UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(AMENDMENT NO. 1)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). o Yes ý 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

Explanatory Note

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

	Performance Measures

	Three months ended March 31, 2003

	Restructuring, Asset Impairment and Other Related Charges

	Goodwill Impairment Charges

	Liquidity and Capital Resources

	Disclosure of Contractual Obligations and Commitments

	Disclosure About 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

Explanatory Note

DeCrane Holdings Co. is filing this Amendment No. 1 on Form 10-Q/A for the quarterly period ended March 31, 2003 to amend and restate, in its entirety, its Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission on May 20, 2003 (referred to herein as the “Original Report” and the “Amended Report”). Except for the reclassifications described below, no changes have been made in this Amended Report to the consolidated financial position, results of operations or cash flows we reported in our Original Report. This Amended Report only modifies and updates our disclosures for events occurring subsequent to the filing of our Original Report, as described below, which resulted in our independent accountants revising and reissuing their report accompanying our financial statements included in Amendment No. 1 on Form 10-K/A filed concurrently herewith but otherwise does not otherwise reflect events occurring after the May 20, 2003 filing of our Original Report or modify or update the disclosures set forth in that Original Report in any way to reflect any changes in our business or our consolidated financial position, results of operations or cash flows subsequent to the filing date of the Original Report. For the convenience of the reader, we deemed it desirable to amend and restate our Original Report in its entirety to provide clarity as to the events that have occurred.

As described in our Original Report, during the fourth quarter of fiscal 2002 we embarked on a plan to sell the Specialty Avionics Group and entered into a definitive agreement to sell the group on March 14, 2003. The sale was consummated on May 23, 2003, subsequent to the filing of our Original Report. In addition, at the time of filing our Original Report, our failure to consummate the sale by June 30, 2003 would have been an event of default under our amended senior credit facility. As a result, our independent accountants qualified their report on our audited financial statements with respect to our ability to continue as a going concern. Consummation of the sale alleviated our independent accountants’ doubt about our ability to continue as a going concern. As a result, our independent accountants issued a revised, unqualified report on our financial statements.

In this Amended Report, we are reclassifying our consolidated statements of financial position, results of operations and cash flows to reflect the Specialty Avionics Group as a discontinued operation for all periods presented. In addition, we are also making similar conforming changes to other parts of the Original Report as well.

This Amended Report should be read in conjunction with our Amendment No. 1 on Form 10-Q/A for the quarterly period ended June 30, 2003 as well as our Amendment No. 1 on Form 10-K/A for the fiscal year ended December 31, 2002 filed concurrently with this Amended Report. As required by Rule 12b-15 of the Securities Exchange Act of 1934, our Chief Executive Officer and Chief Financial Officer are providing updated certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and updated written statements pursuant to Title 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Act.

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
Current assets of discontinued operations	152,003			160,741
Total current assets	283,755			276,970

Property and equipment, net	35,460			36,139
Goodwill	196,430			196,430
Other assets, principally intangibles, net	40,394			39,428
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			—
Current 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 11)

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	7,905			12,159
Amortization of intangible assets	912			843
Total operating expenses	8,817			13,002

Income from operations	2,180			3,436

Other expenses:
Interest expense	5,869			5,948
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	(5,625		)	(4,007		)
Income tax benefit	1,265			1,141

Loss from continuing operations	(4,360		)	(2,866		)

Discontinued operations and change in accounting principle:
Loss from discontinued operations, net of tax	(6,397		)	(37,440		)
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)

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

	Common Stock
	Shares	Amount

Balance, December 31, 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:
Loss from discontinued operations	6,397			37,440
Minority interest in preferred stock of subsidiary	1,597			1,382
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	(1,869		)	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	(22,367		)	995

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	3,341			3,961

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

These consolidated interim financial statements 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. These consolidated interim financial statements 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 / Amendment No. 1, as described below.

As the Company originally described in its Form 10-K for the year ended December 31, 2002, its failure to consummate the sale of the Specialty Avionics Group by June 30, 2003 would have been an event of default under the amended senior credit facility. As a result, the Company’s independent accountants qualified their report on its audited financial statements for the year ended December 31, 2002 with respect to its ability to continue as a going concern. The sale was consummated on May 23, 2003 and repayment of $130.0 million of borrowings alleviated the independent accountants’ doubt about the Company’s ability to continue as a going concern. As a result, the Company’s independent accountants issued a revised, unqualified report on its financial statements, which the Company included in Amendment No. 1 to its Form 10-K for the year ended December 31, 2002.

Reclassifications have also been made to the financial statements for all periods presented, principally to reflect the disposition of the Specialty Avionics Group as a discontinued operation (Note 2).

Stock Option Plan

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

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

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Net loss, as reported	$	(10,757	)	$	(58,134	)
Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(94		)	(94		)
Pro forma net loss	$	(10,851	)	$	(58,228	)

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.

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, the 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.

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 will 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. Disposition of Specialty Avionics Group

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 business, 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.

On March 14, 2003, the Company entered into a definitive agreement to sell its equity interests in the subsidiaries comprising its Specialty Avionics Group to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC, for $140,000,000 in cash. The sale was consummated on May 23, 2003. The selling price is subject to a post-closing adjustment related to the amount of working capital at closing. Proceeds of $130,000,000 from the sale were used to repay senior credit facility borrowings (Note 8). The sale of the Specialty Avionics Group is not expected to affect the operations of the remaining operating groups.

Based upon the fair value of the group implied in the definitive agreement, the Company determined that the carrying value of the group’s net assets was not fully recoverable. As required by SFAS No. 142, 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 the estimated net realizable value established by the definitive agreement. The Company expects to record a modest $689,000 gain, net of tax, on the sale during the second quarter of fiscal 2003, based on the actual financial position of the group on the date of sale. The ultimate gain or loss on the sale is subject to finalizing the post-closing adjustment, which is not expected to be material, if any.

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

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

The following tables summarize the financial position, results operations and cash flows of the Specialty Avionics Group.

(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	18,992			19,405
Impairment of goodwill	7,500			—
Amortization of intangible assets	557			557
Total operating expenses	27,049			19,962

Income (loss) from operations	(3,579		)	5,382

Other expenses:
Interest expense:
Debt required to be repaid with proceeds from sale	1,806			1,811
Debt obligations assumed by the buyer	202			204
Other expenses, net	101			33

Pre-tax income (loss)	(5,688		)	3,334
Provision for income taxes	(709		)	(1,452		)

Income (loss) before change in accounting principle	(6,397		)	1,882
Cumulative effect of change in accounting principle	—			(39,322		)
Net loss from discontinued operations	$	(6,397	)	$	(37,440	)

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Cash Flows Provided By (Used For):
Operating activities	$	4,138		$	4,587
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	$	3,341		$	3,961

Note 3. Restructuring, Asset Impairment and Other Related Charges

During the three months ended March 31, 2003 and the year ended December 31, 2002, the Company recorded restructuring, asset impairment and other related charges as follows:

	Charges Recorded During
	2003		Year Ended December 31, 2002
(In thousands)	1st Quarter		1st Quarter		2nd, 3rd & 4th Quarters		Total
	(Unaudited)
Nature of charges:
Asset Realignment Restructuring	$	—	$	—	$	6,901	$	6,901
Seat Manufacturing Facilities Restructuring	—		4,043		2,251		6,294
Other asset impairment related charges	7,500		—		12,048		12,048
Total pre-tax charges	$	7,500	$	4,043	$	21,200	$	25,243

Business segment recording the charges:
Cabin Management	$	—	$	4,043	$	9,152	$	13,195
Systems Integration	—		—		4,060		4,060
Total continuing operations	—		4,043		13,212		17,255
Discontinued operations (Specialty Avionics)	7,500		—		7,988		7,988
Total pre-tax charges	$	7,500	$	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 (Specialty Avionics)	7,500		—		7,988		7,988
Total pre-tax charges	$	7,500	$	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	7,500		—		7,988		7,988
Total pre-tax charges	$	7,500	$	4,043	$	21,200	$	25,243

Asset Realignment Restructuring

During the second quarter of fiscal 2001, the Company’s Cabin Management Group adopted a restructuring program 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 program in December 2001 designed to reduce costs and conserve working capital. This program 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 business, 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^stQuarter		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 program was completed during the fourth quarter of fiscal 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 program was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with this restructuring program, 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 program 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^stQuarter		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 program 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.

As described in Note 2, on March 14, 2003, the Company entered into a definitive agreement to sell its equity interests in the subsidiaries comprising its Specialty Avionics Group for $140,000,000 in cash. Based upon the fair value of the group implied in the definitive agreement, 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.

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 7)	(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. Goodwill

Goodwill was $196,430,000 as of March 31, 2003 and December 31, 2002.

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which 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 pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.

Note 6. Other Assets, Principally Intangibles

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)
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	$	40,394	$	39,428

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 7. 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 8. 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. Upon consummation of the sale on May 23, 2003, the Company repaid $130,000,000 of senior credit borrowings with the estimated net proceeds from the sale. The Company may be required to repay additional borrowings upon final determination of the net proceeds from the sale.

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 specified types of additional indebtedness and the repurchase of a portion of the Company’s 12% senior subordinated notes with the proceeds from the sale of junior securities.

Note 9. 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 10. 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 11. 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 five 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.

The Company was a defendant in most, but not all, of the actions brought by the estates of the 229 victims of the crash. The actions, which sought damages and costs in unstated amounts, claimed negligence, strict liability, and breach of warranty. Virtually all of the cases have been settled by Boeing and Swissair’s insurers and both assignment of the claims against, and releases in favor of, the Company have been obtained by the Boeing and Swissair insurers.

Boeing and Swissair have made a claim (but have not commenced litigation) against the Company to contribute to the amounts paid to settle the cases. As there is no litigation pending, no discovery has been taken by either side as to liability for the crash. The Company believes that it is not responsible for the crash and, in any event, it maintains insurance for such matters. The Company further believes that any loss it may sustain upon the ultimate resolution of this matter, if any, will not exceed the amount of insurance coverage maintained. Accordingly, no accrual for loss has been recorded.

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 12. Business Segment Information

The Company supplies products and services to the business, 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 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 a group’s overall core economic performance and return on invested capital. Management also uses Adjusted EBITDA in the Company’s annual budget and planning process for future periods, as one of the decision-making criteria for funding discretionary capital expenditures and product development programs and as the measure in determining the value of acquisitions and dispositions. The board of directors uses Adjusted EBITDA as one of the performance metrics for determining the amount of bonuses awarded to pursuant to the Company’s cash incentive bonus plan and as an indicator of enterprise value used in determining the exercise price of stock options granted and the acceleration of stock option vesting pursuant to the Company’s incentive stock option 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. Management believes the presentation of this measure is relevant and useful to investors because it allows investors and analysts to view group performance in a manner similar to the method used by management, helps improve their ability to understand the Company’s core segment performance, adjusted for items management believes are unusual, and makes it easier to compare the Company’s results with other companies that have different financing, capital structures and tax rates. In addition, management believes these measures are consistent with the manner in which its lenders and investors measure the Company’s overall performance and liquidity, including its ability to service debt and fund discretionary capital expenditure and product development programs.

The financial measure Adjusted EBITDA, as defined, excludes certain charges reflected in the Company’s financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, the Company’s presentation of Adjusted EBITDA 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 not be consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance GAAP, such as net income (loss), the nearest comparable GAAP financial measure. A reconciliation of Adjusted EBITDA to net income (loss) is included herein 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 (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			4,296
Corporate (2)	(2,112		)	(1,558		)
Inter-group elimination (3)	110			111
Consolidated totals (4)	$	4,705		$	10,310

(In thousands)	March 31, 2003			December 31, 2002
	(Unaudited)
Total assets (as of period end):
Cabin Management	$	284,258		$	281,655
Systems Integration	70,226			62,437
Corporate (5)	49,555			44,247
Inter-group elimination (6)	(3		)	(113		)
Continuing operations	404,036			388,226
Discontinued operations (Specialty Avionics)	152,003			160,741
Consolidated totals	$	556,039		$	548,967

(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 financial measure Adjusted EBITDA, as defined, to net income (loss).

	Three Months Ended March 31,
(In thousands)	2003			2002
	(Unaudited)
Consolidated Adjusted EBITDA (as defined)	$	4,705		$	10,310
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		)
Interest expense	(5,869		)	(5,948		)
Minority interest in preferred stock of subsidiary	(1,597		)	(1,382		)
Other expenses, net	(339		)	(113		)
Provision for income tax benefit	1,265			1,141
Loss from discontinued operations, net of tax	(6,397		)	(37,440		)
Cumulative effect of change in accounting principle	—			(17,828		)
Net loss	$	(10,757	)	$	(58,134	)

(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 13. Supplemental Condensed Consolidating Financial Information

In conjunction with the 12% senior subordinated notes described in Note 8, 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 is 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 the Company 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	347,091			—			24,518			(371,609		)(1)	—
Intercompany receivables	271,905			164,269			5,834			(442,008		)(2)	—
Total assets	$	668,551		$	676,733		$	35,196		$	(824,441	)	$	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			270,869			—			(442,008		)(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 (deficit):
Paid-in capital	116,987			337,592			82,800			(470,019		)(1)	67,360
Retained earnings (deficit)	(92,469		)	9,499			(111,858		)	87,586		(1)	(107,242		)
Accumulated other comprehensive loss	—			(364		)	—			—			(364		)
Total stockholders’ equity (deficit)	24,518			346,727			(29,058		)	(382,433		)	(40,246		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	668,551		$	676,733		$	35,196		$	(824,441	)	$	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	348,559			—			35,312			(383,871		)(1)	—
Intercompany receivables	276,121			172,389			5,740			(454,250		)(2)	—
Total assets	$	668,927		$	682,875		$	46,249		$	(849,084	)	$	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			276,008			—			(454,250		)(2)	—
Other long-term liabilities	33,601			840			—			—			34,441

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			85,015			(471,653		)(1)	69,575
Retained earnings (deficit)	(83,309		)	10,967			(100,962		)	76,819		(1)	(96,485		)
Accumulated other comprehensive loss	—			(361		)	—			—			(361		)
Total stockholders’ equity	35,312			348,198			(15,947		)	(394,834		)	(27,271		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	668,927		$	682,875		$	46,249		$	(849,084	)	$	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	3,036			4,869			—			—			7,905
Amortization of intangible assets	—			912			—			—			912
Interest expense	5,820			49			—			—			5,869
Minority interest in preferred stock of subsidiary	—			—			1,597			—			1,597
Intercompany charges	(6,523		)	6,523			—			—			—
Equity in loss of subsidiaries	4,411			69			9,160			(13,640		)(3)	—
Other expenses, net	174			165			—			—			339
Provision for income taxes (benefit)	2,242			(3,507		)	—			—			(1,265		)
Loss from discontinued operations	—			6,328			69			—			6,397

Net loss	$	(9,160	)	$	(4,411	)	$	(10,826	)	$	13,640		$	(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	3,180			8,979			—			—			12,159
Amortization of intangible assets	—			843			—			—			843
Interest expense	5,873			75			—			—			5,948
Minority interest in preferred stock of subsidiary	—			—			1,382			—			1,382
Intercompany charges	(7,150		)	7,150			—			—			—
Equity in loss of subsidiaries	53,802			9,523			56,752			(120,077		)(3)	—
Other expenses, net	91			22			—			—			113
Provision for income tax benefit	(528		)	(613		)	—			—			(1,141		)
Loss from discontinued operations	—			27,917			9,523			—			37,440
Cumulative effect of change in accounting principle	1,484			16,344			—			—			17,828

Net loss	$	(56,752	)	$	(53,802	)	$	(67,657	)	$	120,077		$	(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	)	$	(4,411	)	$	(10,826	)	$	13,640	(3)	$	(10,757	)
Loss from discontinued operations	—			6,328			69			—			6,397
Noncash adjustments:
Equity in loss of subsidiaries	4,411			69			9,160			(13,640		)(3)	—
Other noncash adjustments	237			1,509			1,597			—			3,343
Changes in working capital	(16,438		)	(4,912		)	—			—			(21,350		)
Net cash used for operating activities	(20,950		)	(1,417		)	—			—			(22,367		)

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	—			3,341			—			—			3,341

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	)	$	(53,802	)	$	(67,657	)	$	120,077	(3)	$	(58,134	)
Loss from discontinued operations	—			27,917			9,523			—			37,440
Noncash adjustments:
Equity in loss of subsidiaries	53,802			9,523			56,752			(120,077		)(3)	—
Other noncash adjustments	2,516			22,145			1,382			—			26,043
Changes in working capital	4,724			(9,078		)	—			—			(4,354		)
Net cash provided by (used for) operating activities	4,290			(3,295		)	—			—			995

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	—			3,961			—			—			3,961

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

On May 23, 2003, we consummated the sale of our equity interests in the subsidiaries comprising the Specialty Avionics Group to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC, for $140.0 million in cash. Proceeds of $130.0 million from the sale were used to repay senior credit facility borrowings, in accordance with the facility’s terms which were amended to permit the sale.

As we originally described in our Form 10-K for the year ended December 31, 2002, our failure to consummate the sale of the Specialty Avionics Group by June 30, 2003 would have been an event of default under the amended senior credit facility. As a result, our independent accountants qualified their report on our audited financial statements for the year ended December 31, 2002 with respect to our ability to continue as a going concern. Consummation of the sale and repayment of $130.0 million of borrowings alleviated our independent accountants’ doubt about our ability to continue as a going concern. As a result, our independent accountants issued a revised, unqualified report on our financial statements, which we included in Amendment No. 1 to our Form 10-K for the year ended December 31, 2002. See “—Liquidity and Capital Resources–Recent Developments Affecting Financial Condition and Liquidity” below for additional information.

The sale of the Specialty Avionics Group is not expected to affect the operations of the remaining operating groups. As a result of the sale, the Specialty Avionics Group is presented as a discontinued operation in our consolidated financial statements and our discussion below of our results of operations reflects only continuing operations for all periods.

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: business, 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 the aerospace industry.

In response to certain of these adverse conditions, we announced and implemented a restructuring program in December 2001 designed to reduce expenses and conserve working capital. This program 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 business, VIP and head-of-state aircraft portion of our business experienced weakness during 2002 and will continue to experience weakness throughout 2003 as evidenced by various manufacturers’ announced plans to temporarily suspend production at various times throughout the year in response to the weak demand for new aircraft. However, we believe business, VIP and head-of-state aircraft deliveries may experience a modest recovery in 2004 and continuing recovery thereafter. The

commercial aircraft portion of our business, which subsequent to the sale of the Specialty Avionics Group accounts for less than 5% of consolidated revenues, also experienced significant weakness in 2002 and the first half of 2003 and we believe this condition will continue through 2003 and into 2004, with potential recovery not expected to occur until at least 2005. Our beliefs are based on the assumptions that we will experience economic recovery and there are no further negative geo-political developments affecting our industry.

Results of Operations

Performance Measures

The following discussion of our results of operations includes discussions of financial measures and operating statistics we use to evaluate the performance of, and trends in, our businesses. We believe the presentation of these measures and statistics are relevant and useful to investors because it allows them to view performance and trends in a manner similar to the methods we use. These measures and statistics, and why they are important to us and could be of interest to you, are described below.

Adjusted EBITDA. Our discussion of the results of operations includes discussions of financial measures determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as well as the financial measure Adjusted EBITDA, which excludes certain charges reflected in our GAAP basis financial statements. Our presentation of Adjusted EBITDA is in accordance with the GAAP requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which requires us to report the primary measure of segment performance we use to evaluate and manage our businesses.

We utilize more than one measurement to evaluate segment performance and allocate resources among our operating segments; however, we consider Adjusted EBITDA, as defined below, to be the primary measurement of overall operating segment core economic performance and return on invested capital. We also use Adjusted EBITDA in the annual budgeting and planning for future periods, as one of the decision-making criteria for funding discretionary capital expenditure and product development programs and as the measure for determining the value of acquisitions and dispositions. Our board of directors uses Adjusted EBITDA as one of the performance metrics for determining the amount of bonuses awarded to pursuant to the cash incentive bonus plan and as an indicator of enterprise value used in determining the exercise price of stock options granted and the acceleration of stock option vesting pursuant the incentive stock option plan.

We define 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. We believe the presentation of this measure is relevant and useful to investors because it allows investors and analysts to view segment performance in a manner similar to the method we use, helps improve their ability to understand our core segment performance, adjusted for items we believe are unusual, and makes it easier to compare our results with other companies that have different financing, capital structures and tax rates. In addition, we believe these measures are consistent with the manner in which our lenders and investors measure our overall performance and liquidity, including our ability to service debt and fund discretionary capital expenditure and product development programs.

Our method of calculating Adjusted EBITDA 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 net income (loss), the nearest comparable GAAP financial measure. Adjusted EBITDA should not be viewed as substitutes for or superior to net income (loss), cash flow from operations or other data prepared in accordance with GAAP as a measure of our profitability or liquidity. The notes to our financial statements include information about our operating segments, including Adjusted EBITDA, and

should be read in conjunction with the discussions presented herein. The notes to our financial statements also include a reconciliation of Adjusted EBITDA to net income (loss) to clarify the differences between these financial measures.

Bookings and Backlog. Bookings and backlog are operating statistics we use as leading trend indicators of future demand for our products and services. Bookings and backlog are based upon the value of purchase orders received from our customers, which will result in revenues, if and when such orders are filled.

Bookings represent the total invoice value of purchase orders received during the period and backlog represents the total invoice value of unfilled purchase orders as of the end of a period. Orders may be subject to change or cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of our receipt of orders and the speed with which those orders are filled.

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

Our results of operations have been affected by restructuring, asset impairment and other related charges relating to our 2002 restructuring program and goodwill impairment charges. These charges, which affect the comparability of our reported results of operations between periods, are more fully described in “—Restructuring, Asset Impairment and Other Related Charges” and “—Goodwill Impairment Charges” below.

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 all of our product and services categories, is caused by the ongoing adverse impact of weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. The 2003 decrease consists of:

• 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.

The revenue decrease was caused by lower order volume from our customers as opposed to a loss of customers or price reductions. The decrease in order volume is attributable to weak global economic conditions and the impact these conditions are having on manufacturers of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide to them. Weak global economic conditions have reduced the amount of discretionary income available to purchase and operate

these types of aircraft. As a result, the manufacturers of these aircraft have experienced a decrease in orders for new aircraft which, in turn, reduces the orders our customers place with us.

Revenues from Textron and Bombardier, our principal customers, decreased $10.6 million compared to the prior year as a result of the decrease in orders and resulting production of aircraft they are experiencing due to the economic downturn. Bombardier temporarily suspended production of various models of aircraft for several weeks during the first quarter of fiscal 2003 in response to their low order backlog. Textron has announced plans for a similar planned shut down during the second and third quarters of fiscal 2003 as well. We also experienced similar volume decreases from our other customers during the period.

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 demand for our business, VIP and head-of-state aircraft products and services due to the adverse impact weak global economic conditions are having on the demand for those types of aircraft as follows:

• a $1.7 million decrease in our aircraft completion and modification revenues; and

• a $0.6 million decrease in BBJ auxiliary fuel systems revenues; and

• a $0.6 million decrease in the commercial aircraft systems integration engineering services we provide resulting from 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 business, 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 business/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 $4.3 million, or 35.0%, to $7.9 million for the three months ended December 31, 2003, from $12.2 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	(0.2		)
Total	$	(4.3	)

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, as follows:

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

Depreciation charged to:
Cost of sales	$	(0.2	)	(15.3	)%
Selling, general and administrative expense	(0.2		)	(19.0	)
Amortization of intangible assets	0.1			8.2
Total	$	(0.3	)

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

Cabin Management. Adjusted EBITDA decreased by $2.9 million, or 39.0% compared to the prior year primarily due to:

• a $3.3 million decrease in gross profit related to lower volume in our business/VIP aircraft furniture and seating operations;

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

• a $0.2 million increase in gross profit related to other products and services; and

• a $0.6 million decrease in SG&A spending.

Systems Integration. Adjusted EBITDA decreased by $2.1 million, or 49.8% over the prior year, due to lower sales volume partially offset by reduced SG&A spending resulting from workforce reductions.

Operating income. Operating income decreased $1.3 million or 36.5%, to $2.2 million for the three months ended March 31, 2003, from $3.5 million for the same period last year. Operating income changed as follows:

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

Cabin Management	$	0.7		32.6	%
Systems Integration	(2.1		)	(58.3	)
Corporate	0.1
Total	$	(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

• a $3.3 million decrease in gross profit, principally related to lower revenues in our business, 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.

Interest expense. Interest expense decreased $0.1 million, or 1.3%, to $5.9 million for the three months ended March 31, 2003 compared to $6.0 million for the same period last year. We expect interest expense to increase in 2003 as a result of a 1.5% increase in interest rates charged by our lenders as a result of the amendment to our senior credit facility, partially offset by lower principal balances outstanding.

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 $4.4 million for the three months ended March 31, 2003 compared to $2.9 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 $6.4 million for the three months ended March 31, 2003 compared to a loss of $37.5 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;” offset by

• a $7.5 million charge in 2003 for the impairment of goodwill to reduce the carrying value of the assets sold to their estimated net realizable value based upon the $140.0 million fair value implied in definitive agreement to sell the Specialty Avionics Group.

The 2002 and 2003 charges are attributable to the goodwill impairment of one of the three reporting units within the Specialty Avionics Group. Aggregate goodwill was $80.7 million as of December 31, 2002 and $73.2 million as of March 31, 2003, after the $7.5 million 2003 impairment charge. See “—Goodwill Impairment Charges” below for additional information.

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,” as described in “—Goodwill Impairment Charges” below. Including the $39.4 million 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, 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, 2003 and the year ended December 31, 2002, we recorded restructuring, asset impairment and other related pre-tax charges, principally related to our restructuring activities. These charges are summarized in the table below.

	Charges Recorded During
	2003		Year Ended December 31, 2002
(In millions)	1st Quarter		1st Quarter		2nd, 3rd & 4th Quarters		Total

Nature of charges:
Asset Realignment Restructuring	$	—	$	—	$	6.9	$	6.9
Seat Manufacturing Facilities Restructuring	—		4.0		2.3		6.3
Goodwill impairment charges	7.5		—		7.7		7.7
Other asset impairment related charges	—		—		4.3		4.3
Total pre-tax charges	$	7.5	$	4.0	$	21.2	$	25.2

Business segment recording the charges:
Cabin Management	$	—	$	4.0	$	9.2	$	13.2
Systems Integration	—		—		4.0		4.0
Total continuing operations	—		4.0		13.2		17.2
Discontinued operations (Specialty Avionics)	7.5		—		8.0		8.0
Total pre-tax charges	$	7.5	$	4.0	$	21.2	$	25.2

Charged to operations:
Cost of sales	$	—	$	1.2	$	9.4	$	10.6
Selling, general and administrative expenses	—		2.8		3.8		6.6
Discontinued operations (Specialty Avionics)	7.5		—		8.0		8.0
Total pre-tax charges	$	7.5	$	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 pre-tax charges	—		4.0		13.2		17.2
Discontinued operations noncash charges	7.5		—		8.0		8.0
Total pre-tax charges	$	7.5	$	4.0	$	21.2	$	25.2

Asset Realignment Restructuring

During the second quarter of fiscal 2001, we adopted a restructuring program 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. This program primarily affected our Cabin Management and Specialty Avionics Groups.

Due to the ongoing weakness of the business, 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 restructuring, asset impairment charges and other related expenses.

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

Nominal future monthly cash payments will be required during the remainder of 2003 due to lease payments on the vacated facilities and the incurrence of other facility exit costs related to both restructuring programs. The future cash payments will be funded from existing cash balances and internally generated cash from operations.

Goodwill Impairment Charges

Due to continued weakness in the commercial aircraft portion of our business, in the fourth quarter of fiscal 2002 we recorded a pre-tax charge of $7.7 million related to our annual goodwill impairment testing pursuant to SFAS No. 142. The impairment charge pertained to the Specialty Avionics Group.

See “—Goodwill Impairment Charges” below for additional information.

Due to continued weakness in the commercial aircraft portion of our business, in the fourth quarter of fiscal 2002 we recorded a pre-tax charge of $4.3 related to inventories and was charged to cost of goods sold. Charges totaling $0.3 million pertained to the Specialty Avionics Group.

Goodwill Impairment Charges

The following discussion should be read in conjunction with Notes 2, 3 and 5 accompanying our unaudited financial statements included in this report.

Our results of operations for the three months ended March 31, 2003 and 2002 have been affected by the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” and goodwill impairment charges.

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

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

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

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

During 2002, we 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. Our Cabin Management Group consists of three reporting units, our Systems Integration Group consists of two and the Specialty Avionics consists of three. Unallocated goodwill was allocated to the reporting units for impairment testing purposes. The results indicated that the carrying value of goodwill was impaired at one of the reporting units within each of our operating groups. 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, we recorded a $17.8 million noncash write-down of goodwill (net of $0.9 million income tax benefit) as of January 1, 2002 as a cumulative effect of a change in accounting principle. An additional $39.4 million noncash write-down of goodwill pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.

Changes in the carrying amount of goodwill, by business segment, for the three months ended March 31, 2003 are as follows:

	Continuing Operations								Discontinued Operations
(In millions)	Cabin Management Group		Systems Integration Group		Corporate		Total		Specialty Avionics Group

Balance, December 31, 2002	$	173.9	$	20.8	$	1.7	$	196.4	$	80.7
Impairment charge	—		—		—		—		(7.5		)
Balance, March 31, 2003	$	173.9	$	20.8	$	1.7	$	196.4	$	73.2

During the first quarter of fiscal 2003, we entered into a definitive agreement to sell the Specialty Avionics Group. Based upon the fair value of the group implied in the definitive agreement, we determined that the carrying value of the group’s net assets was not fully recoverable. As required by SFAS No. 142, we recorded a goodwill impairment charge of $7.5 million during the three months ended March 31, 2003 to reduce the carrying value to the estimated net realizable value established by the definitive agreement. We recorded a modest $0.7 million gain on the sale during the second quarter of fiscal 2003, based on the actual financial position of the group on the date of sale. However, the ultimate gain or loss on the sale is subject to finalizing the post-closing adjustment, which is not expected to be material, if any.

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 Aircraft’s 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 Aircraft’s 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, potential capital market transactions and third party borrowings, principally under its senior credit facility.

Cash Flows During the Three Months Ended March 31, 2003

Net cash used by operating activities was $22.4 million for the three months ended March 31, 2003 and consisted of $1.1 million of cash used by operations after adding back depreciation, amortization, the noncash portion of our restructuring and asset impairment charges and other noncash items, $20.2 million used for working capital and $1.1 million to reduce other liabilities. The following factors contributed to the $20.2 million working capital increase:

• an $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 sale of the 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.

Capital Resources and Debt Obligations as of March 31, 2003

As of March 31, 2003, we had $75.6 million of working capital, excluding the assets and liabilities of our discontinued operations, compared to $55.4 million as of December 31, 2002. As of March 31, 2003, we also had $6.5 million of borrowings available under our revolving line of credit, as amended in March 2003 and described below, compared to $43.6 million available as of December 31, 2002. Our revolving line of credit expires in September 2004. We may not be able to replace it on commercially acceptable terms, or at all. As of 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, compared to $270.2 million as of December 31, 2002. We also had $100.0 million of 12% senior subordinated notes as of March 31, 2003 and December 31, 2002 and other indebtedness totaling $9.9 million outstanding as of March 31, 2003 compared to $10.8 million as of December 31, 2002.

The increase in working capital is principally attributable to spending $11.5 million for inventory pursuant to long-term contracts and reducing accounts payable and accrued expenses by $5.4 million between the periods. These expenditures were funded through borrowings under our revolving line credit, which is part of our senior credit facility. In addition, the March 2003 senior credit facility amendment reduced by $10.0 million the maximum permitted borrowings under the revolving line of credit.

The senior credit facility and senior subordinated notes indenture impose restrictive and financial covenants on us. In March 2003, terms and financial covenants contained in our senior credit facility were amended to, among other things, permit the sale of the Specialty Avionics Group which was consummated on May 23, 2003. As required by the amendment, we repaid $130.0 million of senior credit facility borrowings with the proceeds from the sale. See “–Recent Developments Affecting Financial Condition and Liquidity” below for additional information.

Recent Developments Affecting Financial Condition and Liquidity

As more fully described in “—Industry Overview and Trends,” the acts and ongoing threats of global terrorism, the current military conflicts, SARS epidemic and weak global economic conditions are all adversely impacting our business. In response, we implemented restructuring programs 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 that we would likely not be in compliance with our senior credit facility’s financial covenants in 2003. We believe that when the aerospace industry recovers, the demand for our Cabin Management and Systems Integration groups’ products and services for business, 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 the 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 equity interests in the subsidiaries comprising the Specialty Avionics Group for $140.0 million in cash and received requisite lender approval on March 28, 2003 to amend the senior credit facility to permit the sale. We consummated the sale on May 23, 2003 and, as required by the senior credit facility amendment, used $130.0 million of the proceeds from the sale to repay senior credit facility borrowings. The senior credit facility 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 specified types of additional indebtedness and the repurchase of up to $20.0 million aggregate principal amount of our 12% senior subordinated notes with the proceeds from the sale of junior securities. Junior securities means: (i) senior subordinated notes issued by us that are unsecured and do not provide for any scheduled redemptions or prepayments or any sinking fund installment payments or maturities prior to the termination of the senior credit facility, or other indebtedness subordinated in right of payment to our obligations under the senior credit facility, and whose material terms are satisfactory to the lenders; and (ii) equity securities issued by us.

The table below reflects senior credit facility borrowings as of March 31, 2003, adjusted to reflect the $130.0 million repayment with the proceeds from the sale and the adjustment of the future maturities pursuant to the amendment.

	Senior Credit Facility Borrowings As of March 31, 2003
(In millions)	Historical		Repayment			As Adjusted

Total maturities during the:
Nine months ending December 31, 2003	$	11.4	$	(11.4	)	$	—
Year ending December 31, 2004	79.9		(39.2		)	40.7
Year ending December 31, 2005	96.6		(29.7		)	66.9
Year ending December 31, 2006	106.2		(49.7		)	56.5
Total senior credit facility borrowings	$	294.1	$	(130.0	)	$	164.1

We believe our expected operating cash flows, together with borrowings under our senior credit facility ($6.5 million of which was available as of March 31, 2003 ($10.5 million on a pro forma basis), the commitment for which expires in September 2004), 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 comply with our debt financial covenants, pay principal or interest and 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. Although we cannot be certain, we expect to be in compliance with the revised financial covenants through the end of the year based on our current operating plan.

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

additional financing on acceptable terms. We are not currently party to any definitive acquisition agreements.

Disclosure of Contractual Obligations and Commitments

The following table summarizes our known contractual 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 obligations have also been adjusted to reflect the repayment of $130.0 million of senior credit facility borrowings with the proceeds from the May 23, 2003 sale of the Specialty Avionics Group, assuming the sale was consummated on March 31, 2003 and the repayment had occurred on that date.

Years Ending December 31,

(In millions)

Total

2003

2004
and
2005

2006
and
2007

2008
and
Beyond

Obligations as of March 31, 2003:

Long-term debt (a):

Senior credit facility

294.1

11.4

176.5

DECRANE HOLDINGS CO 10-Q/A