413,273 |   |
| Investments in  subsidiaries                                                             |   | 403,786                    |    | 20,697 |   | — |   | (424,483 | )(1) | — |   |
| Intercompany  receivables                                                                |   | 256,360                    |    | 121,030 |   | 4,300 |   | (381,690 | )(2) | — |   |
| Total assets                                                                             |   | $                          | 703,643 |   | $ | 728,031 |   | $ | 20,210 |   | $ | (806,173 | ) | $ | 645,711 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| **Liabilities,  Mandatorily Redeemable Preferred Stock and Stockholder’s Equity**   |   |                       |    |   |   |   |   |   |   |   |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Current  liabilities:                                                                    |   |                       |    |   |   |   |   |   |   |   |   |
| Current portion  of long-term debt                                                       |   | $                          | 11,839  |   | $ | 2,054 |   | $ | 6 |   | $ | — |   | $ | 13,899 |   |
| Other current  liabilities                                                               |   | 24,849                     |    | 49,854 |   | 1,107 |   | — |   | 75,810 |   |
| Total current  liabilities                                                               |   | 36,688                     |    | 51,908 |   | 1,113 |   | — |   | 89,709 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Long-term debt,  less current portion                                                    |   | 376,392                    |    | 9,959 |   | — |   | — |   | 386,351 |   |
| Intercompany  payables                                                                   |   | 120,998                    |    | 260,660 |   | 32 |   | (381,690 | )(2) | — |   |
| Other long-term  liabilities                                                             |   | 38,847                     |    | 1,806 |   | 382 |   | — |   | 41,035 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Mandatorily  redeemable preferred stock                                                  |   | 28,240                     |    | — |   | — |   | — |   | 28,240 |   |
|                                                                                     |   |                       |    |   |   |   |   |   |   |   |   |
| Stockholder’s  equity:                                                              |   |                       |    |   |   |   |   |   |   |   |   |
| Paid-in capital                                                                          |   | 119,801                    |    | 336,986 |   | 15,440 |   | (352,426 | )(1) | 119,801 |   |
| Retained  earnings (deficit)                                                             |   | (17,323                    | )       | 66,800 |   | 5,257 |   | (72,057 | )(1) | (17,323 | ) |
| Accumulated  other comprehensive loss                                                    |   | —                     |    | (88 | ) | (2,014 | ) | — |   | (2,102 | ) |
| Total  stockholder’s equity                                                         |   | 102,478                    |    | 403,698 |   | 18,683 |   | (424,483 | ) | 100,376 |   |
| Total  liabilities, mandatorily redeemable preferred stock and stockholder’s equity |   | $                          | 703,643 |   | $ | 728,031 |   | $ | 20,210 |   | $ | (806,173 | ) | $ | 645,711 |   |

 

F-47

----

 

**Statements of Operations**

 
|                                                 |   | **Year Ended December 31, 2002** |    |
|------------------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                                   |   | **Issuer**                       |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Revenues                                             |   | $                                | —  |   | $ | 321,634 |   | $ | 9,325 |   | $ | (5,329 | )(3) | $ | 325,630 |   |
| Cost of sales                                        |   | —                           |    | 231,284 |   | 7,995 |   | (5,329 | )(3) | 233,950 |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Gross profit                                         |   | —                           |    | 90,350 |   | 1,330 |   | — |   | 91,680 |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses        |   | 8,334                            |    | 42,265 |   | 1,285 |   | — |   | 51,884 |   |
| Impairment of  goodwill                              |   | —                           |    | 7,672 |   | — |   | — |   | 7,672 |   |
| Amortization of  intangible assets                   |   | —                           |    | 5,767 |   | 1 |   | — |   | 5,768 |   |
| Interest expense                                     |   | 28,303                           |    | 5,585 |   | 6 |   | — |   | 33,894 |   |
| Intercompany  charges                                |   | (24,309                          | )       | 24,309 |   | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                  |   | 52,890                           |    | 9,535 |   | — |   | (62,425 | )(4) | — |   |
| Other expenses  (income), net                        |   | 495                              |    | 209 |   | 240 |   | — |   | 944 |   |
| Provision for  income taxes (benefit)                |   | (1,211                           | )       | 1,785 |   | (220 | ) | — |   | 354 |   |
| Cumulative  effect of change in accounting principle |   | 1,484                            |    | 46,113 |   | 9,553 |   | — |   | 57,150 |   |
|                                                 |   |                             |    |   |   |   |   |   |   |   |   |
| Net loss                                             |   | $                                | (65,986 | ) | $ | (52,890 | ) | $ | (9,535 | ) | $ | 62,425 |   | $ | (65,986 | ) |

 
|                                          |   | **Year Ended December 31, 2001** |    |
|-----------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                            |   | **Issuer**                       |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Revenues                                      |   | $                                | —  |   | $ | 391,677 |   | $ | 11,322 |   | $ | (7,647 | )(3) | $ | 395,352 |   |
| Cost of sales                                 |   | —                           |    | 277,414 |   | 9,914 |   | (7,647 | )(3) | 279,681 |   |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                           |    | 114,263 |   | 1,408 |   | — |   | 115,671 |   |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses |   | 9,390                            |    | 49,764 |   | 780 |   | — |   | 59,934 |   |
| Impairment of  goodwill                       |   | —                           |    | 8,583 |   | — |   | — |   | 8,583 |   |
| Amortization of  intangible assets            |   | 202                              |    | 19,313 |   | 405 |   | — |   | 19,920 |   |
| Interest expense                              |   | 37,796                           |    | 1,187 |   | 18 |   | — |   | 39,001 |   |
| Intercompany  charges                         |   | (23,815                          | )       | 23,815 |   | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries           |   | (4,894                           | )       | (115 | ) | — |   | 5,009 | (4)  | — |   |
| Other expenses  (income), net                 |   | 361                              |    | 508 |   | 178 |   | — |   | 1,047 |   |
| Provision for  income taxes (benefit)         |   | (5,038                           | )       | 6,314 |   | (88 | ) | — |   | 1,188 |   |
|                                          |   |                             |    |   |   |   |   |   |   |   |   |
| Net income  (loss)                            |   | $                                | (14,002 | ) | $ | 4,894 |   | $ | 115 |   | $ | (5,009 | ) | $ | (14,002 | ) |

 

F-48

----

 
|                                          |   | **Year Ended December 31, 2000** |   |
|-----------------------------------------------|--------|----------------------------------|--------|
| **(In thousands)**                            |   | **Issuer**                       |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                          |   |                             |   |   |   |   |   |   |   |   |   |
| Revenues                                      |   | $                                | — |   | $ | 343,710 |   | $ | 11,873 |   | $ | (8,204 | )(3) | $ | 347,379 |   |
| Cost of sales                                 |   | —                           |   | 230,864 |   | 9,388 |   | (8,204 | )(3) | 232,048 |   |
|                                          |   |                             |   |   |   |   |   |   |   |   |   |
| Gross profit                                  |   | —                           |   | 112,846 |   | 2,485 |   | — |   | 115,331 |   |
|                                          |   |                             |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses |   | 8,720                            |   | 35,359 |   | 1,315 |   | — |   | 45,394 |   |
| Amortization of  intangible assets            |   | 276                              |   | 17,263 |   | 409 |   | — |   | 17,948 |   |
| Interest expense                              |   | 40,864                           |   | 752 |   | 7 |   | — |   | 41,623 |   |
| Intercompany  charges                         |   | (20,214                          | )      | 20,214 |   | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries           |   | (15,668                          | )      | (681 | ) | — |   | 16,349 | (4) | — |   |
| Other expenses  (income), net                 |   | 336                              |   | 158 |   | (12 | ) | — |   | 482 |   |
| Provision for  income taxes (benefit)         |   | (17,916                          | )      | 24,113 |   | 85 |   | — |   | 6,282 |   |
|                                          |   |                             |   |   |   |   |   |   |   |   |   |
| Net income                                    |   | $                                | 3,602  |   | $ | 15,668 |   | $ | 681 |   | $ | (16,349 | ) | $ | 3,602 |   |

 

F-49

----

 

**Statements of Cash Flows**

 
|                                                                     |   | **Year Ended December 31, 2002** |    |
|--------------------------------------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                                                       |   | **Issuer**                       |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| **Cash  flows from operating activities:**                               |   |                             |    |   |   |   |   |   |   |   |   |
| Net loss                                                                 |   | $                                | (65,986 | ) | $ | (52,890 | ) | $ | (9,535 | ) | $ | 62,425 | (4) | $ | (65,986 | ) |
| Noncash  adjustments:                                                    |   |                             |    |   |   |   |   |   |   |   |   |
| Equity in  earnings of subsidiaries                                      |   | 52,890                           |    | 9,535 |   | — |   | (62,425 | )(4) | — |   |
| Other noncash  adjustments                                               |   | 5,542                            |    | 81,077 |   | 10,204 |   | — |   | 96,823 |   |
| Changes in  working capital                                              |   | 31,114                           |    | (30,912 | ) | (721 | ) | — |   | (519 | ) |
| Net cash  provided by (used for) operating activities                    |   | 23,560                           |    | 6,810 |   | (52 | ) | — |   | 30,318 |   |
|                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**                               |   |                             |    |   |   |   |   |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired                        |   | (5,890                           | )       | — |   | — |   | — |   | (5,890 | ) |
| Capital  expenditures                                                    |   | (49                              | )       | (5,263 | ) | (117 | ) | — |   | (5,429 | ) |
| Net cash used  for investing activities                                  |   | (5,939                           | )       | (5,263 | ) | (117 | ) | — |   | (11,319 | ) |
|                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**                               |   |                             |    |   |   |   |   |   |   |   |   |
| Net senior  credit facility borrowings                                   |   | (6,000                           | )       | — |   | — |   | — |   | (6,000 | ) |
| Capital  contribution, net                                               |   | 4,632                            |    | — |   | — |   | — |   | 4,632 |   |
| Other long-term  borrowings                                              |   | —                           |    | 1,145 |   | — |   | — |   | 1,145 |   |
| Principal  payments on long-term debt, capitalized leases and other debt |   | (11,895                          | )       | (2,255 | ) | — |   | — |   | (14,150 | ) |
| Deferred  financing costs                                                |   | (1,656                           | )       | — |   | — |   | — |   | (1,656 | ) |
| Other, net                                                               |   | —                           |    | (199 | ) | — |   | — |   | (199 | ) |
| Net cash used  for financing activities                                  |   | (14,919                          | )       | (1,309 | ) | — |   | — |   | (16,228 | ) |
|                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Effect of  foreign currency translation on cash                          |   | —                           |    | — |   | 47 |   | — |   | 47 |   |
|                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Net increase  (decrease) in cash and equivalents                         |   | 2,702                            |    | 238 |   | (122 | ) | — |   | 2,818 |   |
| Cash and  equivalents at beginning of period                             |   | 9,641                            |    | (92 | ) | 245 |   | — |   | 9,794 |   |
|                                                                     |   |                             |    |   |   |   |   |   |   |   |   |
| Cash and  equivalents at end of period                                   |   | $                                | 12,343  |   | $ | 146 |   | $ | 123 |   | $ | — |   | $ | 12,612 |   |

 

F-50

----

 
|                                                  |   | **Year Ended December 31, 2001** |    |
|-------------------------------------------------------|--------|----------------------------------|---------|
| **(In thousands)**                                    |   | **Issuer**                       |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                  |   |                             |    |   |   |   |   |   |   |   |   |
| **Cash  flows from operating activities:**            |   |                             |    |   |   |   |   |   |   |   |   |
| Net income  (loss)                                    |   | $                                | (14,002 | ) | $ | 4,894 |   | $ | 115 |   | $ | (5,009 | )(4) | $ | (14,002 | ) |
| Noncash  adjustments                                  |   |                             |    |   |   |   |   |   |   |   |   |
| Equity in  earnings of subsidiaries                   |   | (4,894                           | )       | (115 | ) | — |   | 5,009 | (4) | — |   |
| Other noncash  adjustments                            |   | 3,950                            |    | 52,467 |   | 887 |   | — |   | 57,304 |   |
| Changes in  working capital                           |   | 19,987                           |    | (47,707 | ) | (653 | ) | — |   | (28,373 | ) |
| Net cash  provided by operating activities            |   | 5,041                            |    | 9,539 |   | 349 |   | — |   | 14,929 |   |
|                                                  |   |                             |    |   |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**            |   |                             |    |   |   |   |   |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired     |   | (13,529                          | )       | — |   | — |   | — |   | (13,529 | ) |
| Capital  expenditures and other                       |   | (241                             | )       | (10,470 | ) | (552 | ) | — |   | (11,263 | ) |
| Net cash used  for investing activities               |   | (13,770                          | )       | (10,470 | ) | (552 | ) | — |   | (24,792 | ) |
|                                                  |   |                             |    |   |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**            |   |                             |    |   |   |   |   |   |   |   |   |
| Debt financing  for acquisitions                      |   | 20,000                           |    | — |   | — |   | — |   | 20,000 |   |
| Net revolving  line of credit repayments              |   | (400                             | )       | — |   | — |   | — |   | (400 | ) |
| Other borrowings                                      |   | —                           |    | 2,797 |   | — |   | — |   | 2,797 |   |
| Principal  payments on long-term debt and leases      |   | (8,203                           | )       | (1,847 | ) | (26 | ) | — |   | (10,076 | ) |
| Other, net                                            |   | (580                             | )       | (344 | ) | — |   | — |   | (924 | ) |
| Net cash  provided by (used for) financing activities |   | 10,817                           |    | 606 |   | (26 | ) | — |   | 11,397 |   |
|                                                  |   |                             |    |   |   |   |   |   |   |   |   |
| Effect of  foreign currency translation on cash       |   | —                           |    | — |   | 61 |   | — |   | 61 |   |
|                                                  |   |                             |    |   |   |   |   |   |   |   |   |
| Net increase  (decrease) in cash and equivalents      |   | 2,088                            |    | (325 | ) | (168 | ) | — |   | 1,595 |   |
| Cash and  equivalents at beginning of period          |   | 7,553                            |    | 233 |   | 413 |   | — |   | 8,199 |   |
|                                                  |   |                             |    |   |   |   |   |   |   |   |   |
| Cash and  equivalents at end of period                |   | $                                | 9,641   |   | $ | (92 | ) | $ | 245 |   | $ | — |   | $ | 9,794 |   |

 

F-51

----

 
|                                                  |   | **Year Ended December 31, 2000** |   |
|-------------------------------------------------------|--------|----------------------------------|--------|
| **(In thousands)**                                    |   | **Issuer**                       |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidating  Adjustments** |   | **Consolidated  Total** |   |
|                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| **Cash  flows from operating activities:**            |   |                             |   |   |   |   |   |   |   |   |   |
| Net income                                            |   | $                                | 3,602  |   | $ | 15,668 |   | $ | 681 |   | $ | (16,349 | )(4) | $ | 3,602 |   |
| Noncash  adjustments:                                 |   |                             |   |   |   |   |   |   |   |   |   |
| Equity in  earnings of subsidiaries                   |   | (15,668                          | )      | (681 | ) | — |   | 16,349 | (4) | — |   |
| Other noncash  adjustments                            |   | 9,092                            |   | 25,293 |   | 954 |   | — |   | 35,339 |   |
| Changes in  working capital                           |   | 1,283                            |   | (22,458 | ) | (983 | ) | — |   | (22,158 | ) |
| Net cash  provided by (used for) operating activities |   | (1,691                           | )      | 17,822 |   | 652 |   | — |   | 16,783 |   |
|                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**            |   |                             |   |   |   |   |   |   |   |   |   |
| Cash paid for  acquisitions, net of cash acquired     |   | (89,838                          | )      | 292 |   | — |   | — |   | (89,546 | ) |
| Capital  expenditures and other                       |   | (3,614                           | )      | (18,370 | ) | (634 | ) | — |   | (22,618 | ) |
| Net cash used  for investing activities               |   | (93,452                          | )      | (18,078 | ) | (634 | ) | — |   | (112,164 | ) |
|                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**            |   |                             |   |   |   |   |   |   |   |   |   |
| Debt financing  for acquisitions                      |   | 55,000                           |   | — |   | — |   | — |   | 55,000 |   |
| Proceeds from  sale of preferred stock and warrants   |   | 24,924                           |   | — |   | — |   | — |   | 24,924 |   |
| Net revolving  line of credit borrowings              |   | 12,400                           |   | — |   | — |   | — |   | 12,400 |   |
| Capital  contribution                                 |   | 7,902                            |   | — |   | — |   | — |   | 7,902 |   |
| Other borrowings                                      |   | —                           |   | 3,451 |   | — |   | — |   | 3,451 |   |
| Principal  payments on long-term debt and leases      |   | (3,419                           | )      | (2,392 | ) | (13 | ) | — |   | (5,824 | ) |
| Other, net                                            |   | (1,950                           | )      | (247 | ) | — |   | — |   | (2,197 | ) |
| Net cash  provided by (used for) financing activities |   | 94,857                           |   | 812 |   | (13 | ) | — |   | 95,656 |   |
|                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| Effect of  foreign currency translation on cash       |   | —                           |   | — |   | 6 |   | — |   | 6 |   |
|                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| Net increase  (decrease) in cash and equivalents      |   | (286                             | )      | 556 |   | 11 |   | — |   | 281 |   |
| Cash and  equivalents at beginning of period          |   | 7,839                            |   | (323 | ) | 402 |   | — |   | 7,918 |   |
|                                                  |   |                             |   |   |   |   |   |   |   |   |   |
| Cash and  equivalents at end of period                |   | $                                | 7,553  |   | $ | 233 |   | $ | 413 |   | $ | — |   | $ | 8,199 |   |

 

F-52

----

 

**Note 18.  Subsequent Events**

 

On March 14, 2003 the Company entered into adefinitive agreement to sell its Specialty Avionics Group to Odyssey InvestmentPartners, LLC for $140,000,000 in cash. The estimated net proceeds of $132,000,000 from the sale will be used torepay borrowings under the Company’s senior credit facility.  The sale is expected to be consummated priorto June 30, 2003 and is subject to customary closing conditions, includingfinancing and the receipt of regulatory and other third-party approvals.

 

On March 28, 2003 the Company received requisitelender approval to amend its senior credit facility to permit the abovedescribed sale of its Specialty Avionics Group.  The amendment also revises various financial covenants (which theCompany would otherwise have not been able to meet as ofMarch 31, 2003), decreases by $10,000,000 the maximum permitted revolvingline of credit borrowings to $40,000,000, increases the prime rate and LIBORinterest margins by 1.5% and permits the issuance of additional indebtednessand the repurchase of a portion of the Company’s 12% senior subordinated notes.

 

The amendment also provides that an event of defaultwill occur if the sale is not consummated by or is terminated for any reasonprior to June 30, 2003.  If anevent of default occurs, the credit agreement provides that the lenders may, atthat date, cease to provide additional revolving credit facility borrowings andmay accelerate repayment of all borrowings then outstanding.  If the lenders took such action, that wouldbe an event of default under the Company’s other debt agreements, permittingthose lenders to accelerate repayment of all such debt, as well.

 

F-53

----

 

**ConsolidatedSupplementary Financial Information**

 

**Selected Quarterly Financial Data(Unaudited)**

 

Unaudited condensed quarterly data for the two yearsended December 31, 2002 are summarized in the tables below.

 
|                                                                      |   | **Year Ended December 31, 2002** |   |
|---------------------------------------------------------------------------|--------|----------------------------------|--------|
| **(In thousands)**                                                        |   | **1st**                          |   | **2nd** |   | **3rd** |   | **4th** |   |
|                                                                      |   |                             |   |   |   |   |   |   |   |
| Revenues                                                                  |   | $                                | 86,163 |   | $ | 86,332 |   | $ | 79,621 |   | $ | 73,514 |   |
| Gross profit                                                              |   | 25,715                           |   | 21,838 |   | 25,583 |   | 18,544 |   |
| EBITDA, as  defined (Note 16)                                             |   | 17,321                           |   | 18,089 |   | 18,849 |   | 15,759 |   |
| Income (loss)  before cumulative effect of change in accounting principle |   | 398                              |   | (1,932 | ) | 2,530 |   | (9,832 | ) |
| Cumulative  effect of change in accounting principle                      |   | (57,150                          | )      | — |   | — |   | — |   |
| Net income  (loss)                                                        |   | (56,752                          | )      | (1,932 | ) | 2,530 |   | (9,832 | ) |
|                                                                           |        |                                  |        |  |  |  |  |  |  |  |  |  |  |

 

During 2002, the Company recorded restructuring, assetimpairment and other related charges pertaining to a further restructuringpursuant to a plan commenced in 2001 and a 2002 seat manufacturing facilitiesrestructuring in response to the ongoing weakness of the corporate, VIP andhead-of-state aircraft market.  Thecharges totaled $25,243,000 for the year, of which $19,444,000 were noncashcharges, and were charged to operations during the year as follows: 1stQuarter – $4,043,000; 2nd Quarter – $7,666,000; 3rdQuarter – $1,486,000; and 4th Quarter – $12,048,000.  In accordance with the transitionalprovisions of SFAS No. 142, the Company also recorded a $57,150,000 noncashwrite-down of goodwill as of January 1, 2002 as a cumulative effect of a changein accounting principle.

 
|                          |   | **Year Ended December 31, 2001** |   |
|-------------------------------|--------|----------------------------------|--------|
| **(In thousands)**            |   | **1st**                          |   | **2nd** |   | **3rd** |   | **4th** |   |
|                          |   |                             |   |   |   |   |   |   |   |
| Revenues                      |   | $                                | 99,151 |   | $ | 102,780 |   | $ | 102,928 |   | $ | 90,493 |   |
| Gross profit                  |   | 35,045                           |   | 32,576 |   | 32,776 |   | 15,274 |   |
| EBITDA, as  defined (Note 16) |   | 23,385                           |   | 26,308 |   | 21,998 |   | 17,100 |   |
| Net income  (loss)            |   | 2,472                            |   | 2,111 |   | 862 |   | (19,447 | ) |
|                               |        |                                  |        |  |  |  |  |  |  |  |  |  |  |

 

During the second quarter of 2001, the Company adopteda restructuring plan to realign production programs between its manufacturingfacilities and recorded restructuring charges aggregating $3,902,000 related tothis restructuring.  During the fourthquarter of 2001, the Company announced and implemented a further restructuringplan in response to the adverse impact on the aerospace industry resulting fromthe September 11th terrorist attack and further weakening of globaleconomic conditions.  As a result,additional restructuring and asset impairment charges aggregating $24,756,000were recorded in the fourth quarter. Restructuring and asset impairment charges totaled $28,658,000 for theyear, of which $22,058,000 were noncash charges.

 

F-54

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**ConsolidatedFinancial Statement Schedules**

 

**ScheduleII – Valuation and Qualifying Accounts**

 
| **(In thousands)**                                                    |   | **Balance at  Beginning of  Period** |   | **Charged to  Cost and  Expense** |   | **Charged to  Other  Accounts** |   | **Deductions** |   | **Balance at  End of  Period** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|----------------|--------|--------------------------------|--------|
|                                                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year  Ended December 31, 2002**                                     |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for  doubtful accounts                                      |   | $                                    | 2,647  |                              | $      | 1,287                           |   | $              | — |                           | $      | 2,176 |   | $ | 1,758 |   |
| Reserve for  excess, slow moving and potentially obsolete material(1) |   | 7,436                                |   | 3,704                             |   | —                          |   | 5,396          |   | 5,744                          |   |
|                                                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year  Ended December 31, 2001**                                     |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for  doubtful accounts                                      |   | $                                    | 1,902  |                              | $      | 2,418                           |   | $              | — |                           | $      | 1,673 |   | $ | 2,647 |   |
| Reserve for  excess, slow moving and potentially obsolete material(2) |   | 6,380                                |   | 1,829                             |   | —                          |   | 773            |   | 7,436                          |   |
|                                                                  |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| **Year  Ended December 31, 2000**                                     |   |                                 |   |                              |   |                            |   |           |   |                           |   |
| Allowance for  doubtful accounts                                      |   | $                                    | 1,966  |                              | $      | 120                             |   | $              | 223    | (3)                            | $      | 407 |   | $ | 1,902 |   |
| Reserve for  excess, slow moving and potentially obsolete material(3) |   | 7,766                                |   | 1,261                             |   | 215                             | (3)    | 2,862          |   | 6,380                          |   |

 

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(1)                                  Excludes$7,241,000 of other asset impairment related charges resulting from the 2002and 2001 restructuring plans.

 

(2)                                  Excludes$12,155,000 of inventory and capitalized program cost write-offs resulting fromthe 2001 restructuring plan.

 

(3)                                  Attributableto companies acquired. Reflects historical amounts used to determine the fairvalue of assets acquired.

 

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