UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2003

Commission File Number 333-70363

DECRANE HOLDINGS CO.

(Exact name of registrant as specified in its charter)

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

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

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


(Not Applicable)
(Former address and telephone number of principal executive offices, if changed since last report)

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

ý Yes o No

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

o Yes ý No

The number of shares of Registrant’s Common Stock, $.01 par value, outstanding as of August 1, 2003 was 4,116,627 shares.

Table of Contents

Part I – Financial Information

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
	Consolidated Statements of Operations for the three months and six months ended June 30, 2003 and 2002
	Consolidated Statements of Stockholders’ Equity (Deficit) for the six months ended June 30, 2003
	Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002
	Condensed Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Recent Developments
	Industry Overview and Trends
	Results of Operations
		Performance Measures
		Three months ended June 30, 2003
		Six months ended June 30, 2003
	Restructuring, Asset Impairment and Other Related Charges
	Goodwill Impairment Charges
	Liquidity and Capital Resources
	Disclosure of Contractual Obligations and Commitments
	Disclosure of Off-Balance Sheet Commitments and Indemnities
	Recent Accounting Pronouncements
	Special Note Regarding Forward Looking Statements and Risk Factors
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
Item 4.	Controls and Procedures

Part II – Other Information

Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K
	Exhibits
	Reports on Form 8-K
Signatures

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DECRANE HOLDINGS CO. AND SUBSIDIARY
Consolidated Balance Sheets

(In thousands, except share data)	June 30, 2003			December 31, 2002
	(Unaudited)
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 Stockholders’ 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:
Minority interest in 16% preferred stock of subsidiary	37,335			34,081
Mandatorily redeemable 14% preferred stock	66,654			62,222

Stockholders’ equity (deficit):
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized; None issued and outstanding as of June 30, 2003 and December 31, 2002	—			—
Common stock, $.01 par value, 10,000,000 shares authorized; 4,116,627 shares issued and outstanding as of June 30, 2003 and December 31, 2002	41			41
Additional paid-in capital	67,693			72,125
Notes receivable for shares sold	(2,665		)	(2,591		)
Accumulated deficit	(148,418		)	(96,485		)
Accumulated other comprehensive loss	(364		)	(361		)
Total stockholder’s equity (deficit)	(83,713		)	(27,271		)
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.

DECRANE HOLDINGS CO. AND SUBSIDIARY
Consolidated Statements of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2003			2002			2003			2002
	(Unaudited)
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	6,282			11,336			13,480			22,732
Impairment of goodwill	34,000			—			34,000			—
Amortization of intangible assets	914			874			1,826			1,717
Total operating expenses	41,196			12,210			49,306			24,449

Income (loss) from operations	(42,466		)	1,252			(39,579		)	5,451

Other expenses:
Interest expense	7,614			7,997			15,289			15,756
Minority interest in preferred stock of subsidiary	1,657			1,433			3,254			2,815
Other expenses, net	407			86			746			199

Loss from continuing operations before provision for income taxes	(52,144		)	(8,264		)	(58,868		)	(13,319		)
Income tax benefit	9,702			2,487			11,399			4,040

Loss from continuing operations	(42,442		)	(5,777		)	(47,469		)	(9,279		)

Discontinued operations and change in accounting principle:
Income (loss) from discontinued operations, net of tax	1,266			2,412			(4,464		)	(34,392		)
Cumulative effect of change in accounting principle	—			—			—			(17,828		)

Net loss	(41,176		)	(3,365		)	(51,933		)	(61,499		)

Noncash preferred stock dividend accretion	(2,254		)	(1,964		)	(4,432		)	(3,862		)

Net loss applicable to common stockholders	$	(43,430	)	$	(5,329	)	$	(56,365	)	$	(65,361	)

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

DECRANE HOLDINGS CO. AND SUBSIDIARY
Consolidated Statement of Stockholders’ Equity (Deficit)

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

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

Comprehensive income (loss):
Net loss	—	—		—			—			(51,933		)	—			(51,933		)
Unrealized loss on interest rate swap contract	—	—		—			—			—			(3		)	(3		)
																(51,936		)

Noncash dividend accretion on preferred stock	—	—		(4,432		)	—			—			—			(4,432		)

Notes receivable interest accrued	—	—		—			(74		)	—			—			(74		)

Balance, June 30, 2003 (Unaudited)	4,116,627	$	41	$	67,693		$	(2,665	)	$	(148,418	)	$	(364	)	$	(83,713	)

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

DECRANE HOLDINGS, CO. AND SUBSIDIARY

Consolidated Statements of Cash Flows

	Six Months Ended June 30,
(In thousands)	2003			2002
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(51,933	)	$	(61,499	)
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations	4,464			34,392
Minority interest in preferred stock of subsidiary	3,254			2,815
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	(21,128		)	(5,160		)

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	3,380			10,057

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.

DECRANE HOLDINGS CO. AND SUBSIDIARY

Condensed Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

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

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

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

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).

As the Company described in its Form 10-K for the year ended December 31, 2002 and Form 10-Q for the three months ended March 31, 2003, its failure to consummate the sale of the Specialty Avionics Group by June 30, 2003 would have been an event of default under the amended senior credit facility. As a result, the Company’s independent accountants qualified their report on its audited financial statements, as well as their report on DeCrane Aircraft Holdings, Inc. (the Company’s wholly-owned subsidiary), for the year ended December 31, 2002 with respect to their ability to continue as a going concern. Consummation of the sale and repayment of $130.0 million of borrowings alleviated the independent accountants doubt about DeCrane Aircraft’s ability to continue as a going concern. As a result, the Company’s independent accountants issued a revised, unqualified report on DeCrane Aircraft’s financial statements was included in a registration statement on Form S-1 regarding DeCrane Aircraft’s 12% Series B Senior Subordinated Notes due 2008 (Registration No. 333-106381, filed with Securities and Exchange Commission on June 23, 2003 and amended on August 12, 2003). In the near future, DeCrane Holdings expects to file a similar registration statement of Form S-1 regarding its Warrants to Purchase Common Stock (Par Value $0.01 per Share). Absent any adverse changes in circumstances, DeCrane Holdings expects its revised 2002 financial statements will contain an unqualified report as well.

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,
(In thousands)	2003			2002			2003			2002
	(Unaudited)
Net loss, as reported	$	(41,176	)	$	(3,365	)	$	(51,933	)	$	(61,499	)
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	$	(41,270	)	$	(3,459	)	$	(52,121	)	$	(61,687	)

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.

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 all mandatorily redeemable preferred stock as a liability commencing July 1, 2003 and reflect quarterly dividend accretion on its 14% 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 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 the estimated net realizable value established by the definitive agreement. The Company recorded a modest gain on the sale during the second quarter of fiscal 2003, based on the 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. The following tables summarize the financial position, results operations and cash flows of the Specialty Avionics Group.

(In thousands)	December 31, 2002

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,
(In thousands)	2003(a)		2002		2003(a)			2002
	(Unaudited)
Results of Operations:
Revenues	$	13,125	$	25,038	$	36,595		$	50,383

Operating expenses:
Costs and expenses	11,867		21,028		32,426			41,991
Impairment of goodwill	—		—		7,500			—
Total operating expenses	11,867		21,028		39,926			41,991

Pre-tax income (loss)	1,258		4,010		(3,331		)	8,392
Provision for income taxes	681		1,598		1,822			3,462

Income (loss) before change in accounting principle	577		2,412		(5,153		)	4,930
Cumulative effect of change in accounting principle	—		—		—			(39,322		)

Income (loss) from operations	577		2,412		(5,153		)	(34,392		)
Gain on sale, net of tax	689		—		689			—

Net income (loss) from discontinued operations	$	1,266	$	2,412	$	(4,464	)	$	(34,392	)

(a) Reflects the results of operations through May 23, 2003, the date of sale.

	Six Months Ended June 30,
(In thousands)	2003			2002
	(Unaudited)
Cash Flows Provided By (Used For):
Operating activities	$	4,946		$	10,751
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	$	3,380		$	10,057

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,
(In thousands)	2003		2002		2003		2002
	(Unaudited)
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

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:

• Seating Product Line Consolidation. The curtailment of several seating product offerings and conversion of seat products which incorporate a new single-design technology resulted in the write-off of $6,262,000 of inventoried costs related to the discontinued product offerings.

• Excess and Obsolete Inventory Write-Downs. Inventory was written down by $3,073,000 to reflect its net realizable value for quantities on hand exceeding current and forecast order backlog requirements and obsolete inventory related to the curtailed seating product offerings.

• Lease Termination and Related Charges. Lease termination costs related to future estimated rental payments under existing long-term lease agreements for the facilities permanently vacated in connection with down-sizing a furniture manufacturing facility. Future payments have been reduced by the expected sublease income. The net future payments are based on estimated current market rates and anticipated dates that these facilities will be subleased. If market-rates decrease or should it take longer than expected to sublease these facilities, the actual loss could exceed these estimates. Other related charges include the write-off of leasehold improvements related to the vacated facilities.

• Severance and Other Compensation Costs. The Company has reduced its total workforce at the down-sized facility by 49 employees, or 37%, between December 31, 2002 and June 30, 2003.

The components of the restructuring, asset impairment and other related charges are as follows:

										Balance at June 30, 2003
	Total Charges			Amounts Incurred
(In thousands)	Total Charges			Noncash			Cash
	(Unaudited)
Product development costs related to curtailed programs	$	6,262		$	(6,262	)	$	—		$	—
Excess and obsolete inventory write-downs	3,073			(3,073		)	—			—
Lease termination and other related charges	4,436			(591		)	—			3,845
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.

Seat Manufacturing Facilities Restructuring

During the first quarter of fiscal 2002, the Company announced it would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities. This plan was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with this restructuring plan, the Company recorded pre-tax charges to operations totaling $6,294,000 during 2002 for restructuring, asset impairment and other related charges. The charges were comprised of the following:

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

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

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

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

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

The components of the amounts incurred were as follows:

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

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

Asset Realignment Restructuring

During the second quarter of fiscal 2001, the Company’s Cabin Management Group adopted a restructuring plan to realign production programs between its manufacturing facilities. In response to the adverse impact on the aerospace industry resulting from the September 11^th terrorist attack and its aftermath, as well as the weakening of global economic conditions, the Company announced and implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital. This plan included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. Due to the ongoing weakness of the business, VIP and head-of-state aircraft market, the Company decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility. The restructuring, asset impairment and other related charges recorded during fiscal 2002 were comprised of the following:

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

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

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

The components of the amounts incurred were as follows:

	Charges Recorded During the Year Ended December 31, 2002
(In thousands)	2nd Quarter		3rd & 4th Quarters		Total
	(Unaudited)
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.

Note 4. Inventories

Inventories are comprised of the following as of June 30, 2003 and December 31, 2002:

(In thousands)	June 30, 2003		December 31, 2002
	(Unaudited)
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:

(In thousands)	June 30, 2003			December 31, 2002
	(Unaudited)
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 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 Specialty Avionics Group
(In thousands)	Cabin Management Group			Systems Integration Group		Corporate		Total			Discontinued Specialty Avionics Group

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 31^st 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 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 31^st 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.

Note 6. Other Assets

Other assets are comprised of the following as of June 30, 2003 and December 31, 2002:

(In thousands)	June 30, 2003		December 31, 2002
	(Unaudited)
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
(In thousands)	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net

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:

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

Note 8. Long-Term Debt

Long-term debt includes the following amounts as of June 30, 2003 and December 31, 2002:

(In thousands)	June 30, 2003			December 31, 2002
	(Unaudited)
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.

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,
(In thousands)	2003			2002			2003			2002
	(Unaudited)
Pre-tax income (loss) reported by:
Continuing operations	$	(52,144	)	$	(8,264	)	$	(58,868	)	$	(13,319	)
Discontinued operations	1,258			4,010			(3,331		)	8,392
Consolidated pre-tax loss	$	(50,886	)	$	(4,254	)	$	(62,199	)	$	(4,927	)

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	$	(9,702	)	$	(2,487	)	$	(11,399	)	$	(4,040	)
Discontinued operations	681			1,598			1,822			3,462
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, the non-deductible portion of goodwill impairment charges and minority interest in preferred stock of subsidiary, which is not deductible for income tax purposes.

During the three months and six months ended June 30, 2003, the Company established a $13,056,000 valuation allowance for the net deferred tax assets which may not be realized in the future. 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. Based on its evaluation, the Company 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. The Company will reduce the valuation allowance in the future for each item at such time when it determines that recoverability is more likely than not.

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.

	DeCrane Aircraft 16% Preferred Stock								DeCrane Holdings 14% Preferred Stock
(In thousands, except share and per share data)	Number of Shares	Mandatory Redemption Value		Unamortized Issuance Discount			Net Book Value		Number of Shares	Mandatory Redemption Value

Balance, December 31, 2002	370,061	$	37,006	$	(2,925	)	$	34,081	342,417	$	62,222
Accrued dividends and redemption value accretion	30,206	3,020		234			3,254		—	—
Noncash dividend accretion	—	—		—			—		—	4,432
Balance, June 30, 2003 (Unaudited)	400,267	$	40,026	$	(2,691	)	$	37,335	342,417	$	66,654

Per share liquidation value as of June 30, 2003 (Unaudited)		$	100.00							$	194.66

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

DeCrane Aircraft 16% Mandatorily Redeemable Preferred Stock

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

DeCrane Holdings 14% Mandatorily Redeemable Preferred Stock

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

Note 11. Commitments and Contingencies

Litigation

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

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

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

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

Note 12. Business Segment Information

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

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

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

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

Management utilizes more than one measurement to evaluate group performance and allocate resources; however, management considers Adjusted EBITDA, as defined, to be the primary measurement of a group’s overall core economic performance and return on invested capital. Management also uses Adjusted EBITDA in the Company’s annual budget and planning process for future periods, as one of the decision-making criteria for funding discretionary capital expenditures and product development programs and as the measure in determining the value of acquisitions and dispositions. The board of directors uses Adjusted EBITDA as one of the performance metrics for determining the amount of bonuses awarded to pursuant to the Company’s cash incentive bonus plan and as an indicator of enterprise value used in determining the exercise price of stock options granted and the acceleration of stock option vesting pursuant to the Company’s incentive stock option plan.

Management defines Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring, asset impairment and other related charges, acquisition related charges not capitalized and other noncash and nonoperating charges. Management believes the presentation of this measure is relevant and useful to investors because it allows investors and analysts to view group performance in a manner similar to the method used by management, helps improve their ability to understand the Company’s core segment performance, adjusted for items management believes are unusual, and makes it easier to compare the Company’s results with other companies that have different financing, capital structures and tax rates. In addition, management believes these measures are consistent with the manner in which its lenders and investors measure the Company’s overall performance and liquidity, including its ability to service debt and fund discretionary capital expenditure and product development programs.

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

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

The tables below summarize selected financial data by business segment.

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2003			2002			2003			2002
	(Unaudited)
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

	June 30,
(In thousands)	2003			2002
	(Unaudited)
Total assets (as of period end):
Cabin Management	$	236,941		$	288,543
Systems Integration	69,049			68,242
Corporate (5)	17,094			29,072
Inter-group elimination (6)	(438		)	(122		)
Continuing operations	322,646			385,735
Discontinued operations (Specialty Avionics)	—			177,191
Consolidated totals	$	322,646		$	562,926\

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

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

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

(4) The table below reconciles the financial measure Adjusted EBITDA, as defined, to net loss.

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2003			2002			2003			2002
	(Unaudited)
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		)
Corporate overhead charged to discontinued operations	290			752			997			1,515
Interest expense	(7,614		)	(7,997		)	(15,289		)	(15,756		)
Minority interest in preferred stock of subsidiary	(1,657		)	(1,433		)	(3,254		)	(2,815		)
Other expenses, net	(407		)	(86		)	(746		)	(199		)
Income tax benefit	9,702			2,487			11,399			4,040
Income (loss) from discontinued operations	1,266			2,412			(4,464		)	(34,392		)
Cumulative effect of change in accounting principle	—			—			—			(17,828		)
Net loss	$	(41,176	)	$	(3,365	)	$	(51,933	)	$	(61,499	)

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

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2003		2002		2003		2002
	(Unaudited)
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 12% senior subordinated notes described in Note 8, the following condensed consolidating financial information is presented segregating DeCrane Aircraft, as the issuer, and guarantor and non-guarantor subsidiaries. The accompanying financial information in the guarantor subsidiaries column reflects the financial position, results of operations and cash flows for those subsidiaries guaranteeing the senior credit facility and the notes. DeCrane Holdings is not a guarantor of the notes and is therefore reflected in the non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantor subsidiaries.

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

(1) Elimination of investments in subsidiaries.

(2) Elimination of intercompany accounts.

(3) Elimination of equity in earnings of subsidiaries.

Balance Sheets

	June 30, 2003 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

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
Assets of discontinued operations	—			—			—			—			—
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	290,404			—			(16,695		)	(273,709		)(1)	—
Intercompany receivables	55,073			74,846			—			(129,919		)(2)	—
Total assets	$	362,567		$	380,402		$	(16,695	)	$	(403,628	)	$	322,646

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ 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
Liabilities of discontinued operations	—			—			—			—			—
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			55,073			—			(129,919		)(2)	—
Other long-term liabilities	6,332			5,540			—			—			11,872

Minority interest in preferred stock of subsidiary	37,335			—			—			—			37,335
Mandatorily redeemable 14% preferred stock	—			—			66,654			—			66,654

Stockholders’ equity (deficit):
Paid-in capital	115,293			337,592			65,069			(452,885		)(1)	65,069
Retained earnings deficit	(131,988		)	(47,188		)	(148,418		)	179,716		(1)	(148,418		)
Accumulated other comprehensive loss	—			(364		)	—			—			(364		)
Total stockholders’ equity (deficit)	(16,695		)	290,040			(83,349		)	(273,709		)	(83,713		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity	$	362,567		$	380,402		$	(16,695	)	$	(403,628	)	$	322,646

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

Assets

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

Property and equipment, net	2,485			33,654			—			—			36,139
Other assets, principally intangibles, net	11,708			224,150			—			—			235,858
Investments in subsidiaries	351,502			—			34,137			(385,639		)(1)	—
Intercompany receivables	273,178			172,389			5,740			(451,307		)(2)	—
Total assets	$	668,927		$	682,875		$	45,074		$	(847,909	)	$	548,967

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

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

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

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

Stockholders’ equity (deficit):
Paid-in capital	118,621			337,592			83,840			(470,478		)(1)	69,575
Retained earnings (deficit)	(83,309		)	13,910			(100,962		)	(73,876		)(1)	(96,485		)
Accumulated other comprehensive loss	—			(361		)	—			—			(361		)
Total stockholders’ equity (deficit)	35,312			351,141			(17,122		)	(396,602		)	(27,271		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	668,927		$	682,875		$	45,074		$	(847,909	)	$	548,967

Statements of Operations

	Six Months Ended June 30, 2003 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	86,013		$	—		$	—		$	86,013
Cost of sales	—			76,286			—			—			76,286

Gross profit	—			9,727			—			—			9,727

Selling, general and administrative expenses	3,907			9,573			—			—			13,480
Impairment of goodwill	—			34,000			—			—			34,000
Amortization of intangible assets	—			1,826			—			—			1,826
Interest expense	15,068			221			—			—			15,289
Minority interest in preferred stock of subsidiary	—			—			3,254			—			3,254
Intercompany charges	(11,575		)	11,575			—			—			—
Equity in loss of subsidiaries	33,429			218			48,679			(82,326		)(3)	—
Other expenses (income), net	586			160			—			—			746
Income tax benefit	(7,264		)	(18,663		)	—			—			(11,399		)
Loss from discontinued operations	—			4,246			218			—			4,464
Net loss	$	(48,679	)	$	(34,429	)	$	(52,151	)	$	82,326		$	(51,933	)

	Six Months Ended June 30, 2002 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	122,112		$	—		$	—		$	122,112
Cost of sales	—			92,212			—			—			92,212

Gross profit	—			29,900			—			—			29,900

Selling, general and administrative expenses	4,273			18,459			—			—			22,732
Amortization of intangible assets	—			1,717			—			—			1,717
Interest expense	15,682			74			—			—			15,756
Minority interest in preferred stock of subsidiary	—			—			2,815			—			2,815
Intercompany charges	(14,310		)	14,310			—			—			—
Equity in loss of subsidiaries	52,977			9,510			58,684			(121,171		)(3)	—
Other expenses, net	174			25			—			—			199
Income tax benefit	(1,596		)	(2,444		)	—			—			(4,040		)
Loss from discontinued operations	—			24,882			9,510			—			34,392
Cumulative effect of change in accounting principle	1,484			16,344			—			—			17,828
Net loss	$	(58,684	)	$	(52,977	)	$	(71,009	)	$	121,171		$	(61,499	)

Statements of Cash Flows

	Six Months Ended June 30, 2003 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net loss	$	(48,679	)	$	(33,429	)	$	(52,151	)	$	82,326	(3)	$	(51,933	)
Loss from discontinued operations	—			4,246			218			—			4,464
Noncash adjustments:
Equity in loss of subsidiaries	33,429			218			48,679			(82,326		)(3)	—
Other noncash adjustments	(21,973		)	61,060			3,254			—			42,341
Changes in working capital	(16,951		)	(32,591		)	—			—			(16,000		)
Net cash used for operating activities	(20,272		)	(856		)	—			—			(21,128		)
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 and leases	(129,924		)	(524		)	—			—			(130,448		)
Net senior revolving credit facility borrowings	9,250			—			—			—			9,250
Net cash provided by financing activities	(120,674		)	(524		)	—			—			(121,198		)

Net cash provided by discontinued operations	—			3,380			—			—			3,380
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

	Six Months Ended June 30, 2002 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net loss	$	(58,684	)	$	(52,977	)	$	(71,009	)	$	121,171	(3)	$	(61,499	)
Loss from discontinued operations	—			24,882			9,510			—			34,392
Noncash adjustments:
Equity in loss of subsidiaries	52,977			9,510			58,684			(121,171		)(3)	—
Other noncash adjustments	2,318			27,367			—			—			29,685
Changes in working capital	4,974			(18,342		)	2,815			—			(10,553		)
Net cash provided by (used for) operating activities	1,585			(9,560		)	—			—			(7,975		)
Cash flows from investing activities:
Cash paid for acquisitions	(5,890		)	—			—			—			(5,890		)
Capital expenditures	(46		)	(1,978		)				—			(2,024		)
Other, net	—			—			268			(268		)(1)	—
Net cash used for investing activities	(5,936		)	(1,978		)	268			(268		)	(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		)	268			268		(1)	277
Net cash provided by (used for) financing activities	3,206			(1,078		)	268			268			2,128

Net cash provided by discontinued operations	—			12,872			—			—			12,872
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

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

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

Recent Developments

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

As we described in our Form 10-K for the year ended December 31, 2002 and Form 10-Q for the three months ended March 31, 2003, our failure to consummate the sale of the Specialty Avionics Group by June 30, 2003 would have been an event of default under the amended senior credit facility. As a result, our independent accountants qualified their report on our audited financial statements, as well as their report on DeCrane Aircraft Holdings, Inc. (our wholly-owned subsidiary), for the year ended December 31, 2002 with respect to our ability to continue as a going concern. Consummation of the sale and repayment of $130.0 million of borrowings alleviated our independent accountants doubt about DeCrane Aircrafts’ ability to continue as a going concern. As a result, our independent accountants issued a revised, unqualified report on DeCrane Aircraft’s financial statements we included in a registration statement on Form S-1 regarding DeCrane Aircraft’s 12% Series B Senior Subordinated Notes due 2008 (Registration No. 333-106381, filed with Securities and Exchange Commission on June 23, 2003 and amended on August 12, 2003). In the near future, we expect to file a similar registration statement of Form S-1 regarding DeCrane Holdings’ Warrants to Purchase Common Stock (Par Value $0.01 per Share). Absent any adverse changes in circumstances, we expect DeCrane Holdings’ revised 2002 financial statements will contain an unqualified report as well. See “—Liquidity and Capital Resources—Recent Developments Affecting Financial Condition and Liquidity” below for additional information.

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

Industry Overview and Trends

We compete in the aircraft products and services market of the aerospace industry. The market for our products and services is largely driven by demand in the three civil aircraft markets: business, VIP and head-of-state aircraft and, to a lesser extent, commercial and regional aircraft. The September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism, the current Middle-Eastern military conflicts, the Severe Acute Respiratory Syndrome (SARS) epidemic and weak global economic conditions are all adversely impacting travel and, in turn, the aerospace industry and our business. In response to certain of these adverse conditions, we 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 reflect a modest recovery in 2004 and reflect 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 2004, with potential recovery not expected to occur until at least 2005. Our beliefs are based on the assumptions that we will experience economic recovery and there are no further negative geo-political developments affecting our industry.

Results of Operations

Performance Measures

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

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

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

We define Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring, asset impairment and other related charges, acquisition related charges not capitalized and other noncash and nonoperating charges. We believe the presentation of this measure is relevant and useful to investors because it allows investors and analysts to view segment performance in a manner similar to the method we use, helps improve their ability to understand our core segment performance, adjusted for items we believe are unusual, and makes it easier to compare our results with other companies that have different financing, capital structures and tax rates. In addition, we believe these measures are consistent with the manner in which our lenders and investors measure our overall performance and liquidity, including our ability to service debt and fund discretionary capital expenditure and product development programs.

Our method of calculating Adjusted EBITDA may not be consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance GAAP, such as net income (loss), the nearest comparable GAAP financial measure. Adjusted EBITDA should not be viewed as substitutes for or superior to net income (loss), cash flow from operations or other data prepared in accordance with GAAP as a measure of our profitability or liquidity. The notes to our financial statements include information about our operating segments, including Adjusted EBITDA, and should be read in conjunction with the discussions presented herein. The notes to our financial statements also include a reconciliation of Adjusted EBITDA to net income (loss) to clarify the differences between these financial measures.

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

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

Three Months Ended June 30, 2003 Compared to Three 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 $17.2 million, or 28.1%, to $44.1 million for the three months ended June 30, 2003 from $61.3 million for the three months ended June 30, 2002. By segment, revenues changed as follows:

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

Cabin Management	$	(18.6	)	(38.6	)%
Systems Integration	1.5			11.3
Inter-group elimination	(0.1		)
Total	$	(17.2	)

Cabin Management. Revenues decreased by $18.6 million, or 38.6% compared to the prior year. The decrease, which is across all of our product and services categories, is caused by the ongoing adverse impact of weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. The 2003 decrease consists of:

• a $18.0 million decrease in aircraft furniture and related products revenues; and

• a $1.2 million decrease in cabin management and entertainment systems revenues;

• a $0.2 million decrease in seating products revenues; offset by,

• a $0.8 million increase in other product and services revenues.

The revenue decrease was caused by lower order volume from our customers. Revenues from Textron and Bombardier, our principal customers, decreased $14.1 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. We also experienced similar volume decreases from our other customers during the period.

Systems Integration. Revenues increased by $1.5 million, or 11.3% compared to the prior year, due to:

• a $2.1 million increase resulting from revenue recognized pursuant to the “take-or-pay” provisions of a major supply contract; offset by,

• a $0.6 million decrease in the commercial aircraft systems integration engineering services provided in the aftermath of September 11^th and resulting down-turn in the commercial airline industry; the airline industry’s corresponding reduction in the size of its operating fleet and the delay or postponement of retrofit and refurbishment programs for the remaining operational fleet reduced demand for our integration and engineering services.

Gross profit. Gross profit decreased $14.8 million to a loss of $1.3 million for the three months ended June 30, 2003 from $13.5 million for the same period last year. By segment, gross profit changed as follows:

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

Cabin Management	$	(13.8	)	(182.5	)%
Systems Integration	(1.0		)	(17.7	)
Total	$	(14.8	)

Cabin Management. Gross profit decreased by $13.8 million, or 182.5% compared to the prior year, primarily due to:

• a $5.9 million decrease in profit margins due to lower volume for our business, VIP and head-of-state aircraft furniture and seating products; and

• a $0.6 million decrease in gross profit related to lower volume for our cabin management and entertainment systems; and

• a $8.1 million decrease caused by restructuring charges incurred in 2003 as compared to those recorded in 2002 related to the consolidation of our seating and related manufacturing operations; offset by

• a $0.8 million increase in revenues for other products and services.

Systems Integration. Gross profit decreased by $1.0 million, or 17.7% compared to the prior year, primarily due to:

• a $0.5 million decrease resulting from lower revenues and unfavorable overhead absorption as a result of lower production and a change in product delivery mix; and

• a $0.5 million decrease in the commercial aircraft systems integration engineering services provided.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $5.0 million, or 44.2%, to $6.3 million for the three months ended June 30, 2003, from $11.3 million for the same period last year. By segment, SG&A expenses changed as follows:

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

Cabin Management	$	(4.0	)	(49.5	)%
Systems Integration	(1.2		)	(56.7	)
Corporate	0.2
Total	$	(5.0	)

Cabin Management. SG&A expenses decreased by $4.0 million, or 49.5% compared to the prior year, due to:

• a $2.4 million reduction resulting from restructuring charges recorded in 2003 as compared to those recorded in 2002 related to the consolidation of our seating and related manufacturing operations; and

• a $1.6 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak global economic conditions.

Systems Integration. SG&A expenses decreased by $1.2 million, or 56.7% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions in 2003.

Impairment of goodwill. During the three 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 $0.2 million to $2.5 million for the three months ended June 30, 2003 from $2.7 million for the same period last year, primarily resulting from reduced capital expenditures and a lower depreciable base resulting from impairment charges recorded during 2002 as follows:

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

Depreciation charged to:
Cost of sales	$	(0.1	)	(8.1	)%
Selling, general and administrative expense	(0.2		)	(25.1	)
Amortization of intangible assets	0.1			8.2
Total	$	(0.2	)

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 $4.7 million, or 52.3% compared to the prior year primarily due to:

• a $5.3 million decrease in gross profit related to our business/VIP aircraft furniture and seating operations; and

• a $0.6 million decrease in gross profit related our cabin management and entertainment systems; offset by,

• a $1.2 million increase in gross profit related to our other products and services.

Systems Integration. Adjusted EBITDA increased by $0.1 million, or 2.1% over the prior year, due to reduced SG&A spending resulting from workforce reductions.

Operating income. Operating income decreased $43.7 million to a loss of $42.5 million for the three months ended June 30, 2003, from income of $1.3 million for the same period last year. By segment, operating income changed as follows:

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

Cabin Management	$	(43.8	)	(4380.0	)%
Systems Integration	0.2			4.7
Corporate	(0.1		)
Total	$	(43.7	)

Cabin Management. Operating income decreased by $43.8 million, or 4380.0% compared to the prior year, due to:

• a $4.1 million decrease in gross profit, principally related to lower revenues in our business, VIP and head-of-state aircraft furniture and seating operations;

• a $34.0 million increase in goodwill impairment charges; and

• a $5.7 million increase in restructuring charges recorded in 2003 as compared to those recorded in 2002 related to the consolidation of our seating and related manufacturing operations.

Systems Integration. Operating income increased by $0.2 million, or 4.7% compared to the prior year, due to reduced SG&A spending resulting from workforce reductions in 2003.

Interest expense. Interest expense decreased $0.4 million, or 4.8%, to $7.6 million for the three months ended June 30, 2003 compared to $8.0 million for the same period last year. The decrease is attributable to lower outstanding debt balances for a portion of the quarter in the current year.

Minority interest in preferred stock of subsidiary. Minority interest increased $0.2 million to $1.6 million for the three months ended June 30, 2003 compared to $1.4 million for the same period last year. Minority interest reflects the accrued dividends, which are compounded quarterly, and redemption value accretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

Provision for income taxes. The provision for income taxes, 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 minority interest in preferred stock of subsidiary, which is not deductible for income tax purposes.

During the three months ended June 30, 2003, we established a $13.1 million valuation allowance for the net deferred tax assets which may not be realized in the future. 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 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. We will reduce the valuation allowance in the future for each item at such time when we determine that recoverability is more likely than not.

Loss from continuing operations. The loss from continuing operations increased $36.6 million to a loss of $42.4 million for the three months ended June 30, 2003 compared to a loss of $5.8 million for the same period last year, primarily due to:

• a $43.7 million decrease in operating income resulting, in part, from a $34.0 million goodwill impairment charge; and

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

• a $7.2 million increase in the provision for income tax benefit.

Income from discontinued operations. Income from discontinued operations decreased $1.1 million to $1.3 million for the three months ended June 30, 2003 compared to $2.4 million for the same period last year primarily the result of the disposition of the Specialty Avionics Group on May 22, 2003 as compared to a full quarter of results included in the prior year.

Net loss. Net loss increased $37.8 million to a net loss of $41.2 million for the three months ended June 30, 2003 compared to a net loss of $3.4 million for the same period last year. The increase is attributable to an increases in the loss from continuing operations of $36.6 million and a decrease in the income from discontinued operations of $1.1 million.

Net loss applicable to common stockholders. Net loss applicable to our common stockholders increased $38.1 million to a net loss of $43.4 million for the three months ended June 30, 2003 compared to a net loss of $5.3 million for the same period last year. The increase in the net loss applicable to our common stockholder is attributable to:

• a $37.8 million increase in our net loss; and

• a $0.3 million increase in noncash preferred stock dividend accretion on our 14% mandatorily redeemable preferred stock.

Bookings. Bookings decreased $23.4 million, or 31.1%, to $51.9 million for the three months ended June 30, 2003 compared to $75.3 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.

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

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
(In millions)	Amount			Percent

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

• a $29.5 million decrease in aircraft furniture and related products revenues;

• a $2.8 million decrease in cabin management and entertainment systems revenues;

• a $1.8 million decrease in seating products revenues; offset by,

• a $0.3 million increase in other product and services revenues.

The revenue decrease was caused by lower order volume from our customers. 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. 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:

• a $1.3 million decrease in the commercial aircraft systems integration engineering services provided in the aftermath of September 11^th and resulting down-turn in the commercial airline industry; the airline industry’s corresponding reduction in the size of its operating fleet and the delay or postponement of retrofit and refurbishment programs for the remaining operational fleet reduced demand for our integration and engineering services; and

• a $2.3 million decrease resulting from reduced production and delivery of business, VIP and head-of-state aircraft products and services due to the adverse impact weak global economic conditions are having on the demand for those types of aircraft; offset by

• a $2.1 million increase resulting from revenue pursuant to the “take-or-pay” provisions of a major supply contract.

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
(In millions)	Amount			Percent

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

DECRANE HOLDINGS CO 10-Q