Performance Measures

Changes in Accounting Principles

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

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, 2004

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 9, 2004 was 4,358,242 shares.

Table of Contents

Part I – Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003

	Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003

	Consolidated Statements of Stockholders’ Equity (Deficit) for the six months ended June 30, 2004

	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003

	Condensed Notes to Consolidated Financial Statements

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

	Results of Operations

	Performance Measures

	Changes in Accounting Principles

	Three months ended June 30 2004

	Six months ended June 30, 2004

	Restructuring, Asset Impairment and Other Related 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

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Balance Sheets

(In thousands, except share data)	June 30, 2004			December 31, 2003
	(Unaudited)
Assets

Current assets:
Cash and cash equivalents	$	2,362		$	6,936
Accounts receivable, net	27,322			21,455
Inventories	52,314			42,981
Prepaid expenses and other current assets	1,176			1,082
Total current assets	83,174			72,454

Property and equipment, net	29,798			30,900
Goodwill	162,430			162,430
Other assets, principally intangibles, net	34,764			38,092
Total assets	$	310,166		$	303,876

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

Current liabilities:
Current portion of long-term debt	$	1,319		$	1,198
Accounts payable	17,377			15,462
Accrued liabilities	23,387			17,890
Income taxes payable	64			—
Total current liabilities	42,147			34,550

Long-term debt	283,821			268,208
Mandatorily redeemable preferred stock	121,089			—
Other long-term liabilities	7,836			5,464

Commitments and contingencies (Note 10)

Mandatorily redeemable preferred stock	—			112,237

Stockholders’ equity (deficit):
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized; None issued and outstanding as of June 30, 2004 and December 31, 2003	—			—
Common stock, $.01 par value, 10,000,000 shares authorized; 4,009,297 shares issued and outstanding as of June 30, 2004 and December 31, 2003	40			40
Additional paid-in capital	61,475			61,475
Notes receivable for shares sold	(1,305		)	(1,268		)
Accumulated deficit	(204,669		)	(176,562		)
Accumulated other comprehensive loss	(268		)	(268		)
Total stockholders’ equity (deficit)	(144,727		)	(116,583		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	310,166		$	303,876

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)	2004			2003			2004			2003
	(Unaudited)
Revenues	$	54,817		$	44,113		$	103,414		$	86,013
Cost of sales	47,317			38,714			84,156			67,592

Gross profit	7,500			5,399			19,258			18,421

Operating expenses:
Selling, general and administrative expenses	7,788			6,979			15,025			16,909
Research and development expenses	2,001			3,278			4,182			4,851
Impairment of goodwill	—			34,000			—			34,000
Amortization of intangible assets	913			914			1,825			1,826
Total operating expenses	10,702			45,171			21,032			57,586

Loss from operations	(3,202		)	(39,772		)	(1,774		)	(39,165		)

Other expenses:
Interest expense	8,750			6,468			17,452			12,337
Mandatorily redeemable preferred stock dividends	4,387			1,657			8,618			3,254
Other expenses, net	91			407			203			746

Loss from continuing operations before provision for income taxes	(16,430		)	(48,304		)	(28,047		)	(55,502		)
Provision for income (taxes) benefit	(30		)	9,365			(60		)	10,630

Loss from continuing operations	(16,460		)	(38,939		)	(28,107		)	(44,872		)

Discontinued operations and change in accounting principle:
Income (loss) from discontinued operations, net of tax	—			747			—			(5,650		)
Cumulative effect of change in accounting principle	—			—			—			(13,764		)

Net loss	(16,460		)	(38,192		)	(28,107		)	(64,286		)

Noncash preferred stock dividend accretion	—			(2,254		)	—			(4,432		)

Net loss applicable to common stockholders	$	(16,460	)	$	(40,446	)	$	(28,107	)	$	(68,718	)

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

Balance, December 31, 2003	4,009,297	$	40	$	61,475	$	(1,268	)	$	(176,562	)	$	(268	)	$	(116,583	)

Comprehensive loss:
Net loss	—	—		—		—			(28,107		)	—			(28,107		)

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

Balance, June 30, 2004 (Unaudited)	4,009,297	$	40	$	61,475	$	(1,305	)	$	(204,669	)	$	(268	)	$	(144,727	)

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)	2004			2003
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(28,107	)	$	(64,286	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Cumulative effect of change in accounting principles	—			13,764
Loss from discontinued operations	—			5,650
Depreciation and amortization	6,184			6,342
Mandatorily redeemable preferred stock dividends	8,618			3,254
Noncash portion of restructuring, asset impairment and other related charges	2,978			37,664
Interest accretion on second-lien term debt	1,213			—
Preferred stock redemption value accretion	234			—
Deferred income taxes	—			(11,659		)
Other, net	(13		)	295
Changes in assets and liabilities:
Accounts receivable	(5,867		)	4,207
Inventories	(12,144		)	(7,854		)
Prepaid expenses and other assets	(270		)	541
Accounts payable	1,915			(2,251		)
Accrued liabilities	5,432			(10,755		)
Income taxes payable	162			385
Other long-term liabilities	2,372			4,761
Net cash used for operating activities	(17,293		)	(19,942		)

Cash flows from investing activities:
Net proceeds from sale of Specialty Avionics Group	—			132,800
Capital expenditures	(1,767		)	(2,002		)
Cash paid for acquisition contingent consideration	—			(600		)
Net cash provided by (used for) investing activities	(1,767		)	130,198

Cash flows from financing activities:
Debt borrowings:
Revolving line of credit, net	15,050			9,250
Other secured long-term	46			—
Debt repayments:
First-lien term debt	—			(129,275		)
Other secured long-term debt	(610		)	(1,173		)
Net cash provided by (used for) financing activities	14,486			(121,198		)

Net cash provided by discontinued operations	—			2,194

Net decrease in cash and cash equivalents	(4,574		)	(8,748		)
Cash and cash equivalents at beginning of period	6,936			12,421
Cash and cash equivalents at end of period	$	2,362		$	3,673

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, 2003 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 2003 Form 10-K. Reclassifications have been made to the financial statements for prior periods to conform to the current year presentation.

Changes in Accounting Principles

SFAS No. 150 Adopted January 1, 2004

Effective January 1, 2004, the Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” 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. As a result of adopting SFAS No. 150 on January 1, 2004, all mandatorily redeemable preferred stock was reclassified as a liability and all quarterly dividends are reflected as a charge against pre-tax income. In periods prior to January 1, 2004, DeCrane Holdings’ 14% preferred stock dividends were deducted in arriving at the net income or loss applicable to the Company’s common stockholders; DeCrane Aircraft’s 16% preferred stock dividends were charged against pre-tax income as minority interest in preferred stock of subsidiary.

The following table summarizes the results of operations for the three months and six months ended June 30, 2003 as if SFAS No. 150 had been in effect as of the beginning of 2003.

	Three Months Ended June 30, 2003						Six Months Ended June 30, 2003
(In thousands)	As Reported			Pro Forma			As Reported			Pro Forma
	(Unaudited)
Loss from continuing operations	$	(38,939	)	$	(41,193	)	$	(44,872	)	$	(49,304	)
Net loss	(38,192		)	(40,446		)	(64,286		)	(68,718		)

The pro forma data reflects DeCrane Holdings 14% preferred stock dividends of $2,254,000 for the three months ended June 30, 2003 and $4,432,000 for the six months ended June 30, 2003 as charges against income during the periods.

Discontinued Use of Program Accounting Commencing January 1, 2003

As more fully described in “Note 1—Change in Accounting Principle” to the audited financial statements included in the Company’s 2003 Form 10-K, the Company elected to discontinue the use of program accounting for the costs of products manufactured for delivery under production-type contracts. As a result, certain deferred program costs are no longer included in inventory commencing January 1, 2003.

This change in accounting policy was made after concluding the 2003 fiscal year but was applied retroactively to the beginning of the year, January 1, 2003, as required by generally accepted accounting principles. As a result of the change, program-related product development costs are now classified as a component of research and development expenses in the consolidated financial statements rather than classified as a component of inventory cost. The Company has restated its results of operations by charging previously inventoried costs totaling $3,278,000 and $4,851,000 for the three months and six months ended June 30, 2003, respectively, to research and development expense and recording a $13,764,000 charge as of January 1, 2003 to reflect the cumulative effect of the change in accounting principle.

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)	2004			2003			2004			2003
	(Unaudited)
Net loss, as reported	$	(16,460	)	$	(38,192	)	$	(28,107	)	$	(64,286	)
Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(81		)	(94		)	(162		)	(188		)
Pro forma net loss	$	(16,541	)	$	(38,286	)	$	(28,269	)	$	(64,474	)

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.

Note 2. Restructuring, Asset Impairment and Other Related Charges

During the three months and six months ended June 30, 2004 and 2003, the Company recorded restructuring, asset impairment and other related charges as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2004		2003		2004		2003
	(Unaudited)
Nature of charges:
Operational Realignment and Facilities Restructuring	$	6,901	$	—	$	6,901	$	—
Seating Product Line and Furniture Manufacturing Facilities Restructuring	—		7,132		—		7,132
Goodwill impairment charges	—		34,000		—		41,500
Total pre-tax charges	$	6,901	$	41,132	$	6,901	$	48,632

Business segment recording the charges:
Cabin Management	$	1,628	$	41,132	$	1,628	$	41,132
Systems Integration	5,273		—		5,273		—
Total continuing operations	6,901		41,132		6,901		41,132
Discontinued operations (Specialty Avionics)	—		—		—		7,500
Total pre-tax charges	$	6,901	$	41,132	$	6,901	$	48,632

Charged to operations:
Cost of sales	$	6,083	$	6,573	$	6,083	$	6,573
Selling, general and administrative expenses	818		559		818		559
Impairment of goodwill	—		34,000		—		34,000
Discontinued operations (Specialty Avionics)	—		—		—		7,500
Total pre-tax charges	$	6,901	$	41,132	$	6,901	$	48,632

Components of charges:
Continuing operations:
Noncash charges	$	2,978	$	37,664	$	2,978	$	37,664
Cash charges	3,923		3,468		3,923		3,468
Total continuing operations pre-tax charges	6,901		41,132		6,901		41,132
Discontinued operations (noncash charges)	—		—		—		7,500
Total pre-tax charges	$	6,901	$	41,132	$	6,901	$	48,632

Operational Realignment and Facilities Consolidation

During the second quarter of fiscal 2004, the Company adopted plans to restructure the operations of its Cabin Management and Systems Integration groups. The restructuring plan for Cabin Management involves the realignment of production between its manufacturing facilities and the relocation and consolidation of the group’s headquarters to Wichita, Kansas. The plan for Systems Integration involves combining the manufacturing activities of two facilities into a single facility and eliminating some product offerings and service capabilities resulting in a partial downsizing of certain operations. These actions are designed to reduce engineering, production and inventory carrying costs by supporting fewer manufacturing locations and product offerings. In connection with these actions, the Company recorded pre-tax charges to operations totaling $6,901,000, comprised of the following:

• Lease Termination and Related Charges. Lease termination and other related charges are comprised of the net losses expected to be incurred under the existing long-term lease agreements for facilities 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 related charges include the write-off of leasehold improvements related to the vacated facilities.

• Write-Down of Surplus Inventory. Inventory was written down to reflect its net realizable value for quantities on hand exceeding current and forecast order backlog requirements related to the curtailed product offerings.

• Severance and Other Compensation Costs. The Company’s total workforce will be reduced by 25 employees, or 2% from December 31, 2003 levels, when the restructuring is completed during the third quarter of fiscal 2004.

• Other Restructuring Charges. Other charges pertain to legal, travel and relocation costs.

The Company expects to incur additional restructuring-related expenses of approximately $1,900,000 during the last half of fiscal 2004 to complete the restructuring plans. These expenses, which are primarily relocation and travel costs, will be expensed as incurred.

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

	Total		Amounts Incurred						Balance at June 30,
(In thousands)	Charges		Noncash			Cash			2004
			(Unaudited)
Lease termination and other related charges	$	2,992	$	(102	)	$	—		$	2,890
Excess inventory write-downs	2,811		(2,811		)	—			—
Severance and other compensation costs	538		—			(20		)	518
Other restructuring charges	560		(65		)	(183		)	312
Total	6,901		$	(2,978	)	$	(203	)	$	3,720

Other restructuring-related charges to be incurred	1,900
Total expected restructuring charges	$	8,801

Future cash payments will be funded from existing cash balances and internally generated cash from operations.

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 $7,132,000, comprised of the following:

• Lease Termination and Related Charges. Lease termination charges reflect lease cancellation costs for the facilities vacated and possession returned to the lessor in connection with down-sizing a furniture manufacturing facility. Other related charges include the write-off of leasehold improvements related to the vacated facilities.

• Excess 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 related to the curtailed seating product offerings.

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

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

	Total		Amounts Incurred						Balance at December 31,
(In thousands)	Charges		Noncash			Cash			2003

Lease termination and other related charges	$	3,876	$	(591	)	$	(3,285	)	$	—
Excess inventory write-downs	3,073		(3,073		)	—			—
Severance and other compensation costs	183		—			(183		)	—
Total	$	7,132	$	(3,664	)	$	(3,468	)	$	—

The restructuring activities were completed during 2003.

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 in June 2003 and found to be impaired. As a result, $34,000,000 of goodwill associated with the reporting unit was written off and charged to operations during the three months ended June 30, 2003.

As described in Note 3, 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 3. Disposition of Specialty Avionics Group

On May 23, 2003, the Company consummated the sale of 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 which was signed during the first quarter of fiscal 2003, 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 first quarter of fiscal 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, based on the actual financial position of the group on the date of sale. As a result of the sale, the Specialty Avionics Group is presented as a discontinued operation in the accompanying consolidated financial statements.

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 $130,723,000 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 results operations and cash flows of the Specialty Avionics Group for the two months and five months ended May 23, 2003, the date of sale.

	May 23, 2003
(In thousands)	Two Months		Five Months
	(Unaudited)
Revenues	$	13,125	$	36,595

Operating expenses:
Costs and expenses	11,136		30,128
Impairment of goodwill	—		7,500
Amortization of intangible assets	321		878
Total operating expenses	11,457		38,506

Income (loss) from operations	1,668		(1,911		)

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

Pre-tax income (loss)	402		(5,286		)
Provision for income taxes	344		1,053

Income (loss) from operations	58		(6,339		)
Gain on sale, net of tax	689		689

Net income (loss) from discontinued operations	$	747	$	(5,650	)

(In thousands)	Five Months Ended May 23, 2003
	(Unaudited)
Cash Flows Provided By (Used For):
Operating activities	$	3,760
Investing activities	(902		)
Financing activities	(649		)
Net increase in cash and cash equivalents	(13		)
Effect of foreign currency translation on cash	(2		)
Net cash provided by discontinued operations	$	2,194

Note 4. Inventories

Inventories are comprised of the following as of June 30, 2004 and December 31, 2003:

(In thousands)	June 30, 2004		December 31, 2003
	(Unaudited)
Raw materials	$	28,483	$	30,414
Work-in-process	15,216		6,817
Finished goods	1,860		1,693
Costs and estimated earnings in excess of billings on uncompleted contracts	6,755		4,057
Total inventories	$	52,314	$	42,981

Total costs and estimated earnings on all uncompleted contracts as of June 30, 2004 and December 31, 2004 are comprised of the following:

(In thousands)	June 30, 2004			December 31, 2003
	(Unaudited)
Costs incurred on uncompleted contracts	$	79,663		$	71,824
Estimated earnings recognized	76,605			77,782
Total costs and estimated earnings	156,268			149,606
Less billings to date	(152,771		)	(145,661		)
Net	$	3,497		$	3,945

Balance sheet classification:
Asset – Costs and estimated earnings in excess of billings	$	6,755		$	4,057
Liability – Billings in excess of costs and estimated earnings (Note 6)	(3,258		)	(112		)
Net	$	3,497		$	3,945

Note 5. Other Assets, Principally Intangibles

Other assets are comprised of the following as of June 30, 2004 and December 31, 2003:

(In thousands)	June 30, 2004		December 31, 2003
	(Unaudited)
Identifiable intangible assets with finite useful lives	$	23,630	$	25,455
Deferred financing costs	10,231		11,812
Other non-amortizable assets	903		825
Total other assets	$	34,764	$	38,092

Identifiable Intangible Assets with Finite Useful Lives

Identifiable intangible assets with finite useful lives are comprised of the following as of June 30, 2004 and December 31, 2003:

	June 30, 2004 (Unaudited)							December 31, 2003
(In thousands)	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net

FAA certifications	$	22,272	$	(6,965	)	$	15,307	$	22,272	$	(6,222	)	$	16,050
Engineering drawings	7,645		(2,540		)	5,105		7,645		(2,286		)	5,359
Other identifiable intangibles	11,345		(8,127		)	3,218		11,345		(7,299		)	4,046
Total identifiable intangibles	$	41,262	$	(17,632	)	$	23,630	$	41,262	$	(15,807	)	$	25,455

Estimated annual amortization expense for all identifiable intangible assets with finite useful lives for the five-year period ending December 31, 2008 is as follows: 2004 – $3,644,000; 2005 – $3,477,000; 2006 – $2,275,000; 2007 – $2,175,000; and 2008 – $2,171,000.

Note 6. Accrued Liabilities

Accrued liabilities are comprised of the following as of June 30, 2004 and December 31, 2003:

(In thousands)	June 30, 2004		December 31, 2003
	(Unaudited)
Salaries, wages, compensated absences and payroll related taxes	$	4,700	$	4,017
Billings in excess of costs and estimated earnings on uncompleted contracts	3,258		112
Accrued interest	6,439		4,969
Customer advances and deposits	2,439		3,147
Current portion of accrued product warranty obligations	2,164		2,064
Other accrued liabilities	4,387		3,581
Total accrued liabilities	$	23,387	$	17,890

Note 7. Long-Term Debt

Long-term debt includes the following amounts as of June 30, 2004 and December 31, 2003:

(In thousands)	June 30, 2004			December 31, 2003
	(Unaudited)
First-lien credit facility:
Term debt	$	80,521		$	80,521
Revolving line of credit	15,050			—
Second-lien term debt	81,280			80,067
Capital lease obligations and other debt, secured by property and equipment	8,289			8,818
12% subordinated notes	100,000			100,000
Total long-term debt	285,140			269,406
Less current portion	(1,319		)	(1,198		)
Long-term debt, less current portion	$	283,821		$	268,208

A portion of the interest charged on the second-lien term debt is pay-in-kind or “accreted” interest, payable at maturity. An additional $1,213,000 of pay-in-kind interest accreted to the initial principal balance of the term debt during the six months ended June 30, 2004 and $607,000 during the three months ended June 30, 2004.

As of June 30, 2004, the Company had irrevocable standby letters of credit in the amount of $318,000 issued and outstanding under the first-lien credit facility, which reduces borrowings available under the $24,000,000 revolving line of credit.

Subsequent to June 30, 2004, some of the holders of the 12% subordinated notes elected to exchange their notes for new 17% senior discount notes (Note 13).

Note 8. Mandatorily Redeemable Preferred Stock

As more fully described in “Note 1—Changes in Accounting Principles,” the Company adopted the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” as of January 1, 2004.

The table below summarizes the increase in mandatorily redeemable preferred stock during the six months ended June 30, 2004.

	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		Total

Balance, December 31, 2003	432,919	$	43,292	$	(2,457	)	$	40,835	342,417	$	71,402	$	112,237
Preferred stock dividends	35,326	3,533		—			3,533		—	5,085		8,618
Redemption value accretion	—	—		234			234		—	—		234
Balance, June 30, 2004 (Unaudited)	468,245	$	46,825	$	(2,223	)	$	44,602	342,417	$	76,487	$	121,089

Per share liquidation value as of June 30, 2004 (Unaudited)		$	100.00							$	223.37

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 dividend payments; such shares are reflected as a component of minority interest in preferred stock of subsidiary. The preferred stock is mandatorily redeemable in cash on March 31, 2009.

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. The preferred stock is mandatorily redeemable in cash on September 30, 2009.

Subsequent to June 30, 2004, the Company amended the terms of both the 16% and 14% preferred stock to eliminate the dividends unless the Company achieves defined leverage ratios (Note 13).

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)	2004			2003			2004			2003
	(Unaudited)
Pre-tax income (loss) reported by:
Continuing operations	$	(16,430	)	$	(48,304	)	$	(28,047	)	$	(55,502	)
Discontinued operations	—			402			—			(5,286		)
Consolidated pre-tax loss	$	(16,430	)	$	(47,902	)	$	(28,047	)	$	(60,788	)

Total provision for income taxes (benefit):
Income tax benefit based on pre-tax loss	$	(4,619	)	$	(22,077	)	$	(7,143	)	$	(22,633	)
Net deferred tax assets valuation allowance	4,649			13,056			7,203			13,056
Net provision for income taxes (benefit)	$	30		$	(9,021	)	$	60		$	(9,577	)

Allocation of total provision:
Continuing operations	$	30		$	(9,365	)	$	60		$	(10,630	)
Discontinued operations	—			344			—			1,053
Net provision for income taxes (benefit)	$	30		$	(9,021	)	$	60		$	(9,577	)

For the three months and six months ended June 30, 2004, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally mandatorily redeemable preferred stock dividends due to the adoption of SFAS No. 150 effective January 1, 2004 (Note 1).

For the three months and six months ended June 30, 2003, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally the non-deductible portion of goodwill impairment charges and DeCrane Aircraft’s 16% preferred stock dividends.

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 tax 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 taxable income as the means to support the carrying value of the net deferred tax assets. As a result of the evaluation, the Company recorded a $13,056,000 valuation allowance, eliminating the net deferred asset, as of June 30, 2003.

As more fully described in Note 11 to the audited financial statements included in the Company’s 2003 Form 10-K, the Company had a net deferred tax asset of $19,528,000 fully offset by a valuation allowance of the same amount as of December 31, 2003. Based upon the results of operations for the six months ended June 30, 2004, the Company determined that an additional $7,203,000 valuation allowance was required as of that date, $4,649,000 of which is applicable to the three-month period.

Note 10. Commitments and Contingencies

Litigation

Raytheon Aircraft Company (“Raytheon”) has filed a complaint against the Company and one of its subsidiaries in the state court of Kansas with respect to alleged product liability related to certain aircraft seats sold to Raytheon by the Company’s subsidiary. The complaint does not specify the amount of damages claimed by Raytheon, but the amount could be material.

This action has just been served on the Company and no discovery has commenced; accordingly, management has not had an opportunity to determine the likely outcome of this claim. However, based on the allegations in the complaint and the facts currently available, management does not know of a basis which would result in this action having a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows. Further, the Company’s subsidiary may be indemnified by the entity from which it acquired the seat product line.

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

Note 11. Business Segment Information

The Company supplies products and services to the 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, determined using program accounting for product development costs, 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)	2004			2003			2004			2003
	(Unaudited)
Revenues:
Cabin Management	$	40,990		$	29,635		$	75,328		$	60,255
Systems Integration	15,380			14,718			29,911			26,850
Inter-group elimination (1)	(1,553		)	(240		)	(1,825		)	(1,092		)
Consolidated totals	$	54,817		$	44,113		$	103,414		$	86,013

Adjusted EBITDA (as defined):
Cabin Management	$	6,182		$	4,310		$	9,622		$	8,860
Systems Integration	2,399			4,180			5,428			6,337
Corporate (2)	(1,113		)	(1,395		)	(2,206		)	(3,507		)
Inter-group elimination (3)	(2		)	2			1			112
Consolidated totals	7,466			7,097			12,845			11,802
Reconciling items (4)	(23,926		)	(45,289		)	(40,952		)	(76,088		)
Net loss	$	(16,460	)	$	(38,192	)	$	(28,107	)	$	(64,286	)

(In thousands)	June 30, 2004			December 31, 2003
	(Unaudited)
Total assets (as of period end):
Cabin Management	$	241,077		$	224,116
Systems Integration	54,269			58,395
Corporate (5)	14,831			21,456
Inter-group elimination (6)	(11		)	(91		)
Consolidated totals	$	310,166		$	303,876

(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) Adjusted EBITDA (as defined) excludes the following charges reflected in the Company’s financial statements which are prepared in accordance with generally accepted accounting principles:

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2004			2003			2004			2003
	(Unaudited)
Depreciation and amortization of long- lived assets (a)	$	(2,277	)	$	(2,451	)	$	(4,603	)	$	(4,967	)
Adjustment to reflect program costs as research and development expenses (b)	(1,481		)	(3,278		)	(3,097		)	(4,851		)
Restructuring, asset impairment and other related charges	(6,901		)	(41,132		)	(6,901		)	(41,132		)
Acquisition related charges not capitalized	(9		)	(8		)	(18		)	(17		)
Interest expense	(8,750		)	(6,468		)	(17,452		)	(12,337		)
Mandatorily redeemable preferred stock dividends	(4,387		)	(1,657		)	(8,618		)	(3,254		)
Other expenses, net	(91		)	(407		)	(203		)	(746		)
Provision for income (taxes) benefit	(30		)	9,365			(60		)	10,630
Income (loss) from discontinued operations	—			747			—			(5,650		)
Cumulative effect of change in accounting principle	—			—			—			(13,764		)
Total reconciling items	$	(23,926	)	$	(45,289	)	$	(40,952	)	$	(76,088	)

(a) Reflects depreciation and amortization of long-lived assets but excludes 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)	2004		2003		2004		2003
	(Unaudited)
Depreciation and amortization of long- lived assets	$	2,277	$	2,451	$	4,603	$	4,967
Amortization of deferred financing costs	791		680		1,581		1,375
Consolidated depreciation and amortization	$	3,068	$	3,131	$	6,184	$	6,342

(b) Under program accounting, which the Company is required to use for determining covenant compliance under its credit agreements, certain product development costs incurred in connection with specific contracted programs are deferred and charged to cost of sales as revenues related to the program are recognized. For financial reporting purposes, these costs are charged to research and development expense as incurred. This adjustment reflects the net difference between these two methods of accounting.

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

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

Note 12. Supplemental Condensed Consolidating Financial Information

In conjunction with the 12% subordinated notes described in Note 7, the following condensed consolidating financial information is presented segregating DeCrane Aircraft, as the issuer, and the 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 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. DeCrane Aircraft’s non-guarantor subsidiaries are companies within the Specialty Avionics Group which was sold in May 2003 and is therefore classified as a component of discontinued operations.

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, 2004 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Assets

Current assets:
Cash and cash equivalents	$	1,710		$	652		$	—		$	—		$	2,362
Accounts receivable, net	—			27,322			—			—			27,322
Inventories	—			52,314			—			—			52,314
Other current assets	88			1,088			—			—			1,176
Total current assets	1,798			81,376			—			—			83,174

Property and equipment, net	890			28,908			—			—			29,798
Other assets, principally goodwill	12,143			185,051			—			—			197,194
Investments in subsidiaries	79,245			—			(66,667		)	(12,578		)(1)	—
Intercompany receivables	228,891			56,857			—			(285,748		)(2)	—
Total assets	$	322,967		$	352,192		$	(66,667	)	$	(298,326	)	$	310,166

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities:
Current portion of long-term debt	$	46		$	1,273		$	—		$	—		$	1,319
Other current liabilities	8,852			31,976			—			—			40,828
Total current liabilities	8,898			33,249			—			—			42,147

Long-term debt, less current portion	276,921			6,900			—			—			283,821
Mandatorily redeemable preferred stock	44,602			—			76,487			—			121,089
Intercompany payables	56,857			228,891			—			(285,748		)(2)	—
Other long-term liabilities	3,661			4,175			—			—			7,836

Stockholders’ equity (deficit):
Paid-in capital	111,682			151,492			61,515			(264,479		)(1)	60,210
Retained earnings (deficit)	(179,654		)	(72,247		)	(204,669		)	251,901		(1)	(204,669		)
Accumulated other comprehensive loss	—			(268		)	—			—			(268		)
Total stockholders’ equity (deficit)	(67,972		)	78,977			(143,154		)	(12,578		)	(144,727		)
Total liabilities and stockholders’ equity (deficit)	$	322,967		$	352,192		$	(66,667	)	$	(298,326	)	$	310,166

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

Assets

Current assets:
Cash and cash equivalents	$	6,540		$	396		$	—		$	—		$	6,936
Accounts receivable, net	—			21,455			—			—			21,455
Inventories	—			42,981			—			—			42,981
Other current assets	254			828			—			—			1,082
Total current assets	6,794			65,660			—			—			72,454

Property and equipment, net	1,047			29,853			—			—			30,900
Other assets, principally goodwill	13,615			186,907			—			—			200,522
Investments in subsidiaries	85,668			—			(44,913		)	(40,755		)(1)	—
Intercompany receivables	261,631			100,642			—			(362,273		)(2)	—
Total assets	$	368,755		$	383,062		$	(44,913	)	$	(403,028	)	$	303,876

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

Current liabilities:
Current portion of long-term debt	$	11		$	1,187		$	—		$	—		$	1,198
Other current liabilities	8,532			24,820			—			—			33,352
Total current liabilities	8,543			26,007			—			—			34,550

Long-term debt, less current portion	260,654			7,554			—			—			268,208
Intercompany payables	100,642			261,631			—			(362,273		)(2)	—
Other long-term liabilities	2,994			2,470			—			—			5,464

Minority interest in preferred stock of subsidiary	40,835			—			—			—			40,835
Mandatorily redeemable 14% preferred stock	—			—			71,402			—			71,402

Stockholders’ equity (deficit):
Paid-in capital	111,719			151,492			60,247			(263,211		)(1)	60,247
Retained earnings (deficit)	(156,632		)	(65,824		)	(176,562		)	222,456		(1)	(176,562		)
Accumulated other comprehensive loss	—			(268		)	—			—			(268		)
Total stockholders’ equity	(44,913		)	85,400			(116,315		)	(40,755		)	(116,583		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	368,755		$	383,062		$	(44,913	)	$	(403,028	)	$	303,876

Statements of Operations

	Six Months Ended June 30, 2004 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	103,414		$	—		$	—		$	103,414
Cost of sales	—			84,156			—			—			84,156

Gross profit	—			19,258			—			—			19,258

Operating and other expenses (income):
Selling, general and administrative expenses	2,422			12,603			—			—			15,025
Research and development expenses	—			4,182			—			—			4,182
Amortization of intangible assets	—			1,825			—			—			1,825
Interest expense	17,091			361			—			—			17,452
Mandatorily redeemable preferred stock dividends	3,533			—			5,085			—			8,618
Intercompany charges	(10,879		)	10,879			—			—			—
Equity in loss of subsidiaries	6,423			—			23,022			(29,445		)(3)	—
Other expenses (income), net	214			(11		)	—			—			203
Provision for income taxes (benefit)	4,218			(4,158		)	—			—			60

Net loss	$	(23,022	)	$	(6,423	)	$	(28,107	)	$	29,445		$	(28,107	)

	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	—			67,592			—			—			67,592

Gross profit	—			18,421			—			—			18,421

Operating and other expenses (income):
Selling, general and administrative expenses	4,904			12,005			—			—			16,909
Research and development expenses	—			4,851			—			—			4,851
Impairment of goodwill	—			34,000			—			—			34,000
Amortization of intangible assets	—			1,826			—			—			1,826
Interest expense	12,116			221			—			—			12,337
Mandatorily redeemable preferred stock dividends	—			—			3,254			—			3,254
Intercompany charges	(11,575		)	11,575			—			—			—
Equity in loss of subsidiaries	46,968			218			61,032			(108,218		)(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
Cumulative effect of change in accounting principle	—			13,764			—			—			13,764

Net loss	$	(61,032	)	$	(46,968	)	$	(64,504	)	$	108,218		$	(64,286	)

Statements of Cash Flows

	Six Months Ended June 30, 2004 (Unaudited)
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net loss	$	(23,022	)	$	(6,423	)	$	(28,107	)	$	29,445		$	(28,107	)
Noncash adjustments:
Equity in loss of subsidiaries	6,423			—			23,022			(29,445		)(3)	—
Other noncash adjustments	6,717			7,412			5,085			—			19,214
Changes in working capital	(9,992		)	1,592			—			—			(8,400		)
Net cash provided by (used for) operating activities	(19,874		)	2,581			—			—			(17,293		)

Cash flows from investing activities:
Capital expenditures	—			(1,767		)	—			—			(1,767		)
Net cash used for investing activities	—			(1,767		)	—			—			(1,767		)

Cash flows from financing activities:
Net revolving line of credit borrowings	15,050			—			—			—			15,050
Other secured long-term borrowings	—			46			—			—			46
Other secured long-term debt repayments	(6		)	(604		)	—			—			(610		)
Net cash provided by (used for) financing activities	15,044			(558		)	—			—			14,486

Net increase (decrease) in cash and equivalents	(4,830		)	256			—			—			(4,574		)
Cash and equivalents at beginning of period	6,540			396			—			—			6,936

Cash and equivalents at end of period	$	1,710		$	652		$	—		$	—		$	2,362

	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	$	(61,032	)	$	(46,968	)	$	(64,504	)	$	108,218	(3)	$	(64,286	)
Noncash adjustments:
Cumulative effect of change in accounting principle	—			13,764			—			—			13,764
Loss from discontinued operations	—			5,432			218			—			5,650
Equity in loss of subsidiaries	46,968			218			61,032			(108,218		)(3)	—
Other noncash adjustments	(21,973		)	54,615			3,254			—			35,896
Changes in working capital	15,765			(26,731		)	—			—			(10,966		)
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, net of cash acquired	(600		)	—			—			—			(600		)
Net cash provided by (used for) investing activities	132,174			(1,976		)	—			—			130,198

Cash flows from financing activities:
Net revolving line of credit borrowings	9,250			—			—			—			9,250
First-lien term debt repayments	(129,275		)	—			—			—			(129,275		)
Other secured long-term debt repayments	(649		)	(524		)	—			—			(1,173		)
Net cash provided by (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

Note 13. Subsequent Event

On July 23, 2004, holders of $64,485,000 of DeCrane Aircraft’s 12% senior subordinated notes due September 30, 2008 (the “existing notes”) exchanged their notes for new 17% senior discount notes due September 30, 2008 (the “new notes”). The new notes do not bear cash interest and have an initial accreted value equal to the principal amount of the notes exchanged. The new notes accrete in value at a 17% annual rate and will have a $127,771,000 aggregate accreted principal value at maturity. The new notes are senior unsecured obligations of DeCrane Aircraft and are guaranteed by its subsidiaries. Except for the changes in the interest rate and payment and ranking described above, the new notes have terms substantially identical to those contained in the existing notes, although covenants limiting the incurrence of indebtedness, the granting of liens and the making of restricted payments are more restrictive.

Concurrent with the note exchange, DeCrane Aircraft amended the terms of its 16% senior preferred stock and DeCrane Holdings also amended the terms of its 14% preferred stock as well. The amended terms provide that further dividends do not accrue on the preferred stock, except if a leverage ratio (as defined) falls below certain specified levels or if certain triggering events occur, such as failure to discharge any mandatory redemption obligations, and the like. Depending upon the future leverage ratio achieved, dividends will resume at various dividend rates. All dividends accrued through the amendment date and future dividends, if any, are not payable until redemption. The amendment for the 16% preferred stock accelerates the mandatory redemption date from March 31, 2009 to December 31, 2008 while the September 30, 2009 mandatory redemption date for the 14% preferred stock remained unchanged. The amendment to the 16% preferred stock also adds several restrictive covenants. The holders of the 16% preferred stock were issued 348,945 shares of DeCrane Holdings common stock in connection with the amendment.

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.

Results of Operations

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

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

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

We define Adjusted EBITDA as earnings, determined using program accounting for product development costs, 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 group 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.

Adoption of SFAS No. 150. Effective January 1, 2004, we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” 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. As a result of adopting SFAS No. 150 on January 1, 2004, all mandatorily redeemable preferred stock was reclassified as a liability and all quarterly dividends are reflected as a charge against pre-tax income. In periods prior to January 1, 2004, DeCrane Holdings’ 14% preferred stock dividends were deducted in arriving at the net income or loss applicable to our common stockholders; DeCrane Aircraft’s 16% preferred stock dividends were charged against pre-tax income as minority interest in preferred stock of subsidiary.

The following table summarizes the results of operations for the three months and six months ended June 30, 2003 as if SFAS No. 150 had been in effect as of the beginning of 2003.

	Three Months Ended June 30, 2003						Six Months Ended June 30, 2003
(In millions)	As Reported			Pro Forma			As Reported			Pro Forma

Loss from continuing operations	$	(39.0	)	$	(41.3	)	$	(44.9	)	$	(49.3	)
Net loss	(38.2		)	(40.5		)	(64.3		)	(68.7		)

The pro forma data reflects DeCrane Holdings 14% preferred stock dividends of $2.3 million for the three months ended June 30, 2003 and $4.4 million for the six months ended June 30, 2003 as charges against income during the periods.

Change in Accounting for Product Development Costs. In addition, and as more fully described in “Note 1—Change in Accounting Principle” to the audited financial statements included in the Company’s 2003 Form 10-K, we elected to discontinue the use of program accounting for the costs of products manufactured for delivery under production-type contracts. As a result, certain deferred program costs are no longer included in inventory commencing January 1, 2003.

previously inventoried costs totaling $3.3 million and $4.9 million for the three months and six months ended June 30, 2003, respectively, to research and development expense and recording a $13.8 million charge as of January 1, 2003 to reflect the cumulative effect of the change in accounting principle.

Our results of operations for 2003 and 2004 have been affected by restructuring, impairment and other related charges pertaining to a series of restructuring activities. 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” below.

Increase (Decrease)
From 2003

(In millions)

Amount

Percent

Cabin Management

Revenues. Revenues increased $10.7 million, or 24.3%, to $54.8 million for the three months ended June 30, 2004 from $44.1 million for the three months ended June 30, 2003. By segment, revenues changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Cabin Management	$	11.4		38.3	%
Systems Integration	0.7			4.5
Increase in inter-group elimination	(1.4		)
Total	$	10.7

Cabin Management. Revenues increased by $11.4 million, or 38.3% compared to the prior year due to a higher volume of corporate jet production by aircraft manufacturers. The increase consisted of the following:

• a $10.8 million increase in aircraft furniture and related products revenues;

• a $1.1 million increase in cabin management and entertainment systems revenues; and

• a $0.3 million increase in seating products revenues; offset by

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

Systems Integration. Revenues increased by $0.7 million, or 4.5% compared to the prior year, due to:

• a $2.5 million increase in completion and service center revenues; and

• a $1.0 million increase in commercial aircraft systems integration engineering services; offset by

• a $2.8 million decrease resulting from lower production of auxiliary fuel systems pursuant to our supply contract with Boeing Business Jet.

BBJ has exercised its option to convert the supply contract to a “requirements” contract, from a guaranteed “take-or-pay” contract, commencing January 1, 2005. Production under the “take-or-pay” portion of the contract for 2004 was completed during the second quarter of fiscal 2004 and no new orders have been placed pursuant to the new “requirements” contract. Based upon the number of auxiliary fuel systems BBJ has in its inventory, we believe we may not receive any orders for additional systems until late in fiscal 2005. During the three months ended June 30, 2004, auxiliary fuel systems revenues were $3.3 million compared to $6.1 million for the same period last year.

Gross profit. Gross profit increased $2.1 million, or 38.9%, to $7.5 million for the three months ended June 30, 2004 from $5.4 million for the same period in the prior year. By segment, gross profit changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Cabin Management	$	8.5		121.9	%
Systems Integration	(6.4		)	(121.4	)
Total	$	2.1

Cabin Management. Gross profit increased by $8.5 million compared to the prior year, primarily due to:

• a $5.8 million decrease in restructuring charges incurred in 2004 compared to those incurred during the same period in 2003 related to our furniture and seating operations;

• a $2.4 million increase related to higher volume in aircraft furniture and related products revenues; and

• a $0.6 million increase in gross profit related to higher volume for our cabin management and entertainment systems; offset by

• a $0.3 million decrease in gross profit related to other products.

Systems Integration. Gross profit decreased by $6.4 million, or 121.4% compared to the prior year, primarily due to:

• $5.3 million of restructuring charges incurred in 2004 related to the reorganization of our manufacturing operations; and

• a $1.6 million decrease resulting from lower revenues from auxiliary fuel systems and a change in product delivery mix; offset by

• a $0.5 million increase resulting from the increase in commercial aircraft systems integration engineering services revenues.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.8 million, or 11.6%, to $7.8 million for the three months ended June 30, 2004, from $7.0 million for the same period in the prior year. By segment, SG&A expenses changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Cabin Management	$	0.5		13.1	%
Systems Integration	0.6			47.6
Corporate	(0.3		)
Total	$	0.8

Cabin Management. SG&A expenses increased by $0.5 million, or 13.1% compared to the prior year, primarily as a result of restructuring charges.

Systems Integration. SG&A expenses increased by $0.6 million, or 47.6% compared to the prior year, primarily as a result of higher sales and marketing activities associated with the aircraft completion portion of our business.

Corporate. SG&A expenses decreased by $0.3 million compared to the prior year due principally to lower costs pursuant to the incentive compensation plan.

Research and development expenses. Research and development expenses decreased $1.3 million, or 38.9%, to $2.0 million for the three months ended June 30, 2004 compared to $3.3 million in the prior year. By segment, research and development expenses changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Cabin Management	$	(1.8	)	(60.5	)%
Systems Integration	0.5			219.8
Total	$	(1.3	)

Cabin Management. R&D expenses decreased $1.8 million, or 60.5% compared to the prior year. The decrease is primarily related to the near completed development of our new single-design seat technology and design of new interior furnishing components for a major customer’s recently introduced new model of aircraft.

Systems Integration. R&D expenses increased $0.5 million, or 219.8% compared to the prior year. The increase is principally due to the ongoing development of our video surveillance system for different models of commercial aircraft and a design modification to an existing product.

Depreciation and amortization of intangibles. Depreciation and amortization expense decreased $0.2 million to $2.3 million for the three months ended June 30, 2004 from $2.5 million for the same period in the prior year. The decline is attributable to reduced capital expenditures and a lower depreciable base. Depreciation and amortization changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Depreciation charged to:
Cost of sales	$	(0.1	)	(6.4	)%
Selling, general and administrative expense	(0.1		)	(20.2	)
Amortization of intangible assets	0.0
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 increased by $1.9 million, or 43.5%, to $6.2 million for the three months ended June 30, 2004 compared to $4.3 million for the same period in the prior year primarily due to:

• a $2.4 million increase in gross profit related to our business, VIP and head-of-state aircraft furniture and seating operations, excluding the effect of restructuring charges;

• a $0.6 million increase in gross profit related to our cabin management and entertainment systems;

• a $1.8 million decrease in research and development spending; offset by

• a $2.4 million unfavorable impact resulting from adjusting for program costs;

• a $0.3 million decrease in gross profit related to other products; and

• a $0.2 million increase in SG&A spending.

Systems Integration. Adjusted EBITDA decreased by $1.8 million, or 42.6%, to $2.4 million for the three months ended June 30, 2004 compared to $4.2 million for the same period in the prior year due to:

• a $1.2 million decline in gross profit, excluding the effect of restructuring charges; and

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

Impairment of goodwill. During the three months ended June 30, 2003, a $34.0 million charge was recorded to reflect the impairment of goodwill in connection with the impairment testing provision of SFAS No. 142, “Goodwill and Other Intangible Assets.” See “—Restructuring, Asset Impairment and Other Related Charges.”

Operating income (loss). The operating loss decreased $36.6 million, or 91.9%, to a loss of $3.2 million for the three months ended June 30, 2004, from a loss of $39.8 million for the same period in the prior year. By segment, the operating loss changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Cabin Management	$	(43.8	)	(105.8	)%
Systems Integration	7.6			234.5
Corporate	(0.4		)
Total	$	(36.6	)

Cabin Management. The operating loss decreased by $43.8 million, or 105.8% compared to the prior year, due to:

• a $34.0 million decrease in impairment charges;

• a $5.5 million decrease in restructuring charges incurred in 2004 as compared to 2003;

• a $2.4 million increase in gross profit, primarily due to lower revenues related to our furniture and seating operations;

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

• a $1.8 million decrease in research and development expenses; offset by

• a $0.3 million decrease in gross profit related to other products; and

• a $0.2 million increase in SG&A spending.

Systems Integration. The operating loss increased by $7.6 million, or 234.5% compared to the prior year, due to:

• $5.3 million of restructuring charges incurred in 2004;

• a $0.6 million increase in SG&A spending;

• a $1.1 million decrease resulting from reduced gross profit on lower revenues; and

• a $0.6 million increase in research and development expenses.

Interest expense. Interest expense increased $2.3 million, or 35.3%, to $8.8 million for the three months ended June 30, 2004 compared to $6.5 million for the same period in the prior year. The increase is attributable to:

• $3.0 million of additional interest expense attributable to $80.0 million of second-lien term debt issued in December 2003; and

• a $0.3 million increase in other interest expense; offset by

• a $1.0 million decrease in our first-lien interest expense due to lower principal balances outstanding resulting from the partial refinancing with second-lien debt in December, offset, in part, by a 1.5% increase in interest rate margins charged by our lenders based on our consolidated debt leverage ratio.

Mandatorily redeemable preferred stock dividends. Mandatorily redeemable preferred stock dividends increased $2.7 million to $4.4 million for the three months ended June 30, 2004 from $1.7 million for the same period in the prior year as follows:

	Three Months Ended June 30,
(In millions)	2004		2003

DeCrane Holdings 14% preferred stock	$	2.6	$	—
DeCrane Aircraft 16% preferred stock	1.8		1.7
Total dividends	$	4.4	$	1.7

As more fully described in “—Changes in Accounting Principles” above, effective January 1, 2004 we adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” As a result of adopting of SFAS No. 150, the 14% quarterly preferred stock dividends are reflected as a charge against pre-tax income. In periods prior to January 1, 2004, the 14% preferred stock dividends were deducted in arriving at the net income or loss applicable to DeCrane Holdings’ common stockholders and amounted to $2.3 million for the three months ended June 30, 2003; DeCrane Aircraft’s 16% preferred stock dividends totaled $1.7 million and were charged against pre-tax income as minority interest in preferred stock of subsidiary. The increase between periods is attributable to the quarterly compounding of the dividends accrued but not declared and paid.

Provision for income tax benefit. The provision for income taxes is comprised of the following:

	Three Months Ended June 30,
(In millions)	2004			2003

Income tax (benefit) based on reported pre-tax loss	$	(4.6	)	$	(22.5	)
Net deferred tax asset valuation allowance	4.6			13.1
Net income tax benefit	$	—		$	(9.4	)

For the three months ended June 30, 2003, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally the non-deductible portion of goodwill impairment charges and DeCrane Aircraft’s 16% preferred stock dividends.

For the three months ended June 30, 2004, the provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally mandatorily redeemable preferred stock dividends due to the adoption of SFAS No. 150 effective January 1, 2004 described above.

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

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

As more fully described in Note 11 to the audited financial statements included in the Company’s 2003 Form 10-K, there were net deferred tax asset of $19.5 million fully offset by a valuation allowance of the same amount as of December 31, 2003. Based upon the results of operations for the six months ended June 30, 2004, we determined that an additional $7.2 million valuation allowance was required as of that date, $4.6 million of which is applicable to the three-month period.

Loss from continuing operations. The loss from continuing operations decreased $22.4 million to a loss of $16.5 million for the three months ended June 30, 2004 compared to a loss of $38.9 million for the same period in the prior year, primarily due to:

• a $36.6 million operating loss decrease; offset by

• a $2.1 million increase in interest and other expenses (net);

• a $9.4 million decrease in income tax benefit; and

• a $2.7 million increase in preferred stock dividends, principally resulting from the adoption of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” as described above.

Income from discontinued operations. Income from discontinued operations was $0.7 million for the three months ended June 30, 2003 and reflects the results of operations of our Specialty Avionics Group which was sold on May 22, 2003.

Net loss. Net loss decreased $21.7 million to a net loss of $16.5 million for the three months ended June 30, 2004 compared to a net loss of $38.2 million for the same period in the prior year. The decrease is attributable to:

• a decrease in loss from continuing operations of $22.4 million; offset by

• a decrease in the income from discontinued operations of $0.7 million.

Net loss applicable to common stockholders. Net loss applicable our common stockholders decreased $23.9 million to a net loss of $16.5 million for the three months ended June 30, 2004 compared to a net loss of $40.4 million for the same period in the prior year. The decrease in the net loss applicable to our common stockholder is attributable to:

• a $21.7 million decrease in our net loss; and

• a $2.2 million decrease in preferred stock dividends resulting from the January 1, 2004 adoption of SFAS No. 150 which requires preferred stock dividends be deducted from the net income or loss for the period.

Bookings and Backlog. Bookings decreased $1.4 million, or 2.8%, to $50.5 million for the three months ended June 30, 2004 compared to $51.9 million for the same period in the prior year. Backlog increased $15.2 million to $73.2 million as of June 30, 2004 compared to $58.0 million as of December 31, 2003. By segment, bookings and backlog changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Bookings:
Cabin Management	$	16.9		63.9	%
Systems Integration	(18.3		)	(71.8	)
Total	$	(1.4	)

Backlog:
Cabin Management	$	14.1		41.7	%
Systems Integration	1.1			4.5
Total	$	15.2

Cabin Management’s bookings and backlog increased as a result of the increase in our customer’s aircraft production schedules during the period. Systems Integration’s bookings decrease resulted from a $24.0 million decrease in orders for auxiliary fuel systems offset by an increase in bookings for other products and services.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Revenues. Revenues increased $17.4 million, or 20.2%, to $103.4 million for the six months ended June 30, 2004 from $86.0 million for the three months ended June 30, 2003. By segment, revenues changed as follows:

	Increase (Decrease) From 2003
(In millions)	Amount			Percent

Cabin Management	$	15.1		25.0	%
Systems Integration	3.1			11.4
Increase in inter-group elimination	(0.8		)
Total	$	17.4

Cabin Management. Revenues increased by $15.1 million, or 25.0% compared to the prior year due to a higher volume of corporate jet production by aircraft manufacturers. The increase consisted of the following:

• an $11.9 million increase in aircraft furniture and related products revenues;

• a $2.3 million increase in cabin management and entertainment systems revenues; and

• a $1.7 million increase in seating products revenues; offset by

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

Systems Integration. Revenues increased by $3.1 million, or 11.4% compared to the prior year, due to:

• a $3.3 million increase in completion and service center revenues; and

• a $2.0 million increase in commercial aircraft systems integration engineering services; offset by

• a $2.2 million decrease resulting from lower production of auxiliary fuel systems pursuant to our supply contract with Boeing Business Jet.

BBJ has exercised its option to convert the supply contract to a “requirements” contract, from a guaranteed “take-or-pay” contract, commencing January 1, 2005. Production under the “take-or-pay” portion of the contract for 2004 is complete and no new orders have been placed pursuant to the new “requirements” contract. Based upon the number of auxiliary fuel systems BBJ has in its inventory, we believe we may not receive any orders for additional systems until late in fiscal 2005. During the six months ended June 30, 2004, auxiliary fuel systems revenues were $11.8 million compared to $14.0 million for the same period last year. During the year ended December 31, 2003, BBJ auxiliary fuel systems provided approximately $26.4 million, or 15.5%, of our consolidated revenues.

Gross profit. Gross profit increased $0.8 million, or 4.5%, to $19.2 million for the six months ended June 30, 2004 from $18.4 million for the same period in the prior year. By segment, gross profit changed as follows:

DECRANE HOLDINGS CO 10-Q