UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2002

 

Commission File Number 333-70363

 

 

DECRANE HOLDINGS CO.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

ý Yes     o No

 

 

The number of shares of Registrant’s Common Stock, $.01 par value, outstanding as of November 11, 2002 was 4,116,627 shares.

 

 

Table of Contents

 

Part I – Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
	Consolidated Statements of Operations for the three months and nine months ended September 30, 2002 and 2001
	Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2002
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001
	Condensed Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Industry Overview and Trends
	Results of Operations
	Three months ended September 30, 2002
	Nine months ended September 30, 2002
	Restructuring, Asset Impairment and Other Nonrecurring Charges
	Liquidity and Capital Resources
	Recent Accounting Pronouncements
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
Item 4.	Controls and Procedures
Part II – Other Information
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 6.	Exhibits and Reports on Form 8-K
	Exhibits
	Reports on Form 8-K
Signatures
Certifications

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.          FINANCIAL STATEMENTS

 

DECRANE HOLDINGS CO. AND SUBSIDIARY

 

Consolidated Balance Sheets

 

(In thousands, except share data)		September 30, 2002			December 31, 2001
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	24,679		$	9,794
Accounts receivable, net		40,671			58,451
Inventories		82,454			86,498
Deferred income taxes		9,691			14,063
Prepaid expenses and other current assets		3,551			2,559
Total current assets		161,046			171,365
Property and equipment, net		52,818			61,073
Other assets, principally intangibles, net		407,680			413,273
Total assets		$	621,544		$	645,711
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt		$	15,422		$	13,899
Accounts payable		18,199			19,051
Accrued liabilities		32,378			56,626
Income taxes payable		623			133
Total current liabilities		66,622			89,709
Long-term debt, less current portion		384,862			386,351
Deferred income taxes		26,782			33,597
Other long-term liabilities		7,522			7,438
Commitments and contingencies (Note 10)
Minority interest in preferred stock of subsidiary		32,541			28,240
Mandatorily redeemable preferred stock		60,118			54,223
Stockholders’ equity:
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized; none issued and outstanding as of September 30, 2002 and December 31, 2001		—			—
Common stock, $.01 par value, 10,000,000 shares authorized; 4,116,627 and 3,914,274 shares issued and outstanding as of September 30, 2002 and December 31, 2001, respectively		41			39
Additional paid-in capital		74,229			75,542
Notes receivable for shares sold		(2,552		)	(2,668		)
Accumulated deficit		(27,963		)	(24,658		)
Accumulated other comprehensive loss		(658		)	(2,102		)
Total stockholders’ equity		43,097			46,153
Total liabilities and stockholders’ equity		$	621,544		$	645,711

 

The accompanying notes are an integral part of the consolidated financial statements.

 

1

 

DECRANE HOLDINGS CO. AND SUBSIDIARY

 

Consolidated Statements of Operations

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)		2002			2001			2002			2001
		(Unaudited)
Revenues		$	79,621		$	102,928		$	252,116		$	304,859
Cost of sales		54,038			70,152			178,980			204,462
Gross profit		25,583			32,776			73,136			100,397
Operating expenses:
Selling, general and administrative expenses		11,412			13,963			41,703			42,059
Amortization of intangible assets		1,467			4,936			4,298			14,857
Total operating expenses		12,879			18,899			46,001			56,916
Income from operations		12,704			13,877			27,135			43,481
Other expenses:
Interest expense		8,685			9,654			24,843			29,984
Minority interest in preferred stock of subsidiary		1,486			1,287			4,301			3,727
Other expenses (income), net		193			(25		)	578			92
Income (loss) before provision for income taxes		2,340			2,961			(2,587		)	9,678
Provision for income taxes		1,296			3,386			718			7,960
Net income (loss)		1,044			(425		)	(3,305		)	1,718
Noncash preferred stock dividend accretion		(2,033		)	(1,772		)	(5,895		)	(5,138		)
Net loss applicable to common stockholders		$	(989	)	$	(2,197	)	$	(9,200	)	$	(3,420	)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2

 

DECRANE HOLDINGS CO. AND SUBSIDIARY

 

Consolidated Statement of Stockholders’ Equity

 

(In thousands, except share data)		Common Stock					Additional Paid-in Capital			Notes Receivable For Shares Sold			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
		Shares		Amount
Balance, December 31, 2001		3,914,274		$	39		$	75,542		$	(2,668	)	$	(24,658	)	$	(2,102	)	$	46,153
Comprehensive income (loss):
Net loss		—		—			—			—			(3,305		)	—			(3,305		)
Translation adjustment		—		—			—			—			—			1,527			1,527
Unrealized loss on interest rate swap contract		—		—			—			—			—			(83		)	(83		)
																			(1,861		)
Sale of common stock		221,096		2			4,998			—			—			—			5,000
Repurchase of common stock and cashless exercise of options, net of related note receivable repaid		(18,743	)	—			(568		)	200			—			—			(368		)
Tax benefit of options exercised		—		—			14			—			—			—			14
Noncash dividend accretion on preferred stock		—		—			(5,895		)	—			—			—			(5,895		)
Compensatory stock option expense		—		—			138			—			—			—			138
Notes receivable interest accrued		—		—			—			(84		)	—			—			(84		)
Balance, September 30, 2002 (Unaudited)		4,116,627		$	41		$	74,229		$	(2,552	)	$	(27,963	)	$	(658	)	$	43,097

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3

 

DECRANE HOLDINGS CO. AND SUBSIDIARY

 

Consolidated Statements of Cash Flows

 

		Nine Months Ended September 30,
(In thousands)		2002			2001
		(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	(3,305	)	$	1,718
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,863			25,561
Noncash portion of restructuring and asset impairment charges		7,396			—
Minority interest in preferred stock of subsidiary		4,301			3,727
Deferred income taxes		(273		)	6,801
Other, net		371			605
Changes in assets and liabilities, net of effect from acquisitions:
Accounts receivable		17,349			(12,243		)
Inventories		1,311			(14,174		)
Prepaid expenses and other assets		(1,104		)	(2,684		)
Accounts payable		(900		)	3,832
Accrued liabilities		(18,464		)	(6,809		)
Income taxes payable		459			11
Other long-term liabilities		80			(143		)
Net cash provided by operating activities		22,084			6,202
Cash flows from investing activities:
Cash paid for acquisitions		(5,890		)	(13,529		)
Capital expenditures		(3,804		)	(9,794		)
Other, net		—			635
Net cash used for investing activities		(9,694		)	(22,688		)
Cash flows from financing activities:
Net borrowings under senior credit facility		9,000			19,600
Other long-term borrowings		1,145			1,989
Proceeds from the sale of common stock		5,000			—
Principal payments on term debt, capitalized leases and other debt		(10,505		)	(5,198		)
Deferred financing costs		(1,663		)	(580		)
Repurchase of common stock and options		(368		)	—
Other, net		(149		)	(118		)
Net cash provided by financing activities		2,460			15,693
Effect of foreign currency translation on cash		35			39
Net increase (decrease) in cash and cash equivalents		14,885			(754		)
Cash and cash equivalents at beginning of period		9,794			8,199
Cash and cash equivalents at end of period		$	24,679		$	7,445

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4

 

DECRANE HOLDINGS CO. AND SUBSIDIARY

 

Condensed Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.       Consolidated Financial Statements

 

Basis of Presentation

 

The consolidated interim financial statements included in this report are unaudited.  The Company believes the interim financial statements are presented on a basis consistent with the audited financial statements and include all adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows for such interim periods.  All of these adjustments are normal recurring adjustments.

 

Preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

 

The results of operations for interim periods do not necessarily predict the operating results for any other interim period or for the full year.  The consolidated balance sheet as of December 31, 2001 has been derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America as permitted by interim reporting requirements.  The information included in this report should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and related notes included in the Company’s 2001 Form 10-K.  Some reclassifications have been made to prior periods’ financial statements to conform to the 2002 presentation.

 

 

Note 2.       Accounting Pronouncements

 

Accounting Pronouncements Adopted January 1, 2002

 

SFAS No. 141 and 142

 

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

 

•                  Reassessment of Useful Lives of Intangible Assets.  The reassessment of the useful lives of intangible assets acquired on or before June 30, 2001 was completed during the first quarter of fiscal 2002.  The remaining useful lives were deemed appropriate.

 

•                  Reclassification of Intangible Assets.  Intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill were reclassified to goodwill.

 

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

 

5

 

During the second quarter of fiscal 2002, the Company completed the first step of the required transitional impairment testing of goodwill recorded at January 1, 2002 associated with adopting SFAS No. 142.  The results indicate potential impairment in reporting units within the Specialty Avionics and Systems Integration business segments.  The second step of the transitional impairment testing, which is required to be performed to measure the amount of impairment losses, if any, will be completed no later than December 31, 2002.  The transitional impairment losses, if any, will be reflected as a cumulative effect of a change in accounting principle as of January 1, 2002.

 

A reconciliation of reported net income (loss) to net income (loss) adjusted to reflect the discontinuance of periodic goodwill and assembled workforce amortization charges is as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)		2002			2001			2002			2001
		(Unaudited)
Reported net income (loss)		$	1,044		$	(425	)	$	(3,305	)	$	1,718
Add back goodwill and assembled workforce amortization, net of tax		—			2,851			—			8,602
Adjusted net income (loss)		$	1,044		$	2,426		$	(3,305	)	$	10,320

 

SFAS No. 143

 

Effective January 1, 2002, the Company also adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset.  Adoption of SFAS No. 143 is required for the Company’s fiscal year beginning January 1, 2003 although early application is permitted.  Adoption of SFAS No. 143 did not have an impact on the Company’s business, consolidated financial position, results of operations or cash flows.

 

SFAS No. 144

 

Effective January 1, 2002, the Company also adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses the accounting and reporting for the impairment or disposal of long-lived assets.  Adoption of SFAS No. 144 did not have an impact on the Company’s business, consolidated financial position, results of operations or cash flows.

 

6

 

Recently Issued Accounting Pronouncements

 

SFAS No. 145

 

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations–Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002.  The Company believes this new standard will not have an impact on its business, consolidated financial position, results of operations or cash flow.

 

SFAS No. 146

 

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”

 

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

 

The provisions of SFAS No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  The Company believes SFAS No. 146 may affect the timing of recognizing future restructuring costs, as well as the amounts recognized, depending on the nature of the exit or disposal activity and the timing of the related estimated cash flows.

 

7

 

Note 3.       Restructuring, Asset Impairment and Other Nonrecurring Charges

 

During the three months and nine months ended September 30, 2002 and 2001, the Company recorded restructuring, asset impairment and other nonrecurring pre-tax charges related to two restructuring plans as follows:

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)		2002			2001					2002			2001
		(Unaudited)
Restructuring plan:
2002 Seat Manufacturing Facilities Restructuring		$	—		$		—			$	6,294		$	—
2001 Restructuring and Asset Impairment Charges		1,486			—					6,901			3,902
Total pre-tax charges		$	1,486		$		—			$	13,195		$	3,902
Charged to operations:
Cost of sales		$	670		$		—			$	6,616		$	3,902
Selling, general and administrative expenses		816			—					6,579			—
Total pre-tax charges		$	1,486		$	—				$	13,195		$	3,902
Components of charges:
Cash charges		$	—		$		—			$	5,799		$	3,902
Noncash charges		1,486			—					7,396			—
Total pre-tax charges		$	1,486		$		—			$	13,195		$	3,902

 

 

2002 Seat Manufacturing Facilities Restructuring

 

In first quarter of fiscal 2002, the Company announced it would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities.  In connection with this restructuring plan, the Company recorded nonrecurring pre-tax charges to operations totaling $6,294,000 during 2002 for restructuring and asset impairment charges and other related expenses.  The restructuring and asset impairment charges and other related expenses are comprised of the following:

 

•                  Inventory and Accounts Receivable Write-Downs.  In connection with the consolidation of all production, the Company will discontinue manufacturing certain products, principally those which overlap.  Inventory and certain receivables related to the discontinued products were written down to net realizable value.

 

•                  Impairment of Long-Lived Assets.  The restructuring plan resulted in the impairment of property and equipment and, accordingly, these assets were written down to their net realizable value.

 

•                  Severance and Other Compensation Costs.  Approximately 115 employees have been terminated in connection with the permanent closure of the manufacturing facilities.

 

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

 

•                  Other Nonrecurring Restructuring-Related Expenses.  Other expenses pertain to FAA retesting and recertification of products manufactured at a different facility, moving, transportation and travel costs and shutdown / startup costs.

 

8

 

The Company substantially completed the restructuring during the second quarter of fiscal 2002.  The components of the restructuring, assets impairment and other nonrecurring charges are as follows:

 

(In thousands)		Total Charges			Amounts Incurred						Balance at September 30, 2002
					Noncash			Cash
		(Unaudited)
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			—			(197		)	103
Total restructuring and asset impairment charges		4,324			$	(3,574	)	$	(647	)	$	103
Other nonrecurring restructuring-related expenses		1,970
Total pre-tax charges		$	6,294

 

The remaining balance of restructuring costs includes lease termination and other exit costs.  The manufacturing facilities were closed during June 2002; however, future cash payments will extend beyond this date due to future lease payments on the vacated facilities and the incurrence of other exit costs.  Future cash payments will be funded from existing cash balances and internally generated cash from operations.

 

2001 Restructuring and Asset Impairment Charges

 

During the second quarter of fiscal 2001, the Company adopted a restructuring plan to realign aircraft furniture production programs among its manufacturing facilities.  In addition, and in response to the adverse impact on the aerospace industry resulting from the September 11^th terrorist attack and its aftermath, as well as the weakening of global economic conditions, the Company announced and implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions.  These plans primarily affected the Company’s Cabin Management and Specialty Avionics Groups.

 

In connection with these restructuring plans, the Company recorded nonrecurring pre-tax charges to operations of $28,658,000 in fiscal 2001 ($3,902,000 million during the nine months ended September 30, 2001), of which $22,058,000 were noncash charges, for the impairment of long-lived assets and restructuring costs related to write-downs and write-offs of inventoried costs, costs associated with the realignment of aircraft furniture production programs among facilities, severance, lease termination and other related costs.  As of December 31, 2001, $27,049,000 had been incurred and the remaining $1,609,000 was reflected as an accrued liability.

 

Due to the ongoing weakness of the corporate/VIP aircraft market, the Company decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility.  In connection with this decision, the Company recorded additional nonrecurring pre-tax charges to operations totaling $6,901,000 during 2002 ($5,415,000 during the second quarter of 2002 and $1,486,000 during the third quarter of 2002) for restructuring and asset impairment charges and other related expenses.

 

9

 

The restructuring and asset impairment charges and other related expenses are comprised of the following:

 

•                  Impairment of Long-Lived Assets.  The permanent closure of the manufacturing facility resulted in the impairment of property and equipment and, accordingly, these assets were written down to their estimated net realizable value.  Net realizable values were based on estimated current market values and the actual losses could exceed these estimates.

 

•                  Excess Inventory Write-Downs.  Inventory was further written down to net realizable value for quantities on hand exceeding current and forecast order backlog requirements.

 

•                  Other Nonrecurring Restructuring-Related Charges.  Other expenses pertain to provisions for estimated losses on uncompleted long-term contracts aggregating $2,577,000 and other nonrecurring charges.

 

The additional nonrecurring charge of $1,486,000 recorded during the third quarter of 2002 is comprised of a $801,000 charge to reflect the additional impairment of long-lived assets and a $685,000 charge for additional excess inventory write-downs.  The components of the charges and amounts incurred during the nine months ended September 30, 2002 are as follows:

 

(In thousands)		Balance at December 31, 2001			Total Charges			Amounts Incurred						Balance at September 30, 2002
								Noncash			Cash
					(Unaudited)
Severance and other compensation costs		$	1,185		$	—		$	—		$	(1,068	)	$	117
Lease termination and other related costs		424			—			—			(377		)	47
Impairment of property and equipment		—			2,557			(2,557		)	—			—
Excess inventory write-downs		—			1,265			(1,265		)	—			—
Total restructuring and assets impairment charges		$	1,609		3,822			$	(3,822	)	$	(1,445	)	$	164
Other nonrecurring restructuring-related charges					3,079
Total pre-tax charges					$	6,901

 

From January 1, 2002 through September 30, 2002, severance and other compensation costs of approximately $1,068,000 have been paid and the remaining $117,000 will be incurred during the fourth quarter of fiscal 2002 when the remaining personnel are terminated.  The amounts paid to date have been to manufacturing and administrative employees terminated at the manufacturing facilities being closed.  Since the September 11^th terrorist attack, the Company has, in addition to the positions eliminated as a result of the 2002 plant closures described above, reduced its total workforce by approximately 500 employees, or 18.5%, as of September 2002, of which approximately 260 employees had separated as of December 31, 2001.

 

The remaining balance of restructuring costs includes lease termination and other exit costs.  The restructuring plan related to leased facilities was completed during the second quarter of fiscal 2002; however, future cash payments will extend beyond this date due to future lease payments on the vacated facility and the incurrence of other exit costs.

 

Future cash payments will be funded from existing cash balances and internally generated cash from operations.

 

10

 

Note 4.       Inventories

 

Inventories are comprised of the following as of September 30, 2002 and December 31, 2001:

 

(In thousands)		September 30, 2002			December 31, 2001
		(Unaudited)
Raw materials
Work-in-process:		$	44,446		$	50,503
Direct and indirect manufacturing costs		16,278			16,260
Program costs, principally engineering costs		13,153			10,974
Finished goods		6,233			3,089
Costs and estimated earnings in excess of billings on uncompleted contracts		2,344			5,672
Total inventories		$	82,454		$	86,498

 

Inventoried costs are not in excess of estimated realizable value and include direct engineering, production and tooling costs, and applicable manufacturing overhead.  In accordance with industry practice, inventoried costs include amounts relating to programs and contracts with long production cycles that will be recovered from future sales.  Periodic assessments are performed to ensure recoverability of the program costs and adjustments are made, if necessary, to reduce inventoried costs to estimated realizable value.  In connection with the 2001 restructuring, $7,908,000 of previously inventoried program costs were determined to be unrecoverable and were charged to cost of sales during the fourth quarter of fiscal 2001; no adjustments were required during the first nine months of fiscal 2002.

 

Total costs and estimated earnings on all uncompleted contracts as of September 30, 2002 and December 31, 2001 are comprised of the following:

(In thousands)		September 30, 2002			December 31, 2001
		(Unaudited)
Costs incurred on uncompleted contracts		$	47,590		$	46,757
Estimated earnings recognized		58,244			50,413
Total costs and estimated earnings		105,834			97,170
Less billings to date		(104,542		)	(102,653		)
Net		$	1,292		$	(5,483	)
Balance sheet classification:
Asset – Costs and estimated earnings in excess of billings		$	2,344		$	5,672
Liability – Billings in excess of costs and estimated earnings (Note 6)		(1,052		)	(11,155		)
Net		$	1,292		$	(5,483	)

 

Revenues and earnings for products manufactured under long-term contracts are recognized under the percentage-of-completion method using total contract price, actual costs incurred to date and an estimate of the completion costs for each contract.  Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.  The Company recorded a provision for estimated losses totaling $2,577,000 during the nine months ended September 30, 2002 relating to uncompleted contracts at the furniture manufacturing facility being permanently closed (Note 3).

 

11

 

Note 5.       Other Assets

 

Other assets are comprised of the following as of September 30, 2002 and December 31, 2001:

 

(In thousands)		September 30, 2002			December 31, 2001
		(Unaudited)
Goodwill		$	343,309		$	337,443
Identifiable intangible assets with finite useful lives		53,181			63,648
Deferred financing costs		9,870			10,204
Other non-amortizable assets		1,320			1,978
Total other assets		$	407,680		$	413,273

 

Goodwill

 

Changes in the carrying amount of goodwill, by business segment (Note 12), for the year ended December 31, 2001 and the nine months ended September 30, 2002 are as follows:

 

(In thousands)		Cabin Management Group			Specialty Avionics Group			Systems Integration Group			Corporate			Consolidated Total
Year ended December 31, 2001:
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 losses recognized		(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
Nine months ended September 30, 2002:
Reclassification of intangible assets relating to assembled workforce, net of tax, upon adoption of SFAS No. 141 and 142		3,076			1,221			386			120			4,803
Foreign currency translation		—			1,063			—			—			1,063
Balance, September 30, 2002 (Unaudited)		$	181,791		$	128,779		$	28,663		$	4,076		$	343,309

 

12

 

Identifiable Intangible Assets with Finite Useful Lives

 

Identifiable intangible assets with finite useful lives are comprised of the following as of September 30, 2002 and December 31, 2001:

 

		September 30, 2002 (Unaudited)									December 31, 2001
(In thousands)		Cost			Accumulated Amortization			Net			Cost			Accumulated Amortization			Net
FAA certifications		$	45,816		$	(10,776	)	$	35,040		$	45,816		$	(8,485	)	$	37,331
Engineering drawings		14,619			(3,547		)	11,072			14,617			(2,816		)	11,801
Assembled workforce		—			—			—			11,499			(4,535		)	6,964
Other identifiable intangibles		13,086			(6,017		)	7,069			12,293			(4,741		)	7,552
Total identifiable intangibles		$	73,521		$	(20,340	)	$	53,181		$	84,225		$	(20,577	)	$	63,648

 

Estimated annual amortization expense for all identifiable intangible assets with finite useful lives for the five-year period ending December 31, 2006 is as follows: 2002 – $5,601,000; 2003 – $5,574,000; 2004 – $5,521,000; 2005 – $5,521,000; and 2006 – $4,423,000.

 

Note 6.       Accrued Liabilities

 

Accrued liabilities are comprised of the following as of September 30, 2002 and December 31, 2001:

 

(In thousands)		September 30, 2002			December 31, 2001
		(Unaudited)
Salaries, wages, compensated absences and payroll related taxes		$	10,951		$	17,179
Accrued interest		4,265			4,692
Accrued warranty costs		3,370			4,227
Billings in excess of costs and estimated earnings on uncompleted contracts		1,052			11,155
Customer advances and deposits		4,909			3,260
Acquisition related contingent consideration		—			6,904
Other accrued liabilities		7,831			9,209
Total accrued liabilities		$	32,378		$	56,626

 

13

 

Note 7.       Long-Term Debt

 

Long-term debt includes the following amounts as of September 30, 2002 and December 31, 2001:

 

(In thousands)		September 30, 2002			December 31, 2001
		(Unaudited)
Senior credit facility:
Revolving line of credit		$	21,000		$	12,000
Term loans		267,475			275,706
12% senior subordinated notes		100,000			100,000
Capital lease obligations and term debt financing, secured by property and equipment		10,841			10,745
Other indebtedness		968			1,799
Total long-term debt		400,284			400,250
Less current portion		(15,422		)	(13,899		)
Long-term debt, less current portion		$	384,862		$	386,351

 

On March 19, 2002, the Company amended certain of the terms of its senior credit facility.  The amendment combined two $25,000,000 working capital and acquisitions lines of credit into a single $50,000,000 working capital line of credit, increased the prime rate and LIBOR rate margins by 50 basis points, resulting in a range of 2.00% to 3.25% for prime rate borrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amended certain financial covenants, principally through December 31, 2003.

 

Note 8.       Income Taxes

 

For the three months and nine months ended September 30, 2002, the provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to income before income taxes primarily due to the effects of state and foreign income taxes and minority interest in preferred stock of subsidiary which is not deductible for income tax purposes.

 

For the three months and nine months ended September 30, 2001, the provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization and minority interest in preferred stock of subsidiary.  Prior to the January 1, 2002 adoption of SFAS No. 142, goodwill was amortized for financial reporting purposes.

 

During the nine months ended September 30, 2002, the Company reclassified to long-term approximately $4,000,000 of loss carryforwards classified as current at December 31, 2001 to reflect the portion of the carryforwards the Company does not expect to utilize during the 2002 fiscal year.

 

14

 

Note 9.       Capital Structure

 

Mandatorily Redeemable Preferred Stock

 

The table below summarizes the increase in mandatorily redeemable preferred stock during the nine months ended September 30, 2002.

 

					DeCrane Aircraft 16% Preferred Stock									DeCrane Holdings 14% Preferred Stock
(In thousands, except share and per share data)		Number of Shares			Mandatory Redemption Value			Unamortized Issuance Discount			Net Book Value			Number of Shares		Mandatory Redemption Value
Balance, December 31, 2001		316,330			$	31,633		$	(3,393	)	$	28,240		342,417		$	54,223
Accrued dividends and redemption value accretion		39,498			3,950			351			4,301			—		—
Noncash dividend accretion		—			—			—			—			—		5,895
Balance, September 30, 2002 (Unaudited)		355,828			$	35,583		$	(3,042	)	$	32,541		342,417		$	60,118
Per share liquidation value as of September 30, 2002 (Unaudited)					$	100.00										$	175.57

 

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

 

DeCrane Aircraft 16% Mandatorily Redeemable Preferred Stock

 

Holders of the preferred stock are entitled to receive, when, as and if declared, dividends at a rate equal to 16% per annum.  Prior to June 30, 2005, DeCrane Aircraft may, at its option, pay dividends either in cash or by the issuance of additional shares of preferred stock.  Since the preferred stock issuance date on June 30, 2000, DeCrane Aircraft has elected to issue additional shares in lieu of cash dividends; such shares are reflected as a component of minority interest in preferred stock of subsidiary.

 

DeCrane Holdings 14% Mandatorily Redeemable Preferred Stock

 

Holders of the preferred stock are entitled to receive, when, as and if declared, dividends at a rate equal to 14% per annum.  Prior to September 30, 2005, dividends are not paid in cash but instead accrete to the liquidation value of the preferred stock, which, in turn, increases the redemption obligation.

 

Common Stock, Stock Options Exercised and Notes Receivable for Shares Sold

 

During the nine months ended September 30, 2002, DeCrane Holdings sold 221,096 common shares to DLJ and affiliated entities and a director for $5,100,000.  Expenses related to the sale totaled $100,000 and were charged to additional paid–in capital.

 

Also during the nine months ended September 30, 2002, DeCrane Holdings repurchased and canceled 18,743 common shares from former members of DeCrane Aircraft management.  The former management members also elected to exercise 9,252 vested stock options on a cashless basis.  The $14,000 income tax benefit associated with the stock options exercised was also credited to additional paid-in capital.  In connection with the repurchase, a note receivable collateralized by the repurchased common stock was repaid.

 

15

 

Note 10.     Commitments and Contingencies

 

Litigation

 

As part of its investigation of the crash Swissair Flight 111 off the Canadian coast on September 2, 1998, the Canadian Transportation Safety Board (the “CTSB”) notified the Company that they recovered burned wire that was attached to the in-flight entertainment system installed on some of Swissair’s aircraft by one of the Company’s subsidiaries.  The Company is fully cooperating with the CTSB and has been advised that the CTSB intends to issue a final report on its investigation in February, 2003.  The Company believes that no evidence exists that would indicate the equipment installed by its subsidiary malfunctioned or failed during the flight.  Families of the 229 persons who died aboard the flight have filed actions in federal and state courts against the Company, and many other unaffiliated parties, including Swissair and Boeing.  The actions claim negligence, strict liability and breach of warranty relating to the installation and testing of the in-flight entertainment system.  The actions seek compensatory and punitive damages and costs in an unstated amount.  All of the actions have been transferred to the United States District Court for the Eastern District of Pennsylvania and assigned under MDL Case No. 1269 for coordinated or consolidated pretrial proceedings.  The Company intends to defend the claims vigorously.

 

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

 

Contingent Acquisition Consideration

 

The Company’s remaining maximum contingent acquisition consideration payment obligation is $600,000 as of September 30, 2002.  The contingent consideration is payable based upon an acquired company’s level of attainment of its defined performance criteria for the year ending December 31, 2002 and excludes amounts earned and recorded through December 31, 2001.  The contingent consideration, if any, is payable during the first quarter of fiscal 2003.

 

16

 

Note 11.     Consolidated Statements of Cash Flows

 

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

 

		Nine Months Ended September 30,
(In thousands)		2002			2001
		(Unaudited)
Components of cash paid for acquisitions:
Contingent consideration paid for previously completed acquisitions		$	5,826		$	17,075
Cash purchase price reductions received as a result of settling asserted claims against the sellers		—			(3,718		)
Additional acquisition related expenses		64			172
Total cash paid for acquisitions		$	5,890		$	13,529

 

During the nine months ended September 30, 2001, the Company received cash of $3,718,000 in settlement of claims asserted against the sellers for breach of representation and warranty provisions contained in the purchase agreements of two companies acquired in 2000.  The settlement agreement also clarified the calculation of the contingent consideration provisions of the purchase agreement and further provided that the Company pay in 2002 a minimum of $2,750,000 of previously contingent consideration for the year ending December 31, 2001.  The $2,750,000 minimum contingent consideration was paid during the nine months ended September 30, 2002.

 

Note 12.     Business Segment Information

 

The Company supplies products and services to the aerospace industry.  The Company’s subsidiaries are organized into three groups, each of which are strategic businesses that develop, manufacture and sell distinct products and services.  The groups and a description of their businesses are as follows:

 

•                  Cabin Management – provides interior cabin components for the corporate/VIP aircraft market, including cabin interior furnishings, cabin management and entertainment systems, seating and composite components;

 

•                  Specialty Avionics – designs, engineers and manufactures electronic components, display devices and interconnect components and assemblies; and

 

•                  Systems Integration – provides auxiliary fuel tank systems, auxiliary power units and system integration services.

 

Management utilizes more than one measurement to evaluate group performance and allocate resources, however, management considers EBITDA to be the primary measurement of overall economic returns and cash flows.  Management defines EBITDA as earnings before interest, income taxes, depreciation and amortization, acquisition related charges and other noncash, nonoperating and nonrecurring charges.  This is consistent with the manner in which lenders and ultimate investors measure the Company’s overall performance.

 

The accounting policies of the groups are substantially the same as those described in the summary of significant accounting policies in Note 1 to the audited financial statements.  Some transactions are recorded at the Company’s corporate headquarters and are not allocated to the groups, such as most of the Company’s cash and cash equivalents, debt and related net interest expense, corporate headquarters costs and income taxes.

 

17

 

The tables below summarize selected financial data by business segment.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)		2002			2001			2002			2001
		(Unaudited)
Revenues:
Cabin Management		$	41,197		$	53,462		$	135,296		$	158,753
Specialty Avionics		23,410			31,902			73,793			94,999
Systems Integration		15,252			18,528			43,552			53,023
Inter-group elimination(1)		(238		)	(964		)	(525		)	(1,916		)
Consolidated totals		$	79,621		$	102,928		$	252,116		$	304,859
EBITDA:
Cabin Management		$	7,509		$	10,703		$	12,303		$	33,791
Specialty Avionics		6,405			9,014			20,107			26,243
Systems Integration		4,798			4,407			13,190			13,281
Corporate(2)		(1,360		)	(1,845		)	(4,547		)	(5,146		)
Inter-group elimination(3)		11			(281		)	11			(380		)
Consolidated totals(4)		$	17,363		$	21,998		$	41,064		$	67,789
Adjusted EBITDA(5):
Cabin Management		$	8,995		$	10,703		$	25,498		$	37,693
Specialty Avionics		6,405			9,014			20,107			26,243
Systems Integration		4,798			4,407			13,190			13,281
Corporate		(1,360		)	(1,845		)	(4,547		)	(5,146		)
Inter-group elimination		11			(281		)	11			(380		)
Consolidated totals		$	18,849		$	21,998		$	54,259		$	71,691

 

		September 30,
(In thousands)		2002			2001
		(Unaudited)
Total assets (as of period end):
Cabin Management		$	288,503		$	329,356
Specialty Avionics		205,505			225,462
Systems Integration		74,284			77,642
Corporate(6)		53,363			42,520
Inter-group elimination(7)		(111		)	(316		)
Consolidated totals		$	621,544		$	674,664

 

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

 

(2)                        Reflects the Company’s corporate headquarters costs and expenses not allocated to the groups.

 

(3)                        Reflects elimination of the effect of inter-group profits in inventory.

 

18

 

(4)                        The table below reconciles consolidated EBITDA to income from operations and income before income taxes.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)		2002			2001			2002			2001
		(Unaudited)
Consolidated EBITDA		$	17,363		$	21,998		$	41,064		$	67,789
Depreciation and amortization(a)		(4,212		)	(8,066		)	(12,866		)	(23,914		)
Acquisition related charges not capitalized		(447		)	(14		)	(925		)	(117		)
Other noncash charges		—			(41		)	(138		)	(277		)
Consolidated income from operations		12,704			13,877			27,135			43,481
Interest expense		(8,685		)	(9,654		)	(24,843		)	(29,984		)
Minority interest in preferred stock of subsidiary		(1,486		)	(1,287		)	(4,301		)	(3,727		)
Other (expenses) income, net		(193		)	25			(578		)	(92		)
Consolidated income (loss) before income taxes		$	2,340		$	2,961		$	(2,587	)	$	9,678

(a)          Reflects depreciation and amortization of long-lived assets, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142) and other intangible assets.  Excludes amortization of deferred financing costs, which are classified as a component of interest expense.  The table below reconciles depreciation and amortization of long-lived assets to consolidated depreciation and amortization.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)		2002			2001			2002			2001
		(Unaudited)
Depreciation and amortization of long-lived assets		$	4,212		$	8,066		$	12,866		$	23,914
Amortization of deferred financing costs		701			570			1,997			1,647
Consolidated depreciation and amortization		$	4,913		$	8,636		$	14,863		$	25,561

 

(5)                        Reflects EBITDA before Cabin Management’s restructuring, asset impairment and other nonrecurring charges (Note 3) of:

 

•                  $1,486,000 and $13,195,000 for the three months and nine months ended September 30, 2002, respectively, and

 

•                  $3,902,000 for the nine months ended September 30, 2001.

 

(6)                        Reflects the Company’s corporate headquarters assets, excluding investments in and notes receivable from subsidiaries.

 

(7)                        Reflects elimination of inter-group receivables and profits in inventory as of period end.

 

19

 

Note 13.     Supplemental Condensed Consolidating Financial Information

 

In conjunction with the senior credit facility and 12% senior subordinated notes described in Note 7, the following condensed consolidating financial information is presented segregating DeCrane Aircraft, as the issuer, and guarantor and non-guarantor subsidiaries.  The accompanying financial information in the guarantor subsidiaries column reflects the financial position, results of operations and cash flows for those subsidiaries guaranteeing the senior credit facility and the notes.  DeCrane Holdings in not a guarantor of either the senior credit facility or the notes and is therefore reflected in the non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantor subsidiaries.

 

The guarantor subsidiaries are wholly-owned subsidiaries of DeCrane Aircraft and their guarantees are full and unconditional on a joint and several basis.  There are no restrictions on the ability of the guarantor subsidiaries to transfer funds to the issuer in the form of cash dividends, loans or advances.  Separate financial statements of the guarantor subsidiaries are not presented because management believes that such financial statements would not be material to investors.  Investments in subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting.  Consolidating adjustments include the following:

 

(1)          Elimination of investments in subsidiaries.

 

(2)          Elimination of intercompany accounts.

 

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

 

(4)          Elimination of equity in earnings of subsidiaries.

 

20

 

Balance Sheets

 

		September 30, 2002 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Assets
Current assets:
Cash and cash equivalents		$	24,431		$	170		$	78		$	—		$	24,679
Accounts receivable, net		—			39,239			1,432			—			40,671
Inventories		—			81,064			1,390			—			82,454
Other current assets		11,462			1,490			290			—			13,242
Total current assets		35,893			121,963			3,190			—			161,046
Property and equipment, net		2,696			47,868			2,254			—			52,818
Other assets, principally intangibles, net		14,774			382,277			10,629			—			407,680
Investments in subsidiaries		409,057			20,743			106,425			(536,225		)(1)	—
Intercompany receivables		270,962			160,889			5,544			(437,395		)(2)	—
Total assets		$	733,382		$	733,740		$	128,042		$	(973,620	)	$	621,544
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt		$	13,465		$	1,950		$	7		$	—		$	15,422
Other current liabilities		14,762			35,154			1,284			—			51,200
Total current liabilities		28,227			37,104			1,291			—			66,622
Long-term debt, less current portion		375,326			9,536			—			—			384,862
Intercompany payables		160,889			276,506			—			(437,395		)(2)	—
Other long-term liabilities		32,526			1,708			70			—			34,304
Minority interest in preferred stock of subsidiary		32,541			—			—			—			32,541
Mandatorily redeemable preferred stock		—			—			60,118			—			60,118
Stockholders’ equity:
Paid-in capital		120,200			336,986			89,710			(475,178		)(1)	71,718
Retained earnings (deficit)		(16,327		)	72,071			(22,660		)	(61,047		)(1)	(27,963		)
Accumulated other comprehensive loss		—			(171		)	(487		)	—			(658		)
Total stockholders’ equity		103,873			408,886			66,563			(536,225		)	43,097
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity		$	733,382		$	733,740		$	128,042		$	(973,620	)	$	621,544

 

21

 

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

 

22

 

Statements of Operations

 

		Nine Months Ended September 30, 2002 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues		$	—		$	248,877		$	7,222		$	(3,983	)(3)	$	252,116
Cost of sales		—			176,943			6,020			(3,983		)(3)	178,980
Gross profit		—			71,934			1,202			—			73,136
Selling, general and administrative expenses		6,116			34,629			958			—			41,703
Amortization of intangible assets		—			4,297			1			—			4,298
Interest expense		24,092			747			4			—			24,843
Minority interest in preferred stock of subsidiary		—			—			4,301			—			4,301
Intercompany charges		(21,269		)	21,269			—			—			—
Equity in earnings of subsidiaries		(5,271		)	(195		)	(996		)	6,462		(4)	—
Other expenses, net		251			83			244			—			578
Provision for income taxes (benefit)		(4,915		)	5,833			(200		)	—			718
Net income (loss)		$	996		$	5,271		$	(3,110	)	$	(6,462	)	$	(3,305	)

 

 

		Nine Months Ended September 30, 2001 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues		$	—		$	302,182		$	8,594		$	(5,917	)(3)	$	304,859
Cost of sales		—			203,145			7,234			(5,917		)(3)	204,462
Gross profit		—			99,037			1,360			—			100,397
Selling, general and administrative expenses		6,790			34,658			611			—			42,059
Amortization of intangible assets		152			14,405			300			—			14,857
Interest expense		29,082			887			15			—			29,984
Minority interest in preferred stock of subsidiary		—			—			3,727			—			3,727
Intercompany charges		(18,055		)	18,055			—			—			—
Equity in earnings of subsidiaries		(13,898		)	(593		)	(5,445		)	19,936		(4)	—
Other expenses (income), net		248			151			(307		)	—			92
Provision for income taxes (benefit)		(9,764		)	17,576			148			—			7,960
Net income		$	5,445		$	13,898		$	2,311		$	(19,936	)	$	1,718

 

23

 

Statement of Cash Flows

 

		Nine Months Ended September 30, 2002 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Cash flows from operating activities:
Net income (loss)		$	996		$	5,271		$	(3,110	)	$	(6,462	)(4)	$	(3,305	)
Noncash adjustments:
Equity in earnings of subsidiaries		(5,271		)	(195		)	(996		)	6,462		(4)	—
Other noncash adjustments		2,704			19,214			4,740			—			26,658
Changes in working capital		18,788			(19,330		)	(727		)	—			(1,269		)
Net cash provided by (used for) operating activities		17,217			4,960			(93		)	—			22,084
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired		(5,890		)	—			—			—			(5,890		)
Investment in subsidiary		—			—			(4,632		)	4,632		(1)	—
Capital expenditures		(46		)	(3,649		)	(109		)	—			(3,804		)
Net cash used for investing activities		(5,936		)	(3,649		)	(4,741		)	4,632			(9,694		)
Cash flows from financing activities:
Net senior credit facility borrowings		9,000			—			—			—			9,000
Capital contribution to subsidiary of net proceeds from sale of common stock		4,632			—			4,632			(4,632		)(1)	4,632
Other long-term borrowings		—			1,145			—			—			1,145
Principal payments on long-term debt, capitalized leases and other debt		(8,460		)	(2,045		)	—			—			(10,505		)
Deferred financing costs		(1,663		)	—			—			—			(1,663		)
Other, net		—			(149		)	—			—			(149		)
Net cash provided by (used for) financing activities		3,509			(1,049		)	4,632			(4,632		)	2,460
Effect of foreign currency translation on cash		—			—			35			—			35
Net increase (decrease) in cash and equivalents		14,790			262			(167		)	—			14,885
Cash and equivalents at beginning of period		9,641			(92		)	245			—			9,794
Cash and equivalents at end of period		$	24,431		$	170		$	78		$	—		$	24,679

 

24

 

		Nine Months Ended September 30, 2001 (Unaudited)
(In thousands)		Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Cash flows from operating activities
Net income		$	5,445		$	13,898		$	2,311		$	(19,936	)(4)	$	1,718
Noncash adjustments
Equity in earnings of subsidiaries		(13,898		)	(593		)	(5,445		)	19,936		(4)	—
Other noncash adjustments		9,639			22,393			4,662			—			36,694
Changes in working capital		(3,766		)	(27,573		)	(871		)	—			(32,210		)
Net cash provided by (used for) operating activities		(2,580		)	8,125			657			—			6,202
Cash flows from investing activities
Cash paid for acquisitions, net of cash acquired		(13,529		)	—			—			—			(13,529		)
Capital expenditures and other		(125		)	(8,438		)	(596		)	—			(9,159		)
Net cash used for investing activities		(13,654		)	(8,438		)	(596		)	—			(22,688		)
Cash flows from financing activities
Net senior credit facility borrowings		19,600			—			—			—			19,600
Other long-term borrowings		—			1,989			—			—			1,989
Principal payments on term debt, capitalized leases and other debt		(3,611		)	(1,568		)	(19		)	—			(5,198		)
Deferred financing costs		(580		)	—			—			—			(580		)
Other, net		—			(118		)	—			—			(118		)
Net cash provided by (used for) financing activities		15,409			303			(19		)	—			15,693
Effect of foreign currency translation on cash		—			—			39			—			39
Net increase (decrease) in cash and equivalents		(825		)	(10		)	81			—			(754		)
Cash and equivalents at beginning of period		7,553			233			413			—			8,199
Cash and equivalents at end of period		$	6,728		$	223		$	494		$	—		$	7,445

 

25

 

ITEM 2.                           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussions should be read in conjunction with our financial statements and accompanying notes included in this report.

 

Industry Overview and Trends

 

We compete in the aircraft products and services market of the aerospace industry.  The market for our products and services is largely driven by demand in the three civil aircraft markets: commercial, regional and corporate/VIP aircraft.  Currently, we provide a minimal amount of products and services to the military aircraft market and are therefore relatively unaffected by defense spending and other factors affecting that market.

 

The September 11, 2001 terrorist attack on the United States and weak global economic conditions are adversely impacting the commercial airline industry and, in turn, are having an unfavorable impact upon that portion of our business.  The commercial and regional original equipment and aftermarket/retrofit portions of our business are currently estimated at approximately 31% of our revenues.

 

In addition, an estimated 60% of our revenues are currently derived from the corporate/VIP aircraft original equipment and aftermarket/retrofit business.  The weak global economic conditions have negatively impacted this portion of our business, as well.  The remaining 9% of our revenues are derived from the military aircraft and other markets.

 

In response to these adverse conditions, we announced and implemented a restructuring plan in December 2001 designed to reduce expenses and conserve working capital.  This plan includes permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions.  During the first quarter of fiscal 2002, we also announced we would consolidate the production of four Cabin Management manufacturing facilities into two facilities, resulting in the permanent closure of two additional facilities.  During the second quarter of fiscal 2002, we also announced we would permanently close the temporarily idled manufacturing facility.  See “—Restructuring, Asset Impairment and Other Nonrecurring Charges” below for additional information.

 

The commercial aircraft portion of our business is experiencing significant weakness in 2002 and this condition will continue into 2003, with potential recovery occurring during 2004 or 2005.  We believe the corporate/VIP aircraft portion of our business is experiencing growing weakness during the current year and this trend is likely to worsen in 2003.  However, we believe the potential exists for corporate/VIP aircraft deliveries to recover in 2004.

 

Results of Operations

 

Our results of operations for the three months and nine months ended September 30, 2002 and 2001 have been affected by restructuring, asset impairment and other nonrecurring charges relating to our 2001 and 2002 restructuring plans.  These restructuring charges, which affect the comparability of our reported results of operations between periods, are more fully described in “—Restructuring, Asset Impairment and Other Nonrecurring Charges” below.

 

26

 

Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001

 

Revenues.  Revenues decreased $23.3 million, or 22.6%, to $79.6 million for the three months ended September 30, 2002 from $102.9 million for the three months ended September 30, 2001.  By segment, revenues changed as follows:

 

		Increase (Decrease) From 2001
(In millions)		Amount			Percent
Cabin Management		$	(12.3	)	(22.9	)%
Specialty Avionics		(8.4		)	(26.6	)
Systems Integration		(3.3		)	(17.7	)
Inter-group elimination		0.7
Total		$	(23.3	)

 

Cabin Management.  Revenues decreased by $12.3 million, or 22.9% compared to the prior year.  This decrease is spread across most of our product lines and services, and is caused by the adverse impact the weak global economic conditions are having on the corporate/VIP aircraft market in 2002 versus 2001 as follows:

 

•                  a $10.0 million decrease in aircraft furniture and related products revenues;

 

•                  a $1.5 million decrease in seating product revenues;

 

•                  a $1.8 million decrease in cabin management and entertainment systems revenues; offset by

 

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

 

Specialty Avionics.  Revenues decreased by $8.4 million, or 26.6% compared to the prior year, due to decreases in commercial aircraft production affecting the following product lines:

 

•                  a $5.1 million volume decrease in interconnect products; and

 

•                  a $3.3 million decrease in cockpit audio, communications, lighting and power and control devices revenues.

 

Systems Integration.  Revenues decreased by $3.3 million, or 17.7% compared to the prior year, due to:

 

•                  a $2.3 million decrease in the commercial aircraft systems integration engineering services we provide in the aftermath of September 11^th; and

 

•                  a $1.0 million decrease resulting from reduced production and delivery of corporate/VIP aircraft auxiliary fuel tank systems.

 

27

 

Gross profit.  Gross profit decreased $7.2 million, or 21.9%, to $25.6 million for the three months ended September 30, 2002 from $32.8 million for the same period last year.  By segment, gross profit changed as follows:

 

		Increase (Decrease) From 2001
(In millions)		Amount			Percent
Cabin Management		$	(3.0	)	(20.0	)%
Specialty Avionics		(3.9		)	(33.8	)
Systems Integration		(0.6		)	(9.1	)
Inter-group elimination		0.3
Total		$	(7.2	)

 

Gross profit is reduced by restructuring charges pertaining to our Cabin Management group’s 2001 and 2002 restructuring plans totaling $0.7 million for the three months ended September 30, 2002.  Excluding these charges, gross profit decreased $6.5 million, or 19.8%, to $26.3 million for the three months ended September 30, 2002 compared to $32.8 million for the same period last year and gross profit as a percent of revenues was 33.0% for the three months ended September 30, 2002 compared to 31.8% for the same period last year.

 

Cabin Management.  Gross profit decreased by $3.0 million, or 20.0% compared to the prior year, primarily due to:

 

•                  a $2.3 million decrease in profit margins for our corporate/VIP aircraft furniture and seating product line associated with lower volume for our product; and

 

•                  a $0.7 million net decrease caused by restructuring charges related to our 2001 and 2002 restructuring plans.

 

Specialty Avionics.  Gross profit decreased by $3.9 million, or 33.8% compared to the prior year, due to:

 

•                  a $1.5 million decrease related to lower volume for our cockpit audio, communications, lighting and power and control devices products; and

 

•                  a $2.4 million decrease caused by lower volume for our interconnect products.

 

Systems Integration.  Gross profit decreased by $0.6 million, or 9.1% compared to the prior year, due to lower sales volume.

 

28

 

Selling, general and administrative expenses.  Selling, general and administrative expenses decreased $2.6 million, or 18.3%, to $11.4 million for the three months ended September 30, 2002, from $14.0 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		$	—		—	%
Specialty Avionics		(1.4		)	(39.0	)
Systems Integration		(1.0		)	(40.9	)
Corporate		(0.2		)
Total		$	(2.6	)

 

SG&A expenses includes restructuring charges pertaining to our Cabin Management group’s 2001 and 2002 restructuring plans totaling $0.8 million for the three months ended September 30, 2002.  Excluding these charges, SG&A expenses decreased $3.4 million, or 24.3%, to $10.6 million for the three months ended September 30, 2002 compared to $14.0 million for the same period last year and SG&A expenses as a percent of revenues was 13.3% for the three months ended September 30, 2002 compared to 13.6% for the same period last year.

 

Cabin Management.  SG&A expenses were consistent with the prior year, due to:

 

•                  a $0.8 million increase caused by restructuring charges relating to our 2001 and 2002 restructuring plans; offset by

 

•                  a $0.8 million decrease in expenses resulting from cost reduction measures implemented in 2001 and 2002 in response to lower sales volume resulting from the weak global economic conditions.

 

Specialty Avionics.  SG&A expenses decreased by $1.4 million, or 39.0% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of fiscal 2001.

 

Systems Integration.  SG&A expenses decreased by $1.0 million, or 40.9% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of fiscal 2001.

 

Corporate.  SG&A expenses decreased by $0.2 million compared to the prior year, due to lower labor and employee benefit costs.

 

Depreciation and amortization of intangibles.  Depreciation and amortization expense decreased $3.9 million to $4.2 million for the three months ended September 30, 2002 compared to $8.1 million for the same period last year, primarily resulting from the adoption of new accounting standards.

 

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142.  Under these new standards, goodwill is deemed to be an indefinite-lived asset and, as a result, the recording of periodic goodwill amortization charges was discontinued effective January 1, 2002.  In addition, SFAS No. 141 requires that intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $3.5 million for the three months ended September 30, 2001, which includes $0.4 million of assembled workforce amortization, now deemed part of goodwill.

 

29

 

Excluding the effect of the accounting change, depreciation and amortization decreased $0.4 million as a result of lower depreciable costs resulting from the impairment of long-lived assets recorded during the fourth quarter of fiscal 2001 and 2002, partially offset by additional depreciation resulting from capital expenditures during the period.

 

EBITDA and Operating income.  EBITDA decreased $4.6 million, or 21.1%, to $17.4 million for the three months ended September 30, 2002, from $22.0 million for the same period last year.  Operating income decreased $1.2 million to $12.7 million for the three months ended September 30, 2002, from $13.9 million for the same period last year.  EBITDA and operating income changed as follows:

 

		Increase (Decrease) From 2001
(In millions)		Amount			Percent
EBITDA:
Cabin Management		$	(3.2	)	(29.8	)%
Specialty Avionics		(2.6		)	(28.9	)
Systems Integration		0.4			8.9
Corporate		0.5			26.3
Inter-group elimination		0.3
Total EBITDA		(4.6		)
Depreciation and amortization		3.9
Other noncash and acquisition related charges		(0.5		)
Total operating income		$	(1.2	)

 

EBITDA and operating income are reduced by restructuring charges pertaining to our Cabin Management group’s 2001 and 2002 restructuring plans totaling $1.5 million for the three months ended September 30, 2002.  Excluding these charges, EBITDA decreased $3.1 million, or 14.1%, to $18.9 million for the three months ended September 30, 2002 compared to $22.0 million for the same period last year and EBITDA as a percent of revenues was 23.7% for the three months ended September 30, 2002 compared to 21.4% for the same period last year.  Excluding these charges, operating income increased $0.3 million, or 2.2%, to $14.2 million for the three months ended September 30, 2002 compared to $13.9 million for the same period last year.

 

Cabin Management.  EBITDA decreased by $3.2 million, or 29.8% compared to the prior year, primarily due to:

 

•                  a $1.5 million net decrease caused by restructuring charges related to our 2001 and 2002 restructuring plans;

 

•                  a $1.0 million decrease resulting from lower sales volume for our cabin management and entertainment systems; and

 

•                  a $0.7 million decrease resulting from lower sales volume for our corporate/VIP aircraft furniture seating.

 

Specialty Avionics.  EBITDA decreased by $2.6 million, or 28.9% compared to the prior year, as a result of lower demand for our commercial aircraft products offset by the effect of cost reduction programs implemented in 2001 and a favorable shift in product mix.

 

Systems Integration.  EBITDA increased by $0.4 million, or 8.9% compared to the prior year, due to lower sales volume partially offset by reduced operating costs and SG&A spending reductions resulting from workforce reductions.

 

30

 

Corporate.  EBITDA increased $0.5 million, or 26.3% compared to the prior year, due to principally to reduced SG&A spending.

 

 

Interest expense.  Interest expense decreased $1.0 million, or 10.3%, to $8.7 million for the three months ended September 30, 2002 compared to $9.7 million for the same period last year due almost entirely to lower average interest rates charged by our lenders during 2002.

 

Minority interest in preferred stock of subsidiary.  Minority interest increased $0.2 million to $1.5 million for the three months ended September 30, 2002 compared to $1.3 million for the same period last year.  Minority interest reflects the accrued dividends, which are compounded quarterly, and redemption value accretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

 

Provision for income taxes.  The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization for periods prior to the January 1, 2002 adoption of SFAS No. 142 and minority interest in preferred stock of subsidiary.  The difference in the effective tax rates between periods is mostly the result of the adoption of SFAS No. 142.

 

Net income (loss).  Net income increased $1.4 million to $1.0 million for the three months ended September 30, 2002 compared to a net loss of $0.4 million for the same period last year.

 

Net loss applicable to common stockholders.  Net loss applicable to common stockholders decreased $1.2 million to a net loss of $1.0 million for the three months ended September 30, 2002 compared to a net loss of $2.2 million for the same period last year.  The decrease in the net loss applicable to our common stockholders is attributable to:

 

•                  a $1.5 million increase in net income, which is net of a $0.2 million increase in the charge for minority interest in preferred stock of subsidiary; offset by

 

•                  a $0.3 million increase in noncash preferred stock dividend accretion on our 14% mandatorily redeemable preferred stock resulting from the quarterly compounding of the dividends accreted.

 

Bookings.  Bookings decreased $25.5 million, or 29.5%, to $61.0 million for the three months ended September 30, 2002 compared to $86.5 million for the same period last year.  The decrease in bookings for 2002 is due to decreases in orders for all three of our business segments.

 

Backlog at end of period.  Backlog decreased $36.9 million to $113.0 million as of September 30, 2002 compared to $149.9 million as of December 31, 2001.

 

The decrease in bookings and resulting backlog in 2002 primarily results from the continuing adverse impact on our businesses of the aftermath of the events of September 11^th and weak global economic conditions.  In addition, we believe that some of our customers have substantially reduced their order lead times which may have adversely affected bookings during the period and the resulting backlog at the end of the period.

 

As described in “—Industry Overview and Trends,” the September 11^th terrorist attack and its aftermath are having an adverse impact on the aerospace industry and, in turn, are having an unfavorable impact on the commercial airline portion of our business.  In addition, weak global economic conditions have negatively impacted other portions of our business as well.  We are not currently able to determine the continuing impact these events will have on our bookings and resulting backlog for future periods.  However, given the magnitude of these events, the adverse impact could be material.

 

31

 

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

 

Revenues.  Revenues decreased $52.8 million, or 17.3%, to $252.1 million for the nine months ended September 30, 2002 from $304.9 million for the nine months ended September 30, 2001.  By segment, revenues changed as follows:

 

		Increase (Decrease) From 2001
(In millions)		Amount			Percent
Cabin Management		$	(23.5	)	(14.8	)%
Specialty Avionics		(21.2		)	(22.3	)
Systems Integration		(9.5		)	(17.9	)
Inter-group elimination		1.4
Total		$	(52.8	)

 

Cabin Management.  Revenues decreased by $23.5 million, or 14.8% compared to the prior year.  The decrease, which is across most of our product and services categories, is caused by the adverse impact the weak global economic conditions are having on the corporate/VIP aircraft market in 2002 versus 2001 as follows:

 

•                  a $14.5 million decrease in aircraft furniture and related products revenues;

 

•                  a $8.0 million decrease in cabin management and entertainment systems revenues; and

 

•                  a $5.2 million decrease in seating products revenues; offset by

 

•                  a $4.2 million increase in other product and services revenues.

 

Specialty Avionics.  Revenues decreased by $21.2 million, or 22.3% compared to the prior year, due to decreases in commercial aircraft production affecting the following product lines:

 

•                  a $12.9 million volume decrease in interconnect products; and

 

•                  a $8.3 million decrease in cockpit audio, communications, lighting and power and control devices revenues.

 

Systems Integration.  Revenues decreased by $9.5 million, or 17.9% compared to the prior year, due to:

 

•                  a $6.4 million decrease in the commercial aircraft systems integration engineering services we provide in the aftermath of September 11^th; and

 

•                  a $3.1 million decrease resulting from reduced production and delivery of corporate/VIP aircraft auxiliary fuel tank systems.

 

32

 

Gross profit.  Gross profit decreased $27.3 million, or 27.2%, to $73.1 million for the nine months ended September 30, 2002 from $100.4 million for the same period last year.  By segment, gross profit changed as follows:

 

		Increase (Decrease) From 2001
(In millions)		Amount			Percent
Cabin Management		$	(16.9	)	(36.1	)%
Specialty Avionics		(8.7		)	(25.5	)
Systems Integration		(2.1		)	(10.7	)
Inter-group elimination		0.4
Total		$	(27.3	)

 

Gross profit is reduced by restructuring charges pertaining to our Cabin Management group’s 2001 and 2002 restructuring plans totaling $6.6 million for the nine months ended September 30, 2002 and $3.9 million for the same period last year.  Excluding these charges, gross profit decreased $24.6 million, or 23.6%, to $79.7 million for the nine months ended September 30, 2002 compared to $104.3 million for the same period last year and gross profit as a percent of revenues was 31.6% for the nine months ended September 30, 2002 compared to 34.2% for the same period last year.

 

Cabin Management.  Gross profit decreased by $16.9 million, or 36.1% compared to the prior year, primarily due to:

 

•                  a $10.0 million decrease in profit margins due to lower volume for our corporate/VIP aircraft furniture and seating products,

 

•                  a $4.2 million decrease in gross profit related to lower volume for our cabin management and entertainment systems; and

 

•                  a $2.7 million net decrease caused by restructuring charges related to our 2001 and 2002 restructuring plans.

 

Specialty Avionics.  Gross profit decreased by $8.7 million, or 25.5% compared to the prior year, due to:

 

•                  a $4.5 million decrease related to lower volume for our cockpit audio, communications, lighting and power and control devices products; and

 

•                  a $4.2 million decrease caused by lower volume for our interconnect products.

 

Systems Integration.  Gross profit decreased by $2.1 million, or 10.7% compared to the prior year, due to lower sales volume.

 

33

 

Selling, general and administrative expenses.  Selling, general and administrative expenses decreased $0.4 million, or 0.8%, to $41.7 million for the nine months ended September 30, 2002, from $42.1 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		$	4.8		28.2	%
Specialty Avionics		(2.8		)	(25.5	)
Systems Integration		(2.1		)	(26.8	)
Corporate		(0.3		)
Total		$	(0.4	)

 

SG&A expenses includes restructuring charges pertaining to our Cabin Management group’s 2001 and 2002 restructuring plans totaling $6.6 million for the nine months ended September 30, 2002.  Excluding these charges, SG&A expenses decreased $7.0 million, or 16.6%, to $35.1 million for the nine months ended September 30, 2002 compared to $42.1 million for the same period last year and SG&A expenses as a percent of revenues were 13.9% for the nine months ended September 30, 2002 compared to 13.8% for the same period last year.

 

Cabin Management.  SG&A expenses increased by $4.8 million, or 28.2% compared to the prior year, due to:

 

•                  a $6.6 million increase caused by restructuring charges relating to our 2001 and 2002 restructuring plans; offset by

 

•                  a $1.8 million decrease in expenses as a result of cost reduction measures implemented in 2001 and 2002 in response to lower sales volume resulting from the weak global economic conditions.

 

Specialty Avionics.  SG&A expenses decreased by $2.8 million, or 25.5% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of fiscal 2001.

 

Systems Integration.  SG&A expenses decreased by $2.1 million, or 26.8% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of fiscal 2001.

 

Corporate.  SG&A expenses decreased by $0.3 million compared to the prior year, primarily due to workforce and travel expense reductions offset by increases in insurance and employee benefit costs.

 

Depreciation and amortization of intangibles.  Depreciation and amortization expense decreased $11.0 million to $12.9 million for the nine months ended September 30, 2002 compared to $23.9 million for the same period last year, primarily resulting from the adoption of new accounting standards.

 

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142.  Under these new standards, goodwill is deemed to be an indefinite-lived asset and, as a result, the recording of periodic goodwill amortization charges was discontinued effective January 1, 2002.  In addition, SFAS No. 141 requires that intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $10.7 million for the nine months ended September 30, 2001, which includes $1.2 million of assembled workforce amortization, now deemed part of goodwill.

 

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Excluding the effect of the accounting change, depreciation and amortization decreased $0.3 million as a result of lower depreciable costs resulting from the impairment of long-lived assets recorded during the fourth quarter of fiscal 2001 and 2002, partially offset by additional depreciation resulting from capital expenditures during the period.

 

EBITDA and Operating income.  EBITDA decreased $26.7 million, or 39.4%, to $41.1 million for the nine months ended September 30, 2002, from $67.8 million for the same period last year.  Operating income decreased $16.4 million to $27.1 million for the nine months ended September 30, 2002, from $43.5 million for the same period last year.  EBITDA and operating income changed as follows:

 

		Increase (Decrease) From 2001
(In millions)		Amount			Percent
EBITDA:
Cabin Management		$	(21.5	)	(63.6	)%
Specialty Avionics		(6.1		)	(23.4	)
Systems Integration		(0.1		)	(0.7	)
Corporate		0.6			11.6
Inter-group elimination		0.4
Total EBITDA		(26.7		)
Depreciation and amortization		11.0
Other noncash and acquisition related charges		(0.7		)
Total operating income		$	(16.4	)

 

EBITDA and operating income are reduced by restructuring charges pertaining to our Cabin Management group’s 2001 and 2002 restructuring plans totaling $13.2 million for the nine months ended September 30, 2002 and $3.9 million for the same period last year.  Excluding these charges, EBITDA decreased $17.4 million, or 24.3%, to $54.3 million for the nine months ended September 30, 2002 compared to $71.7 million for the same period last year and EBITDA as a percent of revenues was 21.5% for the nine months ended September 30, 2002 compared to 23.5% for the same period last year.  Excluding these charges, operating income decreased $7.1 million, or 14.9%, to $40.3 million for the nine months ended September 30, 2002 compared to $47.4 million for the same period last year.

 

Cabin Management.  EBITDA decreased by $21.5 million, or 63.6% compared to the prior year, primarily due to:

 

•                  a $9.4 million decrease related principally to lower revenues in our corporate/VIP aircraft furniture and seating operations;

 

•                  a $9.3 million net decrease caused by restructuring charges related to our 2001 and 2002 restructuring plans; and

 

•                  a $2.8 million decrease resulting from lower sales volume for our cabin management and entertainment systems.

 

Specialty Avionics.  EBITDA decreased by $6.1 million, or 23.4% compared to the prior year, as a result of lower demand for our commercial aircraft products offset by the effect of cost reduction programs implemented in 2001 and 2002 and a favorable shift in product mix.

 

Systems Integration.  EBITDA decreased by $0.1 million, or 0.7% compared to the prior year, due to lower sales volume partially offset by reduced SG&A spending resulting from workforce reductions.

 

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Corporate.  EBITDA increased $0.6 million, or 11.6% compared to the prior year, due to principally to reduced SG&A spending.

 

Interest expense.  Interest expense decreased $5.2 million, or 17.2%, to $24.8 million for the nine months ended September 30, 2002 compared to $30.0 million for the same period last year due almost entirely to lower average interest rates charged by our lenders during 2002.

 

Minority interest in preferred stock of subsidiary.  Minority interest increased $0.6 million to $4.3 million for the nine months ended September 30, 2002 compared to $3.7 million for the same period last year.  Minority interest reflects the accrued dividends, which are compounded quarterly, and redemption value accretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

 

Provision for income taxes.  The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization for periods prior to the January 1, 2002 adoption of SFAS No. 142 and minority interest in preferred stock of subsidiary.  The difference in the effective tax rates between periods is mostly the result of the adoption of SFAS No. 142.

 

Net income (loss).  Net income decreased $5.0 million to a net loss of $3.3 million for the nine months ended September 30, 2002 compared to net income of $1.7 million for the same period last year.

 

Net loss applicable to common stockholders.  Net loss applicable to common stockholders increased $5.8 million to a net loss of $9.2 million for the nine months ended September 30, 2002 compared to a net loss of $3.4 million for the same period last year.  The increase in the net loss applicable to our common stockholders is attributable to:

 

•                  a $5.0 million net loss increase, which is net of a $0.6 million increase in the charge for minority interest in preferred stock of subsidiary; and

 

•                  a $0.8 million increase in noncash preferred stock dividend accretion on our 14% mandatorily redeemable preferred stock resulting from the quarterly compounding of the dividends accreted.

 

Bookings.  Bookings decreased $91.7 million, or 30.0%, to $215.2 million for the nine months ended September 30, 2002 compared to $306.9 million for the same period last year.  The decrease in bookings for 2002 is due to decreases in orders for all three of our business segments.

 

The decrease in bookings in 2002 primarily results from the continuing adverse impact on our businesses of the aftermath of the events of September 11^th and weak global economic conditions.  In addition, we believe that some of our customers have substantially reduced their order lead times which may have adversely affected bookings during the period.

 

As described in “—Industry Overview and Trends,” the September 11^th terrorist attack and its aftermath are having an adverse impact on the aerospace industry and, in turn, are having an unfavorable impact on the commercial airline portion of our business.  In addition, weak global economic conditions have negatively impacted other portions of our business as well.  We are not currently able to determine the continuing impact these events will have on our bookings for future periods.  However, given the magnitude of these events, the adverse impact could be material.

 

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Restructuring, Asset Impairment and Other Nonrecurring Charges

 

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

 

During the three months and nine months ended September 30, 2002 and 2001, we recorded restructuring, asset impairment and other nonrecurring pre-tax charges related to two restructuring plans.  These charges, and the effect these charges had on our reported results of operations for the periods, are summarized below.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
(In millions)		2002			2001			2002			2001
Restructuring plan:
2002 Seat Manufacturing Facilities Restructuring		$	—		$	—		$	6.3		$	—
2001 Restructuring and Asset Impairment Charges		1.5			—			6.9			3.9
Total pre-tax charges		$	1.5		$	—		$	13.2		$	3.9
Charged to operations:
Cost of sales		$	0.7		$	—		$	6.6		$	3.9
Selling, general and administrative expenses		0.8			—			6.6			—
Total pre-tax charges		$	1.5		$	—		$	13.2		$	3.9
Components of charges:
Cash charges		$	—		$	—		$	5.8		$	3.9
Noncash charges		1.5			—			7.4			—
Total pre-tax charges		$	1.5		$	—		$	13.2		$	3.9
As reported:
Gross profit		$	25.6		$	32.8		$	73.1		$	100.4
Selling, general and administrative expenses		11.4			14.0			41.7			42.1
EBITDA		17.4			22.0			41.1			67.8
Operating income		12.7			13.9			27.1			43.5
Pre-tax income (loss)		2.3			3.0			(2.6		)	9.7
As adjusted:
Gross profit		$	26.3		$	32.8		$	79.7		$	104.3
Selling, general and administrative expenses		10.6			14.0			35.1			42.1
EBITDA		18.9			22.0			54.3			71.7
Operating income		14.2			13.9			40.3			47.4
Pre-tax income		3.8			3.0			10.6			13.6

 

2002 Seat Manufacturing Facilities Restructuring

 

In 2002, we announced we would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities.  In connection with this restructuring plan, we recorded nonrecurring pre-tax charges to operations totaling $6.3 million during the nine months ended September 30, 2002 for restructuring, asset impairment and other related restructuring expenses.

 

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

 

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The restructuring plan was substantially completed during the second quarter of fiscal 2002.  A $0.1 million restructuring reserve remains at September 30, 2002 for lease termination and other related costs.  The manufacturing facilities were closed during June 2002; however, future cash payments will extend beyond this date due to future lease payments on the vacated facilities and the incurrence of other exit costs.  Future cash payments will be funded from existing cash balances and internally generated cash from operations.

 

2001 Restructuring and Asset Impairment Charges

 

During the second quarter of fiscal 2001, we adopted a restructuring plan to realign aircraft furniture production programs among our manufacturing facilities.  In addition, and in response to the adverse impact on the aerospace industry resulting from the September 11^th terrorist attack and its aftermath, as well as the weakening of global economic conditions, we announced and implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions.  These plans primarily affected our Cabin Management and Specialty Avionics Groups.

 

In connection with these restructuring plans, we recorded nonrecurring pre-tax charges to operations of $28.7 million in fiscal 2001 ($3.9 million during the three months and nine months ended September 30, 2001), of which $22.1 million were noncash charges, for the impairment of long-lived assets and restructuring costs related to write-downs and write-offs of inventoried costs, costs associated with the realignment of aircraft furniture production programs among facilities, severance, lease termination and other related costs.  As of December 31, 2001, $27.1 million had been incurred and the remaining $1.6 million was reflected as an accrued liability.

 

Due to the ongoing weakness of the corporate/VIP aircraft market, we decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility.  In connection with this decision, we recorded additional nonrecurring pre-tax charges to operations totaling $6.9 million during the nine months ended September 30, 2002 ($1.5 million during the third fiscal quarter of 2002) for restructuring and asset impairment charges and other related expenses.

 

At December 31, 2001, the remaining $1.6 million restructuring reserve was for severance, lease termination and other related costs.  During the nine months ended September 30, 2002, we paid $1.4 million of these costs resulting in a $0.2 million restructuring reserve remaining at September 30, 2002.  We expect to incur the remaining severance costs during the fourth quarter of fiscal 2002 when the remaining personnel are terminated.  The restructuring plan related to leased facilities was completed during the second quarter of fiscal 2002; however, future cash payments will extend beyond this date due to future lease payments on the vacated facility and the incurrence of other exit costs.  Future cash payments will be funded from existing cash balances and internally generated cash from operations.

 

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Liquidity and Capital Resources

 

We have required cash primarily to fund acquisitions and capital expenditures and for working capital.  Historically, our principal sources of liquidity have been cash flow from operations, third party borrowings and the issuance of common and preferred stock.

 

Net cash provided by operating activities was $22.1 million for the nine months ended September 30, 2002 and consisted of $23.4 million of cash provided by operations after adding back depreciation, amortization, the noncash portion of our restructuring and asset impairment charges and other noncash items, $1.4 million used for working capital, and $0.1 million provided by an increase in other liabilities.  The following factors contributed to the $1.4 million working capital increase:

 

•                  a $19.4 million net decrease in accounts payable and accrued expenses; and

 

•                  a $1.1 million increase in prepaid expenses and other current assets; offset by

 

•                  a $17.3 million accounts receivable decrease resulting from decreased revenues as well as timing differences relating to progress and final billings on long-term contracts; and further offset by

 

•                  a $1.3 million inventory decrease; and

 

•                  a $0.5 million increase in income taxes payable.

 

Net cash used for investing activities was $9.7 million for the nine months ended September 30, 2002 and consisted of:

 

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

 

•                  $3.8 million for capital expenditures.

 

We anticipate spending approximately $6.0 to $7.0 million for capital expenditures in 2002, which includes approximately $2.0 million for improvements to the seat manufacturing facilities that will house the combined operations of the facilities being closed in 2002.

 

Net cash provided by financing activities was $2.5 million for the nine months ended September 30, 2002.  Cash was provided by $9.0 million of net revolving line of credit borrowings under our senior credit facility, $1.1 million of additional long-term borrowings and $5.0 million from the sale of common stock.  Cash of $12.6 million was used for principal payments on our term debt, capitalized lease obligations and other debt, financing costs associated with amending our senior credit facility and the repurchase of stock and options from former management employees.

 

At September 30, 2002, senior credit facility borrowings totaling $288.5 million are at variable interest rates based on defined margins over the current prime or LIBOR rates.  At September 30, 2002, we also had $94.4 million of working capital and had $29.0 million of borrowings available under our revolving line of credit.

 

We are being affected by economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.  As described in “—Industry Overview and Trends,” the September 11^th terrorist attack and its aftermath are having a severe adverse impact on the aerospace industry and, in turn, are having an unfavorable impact on the commercial aircraft portion of our business.  In addition, the weak global economic conditions are adversely impacting other portions of our business as well.  As described in “—Restructuring, Asset Impairment and Other Nonrecurring Charges,” we are taking measures to reduce costs and conserve working capital.

 

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Although we cannot be certain, we believe our operating cash flows, together with borrowings under our bank credit facility, will be sufficient to meet our future short- and long-term operating expenses, working capital requirements, capital expenditures and debt service obligations for the next twelve months.  However, our ability to pay principal or interest, to refinance our debt and to satisfy our other debt obligations will depend on our future operating performance.

 

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

 

Recent Accounting Pronouncements

 

Accounting Pronouncements Adopted January 1, 2002

 

As more fully described in Note 2 accompanying our financial statements included in this report, we adopted the provisions of the following accounting pronouncements effective January 1, 2002:

 

•                  SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142;

 

•                  SFAS No. 143, “Accounting for Asset Retirement Obligations;” and

 

•                  SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

Recently Issued Accounting Pronouncements

 

SFAS No. 145

 

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations–Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002.  We believe this new standard will 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 Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”

 

SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be initially measured at fair value and recognized when the liability is incurred.  In periods subsequent to initial measurement, changes to the liability are measured using the credit-adjusted risk-free rate that was used in the initial measurement of the liability recorded.  The cumulative effect of a change resulting from revisions to either the timing or the amount of estimated cash flows is recognized as an adjustment to the liability in the period of the change and charged to the same line items in the statement of operations used

 

40

 

when the related costs were initially recognized.  Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company’s commitment to an exit plan.

 

The provisions of SFAS No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  We believe SFAS No. 146 may affect the timing of recognizing future restructuring costs, as well as the amounts recognized, depending on the nature of the exit or disposal activity and the timing of the related estimated cash flows.

 

Common European Currency

 

We have evaluated, and will continue to evaluate, the effects on our operations of the European Economic Monetary Union conversion to the Euro.  We do not expect the introduction and use of the Euro, including our costs to adapt our information systems for this conversion, to be material to our business, financial position, results of operations or cash flows.

 

Special Note Regarding Forward-Looking Statements

 

All statements other than statements of historical facts included in this report are considered forward-looking statements within the meaning of the Private Securities 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.  We are vulnerable to a variety of factors that affect many businesses, such as:

 

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

 

•                  terrorist attacks and military conflicts that affect demand for aircraft and air travel, which in turn affect demand for our products and services;

 

•                  our reliance on key customers and the adverse effect a significant decline in business from any one of them would have on our business;

 

•                  changes in prevailing interest rates and the availability of financing to fund our plans for continued growth;

 

•                  competition from larger companies;

 

•                  Federal Aviation Administration prescribed standards and licensing requirements, which apply to many of the products and services we provide;

 

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

 

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

 

•                  the ability to attract and retain qualified personnel;

 

•                  labor disturbances; and

 

•                  changes in operating strategy, or our acquisition and capital expenditure plans.

 

Changes in such factors could cause our actual results to differ materially from those contemplated in such forward-looking statements.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.  You should not rely on our forward-looking statements as if they were certainties.

 

41

 

ITEM 3.                                         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to various market risks, including interest rates and changes in foreign currency exchange rates.  Market risk is the potential loss arising from adverse changes in prevailing market rates and prices.  From time to time, we use derivative financial instruments to manage and reduce risks associated with these factors.  We do not enter into derivatives or other financial instruments for trading or speculative purposes.

 

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

 

Market risk related to our variable-rate debt is estimated as the potential decrease in pre-tax earnings resulting from an increase in interest rates.  The interest rates applicable to variable-rate debt are, at our option, based on defined margins over the current prime or LIBOR rates.  At September 30, 2002, the current prime rate was 4.75% and the current LIBOR rate was 1.95%.  Based on $288.5 million of variable-rate debt outstanding as of September 30, 2002, a hypothetical one percent rise in interest rates, to 5.75% for prime rate borrowings and 2.95% for LIBOR borrowings, would reduce our pre-tax earnings by $2.9 million annually.

 

To limit our exposure related to rising interest rates, we have entered into an interest rate swap contract to effectively convert $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 amount of future cash flows associated with interest payments on this portion of our variable-rate debt.  Market risk related to this interest rate swap contract is estimated as the potential higher interest expense we will incur if the variable interest rate decreases below the 4.2% fixed rate.  Based on the $4.5 million of variable-rate debt converted to fixed-rate debt outstanding as of September 30, 2002, a hypothetical one percent decrease in the variable interest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1 million annually.

 

The estimated fair value of our $100.0 million fixed-rate long-term debt decreased $12.5 million, or 13.4%, to approximately $81.0 million at September 30, 2002 from $93.5 million at December 31, 2001.  Subsequent to September 30, 2002, the estimated fair value decreased an additional $41.0 million to approximately $40.0 million as of October 31, 2002.  Market risk related to our fixed-rate debt is deemed to be the potential increase in fair value resulting from a decrease in interest rates.  For example, a hypothetical ten percent decrease in the interest rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt by approximately $7.0 million.

 

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

 

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ITEM 4.                                         CONTROLS AND PROCEDURES

 

        Evaluation of disclosure controls and procedures.  Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures within 90 days of the filing of this report.  These controls and procedures are designed to ensure that all of the information required to be disclosed by us in our periodic reports filed with the Securities and Exchange Commission (the “Commission”) is recorded, processed, summarized and reported within the time periods specified by the Commission and that the information is communicated to the Chief Executive Officer and Chief Financial Officer on a timely basis.  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that 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 other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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PART II – OTHER INFORMATION

 

ITEM 1.                             LEGAL PROCEEDINGS

 

As part of its investigation of the crash off the Canadian coast on September 2, 1998 of Swissair Flight 111, the Canadian Transportation Safety Board (“TSB”) notified us that they recovered burned wire that was attached to the in-flight entertainment system installed on some of Swissair’s aircraft by one of our subsidiaries.  We are fully cooperating with the CTSB and have been advised that the CTSB intends to issue a final report on its investigation in February, 2003.  We believe that no evidence exists that would indicate the equipment installed by our subsidiary malfunctioned or failed during the flight.  Families of the 229 persons who died aboard the flight have filed actions in federal and state courts against us, and many other parties unaffiliated with us, including Swissair and Boeing.  The actions claim negligence, strict liability and breach of warranty relating to the installation and testing of the in-flight entertainment system.  The actions seek compensatory and punitive damages and costs in an unstated amount.  All of the actions have been transferred to the United States District Court for the Eastern District of Pennsylvania and assigned under MDL Case No. 1269 for coordinated or consolidated pretrial proceedings.  We intend to defend the claims vigorously.

 

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

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

During the nine months ended September 30, 2002, DeCrane Holdings sold unregistered shares of its common stock ($.01 par value) in two separate cash transactions:

•     Sold 3,704 shares to a director for $0.1 million, or $27.00 per share, on June 18, 2002; and

•     Sold 217,392 shares to DLJ Merchant Banking Partners II, L.P. and affiliated entities for $5.0 million, or $23.00 per share, on September 27, 2002.

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

 

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ITEM 6.                             EXHIBITS AND REPORTS ON FORM 8-K

 

a.		Exhibits
		3.26.1.1		Articles of Amendment amending the Restated Articles of Incorporation of ERDA, Inc. (changing its name to DeCrane Aircraft Seating Company, Inc.) **
		3.30.1		Certificate of Formation of DeCrane Cabin Interiors, LLC **
		3.30.2		Limited Liability Company Agreement of DeCrane Cabin Interiors, LLC **
		21.1		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 *

		*		Filed herewith
		**		Previously filed
b.		Reports on Form 8-K
		None

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	DECRANE HOLDINGS CO. (Registrant)
November 12, 2002	By:	/s/  Richard J. Kaplan
	Name:	Richard J. Kaplan
	Title:	Senior Vice President, Chief Financial Officer, Secretary and Treasurer

 

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CERTIFICATIONS

 

Chief Executive Officer Certification

 

I, R. Jack DeCrane, certify that:

 

1.                           I have reviewed this quarterly report on Form 10-Q of DeCrane Holdings Co.;

 

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

 

3.                           Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                           The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                          designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

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

 

c)                          presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                           The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)                          all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

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

 

6.                           The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 12, 2002
	/s/  R. Jack DeCrane
	R. Jack DeCrane
	Chief Executive Officer

 

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Chief Financial Officer Certification

 

I, Richard J. Kaplan, certify that:

 

1.                           I have reviewed this quarterly report on Form 10-Q of DeCrane Holdings Co.;

 

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

 

3.                           Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                           The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                          designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

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

 

c)                          presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                           The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)                          all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

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

 

6.                           The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 12, 2002
	/s/  Richard J. Kaplan
	Richard J. Kaplan
	Senior Vice President, Chief Financial Officer, Secretary and Treasurer

 

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