UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(AMENDMENT NO. 1)

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

For the quarterly period ended 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

Explanatory Note

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 About Off-Balance Sheet Commitments and Indemnities

	Recent Accounting Pronouncements

	Special Note Regarding Forward Looking Statements and Risk Factors

Item 3.	Quantitative and Qualitative Disclosure About Market Risk

Item 4.	Controls and Procedures

Part II – Other Information

Item 1.	Legal Proceedings

Item 6.	Exhibits and Reports on Form 8-K

	Exhibits

	Reports on Form 8-K

Signatures

Explanatory Note

DeCrane Holdings Co. is filing this Amendment No. 1 on Form 10-Q/A for the quarterly period ended June 30, 2003 to amend and restate, in its entirety, its Quarterly Report on Form 10-Q originally filed with the Securities and Exchange Commission on August 14, 2003 (referred to herein as the “Original Report” and the “Amended Report”). Except for the reclassifications described below, no changes have been made in this Amended Report to the consolidated financial position, results of operations or cash flows we reported in our Original Report. This Amended Report does not reflect events occurring after the August 14, 2003 filing of our Original Report or modify or update the disclosures set forth in that Original Report in any way to reflect any changes in our business or our consolidated financial position, results of operations or cash flows subsequent to the filing date of the Original Report. For the convenience of the reader, we deemed it desirable to amend and restate our Original Report in its entirety.

In this Amended Report, we are reclassifying our consolidated statements of financial position, results of operations and cash flows to reflect interest expense and general corporate overhead allocations in accordance with EITF 87-24, “Allocation of Interest to Discontinued Operations,” for all periods presented as described in Note 2 accompanying our financial statements included in this report. In addition, we are also making similar conforming changes to other parts of the Original Report as well.

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

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Balance Sheets

(In thousands, except share data)	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	6,572			12,088			14,477			24,247
Impairment of goodwill	34,000			—			34,000			—
Amortization of intangible assets	914			874			1,826			1,717
Total operating expenses	41,486			12,962			50,303			25,964

Income (loss) from operations	(42,756		)	500			(40,576		)	3,936

Other expenses:
Interest expense	6,468			6,134			12,337			12,082
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	(51,288		)	(7,153		)	(56,913		)	(11,160		)
Income tax benefit	9,365			2,050			10,630			3,191

Loss from continuing operations	(41,923		)	(5,103		)	(46,283		)	(7,969		)

Discontinued operations and change in accounting principle:
Income (loss) from discontinued operations, net of tax	747			1,738			(5,650		)	(35,702		)
Cumulative effect of change in accounting principle	—			—			—			(17,828		)

Net loss	(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 Stockholder’s 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	5,650			35,702
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	(19,942		)	(3,850		)

Cash flows from investing activities:
Net cash proceeds from sale of Specialty Avionics Group	132,800			—
Capital expenditures	(2,002		)	(2,024		)
Cash paid for acquisition contingent consideration	(600		)	(5,890		)
Net cash provided by (used for) investing activities	130,198			(7,914		)

Cash flows from financing activities:
Principal payments on term debt, capitalized leases and other debt	(130,448		)	(4,486		)
Net borrowings under senior revolving credit facility	9,250			8,000
Deferred financing costs	—			(1,663		)
Other, net	—			277
Net cash provided by (used for) financing activities	(121,198		)	2,128

Net cash provided by discontinued operations	2,194			8,747

Net decrease in cash and cash equivalents	(8,748		)	(889		)
Cash and cash equivalents at beginning of period	12,421			9,478
Cash and cash equivalents at end of period	$	3,673		$	8,589

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

DECRANE HOLDINGS CO. AND SUBSIDIARY

Condensed Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

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

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

The results of operations for interim periods do not necessarily predict the operating results for any other interim period or for the full year. The consolidated balance sheet as of December 31, 2002 has been derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America as permitted by interim reporting requirements. These consolidated interim financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited financial statements and related notes included in the Company’s 2002 Form 10-K / Amendment No. 1, as described below.

As the Company originally described in its Form 10-K for the year ended December 31, 2002 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 for the year ended December 31, 2002 with respect to its 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 the Company’s ability to continue as a going concern. As a result, the Company’s independent accountants issued a revised, unqualified report on its financial statements, which the Company included in Amendment No. 1 to its Form 10-K for the year ended December 31, 2002.

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

Stock Option Plan

The Company has one stock-based employee compensation plan, which is more fully described in 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.

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 required by SFAS No. 142, the Company recorded a goodwill impairment charge of $7,500,000 during the three months ended March 31, 2003 to reduce the carrying value to the estimated net realizable value established by the definitive agreement. The Company recorded a modest $689,000 gain, net of tax, on the sale during the second quarter of fiscal 2003, based on the actual financial position of the group on the date of sale. The ultimate gain or loss on the sale is subject to finalizing the post-closing adjustment, which is not expected to be material, if any.

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

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

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 (1)		2002		2003 (1)			2002
	(Unaudited)
Results of Operations:
Revenues	$	13,125	$	25,039	$	36,595		$	50,383

Operating expenses:
Costs and expenses	11,136		19,369		30,128			38,774
Impairment of goodwill	—		—		7,500			—
Amortization of intangible assets	321		557		878			1,114
Total operating expenses	11,457		19,926		38,506			39,888

Income (loss) from operations	1,668		5,113		(1,911		)	10,495

Other expenses:
Interest expense:
Debt required to be repaid with proceeds from sale	1,146		1,863		2,952			3,674
Debt obligations assumed by the buyer	68		198		270			402
Other expenses, net	52		153		153			186

Pre-tax income (loss)	402		2,899		(5,286		)	6,233
Provision for income taxes	344		1,161		1,053			2,613

Income (loss) before change in accounting principle	58		1,738		(6,339		)	3,620
Cumulative effect of change in accounting principle	—		—		—			(39,322		)

Income (loss) from operations	58		1,738		(6,339		)	(35,702		)
Gain on sale, net of tax	689		—		689			—

Net income (loss) from discontinued operations	$	747	$	1,738	$	(5,650	)	$	(35,702	)

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

	Six Months Ended June 30,
(In thousands)	2003 (1)			2002
	(Unaudited)
Cash Flows Provided By (Used For):
Operating activities	$	3,760		$	9,441
Investing activities	(902		)	(468		)
Financing activities	(649		)	(180		)
Net (increase) decrease in cash and cash equivalents	(13		)	(90		)
Effect of foreign currency translation on cash	(2		)	44
Net cash provided by discontinued operations	$	2,194		$	8,747

(1) Reflects cash flows through May 23, 2003, the date of sale.

Note 3. Restructuring, Asset Impairment and Other Related Charges

During the three months and six months ended June 30, 2003 and 2002, the Company recorded restructuring, asset impairment and other related charges as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(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

Seating Product Line and Furniture Manufacturing Facilities Restructuring

During the second quarter of fiscal 2003, the Company consolidated its seating product line offerings and adopted a restructuring plan to down-size a furniture manufacturing facility in response to continuing weakness in the business, VIP and head-of-state aircraft market. These actions were designed to reduce engineering, production and inventory carrying costs by supporting fewer product offerings and achieve profitability at the furniture manufacturing facility based on its lower production levels. In connection with these actions, the Company recorded pre-tax charges to operations totaling $13,394,000 during the second quarter of fiscal 2003. The charges are comprised of the following:

• 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.

• 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.

• 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.

• 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
	Total			Amounts Incurred						June 30,
(In thousands)	Charges			Noncash			Cash			2003
	(Unaudited)
Product development costs related to curtailed programs	$	6,262		$	(6,262	)	$	—		$	—
Lease termination and other related charges	4,436			(591		)	—			3,845
Excess and obsolete inventory write-downs	3,073			(3,073		)	—			—
Severance and other compensation costs	183			—			(183		)	—
Total	13,954			$	(9,926	)	$	(183	)	3,845

Present value discount, using an 8% imputed interest cost	(560		)							(560		)
Total pre-tax charges	$	13,394								$	3,285

As required by SFAS No. 146, the charges recorded were discounted by $560,000 to initially measure and reflect the liabilities incurred as a result of the restructuring plan at their fair value as of June 30, 2003. The cumulative effect of a changes resulting from revisions to either the timing or the amount of estimated cash flows will be recognized as an adjustment to the liability in the period of the change. Future cash payments will be funded from existing cash balances and internally generated cash from operations.

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
(In thousands)	Cabin Management Group			Systems Integration Group		Corporate		Total			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 unit used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment.

As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and the Company’s decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, the Company determined that it should reevaluate the carrying value of its goodwill prior to the annual October 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,
	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	$	(51,288	)	$	(7,153	)	$	(56,913	)	$	(11,160	)
Discontinued operations	402			2,899			(5,286		)	6,233
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	$	(9,365	)	$	(2,050	)	$	(10,630	)	$	(3,191	)
Discontinued operations	344			1,161			1,053			2,613
Net provision for income tax benefit	$	(9,021	)	$	(889	)	$	(9,577	)	$	(578	)

For the three months and six months ended June 30, 2003 and 2002, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes, the non-deductible portion of goodwill impairment charges and minority interest in preferred stock of subsidiary, which is not deductible for income tax purposes.

As of June 30, 2003, the Company had net deferred tax assets of $12,841,000, prior to recording the valuation allowance in June 2003, as opposed to net deferred tax liabilities in prior periods. The change to a net asset position was primarily caused by the $34,000,000 goodwill impairment charge recorded during the second quarter of fiscal 2003. SFAS No. 109, “Accounting for Income Taxes,” requires the recognition of a deferred tax asset for the future income tax benefit of the goodwill deductions that will be taken for income tax purposes (i.e. the goodwill that has been written off in the financial statements for book purposes will continue to be amortized and deducted for tax purposes and accordingly represents a new deferred tax asset).

As required by SFAS No. 109, the Company evaluated its deferred assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization. Since there is no loss carry back potential and the Company does not have any tax planning strategies to assure recoverability, the only possibility for recovery of the net deferred assets is future taxable income. Since there have been prior year losses, the Company believes it was not prudent to rely on future income as the means to support the carrying value of the net assets. As a result of the Company’s evaluation, it determined that recovery was not likely in certain taxing jurisdictions and applied its judgment in estimating the amount of valuation allowance necessary under the circumstances to reduce the assets carrying value to realizable value. Accordingly, the Company recorded the $13,056,000 valuation allowance, eliminating the net deferred asset, as of June 30, 2003.

For periods prior to June 30, 2003, the Company had net deferred tax liabilities ($9,002,000 as of March 31, 2003 and $10,647,000 as of December 31, 2002). The full realization of the deferred assets was achieved through the reversal of the deferred tax liabilities in future periods. As a result, a valuation allowance was not required for periods prior to June 30, 2003.

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

(In thousands)	June 30, 2003			December 31, 2002
	(Unaudited)
Gross deferred tax assets:
Loss carryforwards	$	14,768		$	12,173
Accrued liabilities	7,081			6,797
Inventory	3,389			4,252
Other	848			832
Gross deferred tax assets	26,086			24,054

Gross deferred tax (liabilities):
Intangible assets	(9,300		)	l4(31,267		)
Program costs	(3,707		)	(6,168		)
Property and equipment	(238		)	(3,119		)
Other	—			(56		)
Gross deferred tax (liabilities)	(13,245		)	(40,610		)

Net deferred assets (liabilities) before valuation allowance	12,841			(16,556		)
Net deferred tax asset valuation allowance	(13,056		)	—
Net deferred tax liability	$	(215	)	$	(16,556	)

Balance sheet classification:
Continuing operations:
Current deferred tax asset	$	172		$	16,430
Noncurrent deferred tax (liability)	(387		)	(27,077		)
Net continuing operations	(215		)	(10,647		)

Discontinued operations:
Current deferred tax asset	—			6,201
Noncurrent deferred tax (liability)	—			(12,110		)
Net discontinued operations	—			(5,909		)
Net deferred tax (liability)	$	(215	)	$	(16,556	)

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
	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.

Litigation (Continued)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,
	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

(In thousands)	June 30, 2003			December 31, 2002
	(Unaudited)
Total assets (as of period end):
Cabin Management	$	236,941		$	281,655
Systems Integration	69,049			62,437
Corporate (5)	17,091			44,247
Inter-group elimination (6)	(435		)	(113		)
Continuing operations	322,646			388,226
Discontinued operations (Specialty Avionics)	—			160,741
Consolidated totals	$	322,646		$	548,967

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

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

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

(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		)
Interest expense	(6,468		)	(6,134		)	(12,337		)	(12,082		)
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	9,365			2,050			10,630			3,191
Income (loss) from discontinued operations	747			1,738			(5,650		)	(35,702		)
Cumulative effect of change in accounting principle	—			—			—			(17,828		)
Net loss	$	(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,
	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 the 12% senior subordinated notes described in Note 8, the following condensed consolidating financial information is presented segregating DeCrane Aircraft, as the issuer, and guarantor and non-guarantor subsidiaries. The accompanying financial information in the guarantor subsidiaries column reflects the financial position, results of operations and cash flows for those subsidiaries guaranteeing the senior credit facility and the notes. DeCrane Holdings is not a guarantor of the notes and is therefore reflected in the non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantor subsidiaries.

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

(1) Elimination of investments in subsidiaries.

(2) Elimination of intercompany accounts.

(3) Elimination of equity in earnings of subsidiaries.

Balance Sheets

	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
Total current assets	4,761			84,544			—			—			89,305

Property and equipment, net	2,105			32,696			—			—			34,801
Goodwill	10,224			152,206									162,430
Other assets, principally intangibles, net	—			36,110			—			—			36,110
Investments in subsidiaries	289,218			—			(16,695		)	(272,523		)(1)	—
Intercompany receivables	56,259			74,846			—			(131,105		)(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
Total current liabilities	17,813			21,313			—			—			39,126

Long-term debt, less current portion	242,936			8,436			—			—			251,372
Intercompany payables	74,846			56,259			—			(131,105		)(2)	—
Other long-term liabilities	6,332			5,540			—			—			11,872

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		)	(48,374		)	(148,418		)	180,362		(1)	(148,418		)
Accumulated other comprehensive loss	—			(364		)	—			—			(364		)
Total stockholders’ equity (deficit)	(16,695		)	288,854			(83,349		)	(272,523		)	(83,713		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	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	348,559			—			35,312			(383,871		)(1)	—
Intercompany receivables	276,121			172,389			5,740			(454,250		)(2)	—
Total assets	$	668,927		$	682,875		$	46,249		$	(849,084	)	$	548,967

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

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

Long-term debt, less current portion	355,568			9,132			—			—			364,700
Intercompany payables	178,242			276,008			—			(454,250		)(2)	—
Other long-term liabilities	33,601			840			—			—			34,441

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

Stockholders’ equity (deficit):
Paid-in capital	118,621			337,592			85,015			(471,653		)(1)	69,575
Retained earnings (deficit)	(83,309		)	10,967			(100,962		)	76,819		(1)	(96,485		)
Accumulated other comprehensive loss	—			(361		)	—			—			(361		)
Total stockholders’ equity	35,312			348,198			(15,947		)	(394,834		)	(27,271		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	668,927		$	682,875		$	46,249		$	(849,084	)	$	548,967

Statements of Operations

	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	4,904			9,573			—			—			14,477
Impairment of goodwill	—			34,000			—			—			34,000
Amortization of intangible assets	—			1,826			—			—			1,826
Interest expense	12,116			221			—			—			12,337
Minority interest in preferred stock of subsidiary	—			—			3,254			—			3,254
Intercompany charges	(11,575		)	11,575			—			—			—
Equity in loss of subsidiaries	34,615			218			48,679			(83,512		)(3)	—
Other expenses, net	586			160			—			—			746
Provision for income taxes (benefit)	8,033			(18,663		)	—			—			(10,630		)
Loss from discontinued operations	—			5,432			218			—			5,650

Net loss	$	(48,679	)	$	(34,615	)	$	(52,151	)	$	83,512		$	(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	5,788			18,459			—			—			24,247
Amortization of intangible assets	—			1,717			—			—			1,717
Interest expense	12,008			74			—			—			12,082
Minority interest in preferred stock of subsidiary	—			—			2,815			—			2,815
Intercompany charges	(14,310		)	14,310			—			—			—
Equity in loss of subsidiaries	54,287			9,510			58,684			(122,481		)(3)	—
Other expenses, net	174			25			—			—			199
Provision for income tax benefit	(747		)	(2,444		)	—			—			(3,191		)
Loss from discontinued operations	—			26,192			9,510			—			35,702
Cumulative effect of change in accounting principle	1,484			16,344			—			—			17,828

Net loss	$	(58,684	)	$	(54,287	)	$	(71,009	)	$	122,481		$	(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	)	$	(34,615	)	$	(52,151	)	$	83,512	(3)	$	(51,933	)
Loss from discontinued operations	—			5,432			218			—			5,650
Noncash adjustments:
Equity in loss of subsidiaries	34,615			218			48,679			(83,512		)(3)	—
Other noncash adjustments	(21,973		)	61,060			3,254			—			42,341
Changes in working capital	15,765			(31,765		)	—			—			(16,000		)
Net cash used for operating activities	(20,272		)	330			—			—			(19,942		)

Cash flows from investing activities:

Net proceeds from sale of Specialty Avionics Group	132,800			—			—			—			132,800
Capital expenditures	(26		)	(1,976		)	—			—			(2,002		)
Cash paid for acquisitions	(600		)	—			—			—			(600		)
Net cash provided by (used for) investing activities	132,174			(1,976		)	—			—			130,198

Cash flows from financing activities:

Principal payments on long-term debt, leases and other debt	(129,924		)	(524		)	—			—			(130,448		)
Net senior revolving credit facility borrowings	9,250			—			—			—			9,250
Net cash used for financing activities	(120,674		)	(524		)	—			—			(121,198		)

Net cash provided by discontinued operations	—			2,194			—			—			2,194

Net increase (decrease) in cash and equivalents	(8,772		)	24			—			—			(8,748		)
Cash and equivalents at beginning of period	12,343			78			—			—			12,421

Cash and equivalents at end of period	$	3,571		$	102		$	—		$	—		$	3,673

	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	)	$	(54,287	)	$	(71,009	)	$	122,481	(3)	$	(61,499	)
Loss from discontinued operations	—			26,192			9,510			—			35,702
Noncash adjustments:
Equity in loss of subsidiaries	54,287			9,510			58,684			(122,481		)(3)	—
Other noncash adjustments	2,318			27,367			2,815			—			32,500
Changes in working capital	3,664			(14,217		)	—			—			(10,553		)
Net cash provided by (used for) operating activities	1,585			(5,435		)	—			—			(3,850		)

Cash flows from investing activities:

Cash paid for acquisitions	(5,890		)	—			—			—			(5,890		)
Capital expenditures	(46		)	(1,978		)	—			—			(2,024		)
Net cash used for investing activities	(5,936		)	(1,978		)	—			—			(7,914		)

Cash flows from financing activities:

Net senior revolving credit facility borrowings	8,000			—			—			—			8,000
Principal payments on long-term debt and leases	(2,863		)	(1,623		)	—			—			(4,486		)
Deferred financing costs	(1,663		)	—			—			—			(1,663		)
Other, net	(268		)	545			—			—			277
Net cash provided by (used for) financing activities	3,206			(1,078		)	—			—			2,128

Net cash provided by discontinued operations	—			8,747			—			—			8,747

Net increase (decrease) in cash and equivalents	(1,145		)	256			—			—			(889		)
Cash and equivalents at beginning of period	9,641			(163		)	—			—			9,478

Cash and equivalents at end of period	$	8,496		$	93		$	—		$	—		$	8,589

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

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

Recent Developments

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

As we originally described in our Form 10-K for the year ended December 31, 2002 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 for the year ended December 31, 2002 with respect to our ability to continue as a going concern. Consummation of the sale and repayment of $130.0 million of borrowings alleviated our independent accountants’ doubt about our ability to continue as a going concern. As a result, our independent accountants issued a revised, unqualified report on our financial statements, which we included in Amendment No. 1 to our Form 10-K for the year ended December 31, 2002. See “—Liquidity and Capital Resources–Recent Developments Affecting Financial Condition and Liquidity” below for additional information.

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

Industry Overview and Trends

We compete in the aircraft products and services market of the aerospace industry. The market for our products and services is largely driven by demand in the three civil aircraft markets: business, VIP and head-of-state aircraft and, to a lesser extent, commercial and regional aircraft. Weak global economic conditions, which were exacerbated by the September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism, the current Middle Eastern military conflicts and the Severe Acute Respiratory Syndrome, or SARS, epidemic are all adversely impacting the aerospace industry and have led to a decrease in demand for business, VIP and head-of-state aircraft. In response to certain of these adverse conditions, we have announced and implemented a series of restructuring activities designed to reduce expenses and conserve working capital. See “—Restructuring, Asset Impairment and Other Related Charges” below for additional information.

The business, VIP and head-of-state aircraft portion of our business experienced weakness during 2002 and will continue to experience weakness throughout 2003 as evidenced by various manufacturers’ announced plans to temporarily suspend production at various times throughout the year in response to the weak demand for new aircraft. However, we believe business, VIP and head-of-state aircraft deliveries may experience a modest recovery in 2004 and continuing recovery thereafter. The commercial aircraft portion of our business, which subsequent to the sale of the Specialty Avionics Group accounts for less than 5% of consolidated revenues, also experienced significant weakness in 2002 and the first half of 2003 and we believe this condition will continue through 2003 and into 2004, with potential recovery not expected to occur until at least 2005. Our beliefs are based on the assumptions that

DECRANE HOLDINGS CO 10-Q/A