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Decrane Cabin Interiors LLC, et al. – IPO: ‘S-1/A’ on 10/6/03

On:  Monday, 10/6/03, at 3:11pm ET   ·   Accession #:  1047469-3-32628   ·   File #s:  333-106381, -01, -02, -03, -04, -05, -06, -07, -08, -09, -10, -11, -12, -13, -14

Previous ‘S-1’:  ‘S-1/A’ on 9/18/03   ·   Latest ‘S-1’:  This Filing

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

10/06/03  Decrane Cabin Interiors LLC       S-1/A                  2:2.2M                                   Merrill Corp/New/FA
          Pats Inc
          Precision Pattern Inc
          Ppi Holdings Inc
          Dah-Ip Holdings Inc
          Carl F Booth & Co LLC
          Hollingshead International Inc
          Audio International Inc
          Infinity Partners Ltd
          Custom Woodwork & Plastics LLC
          Pci Newco Inc
          Decrane Aircraft Seating Co Inc
          Decrane Aircraft Furniture Co LP
          Dah-Ip Infinity Inc
          Decrane Aircraft Holdings Inc

Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Pre-Effective Amendment to Registration Statement   HTML   2.13M 
                          (General Form)                                         
 2: EX-23.2     Consent of Experts or Counsel                       HTML     10K 


S-1/A   —   Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Additional Registrants
"Explanatory Note
"Table of Contents
"Summary
"Our Company
"Our Operating Groups
"Industry Overview and Trends
"Risk Factors
"The Notes
"Summary Selected Consolidated Financial Data
"Risks Relating to Our Substantial Debt
"Risk Related to Our Control by Principal Stockholders
"Risks Related to Our Business
"Special Note Regarding Forward-Looking Statements
"RECENT DEVELOPMENTS Sale of the Specialty Avionics Group
"Industry and Market Data
"Capitalization
"Use of Proceeds
"Selected Consolidated Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Recent Developments
"Results of Operations
"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
"Critical Accounting Policies
"Recently Issued Accounting Pronouncements
"Quantitative and Qualitative Disclosures About Market Risk
"Business
"Management
"Directors and Executive Officers
"Executive Compensation
"Directors
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT DeCrane Aircraft
"DeCrane Holdings
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Acquisition of Donaldson, Lufkin & Jenrette, Inc. by Credit Suisse Group
"Transactions with Management and Others
"Indebtedness of Executive Officers and Directors
"Description of the Senior Bank Credit Facility
"DESCRIPTION OF THE NOTES General
"Principal, Maturity and Interest
"Subordination
"Note Guarantees
"Optional Redemption
"Selection and Notice
"Mandatory Redemption
"Repurchase at the Option of Holders
"Principal Covenants
"Events of Default and Remedies
"No Personal Liability of Member, Directors, Officers, Employees and Stockholders
"Legal Defeasance and Covenant Defeasance
"Transfer and Exchange
"Amendment, Supplement and Waiver
"Concerning the Trustee
"Book-Entry, Delivery and Form
"Key Definitions
"Plan of Distribution
"Legal Matters
"Experts
"Available Information
"Index to Consolidated Financial Statements
"Report of Independent Accountants
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Operations
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholder's Equity
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholder's Equity (Deficit)
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Condensed Notes to Unaudited Consolidated Financial Statements
"Part Ii-Information Not Required in Prospectus
"Item 13. Other Expenses of Issuance and Distribution
"Item 14. Indemnification of Directors and Officers
"Item 15. Recent Sales of Unregistered Securities
"Item 16. Exhibits and Financial Statement Schedules
"Report of Independent Accountants on Financial Statement Schedule
"DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Financial Statement Schedules Schedule II-Valuation and Qualifying Accounts
"Item 17. Undertakings
"Signatures
"Exhibit Index
"QuickLinks

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As filed with the Securities and Exchange Commission on October 6, 2003

Registration No. 333-106381



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


AMENDMENT NO. 3
TO
FORM S-1
  
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

DECRANE AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

SEE TABLE OF ADDITIONAL REGISTRANTS


Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  3728
(Primary Standard Industrial
Classification Number)
  34-1645569
(I.R.S. Employer
Identification No.)

2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
(310) 725-9123
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)

Richard J. Kaplan
Senior Vice President, Chief Financial Officer, Secretary and Treasurer
DeCrane Aircraft Holdings, Inc.
2361 Rosecrans Avenue, Suite 180
El Segundo, California 90245
(310) 725-9123
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Michael P. Kaplan
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
  Stephen A. Silverman
Spolin Silverman Cohen & Bartlett LLP
1620 26th Street, Suite 2000 North
Santa Monica, California 90404
(310) 586-2400

        Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ý

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: o


CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be Registered
  Proposed Maximum Aggregate
Offering Price

  Registration Fee
Amount of


12% Series B Senior Subordinated Notes due 2008   (1)   $0(2)

Guarantees thereof by the Additional Registrants   (1)   $0(3)

(1)
Pursuant to Rule 457(q), this Registration Statement registers an indeterminate number of securities to be offered solely for market-making purposes by an affiliate of the Registrant.

(2)
Pursuant to Rule 457(q), no filing fee is required.

(3)
Pursuant to Rule 457(n), no filing fee is required.

        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.





TABLE OF ADDITIONAL REGISTRANTS

        The following direct and indirect subsidiaries of DeCrane Aircraft Holdings, Inc. are co-registrants, as guarantors of the notes registered hereby:


Co-Registrants
  State of
Incorporation
or Organization

  I.R.S.
Employer
Identification
Number

  Co-Registrants
  State of
Incorporation or
Organization

  I.R.S. Employer
Identification
Number


Audio International, Inc.   Arkansas   71-0640962   DeCrane Cabin Interiors, LLC   Delaware   75-2973281

Carl F. Booth & Co., LLC   Delaware   31-1706019   Hollingsead International, Inc.   California   95-2500766

Custom Woodwork & Plastics, LLC   Delaware   94-3369982   PATS, Inc.   Maryland   52-1067232

DAH-IP Holdings, Inc.   Delaware   74-2936057   PCI Newco, Inc.   Delaware   74-2931488

DAH-IP Infinity, Inc.   Delaware   75-2850564   PPI Holdings, Inc.   Kansas   74-2814579

DeCrane Aircraft Furniture Co., L.P.   Texas   74-2961069   Precision Pattern, Inc.   Kansas   48-0759147

DeCrane Aircraft Seating Company, Inc.   Wisconsin   39-1422413   The Infinity Partners, Ltd.   Texas   74-2936058



EXPLANATORY NOTE

        This Registration Statement is being filed for purposes of permitting market-making by Credit Suisse First Boston LLC, which is an affiliate of the Registrant. The Registrant had previously filed a Registration Statement for market-making on Form S-3. This new Registration Statement is being filed because (i) the Registrant is not currently eligible to use Form S-3 and (ii) additional guarantors have been added as registrants, while other entities that previously guaranteed the Notes have been liquidated or sold and released as guarantors.



The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 6, 2003

PROSPECTUS

GRAPHIC

DeCrane Aircraft Holdings, Inc.
12% Series B Senior Subordinated Notes due 2008

        Interest on the notes is payable on March 30 and September 30 of each year. We have the right to redeem any notes at any time beginning September 30, 2003 at the redemption prices stated in this prospectus, plus accrued interest. We will also have the right to redeem, and you will have the right to require us to purchase, the notes upon the occurrence of certain change of control events.

        The notes rank junior to our senior indebtedness and secured debt, including the debt owed under our senior bank credit facility. The notes are unconditionally guaranteed on a senior subordinated basis by all of our existing subsidiaries, and rank junior to the guarantors' senior and secured debt and equally with their future unsecured, senior subordinated debt.


Investing in the notes involves a high degree of risk.
See "Risk Factors" beginning on page 9.


        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

        This prospectus will be used by Credit Suisse First Boston LLC in connection with offers and sales in market-making transactions at negotiated prices related to prevailing market prices. There is currently no public market for the notes. We do not intend to list the notes on any securities exchange. Credit Suisse First Boston LLC has advised us that it intends to make a market in the notes; however, it is not obligated to do so and may stop at any time. Credit Suisse First Boston LLC may act as principal or agent in any such transaction. We will not receive the proceeds of the sale of the notes but will bear the expenses of registration.

Credit Suisse First Boston

                                , 2003



Table of Contents

 
  Page
Summary   1
Risk Factors   9
Recent Developments   17
Industry and Market Data   18
Capitalization   19
Use of Proceeds   19
Selected Consolidated Financial Data   20
Management's Discussion and Analysis of Financial Condition and Results of Operations   25
Business   59
Management   72
Security Ownership of Certain Beneficial Owners and Management   79
Certain Relationships and Related Transactions   83
Description of the Senior Bank Credit Facility   87
Description of the Notes   90
Plan of Distribution   129
Legal Matters   130
Experts   130
Available Information   130
Index to Consolidated Financial Statements   F-1

        You should rely only on the information contained in this prospectus and any supplement. We have not authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. This prospectus is not an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and any supplement is accurate as of its date only. Our business, financial condition, results of operations and prospects may have changed since that date.

i



SUMMARY

        This summary highlights the more detailed information in this prospectus and you should read the entire prospectus carefully. In this prospectus, "DeCrane," "DeCrane Aircraft," the "Company," "we," "us" or "our" refers to DeCrane Aircraft Holdings, Inc. and its subsidiaries, except where the context makes clear that the reference is only to DeCrane Aircraft Holdings, Inc. itself and not its subsidiaries.


Our Company

        DeCrane Aircraft Holdings, Inc., a Delaware corporation founded in 1989, is a provider of integrated assemblies, sub-assemblies and component parts to the aerospace industry. Since our founding in 1989, we have experienced both internal growth and external growth by identifying fragmented, high-growth niche segments within the aerospace industry and acquiring market-leading companies in those niches. Today, we have product capability within two specific segments of the aerospace industry: cabin management for business, VIP and head-of-state aircraft and systems integration services. Within these markets, our customers include original manufacturers of business, VIP and head-of-state aircraft, commonly referred to as OEM's, and aircraft repair and modification centers.


Our Operating Groups

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

        Prior to May 23, 2003, we also had a third strategic business, the Specialty Avionics Group. As described in "Recent Developments—Sale of the Specialty Avionics Group," we sold our equity interests in the companies comprising this group and, as a result, the financial position, results of operations and cash flows of this group are reflected as a discontinued operation in this prospectus.

Cabin Management Group

        DeCrane's Cabin Management Group contributed approximately 75% of our revenues for the year ended December 31, 2002 and 69% for the six months ended June 30, 2003.

        Our Cabin Management Group is a leading independent provider of cabin products, with a primary focus on serving the business, VIP and head-of-state aircraft market. Since 1997, our Cabin Management Group has acquired nine companies involved in the engineering, manufacturing and assembly of the key components for the interior of a business, VIP and head-of-state aircraft, including cabin interior furnishings, veneer, cabin management systems, seating and composite components. Our Cabin Management Group serves major manufacturers of business, VIP and head-of-state aircraft, including Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream and Raytheon.

        The Cabin Management Group introduced the concept of modularity to the business, VIP and head-of-state aircraft market by offering totally integrated interior products. In our view, one of the greatest challenges facing the industry's aircraft manufacturers is minimizing the lead-time necessary to complete an unfinished "green" aircraft. We believe our distinctive approach of delivering integrated assemblies and sub-assemblies addresses this challenge by providing our customers with entire pre-engineered, pre-wired and pre-plumbed modular cabin interiors and management systems ready for final integration into the aircraft. We believe our totally integrated interior products enable our customers to reduce their lead times, supplier base and overall costs.

1



Systems Integration Group

        DeCrane's Systems Integration Group contributed approximately 25% of our revenues for the year ended December 31, 2002 and 31% for the six months ended June 30, 2003.

        Our Systems Integration Group provides a range of aircraft retrofit, completion and refurbishment services, from conceptual design to Federal Aviation Administration certification, including engineering, manufacturing and installation. One of our largest businesses in this group is the design, production and installation of auxiliary fuel systems, which extend the range of an aircraft. We have an exclusive long-term contract through December 31, 2004 with Boeing Business Jet ("BBJ") (which may be cancelled by BBJ at any time upon prior written notice) to design, manufacture and install auxiliary fuel systems on the BBJ, a Boeing 737-700IGW, and the BBJ2, a Boeing 737-800, and are one of only four world-wide approved BBJ/BBJ2 service centers. During 2002, we delivered our first business, VIP and head-of-state aircraft interior completion on a BBJ2 aircraft and are under contract to perform an interior completion on a BBJ aircraft for delivery in 2003.

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


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. Weak global economic conditions, which were exacerbated by the September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism, the current Middle Eastern military conflicts and the Severe Acute Respiratory Syndrome, or SARS, epidemic are all adversely impacting the aerospace industry and have led to a decrease in demand for business, VIP and head-of-state aircraft.

        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.


Risk Factors

        See "Risk Factors" of a discussion of various risks associated with an investment in the notes.


        Our principal executive offices are located at 2361 Rosecrans Avenue, Suite 180, El Segundo, CA 90245 and our telephone number is (310) 725-9123. See also "Available Information" for information on how to obtain additional information.

2



The Notes

        The following summary is provided solely for your convenience. The summary is not intended to be complete. You should read the more specific details contained in "Description of the Notes."

Securities Offered   12% Series B Senior Subordinated Notes due 2008.

Maturity

 

September 30, 2008.

Interest

 

Interest will be payable in cash on March 30 and September 30 of each year.

Optional Redemption

 

We may redeem any of the notes beginning on September 30, 2003. The initial redemption price is 106% of their principal amount, plus accrued interest. The redemption price will decline each year thereafter and will be 100% of their principal amount, plus accrued interest, beginning on September 30, 2006.

Change of Control

 

Upon a change of control (as defined under "Description of the Notes"), we will be required to make an offer to purchase the notes. The purchase price will equal 101% of the principal amount of the notes on the date of purchase plus accrued interest. In addition, at any time prior to September 30, 2003, we may redeem the notes upon a change of control at a price equal to 100% of their principal amount plus a "make-whole" premium and accrued interest. We may not have sufficient funds available at the time of any change of control to make any required debt repayment (including repurchases of the notes).

Guarantees

 

The notes are guaranteed by all of our existing subsidiaries. The notes will also be guaranteed by our future wholly-owned domestic restricted subsidiaries that guarantee our senior bank credit facility.

Ranking

 

The notes and the guarantees rank junior to our senior indebtedness and secured debt, including the debt owed under our senior bank credit facility. The notes will also effectively rank junior to all liabilities of our future subsidiaries that do not guarantee the notes. As of the date of this prospectus, all of our subsidiaries guarantee the notes. As of June 30, 2003, we had senior indebtedness and secured debt outstanding of approximately $159.9 million.

Restrictive Covenants

 

The terms of the notes restrict our ability and the ability of certain of our subsidiaries (as described in "Description of Notes") to:

 

 


 

incur additional indebtedness;

 

 


 

create liens;

 

 


 

engage in sale-leaseback transactions;

 

 


 

pay dividends or make distributions in respect of capital stock;
         

3



 

 


 

purchase or redeem capital stock;

 

 


 

make investments or certain other restricted payments;

 

 


 

sell assets;

 

 


 

issue or sell stock of restricted subsidiaries;

 

 


 

enter into transactions with stockholders or affiliates; or

 

 


 

effect a consolidation or merger.

 

 

However, these limitations will be subject to a number of important qualifications and exceptions.

Use of Proceeds

 

We will not receive any proceeds from the offering of notes. See "Use of Proceeds." The notes were originally issued in October 1998 in a private placement in an aggregate principal amount of $100.0 million to refinance a bridge loan borrowed in connection with the acquisition of us by our principal stockholders, DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities. We received net proceeds from the sale of the notes of approximately $96.0 million.

4



Summary Selected Consolidated Financial Data

        The following table presents selected historical consolidated financial data for DeCrane Aircraft Holdings, Inc. The data as of and for the each of the three years in the period ended December 31, 2002 were derived from the audited consolidated financial statements and related notes for those periods. The data as of and for each of the six month periods ended June 30, 2003 and 2002 were derived from the unaudited consolidated financial statements for those periods which, in the opinion of management, are presented on a basis consistent with the audited consolidated financial statements and include all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented. All information in this table and the accompanying notes should be read in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited historical consolidated financial statements and related notes included in this prospectus.

 
  (1)
 
 
  Six Months Ended
June 30,

  Year Ended
December 31,

 
 
  2003
  2002
  2002
  2001
  2000
 
 
  (In thousands)

 
Statement of Operations Data:                                
Revenues   $ 86,013   $ 122,112   $ 229,841   $ 272,112   $ 236,501  
Cost of sales (2)     76,286     92,212     170,485     196,866     155,134  
   
 
 
 
 
 
Gross profit     9,727     29,900     59,356     75,246     81,367  
Selling, general and administrative expenses (3)     14,477     24,247     40,318     45,429     33,345  
Impairment of goodwill (4)     34,000             8,583      
Amortization of intangible assets (5)     1,826     1,717     3,540     12,436     10,628  
   
 
 
 
 
 
Operating income (loss)     (40,576 )   3,936     15,498     8,798     37,394  
Interest expense (6)     12,337     12,082     25,376     29,645     27,181  
Other expenses, net     746     199     505     634     277  
   
 
 
 
 
 
Loss from continuing operations before provision for income taxes     (53,659 )   (8,345 )   (10,383 )   (21,481 )   9,936  
Provision for income taxes (benefit) (7)     (10,630 )   (3,191 )   (3,621 )   (3,933 )   4,607  
   
 
 
 
 
 
Income (loss) from continuing operations     (43,029 )   (5,154 )   (6,762 )   (17,548 )   5,329  
Income (loss) from discontinued operations, net of tax (8)     (5,650 )   (35,702 )   (41,396 )   3,546     (1,727 )
Cumulative effect of change in accounting principle (9)         (17,828 )   (17,828 )        
   
 
 
 
 
 
Net income (loss)   $ (48,679 ) $ (58,684 ) $ (65,986 ) $ (14,002 ) $ 3,602  
   
 
 
 
 
 
Net income (loss) applicable to common stockholder   $ (51,933 ) $ (61,499 ) $ (71,827 ) $ (19,063 ) $ 1,328  
   
 
 
 
 
 
Other Financial Data:                                
Restructuring, asset impairment and other related charges (10)   $ 54,894   $ 11,709   $ 17,255   $ 25,834   $  
Depreciation and amortization (11)     4,967     5,447     10,612     20,364     15,086  
Capital expenditures:                                
  Paid in cash     2,002     2,024     4,356     10,191     20,193  
  Financed with capital lease obligations     40     22     67     4,376     105  
Ratio of earning to fixed charges (12):                                
  Ratio                     1.4 x
  Deficiency of earnings to fixed charges   $ 53,659   $ 8,345   $ 10,383   $ 21,481   $  

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Bookings (13)   $ 93,282   $ 109,231   $ 197,132   $ 252,800   $ 238,546  
Backlog at end of period (14)     74,075     86,369     66,805     99,518     118,830  

       

 
  (1)
 
  As of June 30,
  As of December 31,
 
  2003
  2002
  2002
  2001
  2000
 
  (In thousands)

Balance Sheet Data:                              
Cash and cash equivalents   $ 3,673   $ 8,589   $ 12,421   $ 9,478   $ 7,706
Working capital (15)     50,179     200,301     196,176     81,656     61,398
Total assets (15)     322,646     562,926     548,967     645,711     664,254
Total debt (16)     259,857     403,888     381,017     399,268     381,513
Mandatorily redeemable securities (17)     37,335     31,055     34,081     28,240     23,179
Stockholder's equity (deficit)     (17,059 )   40,628     34,951     102,390     121,442

See accompanying Notes to Summary Selected Consolidated Financial Data.

5


Notes to Summary Selected Consolidated Financial Data:

(1)
Reflects historical selected consolidated financial data derived from the audited and unaudited consolidated financial statements and related notes for the periods, reclassified to reflect the Specialty Avionics Group as a discontinued operation.
Company Acquired

  Date Acquired

  Coltech (a component of discontinued operations)   August 31, 2000
  DeCrane Aircraft Seating Co. (formerly ERDA)   June 30, 2000
  Carl F. Booth & Co.   May 11, 2000
(2)
Includes charges related to our restructuring activities to reflect:

a $6.3 million noncash write-off of curtailed product development costs, a $3.1 million noncash inventory write-down and a $3.4 million charge for lease termination and severance costs during the six months ended June 30, 2003;

a $6.9 million noncash inventory write-down, a $2.6 million charge for estimated losses on uncompleted long-term contracts and $1.2 million of other charges during the twelve months ended December 31, 2002 (charges totaling $5.9 million were reflected during the six months ended June 30, 2002); and

a $1.8 million noncash inventory write-down, a noncash write-off of $7.9 million of curtailed product development costs and charges totaling $3.9 million for the realignment of production programs between facilities during the twelve months ended December 31, 2001.

(3)
Includes charges related to our restructuring activities of:

$0.6 million during the six months ended June 30, 2003 for lease termination, severance and other related costs;

$6.5 million during the year ended December 31, 2002, $3.9 million of which was a noncash asset impairment write-down (charges totaling $5.8 million were reflected during the six months ended June 30, 2002); and

$3.7 million during the year ended December 31, 2001, $1.3 million of which was a noncash asset impairment write-down.

(4)
Reflects noncash goodwill impairment charges, including charges resulting from our restructuring activities.

(5)
For the three years ended December 31, 2002 and the six months ended June 30, 2003 and 2002, reflects the amortization of identifiable intangible assets. For periods prior to January 1, 2002, also reflects the amortization of goodwill as follows: 2001—$9.1 million; and 2000—$7.8 million. Starting January 1, 2002, goodwill is no longer amortized but instead subject to annual impairment testing with a loss charged to operations in the period in which impairment occurs, as required by SFAS No. 142, "Goodwill and Other Intangible Assets."

(6)
Excludes interest expense attributable to the Specialty Avionics Group, which is classified as a component of the income or loss from discontinued operations, as described in Note 8 below.

(7)
For the six months ended June 30, 2003, includes a $13.1 million charge for a valuation allowance established on the net deferred tax assets which may not be realized in the future. Excluding the valuation allowance, 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

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(8)
Reflects the net income or loss of the Specialty Avionics Group, which was sold on May 23, 2003 and therefore is classified as a discontinued operation during the periods and includes charges to reflect:

a $39.3 million noncash charge during the six months ended June 30, 2002 and the year ended December 31, 2002 to reflect the cumulative effect of the change in accounting principle for the impairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002; and

interest expense attributable to the Specialty Avionics Group as follows:

 
  Six Months Ended June 30,
  Year Ended
December 31,

 
  2003(a)
  2002
  2002
  2001
  2000
 
  (In thousands)

Interest expense associated with:                              
  Senior bank credit facility debt required to be repaid (b)   $ 2,952   $ 3,674   $ 7,720   $ 8,439   $ 13,337
  Debt obligations assumed by the buyer     270     402     798     917     1,105
   
 
 
 
 
    Interest expense attributable to discontinued operations   $ 3,222   $ 4,076   $ 8,518   $ 9,356   $ 14,442
   
 
 
 
 

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

(10)
Reflects the total restructuring, asset impairment and other related charges incurred during the periods related to our restructuring activities.

(11)
Reflects depreciation and amortization of plant and equipment, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142) and other intangible assets. Excludes amortization of deferred financing costs and debt discounts, which are classified as a component of interest expense.

(12)
For the purpose of calculating the ratio of earning to fixed charges, earnings represent net income from continuing operations before income taxes, extraordinary items and fixed charges.

interest, whether expensed or capitalized;

amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and

one-third of rental expenses under operating leases which is considered to be a reasonable approximation of the interest portion of such expense.

(13)
Bookings represent the total invoice value of purchase orders received during the period.

(14)
Backlog represents the total invoice value of unfilled purchase orders at the end of the period. Orders may be subject to 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.

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(15)
Includes amounts attributable to the Specialty Avionics Group, which is reflected as a discontinued operation, as follows:
 
  Historical
 
  As of June 30,
  As of December 31,
 
  2003
  2002
  2002
  2001
  2000
 
  (In thousands)

Working capital:                              
  Continuing operations   $ 50,179   $ 45,561   $ 55,363   $ 39,862   $ 20,480
  Discontinued operations         154,740     140,813     41,794     40,918
   
 
 
 
 
    Total   $ 50,179   $ 200,301   $ 196,176   $ 81,656   $ 61,398
   
 
 
 
 
Total assets:                              
  Continuing operations   $ 322,646   $ 385,735   $ 388,226   $ 423,272   $ 429,812
  Discontinued operations         177,191     160,741     222,439     234,442
   
 
 
 
 
    Total   $ 322,646   $ 562,926   $ 548,967   $ 645,711   $ 664,254
   
 
 
 
 
(16)
Total debt is defined as long-term debt, including current portion. Total debt as of June 30, 2003 reflects the repayment of $130.0 million of senior credit facility debt with the proceeds from the sale of the Specialty Avionics Group.

(17)
Reflects mandatorily redeemable 16% preferred stock.

8



RISK FACTORS

        You should carefully consider the following information as part of your evaluation of our company and its business before making an investment in the offered securities.


Risks Relating to Our Substantial Debt

Our substantial levels of debt could adversely affect our financial health and prevent us from fulfilling our obligations under the debt agreements.

        As of June 30, 2003, we had total consolidated indebtedness of approximately $259.9 million and we had $24.4 million of additional revolving line of credit borrowings available under our senior bank credit facility, subject to customary funding conditions. We also had $37.3 million of mandatorily redeemable preferred stock as of June 30, 2003. The senior bank credit facility and the indenture under which our notes are issued each also permit us to incur significant amounts of additional debt and to secure that debt with some of our assets.

        The amount of debt we carry could have important consequences:

Our operations and those of our subsidiaries are restricted by the terms of the notes and our senior bank credit facility.

        The indenture under which the notes are issued and our senior bank credit facility limit our flexibility in operating our businesses, including our ability and the ability of our subsidiaries to:

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        In addition, our senior bank credit facility requires that we satisfy several tests of financial condition. See "Description of the Senior Bank Credit Facility." Our ability to do so can be affected by events beyond our control, and we cannot assure you that we will meet those tests. Our failure to do so could result in a default under our senior bank credit facility, which would permit the lenders to terminate their commitments and accelerate all debt and would trigger an event of default under the notes. Although we were in compliance with these covenants as of June 30, 2003, we have required amendments on several occasions in recent years to avoid potential defaults and we may not be able to comply with these tests in the future.

        The senior bank credit facility is secured by substantially all our material assets. If we default under our senior debt agreements, the lenders could choose to declare all outstanding amounts immediately due and payable, and seek foreclosure of the assets we granted to them as collateral. We cannot assure you that, if our senior bank credit facility were accelerated, our assets would be sufficient to repay all of our debt, including the notes, in full.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could intensify the risks described above.

        DeCrane Aircraft and its subsidiaries may be able to incur substantial additional indebtedness in the future. The amount of this potential additional indebtedness varies from time to time depending on our financial condition and results of operations relative to our covenants. As of June 30, 2003, the covenants in our credit agreement, our most restrictive debt instrument, would have permitted us to incur additional debt of $19.3 million based on our financial condition and results of operations as of such date relative to our covenants. If new debt is added to our and our subsidiaries' current debt levels, the related risks that we and they now face could intensify.

Your rights under the notes are subordinated to substantially all our existing debt.

        The notes and the subsidiary guarantees are general unsecured obligations of DeCrane Aircraft and its subsidiaries that have provided note guarantees. The notes and the subsidiary guarantees rank lower in right of payment than most of the debt of those companies, including the amounts owed under the senior bank credit facility. As of June 30, 2003, DeCrane Aircraft and the guarantor subsidiaries had outstanding about $159.9 million of senior debt. The senior creditors have rights that might reduce the payments made to you as a holder of the notes:

        See "Description of the Notes—Subordination" for the terms of this subordination.

Our ability to repay the notes and our other debt depends on cash flow from our subsidiaries; our non-guarantor subsidiaries' liabilities will be effectively senior to the notes.

        We conduct all of our operations through subsidiaries. We have no material operations or assets other than the capital stock of our operating subsidiaries. Consequently, we depend on distributions or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations. We cannot assure you that the operating results of our subsidiaries will be sufficient to

10



enable us to make payments on the notes. State law may limit the amount of the dividends that any of our subsidiaries are permitted to pay to us.

        In addition, the liabilities of any future non-guarantor subsidiary will be effectively senior to the notes. Our rights and the rights of our creditors, including holders of the notes, to participate in the assets of any of our non-guarantor subsidiaries upon their liquidation or recapitalization will generally be subject to the prior claims of those subsidiaries' creditors.

We will require a significant amount of cash to service our debt and to fund our operations and planned capital expenditures. Our ability to generate cash depends on cash flows from our subsidiaries and many factors beyond our control.

        We will be required to repay $26.9 million of senior bank credit facility borrowings in 2004 and substantial amounts thereafter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Disclosure of Contractual Obligations and Commitments" for additional information. Our ability to satisfy our debt obligations and to fund our operations and planned capital expenditures will depend on our ability to generate cash in the future and access to our revolving credit facility, which will terminate in September 2004. This, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

        We cannot assure you that our operating cash flow will be sufficient to meet our anticipated future operating and capital expenditures and debt payments as they become due or that future borrowings will be available to us for such purposes. While we generated cash from operations in 2002, we used $19.9 million for operating activities during the first six months of 2003. If our cash flow in future periods is lower than we expect, we might be forced to reduce or delay acquisitions or capital expenditures, sell assets and/or reduce operating expenses in order to make all required debt service payments. Alternatively, we may have to refinance all or a portion of our debt on or before maturity. A reduction in our operating expenses might reduce important efforts, such as selling and marketing programs, management information system upgrades and new product development. In addition, we may not be able to refinance our debt on commercially reasonable terms or at all.

        For example, we reported a net loss of $66.0 million for the year ended December 31, 2002 and a loss of $48.7 million for the six months ended June 30, 2003. The 2002 loss includes $17.8 million as a result of a cumulative effect of change in accounting principle, a $41.4 million loss attributable to discontinued operations and $17.2 million of pre-tax restructuring and long-lived asset impairment charges we recorded resulting from restructuring activities we implemented in response to the adverse impact the September 11th terrorist attack and its aftermath is having on our business. The 2003 loss includes a $34.0 million goodwill impairment charge, $13.4 million of additional restructuring charges and a $5.7 million loss attributable to discontinued operations. See "—Risks Related to Our Business" for additional information.

We may not be able to purchase your notes upon a change of control due to restrictions in our senior bank credit facility and limited financial resources.

        If we experience a change of control of the types described in "Description of Notes—Repurchase at the Option of Holders," you will have the right to require us to repurchase all or any part of your notes at an offer price in cash equal to 101% of the aggregate principal amount, plus accrued interest to the date of repurchase. We cannot assure you that we will have sufficient resources to satisfy our repurchase obligation to every note holder following a change of control.

        Our senior bank credit facility prohibits us from purchasing the notes, and makes change of control events a default. The terms of any other future senior debt may contain similar restrictions. If a change of control occurs while any senior debt prohibits us from purchasing the notes, we could seek the consent of the senior lenders to the purchase, or attempt to refinance the debt that prohibits it.

11



However, we cannot assure you that those attempts would be successful. If they are not, we would still be prohibited from repurchasing the notes. Our failure to do so would result in a default under the indenture, which could also result in a default in the senior debt, and therefore block any payments to you under the "blocking" covenants described in "Description of Notes—Subordination."

Federal and state "fraudulent transfer" statutes allow courts to order noteholders to return payments already made, or void guarantees, if the issuer's or guarantor's financial condition meets specific tests.

        Your rights to repayment of the notes, and to retain amounts already paid under the notes, could be affected by the application of federal or state "fraudulent transfer" laws. These statutes permit obligations to be undone or rescinded if tests having to do with the obligation, the person's intent and the person's financial condition are satisfied. Our repayment obligations to you under the notes could be impaired by those laws if a court determined that, when we issued or exchanged the notes, or, in some states, when payments become due on the notes, we either:

        Based on such a finding, a court could void all or a portion of our obligations to you, subordinate your right to repayment to our other existing and future senior debt, in which case those other creditors would be paid in full before any payment could be made on the notes, and take other action detrimental to your rights, including invalidating the notes. A court would likely find that we received less than fair consideration or reasonably equivalent value for our obligations under the notes to the extent that we used the proceeds from the original issuance of the notes for the acquisition of DeCrane Aircraft by DLJ Merchant Banking. We cannot assure you that, if that occurred, you would ever recover any repayment on your notes.

        In addition, the obligations of our subsidiary guarantors under their subsidiary guarantees may be subject to review under the same laws. In that event, if a court were to find that when a subsidiary guarantor issued its subsidiary guarantee (or, in some jurisdictions, when it became obligated to make payments thereunder), the factors set forth above applied to that subsidiary guarantor, a court could avoid the subsidiary guarantee and the subsidiary guarantor's obligations thereunder and direct the return of any amount paid to you pursuant to that subsidiary guarantee. A court would likely find that a subsidiary guarantor received less than fair consideration or reasonably equivalent value for its obligations under the subsidiary guarantee to the extent that it did not receive direct or indirect benefit from the issuance of the notes. If a court were to avoid a subsidiary guarantee of any subsidiary guarantor, holders of notes would retain their rights against us and the other subsidiary guarantors, although those entities' assets may be insufficient to pay the notes in full.

        The definition of insolvency used in the foregoing tests varies among jurisdictions, depending upon the court and the law that is being applied. A given court might apply different standards in determining whether we were insolvent on a particular date, or regarding other grounds that might lead it to take the actions noted above. Generally, however, an entity would be considered insolvent if:

12


We cannot assure you that a market for the notes will continue.

        We cannot assure you about your ability to sell the notes or the price at which you may be able to sell them. The notes may trade at prices that may be higher or lower, and have recently traded at prices lower than their initial offering price. The notes were issued at a price equal to 100% of their principal in an aggregate principal amount of $100.0 million in October 1998 and had a market value of approximately $47.0 million at June 30, 2003, representing a 53% decline in value. The trading price depends on many factors, including prevailing interest rates, our operating results and the market for similar securities. Credit Suisse First Boston LLC intends to make a market in the notes. However, Credit Suisse First Boston LLC is not obligated to do so and it may discontinue or interrupt any such market-making at any time without notice.

        Because Credit Suisse First Boston LLC may be deemed to be our "affiliate" (as defined in the Securities Act), we maintain a registration statement that allows CSFB to engage in market-making transactions in the notes and CSFB delivers a prospectus in connection with its market-making activities. If at any time the market-making prospectus is not in compliance with the disclosure obligations of the Securities Act, Credit Suisse First Boston LLC may be unable to engage in market-making activities until the prospectus is brought into compliance. There are no other market-makers in the notes.


Risk Related to Our Control by Principal Stockholders

We are controlled by principal stockholders who are affiliated with our lenders and may have economic interests which differ or conflict with yours.

        DeCrane Aircraft is a wholly-owned subsidiary of DeCrane Holdings, and a significant amount of DeCrane Holding's common stock outstanding is held by our principal stockholders, DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities. As a result of the 2000 acquisition by Credit Suisse First Boston of Donaldson, Lufkin & Jenrette, CSFB became an affiliate of our principal stockholders. The CSFB affiliates beneficially own approximately 95% of DeCrane Holding's common stock. As a result of their stock ownership, the CSFB affiliates control DeCrane Holdings and DeCrane Aircraft and have the power to approve all matters requiring approval of the common stockholders, including electing all of their directors, appointing new management, and approving sales of all or substantially all of the assets of the companies. The directors elected by the CSFB affiliates will have the ability to control decisions affecting our capital structure, including issuing additional capital stock, establishing stock purchase programs and declaring dividends.

        Credit Suisse First Boston, which is an agent and lender under our senior bank credit facility, is also an affiliate of DLJ Merchant Banking Partners II, L.P., but does not own any equity securities of DeCrane Aircraft or DeCrane Holdings.

        The interests of the principal stockholders could conflict with your interests as a holder of the notes. For example, those stockholders may have an interest in pursuing transactions that they believe enhance the value of their equity investment in DeCrane Aircraft or DeCrane Holdings, even though the transactions involve risks to your investment in the notes.

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Risks Related to Our Business

The aerospace industry is cyclical and affected by many factors beyond our control, including geo-political and global economic conditions.

        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 civil aircraft markets, principally for 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 and our business.

        Based on industry and market data, we believe the business, VIP and head-of-state aircraft portion of our business will 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. We believe aircraft deliveries may reflect a modest recovery in 2004 and show continuing recovery thereafter. We also believe the commercial aircraft portion of our business will experience significant weakness during 2003 and 2004, with potential recovery not expected to occur until at least 2005. Our beliefs are based on the assumptions we will experience economic recovery and there are no further negative geo-political developments affecting our industry.

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

We receive a significant portion of our revenues from a small group of key customers, and we are vulnerable to changes in their economic condition and purchasing plans.

        A significant decline in business from any one of our key customers could have a material adverse effect on our business. Our three largest customers accounted for 56.3% of our consolidated revenues from continuing operations for the year ended December 31, 2002 as follows: Textron (which includes Cessna)—23.5%; Bombardier—17.4%; and Boeing—15.4%. During the six months ended June 30, 2003, our revenues from those customers accounted for 52.3% of our consolidated revenues from continuing operations as follows: Textron—18.8%; Bombardier—7.4%; and Boeing—26.1%. The decrease in revenues from Textron and Bombardier was a result of a temporary suspension in their production due to industry weakness. We also expect a further decline in revenues from Textron during the third quarters of fiscal 2003 as a result of their additional planned shut downs. Some of our customers also have the in-house capabilities to perform the services and provide many of the products we offer and, accordingly, could discontinue outsourcing their business to us.

        In addition, significant portions of our revenues from our major customers are pursuant to contracts that may include a variety of terms favorable to the customer. Such terms may include our agreement to one or more of the following:

14


Our total assets include a substantial amount of intangible assets. The write-off of a significant portion of intangible assets would negatively affect our results of operations.

        As of June 30, 2003, goodwill and other intangible assets represented approximately 59% of our total assets. Intangible assets consist of goodwill and other identifiable intangible assets associated with our acquisitions, representing the excess of cost over the fair value of tangible assets we have acquired. We may not be able to realize the value of these assets. Goodwill is not amortized but is subject to annual testing for impairment. Identifiable intangible assets with finite lives are amortized over their individual useful lives and are also subject to annual impairment testing. Simply stated, if the carrying value of the asset exceeds the estimated undiscounted future cash flows from the operating activities of the related business, impairment is deemed to have occurred. In this event, the amount is written down accordingly. Under current accounting rules, this would result in a charge against income from operations. We have recorded goodwill asset impairment charges from continuing operations totaling $34.0 million during the six months ended June 30, 2003 and $8.6 million during the year ended December 31, 2001. In addition, we recorded a transitional goodwill impairment charge of $17.8 million from continuing operations as of January 1, 2002 in connection with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets."

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

We operate in a highly competitive industry and compete against a number of companies, some of which have significantly greater financial, technological and marketing resources than we do.

        We operate in highly competitive markets within the aerospace industry. Our competitors include business aircraft manufacturers, independent completion and modification companies and other independent service organizations, including some of our customers, many of whom may have significantly greater financial, technological, manufacturing and marketing resources than we do. The niche markets within the aerospace industry that we serve are relatively fragmented, with several competitors offering the same products and services we provide. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies.

        We believe our ability to compete depends on high product performance, short lead-time and timely delivery, competitive pricing, superior customer service and support and continued certification under customer quality requirements and assurance programs. There can be no assurance that we will be able to compete successfully with respect to these factors in the future.

Our acquisition of other companies may pose certain risks.

        We consider and take advantage of selected opportunities to grow by acquiring other businesses whose operations or product lines complement our existing businesses. Our ability to implement this growth strategy will depend on finding suitable acquisition candidates at acceptable prices and obtaining the required financing. Any acquisition we may make in the future could be subject to a number of risks, including:

15


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

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

        The aerospace industry is highly regulated in the United States by the Federal Aviation Administration to ensure that aviation products and services meet stringent safety and performance standards. The FAA prescribes standards and licensing requirements for aircraft components, issues designated alteration station authorizations, and licenses private repair stations. We hold various FAA authorizations and licenses, including a Designated Alteration Station authorization, which gives one of our subsidiaries the authority to certify some aircraft design modifications on behalf of the FAA. Our business depends on our continuing access to, or use of, these FAA authorizations and licenses, and our employment of, or access to, FAA-certified individual engineering professionals.

        We cannot assure you that we will continue to have adequate access to those authorizations, licenses and certified professionals, the loss or unavailability of which could adversely affect our operations. The FAA could also change its policies regarding the delegation of inspection and certification responsibilities to private companies, which could adversely affect our business.

Some of our operations and facilities generate waste or have done so in the past, which may result in unknown future liabilities for environmental remediation.

        Environmental laws, particularly the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), may impose strict, retroactive and joint and several liability upon persons responsible for releases or potential releases of hazardous substances and other parties who have some relationship to a site or a source of waste, such as a current or former owner or operator of real property or a party who arranges to transport wastes to a third-party site. We have sent waste to treatment, storage or disposal facilities that have been designated as National Priority List (more commonly known as Superfund) sites under CERCLA or equivalent listings under state laws. We have received requests for information or allegations of potential responsibility from the U.S. Environmental Protection Agency regarding our use of several of these sites. Given the potentially retroactive nature of environmental liability, it is possible that we will receive additional notices of potential liability relating to current or former activities. We may incur costs in the future for prior waste disposal by us or former owners of our subsidiaries or our facilities. Some of our operations are also located on properties that are contaminated to varying degrees. We may incur costs in the future to address existing or future contamination. If we incur significant costs in connection with these or other environmental issues, our business and financial condition could be adversely affected.

We could sustain losses in excess of our insurance for liability claims.

        Our business exposes us to possible claims for damages resulting from the manufacture, installation and use of our products. Many factors beyond our control could lead to such claims, such as the failure of an aircraft on which our products have been installed, the reliability and skill of the operators of such aircraft and the maintenance performed on such aircraft. We carry aircraft products and grounding liability insurance for this purpose, but we cannot assure you that our insurance coverage

16



will be adequate to cover claims that may arise or that we will be able to renew our coverage in the future at commercially reasonable rates.

We need to retain the services of our key employees.

        Our success and growth depends in large part on the skills and efforts of our management team and on our ability to attract and retain qualified personnel experienced in the various operations of our business. The loss of key personnel, including our founder, R. Jack DeCrane, combined with the failure to attract additional qualified personnel for whatever reason, could delay implementation of our business plan or otherwise adversely affect our operations. We do not have employment contracts with our key personnel, other than Mr. DeCrane. We do not carry key man life insurance on any members of our management team.


Special Note Regarding Forward-Looking Statements

        All statements other than statements of historical facts included in this prospectus, including statements about our future performance and liquidity and future industry performance, are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict. Some of those risks are specifically described above, but we are also vulnerable to a variety of elements that affect many businesses, such as:

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


RECENT DEVELOPMENTS

Sale of the Specialty Avionics Group

        On March 14, 2003, we entered into a definitive agreement to sell our equity interests in the companies comprising the Specialty Avionics Group to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC. On March 28, 2003, we received requisite lender approval to amend our senior bank credit facility to permit the sale, provided that net proceeds of at least $130.0 million from the sale were used to repay borrowings under the credit facility by June 30, 2003. The amendment also

17



revised various financial covenants for 2003 and beyond, decreased by $10.0 million the maximum permitted revolving line of credit borrowings to $40.0 million, increased the prime rate and LIBOR interest margins by 1.5% and permitted the issuance of specified types of additional indebtedness and the repurchase of up to $20.0 million aggregate principal amount of the 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. See "Description of the Senior Bank Credit Facility" for additional information.

        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 expressed substantial doubt about our ability to continue as a going concern in their report on our consolidated financial statements for the year ended December 31, 2002.

        On May 23, 2003, we consummated the sale. The aggregate selling price was $140.0 million in cash, subject to a post-closing selling price adjustment based on the amount of working capital at closing. We used $130.0 million of the proceeds from the sale to repay borrowings under the senior credit facility, as amended. 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 revised and reissued their report on our consolidated financial statements included in this prospectus, which reflects the removal of their doubt about our ability to continue as a going concern. In addition, all financial data included in this prospectus, including our audited consolidated financial statements for the year ended December 31, 2002, have been revised to reflect the Specialty Avionics Group as a discontinued operation for all periods presented.

        The Specialty Avionics Group consisted of Avtech Corporation of Seattle, Washington, Aerospace Display Systems, LLC of Hatfield, Pennsylvania, and Tri-Star Electronics International, Inc. of El Segundo, California. The group provides aviation electronic components to the aircraft industry, primarily the commercial original equipment and aftermarket segments, specializing in assembling design, engineering and manufacturing capabilities in several avionic categories, including flight deck and cabin audio management systems, flight deck visual display and communication systems including SELCAL, power and control devices, specialty interconnect solutions, as well as a leading manufacturer of high quality electrical contacts for military and aviation applications.


INDUSTRY AND MARKET DATA

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

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CAPITALIZATION

        The following table reflects the consolidated cash and cash equivalents and total capitalization of DeCrane Aircraft as of June 30, 2003. This table should be read in conjunction with DeCrane Aircraft's consolidated audited and unaudited financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus.

 
  As of
June 30, 2003

 
 
  (In thousands)

 
Cash and cash equivalents   $ 3,673  
   
 

Total capitalization:

 

 

 

 
  Total debt:        
    Senior bank credit facility:        
      Term facility   $ 134,925  
      Revolving credit facility     15,250  
    Senior Subordinated Notes due 2008     100,000  
    Other debt     9,682  
   
 
      Total debt     259,857  
  Mandatorily redeemable preferred stock     37,335  
  Stockholder's equity (deficit)     (17,059 )
   
 
    Total capitalization   $ 280,133  
   
 


USE OF PROCEEDS

        This prospectus is being delivered in connection with the sale of the notes by Credit Suisse First Boston Corporation in market-making transactions. We have not received and will not receive any of the proceeds from such transactions. The notes were originally issued in October 1998 in a private placement in an aggregate principal amount of $100.0 million to refinance a bridge loan borrowed in connection with the acquisition of us by our principal stockholders, DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities. We received approximately $96.0 million of net proceeds from the sale of the notes.

19



SELECTED CONSOLIDATED FINANCIAL DATA

        The following table presents selected historical consolidated financial data for DeCrane Aircraft Holdings, Inc. The data as of and for the each of the five years in the period ended December 31, 2002 were derived from the audited consolidated financial statements and related notes for those periods. The data as of and for each of the six month periods ended June 30, 2003 and 2002 were derived from the unaudited consolidated financial statements for those periods, which, in the opinion of management, are presented on a basis consistent with the audited consolidated financial statements and include all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented. The information in this table and the accompanying notes should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited consolidated financial statements and related notes included in this prospectus.

 
  (1)
 
   
   
  Year Ended December 31,
  1998
 
  Six Months
Ended
June 30,

 
   
   
   
   
  Four Months
Ended
December 31,
1998

  Eight Months
Ended
August 31,
1998

 
  2003
  2002
  2002
  2001
  2000
  1999
 
  (Successor)(2)
  (Predecessor)(2)
 
  (In thousands)

Statement of Operations Data:                                                
Revenues   $ 86,013   $ 122,112   $ 229,841   $ 272,112   $ 236,501   $ 131,547   $ 17,945   $ 27,518
Cost of sales(3)     76,286     92,212     170,485     196,866     155,134     90,103     12,011     17,759
   
 
 
 
 
 
 
 
Gross profit     9,727     29,900     59,356     75,246     81,367     41,444     5,934     9,759
Selling, general and administrative expenses(4)     14,477     24,247     40,318     45,429     33,345     26,812     5,442     14,188
Impairment of goodwill(5)     34,000             8,583                
Amortization of intangible assets(6)     1,826     1,717     3,540     12,436     10,628     5,938     748     615
   
 
 
 
 
 
 
 
Operating income (loss)     (40,576 )   3,936     15,498     8,798     37,394     8,694     (256 )   (5,044)
Interest expense(7)     12,337     12,082     25,376     29,645     27,181     15,889     5,672     512
Other expenses, net(8)     746     199     505     634     277     855     64     595
   
 
 
 
 
 
 
 
Income (loss) from continuing operations before provision for income taxes     (53,659 )   (8,345 )   (10,383 )   (21,481 )   9,936     (8,050 )   (4,992 )   (6,151)
Provision for income taxes (benefit)(9)     (10,630 )   (3,191 )   (3,621 )   (3,933 )   4,607     (2,102 )   (3,861 )   (2,172)
   
 
 
 
 
 
 
 
Income (loss) from continuing operations     (43,029 )   (5,154 )   (6,762 )   (17,548 )   5,329     (5,948 )   (1,131 )   (3,979)
Income (loss) from discontinued operations, net of tax(10)     (5,650 )   (35,702 )   (41,396 )   3,546     (1,727 )   1,578     807     7,168
Cumulative effect of change in accounting principle(11)         (17,828 )   (17,828 )                  
Extraordinary loss from debt
refinancing(12)
                            (2,229 )  
   
 
 
 
 
 
 
 
Net income (loss)   $ (48,679 ) $ (58,684 ) $ (65,986 ) $ (14,002 ) $ 3,602   $ (4,370 ) $ (2,553 ) $ 3,189
   
 
 
 
 
 
 
 
Net income (loss) applicable to common stockholder   $ (51,933 ) $ (61,499 ) $ (71,827 ) $ (19,063 ) $ 1,328   $ (4,370 ) $ (2,553 ) $ 3,189
   
 
 
 
 
 
 
 
Other Financial Data:                                                
Restructuring, asset impairment and other related charges(13)   $ 54,894   $ 11,709   $ 17,255   $ 25,834   $   $ 9,935   $   $
Depreciation and amortization(14)     4,967     5,447     10,612     20,364     15,086     8,315     1,004     1,279
Capital expenditures:                                                
  Paid in cash     2,002     2,024     4,356     10,191     20,193     4,077     801     272
  Financed with capital lease obligations     40     22     67     4,376     105     1,012        
Ratio of earnings to fixed charges(15):                                                
  Ratio                     1.4 x          
  Deficiency of earnings to fixed charges   $ 53,659   $ 8,345   $ 10,383   $ 21,481   $   $ 8,050   $ 4,992   $ 6,151

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Bookings(16)   $ 93,282   $ 109,231   $ 197,132   $ 252,800   $ 238,546   $ 170,547   $ 19,759   $ 31,660
Backlog at end of period(17)     74,075     86,369     66,805     99,518     118,830     107,634     20,888     19,583

20


 
  (1)
 
  As of June 30,
  As of December 31,
 
  2003
  2002
  2002
  2001
  2000
  1999
  1998
 
  (Successor)(2)
(In thousands)

Balance Sheet Data:                                          
Cash and cash equivalents   $ 3,673   $ 8,589   $ 12,421   $ 9,478   $ 7,706   $ 7,899   $ 3,831
Working capital(18)     50,179     200,301     196,176     81,656     61,398     32,412     49,033
Total assets(18)     322,646     562,926     548,967     645,711     664,254     531,842     330,927
Total debt(19)     259,857     403,888     381,017     399,268     381,513     314,936     185,807
Mandatorily redeemable securities(20)     37,335     31,055     34,081     28,240     23,179        
Stockholder's equity (deficit)     (17,059 )   40,628     34,951     102,390     121,442     107,773     97,667

See accompanying Notes to Selected Consolidated Financial Data.

21


Notes to Selected Consolidated Financial Data:

(1)
Reflects historical selected consolidated financial data derived from the audited and unaudited consolidated financial statements and related notes for the periods, reclassified to reflect the Specialty Avionics Group as a discontinued operation.
Company Acquired

  Date Acquired

  Coltech (a component of discontinued operations)   August 31, 2000
  DeCrane Aircraft Seating Co. (formerly ERDA)   June 30, 2000
  Carl F. Booth & Co.   May 11, 2000
  Infinity   December 17, 1999
  International Custom Interiors   October 8, 1999
  PCI NewCo   October 6, 1999
  Custom Woodwork   August 5, 1999
  Precision Pattern   April 23, 1999
  PATS   January 22, 1999
  Dettmers   June 30, 1998
  Avtech (a component of discontinued operations)   June 26, 1998
(2)
Reflects our results of operations and financial position prior to (predecessor) and subsequent to (successor) our acquisition by DLJ.

(3)
Includes charges to reflect:

our restructuring activities as follows:

a $6.3 million noncash write-off of curtailed product development costs, a $3.1 million noncash inventory write-down and a $3.4 million charge for lease termination and severance costs during the six months ended June 30, 2003;

a $6.9 million noncash inventory write-down, a $2.6 million charge for estimated losses on uncompleted long-term contracts and $1.2 million of other charges during the twelve months ended December 31, 2002 (charges totaling $5.9 million were reflected during the six months ended June 30, 2002);

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

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

cost of sales based on the fair value of inventory acquired of $1.6 million during the twelve months ended December 31, 1999 in connection with the Precision Pattern and Custom Woodworks acquisitions and $0.7 million during the four months ended December 31, 1998 in connection with the DLJ acquisition.

22


(4)
Includes charges of:

our restructuring activities as follows:

$0.6 million during the six months ended June 30, 2003 for lease termination, severance and other related costs;

$6.5 million during the year ended December 31, 2002, $3.9 million of which was a noncash asset impairment write-down (charges totaling $5.8 million were reflected during the six months ended June 30, 2002);

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

$3.9 million during the year ended December 31, 1999, $1.3 million of which was a noncash asset impairment write-down; and

$3.6 million during the eight months ended August 31, 1998 for non-capitalized transaction costs associated with the DLJ acquisition.

(5)
Reflects noncash goodwill impairment charges, including charges resulting from our restructuring activities.

(6)
For the five years ended December 31, 2002 and the six months ended June 30, 2003 and 2002, reflects the amortization of identifiable intangible assets. For periods prior to January 1, 2002, also reflects the amortization of goodwill as follows: 2001—$9.1 million; 2000—$7.8 million; 1999—$3.8 million; 1998—$0.5 million (four months) and $0.6 million (eight months). Starting January 1, 2002, goodwill is no longer amortized but instead subject to annual impairment testing with a loss charged to operations in the period in which impairment occurs, as required by SFAS No. 142, "Goodwill and Other Intangible Assets."

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

(8)
For the eight months ended August 31, 1998, reflects a $0.6 million charge for costs incurred in connection with a debt offering terminated as a result of the DLJ acquisition.

(9)
For the six months ended June 30, 2003, includes a $13.1 million charge for a valuation allowance established on the net deferred tax assets which may not be realized in the future. For the four months ended December 31, 1998, includes a $2.6 million benefit from the reduction of the deferred tax valuation allowance. Excluding the effect of the valuation allowances, the four months ended December 31, 1998, includes a $2.6 million benefit from the reduction of the deferred tax valuation allowance. 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 income taxes and non-deductible expenses, principally goodwill impairment charges and amortization (for periods prior to January 1, 2002). The difference in the effective tax rates between periods is mostly a result of the relationship of non-deductible expenses to the loss before income taxes.

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

a $39.3 million noncash charge during the six months ended June 30, 2002 and the year ended December 31, 2002 to reflect the cumulative effect of the change in accounting principle for the impairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002; and

23



 
   
   
  Year Ended December 31,
  1998
 
  Six Months
Ended
June 30,

 
   
   
   
   
  Four Months
Ended
December 31,
1998

  Eight Months
Ended
August 31,
1998

 
  2003(a)
  2002
  2002
  2001
  2000
  1999
 
  (Successor)
  (Predecessor)
 
  (In thousands)

Interest expense associated with:                                                
  Senior bank credit facility debt required to be repaid (b)   $ 2,952   $ 3,674   $ 7,720   $ 8,439   $ 13,337   $ 10,875   $ 1,739   $ 1,077
  Debt obligations assumed by the buyer     270     402     798     917     1,105     1,154     441     761
   
 
 
 
 
 
 
 
    Interest expense attributable to discontinued operations   $ 3,222   $ 4,076   $ 8,518   $ 9,356   $ 14,442   $ 12,029   $ 2,180   $ 1,838
   
 
 
 
 
 
 
 

(11)
Reflects the noncash charge, net of $0.9 million tax benefit, for the impairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002.

(12)
Reflects the write-off of deferred financing costs, net of an income tax benefit, as a result of the repayment of our then existing indebtedness in connection with the DLJ acquisition and the refinancing of the bridge notes during the four months ended December 31, 1998.

(13)
Reflects the total restructuring, asset impairment and other related charges incurred during the periods related to our restructuring activities.

(14)
Reflects depreciation and amortization of plant and equipment, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142) and other intangible assets. Excludes amortization of deferred financing costs and debt discounts, which are classified as a component of interest expense.

(15)
For the purposes of calculating the ratio of earning to fixed charges, earnings represent net income or loss from continuing operations before income taxes, extraordinary items and fixed charges. Fixed charges consist of:

interest, whether expensed or capitalized;

amortization of debt expense and discount or premium relating to any indebtedness, whether expensed or capitalized; and

one-third of rental expenses under operating leases which is considered to be a reasonable approximation of the interest portion of such expense.

(16)
Bookings represent the total invoice value of purchase orders received during the period.

(17)
Backlog represents the total invoice value of unfilled purchase orders at the end of the period. Orders may be subject to 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.

(18)
Includes amounts attributable to the Specialty Avionics Group, which is reflected as a discontinued operation, as follows:

 
  As of June 30,
  As of December 31,
(In thousands)

  2003
  2002
  2002
  2001
  2000
  1999
  1998
Working capital:                                          
  Continuing operations   $ 50,179   $ 45,561   $ 55,363   $ 39,862   $ 20,480   $ (1,992 ) $ 14,850
  Discontinued operations         154,740     140,813     41,794     40,918     34,404     34,183
   
 
 
 
 
 
 
    Total   $ 50,179   $ 200,301   $ 196,176   $ 81,656   $ 61,398   $ 32,412   $ 49,033
   
 
 
 
 
 
 
Total assets:                                          
  Continuing operations   $ 322,646   $ 385,735   $ 388,226   $ 423,272   $ 429,812   $ 305,685   $ 95,640
  Discontinued operations         177,191     160,741     222,439     234,442     226,157     235,287
   
 
 
 
 
 
 
    Total   $ 322,646   $ 562,926   $ 548,967   $ 645,711   $ 664,254   $ 531,842   $ 330,927
   
 
 
 
 
 
 
(19)
Total debt is defined as long-term debt, including current portion. Total debt as of June 30, 2003 reflects the repayment of $130.0 million of senior credit facility debt with the proceeds from the sale of the Specialty Avionics Group.

(20)
Reflects mandatorily redeemable 16% preferred stock.

24



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussions should be read in conjunction with our audited and unaudited consolidated financial statements and accompanying notes included in this prospectus.


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. 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. See "—Liquidity and Capital Resources—Recent Developments Affecting Financial Condition and Liquidity" below for additional information.


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. Weak global economic conditions, which were exacerbated by the September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism, the current Middle Eastern military conflicts and the Severe Acute Respiratory Syndrome, or SARS, epidemic are all adversely impacting the aerospace industry and have led to a decrease in demand for business, VIP and head-of-state aircraft. In response to certain of these adverse conditions, we have announced and implemented a series of restructuring activities designed to reduce expenses and conserve working capital. 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.

25



        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.

26



Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

        Our results of operations have been affected by restructuring, asset impairment and other related charges relating to a series of restructuring activities 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 $36.1 million, or 29.6%, to $86.0 million for the six months ended June 30, 2003 from $122.1 million for the six months ended June 30, 2002. By segment, revenues changed as follows:

 
  Increase (Decrease)
From 2002

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (33.8 ) (36.0 )%
Systems Integration     (1.5 ) (5.1 )
Inter-group elimination     (0.8 )    
   
     
  Total   $ (36.1 )    
   
     

        Cabin Management.    Revenues decreased by $33.8 million, or 36.0% compared to the prior year. The decrease, which is across substantially 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:

        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 $24.4 million compared to the prior year as a result of the decrease in orders and resulting lower production of aircraft they are experiencing due to the economic downturn. Both companies temporarily suspended production of various models of aircraft for several weeks during fiscal 2003 in response to their low order backlog resulting from the weak demand for new aircraft. We also expect a further decline in revenues from Textron during the third quarter of fiscal 2003 as a result of their additional planned shut downs. We also experienced similar volume decreases from our other customers during the period.

        Systems Integration.    Revenues decreased by $1.5 million, or 5.1% compared to the prior year, due to:

27



        Gross profit.    Gross profit decreased $20.2 million, or 67.5%, to $9.7 million for the six months ended June 30, 2003 from $29.9 million for the same period last year. By segment, gross profit changed as follows:

 
  Increase (Decrease)
From 2002

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (16.3 ) (93.1 )%
Systems Integration     (3.9 ) (32.3 )
   
     
  Total   $ (20.2 )    
   
     

        Cabin Management.    Gross profit decreased by $16.3 million, or 93.1% compared to the prior year, primarily due to:

        Systems Integration.    Gross profit decreased by $3.9 million, or 32.3% compared to the prior year, primarily due to:

28


        Selling, general and administrative expenses.    Selling, general and administrative expenses decreased $9.8 million, or 40.3%, to $14.5 million for the six months ended June 30, 2003, from $24.3 million for the same period last year. By segment, SG&A expenses changed as follows:

 
  Increase (Decrease)
From 2002

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (7.5 ) (47.5 )%
Systems Integration     (2.0 ) (47.2 )
Corporate     (0.3 )    
   
     
  Total   $ (9.8 )    
   
     

        Cabin Management.    SG&A expenses decreased by $7.5 million, or 47.5% compared to the prior year, due to:


        Systems Integration.    SG&A expenses decreased by $2.0 million, or 47.2% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions in 2003.

        Impairment of goodwill.    During the six months ended June 30, 2003, a $34.0 million charge was recorded to reflect the additional impairment of goodwill in connection with the impairment testing provision of SFAS No. 142, "Goodwill and Other Intangible Assets." The additional impairment results from continued 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 impairment charge pertains to our furniture manufacturing reporting unit within our Cabin Management Group. See "—Goodwill Impairment Charges" below for additional information.

        Depreciation and amortization of intangibles.    Depreciation and amortization expense decreased $0.5 million to $5.0 million for the six months ended June 30, 2003 from $5.5 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

 
 
  Amount
  Percent
 
 
  (In millions)

 
Depreciation charged to:            
  Cost of sales   $ (0.3 ) (11.9 )%
  Selling, general and administrative expense     (0.3 ) (21.4 )
Amortization of intangible assets     0.1   6.3  
   
     
  Total   $ (0.5 )    
   
     

        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

29



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 $7.6 million, or 46.3% compared to the prior year primarily due to:

        Systems Integration.    Adjusted EBITDA decreased by $2.1 million, or 24.5% 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 $44.5 million to a loss of $40.6 million for the six months ended June 30, 2003, from operating income of $3.9 million for the same period last year. By segment, operating income changed as follows:

 
  Increase (Decrease)
From 2002

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (43.2 ) 792.5 %
Systems Integration     (1.9 ) (27.8 )
Corporate     0.6      
   
     
  Total   $ (44.5 )    
   
     

        Cabin Management.    Operating income decreased by $43.2 million, or 792.5% compared to the prior year, due to:


        Systems Integration.    Operating income decreased by $1.9 million, or 27.8% compared to the prior year, due primarily to lower revenues, offset by reduced SG&A spending.

        Interest expense.    Interest expense increased $0.3 million, or 2.1%, to $12.3 million for the six months ended June 30, 2003 compared to $12.0 million for the same period last year. The increase is attributable to a 1.5% increase in interest rate margins charged by our lenders pursuant to the March 28, 2003 senior bank credit facility amendment, partially offset by lower principal balances outstanding.

30



        Provision for income taxes.    The provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes, the non-deductible portion of goodwill impairment charges and a $13.1 million deferred tax asset valuation allowance established as of June 30, 2003.

        As of June 30, 2003, we had net deferred tax assets of $12.8 million, prior to recording the valuation allowance in June 2003, as opposed to net deferred tax liabilities in prior periods. The change to a net asset position was primarily caused by the $34.0 million goodwill impairment charge recorded during the second quarter of fiscal 2003. SFAS No. 109, "Accounting for Income Taxes," requires the recognition of a deferred tax asset for the future income tax benefit of the goodwill deductions that will be taken for income tax purposes (i.e. the goodwill that has been written off in the financial statements for book purposes will continue to be amortized and deducted for tax purposes and accordingly represents a new deferred tax asset).

        As required by SFAS No. 109, we evaluated our deferred assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization. Since there is no loss carry back potential and we do not have any tax planning strategies to assure recoverability, the only possibility for recovery of the net deferred assets is future taxable income. Since there have been prior year losses, we believe it was not prudent to rely on future income as the means to support the carrying value of the net assets. As a result of our evaluation, we determined that recovery was not likely in certain taxing jurisdictions and applied our judgment in estimating the amount of valuation allowance necessary under the circumstances to reduce the assets carrying value to realizable value. Accordingly, we recorded the $13.1 million valuation allowance, eliminating the net deferred asset, as of June 30, 2003.

        For periods prior to June 30, 2003, we had net deferred tax liabilities ($9.0 million as of March 31, 2003 and $10.6 million as of December 31, 2002). The full realization of the deferred assets was achieved through the reversal of the deferred tax liabilities in future periods. As a result, a valuation allowance was not required for periods prior to June 30, 2003.

        Loss from continuing operations.    The loss from continuing operations increased $37.9 million to a loss of $43.0 million for the six months ended June 30, 2003 compared to a loss of $5.1 million for the same period last year, primarily due to:

        Loss from discontinued operations.    Loss from discontinued operations decreased $30.0 million, to a loss of $5.7 million for the six months ended June 30, 2003 compared to a loss of $35.7 million for the same period last year. The decrease is primarily due to:

31


        The loss from discontinued operations for the six months ended June 30, 2003 is net of a modest $0.7 million gain, net of tax, on the sale of the group.

        Cumulative effect of change in accounting principle.    The $17.8 million charge in 2002 to reflect the cumulative effect on continuing operations of the change in accounting principle was a result of transitional goodwill impairment charges recognized upon initial adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." Including the $39.4 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 $10.0 million to a net loss of $48.7 million for the six months ended June 30, 2003 compared to a net loss of $58.7 million for the same period last year. The decrease is attributable to:

        Net loss applicable to common stockholder.    Net loss applicable to DeCrane Holdings, our common stockholder, decreased $9.6 million to a net loss of $51.9 million for the six months ended June 30, 2003 compared to a net loss of $61.5 million for the same period last year. The decrease in the net loss applicable to our common stockholder is attributable to:


        Bookings.    Bookings decreased $15.9 million, or 14.6%, to $93.3 million for the six months ended June 30, 2003 compared to $109.2 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 increased $7.3 million to $74.1 million as of June 30, 2003 compared to $66.8 million as of December 30, 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.

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

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

32



        Revenues.    Revenues decreased $42.3 million, or 15.5%, to $229.8 million for the year ended December 31, 2002 from $272.1 million for the year ended December 31, 2001. By segment, revenues changed as follows:

 
  Increase (Decrease)
From 2001

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (33.2 ) (16.1 )%
Systems Integration     (9.5 ) (14.0 )
Inter-group elimination     0.4      
   
     
  Total   $ (42.3 )    
   
     

        Cabin Management.    Revenues decreased by $33.2 million, or 16.1% compared to the prior year. The decrease, which is across most of our product and services categories, is caused by the ongoing adverse impact of weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. The 2002 decrease consists of:


        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 $15.0 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. We also experienced similar volume decreases from our other customers during the period.

        Systems Integration.    Revenues decreased by $9.5 million, or 14.0% compared to the prior year, due to:

33


        Gross profit.    Gross profit decreased $15.9 million, or 21.1%, to $59.3 million for the year ended December 31, 2002 from $75.2 million for the same period last year. By segment, gross profit changed as follows:

 
  Increase (Decrease)
From 2001

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (10.7 ) (21.7 )%
Systems Integration     (5.3 ) (20.3 )
Inter-group elimination     0.1      
   
     
  Total   $ (15.9 )    
   
     

        Cabin Management.    Gross profit decreased by $10.7 million, or 21.7% compared to the prior year, primarily due to:

        Systems Integration.    Gross profit decreased by $5.3 million, or 20.3% compared to the prior year, primarily due to $4.1 million of other asset impairment related charges and lower sales volume.

        Selling, general and administrative expenses.    Selling, general and administrative expenses decreased $5.1 million, or 11.3%, to $40.3 million for the year ended December 31, 2002, from $45.4 million for the same period last year. By segment, SG&A expenses changed as follows:

 
  Increase (Decrease)
From 2001

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (1.9 ) (7.3 )%
Systems Integration     (2.1 ) (22.0 )
Corporate     (1.1 )    
   
     
  Total   $ (5.1 )    
   
     

        Cabin Management.    SG&A expenses decreased by $1.9 million, or 7.3% compared to the prior year, due to:

34


        Systems Integration.    SG&A expenses decreased by $2.1 million, or 22.0% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of fiscal 2001.

        Corporate.    SG&A expenses decreased by $1.1 million compared to the prior year, primarily due to workforce and travel expense reductions offset by increases in insurance and employee benefit costs.

        Impairment of goodwill.    In 2001, an $8.6 million impairment charge was recognized pursuant to the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," to reflect the impairment resulting from our restructuring activities. See "—Goodwill Impairment Charges" below for additional information.

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

 
  Increase (Decrease)
From 2002

 
(In millions)

 
  Amount
  Percent
 
Depreciation charged to:            
  Cost of sales   $ (0.7 ) (14.2 )%
  Selling, general and administrative expense     (0.2 ) (5.1 )
Amortization of intangible assets:            
  Goodwill     (9.1 ) (100.0 )
  Identifiable intangible assets     0.2   5.0  
   
     
  Total   $ (9.8 )    
   
     

        Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and the provisions of SFAS No. 141, "Business Combinations," which were required to be adopted concurrent with the adoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-lived asset and, as a result, the recording of periodic goodwill amortization charges was discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill be reclassified to goodwill. Goodwill amortization was $9.1 million for the year ended December 31, 2001, which includes $1.6 million of assembled workforce amortization, now deemed part of goodwill. See "—Goodwill Impairment Charges" below for additional information.

        Excluding the effect of the accounting change, depreciation and amortization decreased $0.9 million as a result of lower depreciable costs resulting from the impairment of long-lived assets recorded during the fourth quarter of fiscal 2001 and 2002, partially offset by additional depreciation resulting from capital expenditures during the period.

        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 $12.9 million, or 28.3% compared to the prior year, primarily due to:

35



        Systems Integration.    Adjusted EBITDA increased by $0.9 million, or 5.4% compared to the prior year, primarily the result of reduced SG&A spending resulting from workforce reductions.

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

 
  Increase (Decrease)
From 2001

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ 2.7   55.9 %
Systems Integration     1.4   18.1  
Corporate     2.5      
Inter-group elimination     0.1      
   
     
  Total   $ 6.7      
   
     

        Cabin Management.    Operating income increased by $2.7 million, or 55.9% compared to the prior year, primarily due to:

        Systems Integration.    Operating income increased by $1.4 million, or 18.1% compared to the prior year, primarily due to:

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

        Interest expense.    Interest expense decreased $4.3 million, or 14.4%, to $25.4 million for the year ended December 31, 2002 compared to $29.7 million for the same period last year due almost entirely to lower average interest rates charged by our lenders.

36



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

        Loss from continuing operations.    Loss from continuing operations decreased $10.8 million to a loss of $6.8 million for the year ended December 31, 2002, compared to a loss of $17.6 million for the same period last year. The decrease in loss from continuing operations is attributable to:


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

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

37



        Cumulative effect of change in accounting principle.    The $17.8 million charge to reflect the cumulative effect of change in accounting principle for the year ended December 31, 2002 was a result of transitional goodwill impairment charges recognized upon initial adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." See "—Goodwill Impairment Charges" below for additional information.

        Net income (loss).    Net loss increased $52.0 million to a net loss of $66.0 million for the year ended December 31, 2002 compared to a net loss of $14.0 million for the same period last year. The increase over the prior year is a result of a $10.7 million decrease in loss from continuing operations offset by an increase in loss from discontinued operations of $44.9 million and the cumulative effect of change in accounting principle of $17.8 million.

        Net income (loss) applicable to common stockholder.    Net loss applicable to DeCrane Holdings, our common stockholder, increased $52.7 million to a net loss of $71.8 million for the year ended December 31, 2002 compared to a net loss of $19.1 million for the same period last year. The increase in the net loss applicable to our common stockholder is attributable to:

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

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

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

        Our results of operations have been affected by acquisitions during 2000 and, as a result, affect the comparability of our historical results. The year 2000 acquisitions, which affect the comparability of the historical results of operations described herein, are within our Cabin Management Group and include Carl F. Booth & Co., acquired on May 11, 2000, and DeCrane Aircraft Seating Co. (formerly ERDA), acquired on June 30, 2000. Our historical financial statements reflect the financial position and results of operations of these acquired businesses subsequent to their respective acquisition dates.

        Our results of operations have also been affected by restructuring, asset impairment and other related charges relating to a series of restructuring activities 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.

38



        Revenues.    Revenues increased $35.6 million, or 15.5%, to $272.1 million for the year ended December 31, 2001 from $236.5 million for the year ended December 31, 2000. By segment, revenues changed as follows:

 
  Increase (Decrease)
From 2000

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ 31.3   17.9 %
Systems Integration     4.5   7.2  
Inter-group elimination     (0.2 )    
   
     
  Total   $ 35.6      
   
     

        Cabin Management.    Revenues increased by $31.3 million, or 17.9% over the prior year, due to:

        Systems Integration.    Revenues increased by $4.5 million, or 7.2% over the prior year, due to:

        Gross profit.    Gross profit decreased $6.1 million, or 6.8%, to $75.2 million for the year ended December 31, 2001, from $81.3 million of the same period last year. By segment, gross profit changed as follows:

 
  Increase (Decrease)
From 2000

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ (9.5 ) (15.9 )%
Systems Integration     3.5   15.7  
Inter-group elimination     (0.1 )    
   
     
  Total   $ (6.1 )    
   
     

        Cabin Management.    Gross profit decreased by $9.5 million, or 15.9% compared to prior year, primarily due to:

39


        Systems Integration.    Gross profit increased by $3.5 million, or 15.7% over the prior year, due to:

        Selling, general and administrative expenses.    Selling, general and administrative expenses increased $12.1 million, or 36.2%, to $45.4 million for the year ended December 31, 2001, from $33.3 million for the same period last year. By segment, SG&A expenses changed as follows:

 
  Increase (Decrease)
From 2000

 
 
  Amount
  Percent
 
 
  (In millions)

 
Cabin Management   $ 10.3   65.0 %
Systems Integration     1.0   12.0  
Corporate     0.8   10.1  
   
     
  Total   $ 12.1      
   
     

        Cabin Management.    SG&A expenses increased by $10.3 million, or 65.0% over the prior year, due to:

        Systems Integration.    SG&A expenses increased by $1.0 million, or 12.0% over the prior year, due to an increase in expenses associated with refocusing our cabin and flight deck systems integration services to product offerings requiring higher levels of sales and marketing, program management and customer service support.

        Corporate.    SG&A expenses increased by $0.8 million, or 10.1% over the prior year, primarily due to increased depreciation expense.

        Impairment of goodwill.    In 2001, an $8.6 million impairment charge was recognized pursuant to the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," to reflect the impairment resulting from our restructuring activities. See "—Goodwill Impairment Charges" below for additional information.

        Depreciation and amortization of intangibles.    Depreciation and amortization expense, which includes amortization of goodwill and identifiable intangible assets, increased $5.3 million, or 35.0%, for the year ended December 31, 2001. The increase results from the inclusion of $2.2 million of depreciation and amortization expense in 2001 from companies we acquired during 2000 and additional depreciation resulting from our capital expenditures during the period.

        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

40



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 $0.5 million, or 1.1% compared to the prior year, primarily due to:

        Systems Integration.    Adjusted EBITDA increased by $2.1 million, or 14.1% over the prior year, due principally to higher auxiliary fuel systems revenues and favorable manufacturing efficiencies.

        Operating income.    Operating income decreased $28.6 million to $8.8 million for the year ended December 31, 2001, from $37.4 million for the same period last year. By segment, operating income changed as follows:

 
  Increase (Decrease)
From 2000

 
 
  Amount
  Percent
 
 
  (In millions)

 
Operating income:            
  Cabin Management   $ (26.5 ) (74.3 )%
  Systems Integration     (1.1 ) (10.3 )
  Corporate     (0.6 ) (8.4)  
  Inter-group elimination     (0.4 )    
   
     
    Total Operating income   $ (28.6 )    
   
     

        Cabin Management.    Operating income decreased by $26.5 million, or 74.3% compared to the prior year, primarily due to:

        Systems Integration.    Operating income decreased by $1.1 million, or 10.3% over the prior year, due to the following:

41


        Interest expense.    Interest expense was $29.6 million for the year ended December 31, 2001 compared to $27.2 million for the year ended December 31, 2000, a reduction of $2.4 million due to the following:

        Provision for income taxes.    The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill amortization. The difference in the effective tax rates between periods is mostly a result of the relationship of non-deductible expenses to income before income taxes.

        Loss from continuing operations.    Loss from continuing operations increased $22.9 million to a loss of $17.5 million for the year ended December 31, 2001, compared to income of $5.4 million for the same period last year. The change in the loss from continuing operations is principally attributable to:

        Income (loss) from discontinued operations.    Income from discontinued operations increased $5.3 million to $3.6 million for the year ended December 31, 2002 compared to a loss of $1.7 million for the same period last year.

        Net income (loss).    Net income decreased $17.6 million to a net loss of $14.0 million for the year ended December 31, 2001 compared to net income of $3.6 million for the same period last year.

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

        Bookings.    Bookings increased $14.3 million, or 6.0%, to $252.8 million for the year ended December 31, 2001 compared to $238.5 million for the same period last year. The increase in bookings for 2001 results from:

        Backlog at end of period.    Backlog decreased $19.3 million to $99.5 million as of December 31, 2001 compared to $118.8 million as of December 31, 2000. The decrease in backlog for 2001 primarily

42



results from the adverse impact the events of September 11th and its aftermath and the weakening global economic conditions are having on our businesses.


Restructuring, Asset Impairment and Other Related Charges

        The following discussion should be read in conjunction with the Note 3 accompanying both our audited and unaudited financial statements included in this prospectus.

        During the each of the two years in the period ended December 31, 2002 and the six months ended June 30, 2003, 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.

 
  Six Months Ended
June 30,

  Year Ended
December 31,

 
  2003
  2002
  2002
  2001
  2000
 
  (In millions)

Nature of charges:                              
  Seating Product Line and Furniture Manufacturing Facilities Restructuring   $ 13.4   $   $   $   $
  Seat Manufacturing Facilities Restructuring         6.3     6.3        
  Asset Realignment Restructuring         5.4     6.9     20.1    
  Goodwill impairment charges     41.5         7.7     8.6    
  Other asset impairment related charges             4.3        
   
 
 
 
 
    Total pre-tax charges   $ 54.9   $ 11.7   $ 25.2   $ 28.7   $
   
 
 
 
 
Business segment recording the charges:                              
  Cabin Management   $ 47.4   $ 11.7   $ 13.2   $ 22.4   $
  Systems Integration             4.0     3.5    
   
 
 
 
 
    Total charged to continuing operations     47.4     11.7     17.2     25.9      
    Specialty Avionics (discontinued operations)     7.5         8.0     2.8    
   
 
 
 
 
      Total pre-tax charges   $ 54.9   $ 11.7   $ 25.2   $ 28.7   $
   
 
 
 
 

Charged to operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cost of sales   $ 12.8   $ 5.9   $ 10.7   $ 13.6   $
  Selling, general and administrative expenses     0.6     5.8     6.5     3.7    
  Impairment of goodwill     34.0             8.6    
   
 
 
 
 
    Total charged to continuing operations     47.4     11.7     17.2     25.9      
    Charged to discontinued operations     7.5         8.0     2.8    
   
 
 
 
 
      Total pre-tax charges   $ 54.9   $ 11.7   $ 25.2   $ 28.7   $
   
 
 
 
 

Components of charges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Noncash charges   $ 43.9   $ 5.9   $ 11.4   $ 19.6   $
  Cash charges     3.5     5.8     5.8     6.3    
   
 
 
 
 
    Total charged to continuing operations     47.4     11.7     17.2     25.9      
    Charged to discontinued operations     7.5         8.0     2.8    
   
 
 
 
 
      Total pre-tax charges   $ 54.9   $ 11.7   $ 25.2   $ 28.7   $
   
 
 
 
 

Seating Product Line and Furniture Manufacturing Facilities Restructuring

        During the second quarter of fiscal 2003, we consolidated our seating product line offerings and adopted a restructuring plan to down-size a furniture manufacturing facility in response to continuing weakness in the business, VIP and head-of-state aircraft market. These actions were designed to reduce engineering, production and inventory carrying costs by supporting fewer product offerings and achieve profitability at the furniture manufacturing facility based on its lower production levels. In connection with these actions, we recorded pre-tax charges to operations totaling $13.4 million during the second quarter of fiscal 2003, of which $9.9 million were noncash charges.

43



        The charges are comprised of the write-off of inventoried costs related to discontinued product offerings, lease termination and related charges, excess and obsolete inventory write-downs and severance and other compensation costs. As required by SFAS No. 146, the charges recorded were discounted by $0.6 million to initially measure and reflect the liabilities incurred as a result of the restructuring plan at their fair value as of June 30, 2003. The cumulative effect of a changes resulting from revisions to either the timing or the amount of estimated cash flows will be recognized as an adjustment to the liability in the period of the change.

        These restructuring activities were substantially completed during the second quarter of fiscal 2003. A $3.3 million restructuring reserve remains as of June 30, 2003 for lease termination and related costs. The manufacturing facilities were closed during June 2003. The future cash payments will be funded from existing cash balances and internally generated cash from operations.

Seat Manufacturing Facilities Restructuring

        In 2002, we announced we would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities. This program was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with these restructuring activities, 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.

        These restructuring activities were substantially completed during the second quarter of fiscal 2002. A $0.1 million restructuring reserve remains as of December 31, 2002 for lease termination and other related costs. The manufacturing facilities were closed during June 2002.

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 11th terrorist attack and its aftermath, as well as the weakening of global economic conditions, we 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. This program primarily affected our Cabin Management and Specialty Avionics Groups.

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

        Due to the 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

44



restructuring, asset impairment charges and other related expenses. During 2002, we paid $4.6 million of costs related to this restructuring in cash and a $0.1 million restructuring reserve remained as of December 31, 2002 solely for the remaining lease termination and other related costs. The restructuring activities relating to leased facilities were completed during the second quarter of fiscal 2002.

Goodwill Impairment Charges

        Six Months Ended June 30, 2003.    We recorded two goodwill impairment charges during the period.

        As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and the decision to down-size a furniture manufacturing facility, the goodwill associated with the furniture manufacturing reporting unit was tested for recoverability and found to be impaired. As a result, $34.0 million of goodwill associated with our Cabin Management Group was written off and charged to operations.

        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 one of the reporting unit's net assets was not fully recoverable. As a result, we recorded a goodwill impairment charge of $7.5 million to reduce the carrying value to the estimated net realizable value established by the definitive agreement.

        Year Ended December 31, 2002.    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.

        Year Ended December 31, 2001.    Prior to adoption of SFAS No. 142, impairment testing was in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In 2001, we recorded an $8.6 million pre-tax charge to operations to reflect the impairment loss resulting from our restructuring activities. The impairment charge pertained to our Cabin Management and Systems Integration Groups.

        See "—Goodwill Impairment Charges" below for additional information on all of the impairment charges.

Other Asset Impairment Related 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 to cost of good sold of $4.3 million related to inventories. Of this amount, charges totaling $0.3 million pertained to the Specialty Avionics Group.


Goodwill Impairment Charges

        The following discussion should be read in conjunction with Notes 3 and 7 accompanying our audited financial statements and Notes 2, 3 and 5 accompanying our unaudited financial statements included in this prospectus.

        Our results of operations for each of the years in the two year period ended December 31, 2002 and the six months ended June 30, 2003 and 2002 have been affected by the adoption of SFAS No. 142,

45



"Goodwill and Other Intangible Assets," and goodwill impairment charges. The tables below summarize the changes in goodwill during the periods.

 
  Continuing Operations
  Discontinued
Operations

 
(In millions)

  Cabin
Management
Group

  Systems
Integration
Group

  Corporate
  Total
  Specialty
Avionics
Group

 
Balance, December 31, 2000   $ 187.8   $ 33.0   $ 4.1   $ 224.9   $ 131.5  
Contingent consideration earned     3.8             3.8      
Amortization during the period     (6.6 )   (1.2 )   (0.2 )   (8.0 )   (4.7 )
Impairment charge (a)     (5.1 )   (3.5 )       (8.6 )    
Cash received upon settlement of asserted claims     (1.2 )           (1.2 )    
Foreign currency translation                     (0.3 )
   
 
 
 
 
 
Balance, December 31, 2001     178.7     28.3     3.9     210.9     126.5  

Adoption of SFAS 141 and 142:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Reclassification of intangible assets     3.1     0.4     0.1     3.6     1.3  
  Transitional impairment charge (b)     (8.5 )   (7.9 )   (2.3 )   (18.7 )   (39.4 )
Contingent consideration earned     0.6             0.6      

Impairment charge (c)

 

 


 

 


 

 


 

 


 

 

(7.7

)
   
 
 
 
 
 
Balance, December 31, 2002     173.9     20.8     1.7     196.4     80.7  
Impairment charges (d)     (34.0 )           (34.0 )   (7.5 )
Sale of Specialty Avionics Group                     (73.2 )
   
 
 
 
 
 
Balance, June 30, 2003   $ 139.9   $ 20.8   $ 1.7   $ 162.4   $  
   
 
 
 
 
 

(a)
Reflects a goodwill impairment charge to operations during the year ended December 31, 2001 and reflected as a component of our restructuring, asset impairment and other related charges. See "—Restructuring, Asset Impairment and Other Related Charges" above.

(b)
Reflects a goodwill impairment charge recorded (before $0.9 million of income tax benefit) during the six months ended June 30, 2002 and the year ended December 31, 2002 as the cumulative effect of change in accounting principle in accordance with the transitional provisions of adopting SFAS No. 142, "Goodwill and Other Intangible Assets."

(c)
Reflects a goodwill impairment charge to operations during the year ended December 31, 2002 and reflected as a component of our restructuring, asset impairment and other related charges. See "—Restructuring, Asset Impairment and Other Related Charges" above.

(d)
Reflects a goodwill impairment charges during the six months ended June 30, 2003 and reflected as a component of our restructuring, asset impairment and other related charges. See "—Restructuring, Asset Impairment and Other Related Charges" above.

        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:

46


        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.

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

        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 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.

        As required by SFAS No. 142, we test goodwill for impairment annually, on October 31st of each year, or when events or changes in circumstances indicate the carrying amount may not be recoverable. The goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related reporting units that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment.

        As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and our decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, we determined that we should reevaluate the carrying value of our goodwill prior to the annual October 31st testing date. Accordingly, we performed a step-one test of goodwill associated with our furniture manufacturing reporting unit for recoverability and found the goodwill to be impaired. As a

47



result, we recorded a pre-tax charge to operations of $34.0 million during the three months ended June 30, 2003 based on a comparison of the estimated book value of the net assets of the reporting unit to its fair value. The charge was primarily a result of a decrease in fair value caused by using lower cash flow forecasts based on the most recently reduced industry estimates of aircraft deliveries resulting from overall industry weakness. The amount recorded is an estimate and may be revised during the third quarter of fiscal 2003 upon completion of step two of the goodwill impairment model, which measures the amount of impairment.

        Prior to adoption of SFAS No. 142, impairment testing was in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In 2001, we recorded an $8.6 million pre-tax charge to operations to reflect the impairment loss resulting from our restructuring activities to close a manufacturing facility.


Liquidity and Capital Resources

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

Cash Flows During the Six Months Ended June 30, 2003

        Net cash used by operating activities was $19.9 million for the six months ended June 30, 2003 and consisted of $4.1 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 and $21.0 million used for working capital, offset by a $5.2 million increase in other liabilities. The following factors contributed to the $21.0 million working capital increase:

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

        Net cash provided by investing activities was $130.2 million for the six months ended June 30, 2003 and consisted of:

        We anticipate spending approximately $4.0 to $4.5 million for capital expenditures in 2003. As of June 30, 2003, there are no remaining acquisition contingent consideration payment obligations.

        Net cash used by financing activities was $121.2 million for the six months ended June 30, 2003. Cash of $9.3 million was provided by revolving line of credit borrowings under our senior credit facility. Cash of $130.5 million was used for principal payments on our senior term debt, capitalized lease obligations and other debt.

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Cash Flows During the Year Ended December 31, 2002

        Net cash provided by operating activities was $11.7 million for the year ended December 31, 2002 and consisted of $18.8 million of cash provided by operations after adding back depreciation, amortization, the noncash portion of our restructuring and asset impairment charges and other noncash items, and $7.1 million used for working capital. The following factors contributed to the $7.1 million working capital increase:

        Net cash used for investing activities was $10.2 million for the year ended December 31, 2002 and consisted of:

        Net cash used for financing activities was $15.4 million for the year ended December 31, 2002. Cash of $21.5 million was used for net repayments of our revolving line of credit borrowings under our senior credit facility, principal payments on our term debt, capitalized lease obligations and other debt, financing costs associated with amending our senior credit facility and the repurchase of stock and options from former management members. Cash of $6.1 million was provided by a $5.0 million capital contribution from DeCrane Holdings and $1.1 million of additional long-term borrowings.

Capital Resources and Debt Obligations as of June 30, 2003

        As of June 30, 2003, we had $50.2 million of working capital, compared to $55.4 million as of December 31, 2002, excluding assets and liabilities of the discontinued operations we sold in 2003. As of June 30, 2003, we also had $24.4 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 June 30, 2003, our senior credit facility borrowings totaling $150.2 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 June 30, 2003 and December 31, 2002 and other indebtedness totaling $9.7 million outstanding as of June 30, 2003 compared to $10.8 million as of December 31, 2002.

        The senior credit facility and senior subordinated notes indenture impose restrictive and financial covenants on us. In the first quarter of fiscal 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.

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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 have implemented a series of restructuring activities, 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.

        We consummated the sale of the Specialty Avionics Group 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.

        We believe our expected operating cash flows, together with borrowings under our senior credit facility ($24.4 million of which was available as of June 30, 2003, 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. See "Risk Factors." 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.

50



Disclosure of Contractual Obligations and Commitments

        The following table summarizes our known contractual obligations to make future cash payments as of December 31, 2002, as well an estimate of the periods during which these payments are expected to be made. We have also reflected the changes in those obligations during the six months ended June 30, 2003, which includes reflecting 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.

 
   
  Years Ending December 31,
 
  Total
  2003
  2004 and
2005

  2006 and
2007

  2008 and
Beyond

 
  (In millions)

Obligations as of December 31, 2002:                              
  Long-term debt(a):                              
    Senior credit facility   $ 270.2   $ 14.7   $ 149.3   $ 106.2   $
    12% senior subordinated notes     100.0                 100.0
    Capital lease obligations     4.0     0.6     1.1     0.7     1.6
    Other indebtedness     6.8     1.0     1.2     0.9     3.7
   
 
 
 
 
      Total long-term debt     381.0     16.3     151.6     107.8     105.3
  Operating lease obligations     15.4     1.8     3.2     2.5     7.9
  Mandatorily redeemable preferred stock redemption obligation(b)     37.0                 37.0
   
 
 
 
 
      Total obligations     433.4     18.1     154.8     110.3     150.2
   
 
 
 
 
Increase (decrease) during the six months ended June 30, 2003:                              
  Senior credit facility:                              
    Repayment with proceeds from sale     (130.0 )   (11.4 )   (68.9 )   (49.7 )  
    Revolving line of credit borrowings     13.3         13.3        
    Term debt repayments     (3.3 )   (3.3 )          
  Capital and operating lease obligations and other indebtedness repayments     (1.9 )   (1.9 )          
  Mandatorily redeemable preferred stock redemption obligation (c)     3.0                 3.0
   
 
 
 
 
    Net increase (decrease)     (118.9 )   (16.6 )   (55.6 )   (49.7 )   3.0
   
 
 
 
 
Total obligations as of June 30, 2003   $ 314.5   $ 1.5   $ 99.2   $ 60.6   $ 153.2
   
 
 
 
 

(a)
Excludes interest payments. Interest on the 12% senior subordinated notes is payable semiannually. The senior credit facility bears interest at a variable rate and therefore the amount of future interest payments are uncertain. See "Description of the Senior Bank Credit Facility."

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

(c)
Reflects the accrual of dividends payable by the issuance of additional preferred stock.

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Disclosure About Off-Balance Sheet Commitments and Indemnities

        We are a wholly-owned subsidiary of DeCrane Holdings, whose capital structure also includes mandatorily redeemable preferred stock. Since we are DeCrane Holdings' only operating subsidiary and source of cash, we may be required to fund DeCrane Holdings' redemption obligation in the future, subject to limitations contained in our senior credit agreement and the senior subordinated notes indenture. The DeCrane Holdings preferred stock has a total redemption value of $66.7 million as of June 30, 2003 and $62.2 million as of December 31, 2002, the increase reflecting an increase in its redemption value in lieu of cash dividend payments. DeCrane Holdings' preferred stock is mandatorily redeemable on September 30, 2009.

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

        In connection with the sale of the Specialty Avionics Group, we made indemnities to the buyer with respect to a number of customary, and certain other specific, representations and warranties. Our indemnities with respect to some of these matters are limited in terms of duration with the maximum of potential future payments capped at $14.0 million and our indemnities with respect to specified environmental matters will expire not later than October 2010 and provides for a maximum liability of $5.0 million, while others will have no limitations. In addition, the $140.0 million selling price is subject to a potential post-closing adjustment related to the amount of working capital at closing. Although we cannot be certain, we believe the potential adjustment will not be material. The post-closing adjustment, if any, would be payable by us in cash upon its final determination.

        As of March 31, 2003 and December 31, 2002, we also had an irrevocable standby letter of credit in the amount of $0.4 million issued and outstanding under our senior credit facility.


Critical Accounting Policies

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

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

        Allowance for uncollectible accounts receivable.    Accounts receivable are reduced by an allowance for amounts that are deemed uncollectible. The estimated allowance for uncollectible amounts is based primarily on our evaluation of the financial condition of each of our customers and their payment history. We also provide an allowance based on the age of all receivables for which we have not established a customer-specific allowance. Generally, we do not require collateral or other security to support accounts receivable, however, under certain circumstances, we require deposits or

52



cash-on-delivery terms. While our losses have been within our expectations, a deterioration of our customers' financial condition may require that we provide additional allowances, reducing our operating income in future periods. Our customers operate in the business, VIP and head-of-state and commercial aircraft industry throughout the world and are being adversely impacted by the acts and ongoing threats of global terrorism, the current military conflicts, SARS epidemic and weak global economic conditions. Accounts receivable of $22.4 million as of June 30, 2003 and $27.6 million as of December 31, 2002 are reduced by an allowance for uncollectible accounts of $1.7 million as of June 30, 2003 and $1.2 million as of December 31, 2002.

        Work-in-process inventory—deferred program costs.    We incur product development costs, comprised principally of engineering costs, relative to programs and contracts with long production cycles. In accordance with industry practice, we defer these costs in inventory. Program costs are charged to cost of sales over the production cycle of the program. Periodically, we assess the recoverability of the deferred program costs based on existing order backlog and our estimate of future orders. We reduce the deferred program costs to estimated realizable value in the period in which recoverability becomes uncertain. For example, in connection with our restructuring activities, we reassessed and elected to curtail several programs. As a result, we wrote off program costs totaling $6.3 million during the six months ended June 30, 2003 and $7.9 million during the year ended December 31, 2001. Deferred program costs included in work-in-process inventory are $12.7 million as of June 30, 2003 and $14.8 million as of December 31, 2002.

        Allowance for excess and obsolete inventory.    Inventories are reduced by an allowance for estimated excess and obsolete inventory. The allowance is the difference between the cost of the inventory and its estimated market value. Our market value estimates are based upon existing order backlog, our assumptions about market conditions, including future orders and market pricing. While our products are not subject to rapid technological obsolescence, we also consider this factor in determining our market value estimates. If our customers cancel existing orders or actual market conditions, including future orders, are less favorable than we projected, we may provide additional allowances, reducing our gross profit in future periods. Inventories of $67.7 million as of June 30, 2003 and $63.1 million as of December 31, 2002 are reduced by an allowance for excess and obsolete inventory of $4.6 million as of June 30, 2003 and $3.8 million as of December 31, 2002.

        Goodwill impairment.    On January 1, 2002, we began accounting for goodwill under Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires an impairment-only approach to accounting for goodwill. Because of our history of acquisitions, goodwill constitutes a significant portion of our long-term assets. As a result of the adoption of SFAS No. 142, we recorded a transitional goodwill impairment charge of $17.8 million in 2002 as the cumulative effect of the change in accounting principle. An additional $39.3 million transitional impairment charge pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.

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

        We estimate the fair values of our reporting units using a discounted cash flow approach, taking into consideration projections based on the individual characteristics of the reporting units, historical

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trends, market multiples for comparable businesses and independent appraisals. The forecasts of future cash flows are based on our best estimate of future revenues and operating costs, based primarily on existing backlog, expected future bookings and general market conditions. Changes in these forecasts could cause a particular reporting unit to either pass or fail the first step in the goodwill impairment mode, which could significantly change the amount of impairment recorded.

        As a result of our first required annual testing, as of October 31, 2002, we recorded an additional $7.7 million pre-tax impairment charge pertaining to the Specialty Avionics Group which is reflected as a component of the net loss from discontinued operations. The charge was primarily the result of using lower cash flow forecasts for the commercial aircraft portion of our business.

        As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and our decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, we determined that we should reevaluate the carrying value of our goodwill prior to the next annual October 31st testing date. Accordingly, we performed a step-one test of goodwill associated with our Cabin Management Group for recoverability and found the goodwill to be impaired. As a result, we recorded an additional pre-tax charge to operations of $34.0 million in fiscal 2003. The charge was primarily a result of a decrease in fair value caused by using lower cash flow forecasts based on the most recently reduced industry estimates of aircraft deliveries resulting from overall industry weakness.

        Goodwill pertaining to continuing operations with an aggregate book value of $162.4 million remains as of June 30, 2003 (compared to $196.4 million as of December 31, 2002) and will be subject impairment testing in October 2003, or sooner, if additional events occur or circumstances change such that it is reasonably possible that further impairment may exist.

        Valuation of long-lived assets and other intangible assets.    In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we review long-lived assets and other identifiable intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Factors we consider important, which could trigger an impairment review, include significant:

        Our impairment review consists of comparing the sum of the expected undiscounted future cash flows resulting from the use of the asset to the carrying value of the assets. When we determine that the carrying value may not be recoverable, we record an impairment loss equal to the excess of the asset's carrying value over its fair value. We measure fair value based on a projected discounted cash flow method using a discount rate we believe to be commensurate with the risk inherent in our current business model. Net long-lived assets and intangible assets, excluding goodwill, amounted to $62.1 million as of June 30, 2003 and $65.2 million as of December 31, 2002.

        Accounting for income taxes.    As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing permanent and temporary differences resulting from differing treatment of items, such as amortization of assets and other nondeductible expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our statement of financial position. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance which increases our provision for income taxes in our statement of operations.

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        For example, we have $26.1 million of deferred tax assets as of June 30, 2003, which includes $14.8 million of federal and state loss carryforwards. During the six months ended June 30, 2003, we evaluated our deferred assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization. Based on this evaluation, we determined that recovery was not likely in certain taxing jurisdictions and applied our judgment in estimating the amount of valuation allowance necessary under the circumstances to reduce the assets carrying value to realizable value. As a result, we established a $13.1 valuation allowance for the net deferred tax assets which may not be realized in the future.

        In the event actual results differ from our estimates or we adjust these estimates in future periods, we may need to provide an additional valuation allowance in the period such determination is made, which would increase our provision for income taxes.

        Revenue and profit recognition under long-term contracts.    Because of relatively long production cycles, a portion of our revenues and profits are recognized under percentage-of-completion method of accounting using total contract price, actual costs incurred to date and an estimate of the completion costs for each contract. We use this method because reasonably accurate estimates of the revenue and costs applicable to the various stages of a contract can be made. Recognized revenues and profits on each contract are subject to revisions as the contract progresses towards completion. Revisions to revenue and profit estimates are made in the period in which the facts that give rise to the revision become known. Provisions for estimated losses on uncompleted contracts are fully recognized in the period in which such losses are determined. During the year ended December 31, 2002, approximately 28.9% of our revenues and 25.2% of our gross profit was recognized under the percentage-of-completion method of accounting. During the six months ended June 30, 2003, approximately 27.4% of our revenues and 26.2% of our gross profit (excluding restructuring charges) was recognized under the percentage-of-completion method of accounting.

        Litigation.    We evaluate contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." We establish reserves for estimated loss contingencies when it is our assessment that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are charged against income in the period in which different facts or information becomes known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates, advice of legal counsel or other third parties regarding the probable outcomes of the matter. Should the outcome differ from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required.

        As described in "Business—Legal Proceedings" and Note 13 accompanying our audited financial statements and Note 11 accompanying our unaudited financial statements included in this prospectus, we are involved in legal proceedings for which no reserves for estimated loss contingencies have been established. Our current evaluation of these matters is that it is probable we will prevail and therefore are not required to accrue estimated losses in accordance with SFAS No. 5. However, there is a possibility that we may ultimately be required to pay all or a portion of the contingent liabilities related to these matters, which may have an adverse impact on our business, financial position, results of operations or cash flows in future periods.

        Restructuring of our businesses.    As described in "—Restructuring, Asset Impairment and Other Related Charges," we recorded charges totaling $13.4 million during the six months ended June 30, 2003, $17.2 million during 2002 and $25.9 million during 2001 in response to the adverse aerospace industry impact the acts and ongoing threats of global terrorism and the current weak global economic conditions are having on our businesses. These charges are based on our present estimates of the impact these events are having on our businesses and the future recovery of the aerospace industry.

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Actual results and future recovery could differ from these estimates, potentially resulting in further restructuring, asset impairment and other related charges.


Recently Issued Accounting Pronouncements

SFAS No. 145

        In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning January 1, 2003. Adoption of this new standard in 2003 did not have an impact on our business, consolidated financial position, results of operations or cash flow.

SFAS No. 146

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

        SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be initially measured at fair value and recognized when the liability is incurred. In periods subsequent to initial measurement, changes to the liability are measured using the credit-adjusted risk-free rate that was used in the initial measurement of the liability recorded. The cumulative effect of a change resulting from revisions to either the timing or the amount of estimated cash flows is recognized as an adjustment to the liability in the period of the change and charged to the same line items in the statement of operations used 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. SFAS No. 146 affects the timing of recognizing restructuring costs, as well as the amounts recognized, depending on the nature of the exit, disposal or restructuring activity and the timing of the related estimated cash flows. As required by SFAS No. 146, we applied its provisions to the restructuring activities initiated in June 2003.

FIN No. 45

        In November 2002, the Financial Accounting Standards Board issued 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 us on a prospective basis to guarantees issued or modified after December 31, 2002. However, the disclosure requirements in FIN No. 45 are effective for our financial statements for periods ending after December 15, 2002.

        We are not a party to any agreement in which it is a guarantor of indebtedness of others therefore the interpretation is not expected to have a material effect on our financial position, results of

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operations or cash flows. We have adopted the disclosure requirements of this interpretation as of December 31, 2002.

SFAS No. 148

        In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation," to require disclosure in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

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

        The SFAS No. 148 pro forma disclosures were effective for our fiscal year ended December 31, 2002 and for interim financial statements beginning in 2003. The pro forma disclosures are in the notes accompanying the financial statements included in this prospectus.

FIN No. 46

        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 addresses consolidation by business enterprises of variable interest entities (formerly special purpose entities or "SPEs"). We do not have any variable interest entities as defined in FIN No. 46.

SFAS No. 150

        In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires classification of financial instruments within its scope as a liability, including financial instruments issued in the form of shares that are mandatorily redeemable, because those financial instruments are deemed to be, in essence, obligations of the issuer. We are currently evaluating the impact this new standard will have on our financial position, results of operations and cash flows. However, we believe we will be required to reclassify our mandatorily redeemable preferred stock as a liability commencing July 1, 2003 and reflect its 16% per annum dividend as a charge against pre-tax income. Our mandatorily redeemable preferred stock will have a redemption value of $40.0 million on July 1, 2003.


Quantitative and Qualitative Disclosures About Market Risk

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

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

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        Market risk related to our variable-rate debt is estimated as the potential decrease in pre-tax earnings resulting from an increase in interest rates. The interest rates applicable to variable-rate debt are, at our option, based on defined margins over the current prime rate or LIBOR. See "Description of the Senior Bank Credit Facility." As of June 30, 2003, the current prime rate was 4.00% and the current LIBOR was 1.12%. Based on $150.2 million of variable-rate debt outstanding as of June 30, 2003, a hypothetical one percent rise in interest rates, to 5.00% for prime rate borrowings and 2.12% for LIBOR borrowings, would reduce our pre-tax earnings by $1.5 million annually.

        To limit a portion of our exposure related to rising interest rates, we have entered into an interest rate swap contract to effectively convert $4.5 million of variable-rate industrial revenue bonds to 4.2% fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this portion of our variable-rate debt. Market risk related to this interest rate swap contract is estimated as the potential higher interest expense we will incur if the variable interest rate decreases below the 4.2% fixed rate. Based on the $3.3 million of variable-rate debt converted to fixed-rate debt outstanding as of June 30, 2003, a hypothetical one percent decrease in the variable interest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1 million annually.

        The estimated fair value of our $100.0 million fixed-rate long-term debt increased $7.0 million, or 17.5%, to approximately $47.0 million at June 30, 2003 from $40.0 million as of December 31, 2002. Although we cannot be certain, we believe the increase may have been a result of the sale of the Specialty Avionics Group. Market risk related to our fixed-rate debt is deemed to be the potential increase in fair value resulting from a decrease in interest rates. For example, a hypothetical ten percent decrease in the interest rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt by approximately $7.0 million.

        Foreign Currency Exchange Rate Risk.    Our foreign customers are located in various parts of the world, primarily Canada, the Far and Middle East and Western Europe, and we have subsidiaries with manufacturing facilities in Mexico. To limit our foreign currency exchange rate risk related to sales to our customers, orders are almost always valued and sold in U.S. dollars. We have entered into forward foreign exchange contracts in the past, primarily to limit the Specialty Avionics Group's exposure related to foreign inventory procurement and operating costs. While we have not entered into any such contracts since 1998, we may do so in the future depending on the volume of non-U.S. dollar denominated transactions and our assessment of future foreign exchange rate trends.

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BUSINESS

        DeCrane Aircraft Holdings, Inc., a Delaware corporation founded in 1989, is a provider of integrated assemblies, sub-assemblies and component parts to the aerospace industry. Since our founding in 1989, we have experienced both internal growth and external growth by identifying fragmented, high-growth niche segments within the aerospace industry and acquiring market-leading companies in those niches. Today, we have product capability within two specific segments of the aerospace industry: cabin management for business, VIP and head-of-state aircraft and systems integration services. Within these markets, our customers include original manufacturers of business, VIP and head-of-state aircraft, commonly referred to as OEM's, and aircraft repair and modification centers.

Our Operating Groups

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

        Prior to May 23, 2003, we also had a third strategic business, the Specialty Avionics Group. As described in "Recent Developments," we sold our equity interests in the companies comprising this group to an affiliate of Odyssey Investment Partners, LLC. 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 reflects only our continuing operations for all periods. Our historical financial position and results of operations have also been affected by our history of acquisitions. See "—Other Information—Acquisitions and Dispositions" below for additional information.

Cabin Management Group

        DeCrane's Cabin Management Group contributed approximately 75% of our revenues for the year ended December 31, 2002 and 69% for the six months ended June 30, 2003.

Business Description

        Our Cabin Management Group is a leading independent provider of cabin products, with a primary focus on serving the business, VIP and head-of-state aircraft market. Since 1997, our Cabin Management Group has acquired nine companies involved in the engineering, manufacturing and assembly of the key components for the interior of a business, VIP and head-of-state aircraft, including cabin interior furnishings, veneer, cabin management systems, seating and composite components. Our Cabin Management Group serves major manufacturers of business, VIP and head-of-state aircraft, including Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream and Raytheon.

        The Cabin Management Group introduced the concept of modularity to the business, VIP and head-of-state aircraft market by offering totally integrated interior products. In our view, one of the greatest challenges facing the industry's aircraft manufacturers is minimizing the lead-time necessary to complete an unfinished "green" aircraft. We believe our distinctive approach of delivering integrated assemblies and sub-assemblies addresses this challenge by providing our customers with entire pre-engineered, pre-wired and pre-plumbed modular cabin interiors and management systems ready for final integration into the aircraft. We believe our totally integrated interior products enable our customers to reduce their lead times, supplier base and overall costs.

        The Cabin Management Group is guided by our overall strategy to gain market leadership positions in high-growth segments of the aerospace industry by building more related product

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capabilities than any other company in the industry. To that end, our Cabin Management Group has focused on pursuing two, closely related, strategic imperatives:

        In order to meet these strategic objectives, we have aggressively pursued growth in our Cabin Management Group through selective acquisitions.

Products and Services

        Our Cabin Management Group designs, engineers and manufactures a full line of customized, pre-fit products and provides related services. Approximately 55% of our Cabin Management Group's revenues in 2002 were from two customers, Textron and Bombardier (43% for the six months ended June 30, 2003). Our products and services are in four broad categories, as summarized below.

Interior Furnishings   Seating
  entertainment and refreshment centers     executive track and swivel seats
  conference tables     jump-seats
  hi-low dining and coffee tables     divans, including models that convert to beds
  end tables           or contain storable tables
  cabinets     upholstery services
  arm and side ledges        
  galleys   Cabin Management Systems
  lavatories     in-flight entertainment systems
  vanities     in-flight data network and communication
  room enclosures           systems
  cabinetry refurbishment services     cabin controls
  veneers     switches

Composite Components
  sound-dampening side walls and headliners     environmental (HVAC) ducting
  passenger service units     closets

        Our interior furnishings products and services provided approximately 47% of our consolidated revenues during each of the years in the three year period ended December 31, 2002 and approximately 37% during the six months ended June 30, 2003 compared to approximately 49% for the same six month period in 2002. Seating provided approximately 10% of our consolidated revenues during each of the years in the three year period ended December 31, 2002 and approximately 11% during the six months ended June 30, 2003 compared to approximately 10% during the same six month period in 2002. In addition, cabin management systems provided approximately 13% our consolidated revenues during the year ended December 31, 2000 compared to approximately 10% in 2001 and 7% in 2002. Cabin management systems, as a percent of consolidated revenues, decreased subsequent to 2000 primarily as a result of the interior furnishings and seating companies we acquired during 2000.

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Competition

        The markets served by our Cabin Management Group are fragmented, with several competitors offering similar products and services. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies. Our Cabin Management Group generally faces competition from a group of smaller companies and enterprises, except for the business, VIP and head-of-state aircraft manufacturers and independent completion centers. We believe that the principal competitive factors in the markets we serve are quality, price, timely deliveries and overall customer service. Our principal competitors are summarized below.

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

Systems Integration Group

        DeCrane's Systems Integration Group contributed approximately 25% of our revenues for the year ended December 31, 2002 and 31% for the six months ended June 30, 2003.

Business Description

        Our Systems Integration Group provides a range of aircraft retrofit, completion and refurbishment services, from conceptual design to Federal Aviation Administration certification, including engineering, manufacturing and installation. One of our largest businesses in this group is the design, production and installation of auxiliary fuel systems, which extend the range of an aircraft. We have an exclusive long-term contract through December 31, 2004 with Boeing Business Jet ("BBJ") (which may be cancelled by BBJ at any time upon prior written notice) to design, manufacture and install auxiliary fuel systems on the BBJ, a Boeing 737-700IGW, and the BBJ2, a Boeing 737-800, and are one of only four world-wide approved BBJ/BBJ2 service centers. During 2002, we delivered our first business, VIP and head-of-state aircraft interior completion on a BBJ2 aircraft and are under contract to perform an interior completion on a BBJ aircraft for delivery in 2003.

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

        The aerospace industry is highly regulated in the United States by the FAA and similar regulatory agencies abroad, such as the European Joint Aviation Authorities (commonly referred to as the JAA), to ensure that aviation products and services meet stringent safety and performance standards. As of July 29, 2003, there are only 23 companies world-wide that have the necessary Designated Alteration Station authorization to offer aircraft certification on behalf of the FAA. Our Systems Integration

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Group is authorized to provide the full spectrum of services, from design to FAA certification, needed for timely retrofitting of an aircraft, thus providing a significant competitive advantage.

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

Products and Services

        Our Systems Integration Group provides auxiliary fuel systems, auxiliary power units and system integration services, including engineering, kit manufacturing, installation and certification. Customers include Boeing (Boeing Business Jet, Boeing's Commercial Airplane Group and Boeing Integrated Defense Systems), Bombardier, Cessna, Gulfstream, Honeywell, Raytheon and Rockwell Collins. Approximately 56% of our Systems Integration Group's revenues in 2002 were from Boeing. During the six months ended June 30, 2003, approximately 71% of the group's revenues were from Boeing, with the percentage increase resulting from a decrease in revenues from our other customers. The products and services we provide are described below.

        Auxiliary Fuel Systems and Power Units.    We design, engineer, manufacture and install auxiliary fuel systems for business, VIP, head-of-state and commercial aircraft. Our unique design and construction

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have made us a leader in the auxiliary fuel system market. We also manufacture auxiliary power units, which provide ground power to business jets made by Bombardier, Cessna, Gulfstream and Raytheon. These products and services provided approximately 15% of our consolidated revenues during the year ended December 31, 2002 and 14% during each of the years in the two year period ended December 31, 2001. During the six months ended June 30, 2003, these products and services provided approximately 18% of our consolidated revenues compared to 15% during the same period in 2002.

        Cabin and Flight Deck Systems Integration.    We have designed and patented avionics support structures we sell under the Box-Mount™ name. These structures are used to support and environmentally cool avionics equipment, including navigation, communication and flight control equipment. These support structures are sold to aircraft and related electronics manufacturers, airlines and major modification centers. In addition, these products are essential components of the installation kits used in our systems integration operations.

        Aircraft Completion and Modification Services.    We are one of only three world-wide approved Boeing Business Jet Service Centers providing extensive completion, modification and integration services to the business, VIP and head-of-state aircraft market.

        Retrofit and Refurbishment Services.    We also provide retrofit and refurbishment services, including engineering, kit manufacturing, installation and certification, to both commercial and business, VIP and head-of-state aircraft customers.

Competition

        The markets served by our Systems Integration Group are fragmented with several competitors offering similar products and services. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies. Our Systems Integration Group generally faces competition from a group of smaller companies and enterprises, except for the business, VIP and head-of-state aircraft manufacturers and independent completion centers. We believe that the principal competitive factors in the markets we serve are quality, price, timely deliveries and overall customer service. Our principal competitors are summarized below.

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

Other Information

Acquisitions and Dispositions

Disposition of the Specialty Avionics Group

        On May 23, 2003, we consummated the sale of our equity interests in the companies comprising the Specialty Avionics Group to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners,

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LLC. The aggregate selling price was $140.0 million in cash, subject to a post-closing selling price adjustment for the amount of working capital at closing. We used $130.0 million of the proceeds from the sale to repay borrowings under our senior credit facility, as amended. The sale of the Specialty Avionics Group is not expected to affect the operations of our remaining operating groups. The Specialty Avionics Group is reflected as a discontinued operation in this prospectus. See "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.

        The Specialty Avionics Group consisted of Avtech Corporation of Seattle, Washington, Aerospace Display Systems, LLC of Hatfield, Pennsylvania, and Tri-Star Electronics International, Inc. of El Segundo, California.

Companies Acquired by DeCrane Aircraft

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


        All of the acquisitions were accounted for as purchases. We have used the acquired assets to manufacture products similar to those previously manufactured by the companies prior to their acquisition. Our financial statements reflect the acquired companies subsequent to their respective

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acquisition dates. Our more recent acquisitions are described in Note 2 accompanying our consolidated financial statements included in this prospectus.

        We continue to explore potential acquisitions, some of which may be material. We are not currently party to any definitive acquisition agreements.

DeCrane Holdings' Acquisition of DeCrane Aircraft

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

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

Customers

        We estimate that our Cabin Management Group currently sells its products and services to approximately 800 customers and our Systems Integration Group sells its products and services to approximately 200 customers. Our primary customers include manufacturers of business, VIP and head-of-state aircraft, airlines and aircraft repair and modification companies.

        The following customers accounted for 10% or more of our consolidated revenues for the year ended December 31, 2002. Historical data for the three years ended December 31, 2002 is presented in

65



Note 17 accompanying our consolidated financial statements included in this prospectus. Comparable data for the six months ended June 30, 2003 is also presented.

Significant Customers

  Cabin
Management
Group

  Systems
Integration
Group

  Consolidated
Total

 
Percent of consolidated revenues:              
  Six months ended June 30, 2003:              
    Textron(1)   18.8 % % 18.8 %
    Bombardier   6.6   0.8   7.4  
    Boeing(2)   4.1   22.0   26.1  
   
 
 
 
      Consolidated revenues   29.5 % 22.8 % 52.3 %
   
 
 
 
  Year ended December 31, 2002:              
    Textron(1)   23.5 % % 23.5 %
    Bombardier   16.0   1.4   17.4  
    Boeing(2)   1.4   14.0   15.4  
   
 
 
 
      Consolidated revenues   40.9 % 15.4 % 56.3 %
   
 
 
 

Percent of group revenues(3):

 

 

 

 

 

 

 
  Six months June 30, 2003:              
    Textron(1)   27.2 % %    
    Bombardier   9.5   2.9      
    Boeing(2)   6.0   70.9      
   
 
     
      Group revenues   42.7 % 73.8 %    
   
 
     
 
Year ended December 31, 2002:

 

 

 

 

 

 

 
    Textron(1)   31.3 % %    
    Bombardier   21.4   5.4      
    Boeing(2)   1.9   56.0      
   
 
     
      Group revenues   54.6 % 61.4 %    
   
 
     

(1)
Includes Cessna.

(2)
Reflects only our direct revenues from Boeing. Our Systems Integration Group's revenues from Boeing result from auxiliary fuel systems for the Boeing Business Jet.

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

        Revenues from Textron and Bombardier, as a percentage of total consolidated revenues, decreased during the six months ended June 30, 2003 compared to our revenues from these customers during the year ended December 31, 2002. The decrease is caused by both companies temporarily suspending production of various models of aircraft for several weeks during fiscal 2003 in response to their low order backlog resulting from the weak demand for new aircraft as described in "—Backlog" below. We also expect a further decline in revenues from Textron during the third quarter of fiscal 2003 as a result of their additional planned shut downs. Complete loss of any of the customers identified above could have a significant adverse impact on our results of operations expected in future periods.

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

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Backlog

        As of June 30, 2003, we had an aggregate sales order backlog of $74.1 million compared to $66.8 million as of December 31, 2002, $86.4 million as of June 30, 2002 and $99.5 million as of December 31, 2001, as follows:

 
  June 30,
  December 31,
 
  2003
  2002
  2002
  2001
 
  (In thousands)

Cabin Management   $ 33,835   $ 36,722   $ 31,679   $ 43,653
Systems Integration     40,240     49,647     35,126     55,865
   
 
 
 
  Consolidated totals   $ 74,075   $ 86,369   $ 66,805   $ 99,518
   
 
 
 

        Orders are usually filled within twelve months; however, backlog totaling $3.9 million as of June 30, 2003 is scheduled for delivery during the third quarter of fiscal 2004 and beyond as follows: Cabin Management—$1.3 million; and Systems Integration—$2.6 million. Orders may be subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date will be materially affected by when we receive orders and how fast we fill them. Period-to-period comparisons of backlog figures may not be meaningful. For that reason, our backlogs do not necessarily accurately predict actual shipments or sales for any future period.

        As described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—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 the aerospace industry. We are not able to predict the continuing impact these events will have in future periods. However, given the magnitude of these events, the adverse impact could be material.

Employees

        As of August 31, 2003, we had 1,221 employees: 936 in our Cabin Management Group; 274 in our Systems Integration Group; and 11 in our corporate office. None of our employees is subject to a collective bargaining agreement, and we have not experienced any material business interruption as a result of labor disputes. We believe that we generally have a good relationship with our employees.

Research and Development

        We continually evaluate opportunities to improve our product offerings and develop new products that incorporate new technologies to meet the demands of our customers and the FAA. Total expenditures were $0.1 million for the year ended December 31, 2002, $0.7 million during the year ended December 31, 2001 and $1.6 million during the year ended December 31, 2000.

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Financial Information About Geographic Areas

        Financial information about our revenues and assets by geographic area are included in Note 17 accompanying our audited consolidated financial statements included in this prospectus.

Seasonality

        Our businesses generally are not seasonal in nature.

Sales and Marketing

        Our Cabin Management Group has designated relationship managers who are responsible for maintaining and cultivating relationships with customers. In addition, a dedicated sales force is utilized for some of our products and services.

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

        We are continuously seeking opportunities to combine our sales efforts across all of our operating groups in order to ensure that all sales opportunities are explored and that we maximize our revenue content per plane. We may also assign marketing and sales responsibilities for key customers to one of our senior corporate executives.

Raw Materials and Component Parts

        The components we manufacture require the use of various raw materials including aluminum, hardwoods and plastics. The availability and prices of these materials may fluctuate. The cost of such raw materials is a significant component in, and part of, the sales price of many of our products. Although some of our contracts have prices tied to raw material prices, we cannot always recover raw material price increases in our product sale price. We also purchase a variety of manufactured sub-component parts from various suppliers. Raw materials and component parts are generally available from multiple suppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials and component parts may affect our ability to meet customer production needs.

Intellectual Property and Proprietary Information

        We have various trade secrets, proprietary information, trademarks, tradenames, patents, copyrights and other intellectual property rights we believe are important to our business in the aggregate, but not individually.

Government Regulation

Federal Aviation Administration

        The aerospace industry is highly regulated in the United States by the Federal Aviation Administration and in other countries by similar agencies to ensure that aviation products and services meet stringent safety and performance standards. In addition, many of our customers impose their own compliance and quality requirements on us. The FAA prescribes standards and licensing requirements for aircraft components, issues designated alteration station authorizations, and licenses private repair stations. We hold various FAA approvals and licenses, which may only be used by our subsidiary obtaining such approval. If material FAA or customer authorizations or approvals were revoked or suspended, our operations could be adversely affected.

        The FAA can authorize or deny authorization of many of the services and products we provide. Any such denial would preclude our ability to provide the pertinent service or product. If we failed to comply with applicable FAA standards or regulations, the FAA could exercise a wide range of

68



remedies, including a warning letter, a letter of correction, a civil penalty action, and emergency or non-emergency suspension or revocation of a certificate or approval.

        Each type of aircraft operated by airlines in the United States must possess an FAA type certificate, generally held by the aircraft manufacturer, indicating that the type design meets applicable airworthiness standards. When someone else develops a major modification to an aircraft already type-certificated, that person must obtain an FAA-issued Supplemental Type Certificate for the modification. Historically, we have obtained several hundred of these Supplemental Type Certificates, most of which we obtained on behalf of our customers as part of our systems integration services. Some of these certificates we obtain were or eventually will be transferred to our customers. As of June 30, 2003, we own and/or manage on behalf of our customers approximately 300 Supplemental Type Certificates. Many are multi-aircraft certificates, which apply to all of the aircraft of a single type. We foresee the need to obtain additional Supplemental Type Certificates so that we can expand the services we provide and the customers we serve and believe we will be able to obtain such certificates as the need arises.

        Supplemental Type Certificates can be issued for proposed aircraft modifications directly by the FAA, or on behalf of the FAA by a Designated Alteration Station. The FAA designates what types of Supplemental Type Certificates can be issued by each Designated Alteration Station. A subsidiary within our Systems Integration Group is an FAA-authorized Designated Alteration Station and can directly issue many of the Supplemental Type Certificates our customers and we require for our systems integration operations.

        After obtaining a Supplemental Type Certificate, a manufacturer must apply for a Parts Manufacturer Approval from the FAA, or a supplement to an existing Parts Manufacturer Approval, which permits the holder to manufacture and sell installation kits according to the approved design and data package. As of June 30, 2003, we have six Parts Manufacturer Approvals and approximately 160 supplements to those approvals. In general, each initial Parts Manufacturer Approval is an approval of a manufacturing or modification facility's production quality control system. Each Parts Manufacturer Approval supplement authorizes the manufacture of a particular part in accordance with the requirements of the corresponding Supplemental Type Certificate. We routinely apply for and receive such Parts Manufacturer Approval supplements. In order to perform the actual installations of a modification, we are also required to have FAA approval. This authority is contained either in our Parts Manufacturer Approvals and related supplements, or in our repair station certificates. In order for a company to perform most kinds of repair, engineering, installation or other services on aircraft, its facility must be designated as an FAA-authorized repair station. As of June 30, 2003, we had seven authorized repair stations and employed over 100 FAA certified representatives.

Occupational Safety and Health Administration

        Our manufacturing operations in the United States are subject to a variety of worker and community safety laws. The Occupational Safety and Health Act of 1970 mandates general requirements for safe workplaces for all employees. In addition, OSHA provides special procedures and measures for the handling of hazardous and toxic substances and has established specific safety standards for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with OSHA's health and safety requirements.

Environmental Matters

        Our facilities and operations are subject to various federal, state, local, and foreign environmental laws and regulations, including those relating to discharges to air, water, and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. In addition, some environmental laws, such as the federal Comprehensive Environmental Response,

69



Compensation and Liability Act, as amended ("CERCLA") and similar state laws, impose strict liability upon persons responsible for releases or potential releases of hazardous substances. That liability generally is retroactive, and may create "joint and several" liability among multiple parties who have some relationship to a site or a source of waste, such as a current or former owner or operator of real property or a party who arranges to transport wastes to a third-party site. We have sent waste to treatment, storage, or disposal facilities that have been designated as National Priority List sites under CERCLA or equivalent listings under state laws. We have received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency regarding our use of several of those sites. In addition, some of our operations are located on properties that are contaminated to varying degrees.

        We have not incurred, nor do we expect to incur, liabilities in any significant amount as a result of the foregoing matters because in most of these cases other entities have been held primarily responsible, the levels of contamination are sufficiently low so as not to require remediation, or we are indemnified against such costs. However, in a few cases, we do not have sufficient information to assess our potential liability, if any. In addition, it is possible, given the potentially retroactive nature of environmental liability, that we will receive additional notices of potential liability relating to current or former activities.

        We believe that we have no liabilities under environmental laws and regulations, except for liabilities which we do not expect would likely have a material adverse effect on our business, financial position, results of operations or cash flows. However, some risk of environmental liability is inherent in the nature of our business, and we might in the future incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental laws and regulations.

        In connection with the sale of the Specialty Avionics Group, we have agreed to indemnify the buyer for all pre-closing releases of hazardous materials at any of Avtech's facilities up to a maximum amount of $5.0 million.

Properties

        We operate in a number of manufacturing, engineering and office facilities in the United States and abroad. As of June 30, 2003, we utilized approximately 0.8 million square feet of floor space, approximately 95% of which is located in the United States. We believe that our facilities are in good condition and are adequate to support our operations for the foreseeable future. All of our owned

70



properties are pledged as collateral under our senior credit facility. Our operating groups' facilities at June 30, 2003 are summarized below.

 
  Leased
  Owned
  Total
 
  (In thousands of square feet)

Cabin Management   372   205   577
Systems Integration   114   150   264
Corporate   8     8
   
 
 
  Total in use   494   355   849

Not in use:

 

 

 

 

 

 
  Available for sublease to others (1)   151     151
  Held for sale     104   104
  Subleased to others (2)   84     84
   
 
 
    Total   729   459   1,188
   
 
 

(1)
Reflects facilities vacated in connection with our June 2003 restructuring activities that we believe we may be able to sublease to others.

(2)
Reflects facilities vacated and subleased in connection with our restructuring activities.

Legal Proceedings

        As part of its investigation of the crash of Swissair Flight 111 off the Canadian coast on September 2, 1998, the Canadian Transportation Safety Board (the "CTSB") initially notified us that it recovered burned wire that was attached to the in-flight entertainment system installed on some of Swissair's aircraft by one of our subsidiaries. Our subsidiary has worked vigorously over the last 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.

        We were 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 us have been obtained by the Boeing and Swissair insurers.

        On September 22, 2003, the Company and our insurers entered into an agreement with Boeing, Swissair and each of their respective insurers, in which the Company received a release from those parties and an indemnification by Boeing and Swissair's insurers against claims asserted on behalf of passengers for compensatory damage and by others for contribution and/or indemnity claims. We believe the agreement adequately protects the Company from all existing litigation pending against us arising from this catastrophic incident. Punitive damages are not subject to the indemnity; however, while some of the passenger actions originally asserted punitive damages, by virtue of a court order, claims for punitive damages may not be prosecuted.

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MANAGEMENT

Directors and Executive Officers

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

Name

  Age
  DeCrane Aircraft
  DeCrane Holdings
R. Jack DeCrane(1)   56   Director and Chief Executive Officer   Vice Chairman of the Board of Directors and Chief Executive Officer

Richard J. Kaplan

 

60

 

Director, Senior Vice President, Chief Financial Officer, Secretary and Treasurer

 

Director, Chief Financial Officer and Assistant Secretary

Robert G. Martin

 

66

 

Senior Vice President and Group President

 


Jeffrey A. Nerland

 

46

 

Senior Vice President and Group President

 


Thompson Dean

 

45

 

Chairman of the Board of Directors

 

Chairman of the Board of Directors

James A. Quella

 

53

 

Director

 

Director

Susan C. Schnabel(1)(2)

 

41

 

Director

 

Director

Albert E. Suter(1)(2)

 

67

 

Director

 

Director

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

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

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

        Richard J. Kaplan has been the Senior Vice President, Chief Financial Officer, Secretary and Treasurer of DeCrane Aircraft and Assistant Treasurer and Assistant Secretary (principal accounting officer) of DeCrane Holdings since March 1999. In August 2002, Mr. Kaplan was appointed Chief Financial Officer and Assistant Secretary of DeCrane Holdings. From April 1998 to March 1999, he served as Executive Vice President and Chief Operating Officer of Developers Diversified Realty Corporation. From 1977 to 1998, he was a partner with Price Waterhouse LLP, having joined the firm in 1964. He became a director of DeCrane Aircraft and DeCrane Holdings in 2000.

        Robert G. Martin has been our Senior Vice President and President of the Systems Integration Group since October 1999. Mr. Martin also served as President of PATS since we acquired it in January 1999 through December 2002 and as President of Aerospace Display Systems from September 1992 until October 1999.

        Jeffrey A. Nerland has been our Senior Vice President and President of the Cabin Management Group since December 2001. From January 1999 until December 2001, Mr. Nerland served as Vice President, Business Development, and was appointed Senior Vice President in March 2001. Mr. Nerland also served as President of Cabin Management Group's Seating Division from June 2000

72



through December 2001. From July 1994 through December 1998, he was President of The Nerland Group and a partner with Budetti, Harrison, Nerland and Associates, a consulting and interim management firm.

        Thompson Dean has been a director of DeCrane Aircraft and DeCrane Holdings in 1998. Mr. Dean also served are President of DeCrane Holdings from its inception in 1998 through August 2002. Mr. Dean has also been the Managing Partner of DLJ Merchant Banking, Inc. since November 1995. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. became an indirect affiliate of Credit Suisse First Boston, Inc. and Credit Suisse Group. Mr. Dean serves as a director of AKI Holding Corp., Amatek Holdings S.A., Arcade Holding Corporation, Manufacturers' Services Limited, Mueller Holdings, Inc., and Von Hoffman Holdings, Inc.

        James A. Quella has been a director of DeCrane Aircraft and DeCrane Holdings since February 2003. Mr. Quella has also been a Managing Director and Operating Partner of DLJ Merchant Banking, Inc. since July 2000. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation became indirect affiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group. Previously, Mr. Quella was a Managing Director with GH Ventures Partners LLC from January 2000 through July 2000 and Vice Chairman of Mercer Management Consulting, Inc. from 1997 through 1999. Mr. Quella serves as a director of Advanstar Inc., Advanstar Communications Inc., Merrill Corporation and Von Hoffman Holdings, Inc.

        Susan C. Schnabel has been a director of DeCrane Aircraft and DeCrane Holdings since 1998. Ms. Schnabel has also been a Managing Director of DLJ Merchant Banking, Inc. since January 1998. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation became indirect affiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group. Ms. Schnabel serves as a director of Environmental Systems Products Holdings, Inc., Noveon, Inc. and Shoppers Drug Mart, Inc.

        Albert E. Suter has been a director of DeCrane Aircraft and DeCrane Holdings since May 2002. Mr. Suter is a Senior Advisor and Retired Vice Chairman and Chief Operating Officer of Emerson Electric Co., a manufacturer of electrical, electromechanical and electronic products and systems. Mr. Suter has served Emerson in various capacities since 1989. Mr. Suter serves as a director of Furniture Brands International, Inc.

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Executive Compensation

Summary Compensation Table

        The following table describes all annual compensation awarded to, earned by or paid to our Chief Executive Officer and the four most highly compensated executive officers other than the Chief Executive Officer for the three years ended December 31, 2002.

 
   
  Annual Compensation
  All Other Compensation
Name

  Year
  Salary
  Bonus
  Securities
Underlying
Options(1)

  Other(2)
R. Jack DeCrane(3)
Chief Executive Officer and
Director
  2002
2001
2000
  $

355,144
352,906
341,381
  $

750,000
1,290,000
1,100,000
 

2,981
  $

19,477
15,741
48,979

Richard J. Kaplan(4)
Senior Vice President and Director

 

2002
2001
2000

 

 

212,200
212,200
207,293

 

 

330,000
470,000
400,000

 



4,093

 

 

9,029
5,809
25,721

Robert G. Martin(5)
Senior Vice President

 

2002
2001
2000

 

 

222,789
222,789
216,300

 

 

300,000
403,639
384,000

 



3,229

 

 

6,500
6,275
5,100

Jeffrey A. Nerland(6)
Senior Vice President

 

2002
2001
2000

 

 

210,000
191,794
185,338

 

 

225,000
290,000
250,000

 



5,344

 

 

6,507
5,541
5,024

Jeffrey F. Smith(7)
Senior Vice President

 

2002
2001
2000

 

 

212,181
212,003
206,063

 

 

275,000
490,000
249,000

 



3,000

 

 

4,565
5,250
5,250

(1)
Number of shares of common stock of DeCrane Holdings issuable upon exercise of options granted pursuant to our management incentive plan during the applicable fiscal year.

(2)
Comprised of relocation costs, life insurance premiums and matching contributions to the 401(k) Retirement Plan.

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

(4)
Mr. Kaplan also served as Assistant Treasurer and Assistant Secretary (principal accounting officer) of DeCrane Holdings from March 1999 until August 2002 when he was appointed its Chief Financial Officer and Assistant Secretary.

(5)
Mr. Martin served as President of PATS since we acquired it in January 1999 through December 2002. In October 1999, Mr. Martin also became our Senior Vice President and Group President of Systems Integration.

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

(7)
Mr. Smith was our Senior Vice President and President of the Specialty Avionics Group from October 1999 until he resigned his positions on May 23, 2003 in connection with the sale of the Specialty Avionics Group. Prior to October 1999, Mr. Smith was President of our Avtech subsidiary.

74


Stock Option Grants in Last Fiscal Year

        During the fiscal year ended December 31, 2002, no options to purchase shares of DeCrane Holdings common stock were granted pursuant to the management incentive plan. See "—Employment Agreements and Compensation Arrangements—Incentive Plans."

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

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

Name

  Number of
Securities Underlying
Unexercised Options
Exercisable/Unexercisable

  Value of Unexercised
In-the-Money Options
at Fiscal Year End(1)
Exercisable/Unexercisable

R. Jack DeCrane
    Exercisable at $23.00 per share
  36,253 / 73,605   $ — / —
Richard J. Kaplan
    Exercisable at $23.00 per share
    Exercisable at $35.00 per share
 
9,840 / 19,976
972 / 1,974
   
  — / —
  — / —
Robert G. Martin
    Exercisable at $23.00 per share
    Exercisable at $35.00 per share
 
5,954 / 12,088
990 / 2,010
   
  — / —
  — / —
Jeffrey A. Nerland
    Exercisable at $23.00 per share
    Exercisable at $35.00 per share
 
3,641 / 7,391
1,650 / 3,350
   
  — / —
  — / —
Jeffrey F. Smith
    Exercisable at $23.00 per share
    Exercisable at $35.00 per share
 
6,029 / 12,243
990 / 2,010
   
  — / —
  — / —

(1)
Unexercised options had an exercise price above fair market value as of December 31, 2002. Since the common stock of DeCrane Holdings is privately-held, there is no established public trading market for its shares. The Board of Directors determines the fair value of stock options granted and the fair value of the common stock as of any given period-end date based on the aggregate enterprise value of DeCrane Holdings. Enterprise value is computed based upon a multiple of Adjusted EBITDA, as reflected in our financial statements, and the multiple is based upon comparable data from other publicly-held companies as well as publicly available information on privately-held companies. The Board of Directors did not determine the specific fair value of the common stock as of December 31, 2002, but did conclude that fair value was below $23.00 per share, the lowest exercise price of any options granted.

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Compensation Committee Interlocks and Insider Participation

        The Compensation Committee of our Board of Directors makes decisions regarding officer compensation. Jack DeCrane, chief executive officer of DeCrane Aircraft and DeCrane Holdings, participates in those discussions as a member of the Committee.

Employment Agreements and Compensation Arrangements

R. Jack DeCrane

        On July 17, 1998, the Compensation Committee of our Board of Directors approved a three-year employment agreement between DeCrane Aircraft and R. Jack DeCrane, replacing his prior employment agreement that was to expire on September 1, 1998. Mr. DeCrane's employment agreement was amended on May 5, 2000 to provide for a term through June 30, 2001, which term shall automatically extend for additional one year periods unless terminated by either party giving the other party notice of termination prior to April 1st of the year prior to the year in which the agreement would otherwise terminate and has therefore been extended to June 30, 2005. Mr. DeCrane's employment agreement provides for various benefits, including an initial salary of $310,000, which is subject to annual review and increase, but not a decrease, and an annual bonus, currently determined pursuant to the performance-based cash incentive bonus plan.

        The employment agreement also provides that if specified change-of-control events occur, and Mr. DeCrane's employment is terminated by us for any reason other than for cause or as a result of his death or disability, or by Mr. DeCrane for "good reason," as defined in the agreement, then we will pay Mr. DeCrane a lump sum in cash within fifteen days. The amount of that payment will be $1.00 less than three times the sum of Mr. DeCrane's average base salary plus bonus for the five calendar years preceding his termination date and accrued but unpaid salary and bonus through the termination date. Mr. DeCrane will also receive other specified benefits, including continued coverage under our welfare plans for up to two years; a lump sum payment in cash equal to any unvested portions of our contributions to him under specified savings plans, plus two times the amount of our annual contributions on his behalf to those plans; a lump sum payment in cash equal to our matching contributions under those savings plans that Mr. DeCrane would have received had he continued maximum participation in the plans until the earlier of two years following his termination and December 31 of the year he turns 65, plus the vested and unvested amounts credited to him under any of our deferred compensation plans and the amount required to be credited during the year of his termination; and outplacement consulting services to aid Mr. DeCrane with re-employment. We will reduce these payments to the extent necessary to ensure deductibility for tax purposes.

Change of Control Agreements

        In August 2002, we entered into change of control agreements with each of our executive officers, other than Mr. DeCrane, whose above described employment agreement contains provisions concerning change of control. The agreements, which replaced earlier agreements which had expired, provide that, for a term of two years from the effective date, should a change of control, as defined, occur during the term of the agreement and the executive officer's employment shall be involuntarily terminated for any reason on a date which is less than two years after the date of the change of control, other than for cause, death or disability or terminated by the officer for good reason, DeCrane Aircraft is required to pay such executive a lump sum equal to his then salary plus average annual bonus over the last five years, equal to twenty four months compensation less the number of months elapsed from the date of the change of control to the employment termination date.

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401(k) Retirement Plan

        Substantially all of our full-time employees are eligible to participate in one of the 401(k) retirement plans we sponsor. The 401(k) plans allow employees as participants to defer, on a pre-tax basis, a portion of their salary and accumulate tax deferred earnings, as a retirement fund. The plans generally provide for a discretionary Company match of a percentage of the employee contribution up to a specified percentage of the employee's salary. The full amount vested in a participant's account will be distributed to a participant following termination of employment, normal retirement or in the event of disability or death.

Incentive Plans

        Our management incentive plan provides for the issuance of options to purchase the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of DeCrane Aircraft and its subsidiaries. The Compensation Committee of the Board of Directors of DeCrane Holdings administers the management incentive plan. The plan provides for the granting of options to purchase 356,257 common shares and expires in 2009. Substantially all of the options awarded become fully vested and exercisable eight years from the date of grant but vesting and exercise can be accelerated based upon future attainment of defined performance criteria. As of December 31, 2002, 32% of the options granted pursuant to the plan are vested and exercisable. We believe the per share exercise price of the options granted approximated the fair market value of the underlying common stock on each of the grant dates.

        From time-to-time, we have permitted designated executive personnel and other key employees to purchase shares of common stock of DeCrane Holdings. Prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002, a portion of the purchase price was in certain instances, loaned to the participants by DeCrane Aircraft. This arrangement was made available to persons and in amounts determined by the Compensation Committee of the Board of Directors. In December 1999, management purchased 171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total purchase price was $3.9 million, of which one-half was paid in cash and one-half was loaned to management by DeCrane Aircraft with interest at applicable federal rates. During 2000, an additional 19,707 shares of DeCrane Holdings common stock was purchased by employees at $23.00 per share, which was paid in cash. Subsequent to the July 30, 2002 enactment of the Sarbanes-Oxley Act, we have discontinued making new loans to participants as mandated by the Act. Loans originated prior to and outstanding as of the effective date of the Act will be repaid in accordance with their terms, as permitted by the Act. Upon termination of employment of any purchaser by us without cause, DeCrane Holdings has the right to purchase, and the purchaser has the right to cause DeCrane Holdings to purchase, such purchased stock at its then fair market value or, if we terminate the purchaser with cause or the purchaser terminates employment, the purchase price is the lower of $23.00 per share or its then fair market value.

        Our cash incentive bonus plan provides for the allocation of a bonus pool each year for incentive compensation to designated executive personnel and certain other employees of DeCrane Aircraft and its subsidiaries. The bonus pool, which is approved by the compensation committee, is adjusted each year based on Adjusted EBITDA and cash flow, as defined, generated by the relevant participant's operating unit. Bonus payments are generally made in the quarter following the end of the year or period to which they pertain.

Deferred Compensation Plan

        From December 1999 through December 2002, we had a deferred compensation plan in which certain designated executive officers and key employees were permitted to defer a portion of their compensation earned. DeCrane Aircraft invested amounts deferred and participants were fully vested in

77



the amounts representing the fair market value of their investment accounts. We made no contributions on behalf of the participants and the invested assets are subject to the claims of our general creditors. The plan was terminated in January 2003 and the fair market values of the individual investment accounts on the termination date were distributed to the individual participants.


Directors

Selection of Directors and Term of Office

        DLJ Merchant Banking Partners II, L.P. is entitled to select all members of the Board of Directors of DeCrane Holdings and DeCrane Aircraft as described in "Certain Relationships and Related Transactions—Investors' Agreement." At least one of such directors selected by DLJ Merchant Banking on each board must be an independent director. Mr. Suter is an independent director. All directors hold office until their successor is designated and qualified.

Directors' Compensation

        The directors of DeCrane Holdings and DeCrane Aircraft generally do not receive annual fees or fees for attending meetings of the Board of Directors or committees thereof. However, Albert E. Suter, an independent director not affiliated with any investor in DeCrane Holdings, receives a director's fee of $50,000 per year. In addition, the Board of Directors of DeCrane Holdings authorized the issuance of options to purchase 7,500 shares of DeCrane Holdings common stock to Mr. Suter under the same terms as the management incentive plan. See "Certain Relationships and Related Transactions—Transactions with Management and Others—Recent Transactions" for additional information. Also, Mr. Suter is reimbursed for out-of-pocket expenses. We expect to continue these policies.

78




SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

DeCrane Aircraft

        As of June 15, 2003, DeCrane Aircraft has the following securities issued and outstanding:

        The following table sets forth the beneficial ownership of DeCrane Aircraft's voting and non-voting securities as of June 15, 2003 by its principal owners and its executive officers and directors.

 
  Common Stock(2)
  16% Senior Redeemable
Preferred Stock

 
Name of Beneficial Owner(1)

  Number
of Shares

  Percentage
  Number
of Shares

  Percentage
 
DeCrane Holdings Co.
c/o DLJ Merchant Banking Partners II, L.P.
Eleven Madison Avenue, New York, NY 10010
  100   100.0 %    

DLJ Merchant Banking Partners II, L.P. affiliates(3)
Eleven Madison Avenue, New York, NY 10010

 


 


 

200,000

 

80.0

%

Thompson Dean(4)
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

 


 


 


 


 

James A. Quella(4)
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

 


 


 


 


 

Susan C. Schnabel(4)
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

 


 


 


 


 

Putnam Investment Management, Inc.
and affiliates(5)
One Post Office Square, Boston, MA 02109

 


 


 

50,000

 

20.0

%

Albert E. Suter

 


 


 


 


 

R. Jack DeCrane

 


 


 


 


 

Richard J. Kaplan

 


 


 


 


 

Robert G. Martin

 


 


 


 


 

Jeffrey A. Nerland

 


 


 


 


 

Jeffrey F. Smith

 


 


 


 


 

All directors and named executive officers as a group (nine persons)

 


 


 


 


 

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

79


(2)
The common stock columns reflect the number of shares owned and the total percentage ownership in the manner required by Securities and Exchange Commission rules. The entries for each holder assumes, if applicable, that the particular holder, and no one else, fully exercises all rights under warrants to purchase common stock and common stock which may be acquired upon the exercise of stock options and which are exercisable, or will be exercisable, prior to 60 days from June 15, 2003.

(3)
Reflects preferred stock held by the following investors affiliated with DLJ Merchant Banking Partners II, L.P.:

  DLJ Investment Partners, L.P.   DLJIP II Holdings, L.P.
  DLJ Investment Partners II, L.P.      

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

(4)
Mr. Dean, Mr. Quella and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II, L.P. and directors of DeCrane Holdings Co. The DLJ entities are affiliates of, and commonly collectively referred to as, Credit Suisse First Boston. See "Certain Relationships and Related Transactions" for additional information. The share data shown for these individuals excludes shares shown as held by the DLJ affiliates and DeCrane Holdings Co. separately listed in this table; Mr. Dean, Mr. Quella and Ms. Schnabel disclaim beneficial ownership of those shares.

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

  Putnam Diversified Income Trust   Putnam High Yield Trust
  Putnam Fund Trust—Putnam High Yield Trust II   Putnam Strategic Income Fund
  Putnam High Yield Advantage Fund   Putnam Variable Trust—Putnam VT High Yield Fund

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


DeCrane Holdings

        As of June 15, 2003, DeCrane Holdings has the following securities issued and outstanding:

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        The following table sets forth the beneficial ownership of DeCrane Holdings' voting and non-voting securities as of June 15, 2003 by its principal owners and its executive officers and directors.

 
  Common Stock(2)
  14% Senior Redeemable
Preferred Stock

 
Name of Beneficial Owner(1)
  Number
of Shares,
Partially
Diluted

  Percentage
  Number
of
Shares

  Percentage
 
DLJ Merchant Banking Partners II, L.P.
and affiliates(3)
Eleven Madison Avenue, New York, NY 10010
  4,179,530   95.4 % 340,000   99.3 %

Thompson Dean(4)
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

 


 


 


 


 

James A. Quella(4)
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

 


 


 


 


 

Susan C. Schnabel(4)
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

 


 


 


 


 

Albert E. Suter(5)

 

6,204

 

*

 


 


 

R. Jack DeCrane(6)

 

95,755

 

2.3

%


 


 

Richard J. Kaplan(7)

 

33,698

 

*

 


 


 

Robert G. Martin(8)

 

11,520

 

*

 


 


 

Jeffrey A. Nerland(9)

 

12,156

 

*

 


 


 

Jeffrey F. Smith(10)

 

16,173

 

*

 


 


 

All directors and named executive officers as a group
(nine persons)

 

175,506

 

4.2

%


 


 

*
Less than 1.0%

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

(2)
The common stock columns reflect the number of shares owned and the total percentage ownership in the manner required by Securities and Exchange Commission rules. The entries for each holder assumes, if applicable, that the particular holder, and no one else, fully exercises all rights under warrants to purchase common stock and common stock which may be acquired upon the exercise of stock options and which are exercisable, or will be exercisable, prior to 60 days from June 15, 2003.

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

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

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

(4)
Mr. Dean, Mr. Quella and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II, L.P. and directors of DeCrane Aircraft. The DLJ entities are affiliates of, and commonly collectively referred to as, Credit Suisse First Boston. See "Certain Relationships and Related Transactions" for additional information. The share data shown for these individuals excludes shares shown as held by the DLJ affiliates separately listed in this table; Mr. Dean, Mr. Quella and Ms. Schnabel disclaim beneficial ownership of those shares.

(5)
Includes 2,500 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from June 15, 2003.

(6)
Includes 36,253 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from June 15, 2003.

(7)
Includes 10,812 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from June 15, 2003.

(8)
Includes 6,944 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from June 15, 2003.

(9)
Includes 5,291 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from June 15, 2003.

(10)
Includes 7,019 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from June 15, 2003.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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


Transactions with Management and Others

Arrangements with Other CSFB / DLJ Affiliates

        Credit Suisse First Boston, as successor to DLJ Capital Funding, Inc., receives customary fees and reimbursement of expenses in connection with the arrangement and syndication of our senior bank credit facility and as a lender thereunder. Credit Suisse First Boston Corporation, referred to herein as CSFB Corporation and formerly known as Donaldson, Lufkin & Jenrette Securities Corporation, is the sole market-maker for our senior subordinated notes. In addition, DeCrane Aircraft is obligated to pay CSFB Corporation an advisory fee, currently in the amount of $350,000 per year. We may from time to time enter into other investment banking relationships with CSFB Corporation or one of its affiliates pursuant to which they will receive customary fees and will be entitled to reimbursement for all reasonable disbursements and out-of-pocket expenses incurred in connection therewith. We expect that any such arrangement will include provisions for the indemnification of CSFB Corporation against liabilities, including liabilities under the federal securities laws.

Investors' Agreement

        Investors owing 96.7% of DeCrane Holdings' issued and outstanding common stock and common stock warrants and options, all of DeCrane Holdings' preferred stock and all of DeCrane Aircraft's preferred and common stock, have entered into an Amended and Restated Investors' Agreement, dated October 6, 2000, among DeCrane Holdings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities, Putnam Investment Management, Inc. and affiliated funds and entities and all management investors. Investors who own DeCrane Holdings' warrants to purchase 159,794 shares of common stock are not parties to the Investors' Agreement. The agreement provides that:

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

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

Recent Transactions

        Securities and Exchange Commission rules require we briefly describe transactions, or series of similar transactions, with specified persons (as defined in the rules) and involving amounts exceeding $60,000, which have occurred since January 1, 2000 through the date of this prospectus. These transactions are briefly described below.

Year ended December 31, 2000

        The following transactions occurred during the year ended December 31, 2000:

84


Year Ended December 31, 2001

        The following transactions occurred during the year ended December 31, 2001:


Year Ended December 31, 2002

        The following transactions occurred during the year ended December 31, 2002:

85


January 1, 2003 to the Present

        The following transactions occurred during the period from January 1, 2003 to the date of this prospectus:


Indebtedness of Executive Officers and Directors

        The following table sets forth all indebtedness owed to us by our executive officers and directors that individually exceeds $60,000 as required by Securities and Exchange Commission rules. All indebtedness set forth below results from purchases of DeCrane Holdings common stock in transactions consummated prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002 and is payable to DeCrane Aircraft. Beginning July 30, 2002, we no longer provide loans to directors or executive officers as mandated by the Act. The indebtedness, plus accrued interest, is payable upon the sale of the DeCrane Holdings stock held as collateral for each of the loans. See "Management—Directors and Executive Officers" for information regarding each individual's relationship with DeCrane Aircraft and DeCrane Holdings.

 
   
   
  Total Indebtedness to DeCrane Aircraft
as of December 31, 2002

 
  Number
of Shares
Held as
Collateral(1)

   
Name

  Interest
Rate(2)

  Principal(3)
  Accrued
Interest(4)

  Total(5)
R. Jack DeCrane   56,521   5.74 % $ 649,991   $ 119,806   $ 769,797
Richard J. Kaplan   21,739   5.74     249,998     46,079     296,077
Robert G. Martin(6)   4,347   5.74     49,990     9,214     59,204
Jeffrey A. Nerland   6,521   5.74     74,991     13,822     88,813

(1)
Reflects the number of shares of DeCrane Holdings common stock held by DeCrane Aircraft as collateral for the loans.

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

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(3)
Reflects the original principal amount of the loans.

(4)
Reflects accrued interest payable through December 31, 2002.

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

(6)
Total indebtedness exceeds $60,000 as of the filing date of this prospectus.


DESCRIPTION OF THE SENIOR BANK CREDIT FACILITY

        The senior bank credit facility is provided by a syndicate of lenders led by Credit Suisse First Boston, as syndication agent and as administrative agent. The bank credit facility presently includes a term loan facility in the initial principal amount of $290.0 million and a $40.0 million revolving credit facility, under which up to $5.0 million in letters of credit may be issued and which matures on September 30, 2004. The revolving credit facility will be automatically reduced to $35 million if we issue at least $50.0 million of subordinated debt that meets certain criteria specified in the bank credit facility. As of June 30, 2003, there are $15.3 million of borrowings under the revolving credit facility and the term loan facility is comprised of a Term A facility in the amount of $11.6 million which matures on September 30, 2004, a Term B facility in the amount of $66.9 million which matures on September 30, 2005, and a Term D facility in the amount of $56.4 million which matures on December 17, 2006.

        Loans under the bank credit facility generally bear interest based on a margin over, at our option, the base rate or the Euro-Dollar rate. The margin for revolving loan and Term A loans through their maturity varies based upon DeCrane Aircraft's ratio of total debt to EBITDA, as defined in the credit agreement, ranging from 2.25% to 4% over the alternate base rate and from 3.50% to 5.25% over the reserve adjusted Euro-Dollar rate. The margin for Term B loans through their maturity is 4.25% for base rate borrowings and 5.50% for Euro-Dollar borrowings. The margin for Term D loans through their maturity is 4.75% for base rate borrowings and 6% for Euro-Dollar borrowings. The margin on all the loans is increased by 0.50% in any period during which the loans are rated CCC+ or lower by Standard &Poor's or Caa1 or lower by Moody's, or the loans are not rated by both agencies. The margin on all loans is decreased by 0.50% after we issue at least $50 million of subordinated debt that meets certain criteria specified in the bank credit facility.

        The commitment fees for the working capital facility vary based upon DeCrane Aircraft's ratio of total debt to EBITDA and usage under the facility. The commitment fees range from 0.50% to 0.75%, if utilization is 50% or less, and from 0.25% to 0.50% if utilization exceeds 50%. They are payable quarterly in arrears and when the facility terminates.

        In addition, we pay to the fronting bank a fee of 0.125% on the available amount of each issued letter of credit, and we pay to the lenders under the revolving facility a letter of credit fee on the available amount of each issued letter of credit. If the letter of credit is a standby letter of credit, the fee is 1.25%, and if the letter of credit is a trade letter of credit, the fee is equal to the margin payable for Euro-Dollar revolving loans.

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        The bank credit facility loans are subject to the following repayment schedule:

 
   
  Term Loan Facility
   
 
  Revolving
Credit
Facility

  Term
A

  Term
B

  Term
D

  Total
Credit
Facility

 
  (In millions)

Repayments during the:                              
  Remainder of 2003   $   $   $   $   $
  Year ending December 31, 2004     15.3     11.6             26.9
  Year ending December 31, 2005             66.9         66.9
  Year ending December 31, 2006                 56.4     56.4
   
 
 
 
 
    Total   $ 15.3   $ 11.6   $ 66.9   $ 56.4   $ 150.2
   
 
 
 
 

        The bank credit facility is subject to mandatory prepayment with:

        We are required to apply all mandatory prepayment amounts first to the prepayment of the term loan facilities, pro rata, and afterwards to the permanent reduction and thereafter to the prepayment of the revolving credit facility.

        DeCrane Holdings, and each of DeCrane Aircraft's wholly-owned direct and indirect domestic operating subsidiaries, are guarantors of the bank credit facility. Our obligations under the bank credit facility are secured by:

        The bank credit facility contains customary covenants and restrictions on our ability to engage in certain activities, including, but not limited to:

88


        Borrowings under the revolving credit facility are subject to significant conditions, including compliance with our financial covenants and other covenants and the absence of any material adverse change. These restrictions may limit our access to borrowings.

89




DESCRIPTION OF THE NOTES

General

        The notes have been issued pursuant to an indenture dated as of October 5, 1998 between DeCrane Aircraft and U.S. Bank National Association, as Trustee. The terms of the notes include those stated in the indenture, and those that are incorporated into the indenture by reference to the Trust Indenture Act of 1939. The notes are subject to all of those terms, and holders of notes are referred to the indenture and the Trust Indenture Act for a statement thereof.

        You should read the entire indenture, and the registration rights agreement described below, for a complete understanding of the rights and obligations of the holders of notes. Copies of the indenture and registration rights agreement have been filed with the SEC as exhibits. Also, the terms of the indenture use many specially defined terms. In this summary, we have used the key defined terms, which are shown here as capitalized words. You should refer to the definitions listed in "—Key Definitions" below for their complete scope and meaning.

        The notes are:

        We may issue an unlimited amount of additional senior subordinated notes under the indenture, so long as the total amount of debt is permitted by our financial covenants.

        As of June 30, 2003, DeCrane Aircraft and the Guarantors had outstanding approximately $159.9 million of Senior Indebtedness. The indenture will permit DeCrane Aircraft and its Subsidiaries to incur additional Indebtedness, including Senior Indebtedness, in the future.

        As of the date of the prospectus, all of DeCrane Aircraft's Subsidiaries were designated as Restricted Subsidiaries. However, under some circumstances, DeCrane Aircraft will be permitted to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive covenants set forth in the indenture.


Principal, Maturity and Interest

        The notes will initially be limited in aggregate principal amount to $100.0 million and will mature on September 30, 2008. Interest on the notes will accrue at the rate of 12% per annum and will be payable semi-annually in arrears on March 30 and September 30, to holders of record on the immediately preceding March 15 and September 15. Interest on the notes will accrue from the most recent date to which interest has been paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.

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        Principal of, premium, if any, and interest on the notes will be payable at the office or agency of DeCrane Aircraft maintained for such purpose in New York City or, at the option of DeCrane Aircraft, payment of interest may be made by check mailed to the holders of the notes at their respective addresses set forth in the register of holders of notes. However, all payments of principal, premium and interest with respect to notes represented by one or more permanent global notes will be paid by wire transfer of immediately available funds to the account of the Depository Trust Company or any successor thereto. Until otherwise designated by DeCrane Aircraft, DeCrane Aircraft's office or agency in New York will be the office of the Trustee maintained for such purpose. The notes will be issued in denominations of $1,000 and integral multiples thereof.


Subordination

        The payment of Subordinated Note Obligations is subordinated in right of payment, as set forth in the indenture, to the prior payment in full in cash or cash equivalents of all Senior Indebtedness, whether outstanding on the date of the indenture or thereafter incurred.

        Upon any distribution to creditors of DeCrane Aircraft in a liquidation or dissolution of DeCrane Aircraft or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to DeCrane Aircraft or their property, an assignment for the benefit of creditors or any marshalling of DeCrane Aircraft's assets and liabilities, the holders of Senior Indebtedness will be entitled to receive payment in full in cash or cash equivalents of all Obligations due in respect of such Senior Indebtedness, including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Indebtedness, before the holders of notes will be entitled to receive any payment with respect to the Subordinated Note Obligations. In that instance, until all Obligations with respect to Senior Indebtedness are paid in full in cash or cash equivalents, any distribution to which the holders of notes would be entitled shall be made to the holders of Senior Indebtedness except Permitted Junior Securities and payments made from the trust described under "—Legal Defeasance and Covenant Defeasance."

        DeCrane Aircraft also may not make any payment upon or in respect of the Subordinated Note Obligations, except in Permitted Junior Securities or from the trust described under "—Legal Defeasance and Covenant Defeasance", if a default in the payment of the principal of, premium, if any, or interest on or commitment fees relating to, Designated Senior Indebtedness occurs and is continuing beyond any applicable period of grace, or if any other default occurs and is continuing with respect to Designated Senior Indebtedness that permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default from the holders of any Designated Senior Indebtedness. This right of a senior creditor is typically called "blockage." Payments on the notes may and shall be resumed, in the case of a payment default, upon the date on which such default is cured or waived, and otherwise, upon the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable blockage notice is received, unless the maturity of any Designated Senior Indebtedness has been accelerated. No new period of payment blockage may be commenced unless and until 360 days have elapsed since the effectiveness of the immediately prior blockage notice. No nonpayment default that existed or was continuing on the date of delivery of any blockage notice to the Trustee shall be, or be made, the basis for a subsequent blockage notice unless such default shall have been waived or cured for a period of not less than 90 days.

        "Designated Senior Indebtedness" means any Indebtedness outstanding under the Bank Credit Facility, and any other Senior Indebtedness permitted under the indenture the principal amount of which is $25.0 million or more and that has been designated by DeCrane Aircraft in writing to the Trustee as "Designated Senior Indebtedness."

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        "Permitted Junior Securities" means Equity Interests in DeCrane Aircraft or debt securities of DeCrane Aircraft that are subordinated to all Senior Indebtedness, and any debt securities issued in exchange for Senior Indebtedness, to substantially the same extent as, or to a greater extent than, the notes are subordinated to Senior Indebtedness.

        "Senior Indebtedness" means, with respect to any person,

        However, Senior Indebtedness does not include any liability for federal, state, local or other taxes, any Indebtedness of such person, excluding that arising under the Bank Credit Facility, to any of its Subsidiaries or other Affiliates, any trade payables or any Indebtedness that is incurred in violation of the indenture.

        "Subordinated Note Obligations" means all Obligations with respect to the notes, including principal, premium if any and interest payable pursuant to the terms of the notes, including upon the acceleration or redemption thereof, together with and including any amounts received or receivable upon the exercise of rights of rescission, claims for damages or other rights of action or otherwise.

        The indenture further requires that DeCrane Aircraft promptly notify holders of Senior Indebtedness if payment of the notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency, holders of notes may recover less ratably than creditors of DeCrane Aircraft who are holders of Senior Indebtedness.


Note Guarantees

        DeCrane Aircraft's payment obligations under the notes are fully and unconditionally guaranteed on a joint and several basis by the Guarantors. The Guarantors as of the date of the indenture include all of our subsidiaries, namely: Audio International, Inc., DeCrane Cabin Interiors, LLC, Carl F. Booth & Co., LLC, Hollingsead International, Inc., Custom Woodwork & Plastics, LLC, PATS, Inc., DAH-IP Holdings, Inc., PCI Newco, Inc., DAH-IP Infinity, Inc., PPI Holdings, Inc., DeCrane Aircraft Furniture Co., L.P., Precision Pattern, Inc., DeCrane Aircraft Seating Company, Inc. and The Infinity Partners, Ltd. The guarantee of each Guarantor is subordinated to the prior payment in full in cash or cash equivalents of all Senior Indebtedness of such Guarantor, including such Guarantor's guarantee of the Bank Credit Facility, to the same extent that the notes are subordinated to Senior Indebtedness of DeCrane Aircraft. The obligations of each Guarantor under its guarantee are limited so as not to constitute a fraudulent conveyance under applicable law.

        The indenture provides that no Guarantor may consolidate or merge with or into another corporation, person or entity whether or not affiliated with such Guarantor unless:

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        The indenture provides that, in the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, that Guarantor will be released and relieved of any obligations under its guarantee, so long as the Net Proceeds of such sale or other disposition are applied in accordance with the applicable provisions of the indenture, as described in "—Repurchase at the Option of Holders."


Optional Redemption

        Except as provided below, the notes are not redeemable at DeCrane Aircraft's option before September 30, 2003. Thereafter, the notes will be subject to redemption at any time at the option of DeCrane Aircraft, in whole or in part, on not less than 30 nor more than 60 days' notice, in cash at the redemption prices set forth below, plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve months beginning on September 30 of the years indicated below:

Year

  Percentage of
Principal Amount

2003   106.000%
2004   104.000%
2005   102.000%
2006 and thereafter   100.000%

        In addition, at any time prior to September 30, 2003, DeCrane Aircraft may, at its option upon the occurrence of a Change of Control, redeem the notes, in whole but not in part, upon not less than 30 nor more than 60 days' prior notice, and no more than 60 days after the occurrence of such Change of Control, in cash at a redemption price equal to

        "Treasury Rate" means, as of any redemption date, the yield to maturity as of such redemption date of United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to September 30, 2003, as stated in the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two Business Days prior to the redemption date or, if such Statistical Release is no longer published, any publicly available source of similar market data. However, if the period from the redemption date to September 30, 2003 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used.

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Selection and Notice

        If less than all of the notes are to be redeemed at any time, selection of notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the notes are listed, or, if the notes are not so listed, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate. However, no notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to such note shall state the portion of the principal amount thereof to be redeemed. A new note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption.


Mandatory Redemption

        DeCrane Aircraft is not required to make mandatory redemption of, or sinking fund payments with respect to, the notes.


Repurchase at the Option of Holders

Change of Control

        Upon the occurrence of a Change of Control, each holder of notes will have the right to require DeCrane Aircraft to repurchase all or any part, equal to $1,000 or an integral multiple thereof, of such holder's notes which the holder offers in the manner described below at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to the date of repurchase. Within 60 days following any Change of Control, DeCrane Aircraft will cause the mailing of a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on the payment date specified in such notice, which date shall be no earlier than 30 days and no later than 60 days from the date such notice is mailed, pursuant to the procedures required by the indenture and described in such notice. DeCrane Aircraft will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to the foregoing offer and repurchase, DeCrane Aircraft will comply with the applicable securities laws and regulations and shall not be deemed to have breached their obligations described in the Indenture by virtue thereof.

        On the foregoing payment date, DeCrane Aircraft will, to the extent lawful, accept for payment all notes or portions thereof properly tendered pursuant to its offer to repurchase, deposit with the paying agent an amount equal to the foregoing payment in respect of all notes or portions thereof so tendered, and deliver or cause to be delivered to the Trustee the notes so accepted together with an officers' certificate stating the aggregate principal amount of notes or portions thereof being purchased by DeCrane Aircraft. The paying agent will promptly mail to each holder of notes so tendered the foregoing payment for such notes, and the Trustee will promptly authenticate and mail, or cause to be transferred by book-entry, to each holder a new Note equal in principal amount to any unpurchased portion of the notes surrendered, if any. However, each such new Note must be in a principal amount of $1,000 or an integral multiple thereof. The indenture provides that, prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, DeCrane Aircraft will either repay all outstanding Senior Indebtedness or obtain the requisite consents, if any,

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under all agreements governing outstanding Senior Indebtedness to permit the repurchase of notes required by this covenant. DeCrane Aircraft will publicly announce the results of its offer to repurchase on or as soon as practicable after the foregoing payment date.

        The change of control provisions described above will be applicable whether or not any other provisions of the indenture are applicable. Except as described above, the indenture does not contain provisions that permit the holders of the notes to require that DeCrane Aircraft repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction.

        The Bank Credit Facility prohibits DeCrane Aircraft from purchasing any notes and also provides that change of control events, which may include events not otherwise constituting a "change of control" as defined in the indenture, with respect to DeCrane Aircraft, would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Indebtedness to which DeCrane Aircraft becomes a party may contain similar restrictions and provisions. In the event such a change of control occurs at a time when DeCrane Aircraft is prohibited from purchasing notes, DeCrane Aircraft could seek the consent of its lenders to the purchase of notes or could attempt to refinance the borrowings that contain such prohibition. If DeCrane Aircraft does not obtain such a consent or repay such borrowings, DeCrane Aircraft will remain prohibited from purchasing notes. In such case, DeCrane Aircraft's failure to purchase tendered notes would constitute an Event of Default under the indenture, which would, in turn, constitute a default under the Bank Credit Facility. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the holders of notes.

        DeCrane Aircraft will not be required to make an offer to repurchase upon a change of control in the manner described above if a third party makes the offer to repurchase in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to an offer to repurchase made by DeCrane Aircraft and purchases all notes validly tendered and not withdrawn under such offer.

        "Change of Control" means the occurrence of any of the following:


        The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of DeCrane Aircraft and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require DeCrane Aircraft to repurchase such notes as a

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result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of DeCrane Aircraft and its Subsidiaries taken as a whole to another Person or group may be uncertain.

        "Continuing Members" means, as of any date of determination, any member of the board of directors of DeCrane Aircraft who was a member of such board of directors immediately after consummation of the Acquisition, or was nominated for election or elected to such board of directors with the approval of, or whose election to the board of directors was ratified by, at least a majority of the Continuing Members who were members of such board of directors at the time of such nomination or election or any successor Continuing Directors appointed by such Continuing Directors or their successors.

Asset Sales

        The indenture provides that DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless

        The foregoing 75% requirement will not apply to any Asset Sale in which the cash or Cash Equivalents portion of the consideration received therefrom, determined in accordance with the following sentence, is equal to or greater than what the after-tax proceeds would have been had such Asset Sale complied with that 75% rule. The following types of assets will be deemed cash in applying that 75% test:

        Within 365 days after the receipt of any Net Proceeds from an Asset Sale, DeCrane Aircraft or any such Restricted Subsidiary shall apply such Net Proceeds, at its option, or to the extent DeCrane Aircraft is required to apply such Net Proceeds pursuant to the terms of the Bank Credit Facility, to

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        Pending the final application of any such Net Proceeds, DeCrane Aircraft may temporarily reduce Indebtedness or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million, DeCrane Aircraft will be required to make an offer to all holders of notes, referred to as an "Asset Sale Offer," to purchase the maximum principal amount of notes that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase, in accordance with the procedures set forth in the indenture. To the extent that any Excess Proceeds remain after consummation of an Asset Sale Offer, DeCrane Aircraft may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of notes surrendered by holders thereof in connection with an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the notes to be purchased as set forth under "—Selection and Notice." Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset at zero.

        DeCrane Aircraft will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes pursuant to an Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the indenture relating to such Asset Sale Offer, DeCrane Aircraft will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in the indenture by virtue thereof.


Principal Covenants

Restricted Payments

        DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:

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all such payments and other actions set forth in clauses (a) through (d) above are collectively referred to as "Restricted Payments"; unless, at the time of and after giving effect to such Restricted Payment:

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        The foregoing provisions will not prohibit:

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        The board of directors of DeCrane Aircraft may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such designation, all outstanding Investments by DeCrane Aircraft and its Restricted Subsidiaries, except to the extent repaid in cash, in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the

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first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Restricted Investments in an amount equal to the greater of

        Such designation will only be permitted if such Restricted Investment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.

        The amount of all Restricted Payments other than cash shall be the fair market value on the date of the Restricted Payment of the assets or securities proposed to be transferred or issued by DeCrane Aircraft or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment. The amount of all Qualified Proceeds other than cash shall be the fair market value on the date of receipt thereof by DeCrane Aircraft of such Qualified Proceeds. The fair market value of any non-cash Restricted Payment shall be determined by the board of directors of DeCrane Aircraft whose resolution with respect thereto shall be delivered to the Trustee. Not later than the date of making any Restricted Payment, DeCrane Aircraft shall deliver to the Trustee an officers' certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Restricted Payments" were computed.

Incurrence of Indebtedness and Issuance of Preferred Stock

        The indenture provides that


provided that DeCrane Aircraft or any Restricted Subsidiary may incur Indebtedness, including Acquired Indebtedness, or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for DeCrane Aircraft's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a consolidated pro forma basis including a pro forma application of the net proceeds therefrom, as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The amount of any potential incurrence of Indebtedness varies from time to time depending on our financial condition and results of operations relative to our covenants. As of June 30, 2003, DeCrane Aircraft was not permitted to borrow pursuant to the ratio described in this paragraph but would have been able to incur additional Indebtedness for borrowed money of approximately $160.0 million under the baskets described below based on its financial condition and results of operations as of such date relative to its covenants. However, as of June 30, 2003, the covenants in DeCrane Aircraft's Bank Credit Facility, its most restrictive debt instrument, would only have permitted it to incur additional debt of $19.3 million based on its financial condition and results of operations as of such date relative to its covenants.

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        The provisions of the first paragraph of this covenant will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Indebtedness"):

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        For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Indebtedness described in clauses (1) through (13) above or is entitled to be incurred pursuant to the first paragraph of this covenant, DeCrane Aircraft shall, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. In addition, DeCrane Aircraft may, at any time, change the classification of an item of Indebtedness or any portion thereof to any other clause or to the first paragraph hereof, provided that DeCrane Aircraft would be permitted to incur such item of Indebtedness or such portion thereof pursuant to such other clause or the first paragraph hereof, as the case may be, at such time of reclassification. Accrual of interest,

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accretion or amortization of original issue discount will not be deemed to be an incurrence of Indebtedness for purposes of this covenant.

        All Indebtedness under the Bank Credit Facility outstanding on the date of the indenture shall be deemed to have been incurred on such date in reliance on the first paragraph of the covenant described under "—Incurrence of Indebtedness and Issuance of Preferred Stock." As a result, DeCrane Aircraft will be permitted to incur significant additional secured indebtedness under clause (1) of the definition above of "Permitted Indebtedness."

Liens

        DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien, other than a Permitted Lien, that secures obligations under any Pari Passu Indebtedness or subordinated Indebtedness of DeCrane Aircraft on any asset or property now owned or hereafter acquired by DeCrane Aircraft or any of its Restricted Subsidiaries, or any income or profits therefrom or assign or convey any right to receive income therefrom, unless the notes are equally and ratably secured with the obligations so secured until such time as such obligations are no longer secured by a Lien; provided that, in any case involving a Lien securing subordinated Indebtedness of DeCrane Aircraft, such Lien is subordinated to the Lien securing the notes to the same extent that such subordinated Indebtedness is subordinated to the notes.

Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries

        DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to

        However, the foregoing restrictions will not apply to encumbrances or restrictions existing under or by reason of

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Merger, Consolidation or Sale of Assets

        DeCrane Aircraft may not consolidate or merge with or into, whether or not DeCrane Aircraft is the surviving corporation, or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another person unless

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        The foregoing clause (d) will not prohibit a merger between DeCrane Aircraft and a Wholly Owned Subsidiary of DeCrane Holdings created for the purpose of holding the Capital Stock of DeCrane Aircraft, a merger between DeCrane Aircraft and a Wholly Owned Restricted Subsidiary or a merger between DeCrane Aircraft and an Affiliate incorporated solely for the purpose of reincorporating DeCrane Aircraft in another state of the United States so long as, in each case, the amount of Indebtedness of DeCrane Aircraft and its Restricted Subsidiaries is not increased thereby.

        DeCrane Aircraft will not lease all or substantially all of its assets to any person.

Transactions with Affiliates

        DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate of DeCrane Aircraft each of which the indenture refers to as an "Affiliate Transaction", unless

        Notwithstanding the foregoing, the following items shall not be deemed to be Affiliate Transactions:

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Sale and Leaseback Transactions

        DeCrane Aircraft will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that DeCrane Aircraft or any Restricted Subsidiary may enter into a sale and leaseback transaction if

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No Senior Subordinated Indebtedness

        DeCrane Aircraft will not incur any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the notes and no Guarantor will incur any Indebtedness that is subordinate or junior in right of payment to any Senior Indebtedness and senior in right of payment to the Note Guarantees.

Additional Note Guarantees

        If any Wholly-Owned Restricted Subsidiary of DeCrane Aircraft that is a Domestic Subsidiary guarantees any Indebtedness under the Bank Credit Facility, then such Restricted Subsidiary shall become a Guarantor and execute a supplemental indenture and deliver an opinion of counsel, in accordance with the terms of the indenture.

Accounts Receivable Facility

        No Accounts Receivable Subsidiary will incur any Indebtedness if immediately after giving effect to such incurrence the aggregate outstanding Indebtedness of all Accounts Receivable Subsidiaries, excluding any Indebtedness owed to DeCrane Aircraft or any Restricted Subsidiary, would exceed $60.0 million.

Reports

        Whether or not required by the rules and regulations of the SEC, so long as any notes are outstanding, DeCrane Aircraft will furnish to the holders of notes

        In addition, following the consummation of the exchange offer contemplated by the registration rights agreement, whether or not required by the rules and regulations of the SEC, DeCrane Aircraft will file a copy of all such information and reports with the SEC for public availability within the time periods specified in the SEC's rules and regulations and make such information available to securities analysts and prospective investors upon request. In addition, DeCrane Aircraft and the Guarantors have agreed that, for so long as any notes remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.


Events of Default and Remedies

        Each of the following constitutes an Event of Default:

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        If any Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all the notes to be due and payable immediately; provided that, so long as any Indebtedness permitted to be incurred pursuant to the Bank Credit Facility shall be outstanding, such acceleration shall not be effective until the earlier of

        Notwithstanding the foregoing, in the case of an Event of Default arising from events of bankruptcy or insolvency with respect to DeCrane Aircraft or any Significant Subsidiary, all outstanding notes will become due and payable without further action or notice. Holders of the notes may not enforce the indenture or the notes except as provided in the indenture. In the event of a declaration of acceleration of the notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (e) of the preceding paragraph, the declaration of acceleration of the notes shall be automatically annulled if the holders of any Indebtedness described in clause (e) have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days

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of the date of such declaration, and if the annulment of the acceleration of the notes would not conflict with any judgment or decree of a court of competent jurisdiction, and all existing Events of Default, except non-payment of principal or interest on the notes that became due solely because of the acceleration of the notes, have been cured or waived.

        Subject to limitations, holders of a majority in principal amount of the then outstanding notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of the notes notice of any continuing Default or Event of Default, except a Default or Event of Default relating to the payment of principal or interest, if it determines that withholding notice is in their interest.

        The holders of a majority in aggregate principal amount of the notes then outstanding by notice to the Trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the notes.

        DeCrane Aircraft is required to deliver to the Trustee annually a statement regarding compliance with the indenture, and DeCrane Aircraft is required upon becoming aware of any Default or Event of Default to deliver to the Trustee a statement specifying such Default or Event of Default.


No Personal Liability of Member, Directors, Officers, Employees and Stockholders

        No member, director, officer, employee, incorporator or stockholder of DeCrane Aircraft, as such, shall have any liability for any obligations of DeCrane Aircraft under the notes or the indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. Such waiver may not be effective to waive liabilities under the federal securities laws, and it is the view of the SEC that such a waiver is against public policy.


Legal Defeasance and Covenant Defeasance

        DeCrane Aircraft may, at its option and at any time, elect to have all of its and the Guarantors' obligations discharged with respect to the outstanding notes, the note guarantees and the indenture ("Legal Defeasance") except for

        In addition, DeCrane Aircraft may, at its option and at any time, elect to have their obligations released with respect to some covenants that are described in the indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, some of the events described under "—Events of Default and Remedies" other than non-payment and bankruptcy will no longer constitute an Event of Default with respect to the notes.

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        In order to exercise either Legal Defeasance or Covenant Defeasance,

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Transfer and Exchange

        A holder may transfer or exchange notes in accordance with the indenture. The Registrar and the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and DeCrane Aircraft may require a holder to pay any taxes and fees required by law or permitted by the indenture. DeCrane Aircraft are not required to transfer or exchange any note selected for redemption. Also, DeCrane Aircraft is not required to transfer or exchange any note for a period of 15 days before a selection of notes to be redeemed. The registered holder of a note will be treated as the owner of it for all purposes.


Amendment, Supplement and Waiver

        Except as provided in the next two succeeding paragraphs, the indenture, the note guarantees and the notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the notes then outstanding, and any existing default or compliance with any provision of the indenture, the note guarantees or the notes may be waived with the consent of the holders of a majority in principal amount of the then outstanding notes.

        Without the consent of each holder affected, an amendment or waiver may not, with respect to any notes held by a non-consenting holder:

        Notwithstanding the foregoing, any amendment to or waiver of the covenant described under the caption "—Repurchase at the Option of Holders—Change of Control," and any amendment to Article 10 of the indenture, which relates to subordination, will require the consent of the holders of at least two-thirds in aggregate principal amount of the notes then outstanding if such amendment would materially adversely affect the rights of holders of notes.

        Notwithstanding the foregoing, without the consent of any holder of notes, DeCrane Aircraft, the Guarantors and the Trustee may amend or supplement the indenture, the note guarantees or the notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated notes in addition to or in place of certificated notes, to provide for the assumption of DeCrane Aircraft's obligations to holders of notes in the case of a merger or consolidation or sale of all or substantially all of DeCrane Aircraft's

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assets, to make any change that would provide any additional rights or benefits to the holders of notes or that does not materially adversely affect the legal rights under the indenture of any such holder, or to comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act or to provide for guarantees of the notes.


Concerning the Trustee

        The indenture contains limitations on the rights of the Trustee, U.S. Bank National Association, should it become a creditor of any Company, to obtain payment of claims in some cases, or to realize on property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions. However, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign.

        The holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to exceptions. The indenture provides that in case an Event of Default shall occur and not be cured, the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of notes, unless such holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense.


Book-Entry, Delivery and Form

The Global Notes

        The notes have been issued in the form of one or more registered notes in global form, which are registered in the name of Cede & Co., as nominee of the Depository Trust Company ("DTC"), and remain in the custody of the trustee.

        Except as set forth below, the global notes, may be transferred, in whole and not in part, solely to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the global notes may not be exchanged for notes in physical, certificated form except in the limited circumstances described below.

        All interests in the global notes may be subject to the procedures and requirements of DTC.

Book-Entry Procedures for the Global Notes

        The descriptions of the operations and procedures of DTC set forth below are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and, are subject to change by them from time to time. DeCrane Aircraft takes no responsibility for these operations or procedures, and investors are urged to contact the relevant system or its participants directly to discuss these matters.

        DTC has advised DeCrane Aircraft that it is:

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        DTC's participants include securities brokers and dealers (including the initial purchasers), banks and trust companies, clearing corporations and certain other organizations. Indirect access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies, or "indirect participants" that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Investors who are not participants may beneficially own securities held by or on behalf of DTC only through participants or indirect participants.

        DeCrane Aircraft expects that pursuant to procedures established by DTC ownership of the notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC and the records of participants and the indirect participants.

        The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Accordingly, the ability to transfer interests in the notes represented by a global note to such persons may be limited. In addition, because DTC can act only on behalf of its participants, who in turn act on behalf of persons who hold interests through participants, the ability of a person having an interest in notes represented by a global note to pledge or transfer such interest to persons or entities that do not participate in DTC's system, or to otherwise take actions in respect of such interest, may be affected by the lack of a physical definitive security in respect of such interest.

        So long as DTC or its nominee is the registered owner of a global note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by the global note for all purposes under the indenture. Except as provided below, owners of beneficial interests in a global note will not be entitled to have notes represented by such global note registered in their names, will not receive or be entitled to receive physical delivery of certificated notes, and will not be considered the owners or holders thereof under the indenture for any purpose, including with respect to the giving of any direction, instruction or approval to the trustee thereunder. Accordingly, each holder owning a beneficial interest in a global note must rely on the procedures of DTC and, if such holder is not a participant or an indirect participant, on the procedures of the participant through which such holder owns its interest, to exercise any rights of a holder of notes under the indenture or such global note, DeCrane Aircraft understands that under existing industry practice, in the event that DeCrane Aircraft requests any action of holders of notes, or a holder that is an owner of a beneficial interest in a global note desires to take any action that DTC, as the holder of such global note, is entitled to take, DTC would authorize the participants to take such action and the participants would authorize holders owning through such participants to take such action or would otherwise act upon the instruction of such holders. Neither DeCrane Aircraft nor the trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by DTC, or for maintaining, supervising or reviewing any records of DTC relating to such notes.

        Payments with respect to the principal of, and premium, if any, and interest on, any notes represented by a global note registered in the name of DTC or its nominee on the applicable record date will be payable by the trustee to or at the direction of DTC or its nominee in its capacity as the registered holder of the global note representing such notes under the indenture. Under the terms of the indenture, DeCrane Aircraft and the trustee may treat the persons in whose names the notes, including the global notes, are registered as the owners thereof for the purpose of receiving payment thereon and for any and all other purposes whatsoever. Accordingly, neither DeCrane Aircraft nor the Trustee has or will have any responsibility or liability for the payment of such amounts to owners of beneficial interests in a global note. Payments by the participants and the indirect participants to the

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owners of beneficial interests in a global note will be governed by standing instructions and customary industry practice and will be the responsibility of the participants or the indirect participants and DTC.

        Transfers between participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds.

        Although DTC, has agreed to the foregoing procedures to facilitate transfers of interests in the global notes among participants in DTC, it is under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. Neither DeCrane Aircraft nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their obligations under the rules and procedures governing their operations.

Certificated Notes

        If

then, upon surrender by DTC of the global notes, certificated notes will be issued to each person that DTC identifies as the beneficial owner of the notes represented by the global notes. In addition, beneficial holders may request delivery of a certificated note upon 20 days prior written notice in accordance with customary DTC procedures.

        Upon any such issuance, the trustee is required to register such certificated notes in the name of such person or persons, or the nominee of any thereof, and cause the same to be delivered thereto.

        Neither DeCrane Aircraft nor the trustee shall be liable for any delay by DTC or any Participant or Indirect Participant in identifying the beneficial owners of the related notes and each such person may conclusively rely on, and shall be protected in relying on, instructions from DTC for all purposes, including with respect to the registration and delivery, and the respective principal amounts, of the notes to be issued.


Key Definitions

        Set forth below are key defined terms used in the indenture. Please refer to the indenture for a full description of all such terms, and any other capitalized terms used herein for which no definition is provided.

        "Accounts Receivable Subsidiary" means an Unrestricted Subsidiary of DeCrane Aircraft to which DeCrane Aircraft or any of its Restricted Subsidiaries sells any of its accounts receivable pursuant to a Receivables Facility.

        "Acquired Indebtedness" means, with respect to any specified person,

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        "Acquisition" means the acquisition by an indirect subsidiary of DeCrane Holdings of at least majority of the outstanding stock of DeCrane Aircraft, the merger of such subsidiary into DeCrane Aircraft, the repayment of specified indebtedness of DeCrane Aircraft, the payment of related fees and expenses and the Finance Merger.

        "Acquisition Financing" means the issuance and sale by DeCrane Aircraft of the notes, the execution and delivery by DeCrane Aircraft and certain of its subsidiaries of the Bank Credit Facility and the borrowing thereunder and the issuance and sale by DeCrane Aircraft of bridge notes to finance the Acquisition and the issuance and sale by DeCrane Holdings of common stock and preferred stock for consideration, the proceeds of each of which were used to fund the purchase price for the Acquisition.

        "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified person. For purposes of this definition, "control," when used with respect to any person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing.

        "Asset Sale" means

        However, the following items shall not be deemed to be Asset Sales:

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        "Attributable Indebtedness" in respect of a sale and leaseback transaction means, at the time of determination, the present value, discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP, of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction, including any period for which such lease has been extended or may, at the option of the lessor, be extended.

        "Bank Credit Facility" means that Credit Agreement dated as of August 28, 1998 among DeCrane Aircraft, various financial institutions party thereto, DLJ Capital Funding, Inc., as syndication agent, and The First National Bank of Chicago, as administrative agent, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and, in each case, as amended, modified, renewed, refunded, replaced or refinanced from time to time, including any agreement

        Indebtedness under the Bank Credit Facility outstanding on the date of the indenture shall be deemed to have been incurred on such date in reliance on the first paragraph of the covenant described under the caption "—Certain Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock."

        "Capital Expenditure Indebtedness" means Indebtedness incurred by any person to finance the purchase or construction or any property or assets acquired or constructed by such person which have a useful life or more than one year so long as

        "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP.

        "Capital Stock" means

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        "Cash Equivalents" means


        "Consolidated Cash Flow" means, with respect to any person for any period, the Consolidated Net Income of such Person and its Restricted Subsidiaries for such period plus, to the extent deducted in computing Consolidated Net Income,

        Notwithstanding the foregoing, the provision for taxes based on the income or profits of, the Fixed Charges of, and the depreciation and amortization and other non-cash charges of, a Restricted

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Subsidiary of a person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent and in the same proportion that Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such person.

        "Consolidated Interest Expense" means, with respect to any person for any period, the sum of, without duplication,

provided, however, that Receivables Fees shall be deemed not to constitute Consolidated Interest Expense. Notwithstanding the foregoing, the Consolidated Interest Expense with respect to any Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary shall be included only to the extent and in the same proportion that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income.

        "Consolidated Net Income" means, with respect to any person for any period, the aggregate of the Net Income of such person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that

        "DeCrane Holdings" means DeCrane Holdings Co., a Delaware corporation, the corporate parent of DeCrane Aircraft, or its successors.

        "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default.

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        "Designated Noncash Consideration" means the fair market value of non-cash consideration received by DeCrane Aircraft or one of its Restricted Subsidiaries in connection with an Asset Sale that is so designated as Designated Noncash Consideration pursuant to an officers' certificate, setting forth the basis of such valuation, executed by the principal executive officer and the principal financial officer of DeCrane Aircraft, less the amount of cash or Cash Equivalents received in connection with a sale of such Designated Noncash Consideration.

        "Disqualified Stock" means any Capital Stock that, by its terms or by the terms of any security into which it is convertible, or for which it is exchangeable; or upon the happening of any event other than any event solely within the control of the issuer thereof, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, is exchangeable for Indebtedness, except to the extent exchangeable at the option of such Person subject to the terms of any debt instrument to which such Person is a party, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date on which the notes mature. However, that any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require DeCrane Aircraft to repurchase such Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall not constitute Disqualified Stock, if the terms of such Capital Stock provide that DeCrane Aircraft may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described under the caption "—Principal Covenants—Restricted Payments." Further, if such Capital Stock is issued to any plan for the benefit of employees of DeCrane Aircraft or its Subsidiaries or by any such plan to such employees, such Capital Stock shall not constitute Disqualified Stock solely because it may be required to be repurchased by DeCrane Aircraft in order to satisfy applicable statutory or regulatory obligations.

        "Domestic Subsidiary" means a Subsidiary that is organized under the laws of the United States or any State, district or territory thereof other than Audio International Sales, Inc., a U.S. Virgin Islands corporation.

        "Eligible Institution" means a commercial banking institution that has combined capital and surplus not less than $100.0 million or its equivalent in foreign currency, whose short-term debt is rated "A-3" or higher according to Standard & Poor's Ratings Group or "P-2" or higher according to Moody's Investor Services, Inc. or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments.

        "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock but excluding any debt security that is convertible into, or exchangeable for, Capital Stock.

        "Existing Indebtedness" means Indebtedness of DeCrane Aircraft and its Restricted Subsidiaries other than in existence on the date of the Indenture, excluding Indebtedness under the Bank Credit Facility, until such amounts are repaid.

        "Finance Merger" means the merger of DeCrane Finance Co. with and into DeCrane Aircraft.

        "Fixed Charges" means, with respect to any person for any period, the sum, without duplication, of the Consolidated Interest Expense of such person for such period, and all dividend payments on any series of preferred stock of such person other than dividends payable solely in Equity Interests that are not Disqualified Stock, in each case, on a consolidated basis and in accordance with GAAP.

        "Fixed Charge Coverage Ratio" means, with respect to any person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such person for such period, in each case exclusive of amounts attributable to discontinued operations, as determined in accordance with GAAP, or operations and businesses disposed of prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made referred to as the "Calculation Date." In the event that the referent Person or any of its Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness other than revolving credit borrowings or issues or redeems preferred stock

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subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the Calculation Date, then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee or redemption of Indebtedness, or such issuance or redemption of preferred stock and the use of the proceeds therefrom, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, acquisitions that have been made by DeCrane Aircraft or any of its Subsidiaries, including all mergers or consolidations and any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated to include the Consolidated Cash Flow of the acquired entities on a pro forma basis after giving effect to cost savings resulting from employee terminations, facilities consolidations and closings, standardization of employee benefits and compensation practices, consolidation of property, casualty and other insurance coverage and policies, standardization of sales and distribution methods, reductions in taxes other than income taxes and other cost savings reasonably expected to be realized from such acquisition, as determined in good faith by the principal financial officer of DeCrane Aircraft, regardless of whether such cost savings could then be reflected in pro forma financial statements under GAAP, Regulation S-X promulgated by the SEC or any other regulation or policy of the SEC, and without giving effect to the third clause of the proviso set forth in the definition of Consolidated Net Income.

        "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture.

        "Global Technology Partners" means Global Technology Partners, LLC and its Affiliates.

        "Global Technology Investment" means the sale by DeCrane Holdings to Global Technology Partners of its common stock, the purchase price of which will be partially financed by Global Technology Loans, and the granting by DeCrane Holdings to Global Technology Partners of options to purchase shares of its common stock.

        "Global Technology Loans" means one or more loans by DeCrane Aircraft or DeCrane Holdings to Global Technology Partners to finance Global Technology Partners' purchase of common stock of DeCrane Holdings; provided, however, that the aggregate principal amount of all such Global Technology Loans outstanding at any time shall not exceed $2.0 million.

        "Guarantee" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness.

        "Guarantors" means each of the Domestic Subsidiaries of DeCrane Aircraft that is a Wholly Owned Restricted Subsidiary on the date of the indenture, and any other Subsidiary that executes a note Guarantee in accordance with the provisions of the indenture.

        "Hedging Obligations" means, with respect to any person, the obligations of such person under

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        "Indebtedness" means, with respect to any person, any indebtedness of such Person in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit, or reimbursement agreements in respect thereof, or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing Indebtedness, other than letters of credit and Hedging Obligations, would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all Indebtedness of others secured by a Lien on any asset of such person whether or not such Indebtedness is assumed by such person and, to the extent not otherwise included, the guarantee by such Person of any Indebtedness of any other person, provided that Indebtedness shall not include the pledge by DeCrane Aircraft of the Capital Stock of an Unrestricted Subsidiary of DeCrane Aircraft to secure Non-Recourse Debt of such Unrestricted Subsidiary. The amount of any Indebtedness outstanding as of any date shall be

provided that the principal amount of any Indebtedness that is denominated in any currency other than United States dollars shall be the amount thereof, as determined pursuant to the foregoing provision, converted into United States dollars at the Spot Rate in effect on the date that such Indebtedness was incurred, or, if such indebtedness was incurred prior to the date of the Indenture, the Spot Rate in effect on the date of the indenture.

        "Investments" means, with respect to any person, all investments by such person in other persons including Affiliates in the forms of direct or indirect loans, including guarantees by the referent person of, and Liens on any assets of the referent person securing, Indebtedness or other obligations of other persons, advances or capital contributions, excluding commission, travel and similar advances to officers and employees made in the ordinary course of business, purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. However, an investment by DeCrane Aircraft for consideration consisting of common equity securities of DeCrane Aircraft shall not be deemed to be an Investment. If DeCrane Aircraft or any Restricted Subsidiary of DeCrane Aircraft sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of DeCrane Aircraft such that, after giving effect to any such sale or disposition, such person is no longer a Subsidiary of DeCrane Aircraft, DeCrane Aircraft shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described under "—Restricted Payments."

        "Lien" means, with respect to any asset, any mortgage, Lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code or equivalent statutes of any jurisdiction.

        "Management Loans" means one or more loans by DeCrane Aircraft or DeCrane Holdings to officers and/or directors of DeCrane Aircraft and any of its Restricted Subsidiaries to finance the purchase by such officers and directors of common stock of DeCrane Holdings; provided, however, that the aggregate principal amount of all such Management Loans outstanding at any time shall not exceed $5.0 million.

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        "Net Income" means, with respect to any person, the net income or loss of such person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however,

        "Net Proceeds" means the aggregate cash proceeds received by DeCrane Aircraft or any of its Restricted Subsidiaries in respect of any Asset Sale, including any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale, net of, without duplication:

        "Non-recourse Debt" means Indebtedness

        However, in no event shall Indebtedness of any Unrestricted Subsidiary fail to be Non-Recourse Debt solely as a result of any default provisions contained in a guarantee thereof by DeCrane Aircraft or any of its Restricted Subsidiaries if DeCrane Aircraft or such Restricted Subsidiary was otherwise permitted to incur such guarantee pursuant to the Indenture.

        "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness.

        "Offering" means the offering of the notes by DeCrane Aircraft.

        "Pari Passu Indebtedness" means Indebtedness of DeCrane Aircraft that ranks pari passu in right of payment to the notes.

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        "Permitted Business" means the avionics manufacturing industry and any business in which DeCrane Aircraft and its Restricted Subsidiaries are engaged on the date of the indenture or any business reasonably related, incidental or ancillary thereto.

        "Permitted Investments" means

        "Permitted Liens" means:

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        "Permitted Refinancing Indebtedness" means any Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries issued within 60 days after repayment of, in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of DeCrane Aircraft or any of its Restricted Subsidiaries; provided that

        "Principals" means DLJ Merchant Banking Partners II, L.P. and its Affiliates.

        "Public Equity Offering" means any issuance of common stock by DeCrane Aircraft, other than to DeCrane Holdings and other than Disqualified Stock, or common stock or preferred stock by DeCrane Holdings, other than Disqualified Stock, registered pursuant to the Securities Act, other than issuances registered on Form S-8 and issuances registered on Form S-4, excluding issuances of common stock pursuant to employee benefit plans of DeCrane Holdings or DeCrane Aircraft or otherwise as compensation to employees of DeCrane Aircraft or DeCrane Holdings.

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        "Qualified Proceeds" means any of the following or any combination of the following:


        "Receivables Facility" means one or more receivables financing facilities, as amended from time to time, pursuant to which DeCrane Aircraft or any of its Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable Subsidiary.

        "Receivables Fees" means distributions or payments made directly or by means of discounts with respect to any participation interests issued or sold in connection with, and other fees paid to a Person that is not a Restricted Subsidiary in connection with, any Receivables Facility.

        "Related Party" means, with respect to any Principal, any controlling stockholder or partner of such Principal on the date of the indenture, or any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or persons beneficially holding directly or through one or more Subsidiaries a 51% or more controlling interest of which consist of the Principals and/or such other persons referred to in the immediately preceding clauses.

        "Restricted Investment" means an Investment other than a Permitted Investment.

        "Restricted Subsidiary" of a Person means any Subsidiary of such person that is not an Unrestricted Subsidiary.

        "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof.

        "Spot Rate" means, for any currency, the spot rate at which such currency is offered for sale against United States dollars as determined by reference to the New York foreign exchange selling rates, as published in The Wall Street Journal on such date of determination for the immediately preceding business day or, if such rate is not available, as determined in any publicly available source of similar market data.

        "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof.

        "Subsidiary" means, with respect to any person,

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        "Tax Sharing Agreement" means any tax sharing agreement or arrangement between DeCrane Aircraft and DeCrane Holdings, as the same may be amended from time to time; provided that in no event shall the amount permitted to be paid pursuant to all such agreements and/or arrangements exceed the amount DeCrane Aircraft would be required to pay for income taxes were it to file a consolidated tax return for itself and its consolidated Restricted Subsidiaries as if it were a corporation that was a parent of a consolidated group.

        "Total Assets" means the total consolidated assets of DeCrane Aircraft and its Restricted Subsidiaries, as shown on the most recent balance sheet, excluding the footnotes of DeCrane Aircraft prepared in accordance with GAAP.

        "Unrestricted Subsidiary" means any Subsidiary that is designated by the board of directors as an Unrestricted Subsidiary pursuant to a board resolution, but only to the extent that such Subsidiary:

        Any such designation by the board of directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the board resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described under "—Principal Covenants—Restricted Payments."

        If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of DeCrane Aircraft as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under "—Principal Covenants—Incurrence of Indebtedness and Issuance of Preferred Stock," DeCrane Aircraft shall be in default of such covenant.

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        The board of directors of DeCrane Aircraft may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of DeCrane Aircraft of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if such Indebtedness is permitted under the covenant described under "—Principal Covenants—Incurrence of Indebtedness and Issuance Preferred of Stock," and no Default or Event of Default would be in existence following such designation.

        "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing

        "Wholly Owned Subsidiary" of any Person means a Subsidiary of such person all of the outstanding Capital Stock or other ownership interests of which other than directors' qualifying shares shall at the time be owned by such person or by one or more Wholly Owned Subsidiaries of such person.

        "Wholly Owned Restricted Subsidiary" of any person means a Restricted Subsidiary of such person all the outstanding Capital Stock or other ownership interests of which other than directors' qualifying shares shall at the time be owned by such person or by one or more Wholly Owned Restricted Subsidiaries of such person or by such person and one or more Wholly Owned Restricted Subsidiaries of such person.


PLAN OF DISTRIBUTION

        This prospectus is to be used by Credit Suisse First Boston LLC in connection with offers and sales of the notes in market-making transactions effected from time to time. Credit Suisse First Boston LLC may act as a principal or agent for one party when acting as principal or as agent for both parties, and may receive compensation in the form of discounts and commissions, including from both parties when it acts as agent for both. Those sales will be made at prevailing market prices at the time of sale, at prices related thereto or at negotiated prices.

        DLJ Merchant Banking Partners II, L.P. and several of its affiliates beneficially own approximately 85% of the common stock of DeCrane Holdings. Thompson Dean, James Quella and Susan C. Schnabel, each of whom is a principal of DLJ Merchant Banking, are members of the board of directors of DeCrane Holdings and DeCrane Aircraft. Further, an affiliate of Credit Suisse First Boston LLC is a lender and agent in connection with our senior bank credit facility, for which it receives customary fees and expenses. Credit Suisse First Boston LLC is party to a financial advisory contract with DeCrane and has, from time to time, provided investment banking and other financial advisory services to DeCrane in the past for which it has received customary compensation, and will provide such services and financial advisory services to our company in the future. Credit Suisse First Boston LLC acted as purchaser in connection with the initial sale of the notes and received an underwriting discount in connection therewith. See "Certain Relationships and Related Transactions."

        Credit Suisse First Boston LLC has informed us that it does not intend to confirm sales of the new notes to any accounts over which it exercises discretionary authority without the prior specific written approval of such transactions by the customer.

        Credit Suisse First Boston LLC currently makes a market in the notes. However, Credit Suisse First Boston LLC is not obligated to do so and it may discontinue or interrupt any such market-making

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at any time without notice. Any such market-making activity is also subject to the limits imposed by the Securities Act and the Securities Exchange Act of 1934. These limits include the prohibitions on trading while in knowing possession of material, non-public information as set forth in Rule 10b-5 under the Securities Exchange Act (subject to the exception described in Rule 10b-5-1) and the prohibitions on offers and sales after the filing, and prior to effectiveness of, a post-effective amendment to the registration statement of which this prospectus forms a part. We cannot assure you that any market for the notes will continue, or about your ability to sell the notes or the price at which you may be able to sell them.

        We have entered into a registration rights agreement with Credit Suisse First Boston LLC regarding its use of this prospectus. Pursuant to such agreement, we have agreed to bear all registration expenses incurred under that agreement, and to indemnify Credit Suisse First Boston LLC against some liabilities, including liabilities under the Securities Act.


LEGAL MATTERS

        The validity of the notes offered hereby will be passed upon for us by Spolin Silverman Cohen & Bartlett LLP, Santa Monica, California.


EXPERTS

        The consolidated financial statements of DeCrane Aircraft Holdings, Inc. as of December 31, 2001 and 2002 and for each of the three years in the period ended December 31, 2002 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.


AVAILABLE INFORMATION

        We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Act with respect to our offering of the notes. This prospectus does not contain all the information included in the registration statement and the exhibits and schedules thereto. You will find additional information about us and the notes in the registration statement. The registration statement and the exhibits and schedules thereto may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a site on the World Wide Web (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, including DeCrane Aircraft and DeCrane Holdings, which file electronically with the SEC. Statements made in this prospectus about legal documents may not necessarily be complete and you should read the documents which are filed as exhibits to the registration statement or otherwise filed with the SEC.

        We file annual, quarterly and current reports and other information with the SEC. You may read and copy any reports, statements or other information we file with the SEC at the SEC's reference room in Washington D.C. Please call the SEC at (202) 942-8090 for further information on the operation of the reference rooms. You can also request copies of these documents, upon payment of a duplicating fee, by writing to the SEC, or review our SEC filings on the SEC's EDGAR web site, which can be found at www.sec.gov.

        If for any reason we are not required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, we are still required under the indenture to furnish the holders of the notes with the information, documents and other reports specified in Sections 13 and 15(d) and of the Exchange Act. In addition, we have agreed that, for so long as any notes remain outstanding, we will furnish to the holders of the notes and to securities analysts and prospective investors, upon their request, the information required to be delivered by Rule 144A(d)(4) under the Securities Act.

130



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
  Page
Audited Financial Statements    

Report of Independent Accountants

 

F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001

 

F-3

Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000

 

F-4

Consolidated Statements of Stockholder's Equity for the years ended December 31, 2002, 2001 and 2000

 

F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000

 

F-6

Notes to Consolidated Financial Statements

 

F-7

Unaudited Financial Statements

 

 

Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002

 

F-51

Consolidated Statements of Operations for the three months and six months ended June 30, 2003 and 2002 (unaudited)

 

F-52

Consolidated Statements of Stockholder's Equity (Deficit) for the six months ended June 30, 2003 (unaudited)

 

F-53

Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)

 

F-54

Condensed Notes to Unaudited Consolidated Financial Statements

 

F-55

F-1



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholder of
DeCrane Aircraft Holdings, Inc.

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholder's equity, and of cash flows present fairly, in all material respects, the financial position of DeCrane Aircraft Holdings, Inc. and its subsidiaries at December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our report dated February 18, 2003, we expressed substantial doubt about the Company's ability to continue as a going concern. This doubt was based on the fact that the Company would be in default of its senior credit facility unless it consummated the sale of its Specialty Avionics Group prior to June 30, 2003. As discussed in Notes 2 and 10, the sale was consummated on May 23, 2003 thus alleviating our doubt about its ability to continue as a going concern.

        As discussed in Note 7, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Accordingly, the Company ceased amortizing goodwill as of January 1, 2002.

PRICEWATERHOUSECOOPERS LLP
Los Angeles, California

February 18, 2003, except for Notes 2 and 10,
    which are as of May 23, 2003

F-2



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 
  December 31,
 
 
  2002
  2001
 
 
  (In thousands, except share data)

 
Assets              

Current assets:

 

 

 

 

 

 

 
  Cash and cash equivalents   $ 12,421   $ 9,478  
  Accounts receivable, net     26,354     41,899  
  Inventories     59,300     61,433  
  Deferred income taxes     16,430     6,193  
  Prepaid expenses and other current assets     1,724     1,727  
  Current assets of discontinued operations     160,741     50,635  
   
 
 
    Total current assets     276,970     171,365  

Property and equipment, net

 

 

36,139

 

 

42,660

 
Goodwill     196,430     210,948  
Other assets, intangibles, net     39,428     48,934  
Long-lived assets of discontinued operations         171,804  
   
 
 
    Total assets   $ 548,967   $ 645,711  
   
 
 

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder's Equity

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 
  Current portion of long-term debt   $ 16,317   $ 13,332  
  Accounts payable     13,055     14,512  
  Accrued liabilities     31,494     52,921  
  Income taxes payable         103  
  Current liabilities of discontinued operations     19,928     8,841  
   
 
 
    Total current liabilities     80,794     89,709  

Long-term debt

 

 

364,700

 

 

385,936

 
Deferred income taxes     27,077     19,121  
Other long-term liabilities     7,364     6,620  
Long-term liabilities of discontinued operations         13,695  

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

Mandatorily redeemable preferred stock

 

 

34,081

 

 

28,240

 
   
 
 
Stockholder's equity:              
  Common stock, $.01 par value, 1,000 shares authorized as of December 31, 2002 and 2001; 100 shares issued and outstanding as of December 31, 2002 and 2001          
  Additional paid-in capital     121,212     122,469  
  Notes receivable for shares sold     (2,591 )   (2,668 )
  Accumulated deficit     (83,309 )   (17,323 )
  Accumulated other comprehensive loss     (361 )   (88 )
   
 
 
    Total stockholder's equity     34,951     102,390  
   
 
 
      Total liabilities and stockholder's equity   $ 548,967   $ 645,711  
   
 
 

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

F-3



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Revenues   $ 229,841   $ 272,112   $ 236,501  
Cost of sales     170,485     196,866     155,134  
   
 
 
 
    Gross profit     59,356     75,246     81,367  
   
 
 
 
Operating expenses:                    
  Selling, general and administrative expenses     40,318     45,429     33,345  
  Impairment of goodwill         8,583      
  Amortization of goodwill and other intangible assets     3,540     12,436     10,628  
   
 
 
 
    Total operating expenses     43,858     66,448     43,973  
   
 
 
 
    Income from operations     15,498     8,798     37,394  

Other expenses:

 

 

 

 

 

 

 

 

 

 
  Interest expense     25,376     29,645     27,181  
  Other expenses, net     505     634     277  
   
 
 
 
Income (loss) from continuing operations before provision for income taxes     (10,383 )   (21,481 )   (9,936 )
Provision for income taxes (benefit)     (3,621 )   (3,933 )   4,607  
   
 
 
 
Income (loss) from continuing operations     (6,762 )   (17,548 )   (5,329 )

Income (loss) from discontinued operations, net of tax

 

 

(41,396

)

 

3,546

 

 

(1,727

)
Cumulative effect of change in accounting principle     (17,828 )        
   
 
 
 
Net income (loss)     (65,986 )   (14,002 )   3,602  

Accrued preferred stock dividends

 

 

(5,373

)

 

(4,593

)

 

(2,040

)
Preferred stock redemption value accretion     (468 )   (468 )   (234 )
   
 
 
 
Net income (loss) applicable to common stockholder   $ (71,827 ) $ (19,063 ) $ 1,328  
   
 
 
 

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

F-4



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholder's Equity

 
  Common Stock
   
  Notes
Receivable
For Shares
Sold

   
  Accumulated
Other
Comprehensive
Loss

   
 
 
  Additional
Paid-in
Capital

  Accumulated
Deficit

   
 
 
  Shares
  Amount
  Total
 
 
  (In thousands, except share data)

 
Balance, December 31, 1999   100   $   $ 117,158   $ (2,468 ) $ (6,923 ) $ 6   $ 107,773  
Comprehensive income (loss):                                          
  Net income                   3,602         3,602  
  Translation adjustment                       (6 )   (6 )
                                     
 
                                        3,596  
                                     
 
Capital contribution, net of common stock repurchased           7,851     51             7,902  
Value of warrants issued with sale of preferred stock           4,019                 4,019  
Accrued preferred stock dividends           (2,040 )               (2,040 )
Preferred stock redemption value accretion           (234 )               (234 )
Compensatory stock option expense           561                 561  
Notes receivable interest accrued               (135 )           (135 )
   
 
 
 
 
 
 
 
Balance, December 31, 2000   100         127,315     (2,552 )   (3,321 )       121,442  
Comprehensive income (loss):                                          
  Net loss                   (14,002 )       (14,002 )
  Unrealized loss on interest rate swap contract                       (88 )   (88 )
                                     
 
                                        (14,090 )
                                     
 
Accrued preferred stock dividends           (4,593 )               (4,593 )
Preferred stock redemption value accretion           (468 )               (468 )
Compensatory stock option expense           215                 215  
Notes receivable interest accrued               (116 )           (116 )
   
 
 
 
 
 
 
 
Balance, December 31, 2001   100         122,469     (2,668 )   (17,323 )   (88 )   102,390  
Comprehensive income (loss):                                          
  Net loss                   (65,986 )       (65,986 )
  Unrealized loss on interest rate swap contract                       (273 )   (273 )
                                     
 
                                        (66,259 )
                                     
 
Capital contribution           5,000                 5,000  
Return of capital in connection with the repurchase of common stock, net of related note receivable repaid and tax benefit of options exercised           (554 )   200             (354 )
Accrued preferred stock dividends           (5,373 )               (5,373 )
Preferred stock redemption value accretion           (468 )               (468 )
Compensatory stock option expense           138                 138  
Notes receivable interest accrued               (123 )           (123 )
   
 
 
 
 
 
 
 
Balance, December 31, 2002   100   $   $ 121,212   $ (2,591 ) $ (83,309 ) $ (361 ) $ 34,951  
   
 
 
 
 
 
 
 

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

F-5



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Cash flows from operating activities:                    
  Net income (loss)   $ (65,986 ) $ (14,002 ) $ 3,602  
  Adjustments to reconcile net income (loss) to net cash provided by operating activities:                    
      Net (income) loss from discontinued operations     41,396     (3,546 )   1,727  
      Cumulative effect of change in accounting principle     17,828          
      Depreciation and amortization     13,304     22,582     17,344  
      Noncash portion of restructuring, asset impairment and other related charges     11,456     19,558      
      Deferred income taxes     690     2,322     6,260  
      Other, net     110     389     471  
  Changes in assets and liabilities, net of effect from acquisitions:                    
    Accounts receivable     14,969     (5,508 )   1,644  
    Inventories     (4,792 )   (10,427 )   (13,377 )
    Prepaid expenses and other assets     155     (2,126 )   2,147  
    Accounts payable     (1,458 )   409     71  
    Accrued liabilities     (16,418 )   (7,321 )   (13,523 )
    Income taxes payable     438     3     792  
    Other long-term liabilities     28     (400 )   (758 )
   
 
 
 
        Net cash provided by operating activities     11,720     1,933     6,400  
   
 
 
 
Cash flows from investing activities:                    
  Cash paid for acquisitions, net of cash acquired     (5,890 )   (13,529 )   (79,440 )
  Capital expenditures     (4,356 )   (10,191 )   (20,193 )
  Other, net         636     71  
   
 
 
 
        Net cash used for investing activities     (10,246 )   (23,084 )   (99,562 )
   
 
 
 
Cash flows from financing activities:                    
  Senior term debt borrowings         20,000     55,000  
  Senior revolving line of credit borrowings (repayments), net     (6,000 )   (400 )   12,400  
  Proceeds from sale of preferred stock and warrants             24,924  
  Capital contributions     5,000         7,902  
  Other long-term borrowings     1,145     2,797     3,451  
  Principal payments on term debt, capitalized leases and other debt     (13,534 )   (9,139 )   (5,460 )
  Deferred financing costs     (1,656 )   (767 )   (1,900 )
  Return of capital in connection with shares repurchased     (368 )       (50 )
   
 
 
 
        Net cash provided by (used for) financing activities     (15,413 )   12,491     96,267  
   
 
 
 
Net cash provided by (used for) discontinued operations     16,882     10,432     (3,298 )
   
 
 
 
Net increase (decrease) in cash and cash equivalents     2,943     1,772     (193 )
Cash and cash equivalents at beginning of period     9,478     7,706     7,899  
   
 
 
 
Cash and cash equivalents at end of period   $ 12,421   $ 9,478   $ 7,706  
   
 
 
 

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

F-6



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1.    Summary of Significant Accounting Policies

Description of the Business

        DeCrane Aircraft Holdings, Inc. and subsidiaries (the "Company" or "DeCrane Aircraft") is a provider of products and services to the business, VIP and head-of-state aircraft market within the aerospace industry. The Company's businesses are organized into two separate operating groups: Cabin Management and Systems Integration. The Company also had a third strategic business, its Specialty Avionics Group, which it sold in 2003 (Note 2). The Company is a wholly-owned subsidiary of DeCrane Holdings Co. ("DeCrane Holdings").

Basis of Presentation

        The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries and a majority-owned partnership. All intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation, principally to reflect the Specialty Avionics Group as a discontinued operation.

        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.

Financial Condition and Liquidity

        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, the Company implemented restructuring programs in 2001 and 2002 designed to reduce costs and conserve working capital (Note 3). The Company reported losses for the two years ended December 31, 2002, primarily resulting from charges associated with these restructuring activities, as well as the impairment of goodwill.

        During the fourth quarter of fiscal 2002, the Company further assessed its long-term business strategies in light of current aerospace industry conditions. In addition, the Company subsequently determined that it would likely not be in compliance with its senior credit facility's financial covenants in 2003. 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 the Specialty Avionics Group for $140,000,000 in cash and received requisite lender approval on March 28, 2003 to amend the senior credit facility to permit the sale. The sale was consummated on May 23, 2003 and, as required by the senior credit facility amendment, $130,000,000 of the proceeds was used to repay senior credit facility borrowings. The sale of the Specialty Avionics Group and resulting reduction in borrowings reduced the Company's future senior

F-7



credit facility principal payments obligations by $11,434,000 for 2003, $39,190,000 for 2004 and $79,376,000 for 2005 and 2006. The senior credit facility amendment also relaxes various financial covenants for 2003 and beyond, 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.

        The Company's results in 2003 continue to be affected by weak customer demand. The Company's business is concentrated among a limited number of aircraft manufacturers and temporary suspensions in their production have caused its revenues to decline. Further or prolonged decreases in demand for new business, VIP and head-of-state and commercial aircraft, as well as related component parts, would result in additional decreases in demand for the Company's products and services, and, correspondingly, its revenues, thereby adversely affecting its financial condition. In addition, further deterioration or prolonged decreases in demand could result in additional restructurings of the Company's business.

        Company management believes expected operating cash flows, together with borrowings under the senior credit facility, will be sufficient to meet the Company's future short- and long-term operating expenses, working capital requirements, capital expenditures and debt service obligations for the next twelve months. However, the Company's ability to comply with its debt financial covenants, pay principal or interest and satisfy its other debt obligations will depend on its future operating performance as well as competitive, legislative, regulatory, business and other factors beyond the Company's control. Although Company management cannot be certain, management expects the Company to be in compliance with the revised financial covenants through the end of the year based on the current operating plan.

Inventories

        Inventories are stated at the lower of cost, as determined under the first-in, first-out ("FIFO") method, or market. Costs include materials, labor, including direct engineering labor, tooling costs and manufacturing overhead. In accordance with industry practice, inventoried costs also include amounts relating to programs and contracts with long production cycles that will be recovered from future sales. Periodic assessments are performed to ensure recoverability of the program costs and adjustments are made, if necessary, to reduce inventoried costs to estimated realizable value.

Property and Equipment

        Property and equipment for companies acquired are stated at fair value as of the date the acquisition occurred and at cost for all subsequent additions. Property and equipment are depreciated using the straight-line method over their estimated useful lives. Useful lives for machinery and equipment range from three to twenty years. Building and building improvements are depreciated using the straight-line method over their estimated useful lives of forty years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or remaining lease term, whichever is less. Expenditures for maintenance and repairs are expensed as incurred. The costs for improvements are capitalized. Upon retirement or disposal, the cost and accumulated depreciation of property and equipment are reduced and any gain or loss is recorded in income or expense.

Goodwill

        Prior to January 1, 2002, goodwill was amortized on a straight-line basis over thirty years from the date the acquisition occurred. Additional goodwill resulting from contingent consideration payments subsequent to the acquisition date was amortized prospectively over the remaining period of the initial thirty-year term. Starting January 1, 2002, goodwill is no longer amortized but instead subject to annual

F-8



impairment testing with a loss charged to operations in the period in which impairment occurs (Note 7).

Other Assets

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

Impairment of Goodwill

        Effective January 1, 2002 the Company adopted and began testing goodwill for impairment in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" as described in Note 7. As required by SFAS No. 142, the Company tests goodwill for impairment annually, on October 31stof each year, or when events or changes in circumstances indicate the carrying amount may not be recoverable. The goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related operations that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment. As a result of the 2002 impairment testing, the Company recorded a $7,672,000 pre-tax charge relating to its Specialty Avionics Group.

        Prior to adoption of SFAS No. 142, impairment testing was in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In 2001, the Company recorded an $8,583,000 pre-tax charge to operations to reflect the impairment loss resulting from its restructuring program to close a manufacturing facility (Notes 3 and 7).

Impairment of Long-Lived Assets and Other Intangible Assets

        In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews long-lived assets held for use and intangible assets, other than goodwill, for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Long-lived assets deemed held for sale are stated at the lower of cost or fair value. As a result of two restructuring programs conducted during 2001 and 2002, the Company recorded pre-tax charges of $1,320,000 during 2001 and $3,931,000 during 2002 to reflect the impairment of long-lived assets. The impairment losses are described in Note 3.

Product Warranty Obligations

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

        Provisions for estimated future warranty costs are made in the period corresponding to the sale of the product and such costs have been within management's expectations. Classification between current and long-term warranty obligations is estimated based on historical trends.

F-9



Income Taxes

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

Derivative Financial Instruments

        Effective January 1, 2001, the Company adopted and began accounting for derivative financial instruments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption did not have a material impact on the Company's business, consolidated financial position, results of operations or cash flows. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.

        The Company does not use derivative financial instruments for trading purposes but only to manage the risk that changes in interest rates would have on future interest payments for a portion of its variable-rate debt. As of December 31, 2002, the Company has an interest rate swap contract to effectively convert $4,500,000 of variable-rate debt to 4.2% fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this variable-rate debt. As a result, the interest rate swap contract is reflected at fair value and the related loss of $361,000 on this contract is deferred in stockholder's equity as a component of comprehensive income (loss). The deferred loss will be recognized in future periods as interest expense as the related fixed-rate interest payments are made. In the unlikely event that the counterparty fails to perform under the contract, the Company bears the credit risk that payments due to the Company may not be collected.

Fair Value of Financial Instruments

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

Foreign Currency Translation and Transactions

        The financial statements of the Company's U.K. and Swiss subsidiaries have been translated into U.S. dollars from their functional currencies, pounds sterling and Swiss francs, respectively, in the consolidated financial statements. Assets and liabilities have been translated at the exchange rate on the balance sheet date and income statement amounts have been translated at average exchange rates in effect during the period. The net translation adjustment is reflected as a component of accumulated comprehensive income or loss within stockholder's equity.

        Realized foreign currency exchange gains, which pertain to the Specialty Avionics Group and are included in "discontinued operations" caption in the consolidated statements of operations, were $194,000 for the year ended December 31, 2002, $103,000 for the year ended December 31, 2001 and $351,000 for the year ended December 31, 2000.

F-10



Revenue Recognition

        Revenues from the sale of manufactured products, except for products manufactured under long-term contracts, are recognized upon shipment of product to the customer provided that the Company has received a signed purchase order, the price is fixed, title has transferred, collection of the resulting receivables is probable and there are no remaining significant obligations.

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

        Percentage-of-completion is measured using an estimate of direct labor incurred to date to total expected direct labor for each contract. This method is used because management considers expended direct labor to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Management believes that the Company will not incur any losses on uncompleted contracts as of December 31, 2002.

        Measuring a contract's percentage-of-completion requires management to make estimates. As a result, it is reasonably possible that factors may cause management to change its revenue and cost estimates, thereby altering estimated profitability. These factors include, but are not limited to, changes in contract scope, material and labor efficiencies, contract penalty provisions, if any, and final contract settlements. Revisions to revenue and profit estimates are made in the period in which the facts that give rise to the revision become known.

        The asset "Costs and estimated earnings in excess of billings" represents revenues recognized in excess of amounts billed on uncompleted contracts and is reflected as a component of inventory. Conversely, the liability "Billings in excess of costs and estimated earnings" represents billings in excess of revenues recognized on uncompleted contracts and is reflected as an accrued liability. Unbilled revenues are expected to be billed and collected during the succeeding twelve-month period.

Research and Development Costs

        Research and development costs are expensed as incurred. Such costs were $56,000 for the year ended December 31, 2002, $698,000 for the year ended December 31, 2001 and $1,615,000 for the year ended December 31, 2000.

Stock Option Plan

        In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has elected to continue account of stock-based compensation as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation."

        SFAS No. 148 also amends the disclosure requirements of SFAS 123, to require disclosure in both interim and annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for the Company's fiscal year ended December 31, 2002 and for interim financial statements beginning in 2003.

        The Company has one stock-based employee compensation plan, which is more fully described in Note 15. As permitted under SFAS No. 123, the Company measures compensation expense related to the employee stock option plan utilizing the intrinsic value method as prescribed by Accounting

F-11



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.

 
  Year Ended December 31,
 
(In thousands)

 
  2002
  2001
  2000
 
Net income (loss), as reported   $ (65,986 ) $ (14,002 ) $ 3,602  
Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects     (376 )   (392 )   (439 )
   
 
 
 
  Pro forma net income (loss)   $ (66,362 ) $ (14,394 ) $ 3,163  
   
 
 
 

        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. The assumptions underlying the computations of the fair value of the options are described in Note 15.

Statements of Cash Flows

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

Recent Accounting Pronouncements

SFAS No. 145

        In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning January 1, 2003. The Company believes this new standard will not have an impact on its business, consolidated financial position, results of operations or cash flow.

SFAS No. 146

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

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

F-12



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

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

FIN No. 45

        In November 2002, the Financial Accounting Standards Board issued 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 interpretation is not expected to have a material effect on the Company's financial position, results of operations or cash flows. The disclosure requirements of this interpretation have been adopted by the Company as of December 31, 2002.

FIN No. 46

        In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 addresses consolidation by business enterprises of variable interest entities (formerly special purpose entities or "SPEs"). The Company does not have any variable interest entities as defined in FIN No. 46.

Note 2.    Acquisitions and Dispositions

Disposition of Specialty Avionics Group

        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 10). 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 recorded 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.

F-13


        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.

F-14



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

 
  December 31,
 
  2002
  2001
 
  (In thousands)

Assets:            
  Current assets   $ 41,614   $ 50,635
  Property and equipment, net     15,744     18,413
  Other assets, principally intangibles, net     103,383     153,391
   
 
    Total assets     160,741     222,439
   
 

Liabilities:

 

 

 

 

 

 
  Current liabilities     8,288     8,841
  Long-term liabilities     11,640     13,695
   
 
    Total liabilities     19,928     22,536
   
 
      Net assets of the Specialty Avionics Group   $ 140,813   $ 199,903
   
 
 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Results of Operations:                    
  Revenues   $ 95,789   $ 123,240   $ 110,878  
   
 
 
 
  Operating expenses:                    
    Costs and expenses     75,031     97,320     88,963  
    Impairment of goodwill     7,672          
    Amortization of goodwill and other intangible assets     2,228     7,484     7,320  
   
 
 
 
      Total operating expenses     84,931     104,804     96,283  
   
 
 
 
Income from operations     10,858     18,436     14,595  

Other expenses:

 

 

 

 

 

 

 

 

 

 
  Interest expense:                    
    Debt required to be repaid with proceeds from sale     7,720     8,439     13,337  
    Debt obligations assumed by the buyer     798     917     1,105  
  Other expenses, net     439     413     205  
   
 
 
 
Pre-tax income (loss)     1,901     8,667     (52 )
Provision for income taxes     (3,975 )   (5,121 )   (1,675 )
   
 
 
 
Income before change in accounting principle     (2,074 )   3,546     (1,727 )
Cumulative effect of change in accounting principle     (39,322 )        
   
 
 
 
  Net income (loss) from discontinued operations   $ (41,396 ) $ 3,546   $ (1,727 )
   
 
 
 

Cash Flows Provided By (Used For):

 

 

 

 

 

 

 

 

 

 
  Operating activities   $ 18,598   $ 12,996   $ 10,383  
  Investing activities     (1,073 )   (1,708 )   (12,602 )
  Financing activities     (815 )   (1,094 )   (611 )
  Net (increase) decrease in cash and cash equivalents     125     177     (474 )
  Effect of foreign currency translation on cash     47     61     6  
   
 
 
 
    Net cash provided by (used for) discontinued operations   $ 16,882   $ 10,432   $ (3,298 )
   
 
 
 

F-15


Acquisitions Completed During 2000

        During the year ended December 31, 2000, the Company acquired:

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

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

        The acquisitions were funded with borrowings under the Company's senior credit facility, equity contributions from DeCrane Holdings and the sale of preferred stock as described in Note 12.

Contingent Acquisition Consideration Paid for All Acquisitions

        Prior to the year 2000, six additional companies were acquired in transactions in which the sellers were entitled to contingent consideration payments based upon their respective levels of attainment of defined performance criteria. Based upon the level of attainment of defined performance criteria during the three years ended December 31, 2002, the Company recorded contingent consideration payable of $600,000 in 2002, $700,000 in 2001 and $20,154,000 in 2000 resulting in a corresponding increase in goodwill. As of December 31, 2002, there are no remaining contingent consideration payment obligations.

        During 2001, the Company settled its asserted claims against the sellers of two companies acquired in 2000 for breach of representation and warranty provisions contained in the purchase agreements. The Company received $3,718,000 from the sellers upon entering into the settlement agreements, which also provided that the Company pay in 2002 a minimum of $3,125,000 of previously contingent consideration for the year ended December 31, 2001 which was reflected as an accrued liability as of December 31, 2001.

F-16



Unaudited Pro Forma Information

        Unaudited pro forma consolidated results of operations are presented in the table below for the year ended December 31, 2000. The results of operations reflect the Company's acquisitions, excluding the company acquired by the Specialty Avionics Group, as if all of these transactions were consummated as of January 1, 2000.

 
  Pro Forma
Year Ended
December 31,
2000

 
  (Unaudited, in thousands)

Revenues   $ 255,531
Income from continuing operations before cumulative effect of change in accounting principle, net of tax     6,493
Net income     4,766

        The pro forma results of operations do not purport to represent what actual results would have been if the transactions described above occurred on such dates or to project the results of operations for any future period. The above information reflects adjustments for inventory, depreciation, amortization, general and administrative expenses and interest expense based on the new cost basis and debt and capital structure of the Company following the acquisitions.

        During 2002, three customers accounted for more than 10% of the Company's consolidated revenues (Note 17). If the Company had completed its 2000 acquisitions at the beginning of 2000, unaudited pro forma revenues from these customers for year ended December 31, 2000 would have been as follows: Bombardier—$61,589,000; Boeing—$29,618,000; and Textron—$51,401,000. Complete loss of any of the customers identified above could have a significant adverse impact on the results of operations expected in future periods.

F-17


Note 3.    Restructuring, Asset Impairment and Other Related Charges

        During the two years ended December 31, 2002, the Company recorded restructuring, assets impairment and other related charges as follows:

 
  Year Ended December 31,
 
  2002
  2001
 
  (In thousands)

Nature of charges:            
  Asset Realignment Restructuring   $ 6,901   $ 28,658
  Seat Manufacturing Facilities Restructuring     6,294    
  Other asset impairment related charges     12,048    
   
 
    Total pre-tax charges   $ 25,243   $ 28,658
   
 
Business segment recording the charges:            
Cabin Management   $ 13,195   $ 22,309
Systems Integration     4,060     3,525
   
 
Total continuing operations     17,255     25,834
Discontinued operations (Specialty Avionics)     7,988     2,824
   
 
Total pre-tax charges   $ 25,243   $ 28,658
   
 

Charged to operations:

 

 

 

 

 

 
  Cost of sales   $ 10,676   $ 13,557
  Selling, general and administrative expenses     6,579     3,694
  Impairment of goodwill         8,583
  Discontinued operations (Specialty Avionics)     7,988     2,824
   
 
    Total pre-tax charges   $ 25,243   $ 28,658
   
 

Components of charges:

 

 

 

 

 

 
  Continuing operations:            
    Noncash charges   $ 11,456   $ 19,558
    Cash charges     5,799     6,276
   
 
      Total continuing operations     17,255     25,834
   
 
 
Discontinued operations (Specialty Avionics):

 

 

 

 

 

 
    Noncash charges     7,988     2,500
    Cash charges         324
   
 
      Total discontinued operations     7,988     2,824
   
 
        Total pre-tax charges   $ 25,243   $ 28,658
   
 

Asset Realignment Restructuring

        During the second quarter of 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 11th 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

F-18



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. This program primarily affected the Company's Cabin Management and Specialty Avionics Groups.

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

F-19


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

 
   
   
  Amounts Incurred
   
 
  Balance at
Beginning of
the Year

  Total
Charges

  Balance at
End of
the Year

 
  Noncash
  Cash
 
  (In thousands)

Year ended December 31, 2002:                              

Severance and other compensation costs

 

$

1,185

 

$


 

$


 

$

(1,185

)

$

Lease termination and other related costs     424             (334 )   90
Impairment of property and equipment         2,557     (2,557 )      
Excess inventory write-downs         1,265     (1,265 )      
   
 
 
 
 
  Total   $ 1,609     3,822   $ (3,822 ) $ (1,519 ) $ 90
   
       
 
 
Other restructuring-related charges           3,079                  
         
                 
  Total pre-tax charges         $ 6,901                  
         
                 
 
   
   
  Amounts Incurred
   
 
  Balance at
Beginning of
the Year

  Total
Charges

  Balance at
End of
the Year

 
  Noncash
  Cash
 
  (In thousands)

Year ended December 31, 2001:                              

Impairment of long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Goodwill   $   $ 8,583   $ (8,583 ) $   $
  Property and equipment         1,320     (1,320 )      
Product development cost write-offs         7,908     (7,908 )      
Excess inventory write-downs         4,247     (4,247 )      
Realignment of production programs between facilities         3,902         (3,902 )  
Severance and other compensation costs         2,024         (839 )   1,185
Lease termination and other related costs         674         (250 )   424
   
 
 
 
 
  Total   $   $ 28,658   $ (22,058 ) $ (4,991 ) $ 1,609
   
 
 
 
 

        This restructuring program was completed during the fourth quarter of fiscal 2002. From the inception of this restructuring program in 2001, severance and other compensation costs of approximately $2,024,000 have been paid to manufacturing and administrative employees terminated at the manufacturing facilities closed. Since the September 11th terrorist attack, the Company has, in addition to the positions eliminated as a result of the 2002 plant closures described below, reduced its total workforce by approximately 500 employees, or 18.5%, as of December 2002 pursuant to this restructuring program, of which approximately 260 employees had separated as of December 31, 2001.

        The remaining balance of restructuring costs includes lease termination and other exit costs. The restructuring program related to leased facilities was completed during the second quarter of fiscal 2002; however, future cash payments extend beyond this date due to lease payments on the vacated facility and the incurrence of other exit costs. Future cash payments will be funded from existing cash balances and internally generated cash from operations.

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

F-20



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 are comprised of the following:

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

 
   
  Amounts Incurred
   
 
  Total
Charges

  Balance at
December 31,
2002

 
  Noncash
  Cash
 
  (In thousands)

Restructuring and assets impairment charges:                        
  Inventory and accounts receivable write-downs   $ 2,200   $ (2,200 ) $   $
  Impairment of property and equipment     1,374     (1,374 )      
  Severance and other compensation costs     450         (450 )  
  Lease termination and other related costs     300         (236 )   64
   
 
 
 
    Total restructuring and asset impairment charges     4,324   $ (3,574 ) $ (686 ) $ 64
         
 
 
Other restructuring-related expenses     1,970                  
   
                 
    Total pre-tax charges   $ 6,294                  
   
                 

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

Other Asset Impairment Related Charges

        Due to continued weakness in the commercial aircraft portion of our 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

F-21



pursuant to SFAS No. 142 (Note 7) and $4,376,000 related to inventories and was charged to cost of goods sold. Charges totaling $7,988,000 pertained to discontinued operations.

Note 4.    Accounts Receivable

        The Company is potentially subject to concentrations of credit risk as the Company relies heavily on customers operating in the domestic and foreign business, VIP and head-of-state aircraft industries. Generally, the Company does not require collateral or other security to support accounts receivable subject to credit risk. Under certain circumstances, deposits or cash-on-delivery terms are required. The Company maintains reserves for potential credit losses and generally, such losses have been within management's expectations.

        Accounts receivable are net of an allowance for doubtful accounts of $1,205,000 as of December 31, 2002 and $2,108,000 as of December 31, 2001.

Note 5.    Inventories

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

 
  December 31,
 
  2002
  2001
 
  (In thousands)

Raw materials   $ 28,911   $ 35,989
Work-in-process:            
  Direct and indirect manufacturing costs     6,843     7,365
  Program costs, principally engineering costs     14,769     10,974
Finished goods     4,773     1,433
Costs and estimated earnings in excess of billings on uncompleted contracts     4,004     5,672
   
 
  Total inventories   $ 59,300   $ 61,433
   
 

        Periodic assessments are performed to ensure recoverability of the program costs and adjustments are made, if necessary, to reduce inventoried costs to estimated realizable value. In connection with the Asset Realignment Restructuring, the Company elected to cancel several product development programs to conserve working capital (Note 3) and, as a result, $7,908,000 of previously inventoried costs related to these programs were charged to cost of sales in 2001; no adjustments were required during the years ended December 31, 2002 and 2000.

F-22



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

 
  December 31,
 
 
  2002
  2001
 
 
  (In thousands)

 
Costs incurred on uncompleted contracts   $ 49,572   $ 46,757  
Estimated earnings recognized     63,699     50,413  
   
 
 
  Total costs and estimated earnings     113,271     97,170  
  Less billings to date     (109,880 )   (102,653 )
   
 
 
    Net   $ 3,391   $ (5,483 )
   
 
 

Balance sheet classification:

 

 

 

 

 

 

 
  Asset—Costs and estimated earnings in excess of billings   $ 4,004   $ 5,672  
  Liability—Billings in excess of costs and estimated earnings (Note 8)     (613 )   (11,155 )
   
 
 
    Net   $ 3,391   $ (5,483 )
   
 
 

        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 2002 relating to uncompleted contracts at the furniture manufacturing facility permanently closed.

Note 6.    Property and Equipment

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

 
  December 31,
 
 
  2002
  2001
 
 
  (In thousands)

 
Land, buildings and leasehold improvements   $ 24,733   $ 23,197  
Machinery and equipment     14,160     16,176  
Computer equipment and software, furniture and fixtures     13,208     13,351  
Tooling     4,043     4,001  
   
 
 
  Total cost     56,144     56,725  
  Accumulated depreciation and amortization     (20,005 )   (14,065 )
   
 
 
    Net property and equipment   $ 36,139   $ 42,660  
   
 
 

        Included above are owned land and buildings held for sale related to a manufacturing facility the Company closed during 2002 (Note 3). The cost of the land and buildings is $2,820,000 and the corresponding accumulated depreciation and amortization is $31,000 as of December 31, 2002.

F-23



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

 
  December 31,
 
 
  2002
  2001
 
 
  (In thousands)

 
Land, buildings and leasehold improvements   $ 3,558   $ 4,388  
Machinery and equipment     922     866  
Computer equipment and software, furniture and fixtures     1,435     1,427  
   
 
 
  Total cost     5,915     6,681  
  Accumulated depreciation and amortization     (1,423 )   (1,626 )
   
 
 
    Net property and equipment   $ 4,492   $ 5,055  
   
 
 

        Depreciation of property and equipment under capital leases is included in depreciation expense in the consolidated financial statements.

Note 7.    Goodwill

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

        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.

F-24



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

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Reported income (loss) from continuing operations, net of tax   $ (6,762 ) $ (17,548 ) $ (5,329 )
Add back goodwill and assembled workforce amortization, net of tax         6,681     5,720  
   
 
 
 
  Adjusted income (loss) from continuing operations   $ (6,762 ) $ (10,867 ) $ 11,049  
   
 
 
 

        Changes in the carrying amount of goodwill, by business segment (Note 17), for the two years ended December 31, 2002 are as follows:

 
  Continuing Operations
  Discontinued
 
 
  Cabin
Management
Group

  Systems
Integration
Group

  Corporate
  Total
  Specialty
Avionics
Group

 
 
  (In thousands)

 
Balance, December 31, 2000   $ 187,797   $ 32,982   $ 4,105   $ 224,884   $ 131,472  
Amortization during the period     (6,640 )   (1,180 )   (149 )   (7,969 )   (4,709 )
Impairment charge     (5,058 )   (3,525 )       (8,583 )    
Contingent consideration earned, including acquisition related expenses     3,832             3,832      
Cash received from sellers, net of additional liabilities recorded, upon settlement of asserted claims     (1,216 )           (1,216 )    
Foreign currency translation                     (268 )
   
 
 
 
 
 
Balance, December 31, 2001     178,715     28,277     3,956     210,948     126,495  

Adoption of SFAS 141 and 142:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Reclassification of intangible assets     3,076     386     120     3,582     1,221  
  Transitional impairment charge     (8,463 )   (7,881 )   (2,362 )   (18,706 )   (39,322 )
Contingent consideration earned, including acquisition related expenses     606             606      
Impairment charge                     (7,672 )
   
 
 
 
 
 
Balance, December 31, 2002   $ 173,934   $ 20,782   $ 1,714   $ 196,430   $ 80,722  
   
 
 
 
 
 

        In 2001, the Company recorded impairment charges total $8,583,000 in connection with its Asset Realignment Restructuring program. This charge is included as a component of income from continuing operations. During the fourth quarter of fiscal 2002, the Company performed its annual impairment testing and recorded an additional $7,672,000 impairment charge related to the Specialty Avionics Group. The charge results from a decrease in fair value due to further weakness during 2002 in the commercial aircraft portion of our business. This charge is included as a component of income (loss) from discontinued operations.

F-25



Note 8.    Other Assets, Principally Intangibles

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

 
  December 31,
 
  2002
  2001
 
  (In thousands)

Identifiable intangible assets with finite useful lives     29,106     36,785
Deferred financing costs     9,168     10,204
Other non-amortizable assets     1,154     1,945
   
 
  Total other assets   $ 39,428   $ 48,934
   
 

Identifiable Intangible Assets with Finite Useful Lives

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

 
  December 31, 2002
  December 31, 2001
 
  Cost
  Accumulated
Amortization

  Net
  Cost
  Accumulated
Amortization

  Net
 
  (In thousands)

FAA certifications   $ 22,272   $ (4,737 ) $ 17,535   $ 22,272   $ (3,253 ) $ 19,019
Engineering drawings     7,645     (1,776 )   5,869     7,645     (1,266 )   6,379
Assembled workforce                 7,657     (2,706 )   4,951
Other identifiable intangibles     11,345     (5,643 )   5,702     10,533     (4,097 )   6,436
   
 
 
 
 
 
  Total identifiable intangibles   $ 41,262   $ (12,156 ) $ 29,106   $ 48,107   $ (11,322 ) $ 36,785
   
 
 
 
 
 

        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.

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

F-26


Note 9.    Accrued Liabilities

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

 
  December 31,
 
  2002
  2001
 
  (In thousands)

Salaries, wages, compensated absences and payroll related taxes   $ 9,212   $ 15,307
Billings in excess of costs and estimated earnings on uncompleted contracts     613     11,155
Acquisition related contingent consideration     600     6,904
Accrued interest     7,465     4,692
Customer advances and deposits     4,662     3,260
Other accrued liabilities     8,942     11,603
   
 
  Total accrued liabilities   $ 31,494   $ 52,921
   
 

Accrued Product Warranty Obligations

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

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Accrual activity during the year:                    
  Accrual at beginning of the year   $ 2,642   $ 2,640   $ 2,889  
  Accruals for warranties issued during the period     1,363     602     924  
  Change in accrual estimate related to pre-existing warranties     481     (482 )   (1,157 )
  Settlements made (in cash or in kind) during the period     (800 )   (118 )   (16 )
   
 
 
 
    Accrual at end of the year   $ 3,686   $ 2,642   $ 2,640  
   
 
 
 
Classification at end of the year:                    
  Current liability     2,801     2,531     2,183  
  Long-term liability     885     111     457  
   
 
 
 
    Total   $ 3,686   $ 2,642   $ 2,640  
   
 
 
 

F-27


Note 10.    Long-Term Debt

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

 
  December 31,
 
 
  2002
  2001
 
 
  (In thousands)

 
Senior credit facility:              
  Term loans   $ 264,200   $ 275,706  
  Revolving line of credit     6,000     12,000  
12% senior subordinated notes     100,000     100,000  
Capital lease obligations and term debt financing, secured by property and equipment     10,330     10,647  
Other indebtedness     487     915  
   
 
 
  Total long-term debt     381,017     399,268  
  Less current portion     (16,317 )   (13,332 )
   
 
 
    Long-term debt, less current portion   $ 364,700   $ 385,936  
   
 
 

Senior Credit Facility

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

        The senior credit facility provides for term loan borrowings in the initial principal amount of $290,000,000 and a revolving line of credit for borrowings up to an aggregate principal amount of $50,000,000 for working capital and to finance acquisitions. Principal payments for term loan borrowings are due in increasing amounts over the next four years and all borrowings under the revolving loan facility must be repaid by September 30, 2004. Loans under the senior credit facility generally bear interest based on a margin over, at the Company's option, prime rate or LIBOR. The margins applicable to portions of amounts borrowed may vary depending upon the Company's consolidated debt leverage ratio. Currently, the applicable margins are 2.50 to 3.25 for prime rate borrowings and 3.75% to 4.50% for LIBOR borrowings. The weighted-average interest rate on all senior credit facility borrowings outstanding was 5.97% as of December 31, 2002. Borrowings under the senior credit facility are secured by substantially all of the assets of the Company. The Company is subject to certain commitment fees under the facility as well as the maintenance of certain financial ratios, cash flow results and other restrictive covenants, including the payment of dividends in cash.

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

        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.

F-28



        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 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.

12% Senior Subordinated Notes

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

Other Indebtedness

        As of December 31, 2002, other indebtedness reflects acquisition financing payable to sellers in connection with their respective acquisitions. The debt is non-interest bearing; original issue discounts ranging between 10.5% and 12.5% are being amortized over their terms.

Aggregate Maturities

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

 
  (In thousands)

 
Year ending December 31,        
  2003   $ 16,297  
  2004     53,967  
  2005     97,742  
  2006     107,090  
  2007     650  
  2008 and thereafter     105,299  
   
 
    Total aggregate maturities     381,045  
    Less unamortized debt discounts     (28 )
   
 
      Total long-term debt   $ 381,017  
   
 

F-29


Note 11.    Income Taxes

        The components of income (loss) before income taxes and cumulative effect of change in accounting principle are as follows:

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Reported by:                    
  Continuing operations   $ (10,383 ) $ (21,481 ) $ (9,936 )
  Discontinued operations     1,901     8,667     (52 )
   
 
 
 
    Total   $ (8,482 ) $ (12,814 ) $ 9,884  
   
 
 
 
Taxed under the following jurisdictions:                    
  Domestic   $ (7,381 ) $ (12,236 ) $ 10,049  
  Foreign     (1,101 )   (578 )   (165 )
   
 
 
 
    Total   $ (8,482 ) $ (12,814 ) $ 9,884  
   
 
 
 

        The provisions for income taxes (benefit) are as follows:

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Current:                    
  U.S. federal   $   $ 62   $ 370  
  State and local     255     1,133     671  
  Foreign     67     30     120  
   
 
 
 
    Total current     322     1,225     1,161  
   
 
 
 
Deferred:                    
  U.S. federal     (144 )   545     4,599  
  State and local     463     (464 )   557  
  Foreign     (287 )   (118 )   (35 )
   
 
 
 
    Total deferred     32     (37 )   5,121  
   
 
 
 
Total provision:                    
  U.S. federal     (144 )   607     4,969  
  State and local     718     669     1,228  
  Foreign     (220 )   (88 )   85  
   
 
 
 
    Total provision   $ 354   $ 1,188   $ 6,282  
   
 
 
 
Allocation of total provision:                    
  Continuing operations   $ (3,621 ) $ (3,933 ) $ 4,607  
  Discontinued operations     3,975     5,121     1,675  
   
 
 
 
    Total provision   $ 354   $ 1,188   $ 6,282  
   
 
 
 

F-30


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

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

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

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

 
  December 31,
 
 
  2002
  2001
 
 
  (In thousands)

 
Gross deferred tax liabilities:              
  Intangible assets   $ 31,267   $ 31,849  
  Program costs     6,168     4,839  
  Property and equipment     3,119     3,461  
  Other     56     322  
   
 
 
    Gross deferred tax liabilities     40,610     40,471  
   
 
 
Gross deferred tax (assets):              
  Loss carryforwards     (12,173 )   (8,980 )
  Accrued liabilities     (6,797 )   (7,732 )
  Inventory     (4,252 )   (3,130 )
  Other     (832 )   (1,095 )
   
 
 
    Gross deferred tax (assets)     (24,054 )   (20,937 )
   
 
 
      Net deferred tax liability   $ 16,556   $ 19,534  
   
 
 
Balance sheet classification:              
  Continuing operations:              
    Noncurrent deferred tax liability   $ 27,077   $ 19,121  
    Current deferred tax asset     (16,430 )   (6,193 )
   
 
 
      Net continuing operations     10,647     12,928  
   
 
 
Discontinued operations:              
  Noncurrent deferred tax liability     12,110     14,476  
  Current deferred tax asset     (6,201 )   (7,870 )
   
 
 
    Net discontinued operations     5,909     6,606  
   
 
 
      Net deferred tax liability   $ 16,556   $ 19,534  
   
 
 

        As of December 31, 2002, the Company has total loss carryforwards of approximately $30,782,000 for federal income tax purposes and $21,268,000 for state income tax purposes, including federal loss

F-31



carryforwards acquired in acquisitions. The Company expects that federal loss carryforwards acquired in an acquisition totaling approximately $12,600,000 will transfer to the buyer in connection with the sale of the Specialty Avionics Group described in Note 2. The loss carryforwards are not subject to limitations on their annual utilization ("Section 382 limitation," as defined in the Internal Revenue Code) and therefore are available for utilization in 2002. The federal and state loss carryforwards expire in varying amounts commencing in 2011 and continuing through 2022. Management believes that it is more likely than not that the Company will generate taxable income sufficient to realize the tax benefit associated with the future deductible deferred tax assets and loss carryforwards prior to their expiration.

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

Note 12.    Capital Structure

Authorized Capital Structure

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

Mandatorily Redeemable Preferred Stock

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

 
  Number
of
Shares

  Mandatory
Redemption
Value

  Unamortized
Issuance
Discount

  Net
Book
Value

 
 
  (In thousands, except share data)

 
Sale of preferred stock   250,000   $ 25,000   $ (4,019 ) $ 20,981  
Issuance costs           (76 )   (76 )
Accrued dividends and redemption value accretion   20,400     2,040     234     2,274  
   
 
 
 
 
  Balance, December 31, 2000   270,400     27,040     (3,861 )   23,179  
Accrued dividends and redemption value accretion   45,930     4,593     468     5,061  
   
 
 
 
 
  Balance, December 31, 2001   316,330     31,633     (3,393 )   28,240  
Accrued dividends and redemption value accretion   53,731     5,373     468     5,841  
   
 
 
 
 
  Balance, December 31, 2002   370,061   $ 37,006   $ (2,925 ) $ 34,081  
   
 
 
 
 

        On June 30, 2000, 250,000 shares of DeCrane Aircraft 16% preferred stock and warrants to purchase 139,357 shares of DeCrane Holdings common stock were sold for $25,000,000 to DLJ affiliates (Note 16). The proceeds from the sale were used to fund, in part, the ERDA acquisition (subsequently renamed DeCrane Aircraft Seating Co.). A portion of the proceeds from the sale totaling $4,019,000 were ascribed to the value of the DeCrane Holdings common stock warrants issued and was credited to additional paid-in capital. The corresponding reduction in redemption value of the preferred stock, and related issuance costs, are recorded as an issuance discount and are being amortized using the effective interest method through the preferred stock mandatory redemption date.

F-32



        Since the common stock of DeCrane Holdings is privately-held, there is no established public trading market for its shares upon which to base the value ascribed to the warrants issued. As a result, the Company, with assistance from its financial advisors for the transaction, determined the fair value of the warrants issued based on the aggregate enterprise value of DeCrane Holdings. Enterprise value was computed based upon a multiple of Adjusted EBITDA, as defined in Note 17 of these financial statements, and the multiple is based upon comparable data from other publicly-held companies as well as publicly available information on privately-held companies.

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

        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 dividend payments. The preferred stock is mandatorily redeemable on March 31, 2009. Upon the occurrence of a change in control, as defined, each holder has the right to require DeCrane Aircraft to redeem all or part of such holder's shares at a price equal to 101% of the liquidation preference, plus accrued and unpaid cash dividends.

Common Stock

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

        During 2000 and 2002, DeCrane Aircraft received additional cash capital contributions from DeCrane Holdings aggregating $7,902,000 in 2000 and $5,000,000 in 2002 resulting from DeCrane Holdings' sale of capital stock. The proceeds were used to fund portions of the acquisitions completed during 2000 and to fund working capital requirements in 2002.

        Also during 2002, DeCrane Holdings repurchased and canceled 18,743 common shares from former members of the Company's management. The former management members also elected to exercise 9,252 vested stock options on a cashless basis. The $14,000 income tax benefit associated with the stock options exercised was also credited to additional paid-in capital. In connection with the repurchase, a note receivable collateralized by the repurchased common stock was repaid. The Company returned $368,000 of paid-in capital to DeCrane Holdings to fund its cash requirements for these transactions.

Notes Receivable for Shares Sold

        During 1998 and 1999, DeCrane Holdings sold mandatorily redeemable preferred and common stock in three transactions in which one-half of the purchase price was paid in cash and one-half was loaned to the purchasers by DeCrane Aircraft, with interest at the then applicable federal rates. The loans bear interest at rates ranging between 4.33% and 5.74%. The loans, plus accrued interest, are payable upon the sale of the stock and are collateralized by such stock. The resulting notes receivable, plus accrued interest, are classified as a reduction of stockholder's equity in the consolidated statement of financial position.

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

F-33


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

Note 13.    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.

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Lease Commitments

        The Company leases some of its facilities and equipment under capital and operating leases. Some of the leases require payment of property taxes and include escalation clauses. Future minimum capital and operating lease commitments under non-cancelable leases are as follows as of December 31, 2002:

 
  Capital
Leases

  Operating
Leases

 
  (In thousands)

Year ending December 31,            
  2003   $ 1,015   $ 1,761
  2004     884     1,623
  2005     766     1,591
  2006     567     1,428
  2007     497     1,144
  2008 and thereafter     1,995     7,885
   
 
    Total minimum payments required     5,724   $ 15,432
         
    Less amount representing future interest cost     (1,717 )    
   
     
      Recorded obligation under capital leases   $ 4,007      
   
     

        Total rental expense charged to operations was $3,083,000 for the year ended December 31, 2002, $2,982,000 for the year ended December 31, 2001 and $3,096,000 for the year ended December 31, 2000.

Funding of DeCrane Holdings Preferred Stock Obligations

        The Company is a wholly owned subsidiary of DeCrane Holdings whose capital structure also includes mandatorily redeemable preferred stock. Since the Company is DeCrane Holdings' only operating subsidiary and source of cash, the Company may be required to fund DeCrane Holdings' preferred stock dividend and redemption obligations in the future.

        DeCrane Holdings' preferred stock dividends are payable quarterly at a rate of 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. On or after September 30, 2005, preferred stock dividends are required to be paid in cash, if declared, and the preferred stock is mandatorily redeemable on September 30, 2009. The DeCrane Holdings preferred stock has a total redemption value of $62,222,000 as of December 31, 2002, including accumulated dividends.

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Note 14.    Consolidated Statements of Cash Flows

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

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Components of cash paid for acquisitions:                    
  Fair value of assets acquired   $   $   $ 83,270  
  Liabilities assumed             (34,132 )
   
 
 
 
    Cash paid             49,138  
    Less cash acquired             (173 )
   
 
 
 
      Net cash paid for acquisitions             48,965  
  Contingent consideration paid for previously completed acquisitions     5,826     17,075     29,825  
  Cash purchase price reductions received as a result of settling asserted claims against the sellers (Note 2)         (3,718 )    
  Additional acquisition related expenses     64     172     650  
   
 
 
 
      Total cash paid for acquisitions   $ 5,890   $ 13,529   $ 79,440  
   
 
 
 
Noncash investing and financing transactions:                    
  16% mandatorily redeemable preferred stock dividends paid by the issuance of additional shares   $ 5,373   $ 4,593   $ 2,040  
  Capital expenditures financed with capital lease obligations     67     4,376     105  
  Additional acquisition contingent consideration earned and recorded as a liability     600     3,825     20,154  
  Interest accrued during the period on loans to stockholders for the purchase of DeCrane Holdings capital stock     123     116     135  
Paid in cash:                    
  Interest   $ 27,619   $ 34,904   $ 38,055  
  Income taxes paid (refunded), net     (91 )   1,161     578  

Note 15.    Employee Benefit Plans

Stock Based Incentive Compensation

Management Incentive Stock Option Plan

        DeCrane Holding's Board of Directors has approved a management incentive plan which provides for the issuance of options to purchase the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of the Company and its subsidiaries. The Compensation Committee of the Board of Directors of DeCrane Holdings administers the plan and makes a determination as to any options to be granted. The plan provides for the granting of options to purchase a maximum of 356,257 common shares prior to expiration in 2009. The options are granted at fair market value at the date of grant. Substantially all of the options awarded become fully vested and exercisable eight years from the date of grant but vesting can be accelerated based upon future attainment of defined performance criteria. In addition, the Compensation Committee may authorize alternate vesting schedules. The plan also provides for the acceleration of vesting upon the occurrence of certain events, including, under certain circumstances, a change of control.

        During 2000, options to purchase 80,623 shares were granted under the plan, of which 15,828 shares vested immediately. An additional 36,832 shares from the 1999 (inception of the plan) and 2000 grants vested based on the attainment of year 2000 performance criteria. During 2001, no options were granted under the plan and no additional shares from the 1999 and 2000 grants vested based on the

F-36



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

        The per share exercise price of the options granted was equal to the fair market value of the common stock on each of the grant dates and, accordingly, no compensation expense was recognized during the three years ended December 31, 2002.

Incentive Stock Options Granted to Others

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

Summary of All Stock Options

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

 
  Year Ended December 31,
 
  2002
  2001
  2000
 
  Number
of
Shares

  Weighted-
Average
Exercise
Price

  Number
of
Shares

  Weighted-
Average
Exercise
Price

  Number
of
Shares

  Weighted-
Average
Exercise
Price

Options outstanding at beginning of the year   363,353   $ 24.82   386,869   $ 24.86   327,534   $ 23.00
Granted   15,000     27.00         80,623     31.94
Exercised   (9,252 )   23.00            
Canceled   (31,028 )   31.32   (23,516 )   25.55   (21,288 )   23.00
   
       
       
     
Options outstanding at end of the year   338,073     24.37   363,353     24.82   386,869     24.86
   
       
       
     
Options exercisable at end of the year   138,546     23.66   139,051     23.82   124,395     24.07

        As of December 31, 2002, options to purchase 53,544 common shares remained available for grant under the Management Incentive Stock Option Plan. The following table summarizes information about stock options outstanding and stock options exercisable as of December 31, 2002.

 
  All Options Outstanding
   
 
  Number
of Shares
Exercisable
as of
December 31,
2002

 
  Number
of Shares
as of
December 31,
2002

  Weighted-Average
Remaining
Contractual Life

Per share exercise price:            
  $23.00   294,527   6.95 years   130,946
  $27.00   7,500   9.35 years  
  $35.00   36,046   7.93 years   7,600
   
     
    Total   338,073   7.11 years   138,546
   
     

        For compensatory stock options granted to non-employees, the Company recognized compensation expense of $138,000 for the year ended December 31, 2002, $215,000 for the year ended December 31, 2001 and $561,000 for the year ended December 31, 2000.

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        For non-compensatory stock options granted to employees, the Company uses APB Opinion No. 25 to account for stock-based compensation and, accordingly, no compensation expense was recognized during the three years ended December 31, 2002. The Company has adopted the disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148 (Note 1). For the purposes of the pro forma disclosure presented in Note 1, the estimated fair value of the options is amortized over the options' vesting period. The effect of applying SFAS No. 123 may not be representative of the pro forma effect in future years since additional options may be granted during those future years.

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

 
  2002
  2001
  2000
Compensatory options(1):                  
  Risk free interest rates     5.13%     5.35%     5.23%
  Expected dividend yield            
  Expected life     10 years     10 years     10 years
  Expected stock price volatility            

Non-compensatory options granted to employees and directors(2):

 

 

 

 

 

 

 

 

 
  Risk free interest rates             5.5%-6.7%
  Expected dividend yield            
  Expected life             8 years
  Weighted-average fair value of options granted (per share)   $ 10.96   $   $ 9.48

(1)
Using the Black Scholes option valuation model.

(2)
Using the minimum value method.

        The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models, as well as the minimum value method, do not necessarily provide a reliable single measure of its employee stock options. The Company determines the fair value of its common shares as of any given period-end date based on the aggregate enterprise value of DeCrane Holdings. Enterprise value is computed based upon a multiple of Adjusted EBITDA, as reflected in its financial statements, and the multiple is based upon comparable data from other publicly-held companies as well as publicly available information on privately-held companies.

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

Management Stock Purchases

        Beginning in December 1999, DeCrane Holding's Board of Directors has permitted designated executive personnel and other key employees to purchase shares of common stock of DeCrane Holdings, with a portion of the purchase price to be loaned to the participants by DeCrane Aircraft. In December 1999, management purchased 171,295 shares of DeCrane Holdings' common stock for $23.00 per share. The total purchase price was approximately $3,900,000, of which one-half was paid in cash and one-half was loaned to management by DeCrane Aircraft as described in Note 12. In 2000, management purchased an additional 20,707 shares for $23.00 per share in cash pursuant to the plan's

F-38



antidilution provisions. Dilution resulted from the issuance of the DeCrane Holdings common stock warrants in connection with the sale of DeCrane Aircraft's 16% preferred stock.

401(k) Retirement Plan

        Substantially all domestic employees are eligible to participate in one of the 401(k) retirement plans the Company sponsors, which are defined contribution plans satisfying the requirements of the Employee Retirement Income Security Act of 1974. The Company's expense related to its matching contributions to these plans totaled $1,007,000 for the year ended December 31, 2002, $1,767,000 for the year ended December 31, 2001 and $1,988,000 for the year ended December 31, 2000.

Note 16.    Related Party Transactions and Investors' Agreement

Related Party Transactions

        The Company's transactions with related parties included in the consolidated financial statements are summarized in the table below.

 
  Year Ended December 31,
 
  2002
  2001
  2000
 
  (In thousands)

CSFB/DLJ:                  
  Transaction financing fees and expenses   $ 1,627   $ 520   $ 1,703
  Management fees:                  
    Charged to operations during the period     350     300     300
    Payable as of period end     125     375     75

Global Technology Partners, LLC:

 

 

 

 

 

 

 

 

 
  Promissory notes:                  
    Receivable as of period end, including interest     567     542     518

        Each related party is described below.

CSFB/DLJ

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

        DLJ affiliated funds were the initial purchasers of all of DeCrane Aircraft's 16% preferred stock and DeCrane Holdings common stock warrants sold during 2000. Subsequent to the initial purchase, the DLJ affiliated funds sold 20% of the preferred stock and common stock warrants to unaffiliated parties in a private transaction.

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

Global Technology Partners, LLC

        Members of Global Technology own 1.5% of DeCrane Holdings common stock and 0.7% of its preferred stock, all on a fully diluted basis, and had two members on the Company's Board of

F-39



Directors from August 1998 through July 2000. DeCrane Aircraft loaned one-half of the purchase price for such shares to the members at rates ranging between 4.33% and 5.44%. The loans, plus accrued interest, are payable from the proceeds from the sale of the stock and are collateralized by such stock.

Investors' Agreement

        Investors owing 96.7% of DeCrane Holdings' issued and outstanding common stock and common stock warrants and options, all of DeCrane Holdings' preferred stock and all of DeCrane Aircraft's preferred and common stock, have entered into an Amended and Restated Investors' Agreement, dated October 6, 2000, among DeCrane Holdings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities, Putnam Investment Management, Inc. and affiliated funds and entities and all management investors. Investors who own DeCrane Holdings' warrants to purchase 159,794 shares of common stock are not parties to the Investors' Agreement. The agreement provides that:

Note 17.    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

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is a strategic business that develops, manufactures and sells distinct products and services. The groups and a description of their businesses are as follows:

        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.

F-41


        The accounting policies of the groups are substantially the same as those described in the summary of significant accounting policies (Note 1). 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.

Summary of Business by Segment

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Revenues:                    
  Cabin Management   $ 172,832   $ 206,052   $ 174,796  
  Systems Integration     58,051     67,528     62,965  
  Inter-group elimination(1)     (1,042 )   (1,468 )   (1,260 )
   
 
 
 
    Consolidated totals   $ 229,841   $ 272,112   $ 236,501  
   
 
 
 
Revenues from significant customers(2):                    
  Cabin Management   $ 94,014   $ 108,737   $ 107,194  
  Systems Integration     35,388     46,138     31,750  
   
 
 
 
    Consolidated totals   $ 129,402   $ 154,875   $ 138,944  
   
 
 
 
Adjusted EBITDA (as defined):                    
  Cabin Management   $ 32,644   $ 45,554   $ 46,041  
  Systems Integration     18,084     17,152     15,026  
  Corporate(3)     (6,072 )   (7,125 )   (6,969 )
  Inter-group elimination(4)     9     (62 )   198  
   
 
 
 
    Consolidated totals(5)   $ 44,665   $ 55,519   $ 54,296  
   
 
 
 
Depreciation and amortization:                    
  Cabin Management   $ 6,695   $ 14,607   $ 9,477  
  Systems Integration     2,956     4,346     4,682  
  Corporate     961     1,411     927  
   
 
 
 
    Consolidated totals(6)   $ 10,612   $ 20,364   $ 15,086  
   
 
 
 
Total assets (as of period end):                    
  Cabin Management   $ 281,655   $ 311,476   $ 307,241  
  Systems Integration     62,437     76,312     86,602  
  Corporate(7)     44,247     35,627     36,302  
  Inter-group elimination(8)     (113 )   (143 )   (333 )
   
 
 
 
    Continuing operations     388,226     423,272     429,812  
    Discontinued operations (Specialty Avionics)     160,741     222,439     234,442  
   
 
 
 
      Consolidated totals   $ 548,967   $ 645,711   $ 664,254  
   
 
 
 
Capital expenditures:                    
  Cabin Management   $ 3,829   $ 6,579   $ 14,896  
  Systems Integration     478     3,371     1,612  
  Corporate     49     241     3,685  
   
 
 
 
    Consolidated totals(9)   $ 4,356   $ 10,191   $ 20,193  
   
 
 
 

The notes appear on the next page.

F-42


Summary of Business by Geographical Area

 
  Year Ended December 31,
 
  2002
  2001
  2000
 
  (In thousands)

Consolidated net revenues to unaffiliated customers (10)                  
  United States   $ 222,401   $ 268,981   $ 236,283
  Mexico     7,440     3,131     218
   
 
 
    Consolidated totals   $ 229,841   $ 272,112   $ 236,501
   
 
 
Consolidated long-lived assets(11):                  
  United States   $ 34,420   $ 40,369   $ 35,950
  Mexico     1,719     2,291     2,167
   
 
 
    Consolidated totals   $ 36,139   $ 42,660   $ 38,117
   
 
 

Notes

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

(2)
Three customers each accounted for more than 10% of the Company's consolidated revenues during the three years ended December 31, 2002 as shown in the table below. Complete loss of any of these customers could have a significant adverse impact on the results of operations expected in future periods.

 
  Year Ended December 31,
 
  2002
  2001
  2000
 
  (In thousands)

Textron(a)   $ 54,017   $ 55,522   $ 50,352
Bombardier(b)     39,958     55,517     59,974
Boeing(b)     35,427     43,836     28,618
   
 
 
  Consolidated totals   $ 129,402   $ 154,875   $ 138,944
   
 
 
(3)
Reflects the Company's corporate headquarters costs and expenses not allocated to the groups.

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

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(5)
The table below reconciles the financial measure Adjusted EBITDA, as defined, to net income (loss).

 
  Year Ended December 31,
 
 
  2002
  2001
  2000
 
 
  (In thousands)

 
Consolidated Adjusted EBITDA (as defined)   $ 44,665   $ 55,519   $ 54,296  
Restructuring, asset impairment and other related charges     (17,255 )   (25,834 )    
Depreciation and amortization of long-lived assets(6)     (10,612 )   (20,364 )   (15,086 )
Acquisition related charges not capitalized     (1,162 )   (308 )   (1,255 )
Other noncash charges     (138 )   (215 )   (561 )
Interest expense     (25,376 )   (29,645 )   (27,181 )
Other expenses, net     (505 )   (634 )   (277 )
Provision for income (taxes) benefit     3,621     3,933     (4,607 )
Income (loss) from discontinued operations, net of tax     (41,396 )   3,546     (1,727 )
Cumulative effect of change in accounting principle     (17,828 )        
   
 
 
 
  Net income (loss)   $ (65,986 ) $ (14,002 ) $ 3,602  
   
 
 
 
(6)
Reflects depreciation and amortization of long-lived assets, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142), other intangible assets and deferred financing costs, which are classified as a component of interest expense, as follows:

 
  Year Ended December 31,
 
  2002
  2001
  2000
 
  (In thousands)

Depreciation and amortization of long-lived assets   $ 10,612   $ 20,364   $ 15,086
Amortization of deferred financing costs     2,692     2,218     2,258
   
 
 
  Consolidated depreciation and amortization   $ 13,304   $ 22,582   $ 17,344
   
 
 
(7)
Reflects the Company's corporate headquarters assets, excluding investments in and notes receivable from subsidiaries.

(8)
Reflects elimination of inter-group receivables and profits in inventory as of period end.

(9)
Reflects capital expenditures paid in cash. Excludes capital expenditures financed with capital lease obligations of $67,000 for the year ended December 31, 2002, $4,376,000 for the year ended December 31, 2001 and $105,000 for the year ended December 31, 2000.

(10)
Allocated on the basis of the location of the subsidiary originating the sale.

(11)
Allocated on the basis of the location of the subsidiary and consists of the Company's property and equipment. Corporate long-lived assets are included with the United States assets.

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Note 18.    Supplemental Condensed Consolidating Financial Information

        In conjunction with the 12% senior subordinated notes described in Note 10, the following condensed consolidating financial information is presented segregating the Company, 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.

        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:

Balance Sheets

 
  December 31, 2002
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
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             (348,559 )(1)    
Intercompany receivables     276,121     172,389     5,740     (454,250 )(2)    
   
 
 
 
 
 
      Total assets   $ 668,927   $ 682,875   $ 10,937   $ (813,772 ) $ 548,967  
   
 
 
 
 
 
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder's Equity        
Current liabilities:                                
  Current portion of long-term debt   $ 15,337   $ 980   $   $   $ 16,317  
  Other current liabilities     16,786     27,763             44,549  
  Liabilities of discontinued operations         19,954     (26 )       19,928  
   
 
 
 
 
 
    Total current liabilities     32,123     48,697     (26 )       80,794  

Long-term debt, less current portion

 

 

355,568

 

 

9,132

 

 


 

 


 

 

364,700

 
Intercompany payables     178,242     276,008         (454,250 )(2)    
Other long-term liabilities     33,601     840             34,441  
Mandatorily redeemable preferred stock     34,081                 34,081  
   
 
 
 
 
 
Stockholder's equity:                                
  Paid-in capital     118,621     337,592     15,440     (353,032 )(1)   118,621  
  Retained earnings (deficit)     (83,309 )   10,967     (4,477 )   (6,490 )(1)   (83,309 )
  Accumulated other comprehensive loss         (361 )           (361 )
   
 
 
 
 
 
    Total stockholder's equity     35,312     348,198     10,963     (359,522 )   34,951  
   
 
 
 
 
 
      Total liabilities, mandatorily redeemable preferred stock and stockholder's equity   $ 668,927   $ 682,875   $ 10,937   $ (813,772 ) $ 548,967  
   
 
 
 
 
 

F-45


 
  December 31, 2001
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Assets                                
Current assets:                                
  Cash and cash equivalents   $ 9,641   $ (163 ) $   $   $ 9,478  
  Accounts receivable, net         41,899             41,899  
  Inventories         61,433             61,433  
  Other current assets     7,283     637             7,920  
  Assets of discontinued operations         46,947     3,688         50,635  
   
 
 
 
 
 
    Total current assets     16,924     150,753     3,688         171,365  

Property and equipment, net

 

 

3,355

 

 

39,305

 

 


 

 


 

 

42,660

 
Other assets, principally intangibles, net     15,348     244,534             259,882  
Assets of discontinued operations         180,279     12,222     (20,697 )(1)   171,804  
Investments in subsidiaries     400,151             (400,151 )(1)    
Intercompany receivables     259,995     121,030     4,300     (385,325 )(2)    
   
 
 
 
 
 
      Total assets   $ 695,773   $ 735,901   $ 20,210   $ (806,173 ) $ 645,711  
   
 
 
 
 
 
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder's Equity                                
Current liabilities:                                
  Current portion of long-term debt   $ 11,839   $ 1,493   $   $   $ 13,332  
  Other current liabilities     24,849     42,687             67,536  
  Liabilities of discontinued operations         7,728     1,113         8,841  
   
 
 
 
 
 
    Total current liabilities     36,688     51,908     1,113         89,709  

Long-term debt, less current portion

 

 

376,392

 

 

9,544

 

 


 

 


 

 

385,936

 
Intercompany payables     127,222     258,071     32     (385,325 )(2)    
Other long-term liabilities     24,753     988             25,741  
Liabilities of discontinued operations         15,327     (1,632 )       13,695  
Mandatorily redeemable preferred stock     28,240                 28,240  
   
 
 
 
 
 
Stockholder's equity:                                
  Paid-in capital     119,801     336,986     15,440     (352,426 )(1)   119,801  
  Retained earnings (deficit)     (17,323 )   63,165     5,257     (68,422 )(1)   (17,323 )
  Accumulated other comprehensive loss         (88 )           (88 )
   
 
 
 
 
 
    Total stockholder's equity     102,478     400,063     20,697     (420,848 )   102,390  
   
 
 
 
 
 
      Total liabilities, mandatorily redeemable preferred stock and stockholder's equity   $ 695,773   $ 735,901   $ 20,210   $ (806,173 ) $ 645,711  
   
 
 
 
 
 

F-46


Statements of Operations

 
  Year Ended December 31, 2002
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Revenues   $   $ 229,841   $   $   $ 229,841  
Cost of sales         170,485             170,485  
   
 
 
 
 
 
  Gross profit         59,356             59,356  

Selling, general and administrative expenses

 

 

11,206

 

 

29,112

 

 


 

 


 

 

40,318

 
Amortization of intangible assets         3,540             3,540  
Interest expense     20,583     4,793             25,376  
Intercompany charges     (24,309 )   24,309              
Equity in loss of subsidiaries     55,833     9,535         (65,368 )(3)    
Other expenses, net     495     10             505  
Provision for income taxes (benefit)     694     (4,315 )           (3,621 )
Loss from discontinued operations         31,861     9,535         41,396  
Cumulative effect of change in accounting principle     1,484     16,344             17,828  
   
 
 
 
 
 
    Net loss   $ (65,986 ) $ (55,833 ) $ (9,535 ) $ 65,368   $ (65,986 )
   
 
 
 
 
 
 
  Year Ended December 31, 2001
 
(In thousands)

  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Revenues   $   $ 272,112   $   $   $ 272,112  
Cost of sales         196,866             196,866  
   
 
 
 
 
 
  Gross profit         75,246             72,246  

Selling, general and administrative expenses

 

 

11,840

 

 

33,589

 

 


 

 


 

 

45,429

 
Impairment of goodwill         8,583             8,583  
Amortization of intangible assets     202     12,234             12,436  
Interest expense     29,357     288             29,645  
Intercompany charges     (23,815 )   23,815              
Equity in earnings of subsidiaries     (1,259 )   (115 )       1,374 (3)    
Other expenses, net     361     273             634  
Provision for income tax benefit     (2,684 )   (1,249 )           (3,933 )
Income from discontinued operations         (3,431 )   (115 )       (3,546 )
   
 
 
 
 
 
    Net income (loss)   $ (14,002 ) $ 1,259   $ 115   $ (1,374 ) $ (14,002 )
   
 
 
 
 
 
 
  Year Ended December 31, 2000
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Revenues   $   $ 236,501   $   $   $ 236,501  
Cost of sales         155,134             155,134  
   
 
 
 
 
 
  Gross profit         81,367             81,367  

Selling, general and administrative expenses

 

 

10,958

 

 

22,387

 

 


 

 


 

 

33,345

 
Amortization of intangible assets     276     10,352             10,628  
Interest expense     27,527     (346 )           27,181  
Intercompany charges     (20,214 )   20,214              
Equity in earnings of subsidiaries     (8,931 )   (681 )       9,612 (3)    
Other expenses, net     336     (59 )           277  
Provision for income taxes (benefit)     (13,554 )   18,161             4,607  
(Income) loss from discontinued operations         2,408     (681 )       (1,727 )
   
 
 
 
 
 
    Net income   $ 3,602   $ 8,931   $ 681   $ (9,612 ) $ 3,602  
   
 
 
 
 
 

F-47


Statements of Cash Flows

 
  Year Ended December 31, 2002
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Cash flows from operating activities:                                
Net loss   $ (65,986 ) $ (55,833 ) $ (9,535 ) $ 65,368 (3) $ (65,986 )
Noncash adjustments:                                
  Loss from discontinued operations         31,861     9,535         41,396  
  Equity in loss of subsidiaries     55,833     9,535         (65,368 )(3)    
  Other noncash adjustments     5,542     37,846             43,388  
Changes in working capital     28,171     (35,249 )           (7,078 )
   
 
 
 
 
 
    Net cash provided by (used for) operating activities     23,560     (11,840 )           11,720  
   
 
 
 
 
 
Cash flows from investing activities:                                
Cash paid for acquisitions, net of cash acquired     (5,890 )               (5,890 )
Capital expenditures     (49 )   (4,307 )           (4,356 )
   
 
 
 
 
 
    Net cash used for investing activities     (5,939 )   (4,307 )           (10,246 )
   
 
 
 
 
 
Cash flows from financing activities:                                
Senior revolving line of credit repayments, net     (6,000 )               (6,000 )
Capital contribution, net     5,000                 5,000  
Other long-term borrowings         1,145             1,145  
Principal payments on long-term debt, capitalized leases and other debt     (11,895 )   (1,639 )           (13,354 )
Deferred financing costs     (1,656 )               (1,656 )
Other, net     (368 )               (368 )
   
 
 
 
 
 
    Net cash used for financing activities     (14,919 )   (494 )           (15,413 )
   
 
 
 
 
 
Net cash provided by discontinued operations         16,882             16,882  
   
 
 
 
 
 
Net increase in cash and equivalents     2,702     241             2,943  
Cash and equivalents at beginning of period     9,641     (163 )           9,478  
   
 
 
 
 
 
Cash and equivalents at end of period   $ 12,343   $ 78   $   $   $ 12,421  
   
 
 
 
 
 

F-48


 
  Year Ended December 31, 2001
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Cash flows from operating activities:                                
Net income (loss)   $ (14,002 ) $ 1,259   $ 115   $ (1,374 )(3) $ (14,002 )
Noncash adjustments:                                
  Income from discontinued operations         (3,431 )   (115 )       (3,546 )
  Equity in earnings of subsidiaries     (1,259 )   (115 )       1,374 (3)    
  Other noncash adjustments     3,950     40,901             44,851  
Changes in working capital     16,352     (41,722 )           (25,370 )
   
 
 
 
 
 
    Net cash provided by (used for) operating activities     5,041     (3,108 )           1,933  
   
 
 
 
 
 
Cash flows from investing activities:                                
Cash paid for acquisitions, net of cash acquired     (13,529 )               (13,529 )
Capital expenditures and other     (241 )   (9,314 )           (9,555 )
   
 
 
 
 
 
    Net cash used for investing activities     (13,770 )   (9,314 )           (23,084 )
   
 
 
 
 
 
Cash flows from financing activities:                                
Debt financing for acquisitions     20,000                 20,000  
Other borrowings         2,797             2,797  
Principal payments on long-term debt and leases     (8,203 )   (936 )           (9,139 )
Senior revolving line of credit repayments, net     (400 )               (400 )
Deferred financing costs     (580 )   (187 )           (767 )
   
 
 
 
 
 
    Net cash provided by financing activities     10,817     1,674             12,491  
   
 
 
 
 
 
Net cash provided by discontinued operations         10,432             10,432  
   
 
 
 
 
 
Net increase (decrease) in cash and equivalents     2,088     (316 )           1,772  
Cash and equivalents at beginning of period     7,553     153             7,706  
   
 
 
 
 
 
Cash and equivalents at end of period   $ 9,641   $ (163 ) $   $   $ 9,478  
   
 
 
 
 
 

F-49


 
  Year Ended December 31, 2000
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Cash flows from operating activities:                                
Net income   $ 3,602   $ 8,931   $ 681   $ (9,612 )(3) $ 3,602  
Noncash adjustments:                                
  (Income) loss from discontinued operations         2,408     (681 )       1,727  
  Equity in earnings of subsidiaries     (8,931 )   (681 )       9,612 (3)    
  Other noncash adjustments     9,092     14,983             24,075  
Changes in working capital     (5,454 )   (17,550 )           (23,004 )
   
 
 
 
 
 
    Net cash provided by (used for) operating activities     (1,691 )   8,091             6,400  
   
 
 
 
 
 
Cash flows from investing activities:                                
Cash paid for acquisitions, net of cash acquired     (89,838 )   10,398             (79,440 )
Capital expenditures and other     (3,614 )   (16,508 )           (20,122 )
   
 
 
 
 
 
    Net cash used for investing activities     (93,452 )   (6,110 )           (99,562 )
   
 
 
 
 
 
Cash flows from financing activities:                                
Debt financing for acquisitions     55,000                 55,000  
Proceeds from sale of preferred stock and warrants     24,924                 24,924  
Senior revolving line of credit borrowings, net     12,400                 12,400  
Capital contribution     7,902                 7,902  
Other borrowings         3,451             3,451  
Principal payments on long-term debt and leases     (3,419 )   (2,041 )           (5,460 )
Deferred financing costs     (1,900 )               (1,900 )
Other, net     (50 )               (50 )
   
 
 
 
 
 
    Net cash provided by financing activities     94,857     1,410             96,267  
   
 
 
 
 
 
Net cash used for discontinued operations         (3,298 )           (3,298 )
   
 
 
 
 
 
Net increase (decrease) in cash and equivalents     (286 )   93             (193 )
Cash and equivalents at beginning of period     7,839     60             7,899  
   
 
 
 
 
 
Cash and equivalents at end of period   $ 7,553   $ 153   $   $   $ 7,706  
   
 
 
 
 
 

F-50



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 
  June 30,
2003

  December 31,
2002

 
 
  (Unaudited)
   
 
 
  (In thousands, except share data)

 
Assets              
Current assets:              
  Cash and cash equivalents   $ 3,673   $ 12,421  
  Accounts receivable, net     20,726     26,354  
  Inventories     63,125     59,300  
  Deferred income taxes     172     16,430  
  Prepaid expenses and other current assets     1,609     1,724  
  Current assets of discontinued operations         160,741  
   
 
 
    Total current assets     89,305     276,970  

Property and equipment, net

 

 

34,801

 

 

36,139

 
Goodwill     162,430     196,430  
Other assets, principally intangibles, net     36,110     39,428  
   
 
 
      Total assets   $ 322,646   $ 548,967  
   
 
 
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder's Equity (Deficit)              
Current liabilities:              
  Current portion of long-term debt   $ 8,485   $ 16,317  
  Accounts payable     9,847     13,055  
  Accrued liabilities     20,645     31,494  
  Income taxes payable     149      
  Current liabilities of discontinued operations         19,928  
   
 
 
    Total current liabilities     39,126     80,794  

Long-term debt, less current portion

 

 

251,372

 

 

364,700

 
Deferred income taxes     387     27,077  
Other long-term liabilities     11,485     7,364  

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Mandatorily redeemable preferred stock

 

 

37,335

 

 

34,081

 
   
 
 
Stockholder's equity (deficit):              
  Common stock, $.01 par value, 1,000 shares authorized; 100 shares issued and outstanding as of June 30, 2003 and December 31, 2002          
  Additional paid-in capital     117,958     121,212  
  Notes receivable for shares sold     (2,665 )   (2,591 )
  Accumulated deficit     (131,988 )   (83,309 )
  Accumulated other comprehensive loss     (364 )   (361 )
   
 
 
    Total stockholder's equity (deficit)     (17,059 )   34,951  
   
 
 
      Total liabilities, mandatorily redeemable preferred stock and stockholder's equity (deficit)   $ 322,646   $ 548,967  
   
 
 

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

F-51



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

 
  Three Months Ended June 30,
  Six Months Ended June 30,
 
 
  2003
  2002
  2003
  2002
 
 
  (Unaudited)
(In thousands)

 
Revenues   $ 44,113   $ 61,293   $ 86,013   $ 122,112  
Cost of sales     45,383     47,831     76,286     92,212  
   
 
 
 
 
      Gross profit (loss)     (1,270 )   13,462     9,727     29,900  
   
 
 
 
 
Operating expenses:                          
  Selling, general and administrative expenses     6,572     12,088     14,477     24,247  
  Impairment of goodwill     34,000         34,000      
  Amortization of intangible assets     914     874     1,826     1,717  
   
 
 
 
 
    Total operating expenses     41,486     12,962     50,303     25,964  
   
 
 
 
 
      Income (loss) from operations     (42,756 )   500     (40,576 )   3,936  

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Interest expense     6,468     6,134     12,337     12,082  
  Other expenses, net     407     86     746     199  
   
 
 
 
 
Loss from continuing operations before provision for income taxes     (49,631 )   (5,720 )   (53,659 )   (8,345 )
Income tax benefit     9,365     2,050     10,630     3,191  
   
 
 
 
 
Loss from continuing operations     (40,266 )   (3,670 )   (43,029 )   (5,154 )

Discontinued operations and change in accounting principle:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Income (loss) from discontinued operations, net of tax     747     1,738     (5,650 )   (35,702 )
  Cumulative effect of change in accounting principle                 (17,828 )
   
 
 
 
 
Net loss     (39,519 )   (1,932 )   (48,679 )   (58,684 )
Accrued preferred stock dividends     (1,540 )   (1,316 )   (3,020 )   (2,581 )
Preferred stock redemption value accretion     (117 )   (117 )   (234 )   (234 )
   
 
 
 
 
Net loss applicable to common stockholder   $ (41,176 ) $ (3,365 ) $ (51,933 ) $ (61,499 )
   
 
 
 
 

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

F-52



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholder's Equity (Deficit)

 
  Common Stock
   
  Notes
Receivable
For Shares
Sold

   
  Accumulated
Other
Comprehensive
Loss

   
 
 
  Additional
Paid-in
Capital

  Accumulated
Deficit

   
 
 
  Shares
  Amount
  Total
 
 
  (In thousands, except share data)

 
Balance, December 31, 2002   100   $   $ 121,212   $ (2,591 ) $ (83,309 ) $ (361 ) $ 34,951  

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Net loss                   (48,679 )       (48,679 )
  Unrealized loss on interest rate swap contract                       (3 )   (3 )
                                     
 
                                        (48,682 )
                                     
 
Accrued preferred stock dividends           (3,020 )               (3,020 )
Preferred stock redemption value accretion           (234 )               (234 )
Notes receivable interest accrued               (74 )           (74 )
   
 
 
 
 
 
 
 
Balance, June 30, 2003 (Unaudited)   100   $   $ 117,958   $ (2,665 ) $ (131,988 ) $ (364 ) $ (17,059 )
   
 
 
 
 
 
 
 

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

F-53



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 
  Six Months Ended
June 30,

 
 
  2003
  2002
 
 
  (Unaudited)
(In thousands)

 
Cash flows from operating activities:              
  Net loss   $ (48,679 ) $ (58,684 )
  Adjustments to reconcile net income to net cash provided by operating activities:              
    Loss from discontinued operations     5,650     35,702  
    Cumulative effect of change in accounting principle         17,828  
    Depreciation and amortization     6,342     6,743  
    Noncash portion of restructuring, asset impairment and other related charges     43,926     5,910  
    Deferred income taxes     (11,659 )   (1,008 )
    Other, net     295     212  
Changes in assets and liabilities:              
  Accounts receivable     4,207     7,725  
  Inventories     (12,705 )   (1,786 )
  Prepaid expenses and other assets     541     (1,540 )
  Accounts payable     (2,251 )   (1,090 )
  Accrued liabilities     (10,755 )   (14,340 )
  Income taxes payable     385     30  
  Other long-term liabilities     4,761     448  
   
 
 
      Net cash used for operating activities     (19,942 )   (3,850 )
   
 
 
Cash flows from investing activities:              
  Net cash proceeds from sale of Specialty Avionics Group     132,800      
  Capital expenditures     (2,002 )   (2,024 )
  Cash paid for acquisition contingent consideration     (600 )   (5,890 )
   
 
 
      Net cash provided by (used for) investing activities     130,198     (7,914 )
   
 
 
Cash flows from financing activities:              
  Principal payments on term debt, capitalized leases and other debt     (130,448 )   (4,486 )
  Net borrowings under senior revolving credit facility     9,250     8,000  
  Deferred financing costs         (1,663 )
  Other, net         277  
   
 
 
      Net cash provided by (used for) financing activities     (121,198 )   2,128  
   
 
 
Net cash provided by discontinued operations     2,194     8,747  
   
 
 
Net decrease in cash and cash equivalents     (8,748 )   (889 )
Cash and cash equivalents at beginning of period     12,421     9,478  
   
 
 
Cash and cash equivalents at end of period   $ 3,673   $ 8,589  
   
 
 

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

F-54



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Condensed Notes to Unaudited Consolidated Financial Statements

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 this prospectus.

        Reclassifications have been made to prior periods' financial statements to conform to the 2003 presentation, 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 the notes to its audited financial statements. 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
June 30,

  Six Months Ended
June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (Unaudited)
(In thousands)

 
Net loss, as reported   $ (39,519 ) $ (1,932 ) $ (48,679 ) $ (58,684 )
Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects     (94 )   (94 )   (188 )   (188 )
   
 
 
 
 
  Pro forma net loss   $ (39,613 ) $ (2,026 ) $ (48,867 ) $ (58,872 )
   
 
 
 
 

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        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, or 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 Company believes SFAS No. 146 affects the timing of recognizing restructuring costs, as well as the amounts recognized, depending on the nature of the exit, disposal or restructuring activity and the timing of the related estimated cash flows. As required by the provisions of SFAS No. 146, the Company applied its provisions to the restructuring activities initiated in June 2003 (Note 3).

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.

F-56



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 will be required to reclassify its mandatorily redeemable preferred stock as a liability commencing July 1, 2003 and reflect quarterly dividend and redemption value accretion on its 16% preferred stock as a charge against pre-tax income in future periods.

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 recorded 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.

F-57



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

 
  December 31,
2002

 
  (In thousands)

Assets:      
  Current assets   $ 41,614
  Property and equipment, net     15,744
  Other assets, principally intangibles, net     103,383
   
    Total assets     160,741
   
Liabilities:      
  Current liabilities     8,288
  Long-term liabilities     11,640
   
    Total liabilities     19,928
   
      Net assets of the Specialty Avionics Group   $ 140,813
   
 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2003(1)
  2002
  2003(a)
  2002
 
 
  (Unaudited)
(In thousands)

 
Results of Operations:                          
  Revenues   $ 13,125   $ 25,039   $ 36,595   $ 50,383  
   
 
 
 
 
  Operating expenses:                          
    Costs and expenses     11,136     19,369     30,128     38,774  
    Impairment of goodwill             7,500      
    Amortization of intangible assets     321     557     878     1,114  
   
 
 
 
 
      Total operating expenses     11,457     19,926     38,506     39,888  
   
 
 
 
 
  Income (loss) from operations     1,668     5,113     (1,911 )   10,495  
  Other expenses:                          
    Interest expense:                          
      Debt required to be repaid with proceeds from sale     1,146     1,863     2,952     3,674  
    Debt obligations assumed by the buyer     68     198     270     402  
    Other expenses, net     52     153     153     186  
   
 
 
 
 
  Pre-tax income (loss)     402     2,899     (5,286 )   6,233  
  Provision for income taxes     344     1,161     1,053     2,613  
   
 
 
 
 
  Income (loss) before change in accounting principle     58     1,738     (6,339 )   3,620  
  Cumulative effect of change in accounting principle                 (39,322 )
   
 
 
 
 
  Income (loss) from operations     58     1,738     (6,339 )   (35,702 )
  Gain on sale, net of tax     689         689      
   
 
 
 
 
  Net income (loss) from discontinued operations   $ 747   $ 1,738   $ (5,650 ) $ (35,702 )
   
 
 
 
 

F-58


 
  Six Months Ended
June 30,

 
 
  2003(1)
  2002
 
 
  (Unaudited)
(In thousands)

 
Cash Flows Provided By (Used For):              
  Operating activities   $ 3,760   $ 9,441  
  Investing activities     (902 )   (468 )
  Financing activities     (649 )   (180 )
  Net (increase) decrease in cash and cash equivalents     (13 )   (90 )
  Effect of foreign currency translation on cash     (2 )   44  
   
 
 
    Net cash provided by discontinued operations   $ 2,194   $ 8,747  
   
 
 

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

Note 3.    Restructuring, Asset Impairment and Other Related Charges

        During the three months and six months ended June 30, 2003 and 2002, the Company recorded restructuring, asset impairment and other related charges as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2003
  2002
  2003
  2002
 
  (Unaudited)
(In thousands)

Nature of charges:                        
  Seating Product Line and Furniture Manufacturing Facilities Restructuring   $ 13,394   $   $ 13,394   $
  Seat Manufacturing Facilities Restructuring         2,251         6,294
  Asset Realignment Restructuring         5,415         5,415
  Goodwill impairment charges     34,000         41,500    
   
 
 
 
    Total pre-tax charges   $ 47,394   $ 7,666   $ 54,894   $ 11,709
   
 
 
 
Business segment recording the charges:                        
  Cabin Management   $ 47,394   $ 7,666   $ 47,394   $ 11,709
  Systems Integration                
   
 
 
 
    Total continuing operations     47,394     7,666     47,394     11,709
    Discontinued operations (Specialty Avionics)             7,500    
   
 
 
 
    Total pre-tax charges   $ 47,394   $ 7,666   $ 54,894   $ 11,709
   
 
 
 
Charged to operations:                        
  Cost of sales   $ 12,835   $ 4,732   $ 12,835   $ 5,946
  Selling, general and administrative expenses     559     2,934     559     5,763
  Impairment of goodwill     34,000         34,000    
  Discontinued operations (Specialty Avionics)             7,500    
   
 
 
 
    Total pre-tax charges   $ 47,394   $ 7,666   $ 54,894   $ 11,709
   
 
 
 
Components of charges:                        
  Continuing operations:                        
    Noncash charges   $ 43,926   $ 2,765   $ 43,926   $ 5,910
    Cash charges     3,468     4,901     3,468     5,799
   
 
 
 
      Total continuing operations pre-tax charges     47,394     7,666     47,394     11,709
  Discontinued operations (noncash charges)             7,500    
   
 
 
 
    Total pre-tax charges   $ 47,394   $ 7,666   $ 54,894   $ 11,709
   
 
 
 

F-59


Seating Product Line and Furniture Manufacturing Facilities Restructuring

        During the second quarter of fiscal 2003, the Company consolidated its seating product line offerings and adopted a restructuring plan to down-size a furniture manufacturing facility in response to continuing weakness in the business, VIP and head-of-state aircraft market. These actions were designed to reduce engineering, production and inventory carrying costs by supporting fewer product offerings and achieve profitability at the furniture manufacturing facility based on its lower production levels. In connection with these actions, the Company recorded pre-tax charges to operations totaling $13,394,000 during the second quarter of fiscal 2003. The charges are comprised of the following:

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

 
   
  Amounts Incurred
   
 
 
  Total
Charges

  Balance at
June 30,
2003

 
 
  Noncash
  Cash
 
 
  (Unaudited)
(In thousands)

 
Product development costs related to curtailed programs   $ 6,262   $ (6,262 ) $   $  
Lease termination and other related charges     4,436     (591 )       3,845  
Excess and obsolete inventory write-downs     3,073     (3,073 )        
Severance and other compensation costs     183         (183 )    
   
 
 
 
 
  Total     13,954   $ (9,926 ) $ (183 )   3,845  
         
 
       
Present value discount, using an 8% imputed interest cost     (560 )               (560 )
   
             
 
    Total pre-tax charges   $ 13,394               $ 3,285  
   
             
 

        As required by SFAS No. 146, the charges recorded were discounted by $560,000 to initially measure and reflect the liabilities incurred as a result of the restructuring plan at their fair value as of June 30, 2003. The cumulative effect of a changes resulting from revisions to either the timing or the amount of estimated cash flows will be recognized as an adjustment to the liability in the period of the change. Future cash payments will be funded from existing cash balances and internally generated cash from operations.

F-60



Seat Manufacturing Facilities Restructuring

        During the first quarter of fiscal 2002, the Company announced it would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities. This plan was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with this restructuring plan, the Company recorded pre-tax charges to operations totaling $6,294,000 during 2002 for restructuring, asset impairment and other related charges.

        The charges were comprised of the following:

        The components of the amounts incurred were as follows:

 
  Charges Recorded During the
Year Ended December 31, 2002

 
  1st
Quarter

  2nd
Quarter

  Total
 
  (Unaudited)
   
 
  (In thousands)

Inventory and accounts receivable write-downs   $ 1,445   $ 755   $ 2,200
Impairment of long-lived assets     1,700     (326 )   1,374
Severance and other compensation costs     450         450
Lease termination and other related costs     300         300
Other restructuring-related expenses     148     1,822     1,970
   
 
 
  Total pre-tax charges   $ 4,043   $ 2,251   $ 6,294
   
 
 

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

Asset Realignment Restructuring

        During the second quarter of fiscal 2001, the Company's Cabin Management Group adopted a restructuring plan to realign production programs between its manufacturing facilities. In response to the adverse impact on the aerospace industry resulting from the September 11th terrorist attack and its aftermath, as well as the weakening of global economic conditions, the Company announced and

F-61



implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital. This plan included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. Due to the ongoing weakness of the 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:

        The components of the amounts incurred were as follows:

 
  Charges Recorded During the
Year Ended December 31, 2002

 
  2nd
Quarter

  3rd & 4th
Quarters

  Total
 
  (Unaudited)
   
 
  (In thousands)

Impairment of long-lived assets   $ 1,756   $ 801   $ 2,557
Excess inventory write-downs     580     685     1,265
Other restructuring-related expenses     3,079         3,079
   
 
 
  Total pre-tax charges   $ 5,415   $ 1,486   $ 6,901
   
 
 

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

Goodwill Impairment Charges

        As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and the decision to down-size a furniture manufacturing facility, the goodwill associated with the furniture manufacturing reporting unit was tested for recoverability and found to be impaired (Note 5). As a result, $34,000,000 of goodwill associated with the reporting unit was written off and charged to 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.

F-62



Note 4.    Inventories

        Inventories are comprised of the following as of June 30, 2003 and December 31, 2002:

 
  June 30,
2003

  December 31,
2002

 
  (Unaudited)
   
 
  (In thousands)

Raw materials   $ 31,470   $ 28,911
Work-in-process:            
  Direct and indirect manufacturing costs     7,978     6,843
  Program costs, principally engineering     12,746     14,769
Finished goods     1,392     4,773
Costs and estimated earnings in excess of billings on uncompleted contracts     9,539     4,004
   
 
  Total inventories   $ 63,125   $ 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. In connection with the curtailment of several seating product offerings (Note 3), all inventoried costs related these programs, which aggregated $6,262,000, were charged to cost of sales during the three months ended June 30, 2003. In addition, $3,073,000 of excess and obsolete inventory associated with the curtailed seating product offerings and down-sizing of a furniture manufacturing facility was also charged to cost of sales during the three months ended June 30, 2003.

        Total costs and estimated earnings on all uncompleted contracts as of June 30, 2003 and December 31, 2002 are comprised of the following:

 
  June 30,
2003

  December 31,
2002

 
 
  (Unaudited)
   
 
 
  (In thousands)

 
Costs incurred on uncompleted contracts   $ 62,793   $ 49,572  
Estimated earnings recognized     83,133     63,699  
  Total costs and estimated earnings     145,926     113,271  
  Less billings to date     (136,512 )   (109,880 )
   
 
 
    Net   $ 9,414   $ 3,391  
   
 
 
Balance sheet classification:              
  Asset—Costs and estimated earnings in excess of billings   $ 9,539   $ 4,004  
  Liability—Billings in excess of costs and estimated earnings (Note 7)     (125 )   (613 )
   
 
 
    Net   $ 9,414   $ 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.

Note 5.    Goodwill

        Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" and the provisions of SFAS No. 141, "Business Combinations," which were required to be adopted concurrent with the adoption of SFAS No. 142. During 2002, the Company completed the transitional impairment testing of goodwill recorded as of January 1, 2002 as required under SFAS No. 142. Fair value of each reporting unit was determined using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical

F-63



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.

        Changes in the carrying amount of goodwill, by business segment (Note 12), for the six months ended June 30, 2003 are as follows:

 
  Continuing Operations
   
   
  Discontinued
 
 
  Cabin
Management
Group

  Systems
Integration
Group

  Corporate
  Total
  Specialty
Avionics
Group

 
 
  (In thousands)

 
Balance, December 31, 2002   $ 173,934   $ 20,782   $ 1,714   $ 196,430   $ 80,722  
Impairment charges     (34,000 )           (34,000 )   (7,500 )
Sale of Specialty Avionics Group                     (73,222 )
   
 
 
 
 
 
Balance, June 30, 2003 (unaudited)   $ 139,934   $ 20,782   $ 1,714   $ 162,430   $  
   
 
 
 
 
 

        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. 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.

        As required by SFAS No. 142, the Company tests goodwill for impairment annually, on October 31st of each year, or when events or changes in circumstances indicate the carrying amount may not be recoverable. The goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related reporting units that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment.

        As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and the Company's decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, the Company determined that it should reevaluate the carrying value of its goodwill prior to the annual October 31st testing date. Accordingly, the Company performed a step-one test of goodwill associated with its furniture manufacturing reporting unit for recoverability and found the goodwill to be impaired. As a result, the Company recorded a pre-tax charge to operations of $34,000,000 during the three months ended June 30, 2003 based on a comparison of the estimated book value of the net assets of the reporting unit to its fair value. The charge was primarily a result of a decrease in fair value caused by using lower cash flow forecasts based on the most recently reduced industry estimates of aircraft deliveries resulting from overall industry weakness. The amount recorded is an estimate and may be revised during the third quarter of fiscal 2003 upon completion of step two of the goodwill impairment model, which measures the amount of impairment.

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Note 6.    Other Assets

        Other assets are comprised of the following as of June 30, 2003 and December 31, 2002:

 
  June 30,
2003

  December 31,
2002

 
  (Unaudited)
   
 
  (In thousands)

Identifiable intangible assets with finite useful lives   $ 27,281   $ 29,105
Deferred financing costs     7,793     9,168
Other non-amortizable assets     1,036     1,155
   
 
  Total other assets   $ 36,110   $ 39,428
   
 

Identifiable Intangible Assets with Finite Useful Lives

        Identifiable intangible assets with finite useful lives are comprised of the following as of June 30, 2003 and December 31, 2002:

 
  June 30, 2003 (Unaudited)
  December 31, 2002
 
  Cost
  Accumulated
Amortization

  Net
  Cost
  Accumulated
Amortization

  Net
 
  (In thousands)

FAA certifications   $ 22,272   $ (7,636 ) $ 14,636   $ 22,272   $ (4,738 ) $ 17,534
Customer contracts     8,390     (2,751 )   5,639     8,390     (4,695 )   3,695
Engineering drawings     7,645     (2,436 )   5,209     7,645     (1,776 )   5,869
Other identifiable intangibles     2,955     (1,158 )   1,797     2,955     (948 )   2,007
   
 
 
 
 
 
  Total identifiable intangibles   $ 41,262   $ (13,981 ) $ 27,281   $ 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 June 30, 2003 and December 31, 2002:

 
  June 30,
2003

  December 31,
2002

 
  (Unaudited)
   
 
  (In thousands)

Salaries, wages, compensated absences and payroll related taxes   $ 8,794   $ 9,212
Customer advances and deposits     2,103     4,662
Accrued interest     4,596     7,465
Billings in excess of costs and estimated earnings on uncompleted contracts     125     613
Acquisition related contingent consideration         600
Other accrued liabilities     5,027     8,942
   
 
  Total accrued liabilities   $ 20,645   $ 31,494
   
 

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Note 8.    Long-Term Debt

        Long-term debt includes the following amounts as of June 30, 2003 and December 31, 2002:

 
  June 30,
2003

  December 31,
2002

 
 
  (Unaudited)
 
 
  (In thousands)

 
Senior credit facility:              
  Term loans   $ 134,925   $ 264,200  
  Revolving line of credit     15,250     6,000  
12% senior subordinated notes     100,000     100,000  
Capital lease obligations and term debt financing, secured by property and equipment     9,682     10,331  
Other indebtedness         486  
   
 
 
  Total long-term debt     259,857     381,017  
  Less current portion     (8,485 )   (16,317 )
   
 
 
    Long-term debt, less current portion   $ 251,372   $ 364,700  
   
 
 

        During 2003, the Company amended its senior credit facility to permit the sale of its Specialty Avionics Group. 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), 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 up to $20,000,000 of the Company's 12% senior subordinated notes with the proceeds from the sale of junior securities.

F-66



Note 9.    Income Taxes

        The components of income (loss) before income taxes and cumulative effect of change in accounting principle and the provisions for income tax benefit are as follows:

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (Unaudited)
 
 
  (In thousands)

 
Pre-tax income (loss) reported by:                          
  Continuing operations   $ (49,631 ) $ (5,720 ) $ (53,659 ) $ (8,345 )
  Discontinued operations     402     2,899     (5,286 )   6,233  
   
 
 
 
 
    Consolidated pre-tax loss   $ (49,229 ) $ (2,821 ) $ (58,945 ) $ (2,112 )
   
 
 
 
 

Total provision for income taxes (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 
  Income tax benefit based on pre-tax loss   $ (22,077 ) $ (889 ) $ (22,633 ) $ (578 )
  Net deferred tax assets valuation allowance     13,056         13,056      
   
 
 
 
 
    Net income tax benefit   $ (9,021 ) $ (889 ) $ (9,577 ) $ (578 )
   
 
 
 
 

Allocation of total provision:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Continuing operations   $ (9,365 ) $ (2,050 ) $ (10,630 ) $ (3,191 )
  Discontinued operations     344     1,161     1,053     2,613  
   
 
 
 
 
    Net provision for income tax benefit   $ (9,021 ) $ (889 ) $ (9,577 ) $ (578 )
   
 
 
 
 

        For the three months and six months ended June 30, 2003 and 2002, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and the non-deductible portion of goodwill impairment charges.

        As of June 30, 2003, the Company had net deferred tax assets of $12,841,000, prior to recording the valuation allowance in June 2003, as opposed to net deferred tax liabilities in prior periods. The change to a net asset position was primarily caused by the $34,000,000 goodwill impairment charge recorded during the second quarter of fiscal 2003. SFAS No. 109, "Accounting for Income Taxes," requires the recognition of a deferred tax asset for the future income tax benefit of the goodwill deductions that will be taken for income tax purposes (i.e. the goodwill that has been written off in the financial statements for book purposes will continue to be amortized and deducted for tax purposes and accordingly represents a new deferred tax asset).

        As required by SFAS No. 109, the Company evaluated its deferred assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization. Since there is no loss carry back potential and the Company does not have any tax planning strategies to assure recoverability, the only possibility for recovery of the net deferred assets is future taxable income. Since there have been prior year losses, the Company believes it was not prudent to rely on future income as the means to support the carrying value of the net assets. As a result of the Company's evaluation, it determined that recovery was not likely in certain taxing jurisdictions and applied its judgment in estimating the amount of valuation allowance necessary under the circumstances to reduce the assets carrying value to realizable value. Accordingly, the Company recorded the $13,056,000 valuation allowance, eliminating the net deferred asset, as of June 30, 2003.

        For periods prior to June 30, 2003, the Company had net deferred tax liabilities ($9,002,000 as of March 31, 2003 and $10,647,000 as of December 31, 2002). The full realization of the deferred assets

F-67



was achieved through the reversal of the deferred tax liabilities in future periods. As a result, a valuation allowance was not required for periods prior to June 30, 2003.

        Deferred tax assets and liabilities are comprised of the following as of June 30, 2003 and December 31, 2002:

 
  June 30,
2003

  December 31,
2002

 
 
  (Unaudited)
 
 
  (In thousands)

 
Gross deferred tax assets:              
  Loss carryforwards     14,768     12,173  
  Accrued liabilities     7,081     6,797  
  Inventory     3,389     4,252  
  Other     848     832  
   
 
 
    Gross deferred tax assets     26,086     24,054  
   
 
 

Gross deferred tax (liabilities):

 

 

 

 

 

 

 
  Intangible assets   $ (9,300 ) $ (31,267 )
  Program costs     (3,707 )   (6,168 )
  Property and equipment     (238 )   (3,119 )
  Other         (56 )
   
 
 
    Gross deferred tax (liabilities)     (13,245 )   (40,610 )
   
 
 

Net deferred assets (liabilities) before valuation allowance

 

 

12,841

 

 

(16,556

)
Net deferred tax asset valuation allowance     (13,056 )    
   
 
 
    Net deferred tax liability   $ (215 ) $ (16,556 )
   
 
 

Balance sheet classification:

 

 

 

 

 

 

 
  Continuing operations:              
    Current deferred tax asset   $ 172   $ 16,430  
    Noncurrent deferred tax (liability)     (387 )   (27,077 )
   
 
 
      Net continuing operations     (215 )   (10,647 )
   
 
 

Discontinued operations:

 

 

 

 

 

 

 
  Current deferred tax asset         6,201  
  Noncurrent deferred tax (liability)         (12,110 )
   
 
 
    Net discontinued operations         (5,909 )
   
 
 
      Net deferred tax (liability)   $ (215 ) $ (16,556 )
   
 
 

F-68


Note 10.    Capital Structure

Mandatorily Redeemable Preferred Stock

        The table below summarizes the increase in mandatorily redeemable preferred stock during the six months ended June 30, 2003.

 
  Number
of
Shares

  Mandatory
Redemption
Value

  Unamortized
Issuance
Discount

  Net
Book
Value

 
  (In thousands, except share and per share data)

Balance, December 31, 2002   370,061   $ 37,006   $ (2,925 ) $ 34,081
Accrued dividends and redemption value accretion   14,803     3,020     234     3,254
   
 
 
 
Balance, June 30, 2003 (Unaudited)   384,864   $ 40,026   $ (2,691 ) $ 37,335
   
 
 
 

Per share liquidation value as of June 30, 2003 (Unaudited)

 

 

 

$

100.00

 

 

 

 

 

 
   
 
 
 

        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, the Company 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, the Company has elected to issue additional shares in lieu of cash dividends.

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.

        On September 22, 2003, the Company and its insurers entered into an agreement with Boeing, Swissair and each of their respective insurers, in which the Company received a release from those parties and an indemnification by Boeing and Swissair's insurers against claims asserted on behalf of passengers for compensatory damage and by others for contribution and/or indemnity claims. Company management believes the agreement adequately protects the Company from all existing litigation pending against the Company arising from this catastrophic incident. Punitive damages are not subject to the indemnity; however, while some of the passenger actions originally asserted punitive damages, by virtue of a court order, claims for punitive damages may not be prosecuted.

        The aforementioned agreement did not result in the Company incurring a loss and, accordingly, no charge to operations was required.

        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

F-69



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.

Funding of DeCrane Holdings Preferred Stock Obligations

        The Company is a wholly owned subsidiary of DeCrane Holdings whose capital structure also includes mandatorily redeemable preferred stock. Since the Company is DeCrane Holdings' only operating subsidiary and source of cash, the Company may be required to fund DeCrane Holdings' preferred stock dividend and redemption obligations in the future.

        DeCrane Holdings' preferred stock dividends are payable quarterly at a rate of 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. On or after September 30, 2005, preferred stock dividends are required to be paid in cash, if declared, and the preferred stock is mandatorily redeemable on September 30, 2009. The DeCrane Holdings preferred stock has a total redemption value of $66,654,000 as of June 30, 2003, including accumulated dividends.

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:

        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

F-70



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
June 30,

  Six Months Ended
June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (Unaudited)
(In thousands)

 
Revenues:                          
  Cabin Management   $ 29,635   $ 48,232   $ 60,255   $ 94,099  
  Systems Integration     14,718     13,223     26,850     28,300  
  Inter-group elimination (1)     (240 )   (162 )   (1,092 )   (287 )
   
 
 
 
 
    Consolidated totals   $ 44,113   $ 61,293   $ 86,013   $ 122,112  
   
 
 
 
 

Adjusted EBITDA (as defined):

 

 

 

 

 

 

 

 

 

 

 

 

 
  Cabin Management   $ 4,310   $ 9,042   $ 8,860   $ 16,503  
  Systems Integration     4,180     4,096     6,337     8,392  
  Corporate (2)     (1,395 )   (1,629 )   (3,507 )   (3,187 )
  Inter-group elimination (3)     2     (111 )   112      
   
 
 
 
 
    Consolidated totals (4)   $ 7,097   $ 11,398   $ 11,802   $ 21,708  
   
 
 
 
 

F-71


       

 
  June 30,
2003

  December 31,
2002

 
 
  (Unaudited)
   
 
 
  (In thousands)

 
Total assets (as of period end):              
  Cabin Management   $ 236,941   $ 281,655  
  Systems Integration     69,049     62,437  
  Corporate (5)     17,091     44,247  
  Inter-group elimination (6)     (435 )   (113 )
   
 
 
    Continuing operations     322,646     388,226  
    Discontinued operations (Specialty Avionics)         160,741  
   
 
 
      Consolidated totals   $ 322,646   $ 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.

F-72


(4)
The table below reconciles the financial measure Adjusted EBITDA, as defined, to net loss.

 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
 
  2003
  2002
  2003
  2002
 
 
  (Unaudited)
(In thousands)

 
Consolidated Adjusted EBITDA (as defined)   $ 7,097   $ 11,398   $ 11,802   $ 21,708  
Restructuring, asset impairment and                          
other related charges     (47,394 )   (7,666 )   (47,394 )   (11,709 )
Depreciation and amortization of                          
long-lived assets (a)     (2,451 )   (2,680 )   (4,967 )   (5,447 )
Acquisition related charges not capitalized     (8 )   (468 )   (17 )   (478 )
Other noncash charges         (84 )       (138 )
Interest expense     (6,468 )   (6,134 )   (12,337 )   (12,082 )
Other expenses, net     (407 )   (86 )   (746 )   (199 )
Income tax benefit     9,365     2,050     10,630     3,191  
Income (loss) from discontinued operations     747     1,738     (5,650 )   (35,702 )
Cumulative effect of change in accounting principle                 (17,828 )
   
 
 
 
 
  Net loss   $ (39,519 ) $ (1,932 ) $ (48,679 ) $ (58,684 )
   
 
 
 
 


 
  Three Months Ended
June 30,

  Six Months Ended
June 30,

 
  2003
  2002
  2003
  2002
 
  (Unaudited)
(In thousands)

Depreciation and amortization of long-lived assets   $ 2,451   $ 2,680   $ 4,967   $ 5,447
Amortization of deferred financing costs     680     707     1,375     1,296
   
 
 
 
  Consolidated depreciation and amortization   $ 3,131   $ 3,387   $ 6,342   $ 6,743
   
 
 
 

(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 the Company, 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.

        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

F-73



the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following:

Balance Sheets

 
  June 30, 2003 (Unaudited)
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Assets                                
Current assets:                                
  Cash and cash equivalents   $ 3,571   $ 102   $   $   $ 3,673  
  Accounts receivable, net         20,726             20,726  
  Inventories         63,125             63,125  
  Other current assets     1,190     591             1,781  
   
 
 
 
 
 
    Total current assets     4,761     84,544             89,305  

Property and equipment, net

 

 

2,105

 

 

32,696

 

 


 

 


 

 

34,801

 
Goodwill     10,224     152,206                 162,430  
Other assets, principally intangibles, net         36,110             36,110  
Investments in subsidiaries     289,218             (289,218 )(1)    
Intercompany receivables     56,259     74,846         (131,105 )(2)    
   
 
 
 
 
 
      Total assets   $ 362,567   $ 380,402   $   $ (420,323 ) $ 322,646  
   
 
 
 
 
 

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder's Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Current liabilities:                                
  Current portion of long-term debt   $ 7,336   $ 1,149   $   $   $ 8,485  
  Other current liabilities     10,477     20,164             30,641  
   
 
 
 
 
 
    Total current liabilities     17,813     21,313             39,126  

Long-term debt, less current portion

 

 

242,936

 

 

8,436

 

 


 

 


 

 

251,372

 
Intercompany payables     74,846     56,259         (131,105 )(2)    
Other long-term liabilities     6,332     5,540             11,872  

Mandatorily redeemable preferred stock

 

 

37,335

 

 


 

 


 

 


 

 

37,335

 
   
 
 
 
 
 

Stockholder's equity (deficit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Paid-in capital     115,293     337,592         (337,592 )(1)   115,293  
  Retained earnings deficit     (131,988 )   (48,374 )       48,374 (1)   (131,988 )
  Accumulated other comprehensive loss         (364 )           (364 )
   
 
 
 
 
 
    Total stockholder's equity (deficit)     (16,695 )   288,854         (289,218 )   (17,059 )
   
 
 
 
 
 
      Total liabilities, mandatorily redeemable preferred stock and stockholder's equity (deficit)   $ 362,567   $ 380,402   $   $ (420,323 ) $ 322,646  
   
 
 
 
 
 

F-74


 
  December 31, 2002
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
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             (348,559 )(1)    
Intercompany receivables     276,121     172,389     5,740     (454,250 )(2)    
   
 
 
 
 
 
      Total assets   $ 668,927   $ 682,875   $ 10,937   $ (813,772 ) $ 548,967  
   
 
 
 
 
 

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder's Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Long-term debt, less current portion

 

 

355,568

 

 

9,132

 

 


 

 


 

 

364,700

 
Intercompany payables     178,242     276,008         (454,250 )(2)    
Other long-term liabilities     33,601     840             34,441  

Mandatorily redeemable preferred stock

 

 

34,081

 

 


 

 


 

 


 

 

34,081

 
   
 
 
 
 
 

Stockholder's equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Paid-in capital     118,621     337,592     15,440     (353,032 )(1)   118,621  
  Retained earnings (deficit)     (83,309 )   10,967     (4,477 )   (6,490 )(1)   (83,309 )
  Accumulated other comprehensive loss         (361 )           (361 )
   
 
 
 
 
 
    Total stockholder's equity     35,312     348,198     10,963     (359,522 )   34,951  
   
 
 
 
 
 
      Total liabilities, mandatorily redeemable preferred stock and stockholder's equity   $ 668,927   $ 682,875   $ 10,937   $ (813,772 ) $ 548,967  
   
 
 
 
 
 

F-75


Statements of Operations

 
  Six Months Ended June 30, 2003 (Unaudited)
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Revenues   $   $ 86,013   $   $   $ 86,013  
Cost of sales         76,286             76,286  
   
 
 
 
 
 
  Gross profit         9,727             9,727  
Selling, general and administrative expenses     4,904     9,573             14,477  
Impairment of goodwill         34,000             34,000  
Amortization of intangible assets         1,826             1,826  
Interest expense     12,116     221             12,337  
Intercompany charges     (11,575 )   11,575              
Equity in loss of subsidiaries     34,615     218         (34,833 )(3)    
Other expenses, net     586     160             746  
Provision for income taxes (benefit)     8,033     (18,663 )           (10,630 )
Loss from discontinued operations         5,432     218         5,650  
   
 
 
 
 
 
    Net loss   $ (48,679 ) $ (34,615 ) $ (218 ) $ 34,833   $ (48,679 )
   
 
 
 
 
 

       

 
  Six Months Ended June 30, 2002 (Unaudited)
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Revenues   $   $ 122,112   $   $   $ 122,112  
Cost of sales         92,212             92,212  
   
 
 
 
 
 
  Gross profit         29,900             29,900  
Selling, general and administrative expenses     5,788     18,459             24,247  
Amortization of intangible assets         1,717             1,717  
Interest expense     12,008     74             12,082  
Intercompany charges     (14,310 )   14,310              
Equity in loss of subsidiaries     54,287     9,510         (63,797 )(3)   (3 )
Other expenses, net     174     25             199  
Provision for income tax benefit     (747 )   (2,444 )           (3,191 )
Loss from discontinued operations         26,192     9,510         35,702  
Cumulative effect of change in accounting principle     1,484     16,344             17,828  
   
 
 
 
 
 
    Net loss   $ (58,684 ) $ (54,287 ) $ (9,510 ) $ 63,797   $ (58,684 )
   
 
 
 
 
 

F-76


Statements of Cash Flows

 
  Six Months Ended June 30, 2003 (Unaudited)
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Cash flows from operating activities:                                
Net loss   $ (48,679 ) $ (34,615 ) $ (218 ) $ 34,833 (3) $ (48,679 )
Loss from discontinued operations         5,432     218         5,650  
Noncash adjustments:                                
  Equity in loss of subsidiaries     34,615     218         (34,833 )(3)    
  Other noncash adjustments     (21,973 )   61,060             39,087  
Changes in working capital     15,765     (31,765 )           (16,000 )
   
 
 
 
 
 
    Net cash used for operating activities     (20,272 )   330             (19,942 )
   
 
 
 
 
 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net proceeds from sale of Specialty Avionics Group     132,800                 132,800  
Capital expenditures     (26 )   (1,976 )           (2,002 )
Cash paid for acquisitions     (600 )               (600 )
   
 
 
 
 
 
    Net cash provided by (used for) investing activities     132,174     (1,976 )           130,198  
   
 
 
 
 
 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Principal payments on long-term debt, leases and other debt     (129,924 )   (524 )           (130,448 )
Net senior revolving credit facility borrowings     9,250                 9,250  
   
 
 
 
 
 
    Net cash used for financing activities     (120,674 )   (524 )           (121,198 )
   
 
 
 
 
 

Net cash provided by discontinued operations

 

 


 

 

2,194

 

 


 

 


 

 

2,194

 
   
 
 
 
 
 

Net increase (decrease) in cash and equivalents

 

 

(8,772

)

 

24

 

 


 

 


 

 

(8,748

)
Cash and equivalents at beginning of period     12,343     78             12,421  
   
 
 
 
 
 
Cash and equivalents at end of period   $ 3,571   $ 102   $   $   $ 3,673  
   
 
 
 
 
 

F-77


 
  Six Months Ended June 30, 2002 (Unaudited)
 
 
  Issuer
  Guarantor
Subsidiaries

  Non-Guarantor
Subsidiaries

  Consolidating
Adjustments

  Consolidated
Total

 
 
  (In thousands)

 
Cash flows from operating activities:                                
Net loss   $ (58,684 ) $ (54,287 ) $ (9,510 ) $ 63,797 (3) $ (58,684 )
Loss from discontinued operations         26,192     9,510         35,702  
Noncash adjustments:                                
  Equity in loss of subsidiaries     54,287     9,510         (63,797 )(3)    
  Other noncash adjustments     2,318     27,367             29,685  
Changes in working capital     3,664     (14,217 )           (10,553 )
   
 
 
 
 
 
    Net cash provided by (used for) operating activities     1,585     (5,435 )           (3,850 )
   
 
 
 
 
 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Cash paid for acquisitions     (5,890 )               (5,890 )
Capital expenditures     (46 )   (1,978 )           (2,024 )
   
 
 
 
 
 
    Net cash used for investing activities     (5,936 )   (1,978 )           (7,914 )
   
 
 
 
 
 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net senior revolving credit facility borrowings     8,000                 8,000  
Principal payments on long-term debt and leases     (2,863 )   (1,623 )           (4,486 )
Deferred financing costs     (1,663 )               (1,663 )
Other, net     (268 )   545             277  
   
 
 
 
 
 
    Net cash provided by (used for) financing activities     3,206     (1,078 )           2,128  
   
 
 
 
 
 

Net cash provided by discontinued operations

 

 


 

 

8,747

 

 


 

 


 

 

8,747

 
   
 
 
 
 
 

Net increase (decrease) in cash and equivalents

 

 

(1,145

)

 

256

 

 


 

 


 

 

(889

)
Cash and equivalents at beginning of period     9,641     (163 )           9,478  
   
 
 
 
 
 
Cash and equivalents at end of period   $ 8,496   $ 93   $   $   $ 8,589  
   
 
 
 
 
 

F-78



PART II—INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.    OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

        The following table sets forth the estimated expenses, all of which are to be borne by the Registrant, in connection with the sale and distribution of the securities being registered, other than underwriting discounts and commissions. All the amounts shown are estimates, except the SEC registration fee.

Item

  Amount
SEC registration fee(1)   $
Legal fees and expenses     75,000
Accounting fees and expenses     50,000
Printing and engraving expenses     20,000
Trustee fees     3,000
Miscellaneous expenses     2,000
   
  Total   $ 150,000
   

(1)
Pursuant to Rule 457(q), no filing fee is required.


ITEM 14.    INDEMNIFICATION OF DIRECTORS AND OFFICERS

        The certificate of incorporation of DeCrane Aircraft contains a provision eliminating or limiting director liability to the company and its stockholders for monetary damages arising from acts or omissions in the director's capacity as a director. Those provisions may not, however, eliminate or limit the personal liability of a director:

        As a result of this provision, the ability of the company, or a stockholder thereof, to successfully prosecute an action against a director for breach of his duty of care is limited. However, the provision does not affect the availability of equitable remedies such as an injunction based upon a director's breach of his duty of care.

        In addition, the certificate of incorporation and bylaws for DeCrane Aircraft provides for mandatory indemnification rights, subject to limited exceptions, to any director or executive officer of the company who (by reason of the fact that he or she is a director or officer) is involved in a legal proceeding of any nature. Such indemnification rights include reimbursement for expenses incurred by such director or officer in advance of the final disposition of such proceeding in accordance with the applicable corporate law.

        DeCrane Aircraft also maintains directors' and officers' liability insurance.

        The Registration Rights Agreement filed as Exhibit 4.2 to this Registration Statement provides for indemnification of directors and officers of DeCrane Aircraft by CSFB against certain liabilities.

II-1




ITEM 15.    RECENT SALES OF UNREGISTERED SECURITIES

        On June 30, 2000, the Registrant sold 250,000 units consisting of 250,000 shares of its 16% mandatorily redeemable preferred stock and warrants to purchase 0.55728 shares of DeCrane Holdings Co. common stock (exercisable at $0.01 per share) to investors affiliated with DLJ Merchant Banking Partners II, L.P. as listed in the table below for $100.00 dollars per unit for a total selling price of $25.0 million in cash. No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder.

 
  Number of
   
 
  16%
Preferred
Stock

  $.01
Common
Stock
Warrants

  Total
Selling
Price

 
  (In thousands, except share data)

DLJ Investment Partners II, L.P.   142,064   79,191   $ 14,206
DLJ Investment Partners, L.P.   63,140   35,196     6,314
DLJ ESC II, L.P.   31,357   17,479     3,136
DLJ Investment Funding II, Inc.   13,439   7,491     1,344
   
 
 
  Total   250,000   139,357   $ 25,000
   
 
 


ITEM 16.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
Exhibits

        The list of exhibits is incorporated herein by reference to the Exhibit Index following the signature pages.

(b)
Financial Statement Schedules


Report of Independent Accountants on Financial Statement Schedule

To the Board of Directors and Stockholder of
DeCrane Aircraft Holdings, Inc.

        Our audits of the consolidated financial statements referred to in our report dated February 18, 2003, except for Notes 2 and 10, which are as of May 23, 2003, also included an audit of the financial statement schedule listed in Item 16(b) of this Registration Statement on Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PRICEWATERHOUSECOOPERS LLP
Los Angeles, California

May 23, 2003

II-2



DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts

 
  Balance at
Beginning of
Period

  Charged to
Cost and
Expense

  Charged to
Other
Accounts

  Deductions
  Balance at
End of
Period

 
  (In thousands)

Year Ended December 31, 2002(1)                              
Allowance for doubtful accounts   $ 2,108   $ 843   $   $ (1,746 ) $ 1,205
Reserve for excess, slow moving and potentially obsolete material(2)     2,986     3,553         (2,780 )   3,759

Year Ended December 31, 2001(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Allowance for doubtful accounts   $ 1,536   $ 2,001   $   $ (1,429 ) $ 2,108
Reserve for excess, slow moving and potentially obsolete material(3)     3,213     731         (958 )   2,986

Year Ended December 31, 2000(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Allowance for doubtful accounts   $ 1,713   $ 7   $ 223 (4) $ (407 ) $ 1,536
Reserve for excess, slow moving and potentially obsolete material     5,229     631     215 (4)   (2,862 )   3,213

(1)
Excludes amounts attributable to the Specialty Avionics Group which is classified as discontinued operation.

(2)
Excludes $7,241,000 of other asset impairment related charges resulting from the 2002 and 2001 restructuring programs.

(3)
Excludes $12,155,000 of inventory and capitalized program cost write-offs resulting from the 2001 restructuring program.

(4)
Attributable to companies acquired. Reflects historical amounts used to determine the fair value of assets acquired.

II-3



ITEM 17.    UNDERTAKINGS

        The undersigned Registrant hereby undertakes:

  (a) (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

 

 

(i)

 

To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

 

 

(ii)

 

To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement;

 

 

 

(iii)

 

To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;"

 

 

(2)

That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

 

(3)

To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(b)

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-4



SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of El Segundo, State of California, on the 6th day of October, 2003.

    DeCrane Aircraft Holdings, Inc.

 

 

By:

/s/  
RICHARD J. KAPLAN      
Richard J. Kaplan
Senior Vice President, Chief Financial Officer, Secretary and Treasurer

        Pursuant to the requirements of the Securities Act of 1933, this amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated.

By: *
Thompson Dean
Chairman of the Board of Directors
  By: *
R. Jack DeCrane
Director and Principal Executive Officer

By:

/s/  
RICHARD J. KAPLAN      
Richard J. Kaplan
Director and Principal Accounting and Financial Officer

 

By:

*

James A. Quella
Director

By:

*

Susan C. Schnabel
Director

 

By:

*

Albert E. Suter
Director

*By:

/s/  
RICHARD J. KAPLAN      
Richard J. Kaplan
Attorney-in-Fact

 

 

 

Date:    October 6, 2003

 

 

 

II-5



SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, each of the Registrants listed below has duly caused this amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of El Segundo, State of California, on the 6th day of October, 2003.

    Audio International, Inc.
Carl F. Booth & Co., LLC
Custom Woodwork & Plastics, LLC
DAH-IP Holdings, Inc.
DAH-IP Infinity, Inc.
DeCrane Aircraft Furniture Co., L.P.
DeCrane Aircraft Seating Company, Inc.
DeCrane Cabin Interiors, LLC
Hollingsead International, Inc.
PATS, Inc.
PCI Newco, Inc.
PPI Holdings, Inc.
Precision Pattern, Inc.
The Infinity Partners, Ltd.

 

 

By:

/s/  
RICHARD J. KAPLAN      
Richard J. Kaplan
Chief Financial Officer and Secretary

        Pursuant to the requirements of the Securities Act of 1933, this amendment to the Registration Statement has been signed by the following persons in the capacities and on the date indicated.

By: *
R. Jack DeCrane
Director and Principal Executive Officer of each of each of the above-mentioned Registrants
  By: /s/  RICHARD J. KAPLAN      
Richard J. Kaplan
Director and Principal Accounting and Financial Officer of each of the above-mentioned Registrants

*By:

/s/  
RICHARD J. KAPLAN      
Richard J. Kaplan
Attorney-in-Fact

 

 

 

Date:    October 6, 2003

 

 

 

II-6



EXHIBIT INDEX

Exhibit
Number

  Filing
Reference

  Exhibit Description
2.1   (18)   Stock Purchase Agreement dated as of March 14, 2003 among Wings Holdings, Inc. and DeCrane Aircraft Holdings, Inc. and DeCrane Holdings Co. relating to the purchase and sale of 100% of the Common Stock of Avtech Corporation and Tri-Star Electronics International, Inc. and 100% of the Membership Interest of Aerospace Display Systems, LLC
3.1.1   (1)   Certificate of Incorporation of DeCrane Aircraft Holdings, Inc.
3.1.1.1   (15)   Certificate of Amendment of Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. dated October 17, 2001
3.1.2   (22)   Bylaws of DeCrane Aircraft Holdings, Inc. as amended on July 9, 2003
3.3.1   (1)   Articles of Incorporation of Audio International, Inc.
3.3.2   (1)   Amended & Restated Bylaws of Audio International, Inc.
3.4.1   (1)   Articles of Incorporation of Hollingsead International, Inc.
3.4.2   (1)   Bylaws of Hollingsead International Inc.
3.5.1   (1)   Articles of Incorporation of PATS, Inc.
3.5.1.1   (1)   Amendment to Articles of Incorporation of PATS, Inc.
3.5.2   (1)   Bylaws of PATS, Inc.
3.5.2.1   (1)   Amendment to Bylaws of PATS, Inc.
3.6.1   (3)   Articles of Incorporation of PPI Holdings, Inc.
3.6.2   (3)   Bylaws of PPI Holdings, Inc.
3.7.1   (3)   Articles of Incorporation of Precision Pattern, Inc.
3.7.2   (3)   Bylaws of Precision Pattern, Inc.
3.8.1   (10)   Certificate of Formation and Certificate of Merger for Custom Woodwork & Plastics, LLC
3.8.2   (10)   Limited Liability Company Operating Agreement for Custom Woodwork & Plastics, LLC
3.9.1   (4)   Articles of Incorporation of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.)
3.9.1.1   (16)   Certificate of Amendment of Articles of Incorporation of PCI Acquisition Co., Inc. (changing its name to PCI Newco, Inc.)
3.9.2   (4)   Bylaws of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.)
3.10.1   (5)   Articles of Incorporation DAH-IP Holdings, Inc.
3.10.2   (5)   Bylaws of DAH-IP Holdings, Inc.
3.11.1   (5)   Articles of Incorporation of DAH-IP Infinity, Inc.
3.11.2   (5)   Bylaws of DAH-IP Infinity, Inc.
3.12.1   (5)   Certificate of Limited Partnership of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.)
3.12.1.1   (16)   Certificate of Amendment of the Certificate of Limited Partnership of DAH-IP Acquisition Co., L.P. (changing its name to The Infinity Partners, LTD.)
3.12.2   (5)   Limited Partnership Agreement of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) among DAH-IP Holdings, Inc., the General Partner, and DeCrane Aircraft Holdings, Inc., the Limited Partner
3.12.3   (5)   Assignment of Partnership Interest in The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) by DeCrane Aircraft Holdings, Inc. to DAH-IP Infinity, Inc.
3.13.1   (8)   Certificate of Formation and Certificate of Amendment of Carl F. Booth & Co., LLC
3.13.2   (8)   Limited Liability Company Agreement of Carl F. Booth & Co., LLC
3.14.1   (10)   Restated Articles of Incorporation of ERDA, Inc.
3.14.1.1   (17)   Articles of Amendment amending the Restated Articles of Incorporation of ERDA, Inc. (changing its name to DeCrane Aircraft Seating Company, Inc.
3.14.2   (10)   Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co., Inc.)
         

3.15.1   (13)   Certificate of Limited Partnership of DeCrane Aircraft Furniture Co., LP
3.15.2   (13)   Limited Partnership Agreement of DeCrane Aircraft Furniture Co., LP
3.16.1   (17)   Certificate of Formation of DeCrane Cabin Interiors, LLC
3.16.2   (17)   Limited Liability Company Agreement of DeCrane Cabin Interiors, LLC
4.1   (1)   Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank and Trust Company
4.1.1   (1)   Supplemental Indenture dated January 22, 1999 among PATS, Inc. and its subsidiaries, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.2   (2)   Supplemental Indenture dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.3   (12)   Supplemental Indenture dated August 5, 1999 among CWP Acquisition, Inc. d/b/a Custom Woodwork & Plastics, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.4   (12)   Supplemental Indenture dated October 6, 1999 among PCI Acquisition Co., Inc. d/b/a PCI Newco, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.5   (12)   Supplemental Indenture dated December 17, 1999 among DAH-IP Acquisition, L.P. d/b/a Infinity Partners, L.P., DAH-IP Holdings, Inc., DAH-IP Infinity, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.6   (12)   Supplemental Indenture dated May 11, 2000 among Booth Acquisition, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.7   (12)   Supplemental Indenture dated June 16, 2000 among DeCrane Aircraft Furniture Co., L.P., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.8   (12)   Supplemental Indenture dated June 30, 2000 among ERDA, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.1.9   (20)   Supplemental Indenture dated June 17, 2003 among DeCrane Cabin Interiors, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company
4.2   (1)   A/B Exchange Registration Rights Agreement among DeCrane Aircraft Holdings, Inc., the subsidiary guarantors, and DLJ Securities Corporation
4.5   (1)   Form of DeCrane Aircraft 12% Senior Subordinated Notes due 2008
4.6   (10)   Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009
4.6.1   (12)   Amendment to the Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009 dated October 5, 2000
4.7   (10)   Senior Preferred Stock Registration Rights Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc. and the Holders of Senior Preferred Stock
4.7.1   (12)   Amendment No. 1 to the Senior Preferred Stock Registration Rights Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc. and the Holders of Senior Preferred Stock dated October 6, 2000
5.1   (21)   Opinion of Spolin Silverman Cohen & Bartlett LLP with respect to the validity of the Notes
10.1   (10)   Securities Purchase Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the purchasers named therein
         

10.2   (12)   Amended and Restated Investors' Agreement dated as of October 6, 2000 by and among DeCrane Holdings Co., DeCrane Aircraft Holdings, Inc. and the stockholders named therein
10.5   (1)   Tax Sharing Agreement dated March 15, 1993 between DeCrane Aircraft and several subsidiaries
10.6   (1)   Employment Agreement dated July 17, 1998 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane
10.6.1   (13)   First Amendment to Employment Agreement dated May 5, 2000 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane
10.7   (1)   401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company
10.8   (1)   Form of Subscription Agreement for DeCrane Holdings Co. common and preferred stock by certain members of Global Technology Partners LLC
10.10   (1)   Credit Agreement dated August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.
10.10.1   (1)   First Amendment to Credit Agreement dated January 22, 1999
10.10.2   (6)   Second Amended and Restated Credit Agreement dated as of December 17, 1999 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent
10.10.3   (9)   Third Amended and Restated Credit Agreement dated as of May 11, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent
10.10.3.1   (12)   First Amendment to the Third Amended and Restated Credit Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent
10.10.4   (14)   Increased Commitments Agreement, dated as of April 27, 2001, pursuant to Third Amended and Restated Credit Agreement, dated as of May 11, 2000, as amended by the First Amendment to the Third Amended and Restated Credit Agreement, dated as of June 30, 2000
10.10.5   (16)   Second Amendment to the Third Amended and Restated Credit Agreement dated as of March 19, 2002 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, Credit Suisse First Boston (as successor to DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as administrative agent
10.10.6   (18)   Third Amendment to the Third Amended and Restated Credit Agreement dated as of March 31, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, Credit Suisse First Boston (as successor to DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as administrative agent
10.11   (1)   General Terms Agreement between The Boeing Company and PATS, Inc. dated February 17, 1998
10.11.1   (1)   Special Business Provisions between The Boeing Company and PATS, Inc. dated February 17, 1998
10.11.2   (1)   Letter Agreement between The Boeing Company and DeCrane Aircraft Holdings, Inc. dated January 15, 1999
10.11.3   (21)   Addendum 6-5723-03-064 to the Special Business Provisions between The Boeing Company and PATS, Inc. dated April 16, 2003
10.19   (5)   Amended Management Incentive Stock Option Plan
10.20   (5)   Amended Stock Subscription Agreement
10.21   (5)   Amended Incentive Bonus Plan
10.22   (7)   Executive Deferred Compensation Plan
         

10.23   (18)   Form of Change of Control Agreements between DeCrane Aircraft Holdings, Inc. and certain executives
12.1   (22)   Computation of Earnings to Fixed Charges Ratios
21.1   (19)   List of Subsidiaries of Registrant
23.1   (21)   Consent of Spolin Silverman Cohen & Bartlett LLP (contained in their opinion filed as Exhibit 5.1)
23.2   *   Consent of PricewaterhouseCoopers LLP
24   (20)   Powers of Attorney (included on signature pages)
25   (20)   Statement of Eligibility of U.S. Bank National Association, as Trustee, on Form T-1

*
Filed herewith.

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

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

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

(4)
Filed as an exhibit to our Form 8-K dated August 5, 1999 filed with the Commission on October 19, 1999.

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

(6)
Filed as an exhibit to our Form 10-K dated December 31, 1999 filed with the Commission on March 30, 2000.

(7)
Filed as an exhibit to our Form 10-Q dated March 31, 2000 filed with the Commission on May 9, 2000.

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

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

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

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

(12)
Filed as an exhibit to our Form 10-Q dated September 30, 2000 filed with the Commission on November 14, 2000.

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

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

(15)
Filed as an exhibit to our Form 10-Q dated September 30, 2001 filed with the Commission on November 13, 2001.

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

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

(18)
Filed as an exhibit to our Form 10-K dated December 31, 2002 filed with the Commission on April 15, 2003.

(19)
Filed as an exhibit to our Form 8-K dated May 23, 2003 filed with the Commission on June 6, 2003.

(20)
Filed as an exhibit to our Registration Statement (Registration No. 333-106381) on Form S-1 filed with the Commission on June 23, 2003.

(21)
Filed as an exhibit to our Registration Statement (Registration No. 333-106381) on Form S-1 filed with the Commission on August 12, 2003.

(22)
Filed as an exhibit to our Registration Statement (Registration No. 333-106381) on Form S-1 filed with the Commission on September 18, 2003.



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TABLE OF ADDITIONAL REGISTRANTS
EXPLANATORY NOTE
Table of Contents
SUMMARY
Our Company
Our Operating Groups
Industry Overview and Trends
Risk Factors
The Notes
Summary Selected Consolidated Financial Data
RISK FACTORS
Risks Relating to Our Substantial Debt
Risk Related to Our Control by Principal Stockholders
Risks Related to Our Business
Special Note Regarding Forward-Looking Statements
RECENT DEVELOPMENTS Sale of the Specialty Avionics Group
INDUSTRY AND MARKET DATA
CAPITALIZATION
USE OF PROCEEDS
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recent Developments
Industry Overview and Trends
Results of Operations
Restructuring, Asset Impairment and Other Related Charges
Goodwill Impairment Charges
Liquidity and Capital Resources
Disclosure of Contractual Obligations and Commitments
Disclosure About Off-Balance Sheet Commitments and Indemnities
Critical Accounting Policies
Recently Issued Accounting Pronouncements
Quantitative and Qualitative Disclosures About Market Risk
BUSINESS
MANAGEMENT
Directors and Executive Officers
Executive Compensation
Directors
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT DeCrane Aircraft
DeCrane Holdings
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Acquisition of Donaldson, Lufkin & Jenrette, Inc. by Credit Suisse Group
Transactions with Management and Others
Indebtedness of Executive Officers and Directors
DESCRIPTION OF THE SENIOR BANK CREDIT FACILITY
DESCRIPTION OF THE NOTES General
Principal, Maturity and Interest
Subordination
Note Guarantees
Optional Redemption
Selection and Notice
Mandatory Redemption
Repurchase at the Option of Holders
Principal Covenants
Events of Default and Remedies
No Personal Liability of Member, Directors, Officers, Employees and Stockholders
Legal Defeasance and Covenant Defeasance
Transfer and Exchange
Amendment, Supplement and Waiver
Concerning the Trustee
Book-Entry, Delivery and Form
Key Definitions
PLAN OF DISTRIBUTION
LEGAL MATTERS
EXPERTS
AVAILABLE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Operations
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholder's Equity
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Operations
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholder's Equity (Deficit)
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Condensed Notes to Unaudited Consolidated Financial Statements
PART II—INFORMATION NOT REQUIRED IN PROSPECTUS
Report of Independent Accountants on Financial Statement Schedule
DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES Consolidated Financial Statement Schedules Schedule II—Valuation and Qualifying Accounts
SIGNATURES
SIGNATURES
EXHIBIT INDEX

Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘S-1/A’ Filing    Date    Other Filings
6/30/10
9/30/09
8/28/09
3/31/09
9/30/08
12/31/07
12/31/06
12/17/06
9/30/06
12/31/05
9/30/05
6/30/05
12/31/0410-K
9/30/0410-Q
12/31/0310-K
Filed on:10/6/03
9/30/0310-Q
9/22/038-K
9/18/03S-1/A
8/31/03
8/12/03S-1/A
7/29/03
7/9/03
7/1/03
6/30/0310-Q,  10-Q/A
6/23/038-K,  S-1
6/17/03
6/15/03
6/6/038-K
5/23/038-K
5/22/03
4/16/03
4/15/0310-K
3/31/0310-Q,  10-Q/A,  NT 10-K,  NT 10-Q
3/28/03
3/27/03
3/14/03
2/18/03
1/1/03
12/31/0210-K,  10-K/A,  NT 10-K
12/30/02
12/15/02
10/31/02
7/30/02
6/30/0210-Q
5/13/0210-Q
3/31/0210-Q
3/27/0210-K
3/19/02
1/1/02
12/31/0110-K
11/13/0110-Q
10/17/01
9/30/0110-Q
9/11/01
6/30/0110-Q
5/14/0110-Q
4/27/01
3/31/0110-Q,  10-Q/A
3/30/0110-K,  424B3
1/1/01
12/31/0010-K
11/14/0010-Q
10/6/00
10/5/00
9/30/0010-Q
8/31/00
8/14/0010-Q
8/2/008-K/A
6/30/0010-Q,  8-K,  8-K/A
6/16/008-K/A
5/25/008-K
5/11/008-K,  8-K/A
5/9/0010-Q
5/5/00
3/31/0010-Q
3/30/0010-K
1/1/00
12/31/9910-K
12/17/998-K,  8-K/A
10/19/998-K
10/8/99
10/6/998-K/A
8/5/998-K
5/6/99S-1/A
4/23/99S-1/A
3/3/99S-1/A
1/22/99
1/15/99
12/31/98
10/5/98
10/1/98
9/2/98
9/1/98
8/31/98
8/28/98SC 14D1/A
7/17/98
6/30/9810-Q
6/26/988-K
2/17/98
3/15/93
4/30/92
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