DECRANE HOLDINGS CO - 10-Q Quarterly Report

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 March 31, 2003

Commission File Number 333-70363

DECRANE HOLDINGS CO.

(Exact name of registrant as specified in its charter)

Delaware		13-4019703
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

c/o Credit Suisse First Boston / DLJ Merchant Banking Partners II, L.P. Eleven Madison Avenue, New York, NY 10010 (Address, including zip code, of principal executive offices)

(212) 325-2000
(Registrant’s telephone number, including area code)

(Not Applicable)

(Former address and telephone number of principal executive offices, if changed since last report)

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 May 15, 2003 was 4,116,627 shares.

Table of Contents

Part I - Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002

	Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002

	Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2003

	Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002

	Condensed Notes to Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Recent Developments

	Industry Overview and Trends

	Results of Operations

	Restructuring, Asset Impairment and Other Related Charges

	Liquidity and Capital Resources

	Disclosure of Contractual Obligations and Commitments

	Disclosure of Off-Balance Sheet Commitments and Indemnities

	Recent Accounting Pronouncements

	Special Note Regarding Forward Looking Statements and Risk Factors

Item 3.	Quantitative and Qualitative Disclosure About Market Risk

Item 4.	Controls and Procedures

Part II - Other Information

Item 1.	Legal Proceedings

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)	March 31, 2003			December 31, 2002
	(Unaudited)

Assets
Current assets:
Cash and cash equivalents	$	14,637		$	12,421
Accounts receivable, net	26,568			26,354
Inventories	70,736			59,300
Deferred income taxes	17,412			16,430
Prepaid expenses and other current assets	2,399			1,724
Assets of discontinued operations	152,003			160,741
Total current assets	283,755			276,970

Property and equipment, net	35,460			36,139
Other assets, principally intangibles, net	236,824			235,858
Total assets	$	556,039		$	548,967

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Current portion of long-term debt	$	17,492		$	16,317
Accounts payable	15,571			13,055
Accrued liabilities	23,016			31,494
Income taxes payable	46			—
Liabilities of discontinued operations	20,909			19,928
Total current liabilities	77,034			80,794

Long-term debt, less current portion	386,520			364,700
Deferred income taxes	26,414			27,077
Other long-term liabilities	6,239			7,364

Commitments and contingencies (Note 10)

Mandatorily redeemable preferred stock:
Minority interest in 16% preferred stock of subsidiary	35,678			34,081
Mandatorily redeemable 14% preferred stock	64,400			62,222

Stockholders’ equity (deficit):
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized; none issued and outstanding as of March 31, 2003 and December 31, 2002	—			—
Common stock, $.01 par value, 10,000,000 shares authorized; 4,116,627 shares issued and outstanding as of March 31, 2003 and December 31, 2002	41			41
Additional paid-in capital	69,947			72,125
Notes receivable for shares sold	(2,628		)	(2,591		)
Accumulated deficit	(107,242		)	(96,485		)
Accumulated other comprehensive loss	(364		)	(361		)
Total stockholders’ equity (deficit)	(40,246		)	(27,271		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity	$	556,039		$	548,967

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

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Statements of Operations

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Revenues	$	41,900		$	60,819
Cost of sales	30,903			44,381

Gross profit	10,997			16,438

Operating expenses:
Selling, general and administrative expenses	7,198			11,396
Amortization of intangible assets	912			843
Total operating expenses	8,110			12,239

Income from operations	2,887			4,199

Other expenses:
Interest expense	7,675			7,759
Minority interest in preferred stock of subsidiary	1,597			1,382
Other expenses, net	339			113

Loss from continuing operation before provision for income taxes	(6,724		)	(5,055		)
Provision for income tax benefit	(1,697		)	(1,553		)

Loss from continuing operations	(5,027		)	(3,502		)

Discontinued operations and change in accounting principle:
Loss from discontinued operations, net of tax	(5,730		)	(36,804		)
Cumulative effect of change in accounting principle	—			(17,828		)

Net loss	(10,757		)	(58,134		)

Noncash preferred stock dividend accretion	(2,178		)	(1,898		)

Net loss applicable to common stockholders	$	(12,935	)	$	(60,032	)

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

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Statement of Stockholders’ Equity (Deficit)

	Common Stock			Additional Paid-in			Notes Receivable For Shares			Accumulated			Accumulated Other Comprehensive
(In thousands, except share data)	Shares	Amount		Capital			Sold			Deficit			Loss			Total

Balance, December 31, 2002	4,116,627	$	41	$	72,125		$	(2,591	)	$	(96,485	)	$	(361	)	$	(27,271	)

Comprehensive income (loss):
Net loss	—	—		—			—			(10,757		)	—			(10,757		)
Unrealized loss on interest rate swap contract	—	—		—			—			—			(3		)	(3		)
																(10,760		)

Noncash dividend accretion on preferred stock	—	—		(2,178		)	—			—			—			(2,178		)

Notes receivable interest accrued	—	—		—			(37		)	—			—			(37		)

Balance, March 31, 2003 (Unaudited)	4,116,627	$	41	$	69,947		$	(2,628	)	$	(107,242	)	$	(364	)	$	(40,246	)

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

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Statements of Cash Flows

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(10,757	)	$	(58,134	)
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in preferred stock of subsidiary	1,597			1,382
Loss from discontinued operations	5,730			36,804
Cumulative effect of change in accounting principle	—			17,828
Depreciation and amortization	3,211			3,356
Noncash portion of restructuring, asset impairment and other related charges	—			3,145
Deferred income taxes	(852		)	186
Other, net	404			146
Changes in assets and liabilities:
Accounts receivable	(233		)	2,758
Inventories	(11,434		)	(2,751		)
Prepaid expenses and other assets	(3,248		)	(1,128		)
Accounts payable	2,521			646
Accrued liabilities	(7,877		)	(4,275		)
Income taxes payable	46			174
Other long-term liabilities	(1,125		)	222
Net cash provided by (used for) operating activities	(22,017		)	359

Cash flows from investing activities:
Cash paid for acquisition contingent consideration	(600		)	(707		)
Capital expenditures	(1,098		)	(419		)
Net cash used for investing activities	(1,698		)	(1,126		)

Cash flows from financing activities:
Net borrowings under senior credit facility	27,150			—
Principal payments on term debt, capitalized leases and other debt	(4,210		)	(396		)
Deferred financing costs	—			(1,629		)
Other, net	—			(71		)
Net cash provided by (used for) financing activities	22,940			(2,096		)

Net cash provided by discontinued operations	2,991			4,597

Net increase in cash and cash equivalents	2,216			1,734
Cash and cash equivalents at beginning of period	12,421			9,478
Cash and cash equivalents at end of period	$	14,637		$	11,212

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

DECRANE HOLDINGS CO. AND SUBSIDIARY

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

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, 2002 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 2002 Form 10-K.

Reclassifications have been made to prior periods’ financial statements to conform to the 2003 presentation, principally to reflect the pending disposition of the Specialty Avionics Group as a discontinued operation (Note 2).

Accounting Pronouncements Adopted January 1, 2003

Effective January 1, 2003 the Company adopted the following accounting pronouncements.

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. Adoption of this new standard did not have an impact on the Company’s consolidated financial position, results of operations or cash flow.

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. Since the Company has not initiated any disposal activities within the scope of SFAS No. 146 during 2003 therefore adoption of this new standard did not have an impact on the Company’s consolidated financial position, results of operations or cash flow. However, 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.

SFAS No. 148 – Accounting for Stock-Based Compensation—Transition and Disclosure

SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation,” to require disclosure in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

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

Since the fair market value of all options on the date of grant was equal to the exercise price, the Company did not recognize any compensation expense. Had compensation expense for the plan been determined based on the fair value at the grant dates during the first quarters of 2003 and 2002 under the plan consistent with the method of SFAS No. 123, the pro forma net loss and loss per share would have been as follows:

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Net loss:
As reported	$	(10,757	)	$	(58,134	)
Pro forma	(10,851		)	(58,228		)

For the purposes of the pro forma disclosure, the estimated fair value of the options is amortized over the options’ vesting period. The effect of applying SFAS No. 123 may not be representative of the pro forma effect in future years since additional options may be granted during those future years.

FASB Interpretation No. 45 – Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others

FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN No. 45 are applicable to the Company on a prospective basis to guarantees issued or modified after December 31, 2002. However, the disclosure requirements in FIN No. 45 are effective for the Company’s financial statements for periods ending after December 15, 2002. The Company is not a party to any agreement in which it is a guarantor of indebtedness of others therefore the adoption of interpretation did not have an impact on the Company’s financial position, results of operations or cash flows. The disclosure requirements of this interpretation were adopted by the Company as of December 31, 2002.

Recently Issued Accounting Pronouncement

SFAS No. 150 – Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

Issued in May 2003, SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires classification of financial instruments within its scope as a liability, including financial instruments issued in the form of shares that are mandatorily redeemable, because those financial instruments are deemed to be, in essence, obligations of the issuer. The Company is currently evaluating the impact this new standard will have on its financial position, results of operations and cash flows. However, the Company believes it may be required to reclassify its mandatorily redeemable preferred stock as a liability commencing July 1, 2003 and reflect subsequent changes in the redemption obligation as a charge against pre-tax income.

Note 2. Pending Disposition of Specialty Avionics Group

As described in the Company’s Form 10-K for the year ended December 31, 2002, during the fourth quarter of fiscal 2002 the Company assessed its long-term business strategies in light of current aerospace industry conditions. The Company believes that as the aerospace industry recovers, the demand for its Cabin Management and Systems Integration Groups’ products and services for corporate, VIP and head-of-state aircraft will return to historical levels and, accordingly, the Company decided to focus its resources in these market segments. To accomplish this objective, the Company embarked on a plan to sell its Specialty Avionics Group, which is highly dependent on the commercial airline industry.

The Company entered into a definitive agreement to sell its Specialty Avionics Group for $140,000,000 in cash on March 14, 2003. Based upon the fair value of the Group implied in the definitive agreement, net of an estimated potential sale price adjustment and transaction costs and expenses, the Company determined that the carrying value of the Group’s net assets was not fully recoverable. As a result, the Company recorded a goodwill impairment charge of $7,500,000 during the three months ended March 31, 2003 to reduce the carrying value to estimated net realizable value. The resulting carrying value is an estimate and a loss on the sale may be realized upon final determination of the net proceeds from the sale (net of a potential post-closing sale price adjustment related to the amount of working capital at closing, transaction expenses and income taxes).

As a result of the pending sale, the Specialty Avionics Group is presented as a discontinued operation in the accompanying consolidated financial statements. The financial statements have been reclassified to segregate the Group’s assets and liabilities, results of operations and cash flows for all periods presented in this report. The following tables summarize the reclassifications.

(In thousands)	March 31, 2003		December 31, 2002
	(Unaudited)
Assets:
Current assets	$	41,523	$	41,614
Property and equipment, net	15,153		15,744
Other assets, principally intangibles, net	95,327		103,383
Total assets	152,003		160,741

Liabilities:
Current liabilities		8,728		8,288
Long-term liabilities	12,181		11,640
Total liabilities	20,909		19,928

Net assets of the Specialty Avionics Group	$	131,094	$	140,813

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Results of Operations:
Revenues	$	23,470		$	25,344

Operating expenses:
Costs and expenses	20,559			20,962
Impairment of goodwill	7,500			—
Total operating expenses	28,059			20,962

Pre-tax income (loss)	(4,589		)	4,382
Provision for income taxes	1,141			1,864
Income (loss) before change in accounting principle	(5,730		)	2,518
Cumulative effect of change in accounting principle	—			(39,322		)
Net loss from discontinued operations	$	(5,730	)	$	(36,804	)

Cash Flows Provided By (Used For):
Operating activities	$	3,788		$	5,223
Investing activities	(269		)	(204		)
Financing activities	(587		)	(104		)
Net (increase) decrease in cash and cash equivalents	57			(315		)
Effect of foreign currency translation on cash	2			(3		)
Net cash provided by discontinued operations	$	2,991		$	4,597

Note 3. Restructuring, Asset Impairment and Other Related Charges

During the year ended December 31, 2002, the Company recorded restructuring, asset impairment and other related charges as follows:

	Charges Recorded During the Year Ended December 31, 2002
(In thousands)	1^stQuarter		2^nd, 3^rd & 4th Quarters		Total
	(Unaudited)
Nature of charges:
2001 Asset Realignment Restructuring	$	—	$	6,901	$	6,901
2002 Seat Manufacturing Facilities Restructuring	4,043		2,251		6,294
Other asset impairment related charges	—		12,048		12,048
Total pre-tax charges	$	4,043	$	21,200	$	25,243

Charged to operations:
Cost of sales	$	1,214	$	9,462	$	10,676
Selling, general and administrative expenses	2,829		3,750		6,579
Discontinued operations	—		7,988		7,988
Total pre-tax charges	$	4,043	$	21,200	$	25,243

Components of charges:
Continuing operations:
Noncash charges	$	3,145	$	8,311	$	11,456
Cash charges	898		4,901		5,799
Total continuing operations pre-tax charges	4,043		13,212		17,255
Discontinued operations noncash charges	—		7,988		7,988
Total pre-tax charges	$	4,043	$	21,200	$	25,243

2001 Asset Realignment Restructuring

During the second quarter of fiscal 2001, the Company’s Cabin Management Group adopted a restructuring plan to realign production programs between its manufacturing facilities. 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. Due to the ongoing weakness of the corporate, VIP and head-of-state aircraft market, the Company decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility. The restructuring, asset impairment and other related charges recorded during fiscal 2002 were comprised of the following:

• Impairment of Long-Lived Assets. The decision to permanently close the additional manufacturing facility resulted in an additional impairment of property and equipment and, accordingly, these assets were written down to their estimated net realizable value in 2002. Net realizable values are based on estimated current market values and the actual losses could exceed these estimates.

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

• Other Asset Impairment Related Charges. Other expenses pertain to provisions for estimated losses on uncompleted long-term contracts aggregating $2,577,000 and other related charges expensed as incurred.

The components of the amounts incurred were as follows:

	Charges Recorded During the Year Ended December 31, 2002
(In thousands)	1^st Quarter		2^nd, 3^rd & 4th Quarters		Total
	(Unaudited)
Impairment of long-lived assets	$	—	$	2,557	$	2,557
Excess inventory write-downs	—		1,265		1,265
Other restructuring-related expenses	—		3,079		3,079
Total pre-tax charges	$	—	$	6,901	$	6,901

This restructuring plan was completed during the fourth quarter of fiscal 2002.

2002 Seat Manufacturing Facilities Restructuring

During the 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. This plan was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with this restructuring plan, the Company recorded pre-tax charges to operations totaling $6,294,000 during 2002 for restructuring, asset impairment and other related charges. The charges were comprised of the following:

• Inventory and Accounts Receivable Write-Downs. In connection with the consolidation of all production, the Company discontinued 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 were 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 Asset Impairment 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. Such costs were charged to expense as incurred.

The components of the amounts incurred were as follows:

	Charges Recorded During the Year Ended December 31, 2002
(In thousands)	1^st Quarter		2^nd, 3^rd & 4th Quarters			Total
	(Unaudited)
Inventory and accounts receivable write-downs	$	1,445	$	755		$	2,200
Impairment of long-lived assets	1,700		(326		)	1,374
Severance and other compensation costs	450		—			450
Lease termination and other related costs	300		—			300
Other restructuring-related expenses	148		1,822			1,970
Total pre-tax charges	$	4,043	$	2,251		$	6,294

This restructuring plan was completed during the second quarter of fiscal 2002.

Other Asset Impairment Related Charges

Due to continued weakness in the commercial aircraft portion of the business, in the fourth quarter of fiscal 2002 the Company recorded a pre-tax charge of $12,048,000 for additional asset impairments. Of this amount, $7,672,000 related to the Company’s annual goodwill impairment testing pursuant to SFAS No. 142 and $4,376,000 related to inventories and was charged to cost of goods sold. Charges totaling $7,988,000 pertained to discontinued operations.

Note 4. Inventories

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

(In thousands)	March 31, 2003		December 31, 2002
	(Unaudited)
Raw materials	$	33,179	$	28,911
Work-in-process:
Direct and indirect manufacturing costs	10,696		6,843
Program costs, principally engineering	16,095		14,769
Finished goods	1,187		4,773
Costs and estimated earnings in excess of billings on uncompleted contracts	9,579		4,004
Total inventories	$	70,736	$	59,300

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. No adjustments were required during the year ended December 31, 2002 or the first three months of fiscal 2003.

Total costs and estimated earnings on all uncompleted contracts as of March 31, 2003 and December 31, 2002 are comprised of the following:

(In thousands)	March 31, 2003			December 31, 2002
	(Unaudited)
Costs incurred on uncompleted contracts	$	50,122		$	49,572
Estimated earnings recognized	66,965			63,699
Total costs and estimated earnings	117,087			113,271
Less billings to date	(107,600		)	(109,880		)
Net	$	9,487		$	3,391

Balance sheet classification:
Asset – Costs and estimated earnings in excess of billings	$	9,579		$	4,004
Liability – Billings in excess of costs and estimated earnings (Note 6)	(92		)	(613		)
Net	$	9,487		$	3,391

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 second quarter of fiscal 2002 relating to uncompleted contracts at the furniture manufacturing facility being permanently closed (Note 3).

Note 5. Other Assets

Other assets are comprised of the following as of March 31, 2003 and December 31, 2002:

(In thousands)	March 31, 2003		December 31, 2002
	(Unaudited)
Goodwill	$	196,430	$	196,430
Identifiable intangible assets with finite useful lives	28,193		29,105
Deferred financing costs	8,433		9,168
Other non-amortizable assets	3,768		1,155
Total other assets	$	236,824	$	235,858

Goodwill

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142. During 2002, the Company completed the transitional impairment testing of goodwill recorded as of January 1, 2002 as required under SFAS No. 142. Fair value of each reporting unit was determined using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends, market multiples for comparable businesses and independent appraisals. Unallocated goodwill was allocated to the reporting units for impairment testing purposes. The results indicated that the carrying value of goodwill was impaired. The resulting impairment was primarily attributable to a change in the evaluation criteria for goodwill utilized under previous accounting guidance to the fair value approach stipulated in SFAS No. 142.

In accordance with the transitional provision of SFAS No. 142, the Company recorded a $17,828,000 noncash write-down of goodwill (net of $878,000 income tax benefit) as of January 1, 2002 as a cumulative effect of a change in accounting principle. An additional $39,322,000 noncash write-down of goodwill pertains to the Specialty Avionics Group and is included in the loss from discontinued operations.

There were no changes in goodwill during the three months ended March 31, 2003.

Identifiable Intangible Assets with Finite Useful Lives

Identifiable intangible assets with finite useful lives are comprised of the following as of March 31, 2003 and December 31, 2002:

	March 31, 2003 (Unaudited)							December 31, 2002
(In thousands)	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net

FAA certifications	$	22,272	$	(5,110	)	$	17,162	$	22,272	$	(4,738	)	$	17,534
Customer contracts	8,390		(4,995		)	3,395		8,390		(4,695		)	3,695
Engineering drawings	7,645		(1,903		)	5,742		7,645		(1,776		)	5,869
Other identifiable intangibles	2,955		(1,061		)	1,894		2,955		(948		)	2,007
Total identifiable intangibles	$	41,262	$	(13,069	)	$	28,193	$	41,262	$	(12,157	)	$	29,105

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

Note 6. Accrued Liabilities

Accrued liabilities are comprised of the following as of March 31, 2003 and December 31, 2002:

(In thousands)	March 31, 2003		December 31, 2002
	(Unaudited)
Salaries, wages, compensated absences and payroll related taxes	$	6,115	$	9,212
Customer advances and deposits	4,205		4,662
Accrued interest	4,042		7,465
Billings in excess of costs and estimated earnings on uncompleted contracts	92		613
Acquisition related contingent consideration	—		600
Other accrued liabilities	8,562		8,942
Total accrued liabilities	$	23,016	$	31,494

Note 7. Long-Term Debt

Long-term debt includes the following amounts as of March 31, 2003 and December 31, 2002:

(In thousands)	March 31, 2003			December 31, 2002
	(Unaudited)
Senior credit facility:
Term loans	$	260,925		$	264,200
Revolving line of credit	33,150			6,000
12% senior subordinated notes	100,000			100,000
Capital lease obligations and term debt financing, secured by property and equipment	9,937			10,331
Other indebtedness	—			486
Total long-term debt	404,012			381,017
Less current portion	(17,492		)	(16,317		)
Long-term debt, less current portion	$	386,520		$	364,700

On March 28, 2003 the Company received requisite lender approval to amend its senior credit facility to permit the sale of its Specialty Avionics Group, provided that net proceeds of at least $130,000,000 from the sale are used to repay senior credit facility borrowings prior to June 30, 2003. The amendment also revised various financial covenants (which the Company would otherwise have not been able to meet as of March 31, 2003), decreases by $10,000,000 the maximum permitted revolving line of credit borrowings to $40,000,000, increases the prime rate and LIBOR interest margins by 1.5% and permits the issuance of additional indebtedness and the repurchase of a portion of the Company’s 12% senior subordinated notes.

The amendment also provides that an event of default will occur if the sale is not consummated by or is terminated for any reason prior to June 30, 2003. If an event of default occurs, the credit agreement provides that the lenders may, at that date, cease to provide additional revolving credit facility borrowings and may accelerate repayment of all borrowings then outstanding. If the lenders took such action, that would be an event of default under the Company’s other debt agreements, permitting those lenders to accelerate repayment of all such debt, as well. The Company is working diligently to close the sale, which is subject to customary closing conditions.

Note 8. Income Taxes

For the three months ended March 31, 2003 and 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.

Note 9. Capital Structure

Mandatorily Redeemable Preferred Stock

The table below summarizes the increase in mandatorily redeemable preferred stock during the three months ended March 31, 2003.

	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, 2002	370,061	$	37,006	$	(2,925	)	$	34,081	342,417	$	62,222
Accrued dividends and redemption value accretion	14,803	1,480		117			1,597		—	—
Noncash dividend accretion	—	—		—			—		—	2,178
Balance, March 31, 2003 (Unaudited)	384,864	$	38,486	$	(2,808	)	$	35,678	342,417	$	64,400

Per share liquidation value as of March 31, 2003 (Unaudited)		$	100.00							$	188.07

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.

Note 10. Commitments and Contingencies

Litigation

As part of its investigation of the crash of Swissair Flight 111 off the Canadian coast on September 2, 1998, the Canadian Transportation Safety Board (the “CTSB”) initially notified the Company that it 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’s subsidiary has worked vigorously over the last four years with the CTSB investigators in the fact-finding investigation of this catastrophic incident. On March 27, 2003, the CTSB released its final report on its investigation. This report indicated that the CTSB was unable to conclusively determine the cause of the fire which led to the crash of the aircraft.

Families of most of the 229 persons who died aboard the flight have filed actions in federal and state courts against the subsidiary, the Company, and many other unaffiliated parties, including Swissair and Boeing (“Passenger Actions”). The Passenger Actions claim negligence, strict liability, and breach of warranty relating to the installation and testing of the in-flight entertainment system. The Passenger Actions seek damages and costs in an unstated amount. All of the Passenger 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 pre-trial proceedings. Most of the Passenger Actions have been settled by Boeing and Swissair. Boeing and Swissair have advised the Company that they intend to seek contribution from the Company’s subsidiary. The Company, based in part on information received from independent fire and safety experts retained by it, does not believe that the installation of the equipment installed by its subsidiary impacted the operation or safety of the aircraft. Accordingly, the Company continues to defend the claims.

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.

Note 11. Business Segment Information

The Company supplies products and services to the corporate, VIP and head-of-state aircraft market within the aerospace industry. The Company’s subsidiaries are organized into two groups, each of which is a strategic business that develops, manufactures and sells distinct products and services. The groups and a description of their businesses are as follows:

• Cabin Management – manufactures interior cabin components, including cabin interior furnishings, cabin management systems, seating and composite components;

• Systems Integration – manufactures auxiliary fuel systems and auxiliary power units, provides system integration services, provides aircraft completion and refurbishment services and is a Boeing Business Jet authorized service center.

In prior periods, the Company’s Specialty Avionics Group was a third strategic business for which segment information was provided. As a result of the pending sale of the Specialty Avionics Group, this group is reflected as a discontinued operation and segment information for prior periods has been restated.

Management utilizes more than one measurement to evaluate group performance and allocate resources; however, management considers Adjusted EBITDA, as defined, to be the primary measurement of overall economic returns and cash flows. Management also uses Adjusted EBITDA in the Company’s annual budget and planning process, as the measure in determining the value of acquisitions and dispositions and as the performance metric for determination of the amount of bonuses awarded to pursuant to the Company’s cash incentive bonus plan. Management defines Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring, asset impairment and other related charges, acquisition related charges not capitalized and other noncash and nonoperating charges. This is consistent with the manner in which the Company’s lenders and ultimate investors measure its overall performance and liquidity, including its ability to service debt and fund discretionary capital expenditure and product development programs.

Adjusted EBITDA is a financial measure that is not in accordance with accounting principles generally accepted in the United States of America (“GAAP”) because it excludes certain charges reflected in the Company’s GAAP-basis financial statements. However, the Company’s presentation of Adjusted EBITDA, a non-GAAP financial measure, is in accordance with the GAAP requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which requires the Company to report the primary measure of segment performance used by management to evaluate and manage its businesses. The Company’s method of calculating Adjusted EBITDA may or may not be consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance GAAP, such as operating income, net income and cash flows from operations. Operating income by segment, the nearest comparable GAAP financial measure, is presented herein for comparability, along with a reconciliation of Adjusted EBITDA to operating income, net income and cash flows from operations, to clarify the differences between these financial measures.

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.

The tables below summarize selected financial data by business segment.

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Revenues:
Cabin Management	$	30,620		$	45,867
Systems Integration	12,132			15,077
Inter-group elimination(1)	(852		)	(125		)
Consolidated totals	$	41,900		$	60,819

Adjusted EBITDA (as defined):
Cabin Management	$	4,550		$	7,461
Systems Integration	2,157			5,059
Corporate(2)	(1,405		)	(1,558		)
Inter-group elimination(3)	110			111
Consolidated totals(4)	$	5,412		$	11,073

Operating income:
Cabin Management	$	2,920		$	2,202
Systems Integration	1,478			3,541
Corporate(2)	(1,621		)	(1,655		)
Inter-group elimination(3)	110			111
Consolidated totals(4)	$	2,887		$	4,199

	March 31,
(In thousands)	2003			2002
	(Unaudited)
Total assets (as of period end):
Cabin Management	$	284,258		$	296,584
Systems Integration	70,226			69,672
Corporate(5)	49,555			44,248
Inter-group elimination(6)	(3		)	(867		)
Continuing operations	404,036			409,637
Discontinued operations (Specialty Avionics)	152,003			171,811
Consolidated totals	$	556,039		$	581,448

(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.

(4) The table below reconciles the non-GAAP financial measure Adjusted EBITDA, as defined, to operating income, loss from continuing operations and cash flows from continuing operations.

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Consolidated Adjusted EBITDA (as defined)	$	5,412		$	11,073
Restructuring, asset impairment and other related charges	—			(4,043		)
Depreciation and amortization of long-lived assets(a)	(2,516		)	(2,767		)
Acquisition related charges not capitalized	(9		)	(10		)
Other noncash charges	—			(54		)
Consolidated operating income	2,887			4,199

Interest expense	(7,675		)	(7,759		)
Minority interest in preferred stock of subsidiary	(1,597		)	(1,382		)
Other expenses, net	(339		)	(113		)
Provision for income tax benefit	1,697			1,553
Loss from continuing operations	(5,027		)	(3,502		)

Noncash adjustments:
Depreciation and amortization(a)	3,211			3,356
Minority interest in preferred stock of subsidiary	1,597			1,382
Noncash portion of restructuring, asset impairment and other related charges	—			3,145
Other noncash adjustments	(448		)	332
Changes in assets and liabilities	(21,350		)	(4,354		)
Net cash provided by (used for) continuing operations	$	(22,017	)	$	359

(a) Reflects depreciation and amortization of long-lived assets and amortization of deferred financing costs, which are classified as a component of interest expense, as follows:

	Three Months Ended March 31,
(In thousands)	2003		2002
	(Unaudited)
Depreciation and amortization of long-lived assets	$	2,516	$	2,767
Amortization of deferred financing costs	695		589
Consolidated depreciation and amortization	$	3,211	$	3,356

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

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

Note 12. Supplemental Condensed Consolidating Financial Information

In conjunction with the 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 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 equity in earnings of subsidiaries.

Balance Sheets

	March 31, 2003 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Assets

Current assets:
Cash and cash equivalents	$	14,551		$	86		$	—		$	—		$	14,637
Accounts receivable, net	—			26,568			—			—			26,568
Inventories	—			70,736			—			—			70,736
Other current assets	19,129			682			—			—			19,811
Assets of discontinued operations	—			157,983			4,844			(10,824		)(1)	152,003
Total current assets	33,680			256,055			4,844			(10,824		)	283,755

Property and equipment, net	2,281			33,179			—			—			35,460
Other assets, principally intangibles, net	13,594			223,230			—			—			236,824
Investments in subsidiaries	347,758			—			27,146			(374,904		)(1)	—
Intercompany receivables	271,238			164,269			5,834			(441,341		)(2)	—
Total assets	$	668,551		$	676,733		$	37,824		$	(827,069	)	$	556,039

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

Current liabilities:
Current portion of long-term debt	$	16,360		$	1,132		$	—		$	—		$	17,492
Other current liabilities	10,895			27,738			—			—			38,633
Liabilities of discontinued operations	—			21,055			(146		)	—			20,909
Total current liabilities	27,255			49,925			(146		)	—			77,034

Long-term debt, less current portion	377,822			8,698			—			—			386,520
Intercompany payables	171,139			270,202			—			(441,341		)(2)	—
Other long-term liabilities	32,139			514			—			—			32,653

Mandatorily redeemable preferred stock:
Minority interest in preferred stock of subsidiary	35,678			—			—			—			35,678
Mandatorily redeemable 14% preferred stock	—			—			64,400			—			64,400

Stockholders’ equity:
Paid-in capital	116,987			337,592			85,428			(472,647		)(1)	67,360
Retained earnings (deficit)	(92,469		)	10,166			(111,858		)	86,919		(1)	(107,242		)
Accumulated other comprehensive loss	—			(364		)	—			—			(364		)
Total stockholders’ equity	24,518			347,394			(26,430		)	(385,728		)	(40,246		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	668,551		$	676,733		$	37,824		$	(827,069	)	$	556,039

	December 31, 2002
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Assets

Current assets:
Cash and cash equivalents	$	12,343		$	78		$	—		$	—		$	12,421
Accounts receivable, net	—			26,354			—			—			26,354
Inventories	—			59,300			—			—			59,300
Other current assets	17,711			443			—			—			18,154
Assets of discontinued operations	—			166,507			5,197			(10,963		)(1)	160,741
Total current assets	30,054			252,682			5,197			(10,963		)	276,970

Property and equipment, net	2,485			33,654			—			—			36,139
Other assets, principally intangibles, net	11,708			224,150			—			—			235,858
Investments in subsidiaries	351,502			—			37,903			(389,405		)(1)	—
Intercompany receivables	273,178			172,389			5,740			(451,307		)(2)	—
Total assets	$	668,927		$	682,875		$	48,840		$	(851,675	)	$	548,967

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

Current liabilities:
Current portion of long-term debt	$	15,337		$	980		$	—		$	—		$	16,317
Other current liabilities	16,786			27,763			—			—			44,549
Liabilities of discontinued operations	—			19,954			(26		)	—			19,928
Total current liabilities	32,123			48,697			(26		)	—			80,794

Long-term debt, less current portion	355,568			9,132			—			—			364,700
Intercompany payables	178,242			273,065			—			(451,307		)(2)	—
Other long-term liabilities	33,601			840			—			—			34,441

Mandatorily redeemable preferred stock:
Minority interest in preferred stock of subsidiary	34,081			—			—			—			34,081
Mandatorily redeemable 14% preferred stock	—			—			62,222			—			62,222

Stockholders’ equity (deficit):
Paid-in capital	118,621			337,592			87,606			(474,244		)(1)	69,575
Retained earnings (deficit)	(83,309		)	13,910			(100,962		)	73,876		(1)	(96,485		)
Accumulated other comprehensive loss	—			(361		)	—			—			(361		)
Total stockholders’ equity (deficit)	35,312			351,141			(13,356		)	(400,368		)	(27,271		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	668,927		$	682,875		$	48,840		$	(851,675	)	$	548,967

Statements of Operations

	Three Months Ended March 31, 2003 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	41,900		$	—		$	—		$	41,900
Cost of sales	—			30,903			—			—			30,903

Gross profit	—			10,997			—			—			10,997

Selling, general and administrative expenses	2,329			4,869			—			—			7,198
Amortization of intangible assets	—			912			—			—			912
Interest expense	7,626			49			—			—			7,675
Minority interest in preferred stock of subsidiary	—			—			1,597			—			1,597
Intercompany charges	(6,523		)	6,523			—			—			—
Equity in loss of subsidiaries	3,744			69			9,160			(12,973		)(3)	—
Other expenses (income), net	174			165			—			—			339
Provision for income taxes (benefit)	1,810			(3,507		)	—			—			(1,697		)
Loss from discontinued operations	—			5,661			69			—			5,730

Net income	$	(9,160	)	$	(3,744	)	$	(10,826	)	$	12,973		$	(10,757	)

	Three Months Ended March 31, 2002 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	60,819		$	—		$	—		$	60,819
Cost of sales	—			44,381			—			—			44,381

Gross profit	—			16,438			—			—			16,438

Selling, general and administrative expenses	2,417			8,979			—			—			11,396
Amortization of intangible assets	—			843			—			—			843
Interest expense	7,684			75			—			—			7,759
Minority interest in preferred stock of subsidiary	—			—			1,382			—			1,382
Intercompany charges	(7,150		)	7,150			—			—			—
Equity in loss of subsidiaries	53,166			9,523			56,752			(119,441		)(3)	—
Other expenses, net	91			22			—			—			113
Provision for income tax benefit	(940		)	(613		)	—			—			(1,553		)
Loss from discontinued operations	—			27,281			9,523			—			36,804
Cumulative effect of change in accounting principle	1,484			16,344			—			—			17,828

Net loss	$	(56,752	)	$	(53,166	)	$	(67,657	)	$	119,441		$	(58,134	)

Statements of Cash Flows

	Three Months Ended March 31, 2003 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net loss	$	(9,160	)	$	(3,744	)	$	(10,826	)	$	12,973	(3)	$	(10,757	)
Loss from discontinued operations	—			5,661			69			—			5,730
Noncash adjustments:
Equity in earnings of subsidiaries	3,744			69			9,160			(12,973		)(3)	—
Other noncash adjustments	237			2,526			1,597			—			4,360
Changes in working capital	(15,771		)	(5,579		)	—			—			(21,350		)
Net cash used for operating activities	(20,950		)	(1,067		)	—			—			(22,017		)

Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(600		)	—			—			—			(600		)
Capital expenditures	(3		)	(1,095		)	—			—			(1,098		)
Net cash used for investing activities	(603		)	(1,095		)	—			—			(1,698		)

Cash flows from financing activities:
Net senior credit facility borrowings	27,150			—			—			—			27,150
Principal payments on long-term debt and leases	(3,389		)	(821		)	—			—			(4,210		)
Net cash provided by (used for) financing activities	23,761			(821		)	—			—			22,940

Net cash provided by discontinued operations	—			2,991			—			—			2,991
Net increase in cash and equivalents	2,208			8			—			—			2,216
Cash and equivalents at beginning of period	12,343			78			—			—			12,421
Cash and equivalents at end of period	$	14,551		$	86		$	—		$	—		$	14,637

	Three Months Ended March 31, 2002 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net loss	$	(56,752	)	$	(53,166	)	$	(67,657	)	$	119,441	(3)	$	(58,134	)
Loss from discontinued operations	—			27,281			9,523			—			36,804
Noncash adjustments:
Equity in loss of subsidiaries	53,166			9,523			56,752			(119,441		)(3)	—
Other noncash adjustments	2,516			22,145			1,382			—			26,043
Changes in working capital	5,360			(9,714		)	—			—			(4,354		)
Net cash provided by operating activities	4,290			(3,931		)	—			—			359

Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(707		)	—			—			—			(707		)
Capital expenditures	(4		)	(415		)	—			—			(419		)
Net cash used for investing activities	(711		)	(415		)	—			—			(1,126		)

Cash flows from financing activities:
Deferred financing costs	(1,629		)	—			—			—			(1,629		)
Principal payments on long-term debt and leases	(97		)	(299		)	—			—			(396		)
Other, net	(368		)	297			—			—			(71		)
Net cash used for financing activities	(2,094		)	(2		)	—			—			(2,096		)

Net cash provided by discontinued operations	—			4,597			—			—			4,597
Net increase in cash and equivalents	1,485			249			—			—			1,734
Cash and equivalents at beginning of period	9,641			(163		)	—			—			9,478

Cash and equivalents at end of period	$	11,126		$	86		$	—		$	—		$	11,212

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.

Recent Developments

Our historical financial statements include the financial position and results of operations of our Specialty Avionics Group. On March 14, 2003, we entered into a definitive agreement to sell this Group for $140.0 million in cash, with the net proceeds from the sale going to repay borrowings under our senior credit facility. The sale of our Specialty Avionics Group is not expected to affect the operations of our remaining operating groups. See “—Liquidity and Capital Resources” below for additional information.

As a result of the pending sale, the Specialty Avionics Group is presented as a discontinued operation in our consolidated financial statements. The financial statements have been reclassified to segregate the Group’s assets and liabilities, results of operations and cash flows for all periods presented 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: corporate, VIP and head-of-state aircraft and, to a lesser extent, commercial and regional aircraft. The September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism, the current Middle-Eastern military conflicts, the Severe Acute Respiratory Syndrome (SARS) epidemic and weak global economic conditions are all adversely impacting air travel and, in turn, the aerospace industry and our business.

In response to certain of these adverse conditions, we announced and implemented a restructuring plan in December 2001 designed to reduce expenses 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. 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 Related Charges” below for additional information.

The corporate, VIP and head-of-state aircraft portion of our business experienced growing weakness during 2002 and this trend is likely to worsen in 2003. However, we believe the potential exists for corporate, VIP and head-of-state aircraft deliveries to recover modestly in 2004 and reflect growing strength in 2005. The commercial aircraft portion of our business also experienced significant weakness in 2002 and we believe this condition will continue into 2003 and 2004, with potential recovery not expected to occur until at least 2005.

Results of Operations

Our results of operations for the three months ended March 31, 2002 have been affected by restructuring, asset impairment and other related 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.

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Revenues. Revenues decreased $18.9 million, or 31.1%, to $41.9 million for the three months ended March 31, 2003 from $60.8 million for the three months ended March 31, 2002. By segment, revenues changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent
Cabin Management	$	(15.2	)	(33.2	)%
Systems Integration	(2.9		)	(19.5	)
Inter-group elimination	(0.8		)
Total	$	(18.9	)

Cabin Management. Revenues decreased by $15.2 million, or 33.2% compared to the prior year. The decrease, which is across most of our product and services categories, is caused by the ongoing adverse impact of weak global economic conditions on the corporate, VIP and head-of-state aircraft market in 2003 as follows:

• a $11.5 million decrease in aircraft furniture and related products revenues;

• a $1.6 million decrease in cabin management and entertainment systems revenues;

• a $1.6 million decrease in seating products revenues; and

• a $0.5 million decrease in other product and services revenues.

Systems Integration. Revenues decreased by $2.9 million, or 19.5% compared to the prior year, due to:

• a $2.3 million decrease resulting from reduced production and delivery of corporate, VIP and head-of-state aircraft auxiliary fuel systems due to the adverse impact of weak global economic conditions on the demand for those types of aircraft; and

• a $0.6 million decrease in the commercial aircraft systems integration engineering services we provide in the aftermath of September 11^th.

Gross profit. Gross profit decreased $5.4 million, or 33.1%, to $11.0 million for the three months ended March 31, 2003 from $16.4 million for the same period last year. By segment, gross profit changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Cabin Management	$	(2.6	)	(25.4	)%
Systems Integration	(2.8		)	(46.7	)
Total	$	(5.4	)

Cabin Management. Gross profit decreased by $2.6 million, or 25.4% compared to the prior year, primarily due to:

• a $3.4 million decrease in profit margins due to lower volume for our corporate, VIP and head-of-state aircraft furniture and seating products; and

• a $0.4 million decrease in gross profit related to lower volume for our cabin management and entertainment systems; offset by

• a $1.2 million increase caused by restructuring charges incurred in 2002 related to the consolidation of our seating and related manufacturing operations.

Systems Integration. Gross profit decreased by $2.8 million, or 46.7% compared to the prior year, primarily due to:

• a $2.4 million decrease resulting from lower revenues and unfavorable overhead absorption as a result of lower production and delivery of corporate / VIP aircraft auxiliary fuel tank systems; and

• a $0.4 million decrease in the commercial aircraft systems integration engineering services provided.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $4.2 million, or 36.8%, to $7.2 million for the three months ended December 31, 2003, from $11.4 million for the same period last year. By segment, SG&A expenses changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Cabin Management	$	(3.4	)	(81.6	)%
Systems Integration	(0.7		)	(64.2	)
Corporate	(0.1		)
Total	$	(4.2	)

Cabin Management. SG&A expenses decreased by $3.4 million, or 81.6% compared to the prior year, due to:

• a $2.8 million reduction resulting from restructuring charges recorded in 2002 related to the consolidation of our seating and related manufacturing operations; and

• a $0.6 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak global economic conditions.

Systems Integration. SG&A expenses decreased by $0.7 million, or 64.2% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions in 2003.

Depreciation and amortization of intangibles. Depreciation and amortization expense decreased $0.3 million to $2.5 million for the three months ended March 31, 2003 from $2.8 million for the same period last year, primarily resulting from reduced capital expenditures and a lower depreciable base resulting from impairment charges recorded during 2002.

Operating income. Operating income decreased $1.3 million or 31.2%, to $2.9 million for the three months ended March 31, 2003, from $4.2 million for the same period last year. Operating income changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Operating income:
Cabin Management	$	0.7		32.6	%
Systems Integration	(2.1		)	(58.3	)
Corporate	0.1
Total Operating income	$	(1.3	)

Cabin Management. Operating income increased by $0.7 million, or 32.6% compared to the prior year, primarily due to:

• a $4.0 million increase resulting from restructuring charges recorded in 2002 related to the consolidation of our seating and related manufacturing operations; offset by

• $3.3 million decrease in gross profit, principally related to lower revenues in our corporate, VIP and head-of-state aircraft furniture and seating operations.

Systems Integration. Operating income decreased by $2.1 million, or 58.3% compared to the prior year, primarily the result of lower sales volume, partially offset by reduced SG&A spending resulting from workforce reductions.

Corporate. Operating income increased $0.1 million due to reduced SG&A spending.

Interest expense. Interest expense decreased $0.1 million, or 1.1%, to $7.7 million for the three months ended March 31, 2003 compared to $7.8 million for the same period last year.

Minority interest in preferred stock of subsidiary. Minority interest increased $0.2 million to $1.6 million for the three months ended March 31, 2003 compared to $1.4 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 minority interest in preferred stock of subsidiary, which is not deductible for income tax purposes.

Loss from continuing operations. The loss from continuing operations increased $1.5 million to $5.0 million for the three months ended March 31, 2003 compared to $3.5 million for the same period last year, primarily due to:

• a $5.3 million loss increase, principally related to lower revenues; and

• a $0.2 million increase in minority interest in preferred stock of subsidiary; offset by

• a $4.0 million loss decrease resulting from restructuring charges recorded in 2002 related to the consolidation of our seating and related manufacturing operations.

Loss from discontinued operations. Loss from discontinued operations decreased $31.1 million, to a loss of $5.7 million for the three months ended March 31, 2003 compared to a loss of $36.8 million for the same period last year. The decrease is primarily due to:

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

• a $7.5 million charge in 2003 to the impairment of goodwill to reduce the carrying value of assets sold to their estimated net realizable value.

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

Net loss. Net loss decreased $47.3 million to a net loss of $10.8 million for the three months ended March 31, 2003 compared to a net loss of $58.1 million for the same period last year. The decrease is primarily due to the $57.2 million charge in 2002 to reflect the cumulative effect of the change in accounting principle offset by a $7.5 million charge in 2003 for the impairment of goodwill related to discontinued operations.

Net income (loss) applicable to common stockholders. Net loss applicable to our common stockholders decreased $47.1 million to a net loss of $12.9 million for the three months ended March 31, 2003 compared to a net loss of $60.0 million for the same period last year. The decrease in the net loss applicable to our common stockholder is attributable to:

• a $57.2 million charge in 2002 to reflect the cumulative effect of the change in accounting principle; offset by

• a $7.5 million charge in 2003 for the impairment of goodwill related to discontinued operations;

• a $1.5 million increase in our loss from continuing operations and a $0.9 million decrease in income from discontinued operations, before the cumulative effect of the change in accounting principle; and

• a $0.2 million increase in noncash preferred stock dividend accretion on our 14% mandatorily redeemable preferred stock.

Bookings. Bookings decreased $15.7 million, or 27.5%, to $41.4 million for the three months ended March 31, 2003 compared to $57.1 million for the same period last year. The decrease in bookings for 2003 is due to decreases in orders for all of our business segments.

Backlog at end of period. Backlog decreased $0.5 million to $66.3 million as of March 31, 2003 compared to $66.8 million as of December 31, 2002.

As described in “—Industry Overview and Trends,” the acts, and ongoing threats, of global terrorism and the current military conflicts, SARS epidemic and weak global economic conditions are having an adverse impact on our business, resulting in the decrease in bookings during 2003 and related backlog at the end of the period. 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.

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

Restructuring, Asset Impairment and Other Related Charges

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

During the three months ended March 31, 2002 and the year ended December 31, 2002, we recorded restructuring, asset impairment and other related pre-tax charges, principally related to two restructuring plans. These charges, and the effect these charges had on our reported results of operations for the three months ended March 31, 2002, are summarized below, along with comparative information for 2003.

	Charges Recorded During the Year Ended December 31, 2002
(In millions)	1^stQuarter		2^nd, 3^rd & 4th Quarters		Total

Nature of charges:
2001 Asset Realignment Restructuring	$	—	$	6.9	$	6.9
2002 Seat Manufacturing Facilities Restructuring	4.0		2.3		6.3
Other asset impairment related charges	—		12.0		12.0
Total pre-tax charges	$	4.0	$	21.2	$	25.2

Charged to operations:
Cost of sales	$	1.2	$	9.5	$	10.7
Selling, general and administrative expenses	2.8		3.7		6.5
Discontinued operations	—		8.0		8.0
Total pre-tax charges	$	4.0	$	21.2	$	25.2

Components of charges:
Continuing operations:
Noncash charges	$	3.1	$	8.3	$	11.4
Cash charges	0.9		4.9		5.8
Total continuing operations	4.0		13.2		17.2
Discontinued operations noncash charges	—		8.0		8.0
Total pre-tax charges	$	4.0	$	21.2	$	25.2

	Three Months Ended March 31,
(In millions)	2003			2002
As reported:
Gross profit	$	11.0		$	16.4
Selling, general and administrative expenses	7.2			11.4
Operating income	2.9			4.2
Loss from continuing operations	(5.0		)	(3.5		)

As adjusted, excluding the charges:
Gross profit	$	11.0		$	17.6
Selling, general and administrative expenses	7.2			8.6
Operating income	2.9			8.2
Loss from continuing operations	(5.0		)	0.5

2001 Asset Realignment Restructuring

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.

Due to the ongoing weakness of the corporate, VIP and head-of-state 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 pre-tax charges to operations totaling $6.9 million during the year ended December 31, 2002, of which $3.8 million were noncash charges, for additional impairment of long-lived assets, current asset write-downs and other related expenses.

This restructuring plan was completed during the fourth quarter of fiscal 2002.

2002 Seat Manufacturing Facilities Restructuring

During the first quarter of fiscal 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. This plan was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with this restructuring plan, we recorded pre-tax charges to operations totaling $6.3 million during the year ended December 31, 2002, of which $3.6 million were noncash charges, for restructuring, asset impairment and other related restructuring charges.

The restructuring, asset impairment and other related expenses are comprised of charges for current asset 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.

This restructuring plan was completed during the second quarter of fiscal 2002.

Other Asset Impairment Related Charges

Due to continued weakness in the commercial aircraft portion of the business, in the fourth quarter of fiscal 2002 we recorded a pre-tax charge of $12.0 million for additional asset impairments. Of this amount, $7.7 million related to our annual goodwill impairment testing pursuant to SFAS No. 142 and $4.3 million related to inventories and was charged to cost of goods sold. Charges totaling $8.0 million pertained to discontinued operations.

Liquidity and Capital Resources

We are a holding company and have no direct material operations. Our only asset is our ownership of all of the common stock of DeCrane Aircraft, and our only material liability is our guarantee of the DeCrane Aircraft senior credit facility. Our principal liquidity needs are for income taxes and, beginning in 2005, the payment cash dividends on our preferred stock.

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

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

Net cash used for operating activities was $22.0 million for the three months ended March 31, 2003 and consisted of $0.7 million of cash used by continuing operations after adding back depreciation, amortization and other noncash items, $20.2 million used for working capital, and $1.1 million used for other liabilities. The following factors contributed to the $20.2 million working capital increase:

• a $11.5 million inventory increase principally related to long-term contracts;

• a $5.4 million decrease in accounts payable and accrued expenses, primarily resulting from reduced purchasing commensurate with lower revenues; and

• a $3.3 million increase in prepaid expenses and other assets, consisting principally of expense associated with the pending sale of our Specialty Avionics Group.

We expect working capital increases, if any, to moderate during the remainder of 2003.

Net cash used for investing activities was $1.7 million for the three months ended March 31, 2003 and consisted of:

• $1.1 million for capital expenditures; and

• $0.6 million of contingent acquisition consideration paid during 2003.

We anticipate spending approximately $4.0 to $4.5 million for capital expenditures in 2003. As of March 31, 2003, there are no remaining acquisition contingent consideration payment obligations.

Net cash provided by financing activities was $22.9 million for the three months ended March 31, 2003. Cash of $27.1 million was provided by revolving line of credit borrowings under our senior credit facility. Cash of $4.2 million was used for principal payments on our term debt, capitalized lease obligations and other debt.

At March 31, 2003, our senior credit facility borrowings totaling $294.1 million are at variable interest rates based on defined margins over the current prime rate or LIBOR. We also had $100.0 million of 12% senior subordinated notes and other indebtedness totaling $9.9 million outstanding as of March 31, 2003. The senior credit facility and senior subordinated notes indenture impose restrictive and financial covenants on us.

At March 31, 2003, we had $75.6 million of working capital, excluding the assets and liabilities of our discontinued operations, and had $6.9 million of borrowings available under our revolving line of credit, as amended. In March 2003, terms and financial covenants contained in our senior credit facility were amended as described below.

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

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

On March 14, 2003, we entered into a definitive agreement to sell our Specialty Avionics Group and received requisite lender approval on March 28, 2003 to amend the senior credit facility to permit the sale, provided that net proceeds of at least $130.0 million from the sale are used to repay senior credit facility borrowings prior to June 30, 2003. The amendment also relaxes various financial covenants for 2003 and beyond, decreases by $10.0 million the maximum permitted revolving line of credit borrowings to $40.0 million, increases the prime rate and LIBOR interest margins by 1.5% and permits the issuance of additional indebtedness and the repurchase of a portion of our 12% senior subordinated notes. We expect to be in compliance with the revised financial covenants through 2003 based on our current operating plan and our ability to respond to further adverse changes in our business through additional cost reduction measures. We expect to continue conducting our remaining operations in the ordinary course of business.

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

The purchaser’s obligation to close the sale is subject to various customary conditions, including a financing condition. The purchaser has informed us that, in their judgment, certain closing conditions, including the financing condition, have not been satisfied. Although this has resulted in a delay of the closing, the purchaser has informed us that it has been using, and will continue to use, commercially reasonable efforts to cause all closing conditions to be satisfied and to consummate the transaction and will be prepared to schedule a closing as soon as possible thereafter.

Although we cannot be certain and provided that the sale of the Specialty Avionics Group is consummated prior to June 30, 2003, we believe our operating cash flows, together with borrowings under our senior 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 comply with our debt financial covenants and to satisfy our other debt obligations will depend on our future operating performance as well as competitive, legislative, regulatory, business and other factors beyond our control.

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.

Disclosure of Contractual Obligations and Commitments

The following table summarizes our known obligations to make future cash payments as of March 31, 2003, as well an estimate of the periods during which these payments are expected to be made. The payment obligations exclude approximately $10.0 million of capital and operating lease obligations and other indebtedness pertaining to our Specialty Avionics Group which will be assumed by the buyer upon consummation of the sale of the Group. The Specialty Avionics Group is presented as a discontinued operation in this report. The obligations have also been adjusted to reflect the repayment of $130.0 of senior credit facility borrowings with the net proceeds from the sale assuming the sale was consummated and repayment had occurred on March 31, 2003.

	Years Ending December 31,
(In millions)	Total			2003			2004 and 2005			2006 and 2007			2008 and Beyond

Long-term debt:
Senior credit facility	$	294.1		$	11.4		$	176.6		$	106.1		$	—
12% senior subordinated notes	100.0			—			—			—			100.0
Capital lease obligations and other indebtedness	9.9			0.7			2.3			1.6			5.3
Total long-term debt	404.0			12.1			178.9			107.7			105.3

Operating lease obligations	14.9			1.3			3.2			3.9			6.5
Mandatorily redeemable preferred stock redemption obligations:
DeCrane Aircraft preferred stock	38.5			—			—			—			38.5
DeCrane Holdings preferred stock	64.4			—			—			—			64.4
Total obligations at March 31, 2003	521.8			13.4			182.1			111.6			214.7

Senior credit facility repayment with net proceeds from the sale	(130.0		)	(11.4		)	(68.9		)	(49.7		)	—
Total obligations at March 31, 2003, as adjusted	$	391.8		$	2.0		$	113.2		$	61.9		$	214.7

Disclosure of Off-Balance Sheet Commitments and Indemnities

Our report on Form 10-K for the year ended December 31, 2002 contains disclosures about our off-balance sheet commitments and indemnities. There have been no material changes in the matters disclosed or new matters requiring disclosure during the three months ended March 31, 2003.

Recent Accounting Pronouncements

Accounting Pronouncements Adopted January 1, 2003

As more fully described in Note 1 accompanying our financial statements included in this report, we adopted the provisions of the following accounting pronouncements effective January 1, 2003:

• SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections;”

• SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities;”

• SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure;” and

• FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other.”

Recently Issued Accounting Pronouncement

SFAS No. 150 – Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity

Issued in May 2003, SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires classification of financial instruments within its scope as a liability, including financial instruments issued in the form of shares that are mandatorily redeemable, because those financial instruments are deemed to be, in essence, obligations of the issuer. We are currently evaluating the impact this new standard will have on our financial position, results of operations and cash flows. However, we believe we may be required to reclassify our mandatorily redeemable preferred stock as a liability commencing July 1, 2003 and reflect subsequent changes in the redemption obligation as a charge against pre-tax income.

Special Note Regarding Forward-Looking Statements and Risk Factors

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;

• acts, and ongoing threats, of global terrorism, military conflicts and health epidemics 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;

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

• 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.

Some of the more significant factors listed above are further described in our Annual Report of Form 10-K and should be read in conjunction with this report. 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.

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 rate or LIBOR. At March 31, 2003, the current prime rate was 4.25% and the current LIBOR was 1.38%. Based on $294.1 million of variable-rate debt outstanding as of March 31, 2003, a hypothetical one percent rise in interest rates, to 5.25% for prime rate borrowings and 2.38% for LIBOR borrowings, would reduce our pre-tax earnings by $2.9 million annually.

To limit a portion of 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 March 31, 2003, 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 increased $11.0 million, or 27.5%, to approximately $51.0 million at March 31, 2003 from $40.0 million at December 31, 2002. Although we cannot be certain, we believe the increase may have been a result of our announcement that we had entered into a definitive agreement to sell our Specialty Avionics Group. 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 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.

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.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

Families of most of the 229 persons who died aboard the flight have filed actions in federal and state courts against us, our subsidiary, and many other unaffiliated parties, including Swissair and Boeing (“Passenger Actions”). The Passenger Actions claim negligence, strict liability, and breach of warranty relating to the installation and testing of the in-flight entertainment system. The Passenger Actions seek damages and costs in an unstated amount. All of the Passenger 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 pre-trial proceedings. Most of the Passenger Actions have been settled by Boeing and Swissair. Boeing and Swissair have advised us that they intend to seek contribution from our subsidiary. We do not believe, based, in part, on information received from independent fire and safety experts retained by us, that the installation of the equipment installed by our subsidiary impacted the operation or safety of the aircraft. Accordingly, we continue to defend the claims.

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 6. EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits

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

b. Reports on Form 8-K

On March 17, 2003, we filed a Form 8-K Current Report regarding DeCrane Aircraft entering into a definitive agreement to sell its Specialty Avionics Group. The text of the press release is contained in the filing.

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)


May 20, 2003	By:	/s/ Richard J. Kaplan
	Name:	Richard J. Kaplan
	Title:	Chief Financial Officer, Assistant Secretary and
		Director

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: May 20, 2003

	/s/ R. Jack DeCrane
	R. Jack DeCrane
	Chief Executive Officer

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.;

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;

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

Date: May 20, 2003

	/s/ Richard J. Kaplan
	Richard J. Kaplan
	Chief Financial Officer and Assistant Secretary