Prepared by MerrillDirect

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, 2001

Commission File Number 333-70365

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

Delaware	34-1645569
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

2361 Rosecrans Avenue, Suite 180, El Segundo, CA 90245
(Address, including zip code, of principal executive offices)

(310) 725-9123
(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

The number of shares of Registrant's Common Stock, $.01 par value, outstanding as of August 10, 2001 was 100 shares.

Table of Contents

Part I – Financial Information

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000
	Consolidated Statements of Operations for the three months and six months ended June 30, 2001 and 2000
	Consolidated Statements of Stockholder’s Equity for the six months ended June 30, 2001
	Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000
	Condensed Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Overview
	Results of Operations
	Liquidity and Capital Resources
	Recently Issued Accounting Pronouncements
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
	Interest Rate Risk
	Foreign Currency Exchange Risk

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 AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(In thousands, except share data)

					June 30, 2001				December 31, 2000

					(Unaudited)
Assets
Current assets
	Cash and cash equivalents				$	7,536			$	8,199
	Accounts receivable, net				61,473				53,131
	Inventories				90,081				83,677
	Deferred income taxes				13,756				15,090
	Prepaid expenses and other current assets				1,813				987

		Total current assets			174,659				161,084
Property and equipment, net					61,299				59,491
Other assets, principally intangibles, net					428,146				439,582

				Total assets	$	664,104			$	660,157

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity
Current liabilities
	Current portion of long-term debt				$	13,168			$	9,289
	Accounts payable				23,994				20,304
	Accrued liabilities				44,060				70,472
	Income taxes payable				4,229				3,505

		Total current liabilities			85,451				103,570
Long-term debt					391,097				373,990
Deferred income taxes					38,475				37,013
Other long-term liabilities					2,694				2,650
Commitments and contingencies (Note 8)
Mandatorily redeemable preferred stock					25,619				23,179

Stockholder’s equity
	Cumulative convertible preferred stock, $.01 par value, 8,314,018 shares authorized; none issued and outstanding as of June 30, 2001 and December 31, 2000				—				—
	Undesignated preferred stock, $.01 par value, 9,300,000 shares authorized as of June 30, 2001 and December 31, 2000; none issued and outstanding as of June 30, 2001 and December 31, 2000				—				—
	Common stock, $.01 par value, 35,000,000 shares authorized; 100 shares issued and outstanding as of June 30, 2001 and December 31, 2000				—				—
	Additional paid-in capital				126,373				127,315
	Notes receivable for shares sold				(2,622			)	(2,552		)
	Accumulated deficit				—				(3,321		)
	Accumulated other comprehensive loss				(2,983		)		(1,687		)

		Total stockholder’s equity			120,768				119,755

			Total liabilities and stockholder’s equity		$	664,104			$	660,157

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

Consolidated Statements of Operations
(In thousands)

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

				2001			2000			2001			2000

				(Unaudited)

Revenues				$	102,360		$	82,094		$	201,511		$	161,272
Cost of sales				69,784			54,483			133,890			107,509

		Gross profit		32,576			27,611			67,621			53,763

Operating expenses
	Selling, general and administrative expenses			13,436			9,893			28,096			20,939
	Amortization of intangible assets			4,955			4,037			9,921			8,250

			Total operating expenses	18,391			13,930			38,017			29,189

			Income from operations	14,185			13,681			29,604			24,574
Other expenses
	Interest expense			9,875			10,037			20,330			18,713
	Other expenses, net			12			109			117			173

Income before provision for income taxes				4,298			3,535			9,157			5,688
Provision for income taxes				2,187			1,548			4,574			2,946

Net income				2,111			1,987			4,583			2,742
Accrued preferred stock dividends				(1,124		)	—			(2,206		)	—
Preferred stock redemption value accretion				(117		)	—			(234		)	—

Net income applicable to common stockholder				$	870		$	1,987		$	2,143		$	2,742

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

Consolidated Statements of Stockholder’s Equity
(In thousands, except share data)



					Additional Paid-in Capital			For Shares Sold			Notes Receivable Accumulated Deficit			Accumulated Other Comprehensive Loss			Total

		Common Stock

		Shares	Amount

Balance, December 31, 2000		100	$	—	$	127,315		$	(2,552	)	$	(3,321	)	$	(1,687	)	$	119,755
Comprehensive income
	Net income	—	—		—			—			4,583			—			4,583
	Translation adjustment	—	—		—			—			—			(1,296		)	(1,296		)

																	3,287

Accrued preferred stock dividends		—	—		(944		)	—			(1,262		)	—			(2,206		)
Preferred stock redemption value accretion		—	—		(234		)	—			—			—			(234		)
Compensatory stock option expense		—	—		236			—			—			—			236
Notes receivable interest accrued		—	—		—			(70		)	—			—			(70		)

Balance, June 30, 2001 (Unaudited)		100	$	—	$	126,373		$	(2,622	)	$	—		$	(2,983	)	$	120,768

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

Consolidated Statements of Cash Flows
(In thousands)

					Six Months Ended
					June 30,

					2001			2000

					(Unaudited)
Cash flows from operating activities
	Net income				$	4,583		$	2,742
	Adjustments to reconcile net income to net cash
			provided by operating activities
				Depreciation and amortization	16,925			13,474
				Deferred income taxes	1,406			1,407
				Other, net	597			522
		Changes in assets and liabilities, net of effect from acquisitions
			Accounts receivable		(9,002		)	(11,684		)
			Inventories		(6,538		)	(7,661		)
			Prepaid expenses and other assets		(1,299		)	(316		)
			Accounts payable		3,828			(768		)
			Accrued liabilities		(11,908		)	(1,827		)
			Income taxes payable		2,223			1,199
			Other long-term liabilities		80			(195		)

				Net cash provided by (used for) operating activities	895			(3,107		)

Cash flows from investing activities
		Cash paid for acquisitions, net of cash acquired			(13,529		)	(76,861		)
		Capital expenditures			(6,365		)	(12,635		)
		Other, net			635			75

				Net cash used for investing activities	(19,259		)	(89,421		)

Cash flows from financing activities
		Net senior credit facility borrowings			21,400			65,000
		Proceeds from the sale of preferred stock			—			25,000
		Capital contribution			—			7,500
		Principal payments on term debt, capitalized leases and other debt			(3,035		)	(2,611		)
		Deferred financing costs			(580		)	(2,170		)
		Other, net			(93		)	(187		)

				Net cash provided by financing activities	17,692			92,532

Effect of foreign currency translation on cash					9			(5		)

Net decrease in cash and cash equivalents					(663		)	(1		)
Cash and cash equivalents at beginning of period					8,199			7,918

Cash and cash equivalents at end of period					$	7,536		$	7,917

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

Condensed Notes to Consolidated Financial Statements
(Unaudited)

Note 1. Consolidated Financial Statements

The consolidated interim financial statements included in this report are unaudited. The Company believes the interim financial statements are presented on a basis consistent with the audited financial statements. The Company also believes that the interim financial statements contain all adjustments necessary for a fair statement of the results for such interim periods. All of these adjustments are normal recurring adjustments. The results of operations for interim periods do not necessarily predict the operating results for the full year. The consolidated balance sheet as of December 31, 2000 has been derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles as permitted by interim reporting requirements. The information included in this report 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 2000 Form 10-K. Some reclassifications have been made to prior periods’ financial statements to conform to the 2001 presentation.

Note 2. Unaudited Pro Forma Results of Operations for 2000 Acquisitions

Unaudited pro forma consolidated results of operations are presented in the table below for the six months ended June 30, 2000. The pro forma results of operations reflects the companies acquired during 2000, which are not reflected in the June 30, 2000 historical results, as if all of the acquisitions were consummated as of January 1, 2000. Historical results for 2001, which reflects the companies acquired during 2000, are presented for comparability. Amounts are in thousands.

	Six Months Ended June 30,

	2001 Historical		2000 Pro Forma

	(Unaudited)
Revenues	$	201,511	$	183,582
EBITDA, as defined (Note 10)	45,791		43,898
Net income	4,583		3,119

The pro forma results of operations do not purport to represent what actual results would have been if the transactions described above occurred on such dates or to project the results of operations for any future period. The above information reflects adjustments for inventory, depreciation, amortization, general and administrative expenses and interest expense based on the new cost basis and debt and capital structure of the Company following the acquisitions.

Note 3. Inventories

Inventories are comprised of the following as of June 30, 2001 and December 31, 2000 (amounts in thousands):

		June 30, 2001		December 31, 2000

		(Unaudited)
Raw materials		$	48,187	$	49,235
Work-in process		33,952		26,749
Finished goods		7,942		7,693

	Total inventories	$	90,081	$	83,677

Inventoried costs are not in excess of estimated realizable value and include direct engineering, production and tooling costs, and applicable manufacturing overhead. In accordance with industry practice, inventoried costs include amounts relating to programs and contracts with long production cycles. Included above are program costs, principally engineering, of $13,391,000 at June 30, 2001 and $8,603,000 at December 31, 2000 related to long-term contracts that will be recoverable based on future sales. Periodic assessments are performed to ensure recoverability of program costs and adjustments are made, if necessary, to reduce inventoried costs to estimated realizable value. No adjustments were required in 2001 and 2000.

Note 4. Accrued Liabilities

Accrued liabilities are comprised of the following as of June 30, 2001 and December 31, 2000 (amounts in thousands):

		June 30, 2001		December 31, 2000

		(Unaudited)
Acquisition related contingent consideration		$	5,829	$	20,154
Customer advances and deposits		9,519		14,082
Salaries, wages, compensated absences and payroll related taxes		12,492		15,337
Accrued interest		5,125		3,730
Other accrued liabilities		11,095		17,169

	Total accrued liabilities	$	44,060	$	70,472

Note 5. Long-Term Debt

Long-term debt includes the following amounts as of June 30, 2001 and December 31, 2000 (amounts in thousands):

			June 30, 2001			December 31, 2000

			(Unaudited)
Senior credit facility
	$25 million working capital revolving line of credit		$	1,800		$	—
	$25 million acquisition revolving line of credit		12,000			12,400
	Term loans		281,813			263,443
12% senior subordinated notes			100,000			100,000
Capital lease obligations and equipment term debt financing, secured by property and equipment			6,955			5,231
Other indebtedness			1,697			2,205

	Total long-term debt		404,265			383,279
	Less current portion		(13,168		)	(9,289		)

		Long-term debt, less current portion	$	391,097		$	373,990

In April 2001, the Company amended its senior credit facility and borrowed the remaining $20,000,000 of funds committed under its term loan facility. The net proceeds were used to repay amounts then outstanding under the acquisition revolving line of credit. Principal payments for the additional term loan are due in $50,000 quarterly installments through 2005 and $4,763,000 quarterly installments through 2006. The term loan bears interest, at the Company’s option, based on a margin of either 2.75% over the prime rate or 4.00% over the Eurodollar rate.

Note 6. Income Taxes

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

Note 7. Capital Structure

Mandatorily Redeemable Preferred Stock

The table below summarizes the increase in mandatorily redeemable preferred stock during the six months ended June 30, 2001.

	Number of Shares	Mandatory Redemption Value		Unamortized Issuance Discount			Net Book Value

	(in thousands, except share and per share data)
Balance, December 31, 2000	270,400	$	27,040	$	(3,861	)	$	23,179
Accrued dividends and redemption value accretion	22,065	2,206		234			2,440

Balance, June 30, 2001 (Unaudited)	292,465	$	29,246	$	(3,627	)	$	25,619


Per share liquidation value as of June 30, 2001 (Unaudited)		$	100.00

Holders of the preferred stock are entitled to receive, when, as and if declared, dividends at a rate equal to 16% per annum. Prior to June 30, 2005, the Company may, at its option, pay dividends either in cash or by the issuance of additional shares of preferred stock. For the six months ended June 30, 2001, the Company elected to issue 22,065 additional shares in lieu of cash dividend payments. Accrued dividends totaling $1,262,000 were charged to retained earnings, eliminating the Company’s cumulative earnings to date. The remaining accrued dividends and the redemption value accretion were charged to additional paid-in capital.

Note 8. Commitments and Contingencies

Contingent Acquisition Consideration

The determinable amounts of the Company’s remaining maximum contingent consideration payment obligations, as of June 30, 2001, are summarized below. The contingent consideration is payable based upon the acquired companies level of attainment of their defined performance criteria in future periods and excludes amounts earned and recorded through June 30, 2001 (Notes 4 and 9). Provided the defined performance criteria is attained for the future years ending December 31, the Company’s determinable maximum contingent consideration payment obligation will be (amounts in thousands):

	(Unaudited)
For the year ending December 31,
2001	$	1,450
2002	600

Total maximum determinable obligation	$	2,050

Contingent consideration, if any, is payable during the first quarter of the following year.

Funding of DeCrane Holdings Preferred Stock Obligations

The Company is a wholly owned subsidiary of DeCrane Holdings whose capital structure also includes mandatorily redeemable preferred stock. Since the Company is DeCrane Holdings’ only operating subsidiary and source of cash, the Company may be required to fund DeCrane Holdings’ preferred stock dividend and redemption obligations in the future.

DeCrane Holdings’ preferred stock dividends are payable quarterly at a rate of 14% per annum. Prior to September 30, 2005, dividends are not paid in cash but instead accrete to the liquidation value of the preferred stock, which, in turn, increases the redemption obligation. On or after September 30, 2005, preferred stock dividends are required to be paid in cash, if declared. The DeCrane Holdings preferred stock has a total redemption value of $50,618,000 as of June 30, 2001, including accumulated dividends.

Note 9. Consolidated Statements of Cash Flows

The following information supplements the Company’s consolidated statements of cash flows (amounts in thousands):

					Six Months Ended June 30,

					2001			2000

					(Unaudited)
Components of cash paid for acquisitions
	Fair value of assets acquired				$	—				$		62,381
	Liabilities assumed				—			(14,951					)

		Cash paid			—			47,430
		Less cash acquired			—			(173					)

			Net cash paid for companies acquired during the period					47,257
	Contingent consideration paid for previously completed acquisitions				17,075			29,325
	Cash purchase price reductions received related to previously completed acquisitions				(3,718		)	—
	Additional acquisition related expenses				172			279

				Total cash paid for acquisitions	$	13,529			$		76,861

During the six months ended June 30, 2001, the Company settled its asserted claims against the sellers of two companies acquired in 2000 for breach of representation and warranty provisions contained in the purchase agreements. The Company received $3,718,000 from the sellers upon entering into the settlement agreements, which also provided that the Company pay in 2002 a minimum of $2,750,000 of previously contingent consideration for the year ending December 31, 2001. The $2,750,000 minimum contingent consideration payable is reflected as an accrued liability as of June 30, 2001.

Note 10. Business Segment Information

The Company supplies products and services to the general aviation industry. The Company’s subsidiaries are organized into three groups, each of which are strategic businesses that are managed separately because each business develops, manufactures and sells distinct products and services. The groups and a description of their businesses are as follows:

	•	Cabin Management – provides interior cabin components for the corporate aircraft market, including furniture, cabinetry, seats and in-flight entertainment systems;
	•	Specialty Avionics – designs, engineers and manufactures electronic components, display devices and interconnect components and assemblies; and
	•	Systems Integration – provides auxiliary fuel tanks, auxiliary power units and system integration services.

Management utilizes more than one measurement to evaluate group performance and allocate resources, however, EBITDA is considered to be the primary measurement of overall group economic returns and cash flows. Management defines EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring and asset impairment charges, acquisition related charges and other noncash and nonoperating charges. This is consistent with the manner in which the Company’s lenders and ultimate investors measure its overall performance.

The accounting policies of the groups are substantially the same as those described in the summary of significant accounting policies in 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.

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

				2001			2000				2001					2000

				(Unaudited)
Revenues
	Cabin Management			$	53,512			$	40,554			$		104,871		$		76,778
	Specialty Avionics			31,824				26,045				63,097				52,842
	Systems Integration			17,761				15,783				34,495				32,392
	Inter-group elimination (1)			(737		)		(288		)		(952			)	(740			)

		Consolidated totals		$	102,360			$	82,094			$		201,511		$		161,272


EBITDA (2)
	Cabin Management			$	9,690			$	11,840			$		23,088		$		21,381
	Specialty Avionics			9,402				5,998				17,229				12,131
	Systems Integration			4,778				3,514				8,874				6,956
	Corporate (3)			(1,365		)		(1,542		)		(3,301			)	(3,345			)
	Inter-group elimination (4)			(99		)		131				(99			)	—

		Consolidated totals		$	22,406			$	19,941			$	45,791			$		37,123

Total assets (as of period end)
	Cabin Management											$	319,590			$	269,537
	Specialty Avionics											225,199				221,427
	Systems Integration											78,498				85,014
	Corporate (5)											41,014				36,680
	Inter-group elimination (6)											(197			)	(723			)

			Consolidated totals									$	664,104			$	611,935

(1)	Inter-group sales are accounted for at prices comparable to sales to unaffiliated customers, and are eliminated in consolidation.
(2)	The table below reconciles EBITDA to consolidated income from operations and income before income taxes (amounts in thousands).

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

		2001			2000			2001			2000

		(Unaudited)
Consolidated EBITDA		$	22,406		$	19,941		$	45,791		$	37,123
Depreciation and amortization (a)		(8,153		)	(6,171		)	(15,848		)	(12,371		)
Acquisition related charges not capitalized		(22		)	(3		)	(103		)	(7		)
Other noncash charges		(46		)	(86		)	(236		)	(171		)

	Consolidated income from operations	14,185			13,681			29,604			24,574
Interest expense		(9,875		)	(10,037		)	(20,330		)	(18,713		)
Other expenses, net		(12		)	(109		)	(117		)	(173		)

	Consolidated income before income taxes	$	4,298		$	3,535		$	9,157		$	5,688

	(a)		Reflects depreciation and amortization of long-lived assets, goodwill and other intangible assets. Excludes amortization of deferred financing costs, which are classified as a component of interest expense, of $524,000 and $500,000 for the three months ended June 30, 2001 and 2000, respectively, and $1,077,000 and $1,103,000 for the six months ended June 30, 2001 and 2000, respectively.
(3)		Reflects the Company’s corporate headquarters costs and expenses not allocated to the groups.
(4)		Reflects elimination of the effect of inter-group profits in inventory.
(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 11. Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

SFAS No. 141 establishes accounting and reporting standards for business combinations. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting and provides criteria for the initial recognition and measurement of goodwill and other intangible assets. SFAS No. 141 is effective for all business combinations initiated or completed after June 30, 2001. For business combinations completed prior to July 1, 2001, SFAS No. 141 is effective concurrent with the adoption of SFAS No. 142.

SFAS No. 142 establishes accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 eliminates the current requirement to amortize goodwill and other indefinite-lived intangible assets requiring instead periodic impairment testing with a loss charged to the results of operation in the periods in which impairment occurs. Finite-lived intangible assets are amortized and are also subject to periodic impairment testing. Adoption of SFAS No. 142 is required for the Company’s fiscal year beginning January 1, 2002.

The Company is currently evaluating the impact the new accounting standards will have on its financial position and results of operations upon adoption on January 1, 2002; there will be no impact on cash flows. While the full, net of tax, impact has yet to be determined, adoption of the new standards will result in the following:

	•	Under the criteria established in SFAS No. 141, the values ascribed to the assembled workforces acquired are not recognized as an intangible asset apart from goodwill. As a result, the net book value ascribed to the assembled workforces, net of deferred income tax liabilities, will be reclassified to goodwill as of January 1, 2002.
	•	Adoption of SFAS No. 142 on January 1, 2002 will reduce amortization expense in future periods. If SFAS No. 142 had been effective as of the beginning of 2001, goodwill and assembled workforces amortization totaling $7,121,000 for the six months ended June 30, 2001 would have been eliminated.

The Company has until June 30, 2002 to complete its transitional impairment testing associated with adopting SFAS No. 142. The amount of impairment losses recognizable upon adoption, if any, is not known at this time.

Note 12. Supplemental Condensed Consolidating Financial Information

In conjunction with the senior credit facility and 12% senior subordinated notes described in Note 5, the following condensed consolidating financial information is presented segregating the Company, as the issuer, and guarantor and non-guarantor subsidiaries. The accompanying financial information in the guarantor subsidiaries column reflects the financial position, results of operations and cash flows for those subsidiaries guaranteeing the senior credit facility and the notes.

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

(1) Elimination of investments in subsidiaries.

(2) Elimination of intercompany accounts.

(3) Elimination of intercompany sales between guarantor and non-guarantor subsidiaries.

(4) Elimination of equity in earnings of subsidiaries.

Balance Sheets

							June 30, 2001 (Unaudited)

							Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

							(in thousands)
Assets
Current assets
	Cash and cash equivalents						$	7,289	$	176	$	71		$	—		$	7,536
	Accounts receivable, net						—		60,358		1,115			—			61,473
	Inventories						—		88,387		1,694			—			90,081
	Other current assets						13,774		1,636		159			—			15,569

			Total current assets				21,063		150,557		3,039			—			174,659
Property and equipment, net							3,745		54,913		2,641			—			61,299
Other assets, principally intangibles, net							16,206		402,750		9,190			—			428,146
Investments in subsidiaries							406,347		20,860		—			(427,207)		(1)	—
Intercompany receivables							252,088		91,830		4,889			(348,807)		(2)	—

						Total assets	$	699,449	$	720,910	$	19,759		$	(776,014)		$	664,104


Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity
Current liabilities
	Current portion of long-term debt						$	12,003	$	1,147	$	18		$	—		$	13,168
	Other current liabilities						23,270		47,664		1,349			—			72,283

				Total current liabilities			35,273		48,811		1,367			—			85,451
Long-term debt							384,404		6,693		—			—			391,097
Intercompany payables							91,830		256,977		—			(348,807)		(2)	—
Other long-term liabilities							38,572		2,082		515			—			41,169
Mandatorily redeemable preferred stock							25,619		—		—			—			25,619

Stockholder’s equity
	Paid-in capital						123,751		338,309		15,440			(353,749)		(1)	123,751
	Retained earnings (deficit)						—		68,038		5,420			(73,458)		(1)	—
	Accumulated other comprehensive loss						—		—		(2,983		)	—			(2,983		)

		Total stockholder’s equity					123,751		406,347		17,877			(427,207)			120,768

					Total liabilities, mandatorily redeemable preferred stock and stockholder’s equity		$	699,449	$	720,910	$	19,759		$	(776,014)		$	664,104

				December 31, 2000

				Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

				(in thousands)
Assets
Current assets
	Cash and cash equivalents			$	7,553		$	233	$	413		$	—		$	8,199
	Accounts receivable, net			—			51,396		1,735			—			53,131
	Inventories			—			82,013		1,664			—			83,677
	Other current assets			14,814			1,118		145			—			16,077

		Total current assets		22,367			134,760		3,957			—			161,084
Property and equipment, net				4,423			52,303		2,765			—			59,491
Other assets, principally intangibles, net				16,514			412,730		10,338			—			439,582
Investments in subsidiaries				394,794			20,739		—			(415,533)		(1)	—
Intercompany receivables				251,725			92,991		3,863			(348,579)		(2)	—

			Total assets	$	689,823		$	713,523	$	20,923		$	(764,112)		$	660,157


Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity
Current liabilities
	Current portion of long-term debt			$	7,997		$	1,266	$	26		$	—		$	9,289
	Other current liabilities			38,635			54,384		1,262			—			94,281

		Total current liabilities		46,632			55,650		1,288			—			103,570
Long-term debt				368,837			5,147		6			—			373,990
Intercompany payables				92,991			255,588		—			(348,579)		(2)	—
Other long-term liabilities				36,742			2,344		577			—			39,663
Mandatorily redeemable preferred stock				23,179			—		—			—			23,179

Stockholder’s equity
	Paid-in capital			124,763			338,729		15,440			(354,169)		(1)	124,763
	Retained earnings (deficit)			(3,321		)	56,065		5,299			(61,364)		(1)	(3,321		)

Accumulated other comprehensive loss				—			—		(1,687		)	—			(1,687		)

		Total stockholder’s equity		121,442			394,794		19,052			(415,533)			119,755

Total liabilities, mandatorily redeemable preferred stock and stockholder’s equity				$	689,823		$	713,523	$	20,923		$	(764,112)		$	660,157

Statements of Operations
			Six Months Ended June 30, 2001 (Unaudited)

			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

						(in thousands)

Revenues			$	—		$	199,741		$	5,810		$	(4,040)	(3)	$	201,511
Cost of sales			—			132,914			5,016			(4,040)		(3)	133,890

	Gross profit		—			66,827			794			—			67,621

Selling, general and administrative expenses			4,361			23,293			442			—			28,096
Amortization of intangible assets			101			9,618			202			—			9,921
Interest expense			19,786			531			13			—			20,330
Intercompany charges			(10,581		)	10,581			—			—			—
Equity in earnings of subsidiaries			(11,973		)	(214		)	—			12,187		(4)	—
Other expenses (income), net			161			81			(125		)	—			117
Provision for income taxes (benefit)			(6,438		)	10,964			48			—			4,574

		Net income	$	4,583		$	11,973		$	214		$	(12,187	)	$	4,583




			Six Months Ended June 30, 2000 (Unaudited)

			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

						(in thousands)

Revenues			$	—		$	160,097		$	6,261		$	(5,086)	(3)	$	161,272
Cost of sales			—			107,707			4,888			(5,086)		(3)	107,509

	Gross profit		—			52,390			1,373			—			53,763

Selling, general and administrative expenses			3,745			16,537			657			—			20,939
Amortization of intangible assets			101			7,932			217			—			8,250
Interest expense			18,524			178			11			—			18,713
Intercompany charges			(6,822		)	6,822			—			—			—
Equity in earnings of subsidiaries			(11,822		)	(391		)	—			12,213		(4)	—
Other expenses (income), net			114			30			29			—			173
Provision for income taxes (benefit)			(6,582		)	9,460			68			—			2,946

		Net income	$	2,742		$	11,822		$	391		$	(12,213)		$	2,742

Statements of Cash Flows
				Six Months Ended June 30, 2001 (Unaudited)

				Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

							(in thousands)

Cash flows from operating activities
Net income				$	4,583		$	11,973		$	214		$	(12,187	)(4)	$	4,583
Noncash adjustments
	Equity in earnings of subsidiaries			(11,973		)	(214		)	—			12,187		(4)	—
	Other noncash adjustments			3,457			14,902			569			—			18,928
Changes in working capital				(1,686		)	(20,293		)	(637		)	—			(22,616		)

		Net cash provided by (used for)
			operating activities	(5,619		)	6,368			146			—			895


Cash flows from investing activities
Cash paid for acquisitions, net
of cash acquired				(13,529		)	—			—			—			(13,529		)
Capital expenditures and other				(109		)	(5,135		)	(486		)	—			(5,730		)

	Net cash used for
	investing activities			(13,638		)	(5,135		)	(486		)	—			(19,259		)


Cash flows from financing activities
Net senior credit facility borrowings				21,400			—			—			—			21,400
Principal payments on term debt,
capitalized leases and other debt				(1,827		)	(1,197		)	(11		)	—			(3,035		)
Deferred financing costs				(580		)	—			—			—			(580		)
Other, net				—			(93		)	—			—			(93		)

	Net cash provided by (used for)
	financing activities			18,993			(1,290		)	(11		)	—			17,692


Effect of foreign currency
translation on cash				—			—			9			—			9

Net decrease in cash and equivalents				(264		)	(57		)	(342		)	—			(663		)
Cash and equivalents at beginning
of period				7,553			233			413			—			8,199

Cash and equivalents at end of period				$	7,289		$	176		$	71		$	—		$	7,536

						Six Months Ended June 30, 2000 (Unaudited)

						Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

									(in thousands)

Cash flows from operating activities
Net income						$	2,742		$	11,822		$	391		$	(12,213	)(4)	$	2,742
Noncash adjustments
	Equity in earnings of subsidiaries					(11,822		)	(391		)	—			12,213		(4)	—
	Other noncash adjustments					2,936			11,985			482			—			15,403
Changes in working capital						(6,141		)	(14,489		)	(622		)	—			(21,252		)

				Net cash provided by (used for)
					operating activities	(12,285		)	8,927			251			—			(3,107		)


Cash flows from investing activities
Cash paid for acquisitions						(77,034		)	173			—			—			(76,861		)
Capital expenditures and other						(3,626		)	(8,572		)	(362		)	—			(12,560		)

	Net cash used for
		investing activities				(80,660		)	(8,399		)	(362		)	—			(89,421		)


Cash flows from financing activities
Net senior credit facility borrowings						65,000			—			—			—			65,000
Proceeds from saleof preferred stock						25,000			—			—			—			25,000
Capital contribution						7,500			—			—			—			7,500
Principle payments on term debt
capitalized leases and other debt						(2,266		)	(332		)	(13		)	—			(2,611		)
Deferred financing costs						(2,170		)				—			—			(2,170		)
Other, net						(50		)	(137		)	—			—			(187		)

	Net cash provided by (used for)														—
			financing activities			93,014			(469		)	(13		)	—			92,532

Effect of foreign currency
translation on cash						—			—			(5		)	—			(5		)

Net increase (decrease) in cash and															—
equivalents						69			59			(129		)	—			(1		)
Cash and equivalents at beginning
of period						7,839			(323		)	402			—			7,918

Cash and equivalents at end of period						$	7,908		$	(264	)	$	273		$	—		$	7,917

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.

Overview

Our financial position and results of operations have been affected by our history of acquisitions. As a result, our historical financial statements do not reflect the financial position and results of operations of our current businesses. Our most recent acquisitions, which affect the comparability of the historical financial condition and results of operations described herein, consist of our Cabin Management Group’s acquisitions of Carl F. Booth & Co. on May 11, 2000 and ERDA on June 30, 2000.

Our historical financial statements reflect the financial position, results of operations and cash flows of the acquired businesses subsequent to their respective acquisition dates.

Results of Operations

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

Revenues. Revenues increased $20.3 million, or 24.7%, to $102.4 million for the three months ended June 30, 2001 from $82.1 million for the three months ended June 30, 2000. By segment, revenues changed as follows:

		Increase (Decrease) From 2000

		Amount			Percent

		(in millions)
Cabin Management		$	13.0		32.0	%
Specialty Avionics		5.8			22.2
Systems Integration		2.0			12.5
Inter-group elimination		(0.5		)

	Total	$	20.3

Cabin Management. Revenues increased by $13.0 million, or 32.0% over the prior year, due to:

•	the inclusion of $9.0 million of revenues resulting from our acquisitions of Carl F. Booth & Co. and ERDA in 2000; and

•	a $4.0 million increase in cabin furniture and related products revenues reflecting primarily a higher volume of corporate jet production by the aircraft manufacturers.

Specialty Avionics. Revenues increased by $5.8 million, or 22.2% over the prior year, due to:

•	a $4.1 million increase in cockpit audio, communications, lighting and power and control devices revenues; and

•	a $1.7 million revenue increase resulting from higher volume for our interconnect products.

Systems Integration. Revenues increased by $2.0 million, or 12.5% over the prior year, due to:

•	a $2.1 million increase in auxiliary fuel tank system and power unit revenues; offset by

•	a $0.1 million decrease in cabin and flight deck systems integration revenues.

Gross profit. Gross profit increased $5.0 million, or 18.0%, to $32.6 million for the three months ended June 30, 2001. Gross profit as a percent of revenues decreased to 31.8% for the three months ended June 30, 2001 from 33.6% for the same period last year primarily as a result of reduced profit margins in our Cabin Management group. By segment, gross profit changed as follows:

		Increase (Decrease) From 2000

		Amount			Percent

		(in millions)
Cabin Management		$	(1.3	)	(8.8	)%
Specialty Avionics		4.7			63.2
Systems Integration		1.7			31.0
Inter-group elimination		(0.1		)

	Total	$	5.0

Cabin Management. Gross profit decreased by $1.3 million, or 8.8% from the prior year, primarily due to:

•	a $2.2 million increase in gross profit resulting from our 2000 acquisitions; offset by

•	a $3.9 million decrease resulting from nonrecurring start up costs associated with four new programs and the rationalization of production between manufacturing facilities.

Specialty Avionics. Gross profit increased by $4.7 million, or 63.2% over the prior year, due to:

•	a $2.9 million increase related to a shift in product mix to items with higher margins;

•	a $1.6 million increase related to higher volume for our cockpit audio, communications, lighting and power and control devices products; and

•	a $0.3 million increase related to higher volume for our interconnect products; offset by

•	a $0.1 million decrease related to labor inefficiencies caused higher electrical energy costs at our California-based facilities.

Systems Integration. Gross profit increased by $1.7 million, or 31.0% over the prior year, due to:

•	a $1.0 million increase due to higher auxiliary fuel tank systems volume; and

•	a $0.7 million increase resulting, in part, from improved operating results subsequent to our fourth quarter 1999 restructuring.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $3.5 million, or 35.8%, to $13.4 million for the three months ended June 30, 2001, from $9.9 million for the same period last year. SG&A expenses as a percent of revenues increased to 13.1% for the three months ended June 30, 2001 compared to 12.1% for the same period last year. By segment, SG&A expenses changed as follows:

		Increase (Decrease) From 2000

		Amount		Percent

		(in millions)
Cabin Management		$	1.9	56.2	%
Specialty Avionics		1.2		48.3
Systems Integration		0.3		12.5
Corporate		0.1		9.3

	Total	$	3.5

Cabin Management. SG&A expenses increased by $1.9 million, or 56.2% over the prior year, due to:

•	a $1.0 million increase in expenses resulting from our 2000 acquisitions; and

•	a $0.9 million increase in expenses to support increased production and new programs.

Specialty Avionics. SG&A expenses increased by $1.2 million, or 48.3% over the prior year, due to:

•	a $0.5 million increase in research and developments costs; and

•	a $0.7 million increase in labor and employee benefit costs.

Systems Integration. SG&A expenses increased by $0.3 million, or 12.5% over the prior year, due to refocusing our cabin and flight deck systems integration services to product offerings requiring higher levels of sales and marketing, program management and customer service.

Corporate. SG&A expenses increased by $0.1 million, or 9.3% over the prior year, primarily due to an increase in depreciation expense.

Depreciation and amortization of intangibles. Depreciation and amortization expense, which includes amortization of goodwill and identifiable intangible assets, increased $1.9 million, or 32.1%, for the three months ended June 30, 2001. The increase results from the inclusion of $1.0 million of depreciation and amortization expense in 2001 from companies we acquired during 2000 and additional depreciation reflecting our capital expenditures during the period.

EBITDA and Operating income. EBITDA increased $2.5 million to $22.4 million, or 12.4%, for the three months ended June 30, 2001, from $19.9 million for the same period last year. EBITDA as a percent of revenues decreased to 21.9% for the three months ended June 30, 2001, from 24.3% for the same period last year. Operating income increased $0.5 million to $14.2 million, or 3.7%, for the three months ended June 30, 2001, from $13.7 million for the same period last year. By segment, EBITDA changed as follows:

			Increase (Decrease) From 2000

			Amount			Percent

			(in millions)
EBITDA
	Cabin Management		$	(2.2	)	(18.2	)%
	Specialty Avionics		3.4			56.8
	Systems Integration		1.3			36.0
	Corporate		0.2			11.5
	Inter-group elimination		(0.2		)

		Total EBITDA	2.5

Depreciation and amortization			(1.9		)
Other noncash and acquisition related charges			(0.1		)

		Total operating income	$	0.5

Cabin Management. EBITDA decreased by $2.2 million, or 18.2% from the prior year, primarily due to:

•	a $1.7 million increase resulting from our 2000 acquisitions; offset by

•	a $3.9 million decrease resulting from nonrecurring startup costs associated with four new programs and the rationalization of production between manufacturing facilities.

Specialty Avionics. EBITDA increased by $3.4 million, or 56.8% over the prior year, due to higher demand for our commercial aircraft products.

Systems Integration. EBITDA increased by $1.3 million, or 36.0% over the prior year, due to higher auxiliary fuel tank systems revenues and favorable manufacturing efficiencies.

Corporate. Expenses decreased by $0.2 million, or 11.5% from the prior year, which contributed to the consolidated EBITDA increase.

Interest expense. Interest expense decreased $0.2 million to $9.8 million for the three months ended June 30, 2000, from $10.0 million for the same period last year, due to:

•	a $1.3 million increase resulting from higher debt levels; offset by

•	a $1.5 million decrease resulting from lower average interest rates charged by our lenders during 2001.

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

Net income. Net income increased $0.1 million to $2.1 million for the three months ended June 30, 2001 compared to $2.0 million for the same period in 2000.

Net income applicable to common stockholder. Net income applicable to DeCrane Holdings, our common stockholder, decreased $1.1 million to $0.9 million for the three months ended June 30, 2001 compared to $2.0 million for the same period in 2000. The net decrease is attributable to:

•	a $0.1 million increase in net income; offset by

•	a $1.2 million increase in accrued dividends and redemption value accretion resulting from the issuance of 16% mandatorily redeemable preferred stock on June 30, 2000.

Bookings. Bookings increased $22.0 million, or 24.8%, to $110.7 million for the three months ended June 30, 2001 compared to $88.7 million for the same period in 2000. The increase in bookings for 2001 results from:

•	a $9.8 million increase associated with companies we acquired in 2000; and

•	a $12.2 million increase related to business growth, principally related to our Cabin Management and Specialty Avionics product lines.

Backlog at end of period. Backlog increased $18.9 million to $197.2 million as of June 30, 2001 compared to $178.3 million as of December 31, 2000. The increase in backlog for 2001 primarily relates to our Specialty Avionics and Cabin Management groups.

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

Revenues. Revenues increased $40.2 million, or 25.0%, to $201.5 million for the six months ended June 30, 2001 from $161.3 million for the six months ended June 30, 2000. By segment, revenues changed as follows:

		Increase (Decrease) From 2000

		Amount			Percent

		(in millions)
Cabin Management		$	28.1		36.6	%
Specialty Avionics		10.2			19.4
Systems Integration		2.1			6.5
Inter-group elimination		(0.2		)

	Total	$	40.2

Cabin Management. Revenues increased by $28.1 million, or 36.6% over the prior year, due to:

•	the inclusion of $23.8 million of revenues resulting from our acquisitions of Carl F. Booth & Co. and ERDA in 2000; and

•	a $4.3 million increase in cabin furniture and related products revenues reflecting primarily a higher volume of corporate jet production by the aircraft manufacturers.

Specialty Avionics. Revenues increased by $10.2 million, or 19.4% over the prior year, due to:

•	a $8.3 million increase in cockpit audio, communications, lighting and power and control devices revenues; and

•	a $1.9 million revenue increase resulting from higher volume for our interconnect products.

Systems Integration. Revenues increased by $2.1 million, or 6.5% over the prior year, due to:

•	a $3.8 million increase in auxiliary fuel tank system and power unit revenues; offset by

•	a $1.7 million decrease in cabin and flight deck systems integration revenues resulting from reducing the number of product offerings to focus on our core product lines.

Gross profit. Gross profit increased $13.9 million, or 25.8%, to $67.6 million for the six months ended June 30, 2001. Gross profit as a percent of revenues increased to 33.6% for the six months ended June 30, 2001 from 33.3% for the same period last year. By segment, gross profit changed as follows:

		Increase (Decrease) From 2000

		Amount		Percent

		(in millions)
Cabin Management		$	3.8	13.6	%
Specialty Avionics		6.9		44.4
Systems Integration		3.0		27.9
Inter-group elimination		0.2

	Total	$	13.9

Cabin Management. Gross profit increased by $3.8 million, or 13.6% over the prior year, primarily due to:

	•	a $7.1 million increase in gross profit resulting from our 2000 acquisitions; offset by

	•	a $3.9 million decrease resulting from nonrecurring startup costs associated with four new programs and the rationalization of production between manufacturing facilities.

Specialty Avionics. Gross profit increased by $6.9 million, or 44.4% over the prior year, due to:

	•	a $3.4 million increase related to higher volume for our cockpit audio, communications, lighting and power and control devices products;

	•	a $3.5 million increase related to a shift in product mix to items with higher margins; and

	•	a $0.4 million increase related to higher volume for our interconnect products; offset by

	•	a $0.4 million decrease related to labor inefficiencies caused by rolling blackouts and higher electrical energy costs at our California-based facilities.

Systems Integration. Gross profit increased by $3.0 million, or 27.9% over the prior year, due to:

	•	a $1.5 million increase due to higher auxiliary fuel tank systems volume;

	•	a $0.6 million increase in gross profit resulting from improved auxiliary fuel tank manufacturing and installation efficiencies; and

	•	a $0.9 million increase resulting, in part, from improved operating results subsequent to our fourth quarter 1999 restructuring.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $7.2 million, or 34.2%, to $28.1 million for the six months ended June 30, 2001, from $20.9 million for the same period last year. SG&A expenses as a percent of revenues increased to 13.9% for the six months ended June 30, 2001 compared to 13.0% for the same period last year. By segment, SG&A expenses changed as follows:

		Increase (Decrease) From 2000

		Amount		Percent

		(in millions)
Cabin Management		$	4.0	56.8	%
Specialty Avionics		1.8		31.7
Systems Integration		0.8		17.0
Corporate		0.6		16.2

	Total	$	7.2

Cabin Management. SG&A expenses increased by $4.0 million, or 56.8% over the prior year, due to:

	•	a $3.1 million increase in expenses resulting from our 2000 acquisitions; and

	•	a $0.9 million increase in expenses to support increased production and new programs.

Specialty Avionics. SG&A expenses increased by $1.8 million, or 31.7% over the prior year, due to:

	•	a $0.5 million increase in research and development costs; and

	•	a $1.3 million increase in labor and employee benefit costs in support of revenue growth.

Systems Integration. SG&A expenses increased by $0.8 million, or 17.0% over the prior year, due to refocusing our cabin and flight deck systems integration services to product offerings requiring higher levels of sales and marketing, program management and customer service.

Corporate. SG&A expenses increased by $0.6 million, or 16.2% over the prior year primarily due an increase in depreciation expense.

Depreciation and amortization of intangibles. Depreciation and amortization expense, which includes amortization of goodwill and identifiable intangible assets, increased $3.5 million, or 28.1%, for the six months ended June 30, 2001. The increase results from the inclusion of $2.2 million of depreciation and amortization expense in 2001 from companies we acquired during 2000 and additional depreciation reflecting our capital expenditures during the period.

EBITDA and Operating income. EBITDA increased $8.7 million to $45.8 million, or 23.3%, for the six months ended June 30, 2001, from $37.1 million for the same period last year. EBITDA as a percent of revenues decreased to 22.7% for the six months ended June 30, 2001, from 23.0% for the same period last year. Operating income increased $5.0 million to $29.6 million, or 20.5%, for the six months ended June 30, 2001, from $24.6 million for the same period last year. By segment, EBITDA changed as follows:

			Increase (Decrease) From 2000

			Amount			Percent

			(in millions)
EBITDA
	Cabin Management		$	1.7		8.0	%
	Specialty Avionics		5.1			42.0
	Systems Integration		1.9			27.6
	Corporate		0.1			1.3
	Inter-group elimination		(0.1		)

		Total EBITDA	8.7

Depreciation and amortization			(3.5		)
Other noncash and acquisition related charges			(0.2		)

		Total operating income	$	5.0

Cabin Management. EBITDA increased by $1.7 million, or 8.0% over the prior year, primarily due to:

	•	a $5.0 million increase resulting from our 2000 acquisitions; offset by

	•	a $3.9 million decrease resulting from nonrecurring startup costs associated with four new programs and the rationalization of production between manufacturing facilities.

Specialty Avionics. EBITDA increased by $5.1 million, or 42.0% over the prior year, due to higher demand for our commercial aircraft products.

Systems Integration. EBITDA increased by $1.9 million, or 27.6% over the prior year, due principally to higher auxiliary fuel tank systems revenues and favorable manufacturing efficiencies.

Interest expense. Interest expense increased $1.6 million to $20.3 million for the six months ended June 30, 2000, from $18.7 million for the same period last year, due to:

	•	a $3.1 million increase resulting from higher debt levels associated with our acquisition of companies during 2000; offset by

	•	a $1.5 million decrease resulting from lower average interest rates charged by our lenders during 2001.

Net income. Net income increased $1.9 million to $4.6 million for the six months ended June 30, 2001 compared to $2.7 million for the same period in 2000.

Net income applicable to common stockholder. Net income applicable to DeCrane Holdings, our common stockholder, decreased $0.6 million to $2.1 million for the six months ended June 30, 2001 compared to $2.7 million for the same period in 2000. The net decrease is attributable to:

	•	a $1.9 million increase in net income; offset by

	•	a $2.5 million increase in accrued dividends and redemption value accretion resulting from the issuance of 16% mandatorily redeemable preferred stock on June 30, 2000.

Bookings. Bookings increased $59.1 million, or 36.6%, to $220.4 million for the six months ended June 30, 2001 compared to $161.3 million for the same period in 2000. The increase in bookings for 2001 results from:

	•	a $22.5 million increase associated with companies we acquired in 2000; and

	•	a $36.6 million increase related to business growth, principally related to our Cabin Management and Specialty Avionics product lines.

Liquidity and Capital Resources

We have required cash primarily to fund acquisitions and, to a lesser extent, to fund capital expenditures and for working capital. Our principal sources of liquidity have been cash flow from operations, third party borrowings, capital contributions from DeCrane Holdings and the issuance of preferred stock.

Cash provided by operating activities was $0.9 million for the six months ended June 30, 2001, which is the net of $23.5 million of cash provided by operations after adding back depreciation, amortization and other noncash items, $22.7 million used for working capital offset by $0.1 million resulting from an increase in other liabilities. The following factors contributed to the $22.7 million working capital increase:

	•	a $9.0 million accounts receivable increase resulting from higher revenues, timing differences relating to completion of projects versus the associated collection and the timing of other collections;

	•	a $6.5 million inventory increase resulting from longer production lead times and inventory level increases to meet current and projected revenue growth;

	•	a $1.3 million increase in prepaid and other assets; and

	•	a $8.1 million net decrease in accounts payable and accrued expenses; offset by

	•	a $2.2 million increase in income taxes payable due to higher current taxable income.

Cash used for investing activities was $19.3 million for the six months ended June 30, 2001, and consisted of:

	•	$17.1 million of contingent acquisition consideration paid during 2001; and

	•	$6.4 million for capital expenditures; offset by

	•	$3.6 million cash purchase price reductions received for previously completed acquisitions; and further offset by

	•	$0.6 million of proceeds from the sale of property and equipment, principally an owned manufacturing facility replaced with a larger leased facility.

We anticipate spending approximately $15.0 million for capital expenditures in 2001.

Cash provided by financing activities was $17.7 million for the six months ended June 30, 2001 and was primarily used to fund the payment of contingent acquisition consideration and capital expenditures. We obtained these funds by borrowing $21.4 million under our senior credit facility. We used $3.0 million to make principal payments on our senior term debt, capitalized leases and other debt.

At June 30, 2001, senior credit facility borrowings totaling $295.6 million are at variable interest rates based on defined margins over the current prime or Eurodollar rates. At June 30, 2001 we had $89.2 million of working capital and had $23.2 million of borrowings available under our working capital credit facility and $13.0 available under our acquisition credit facility. Although we cannot be certain, we believe that operating cash flow, together with borrowings under our bank credit facility, will be sufficient to meet our future short- and long-term operating expenses, working capital requirements, capital expenditures and debt service obligations for the next twelve months. However, our ability to pay principal or interest, to refinance our debt and to satisfy our other debt obligations will depend on our future operating performance. We will be affected by economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. In addition, we are continually considering acquisitions that complement or expand our existing businesses or that may enable us to expand into new markets. Future acquisitions may require additional debt, equity financing or both. We may not be able to obtain any additional financing on acceptable terms.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”

We are currently evaluating the impact the new accounting standards will have on our financial position and results of operations upon adoption on January 1, 2002; there will be no impact on cash flows. While the full, net of tax, impact has yet to be determined, adoption of the new standards will result in the following:

•	Under the criteria established in SFAS No. 141, the values ascribed to the assembled workforces acquired are not recognized as an intangible asset apart from goodwill. As a result, the net book value ascribed to the assembled workforces, net of deferred income tax liabilities, will be reclassified to goodwill as of January 1, 2002.

•	Adoption of SFAS No. 142 on January 1, 2002 will reduce amortization expense in future periods. If SFAS No. 142 had been effective as of the beginning of 2001, goodwill and assembled workforces amortization totaling $7,121,000 for the six months ended June 30, 2001 would have been eliminated.

We have until June 30, 2002 to complete our transitional impairment testing associated with adopting SFAS No. 142. The amount of impairment losses recognizable upon adoption, if any, is not known at this time.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Market risk related to our variable-rate debt is estimated as the potential decrease in pre-tax earnings resulting from an increase in interest rates. The interest rates applicable to variable-rate debt are, at our option, based on defined margins over the current prime or Eurodollar rates. At June 30, 2001, the current prime rate was 6.75% and the current Eurodollar rate was 3.99%. Based on $295.6 million of variable-rate debt outstanding as of June 30, 2001, a hypothetical one percent rise in interest rates, to 7.75% for prime rate borrowings and 4.99% for Eurodollar borrowings, would reduce our pre-tax earnings by $3.0 million annually. We have, during periods prior to 1998, purchased interest rate cap contracts to limit our exposure related to rising interest rates on our variable-rate debt. While we have not entered into similar contracts during the last three years, we may do so in the future depending on our assessment of future interest rate trends.

The estimated fair value of our $100.0 million fixed-rate long-term debt is approximately $95.0 million at June 30, 2001. Market risk related to our fixed-rate debt is deemed to be the potential increase in fair value resulting from a decrease in interest rates. For example, a hypothetical ten percent decrease in the interest rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt by approximately $7.0 million.

Foreign Currency Exchange Rate Risk. Our foreign customers are located in various parts of the world, primarily Western Europe, the Far East and Canada, and one of our subsidiaries operates in Western Europe and one has a manufacturing facility in Mexico. To limit our foreign currency exchange rate risk related to sales to our customers, orders are primarily valued and sold in U.S. dollars. From time to time we have entered into forward foreign exchange contracts to limit our exposure related to foreign inventory procurement and operating costs. While we have not entered into any such contracts since 1998 and no such contracts are open as of June 30, 2001, we may do so in the future depending on our assessment of future foreign exchange rate trends.

Special Note Regarding Forward-Looking Statements

All statements other than statements of historical facts included in this report are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict. We are vulnerable to a variety of factors that affect many businesses, such as:

	•	fuel prices and general economic conditions that affect demand for aircraft and air travel, which in turn affect demand for our products and services;

	•	our reliance on key customers and the adverse effect a significant decline in business from any one of them would have on our business;

	•	changes in prevailing interest rates and the availability of financing to fund our plans for continued growth;

	•	competition from larger companies;

	•	Federal Aviation Administration prescribed standards and licensing requirements, which apply many of the products and services we provide;

	•	inflation, and other general changes in costs of goods and services;

	•	liability and other claims asserted against us that exceeds our insurance coverage;

	•	the ability to attract and retain qualified personnel;

	•	labor disturbances; and

	•	changes in operating strategy, or our acquisition and capital expenditure plans.

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

Incorporation of Documents by Reference

We have filed with the Securities and Exchange Commission, and are including within this report by referring to it here, our Form 10-K for the year ended December 31, 2000. The Form 10-K includes our audited financial statements, which we refer to in this report.

You may read and copy any reports, statements or other information we file at the SEC’s reference room in Washington D.C. Please call the SEC at (202) 942-8090 for further information on the operation of the reference rooms. You can also request copies of these documents, upon payment of a duplicating fee, by writing to the SEC, or review our SEC filings on the SEC’s EDGAR web site, which can be found at http://www.sec.gov. You may also write or call us at our corporate office or visit our web site at http://decraneaircraft.com. Our corporate offices are located at 2361 Rosecrans Avenue, Suite 180, El Segundo, California 90245. Our telephone number is (310) 725–9123.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to the legal proceedings described in Item 3 of our Form 10-K for the year ended December 31, 2000.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.	Exhibits

	10.10.4	Increased Commitments Agreement, dated as of April 27, 2001, pursuant to Third Amended and Restated Credit Agreement, dated as of May 11, 2000, as amended by the First Amendment to the Third Amended and Restated Credit Agreement, dated as of June 30, 2000 *


	*	Previously filed

	**	Filed herewith


b.	Reports on Form 8-K

	None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DECRANE AIRCRAFT HOLDINGS, INC. (Registrant)





August 10, 2001	By:	/s/ Richard J. Kaplan

	Name:	Richard J. Kaplan
	Title:	Senior Vice President, Chief Financial Officer,
		Secretary, Treasurer and Director