10-Q

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 March 31, 2002

Commission File Number 000-22371

DECRANE AIRCRAFT HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	34-1645569
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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 May 10, 2002 was 100 shares.

Table of Contents

Part I – Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001
	Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001
	Consolidated Statements of Stockholder’s Equity for the three months ended March 31, 2002
	Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001
	Condensed Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Industry Overview and Trends
	Results of Operations
	Restructuring and Asset Impairment Charges
	Liquidity and Capital Resources
	Recent 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)

	March 31, 2002			December 31, 2001
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	11,843		$	9,794
Accounts receivable, net	54,285			58,451
Inventories	87,862			86,498
Deferred income taxes	13,820			14,063
Prepaid expenses and other current assets	3,122			2,559
Total current assets	170,932			171,365
Property and equipment, net	57,182			61,073
Other assets, principally intangibles, net	411,249			413,273
Total assets	$	639,363		$	645,711
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity
Current liabilities:
Current portion of long-term debt	$	17,074		$	13,899
Accounts payable	19,187			19,051
Accrued liabilities	52,359			56,626
Income taxes payable	232			133
Total current liabilities	88,852			89,709
Long-term debt	383,075			386,351
Deferred income taxes	31,345			33,597
Other long-term liabilities	7,575			7,438
Commitments and contingencies (Note 10)
Mandatorily redeemable preferred stock	29,622			28,240
Stockholder’s equity:
Common stock, $.01 par value, 1,000 shares authorized; 100 shares issued and outstanding as of March 31, 2002 and December 31, 2001	—			—
Additional paid-in capital	120,587			122,469
Notes receivable for shares sold	(2,500		)	(2,668		)
Accumulated deficit	(16,925		)	(17,323		)
Accumulated other comprehensive loss	(2,268		)	(2,102		)
Total stockholder’s equity	98,894			100,376
Total liabilities and stockholder’s equity	$	639,363		$	645,711

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

1

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands)

	Three Months Ended March 31,
	2002			2001
	(Unaudited)
Revenues	$	86,163		$	99,151
Cost of sales	60,448			64,106
Gross profit	25,715			35,045
Operating expenses:
Selling, general and administrative expenses	15,497			14,660
Amortization of intangible assets	1,400			4,966
Total operating expenses	16,897			19,626
Income from operations	8,818			15,419
Other expenses:
Interest expense	7,963			10,455
Other expenses, net	146			105
Income before provision for income taxes	709			4,859
Provision for income taxes	311			2,387
Net income	398			2,472
Accrued preferred stock dividends	(1,265		)	(1,082		)
Preferred stock redemption value accretion	(117		)	(117		)
Net income (loss) applicable to common stockholder	$	(984	)	$	1,273

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

2

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholder’s Equity

(In thousands, except share data)

	Common Stock			Additional Paid-in Capital			Notes Receivable For Shares Sold			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
	Shares	Amount
Balance, December 31, 2001	100	$	—	$	122,469		$	(2,668	)	$	(17,323	)	$	(2,102	)	$	100,376
Comprehensive income (loss):
Net loss	—	—		—			—			398			—			398
Translation adjustment	—	—		—			—			—			(163		)	(163		)
Unrealized loss on interest rate swap contract	—	—		—			—			—			(3		)	(3		)
																232
Return of capital in connection with the repurchase of common stock and cashless exercise of options, net of related note receivable repaid	—	—		(568		)	200			—			—			(368		)
(tax benefit of options exercised)	—	—		14			—			—			—			14
Accrued preferred stock dividends	—	—		(1,265		)	—			—			—			(1,265		)
Preferred stock redemption value accretion	—	—		(117		)	—			—			—			(117		)
Compensatory stock option expense	—	—		54			—			—			—			54
Notes receivable interest accrued	—	—		—			(32		)	—			—			(32		)
Balance, March 31, 2002 (Unaudited)	100	$	—	$	120,587		$	(2,500	)	$	(16,925	)	$	(2,268	)	$	98,894

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

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DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	Three Months Ended March 31,
	2002			2001
	(Unaudited)
Cash flows from operating activities:
Net income	$	398		$	2,472
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,985			8,248
Noncash portion of restructuring and asset impairment charges	3,145			—
Deferred income taxes	128			746
Other, net	215			359
Changes in assets and liabilities, net of effect from acquisitions:
Accounts receivable	3,547			(8,799		)
Inventories	(2,480		)	(4,086		)
Prepaid expenses and other assets	(1,177		)	(838		)
Accounts payable	152			5,302
Accrued liabilities	(3,557		)	(10,675		)
Income taxes payable	114			1,505
Other long-term liabilities	112			155
Net cash provided by (used for) operating activities	5,582			(5,611		)
Cash flows from investing activities:
Cash paid for acquisitions	(707		)	(17,247		)
Capital expenditures	(623		)	(2,604		)
Other, net	—			55
Net cash used for investing activities	(1,330		)	(19,796		)
Cash flows from financing activities:
Net borrowings under senior credit facility	—			23,300
Other long-term borrowings	297			—
Deferred financing costs	(1,629		)	—
Principal payments on term debt, capitalized leases and other debt	(451		)	(1,001		)
Return of capital in connection with shares repurchased	(368		)	—
Other, net	(49		)	(58		)
Net cash provided by (used for) financing activities	(2,200		)	22,241
Effect of foreign currency translation on cash	(3		)	71
Net increase (decrease) in cash and cash equivalents	2,049			(3,095		)
Cash and cash equivalents at beginning of period	9,794			8,199
Cash and cash equivalents at end of period	$	11,843		$	5,104

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

4

DECRANE AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES

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 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, 2001 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.  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 2001 Form 10-K.  Some reclassifications have been made to prior periods’ financial statements to conform to the 2002 presentation.

Note 2.           Accounting Pronouncements

Accounting Pronouncements Adopted January 1, 2002

SFAS No. 141 and 142

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142.  Adoption of these accounting pronouncements resulted in the following:

•Reassessment of Useful Lives of Intangible Assets.  The reassessment of the useful lives of intangible assets acquired on or before June 30, 2001 was completed during the first quarter of 2002.  The remaining useful lives were deemed appropriate.

•Reclassification of Intangible Assets.  Intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill were reclassified to goodwill.

•Discontinuance of Goodwill Amortization.  Goodwill is deemed to be an indefinite-lived asset.  As a result, the recording of periodic goodwill amortization charges was discontinued effective January 1, 2002.

5

The Company has until June 30, 2002 to complete the first step of the transitional impairment testing of goodwill associated with adopting SFAS No. 142 and until December 31, 2002 to complete the second step, if needed.  The amount of impairment losses recognizable upon adoption, if any, is not known at this time.  The transitional impairment losses, if any, will be reflected as a cumulative effect of a change in accounting principle as of January 1, 2002.

A reconciliation of reported net income to net income adjusted to reflect the impact of the discontinuance of the amortization of goodwill and other intangible assets is as follows (amounts in thousands):

	Three Months Ended March 31,
	2002		2001
	(Unaudited)
Reported net income	$	398	$	2,472
Add back goodwill and assembled workforce amortization, net of tax	—		2,881
Adjusted net income	$	398	$	5,353

SFAS No. 143

Effective January 1, 2002, the Company also adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset.  Adoption of SFAS No. 143 is required for the Company’s fiscal year beginning January 1, 2003 although early application is permitted.  Adoption of SFAS No. 143 did not have an impact on the Company’s business, consolidated financial position, results of operations or cash flows.

SFAS No. 144

Effective January 1, 2002, the Company also adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses the accounting and reporting for the impairment or disposal of long-lived assets.  Adoption of SFAS No. 144 did not have an impact on the Company’s business, consolidated financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncement

SFAS No. 145

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002.  The Company is currently evaluating the impact this new standard will have on its business, consolidated financial position, results of operations and cash flow.

6

Note 3.           Restructuring and Asset Impairment Charges

2002 Restructuring of Seat Manufacturing Facilities

In 2002, the Company announced it would consolidate the production of four seating and related manufacturing facilities into two facilities, resulting in the permanent closure of two facilities.  In connection with the restructuring plan, the Company expects to record nonrecurring pre-tax charges to operations totaling $5,145,000 during 2002 for restructuring and asset impairment charges and other related expenses.  Of this amount, $4,043,000 was charged to operations during the three months ended March 31, 2002 as follows (amounts in thousands):

						Remaining Charges to be Incurred
	Total Expected Charges		Charges Recorded to Date
	(Unaudited)
Restructuring and asset impairment charges recorded	$	3,895	$	(3,895	)	$	—
Other restructuring related expenses to be recognized as incurred	1,250		(148		)	1,102
Total	$	5,145	$	(4,043	)	$	1,102

Of the $4,043,000 incurred during the three months ended March 31, 2002, $1,214,000 is included in cost of sales and the remaining $2,829,000 is included in selling, general and administrative expenses.  The restructuring and asset impairment charges and other related expenses are comprised of the following:

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

•Inventory and Accounts Receivable Write-Downs.  In connection with the production consolidation, the Company will discontinue manufacturing certain products.  Inventory and certain receivables related to the discontinued products were written down to net realizable value.

•Severance and Other Compensation Costs.  Approximately 100 employees will be terminated as soon as the operations are consolidated and the facilities are permanently closed; none have been terminated as of March 31, 2002.

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

•Other Restructuring-Related Expenses.  Other expenses pertain to FAA retesting and recertification of products manufactured at a different facility, moving, transportation and travel costs and shutdown / startup costs.  These expenses will be charged to operations as incurred.

7

The Company has commenced with the restructuring plan and expects it to be completed during the third quarter of fiscal 2002.  The components of the restructuring, assets impairment and other nonrecurring charges are as follows (amounts in thousands):

									Balance at March 31, 2002
	Total Charges		Amounts Incurred
			Noncash			Cash
	(Unaudited)
Restructuring and assets impairment charges (1):
Impairment of property and equipment	$	1,445	$	(1,445	)	$	—		$	—
Inventory and accounts receivable write-downs	1,700		(1,700		)	—			—
Severance and other compensation costs	450		—			—			450
Lease termination and other related costs	300		—			—			300
Total restructuring and asset impairment charges (2)	3,895		(3,145		)	—			750
Other nonrecurring restructuring-related expenses (3)	1,250		—			(148		)	1,102
Total	$	5,145	$	(3,145	)	$	(148	)	$	1,852
Components of charges:
Noncash charges	$	3,145	$	(3,145	)	$	—		$	—
Cash charges	2,000		—			(148		)	1,852
Total	$	5,145	$	(3,145	)	$	(148	)	$	1,852

(1)Reflects charges to operations during the three months ended March 31, 2002.

(2)Balance at March 31, 2002 reflects the remaining accrued liability recorded.

(3)Reflects expenses to be charged to operations as incurred.  Balance at March 31, 2002 reflects an estimate of the costs that will be charged to operations during the remainder of 2002; these costs are not accrued as of March 31, 2002.

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

2001 Restructuring and Asset Impairment Charges

During the second quarter of 2001, the Company adopted a restructuring plan to realign aircraft furniture production programs among its manufacturing facilities.  In response to the adverse impact on the aerospace industry resulting from the September 11^th terrorist attack and its aftermath, as well as the weakening of global economic conditions, the Company announced and implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital.  This plan included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions.  This plan primarily affected the Company’s Cabin Management and Specialty Avionics Groups.

In 2001, the Company recorded nonrecurring pre-tax charges to operations of $28,658,000 for restructuring costs and asset impairment charges in connection with these restructuring plans.  The restructuring costs and asset impairment charges were comprised of the following:

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

8

•Write-off of Product Development Costs.  The curtailment of several product development programs in 2001 resulting in the write-off of inventoried costs related to these programs.

•Excess Inventory Write-Downs.  Inventory was written down to net realizable value for quantities on hand exceeding current and forecast order backlog requirements.  Inventory at the closed and temporarily idled manufacturing facilities was also written down to net realizable value.

•Realignment of Production Programs Among Facilities.  Costs associated with this realignment were incurred during the fiscal second quarter of 2001.

•Severance and Other Compensation Costs.  Since the September 11^th terrorist attack, the Company has reduced its total workforce by approximately 400 employees, or 14%, as of March 2002, of which approximately 260 employees had separated as of December 31, 2001.

•Lease Termination and Other Related Costs.  Lease termination and other related costs 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.

As of December 31, 2001, $27,049,000 had been incurred, $22,058,000 of which represented a noncash write-down of assets, and the remaining $1,609,000 was reflected as an accrued liability.  Components of the amounts incurred through March 31, 2002 are as follows (amounts in thousands):

	Balance at December 31, 2001					Balance at March 31, 2002
			Amounts Incurred
			(Unaudited)			(Unaudited)
Severance and other compensation costs	$	1,185	$	(621	)	$	564
Lease termination and other related costs	424		(116		)	308
Total	$	1,609	$	(737	)	$	872

Through March 31, 2002, severance and other compensation costs of approximately $1,460,000 have been paid, of which $621,000 was incurred during the three months ended March 31, 2002.  The amounts paid to date have been to manufacturing and administrative employees terminated at the manufacturing facilities either permanently closed or being temporarily idled.  The Company expects to incur the remaining costs during the second quarter of 2002 when the manufacturing facility being temporarily idled ceases operations and the remaining personnel are terminated.

The remaining balance of restructuring costs includes lease termination and other exit costs.  Most of the restructuring plan will be completed by the second quarter of 2002; however, future cash payments will extend beyond this date due to future lease payments on the vacated facility and the incurrence of other exit costs.

No significant adjustments have been made to the original estimates.  Future cash payments will be funded from existing cash balances and internally generated cash from operations.

9

Note 4.           Inventories

Inventories are comprised of the following as of March 31, 2002 and December 31, 2001 (amounts in thousands):

	March 31, 2002		December 31, 2001
	(Unaudited)
Raw materials	$	48,314	$	50,503
Work-in-process:
Direct and indirect manufacturing costs	17,417		16,260
Program costs, principally engineering costs	11,710		10,974
Finished goods	6,235		3,089
Costs and estimated earnings in excess of billings on uncompleted contracts	4,186		5,672
Total inventories	$	87,862	$	86,498

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 that will be recovered from future sales.  Periodic assessments are performed to ensure recoverability of the program costs and adjustments are made, if necessary, to reduce inventoried costs to estimated realizable value.  In connection with the 2001 restructuring, $7,908,000 of previously inventoried program costs were determined to be unrecoverable and were charged to cost of sales during the fourth quarter of fiscal 2001; no adjustments were required during the first quarter of fiscal 2002.

Total costs and estimated earnings on all uncompleted contracts as of March 31, 2002 and December 31, 2001 are comprised of the following (amounts in thousands):

	March 31, 2002			December 31, 2001
	(Unaudited)
Costs incurred on uncompleted contracts	$	60,899		$	46,757
Estimated earnings recognized	56,730			50,413
Total costs and estimated earnings	117,629			97,170
Less billings to date	(119,344		)	(102,653		)
Net	$	(1,715	)	$	(5,483	)
Balance sheet classification:
Asset — Costs and estimated earnings in excess of billings	$	4,186		$	5,672
Liability — Billings in excess of costs and estimated earnings (Note 6)	(5,901		)	(11,155		)
Net	$	(1,715	)	$	(5,483	)

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Note 5.           Other Assets

Other assets are comprised of the following as of March 31, 2002 and December 31, 2001 (amounts in thousands):

	March 31, 2002		December 31, 2001
	(Unaudited)
Goodwill	$	342,133	$	337,443
Identifiable intangible assets with finite useful lives	55,284		63,648
Deferred financing costs	11,243		10,204
Other non-amortizable assets	2,589		1,978
Total other assets	$	411,249	$	413,273

Goodwill

Changes in the carrying amount of goodwill, by business segment (Note 12), for the three months ended March 31, 2002 and the year ended December 31, 2001 are as follows (amounts in thousands):

	Cabin Management Group			Specialty Avionics Group			Systems Integration Group
													Consolidated Total
										Corporate
Three months ended March 31, 2002:
Balance, December 31, 2001	$	178,715		$	126,495		$	28,277		$	3,956		$	337,443
Reclassification of intangible assets relating to assembled workforce, net of tax	3,076			1,221			386			120			4,803
Foreign currency translation	—			(113		)	—			—			(113		)
Balance, March 31, 2002 (Unaudited)	$	181,791		$	127,603		$	28,663		$	4,076		$	342,133
Year ended December 31, 2001:
Balance, December 31, 2000	$	187,797		$	131,472		$	32,982		$	4,105		$	356,356
Amortization during the period	(1,641		)	(1,180		)	(295		)	(37		)	(3,153		)
Foreign currency translation	—			(677		)	—			—			(677		)
Balance, March 31, 2001 (Unaudited)	186,156			129,615			32,687			4,068			352,526
Amortization during the period	(4,999		)	(3,529		)	(885		)	(112		)	(9,525		)
Impairment losses recognized	(5,058		)	—			(3,525		)	—			(8,583		)
Contingent consideration earned, including acquisition related expenses	3,832			—			—			—			3,832
Cash received from sellers, net of additional liabilities recorded, upon settlement of asserted claims	(1,216		)	—			—			—			(1,216		)
Foreign currency translation	—			409			—			—			409
Balance, December 31, 2001	$	178,715		$	126,495		$	28,277		$	3,956		$	337,443

Corporate reflects the portion of goodwill that has not been allocated to a business segment.  The corporate goodwill will be allocated in connection with the transitional impairment testing of goodwill associated with adopting SFAS No. 142.

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Identifiable Intangible Assets with Finite Useful Lives

Identifiable intangible assets with finite useful lives are comprised of the following as of March 31, 2002 and December 31, 2001 (amounts in thousands):

	March 31, 2002 (Unaudited)							December 31, 2001
			Accumulated Amortization							Accumulated Amortization
	Cost					Net		Cost					Net
FAA certifications	$	45,816	$	(9,249	)	$	36,567	$	45,816	$	(8,485	)	$	37,331
Engineering drawings	14,617		(3,059		)	11,558		14,617		(2,816		)	11,801
Assembled workforce	—		—			—		11,499		(4,535		)	6,964
Other identifiable intangibles	12,293		(5,134		)	7,159		12,293		(4,741		)	7,552
Total identifiable intangibles	$	72,726	$	(17,442	)	$	55,284	$	84,225	$	(20,577	)	$	63,648

Estimated annual amortization expense for all identifiable intangible assets with finite useful lives for the five-year period ending December 31, 2006 is as follows: 2002 — $5,601,000; 2003 — $5,574,000; 2004 — $5,521,000; 2005 — $5,521,000; and 2006 — $4,423,000.

Note 6.           Accrued Liabilities

Accrued liabilities are comprised of the following as of March 31, 2002 and December 31, 2001 (amounts in thousands):

	March 31, 2002		December 31, 2001
	(Unaudited)
Salaries, wages, compensated absences and payroll related taxes	$	12,829	$	17,179
Accrued interest	10,003		4,692
Accrued warranty costs	6,588		4,227
Acquisition related contingent consideration	6,204		6,904
Billings in excess of costs and estimated earnings on uncompleted contracts	5,901		11,155
Customer advances and deposits	3,352		3,260
Other accrued liabilities	7,482		9,209
Total accrued liabilities	$	52,359	$	56,626

12

Note 7.           Long-Term Debt

Long-term debt includes the following amounts as of March 31, 2002 and December 31, 2001 (amounts in thousands):

	March 31, 2002			December 31, 2001
	(Unaudited)
Senior credit facility:
$50 million revolving line of credit	$	12,000		$	12,000
Term loans	275,706			275,706
12% senior subordinated notes	100,000			100,000
Capital lease obligations and term debt financing, secured by property and equipment	10,592			10,745
Other indebtedness	1,851			1,799
Total long-term debt	400,149			400,250
Less current portion	(17,074		)	(13,899		)
Long-term debt, less current portion	$	383,075		$	386,351

On March 19, 2002, the Company amended certain of the terms of its senior credit facility.  The amendment combines two $25,000,000 working capital and acquisitions lines of credit into a single $50,000,000 working capital line of credit, increases the prime rate and LIBOR rate margins by 50 basis points, resulting in a range of 2.00% to 3.25% for prime rate borrowings and 3.25% to 4.50% for LIBOR rate borrowings, and amends certain financial covenants, principally through December 31, 2003.

Note 8.           Income Taxes

For the three months ended March 31, 2002, 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.

For the three months ended March 31, 2001, 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.  Prior to the January 1, 2002 adoption of SFAS No. 142, goodwill was amortized for financial reporting purposes.

13

Note 9.           Capital Structure

Mandatorily Redeemable Preferred Stock

The table below summarizes the increase in mandatorily redeemable preferred stock during the three months ended March 31, 2002.

	Number of Shares	Mandatory Redemption Value		Unamortized Issuance Discount			Net Book Value
	(in thousands, except share and per share data)
Balance, December 31, 2001	316,330	$	31,633	$	(3,393	)	$	28,240
Accrued dividends and redemption value accretion	12,653	1,265		117			1,382
Balance, March 31, 2002 (Unaudited)	328,983	$	32,898	$	(3,276	)	$	29,622
Per share liquidation value as of March 31, 2002 (Unaudited)		$	100.00

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

Common Stock, Stock Options Exercised and Notes Receivable for Shares Sold

During the three months ended March 31, 2002, DeCrane Holdings repurchased and canceled 18,743 common shares from former members of DeCrane Aircraft management.  The former management members also elected to exercise 9,252 vested stock options on a cashless basis.  The $14,000 income tax benefit associated with the stock options exercised was also credited to additional paid-in capital.  In connection with the repurchase, a note receivable collateralized by the repurchased common stock was repaid.

Note 10.         Commitments and Contingencies

Contingent Acquisition Consideration

The Company’s remaining maximum contingent acquisition consideration payment obligation is $600,000 as of March 31, 2002.  The contingent consideration is payable based upon an acquired company’s level of attainment of its defined performance criteria for the year ending December 31, 2002 and excludes amounts earned and recorded through December 31, 2001.  The contingent consideration, if any, is payable during the first quarter of 2003.

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.

14

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 $56,121,000 as of March 31, 2002, including accumulated dividends.

Note 11.         Consolidated Statements of Cash Flows

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

	Three Months Ended March 31,
	2002		2001
	(Unaudited)
Components of cash paid for acquisitions:
Contingent consideration paid for previously completed acquisitions	$	700	$	17,075
Additional acquisition related expenses	7		172
Total cash paid for acquisitions	$	707	$	17,247

Note 12.         Business Segment Information

The Company supplies products and services to the aerospace industry.  The Company’s subsidiaries are organized into three groups, each of which are strategic businesses that develop, manufacture and sell 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 cabin interior furnishings, cabin management systems, seating and composite components;

•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, management considers EBITDA to be the primary measurement of overall economic returns and cash flows.  Management defines EBITDA as earnings before interest, income taxes, depreciation and amortization, 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.

15

The tables below summarize selected financial data by business segment (amounts in thousands).

	Three Months Ended March 31,
	2002			2001
	(Unaudited)
Revenues:
Cabin Management	$	45,867		$	51,359
Specialty Avionics	25,344			31,273
Systems Integration	15,077			16,734
Inter-group elimination (1)	(125		)	(215		)
Consolidated totals	$	86,163		$	99,151
EBITDA:
Cabin Management	$	3,978		$	13,398
Specialty Avionics	7,011			7,827
Systems Integration	4,296			4,096
Corporate (2)	(2,118		)	(1,936		)
Inter-group elimination (3)	111			—
Consolidated totals (4)	$	13,278		$	23,385
Adjusted EBITDA (5):
Cabin Management	$	8,021		$	13,398
Specialty Avionics	7,011			7,827
Systems Integration	4,296			4,096
Corporate	(2,118		)	(1,936		)
Inter-group elimination	111			—
Consolidated totals	$	17,321		$	23,385
Total assets (as of period end):
Cabin Management	$	305,047		$	317,314
Specialty Avionics	211,446			228,044
Systems Integration	77,553			83,971
Corporate (6)	46,184			39,449
Inter-group elimination (7)	(867		)	(339		)
Consolidated totals	$	639,363		$	668,439

(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.

16

(4)The table below reconciles consolidated EBITDA to income from operations and income before income taxes (amounts in thousands).

	Three Months Ended March 31,
	2002			2001
	(Unaudited)
Consolidated EBITDA	$	13,278		$	23,385
Depreciation and amortization (a)	(4,396		)	(7,695		)
Acquisition related charges not capitalized	(10		)	(81		)
Other noncash charges	(54		)	(190		)
Consolidated income from operations	8,818			15,419
Interest expense	(7,963		)	(10,455		)
Other expenses, net	(146		)	(105		)
Consolidated income before income taxes	$	709		$	4,859

(a)Reflects depreciation and amortization of long-lived assets, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142) and other intangible assets.  Excludes amortization of deferred financing costs, which are classified as a component of interest expense.  The table below reconciles depreciation and amortization of long-lived assets to consolidated depreciation and amortization (amounts in thousands).

	Three Months Ended March 31,
	2002		2001
	(Unaudited)
Depreciation and amortization of long-lived assets	$	4,396	$	7,695
Amortization of deferred financing costs	589		553
Consolidated depreciation and amortization	$	4,985	$	8,248

(5)Reflects EBITDA before $4,043,000 of restructuring and asset impairment charges and other restructuring related expenses charged to operations during the three months ended March 31, 2002 pertaining to Cabin Management’s restructuring of its seating and related manufacturing facilities (Note 3).

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

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

17

Note 13.         Supplemental Condensed Consolidating Financial Information

In conjunction with the senior credit facility and 12% senior subordinated notes described in Note 7, 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.

18

Balance Sheets

	March 31, 2002 (Unaudited)
	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
	(in thousands)
Assets
Current assets:
Cash and cash equivalents	$	11,126		$	326		$	391		$	—		$	11,843
Accounts receivable, net	—			52,557			1,728			—			54,285
Inventories	—			86,217			1,645			—			87,862
Other current assets	15,279			1,399			264			—			16,942
Total current assets	26,405			140,499			4,028			—			170,932
Property and equipment, net	3,124			51,764			2,294			—			57,182
Other assets, principally intangibles, net	16,655			385,141			9,453			—			411,249
Investments in subsidiaries	406,286			20,678			—			(426,964		)(1)	—
Intercompany receivables	260,759			133,290			4,324			(398,373		)(2)	—
Total assets	$	713,229		$	731,372		$	20,099		$	(825,337	)	$	639,363
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity
Current liabilities:
Current portion of long-term debt	$	15,128		$	1,940		$	6		$	—		$	17,074
Other current liabilities	24,209			46,324			1,245			—			71,778
Total current liabilities	39,337			48,264			1,251			—			88,852
Long-term debt	373,006			10,069			—			—			383,075
Intercompany payables	133,218			265,083			72			(398,373		)(2)	—
Other long-term liabilities	36,884			1,761			275			—			38,920
Mandatorily redeemable preferred stock	29,622			—			—			—			29,622
Stockholder’s equity:
Paid-in capital	118,087			336,986			15,440			(352,426		)(1)	118,087
Retained earnings (deficit)	(16,925		)	69,300			5,238			(74,538		)(1)	(16,925		)
Accumulated other comprehensive loss	—			(91		)	(2,177		)	—			(2,268		)
Total stockholder’s equity	101,162			406,195			18,501			(426,964		)	98,894
Total liabilities, mandatorily   redeemable preferred stock and stockholder’s equity	$	713,229		$	731,372		$	20,099		$	(825,337	)	$	639,363

19

	December 31, 2001
	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
	(in thousands)
Assets
Current assets:
Cash and cash equivalents	$	9,641		$	(92	)	$	245		$	—		$	9,794
Accounts receivable, net	—			56,973			1,478			—			58,451
Inventories	—			84,864			1,634			—			86,498
Other current assets	15,153			1,138			331			—			16,622
Total current assets	24,794			142,883			3,688			—			171,365
Property and equipment, net	3,355			55,152			2,566			—			61,073
Other assets, principally intangibles, net	15,348			388,269			9,656			—			413,273
Investments in subsidiaries	403,786			20,697			—			(424,483		)(1)	—
Intercompany receivables	256,360			121,030			4,300			(381,690		)(2)	—
Total assets	$	703,643		$	728,031		$	20,210		$	(806,173	)	$	645,711
Liabilities, Mandatorily Redeemable Preferred Stock and Stockholder’s Equity
Current liabilities:
Current portion of long-term debt	$	11,839		$	2,054		$	6		$	—		$	13,899
Other current liabilities	24,849			49,854			1,107			—			75,810
Total current liabilities	36,688			51,908			1,113			—			89,709
Long-term debt	376,392			9,959			—			—			386,351
Intercompany payables	120,998			260,660			32			(381,690		)(2)	—
Other long-term liabilities	38,847			1,806			382			—			41,035
Mandatorily redeemable preferred stock	28,240			—			—			—			28,240
Stockholder’s equity:
Paid-in capital	119,801			336,986			15,440			(352,426		)(1)	119,801
Retained earnings (deficit)	(17,323		)	66,800			5,257			(72,057		)(1)	(17,323		)
Accumulated other comprehensive loss	—			(88		)	(2,014		)	—			(2,102		)
Total stockholder’s equity	102,478			403,698			18,683			(424,483		)	100,376
Total liabilities, mandatorily   redeemable preferred stock and stockholder’s equity	$	703,643		$	728,031		$	20,210		$	(806,176	)	$	645,711

20

Statements of Operations

	Three Months Ended March 31, 2002 (Unaudited)
	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
	(in thousands)
Revenues	$	—		$	85,205		$	2,482		$	(1,524	)(3)	$	86,163
Cost of sales	—			59,873			2,099			(1,524		)(3)	60,448
Gross profit	—			25,332			383			—			25,715
Selling, general and administrative expenses	2,417			12,668			412			—			15,497
Amortization of intangible assets	—			1,400			—			—			1,400
Interest expense	7,684			277			2			—			7,963
Intercompany charges	(7,150		)	7,150			—			—			—
Equity in earnings of subsidiaries	(2,500		)	(30		)	—			2,530		(4)	—
Other expenses (income), net	91			58			(3		)	—			146
Provision for income taxes (benefit)	(940		)	1,309			(58		)	—			311
Net income	$	398		$	2,500		$	30		$	(2,530	)	$	398

	Three Months Ended March 31, 2001 (Unaudited)
	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
	(in thousands)
Revenues	$	—		$	98,193		$	2,712		$	(1,754	)(3)	$	99,151
Cost of sales	—			63,502			2,358			(1,754		)(3)	64,106
Gross profit	—			34,691			354			—			35,045
Selling, general and administrative expenses	2,422			11,987			251			—			14,660
Amortization of intangible assets	76			4,787			103			—			4,966
Interest expense	10,194			251			10			—			10,455
Intercompany charges	(5,239		)	5,239			—			—			—
Equity in earnings of subsidiaries	(6,398		)	(4		)	—			6,402		(4)	—
Other expenses (income), net	75			72			(42		)	—			105
Provision for income taxes (benefit)	(3,602		)	5,961			28			—			2,387
Net income	$	2,472		$	6,398		$	4		$	(6,402	)	$	2,472

21

Statements of Cash Flows

	Three Months Ended March 31, 2002 (Unaudited)
	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
	(in thousands)
Cash flows from operating activities:
Net income	$	398		$	2,500		$	30		$	(2,530	)(4)	$	398
Noncash adjustments:
Equity in earnings of subsidiaries	(2,500		)	(30		)	—			2,530		(4)	—
Other noncash adjustments	1,032			7,192			249			—			8,473
Changes in working capital	5,360			(8,558		)	(91		)	—			(3,289		)
Net cash provided by operating activities	4,290			1,104			188			—			5,582
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(707		)	—			—			—			(707		)
Capital expenditures	(4		)	(580		)	(39		)	—			(623		)
Net cash used for investing activities	(711		)	(580		)	(39		)	—			(1,330		)
Cash flows from financing activities:
Long-term borrowings	—			297			—			—			297
Deferred financing costs	(1,629		)	—			—			—			(1,629		)
Principal payments on long-term debt and leases	(97		)	(354		)	—			—			(451		)
Other, net	(368		)	(49		)	—			—			(417		)
Net cash used for financing activities	(2,094		)	(106		)	—			—			(2,200		)
Effect of foreign currency translation on cash	—			—			(3		)	—			(3		)
Net increase in cash and equivalents	1,485			418			146			—			2,049
Cash and equivalents at beginning of period	9,641			(92		)	245			—			9,794
Cash and equivalents at end of period	$	11,126		$	326		$	391		$	—		$	11,843

22

	Three Months Ended March 31, 2001 (Unaudited)
	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
	(in thousands)
Cash flows from operating activities:
Net income	$	2,472		$	6,398		$	4		$	(6,402	)(4)	$	2,472
Noncash adjustments:
Equity in earnings of subsidiaries	(6,398		)	(4		)	—			6,402		(4)	—
Other noncash adjustments	2,309			6,470			574			—			9,353
Changes in working capital	(7,077		)	(9,601		)	(758		)	—			(17,436		)
Net cash provided by (used for) operating activities	(8,694		)	3,263			(180		)	—			(5,611		)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(17,247		)	—			—			—			(17,247		)
Capital expenditures and other	(51		)	(2,290		)	(208		)	—			(2,549		)
Net cash used for investing activities	(17,298		)	(2,290		)	(208		)	—			(19,796		)
Cash flows from financing activities:
Net senior credit facility borrowings	23,300			—			—			—			23,300
Principal payments on term debt, capitalized leases and other debt	(98		)	(896		)	(7		)	—			(1,001		)
Other, net	—			(58		)	—			—			(58		)
Net cash provided by (used for) financing activities	23,202			(954		)	(7		)	—			22,241
Effect of foreign currency translation on cash	—			—			71			—			71
Net increase (decrease) in cash and equivalents	(2,790		)	19			(324		)	—			(3,095		)
Cash and equivalents at beginning of period	7,553			233			413			—			8,199
Cash and equivalents at end of period	$	4,763		$	252		$	89		$	—		$	5,104

23

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.

Industry Overview and Trends

We compete in the aircraft products and services market of the aerospace industry.  The market for our products and services is largely driven by demand in the three civil aircraft markets: commercial, regional and corporate aircraft.  Currently, we provide a minimal amount of products and services to the military aircraft market and are therefore relatively unaffected by defense spending and other factors affecting that market.

The September 11, 2001 terrorist attack on the United States and weak global economic conditions are adversely impacting the commercial airline industry and, in turn, are having an unfavorable impact upon that portion of our business.  The commercial and regional original equipment and aftermarket/retrofit portions of our business are currently estimated at approximately 31% of our revenues.

In addition, an estimated 60% of our revenues are currently derived from the corporate aircraft original equipment and aftermarket/retrofit business.  The weak global economic conditions have negatively impacted this portion of our business as well, although not as severely as the commercial market.  The remaining 9% of our revenues are derived from the military aircraft and other markets.

In response to these adverse conditions, we announced and implemented a restructuring plan in December 2001 designed to reduce expenses and conserve working capital.  This plan includes permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions.  During the first quarter of 2002, we also announced we would consolidate the production of four Cabin Management manufacturing facilities into two facilities, resulting in the permanent closure of two additional facilities.  See “—Restructuring and Asset Impairment Charges” below for additional information.

We believe the commercial aircraft portion of our business will experience significant weakness during 2002 and 2003, with potential recovery occurring during 2004 and continuing into 2005.  We also believe the corporate aircraft portion of our business will experience somewhat more moderate weakness during 2002 and 2003 with aircraft deliveries recovering in 2004 and continuing growth thereafter.

24

Results of Operations

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Revenues.Revenues decreased $13.0 million, or 13.1%, to $86.2 million for the three months ended March 31, 2002 from $99.2 million for the three months ended March 31, 2001.  By segment, revenues changed as follows:

	Increase (Decrease) From 2001
	Amount			Percent
	(in millions)
Cabin Management	$	(5.5	)	(10.7	)%
Specialty Avionics	(5.9		)	(19.0	)
Systems Integration	(1.7		)	(9.9	)
Inter-group elimination	0.1
Total	$	(13.0	)

Cabin Management.  Revenues decreased by $5.5 million, or 10.7% compared to the prior year.  The decrease, which is across most of our product and services categories, is caused by the adverse impact the weak global economic conditions are having on the corporate aircraft market in 2002 versus 2001 as follows:

•a $2.5 million decrease in aircraft furniture and related products revenues;

•a $3.0 million decrease in audio and entertainment products revenues; and

•a $2.3 million decrease in seating products revenues; offset by

•a $2.3 million increase in other product and services revenues.

Specialty Avionics.  Revenues decreased by $5.9 million, or 19.0% compared to the prior year, due to:

•a $3.7 million decrease resulting from lower volume for our interconnect products; and

•a $2.2 million decrease in cockpit audio, communications, lighting and power and control devices revenues resulting from a slowdown in the commercial airline production.

Systems Integration.  Revenues decreased by $1.7 million, or 9.9% compared to the prior year, due to a decrease in our commercial airline business in the aftermath of September 11^th.

25

Gross profit.  Gross profit decreased $9.3 million, or 26.6%, to $25.7 million for the three months ended March 31, 2002.  Gross profit for the three months ended March 31, 2002 is reduced by $1.2 million of restructuring charges, of which $1.1 million are noncash charges, relating to the closure of two manufacturing facilities in our Cabin Management group.  Excluding these charges, gross profit decreased $8.1 million compared to the prior year and gross profit as a percent of revenues was 31.3% for the three months ended March 31, 2002 compared to 35.3% for the same period last year.  By segment, gross profit changed as follows:

	Increase (Decrease) From 2001
	Amount			Percent
	(in millions)
Cabin Management	$	(7.9	)	(43.5	)%
Specialty Avionics	(1.1		)	(10.5	)
Systems Integration	(0.4		)	(6.9	)
Inter-group elimination	0.1
Total	$	(9.3	)

Cabin Management.  Gross profit decreased by $7.9 million, or 43.5% compared to prior year, primarily due to:

•a $4.7 million decrease in profit margins associated with lower volume for our corporate aircraft furniture products;

•a $1.2 million decrease caused by 2002 restructuring charges related to the consolidation of our seating and related manufacturing operations; and

•a $1.7 million decrease in gross profit related to lower volume for our in-flight entertainment products.

Specialty Avionics.  Gross profit decreased by $1.1 million, or 10.5% compared to the prior year, due to:

•a $0.8 million decrease related to lower volume for our cockpit audio, communications, lighting and power and control devices products; and

•a $0.8 million decrease caused by lower volume for our interconnect products; offset by

•a $0.5 million increase related to a shift in product mix to items with higher margins.

Systems Integration.  Gross profit decreased by $0.4 million, or 6.9% compared to the prior year, due to lower sales volume.

26

Selling, general and administrative expenses.  Selling, general and administrative expenses increased $0.8 million, or 5.7%, to $15.5 million for the three months ended March 31, 2002, from $14.7 million for the same period last year.  SG&A expenses for the three months ended March 31, 2002 includes $2.8 million of restructuring and asset impairment charges, of which $2.0 million are noncash charges.  Excluding these restructuring and asset impairment charges, SG&A expenses decreased $2.0 million compared to the prior year and SG&A expenses as a percent of revenues of 14.7% for the three months ended March 31, 2002 is comparable to 14.8% for the same period last year.  By segment, SG&A expenses changed as follows:

	Increase (Decrease) From 2001
	Amount			Percent
	(in millions)
Cabin Management	$	2.1		30.6	%
Specialty Avionics	(0.2		)	(4.7	)
Systems Integration	(0.5		)	(16.7	)
Corporate	(0.6		)
Total	$	0.8

Cabin Management.  SG&A expenses increased by $2.1 million, or 30.6% over the prior year, due to:

•a $2.8 million increase caused by 2002 restructuring charges relating to the consolidation of our seating and related manufacturing operations, offset by

•a $0.7 million decrease in expenses as a result of cost reduction measures implemented in 2001 in response to lower sales volume resulting from the weak global economic conditions.

Specialty Avionics.  SG&A expenses decreased by $0.2 million, or 4.7% compared the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of 2001.

Systems Integration.  SG&A expenses decreased by $0.5 million, or 16.7% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of 2001.

Corporate.  SG&A expenses decreased by $0.6 million compared to the prior year, primarily due to workforce and travel expense reductions.

Depreciation and amortization of intangibles.  Depreciation and amortization expense decreased $3.3 million to $4.4 million for the three months ended March 31, 2002 compared to $7.7 million for the same period in 2001, primarily resulting from the adoption of new accounting standards.  Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142.  Under these new standards, goodwill is deemed to be an indefinite-lived asset and, as a result, the recording of periodic goodwill amortization charges was discontinued effective January 1, 2002.  In addition, SFAS No. 141 requires that intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill be reclassified to goodwill.  Goodwill amortization was $3.6 million for the three months ended March 31, 2001, which includes $0.4 million of assembled workforce amortization, now deemed part of goodwill.  Excluding the effect of the accounting change, depreciation and amortization increased $0.3 million as a result of capital expenditures during the period.

27

EBITDA and Operating income.  EBITDA decreased $10.1 million, or 43.2%, to $13.3 million for the three months ended March 31, 2002, from $23.4 million for the same period last year.  Operating income decreased $6.6 million to $8.8 million for the three months ended March 31, 2002, from $15.4 million for the same period last year. EBITDA and operating income for the three months ended March 31, 2002 are reduced by $4.0 million of restructuring and asset impairment charges, $3.1 million of which are noncash charges, relating to the consolidation of our seating and related manufacturing facilities in our Cabin Management group.

Excluding these charges, EBITDA decreased $6.1 million, or 25.9%, to $17.3 million compared to the same period last year and operating income decreased $2.6 million, or 16.6%, compared to the prior year.  EBITDA as a percent of revenues decreased to 20.1% for the three months ended March 31, 2002 from 23.6% for the same period last year.

EBITDA and operating income changed as follows:

	Increase (Decrease) From 2001
	Amount			Percent
	(in millions)
EBITDA
Cabin Management	$	(9.4	)	(70.3	)%
Specialty Avionics	(0.8		)	(10.4	)
Systems Integration	0.2			4.9
Corporate	(0.2		)	(9.3	)
Inter-group elimination	0.1
Total EBITDA	(10.1		)
Depreciation and amortization	3.3
Other noncash and acquisition related charges	0.2
Total operating income	$	(6.6)

Cabin Management.  EBITDA decreased by $9.4 million, or 70.3% compared to the prior year, primarily due to:

•a $4.0 million restructuring and asset impairment charge relating to the consolidation of our seating and related manufacturing facilities;

•a $4.0 million decrease related principally to lower revenues in our aircraft furniture operations, and

•a $1.4 million decrease resulting from lower sales volume for audio and in flight entertainment systems.

Specialty Avionics.  EBITDA decreased by $0.8 million, or 10.4% compared to the prior year, as a result of lower demand for our commercial aircraft products offset by the effect of cost reduction programs implemented in 2001 and a favorable shift in product mix.

Systems Integration.  EBITDA increased by $0.2 million, or 4.9% over the prior year, due principally to cost reduction programs implemented in 2001.

28

Interest expense.  Interest expense decreased $2.5 million, or 23.8%, to $8.0 million for the three months ended March 31, 2002 compared to $10.5 million for the same period last year due almost entirely to lower average interest rates charged by our lenders during 2002.

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 for periods prior to the January 1, 2002 adoption of SFAS No. 142.  The difference in the effective tax rates between periods is mostly the result of the adoption of SFAS No. 142.

Net income.  Net income decreased $2.1 million to $0.4 million for the three months ended March 31, 2002 compared to $2.5 million for the same period last year.

Net income (loss) applicable to common stockholder.  Net income applicable to DeCrane Holdings, our common stockholder, decreased $2.3 million to a net loss of $1.0 million for the three months ended March 31, 2002 compared to net income of $1.3 million for the same period last year.  The increase is attributable to:

•a $2.1 million decrease in net income; and

•a $0.2 million increase in accrued 16% mandatorily redeemable preferred stock dividends; the accrued dividends are compounded quarterly.

Bookings.  Bookings decreased $30.7 million, or 28.0%, to $79.0 million for the three months ended March 31, 2002 compared to $109.7 million for the same period last year.  The decrease in bookings for 2002 is due to decreases in orders for all three of our business segments.

Backlog at end of period.  Backlog decreased $7.1 million to $142.8 million as of March 31, 2002 compared to $149.9 million as of December 31, 2001.

The decrease in bookings and resulting backlog in 2002 primarily results from the continuing adverse impact on our businesses of the aftermath of the events of September 11^th and weak global economic conditions.

As described in “—Industry Overview and Trends,” the events of September 11^th and its aftermath are having an adverse impact on the aerospace industry and, in turn, are having an unfavorable impact on the commercial airline portion of our business.  In addition, weak global economic conditions have negatively impacted other portions of our business as well.  We are not currently able to determine the continuing impact these events will have on our bookings and resulting backlog for future periods.  However, given the magnitude of these events, the impact could be material.

29

Restructuring and Asset Impairment Charges

The following discussion should be read in conjunction with Note 3 accompanying our financial statements included in this report.

2002 Restructuring of Seat Manufacturing Facilities

In 2002, the Company announced it would consolidate the production of four seating and related manufacturing facilities into two facilities, resulting in the permanent closure of two facilities.  In connection with the restructuring plan, the Company expects to record nonrecurring pre-tax charges to operations totaling $5.1 million during 2002 for restructuring and asset impairment charges and other related expenses.  Of this amount, $4.0 million was charged to operations during the three months ended March 31, 2002, $3.1 million of which were noncash charges.  The remaining $1.1 million of other restructuring related expenses will be charged to operations as incurred during the remainder of 2002.

Of the $4.0 million incurred during the three months ended March 31, 2002, $1.2 million is included in cost of sales and the remaining $2.8 million is included in selling, general and administrative expenses.  The restructuring and asset impairment charges and other related expenses are comprised of charges of the impairment of long-lived assets, inventory and accounts receivable write-downs, severance and lease termination costs and other restructuring-related expenses pertaining to FAA retesting and recertification, moving and transportation costs and shutdown and startup costs.

Cash costs incurred during the three months ended March 31, 2002 were negligible.  A $0.8 million restructuring reserve remains at March 31, 2002 for severance and lease termination costs.  We expect to complete this plan in the third quarter of 2002.  Future cash payments will be funded from existing cash balances and internally generated cash from operations.

2001 Restructuring and Asset Impairment Charges

During the second quarter of 2001, we adopted a restructuring plan to realign aircraft furniture production programs among our manufacturing facilities.  In response to the adverse impact on the aerospace industry resulting from the September 11^th terrorist attack and its aftermath, as well as the weakening of global economic conditions, we announced and implemented a further restructuring plan in December 2001 designed to reduce costs and conserve working capital.  This plan includes permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions.  This plan primarily affects our Cabin Management and Specialty Avionics Groups.

In connection with these restructuring plans, we recorded nonrecurring pre-tax charges to operations of $28.7 million in 2001, of which $22.1 million were noncash charges, for the impairment of long-lived assets and restructuring costs related to write-downs and write-offs of inventoried costs, costs associated with the realignment of aircraft furniture production programs among facilities, severance, lease termination and other related costs.  Of this amount, $16.1 million is included in cost of sales and the remaining $12.6 million is included in selling, general and administration expenses.

During 2001, we paid $5.0 million of costs related to this restructuring in cash and a $1.6 million restructuring reserve remained at December 31, 2001 for severance, lease termination and other related costs.  During the three months ended March 31, 2002, we paid an additional $0.7 million in severance and lease termination costs; a $0.9 million restructuring reserve remains at March 31, 2002.  We expect to complete this plan in the second quarter of 2002 and costs have been within our expectations.  As a result, no adjustments have been made to our original estimates.  Future cash payments will be funded from existing cash balances and internally generated cash from operations.

30

Liquidity and Capital Resources

We have required cash primarily to fund acquisitions, capital expenditures and for working capital.  Historically, 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.

Net cash provided by operating activities was $5.6 million for the three months ended March 31, 2002 and consisted of $8.9 million of cash provided by operations after adding back depreciation, amortization, the noncash portion of our restructuring and asset impairment charges and other noncash items, $3.4 million used for working capital, and $0.1 million provided by an increase in other liabilities.  The following factors contributed to the $3.4 million working capital increase:

•a $3.4 million net decrease in accounts payable and accrued expenses;

•a $2.5 million inventory increase resulting from longer production lead times and new product development costs,

primarily engineering costs, for new cabin interior products and components; and

•a $1.2 million increase in prepaid expenses and other current assets; offset by

•a $3.6 million accounts receivable decrease resulting from timing differences relating to progress and final billings on long-term contracts versus the associated collection and the timing of other collections; and further offset by

•a $0.1 million increase in income taxes payable.

Net cash used for investing activities was $1.3 million for the three months ended March 31, 2002 and consisted of:

•$0.7 million of contingent acquisition consideration paid during 2002; and

•$0.6 million for capital expenditures.

We anticipate spending approximately $6.0 to $8.0 million for capital expenditures in 2002, which includes approximately $2.0 million for improvements to the manufacturing facilities that will house the combined operations of the facilities being closed in 2002.

Net cash used for financing activities was $2.2 million for the three months ended March 31, 2002 and was provided by cash from operations and $0.3 million of additional long-term borrowings.  Cash of $2.5 million was used to pay financing costs associated with amending our senior credit facility, make principal payments on our term debt, capitalized leases and other debt and repurchase stock and options from former management employees.

At March 31, 2002, senior credit facility borrowings totaling $287.7 million are at variable interest rates based on defined margins over the current prime or LIBOR rates.  At March 31, 2002, we also had $82.1 million of working capital and had $38.0 million of borrowings available under our revolving line of credit.

We are being affected by economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.  As described in “—Industry Overview and Trends,” the September 11^th terrorist attack and its aftermath is having a severe adverse impact on the aerospace industry and, in turn, is having an unfavorable impact on portions of our business.  In addition, the weak global economic conditions are adversely impacting other portions of our business as well.  As described in “—Restructuring and Asset Impairment Charges,” we are taking measures to reduce costs and conserve working capital.

31

Although we cannot be certain, we believe our operating cash flows, 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.

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.

Recent Accounting Pronouncements

Accounting Pronouncements Adopted January 1, 2002

As more fully described in Note 2 accompanying our financial statements included in this report, we adopted the provisions of the following accounting pronouncements effective January 1, 2002:

•SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142;

•SFAS No. 143, “Accounting for Asset Retirement Obligations;” and

•SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Recently Issued Accounting Pronouncement

SFAS No. 145

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145, “Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” are met.  SFAS No. 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002.  We are currently evaluating the impact this new standard will have on our business, consolidated financial position, results of operations and cash flow.

Common European Currency

We have evaluated, and will continue to evaluate, the effects on our operations of the European Economic Monetary Union conversion to the Euro.  We do not expect the introduction and use of the Euro, including our costs to adapt our information systems for this conversion, to be material to our business, financial position, results of operations or cash flows.

32

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;

•terrorist attacks and military conflicts 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 to 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.

33

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 prevailing market rates and prices.  From time to time, we use derivative financial instruments to manage and reduce risks associated with these factors.  We do not enter into derivatives or other financial instruments for trading or speculative purposes.

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

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 LIBOR rates.  At March 31, 2002, the current prime rate was 4.75% and the current LIBOR rate was 2.03%.  Based on $287.7 million of variable-rate debt outstanding as of March 31, 2002, a hypothetical one percent rise in interest rates, to 5.75% for prime rate borrowings and 3.03% for LIBOR borrowings, would reduce our pre-tax earnings by $2.9 million annually.

To limit our exposure related to rising interest rates, we have entered into an interest rate swap contract to effectively convert an additional $4.5 million variable-rate debt to 4.2% fixed-rate debt until maturity in 2008.  The contract is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this portion of our variable-rate debt.  Market risk related to this interest rate swap contract is estimated as the potential higher interest expense we will incur if the variable interest rate decreases below the 4.2% fixed rate.  Based on the $4.5 million of variable-rate debt converted to fixed-rate debt outstanding as of March 31, 2002, a hypothetical one percent decrease in the variable interest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1 million annually.

The estimated fair value of our $100.0 million fixed-rate long-term debt is approximately $92.0 million at March 31, 2002.  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 we have subsidiaries with manufacturing facilities in Switzerland and 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, we may do so in the future depending on our assessment of future foreign exchange rate trends.

34

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, 2001.

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

a.	Exhibits
	3.26.1.1	Articles of Amendment amending the Restated Articles of Incorporation of ERDA, Inc. (changing its name to DeCrane Aircraft Seating Company, Inc. *
	3.30.1	Certificate of Formation of DeCrane Cabin Interiors, LLC *
	3.30.2	Limited Liability Company Agreement of DeCrane Cabin Interiors, LLC *
	21.1	List of Subsidiaries of Registrant *

*         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)
May 13, 2002	By:	/s/  Richard J. Kaplan
	Name:	Richard J. Kaplan
	Title:	Senior Vice President, Chief Financial Officer, Secretary, Treasurer and Director

35

EX-3.26 1 1

Exhibit 3.26.1.1

Sec. 180.1006

Wis. Stats.

State of Wisconsin

DEPARTMENT OF FINANCIAL INSTITUTIONS

Division of Corporate & Consumer Services

ARTICLES OF AMENDMENT -STOCK, FOR-PROFIT CORPORATION

A.The present corporate name (prior to any change effected by this amendment) is:

E R D A, Inc.

Text of Amendment (Refer to the existing articles of incorporation and the instructions on the reverse of this form. Determine those items to be changed and set forth the number identifying the paragraph in the articles of incorporation being changed and how the amended paragraph is to read.)

RESOLVED, THAT the articles of incorporation be amended as follows:

Resolved, that Article 1 of the articles of incorporation be amended to read:

Article 1: Name of the Corporation: DeCrane Aircraft Seating Company, Inc.

1

ARTICLES OF AMENDMENT — Stock, For-Profit Corporation

B.Amendment(s) adopted on March 22, 2002

(Indicate the method of adoption by checking ý the appropriate choice below.)

oIn accordance with sec. 180.1002, Wis. Stats. (By the Board of Directors)

OR

ýIn accordance with sec. 180.1003, Wis. Stats. (By the Board of Directors and Shareholders)

OR

oIn accordance with sec. 180.1905, Wis. Stats. (By Incorporators or Board of Directors, before issuance of shares)

C.	Executed on	03/23/02	/s/  Richard J. Kaplan
		(Date)	(Signature)
Title:  o President		ý Secretary
or other office title			Richard J. Kaplan
			(Printed name)

This document was drafted by             Sheridan West                                                                                                                  

                                                                                             (Name the individual who drafted the document)

INSTRUCTIONS (Ref. sec. 180.1006 Wis. Stats. for document content)

Submit one original and one exact copy to Dept. of Financial Institutions, PO Box 7846, Madison WI, 53707- 7846, together with a FILING FEE of $40.00 payable to the department. (If sent by Express or Priority U.S. mail, address to 345 W. Washington Ave., 3rd Floor, Madison WI, 53703). This document can be made available in alternate formats upon request to qualifying individuals with disabilities. The original must include an original manual signature, per sec. 180.0120(3)(c), Wis. Stats. Upon filing, the information in this document becomes public and might be used for purposes other than that for which it was originally furnished. If you have any questions, please contact the Division of Corporate & Consumer Services at 608-261-7577. Hearing-impaired may call 608-266-8818 for TTY.

2

ARTICLES OF AMENDMENT — Stock, For-Profit Corporation

Sheridan West

Spolin Silverman Cohen & Bartlett LLP

1620 26th Street, Suite 2000 North

Santa Monica CA 90404

•Your return address and phone number during the day:     (310) 586 -2400  

INSTRUCTIONS (Continued)

A.State the name of the corporation (before any change effected by this amendment) and the text of the amendment(s). The text should recite the resolution adopted (e.g., “Resolved, that Article 1 of the articles of incorporation be amended to read: ... . . . . (enter the amended article). If an amendment provides for an exchange, reclassification or cancellation of issued shares, state the provisions for implementing the amendment if not contained in the amendment itself.

B.Enter the date of adoption of the amendment(s). If there is more than one amendment, identify the date of adoption of each. Mark (X) one’ of the three choices to indicate the method of adoption of the amendment(s).

By Board of Directors -Refer to sec. 180.1002 for specific information on the character of amendments that may be adopted by the Board of Directors without shareholder action.

By Board of Directors and Shareholders -Amendments proposed by the Board of Directors and adopted by shareholder approval. Voting requirements differ with circumstances and provisions in the articles of incorporation. See sec. 180.1003, Wis. Stats., for specific information.

By Incorporators 9r Board of Directors -Before issuance of shares -See sec. 180.1005, Wis. Stats., for conditions attached to the adoption of an amendment approved by a vote or consent of less than 2/3rds of the shares subscribed for.

C.Enter the date of execution and the name and title of the person signing the document. The document must be signed by one of the following: An officer of the corporation (or incorporator if directors have not been elected), or a court-appointed receiver, trustee or fiduciary. A director is not empowered to sign.

If the document is executed in Wisconsin, sec. 182.01(3) provides that it shall not be filed unless the name of the person (individual) who drafted it is printed, typewritten or stamped thereon in a legible manner.  If the document is not executed in Wisconsin, enter that remark.’

3

EX-3.30 1

Exhibit 3.30.1

STATE of DELAWARE

LIMITED LIABILITY COMPANY

CERTIFICATE of FORMATION

FIRST:           The name of the limited liability company is DeCrane Cabin Interiors, LLC.

SECOND:      The address of its registered office in the State of Delaware is: 2711 Centerville Road, Suite 400, Wilmington DE 19808. The name of its Registered agent at such address is Corporation Service Company.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Formation of DeCrane Cabin Interiors, LLC this 20th day of December, 2001.

By:	/s/ Stephen A. Silverman
	Authorized Person(s)
Name:	Stephen A. Silverman
	Type or Print

EX-3.30 2

Exhibit 3.30.2

LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
DECRANE CABIN INTERIORS, LLC

This LIMITED LIABILITY COMPANY OPERATING AGREEMENT (this “Agreement”) of DeCrane Cabin Interiors, LLC, a limited liability company organized under the laws of Delaware (the “Company”), is made and entered into effective as of January 2, 2002 by DeCrane Aircraft Holdings, Inc., a Delaware corporation (the “Initial Member”). Capitalized words and phrases used in this Agreement and not otherwise defined here are used as defined in Article 13 or in Section 14.21 (Tax Definitions).

RECITALS

WHEREAS, the Initial Member formed the Company pursuant to the Delaware Limited Liability Company Act, 6 Del. C. § 18-101, et seq., as amended from time to time (the “Act”), by filing a Certificate of Formation of the Company with the office of the Secretary of State of the State of Delaware.

WHEREAS, the Initial Member intends that the Company be treated as a pass-through entity for federal income tax purposes.

NOW, THEREFORE, the Initial Member hereby provides as follows:

1.ORGANIZATION

1.1Name

The name of the Company will be “DeCrane Cabin Interiors, LLC.”  The business of the Company may be conducted under that name or, upon compliance with applicable laws, any other name that the Board of Directors deemsthan a appropriate or advisable.  Any Manager may file any fictitious name certificates and similar filings, and any amendments thereto, that such Manager considers appropriate or advisable.

1.2Purpose and Limitations

The purpose of the Company is to engage in any lawful activity for which a limited liability company may be organized under the Act.  The Company shall have full power and authority to do every act and thing necessary or convenient to carry out the purposes for which it was formed.

1.3Managed by Managers and Board of Directors

The Company shall be managed by its Managers appointed hereunder, subject to the supervision and powers of the Board of Directors as set forth in this Agreement.

1.4Principal Office

The principal office of the Company shall be at DeCrane Cabin Interiors, LLC, 2361 Rosecrans Avenue, Suite 180, El Segundo, CA  90245.  The Board of

1

Directors may change the principal place of business of the Company to any place from time to time in their discretion.

1.5Agent for Service of Process

The initial agent for service of process on the Company shall be CT Corporation System.

2.CAPITAL CONTRIBUTIONS

2.1Initial Member

DeCrane Aircraft Holdings, Inc. shall be the sole Initial Member.  The address, initial Capital Contribution and initial LLC Percentage of the Initial Member are:

Member, Address	Capital Contribution		Initial LLC Percentage
DeCrane Aircraft Holdings, Inc. 2361 Rosecrans Avenue, Suite 180 El Segundo, California  90245	$	100.00	100	%
Totals:	$	100.00	100	%

2.2Initial Capital Contribution

The initial Capital Contribution shall be paid to the Company concurrently with the signing of this Agreement.  No Person shall be treated as a Member for any purpose until the Company receives such Person’s initial Capital Contribution.

2.3Expertise

Each Member shall make available to the Manager his or its expertise for the benefit of the Company and the Company’s business.

2.4Guarantees of the Company’s Debts

If a Member guarantees a debt of the Company and that debt is paid by the Member (or its successors in interest), then such payment shall be considered a loan to the Company and not an additional Capital Contribution.  The amount of debt paid by the Member shall be repayable out of the Company’s cash and, unless otherwise agreed between the Company and the lending Member, shall bear interest at an annual rate equal to one percentage point above the prime lending rate of Bank of America, NA (or another similar financial institution, if any, designated jointly by such Member and the Managers) in effect at the time the debt is paid.

2.5Additional Capital Contributions or Loans

No Member shall be required to contribute or lend any additional funds to the Company.

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2.6Loans

If any Member makes any loan to the Company or advances money on its behalf, the amount of any such loan or advance shall not be treated as a Capital Contribution but shall be a debt due from the Company.  The amount of any such loan or advance by a lending Member shall be repayable out of the Company’s cash and shall bear interest at an annual rate equal to one points above the prime lending rate of Bank of America, NA (or a similar financial institution acceptable to the lending Member and the Managers) then in effect.

2.7Investment Representation

Each Member represents and warrants to the Company as of the date on which he or it becomes a Member that (a) he or it has a pre-existing personal or business relationship with each other Member, and (b) his or its acquisition of an Interest is made as principal for his or its own account and not with a view to or for sale in connection with any distribution of such Interest.

2.8Title to Property

All real and personal property owned by the Company shall be owned by it as an entity and, insofar as permitted by applicable law, no Member shall have any ownership interest in such property in his or its individual name or right, and each Member’s interest in the Company shall be personal property for all purposes.

2.9Interests Uncertificated

Interests shall not be evidenced or represented by any instrument or certificate, but rather, their ownership shall be determined by reference to the terms of this Agreement as it may be amended from time to time.

3.DISTRIBUTIONS

3.1Distributions Generally

The Managers shall cause the Company to make such distributions to the Members in amounts (if any) as may be determined from time to time by the Board of Directors.  Any distributions that are made to Members shall be made in the following order and priority:

(a)First, to the Members until their Adjusted Capital Contributions are reduced to zero (pro rata among them in proportion to their Adjusted Capital Contributions); and

(b)Second, the balance, if any, to the Members in proportion to their LLC Percentages at that time.

3.2Estimated Tax Payments

If required by applicable law, or permitted by applicable law and approved by the Board of Directors, the Managers may cause the Company to make estimated payments of tax for any Member after consultation with such Member.

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3.3Amounts Withheld

All amounts withheld pursuant to applicable law with respect to any payment or distribution to the Company or the Members shall be treated as amounts distributed to such Members for all purposes under this Agreement.  The Managers shall allocate any such amounts among the Members in accordance with applicable law.

3.4Return of Capital

Except as otherwise provided in this Agreement, no Member shall demand or receive a return of his or its Capital Contribution without the approval of the Board of Directors.  Under circumstances requiring a return of any Capital Contribution, no Member shall have the right to receive property other than cash except as may be specifically provided in this Agreement.  No Member shall have any personal liability for the repayment of the Capital Contribution of any other Member.

4.FINANCE

4.1LLC Funds

All property of the Company in the form of cash not otherwise invested shall be deposited in one or more bank accounts maintained in the name of the Company or the name of the Initial Member, in such financial institutions as the Managers shall determine. The funds of the Company shall not be commingled with the funds of any other Person.  The Managers shall deposit into such accounts all revenue and proceeds of or in connection with the Company’s business and all amounts received by the Managers from, for, or on behalf of, the Company.

4.2Books and Records

The Managers shall maintain or cause to be maintained accurate books and records of account of the business of the Company in accordance with generally accepted accounting principles consistently applied, setting forth a true and accurate account of all business transactions arising out of and in connection with the conduct of the Company’s business.

4.3Tax Information

The Managers shall prepare or cause to be prepared, and file, any applicable tax returns required to be filed by the Company consistent with the terms of this Agreement.  The Managers shall select an accounting firm to prepare any such tax returns, subject to approval by the Board of Directors.  Within 90 days after the end of each taxable year (or such earlier deadlines as may be imposed upon the Members by law), the Managers shall deliver to each Member all tax information regarding the Company necessary for such Member to make all required returns, together with a copy of any federal, state and local income tax or information returns of the Company for the year, and a report listing each material elective adjustment or calculation (if any) made by any Manager with respect to such period pursuant to Article 14 hereof.

4.4Allocations

The Profits, Losses and other items of the Company shall be allocated as set forth in Article 14 (Additional Tax Provisions).  The Members agree to be bound by

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these allocations in reporting their shares of the Company’s income, loss and other items for income tax purposes.

5.ROLE OF THE MANAGERS

5.1Managers

The Initial Member of the Company has designated the following persons to serve as the initial managers and officers of the Company (herein, “Managers”), until changed pursuant to Sections 5.3 or 5.4:

R. Jack DeCrane                           Chief Executive Officer

Richard J. Kaplan                         Chief Financial Officer, Treasurer and Secretary

Jeffrey A. Nerland                        President

Stephen A. Silverman                  Assistant Secretary

5.2Authority

Except to the extent otherwise provided in the Articles of Organization or this Agreement (including the powers reserved to the Board of Directors and the Members), the business and affairs of the Company shall be managed and all corporate powers shall be exercised by the Managers, who shall have all of the authority, rights and powers which may be possessed by managers of a limited liability company under the Act, and may at their discretion, delegate and assign their management duties.  The Managers may act jointly or severally in their role as Managers, and the act of any one Manager is the act of all Managers.

5.3Qualification and Election

The Managers of the Company shall be selected by the Initial Member.  The Initial Member may appoint additional Managers from time to time in its discretion, with such title and such roles as the Initial Member may specify.

5.4Removal and Resignation

(a)           All Managers serve at the pleasure of the Initial Member, and any Manager may be removed with or without cause by the Initial Member, for any reason or no reason, by providing written notice thereof to such Manager.

(b)           Any Manager may resign at any time by giving written notice to the Company.  Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

5.5Duties and Obligations of the Managers

The Managers shall take all actions which may be necessary or appropriate to operate and manage the Company’s business, and otherwise directed by the Board of Directors.

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5.6Matters Requiring Unanimous Consent of the Members

Notwithstanding any other term of this Agreement, the Managers shall not, without the unanimous written consent of the Members:

(a)           Do any act in contravention of this Agreement;

(b)           Do any act which would make it impossible to carry on the ordinary business of the Company, except as otherwise provided in this Agreement;

(c)           Sell or otherwise dispose of at one time all or substantially all of the property of the Company, except pursuant to Section 11.3(e) (Winding Up);

(d)           Amend this Agreement or the Certificate of Formation;

(e)           Liquidate or dissolve the Company;

(f)            Admit a new Member;

(g)           Reduce, increase or alter the outstanding capital of the Company, make any call on capital, issue or redeem Interests, options or other securities of the Company or any subsidiary of the Company;

(h)           Grant a power of attorney or other delegation of the Members’ powers; or

(i)            Cause the Company to merge or consolidate with any other business.

5.7Matters Requiring the Approval of the Board of Directors

Notwithstanding any other term of this Agreement, without first obtaining the approval of a majority of the Board of Directors, at a meeting duly held, or by a written act of such Directors in lieu of a meeting, the Managers shall not:

(a)           Appoint or remove an auditor;

(b)           Obtain, incur or suffer an aggregate amount of debt other than in the ordinary course of its business in excess of $50,000; or

(c)           Cause the Company to acquire shares of or any interest in any corporation or other legal entity, or create any partnership, joint venture or legal entity of which the Company is or will be a partner, member or similar participant.

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5.8Indemnification of Managers

5.8(a)Mandatory

The Company, its receiver or its trustee, shall indemnify, save harmless and pay all judgments and claims against the Managers relating to any liability or damage incurred by reason of any act performed or omitted to be performed by the Managers in connection with the business of the Company, including attorneys’ fees incurred by the Managers in connection with the defense of any action based on any such act or omission, which attorneys’ fees may be paid as incurred, including all such liabilities under federal and state securities laws (including the Securities Act of 1933, as amended) as permitted by law.

5.8(b)If Manager is Exonerated in the Proceeding

In the event of any action by a Member against a Manager, including a derivative suit on behalf of the Company, the Company shall indemnify, save harmless and pay all expenses of such Manager, including attorneys’ fees, incurred in the defense of such action, if such Manager is successful in such action.

5.8(c)No Indemnification

Notwithstanding the foregoing provisions of this Section 5.8, the Managers shall not be indemnified from any liability for fraud, bad faith, willful misconduct or gross negligence.

5.8(d)Limitation

Any indemnification under this Section 5.8 shall be paid from and only to the extent of the Company’s assets, and no Member shall have personal liability for such indemnification.

6.ROLE OF THE BOARD OF DIRECTORS

6.1Number and Designation of Directors

The Company shall have a Board of Directors composed of two directors.  The Initial Member designates R. Jack DeCrane and Richard J. Kaplanas the initial directors.

6.2Rights and Powers

The Board of Directors shall have the powers reserved to it in this Agreement and, in addition, may take any action reserved to the Members in this Agreement or in the Act.

6.3Term; Removal

Each director serves at the pleasure of the Member who designated him or her pursuant to Section 3.1; and each Member having the right to designate one or more directors may remove and replace such designated directors at will, by notice to the Managers and directors.  In the event a Member sells, transfers or loses all of its Interests in the Company, all directors designated by such Member shall be removed from the Board of Directors and their seats shall be declared vacant.

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6.4Meetings

The Board of Directors shall meet at such times as they may elect from time to time, in each case at the dates and times agreed by the directors; but the Board of Directors shall not be required to meet at any fixed time.  The rules set forth in Section 8.2(a), (d), (e), (f) and (g) for the meetings of Members shall also apply to all meetings of the Board of Directors, except that there shall be no record date in connection with propositions to be put to a vote at meetings of the Board.  60% of the then-seated directors shall constitute a quorum for any transacting of business by the Board of Directors, and the Board of Directors may not act in the absence of a quorum.  Any action approved by a majority of the directors present at a duly called meeting of the Board of Directors at which a quorum is present, or by all of the directors then-seated by written consent without meeting, shall be the action of the Board of Directors.  Any action that may be taken at any meeting of the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed and delivered to the Managers by directors having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all of the directors entitled to vote thereon were present and voted.

6.5Limited Liability

The rights and powers of a member of the Board of Directors, in his capacity as a director, shall not exceed the rights and powers that a member of a manager-managed limited liability company could exercise under the Act.  Except to the extent (if any) otherwise required by the Act, no director shall be liable for the debts, liabilities, contracts or any other obligations of the Company.

7.ROLE OF MEMBERS

7.1Rights and Powers

The Members shall have the powers reserved to them in this Agreement or in the Act.

7.2Limited Liability

Except to the extent (if any) otherwise required in the Act, no Member shall be liable for the debts, liabilities, contracts or any other obligations of the Company.

7.3No Partition

No Member or director shall, either directly or indirectly, take any action to require partition of the Company or of any of its property or to cause the sale of any of such property, nor shall any Manager do so without the approval of the Board of Directors.

8.MEETINGS OF MEMBERS

8.1Required Meetings

The Member or Members shall hold meetings at such times as it or they may unanimously agree in writing, but shall not be required to meet at any fixed time.  At any such meeting, Members holding a majority in Interest shall constitute a quorum.  No

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action can be taken by the Members at a meeting after a quorum ceases to be present at the meeting.  The failure of the Company to observe any corporate formalities or requirements relating to the exercise of its powers or management of its business or affairs under this Agreement or the Act shall not be grounds for imposing personal liability on the Members for liabilities of the Company.

8.2Procedure

8.2(a)Location

Unless all of the Members agree otherwise in writing, meetings of Members shall be held at the chief executive office of the Initial Member in California (or at any other place in the County of Los Angeles, State of California, selected by the Board of Directors and specifically identified in the notice of the meeting), so long as the meeting place has adequate facilities to permit participation by telephone conference call.

8.2(b)Call

A meeting of the Members may be called by any Manager, or by any Member or Members representing more than 10% of the Interests for the purpose of addressing any matters on which the Members may vote.

8.2(c)Notice

(1)           Whenever Members are required or permitted to take any action at a meeting, a written notice of the meeting shall be given pursuant to Article 12 (Other Provisions) not less than 10 days nor more than 60 days before the date of the meeting to each Member entitled to vote at the meeting. The notice shall state the place, date, and hour of the meeting and the general nature of the business to be transacted.  No other business may be transacted at this meeting.

(2)           An affidavit of mailing of any notice or report in accordance with the provisions of this paragraph, signed by a Manager, shall be prima facie evidence of the giving of the notice or report.

(3)           Upon written request to a Manager by any person entitled to call a meeting of Members, the Manager shall immediately cause notice to be given to the Members entitled to vote that a meeting will be held at a time requested by the person calling the meeting, not less than 10 days nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the person entitled to call the meeting may give the notice or, upon the application of that person, the superior court of the county in California in which the principal office of the Company is located shall summarily order the giving of the notice, after notice to the Company affording it an opportunity to be heard.  The court may issue any order as may be appropriate, including an order designating the time and place of the meeting, the record date for determination of members entitled to vote, and the form of notice.

8.2(d)Adjourned Meetings

When a meeting of Members is adjourned to another time or place, unless the articles of organization or this Agreement otherwise require and, except as provided in this paragraph, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Company may transact any business that may have been

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transacted at the original meeting.  If the adjournment is for more than 45 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting.

8.2(e)Waiver of Notice

The actions taken at any meeting of Members, however called and noticed, and wherever held, have the same validity as if taken at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the Members entitled to vote, not present in person or by proxy, signs a written waiver of notice or consents to the holding of the meeting or approves the minutes of the meeting.  All waivers, consents, and approvals shall be filed with the Company records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of the meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by this title to be included in the notice but not so included, if the objection is expressly made at the meeting. Neither the business to be transacted nor the purpose of any meeting of Members need be specified in any written waiver of notice, unless otherwise provided in the articles of organization or operating agreement, except as provided in paragraph (g) below.

8.2(f)Participation by Telephone Conference Call

Members may participate in a meeting of Members through the use of conference telephones or similar communications equipment, as long as all Members participating in the meeting can hear one another.  Participation in a meeting pursuant to this provision constitutes presence in person at that meeting.

8.2(g)Nature of Proposal

Any action approved at a meeting, other than by unanimous approval of those entitled to vote, shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting (or at the previous meeting) or in any written waiver of notice.

8.2(h)Quorum

A majority in Interest of the Members represented in person or by proxy shall constitute a quorum at a meeting of Members.  In the absence of a quorum, any meeting of Members may be adjourned from time to time by the vote of a majority of the Interest represented either in person or by proxy, but no other business may be transacted.

8.2(i)Written Action Without Meeting

Any action that may be taken at any meeting of the Members may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed and delivered to the Managers within 60 days of the record date for that action by Members having not less than the minimum number of votes that would be necessary to

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authorize or take that action at a meeting at which all Members entitled to vote thereon were present and voted.

(1)           Unless the consents of all Members entitled to vote have been solicited in writing, (A) notice of any Member approval of an amendment to the articles of organization or this Agreement, a dissolution of the Company, or a merger of the Company, without a meeting by less than unanimous written consent shall be given at least 10 days before the consummation of the action authorized by such approval, and (B) prompt notice shall be given of the taking of any other action approved by Members without a meeting by less than unanimous written consent, to those Members entitled to vote who have not consented in writing.

(2)           Any Member giving a written consent, or the Member’s proxyholder, may revoke the consent by a writing received by the Company prior to the time that written consents of Members having the minimum number of votes that would be required to authorize the proposed action have been filed with the Company, but may not do so thereafter. This revocation is effective upon its receipt at the principal office of the Company in California.

8.2(j)Proxies

The use of proxies in connection with this section will be governed in the same manner as in the case of corporations formed under the Delaware General Corporation Law.

8.2(k)Record Date

In order that the Company may determine the Members of record entitled to notices of any meeting or to vote, or entitled to receive any distribution or to exercise any rights in respect of any other lawful action, a Manager, or Members representing more than 10 percent of the interests of Members, may fix, in advance, a record date, that is not more than 60 days nor less than 10 days prior to the date of the meeting and not more than 60 days prior to any other action. If no record date is fixed:

(1)           The record date for determining Members entitled to notice of or to vote at a meeting of Members shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held.

(2)           The record date for determining Members entitled to give consent to limited liability company action in writing without a meeting shall be the day on which the first written consent is given.

(3)           The record date for determining Members for any other purpose shall be at the close of business on the day on which the Managers adopt the resolution relating thereto, or the 60th day prior to the date of the other action, whichever is later.

(4)           The determination of Members of record entitled to notice of or to vote at a meeting of Members shall apply to any adjournment of the meeting unless

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a Manager or the Members who called the meeting fix a new record date for the adjourned meeting, but the Manager or the Members who called the meeting shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting.

8.3Voting Rights

The Members shall have the right to vote on the matters explicitly set forth in this Agreement or in the Act.  Each Member shall have a vote on all matters on which all Members may vote equal to his or its LLC Percentage.  With respect to the Members, the term “majority in interest” means more than 50% of the LLC Percentages of all Members.

8.4Rules of Conduct

At each meeting of Members they shall appoint a chair who shall conduct the meeting and who shall appoint a secretary of the meeting to keep minutes and file the minutes with the Company’s permanent files.

9.RESTRICTIONS ON TRANSFER

9.1Restriction on Transfers

Except as otherwise permitted by this Agreement, no Member shall Transfer all or any portion of any Interest.

9.2Permitted Transfers

The Initial Member may Transfer its Interest in connection with a sale of substantially all assets of the Initial Member, to the purchaser thereof.  The Initial Member may Transfer its Interest for the purpose of providing security for an obligation, by hypothecation, pledge, collateralization or otherwise.  Any Interest so held or Transferred shall remain subject to all of the provisions of this Agreement and the Member, both individually and as trustee of the trust, shall continue to be considered a “Member” for purposes of this Agreement.

9.3Involuntary Transfer

Any proposed Transfer of an Interest that is required by law pursuant to any insolvency proceeding of a Member shall be subject to the terms and conditions of this Agreement, including Section 9.7.

9.4Prohibited Transfers

Any purported Transfer of an Interest that is not permitted by this Agreement shall be null and void and of no effect whatever; provided that if the Company is required to recognize a Transfer that is not so permitted, the Interest Transferred shall be strictly limited to the transferor’s rights to allocations and distributions under this Agreement with respect to the Transferred Interest, which allocations and distributions may be applied (without limiting any other legal or equitable rights of the Company) to satisfy any debts, obligations, or liabilities for damages that the transferor or transferee of such Interest may have to the Company.

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In the case of a Transfer or attempted Transfer that is not permitted by this Agreement, the parties engaging or attempting to engage in such Transfer shall be liable to indemnify and hold harmless the Company and the other Members from all costs, liabilities and damages that any of such indemnified Persons may incur (including additional tax liability and lawyers’ fees and expenses) as a result of such Transfer or attempted Transfer and efforts to enforce this Section 9.4, including such indemnity.

9.5General Transfer Provisions

(a)           All Transfers shall be by instrument in form and substance satisfactory to counsel for the Company and shall contain an expression by the transferee of his or its intention to accept the Transfer and to adopt and be bound by all of the provisions of this Agreement, and shall provide for the payment by the transferor of all reasonable expenses incurred by the Company in connection with such Transfer, including the necessary amendments to this Agreement to reflect such Transfer.  The transferor shall sign and acknowledge all such instruments, in form and substance reasonably satisfactory to the Company’s counsel, as may be necessary or desirable to effect such Transfer.

(b)           The Company shall not dissolve or terminate upon the admission of any new Member or upon any permitted Transfer.  Each Member hereby waives any right such Member may have to dissolve, liquidate or terminate the Company in any such event.

(c)           This Section 9.5 imposes additional restrictions on the Transfer of Interests and does not permit any Transfer not otherwise permitted by this Agreement.

9.6Compliance

Notwithstanding anything to the contrary in this Agreement, at law or in equity, no Member shall Transfer or otherwise deal with any Interest in a way that would cause a default under any material agreement to which the Company is a party or by which it is bound.

9.7Admission of Members

No new Members shall be admitted without the approval required by Section 5.6.  A transferee of an Interest shall not be admitted as a Member without the approval required by Section 5.6, provided that if the transferee is already a Member at the time of the transfer and the transfer is permitted by this Agreement, then the transferee shall have all rights of a Member with respect to the transferred Interest.

9.8Rights of Unadmitted Assignees

Notwithstanding any other provision of this Agreement, a Person who acquires an Interest but who is not admitted as a Member of the Company pursuant to this Agreement shall be entitled only to receive, to the extent assigned, the distributions and the allocations to which the assignor would be entitled under this Agreement, but shall have no right to vote or to participate in the management and affairs of the Company, or to exercise any of the rights of a Member.

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10.[DELIBERATELY OMITTED.]

11.DISSOLUTION

11.1Liquidating Events

The Company shall dissolve and commence winding up and liquidating upon the first to occur of any of the following (“Liquidating Events”):

(a)           The decision of all of the Members to dissolve, wind up and liquidate the Company;

(b)           The sale or transfer by the Company of all or substantially all of its assets;

(c)           The occurrence of any other event that makes it unlawful or impossible to carry on the business of the Company; or

(d)           Entry of a decree of judicial dissolution pursuant to the Act.

11.2Continuing Limited Liability Company

Notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Liquidating Event.  The withdrawal, resignation or retirement of any Member which the Company is required by proper authority to recognize, or the death, expulsion, bankruptcy or dissolution of any Member or the occurrence of any other event which terminates the continued membership in the Company of any Member shall not be a liquidating event.

11.3Winding Up

Upon the occurrence of a Liquidating Event:

(a)           The Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members;

(b)           No Member shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Company’s business and affairs;

(c)           A person, who may but need not be a Member, shall be unanimously selected by the Members (or by arbitration pursuant to the terms hereof if agreement cannot be reached) as the Company’s liquidator, and shall be responsible for overseeing the winding up and dissolution of the Company and shall take full account of the Company’s liabilities and assets;

(d)           No Manager shall receive any additional compensation for any services performed pursuant to this Section 11.3;

(e)           Unless all Members agree upon a sale among themselves or a division in kind of assets, the assets of the Company shall be sold in the usual course of business using reasonable business judgment; and

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(f)            If any property of the Company is to be distributed in kind upon the liquidation of the Company, such property shall be liquidated as promptly as is consistent with obtaining its fair value.

11.4Application of Proceeds

The liquidation proceeds shall be applied and distributed, to the extent sufficient to do so, in the following order:

First, to the payment and discharge of all of the Company’s debts and liabilities to creditors other than the Members;

Second, to the payment and discharge of all of the Company’s debts and liabilities to the Members; and

The balance, if any, to the Members in accordance with their Capital Accounts, after giving effect to all contributions, distributions and allocations for all periods.  Any in-kind distributions of property of the Company shall be made among the Members pro rata in proportion with their relative Capital Accounts.

11.5Negative Capital Accounts

If a Liquidation Event and a Tax Liquidation both occur, then:

Distributions shall be made pursuant to this Article 11 to the Members who have positive Capital Accounts; and

(a)           If any Member has a deficit balance in his or its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), then such Member shall have no obligation to contribute to the capital of the Company and the deficit shall not be considered a debt owed to the Company or any other Person for any purpose whatsoever; and

(b)           Section 14.19 (Negative Capital Accounts: Tax Issues) shall apply.

11.6Discretionary Withholding and Distributions

With the approval of the Board of Directors, a pro rata portion of the distributions that would otherwise be made to the Members pursuant to this Article 11 may be:

(a)           Distributed to a trust established for the benefit of the Members for the purposes of liquidating property of the Company, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company or of the Managers arising out of or in connection with the Company, provided that assets of any such trust shall be distributed to the Members from time to time, in the reasonable discretion of the liquidator appointed hereunder, in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Members pursuant to this Agreement; or

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(b)           Withheld to provide a reasonable reserve for liabilities (contingent or otherwise) of the Company and to reflect the unrealized portion of any installment obligations owed to the Company, provided that such withheld amounts shall be distributed to the Members as soon as practicable.

11.7Rights of Members

Except as otherwise provided in this Agreement, the Members shall look solely to the assets of the Company for the return of their Capital Contributions and no Member shall have any right or power to demand or receive property other than cash from the Company.  No Member shall have priority over any other Member as to the return of his or its Capital Contribution, distributions or allocations.

11.8Notice of Dissolution

If a Liquidating Event occurs, the Company shall, within 60 days after the occurrence, provide written notice of the occurrence to each of the Members and to all known creditors and claimants whose names appear on the records of the Company.

11.9Certificates of Dissolution

Upon the dissolution of the Company, the liquidator appointed hereunder and, to the extent required, any other party hereto or appointed hereunder, shall promptly sign and cause to be filed certificates of dissolution in accordance with the Act and the laws of any other states or jurisdictions in which the Company has filed its Articles of Organization or qualified to transact intrastate business.

12.OTHER PROVISIONS

12.1Entire Agreement

This Agreement, which includes material provisions on the schedules hereto, each of which is incorporated in full herein, constitutes the entire agreement pertaining to the organization of the Company and completely supersedes all other agreements and all drafts, understandings, negotiations and discussions, whether oral or written, among the parties pertaining to the subject matter of this Agreement.

12.2Amendments

No amendment or waiver of any provision of this Agreement shall be effective unless and until an instrument reflecting the amendment or waiver has received the approval of the Members.

The waiver by any party of a breach or default of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach or default.  A party’s failure either to insist upon any other party’s strict performance of any provision of this Agreement or to exercise any of the party’s rights or remedies under this Agreement shall not constitute a waiver of any default by the other party or of any right or remedy of the non-defaulting party.

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12.3Governing Law

Delaware law shall govern this Agreement, any agreement to amend or adopt this Agreement, and all disputes arising hereunder.

12.4Severable Provisions

The provisions of this Agreement are severable, and if any provision is determined to be illegal or otherwise unenforceable, in whole or in part, then the remaining provisions, and any partially unenforceable provisions to the extent enforceable, shall nevertheless be binding and enforceable and shall be construed as closely as possible to their original meanings.

12.5Binding Effect

Except as otherwise provided in this Agreement, every provision of this Agreement shall bind and benefit the Members and their respective heirs, legatees, legal representatives, successors, transferees and assigns.

12.6Parties in Interest; Third Parties

All references in this Agreement to “parties” refer to the parties to this Agreement.  Nothing in this Agreement, expressed or implied, is intended to confer on any Person or entity other than a party any right or remedy under or by reason of this Agreement.  The provisions of this Agreement are not intended to benefit any creditor or other Person (other than a Member in his or its capacity as a Member) to whom any debts, liabilities or obligations are owed or who otherwise has a claim against the Company or any Member; and no such creditor or other Person shall obtain any right under this Agreement against the Company or any Member by reason of any such debt, liability or obligation, or otherwise.

13.DEFINITIONS

Capitalized words and phrases used in this Agreement have the following meanings

13.1“Adjusted Capital Contributions”

means, as of any day with respect to a Member, such Member’s Capital Contributions, adjusted as follows:

(a)           Increased by the amount of any Company liabilities which, in connection with distributions to such Member pursuant to Section 3.1 (Distributions Generally) and 11.4 (Dissolution/Application of Proceeds) are assumed by such Member or are secured by any property of the Company distributed to such Member; and

(b)           Reduced by the amount of cash and the Gross Asset Value (as defined in Section 14.21) of any property of the Company distributed to such Member pursuant to Sections 3.1 (Distributions Generally) and 11.4 (Dissolution/Application of Proceeds) and the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company.

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(c)           If such Member Transfers all or any portion of his Interest in accordance with the terms of this Agreement, his transferee shall succeed to his or its Adjusted Capital Contributions to the extent it relates to the Transferred Interest.

13.2“Agreement”

means this Operating Agreement, as amended from time to time.

13.3“Board of Directors”

means the board established pursuant to Article 6 (Role of the Board of Directors).

13.4“Business Day”

means a day that is not a Saturday, Sunday or public holiday in the place to which the notice, consent or other communication is sent.

13.5“Capital Account”

means, with respect to any Member, the Capital Account maintained for such Person in accordance with the following provisions and Section 14.21:

(a)           To each Person’s Capital Account there shall be credited such Person’s Capital Contribution, such Person’s distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Sections 14.4 (Minimum Gain Chargeback) through 14.12 (Order of Application), and the amount of any of the Company’s liabilities assumed by such Person or which are secured by any property of the Company distributed to such Person.

(b)           To each Person’s Capital Account there shall be debited the amount of money and the Gross Asset Value of any property distributed to such Person pursuant to any provision of this Agreement, such Person’s distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Sections 14.4 through 14.12 and the amount of any liabilities of such Person assumed by the Company or which are secured by any property contributed by such Person to the Company.

(c)           If any Interest is Transferred in accordance with this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Transferred Interest.

13.6“Capital Contribution”

means, with respect to any Member, the amount of money and the gross fair market value of any property (other than money) contributed pursuant to this Agreement to the controlled by such a person or entity.

13.7“Code”

means the Internal Revenue Code of 1986, as amended from time to time.

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13.8“Company”

means the California limited liability company created and pursuant to this Agreement and the limited liability company continuing the business in the event of dissolution as provided in Section 11.2 (Dissolution).

13.9“Initial Member”

has the meaning set forth for such term in the introductory paragraph of this Agreement.

13.10“Interest”

means, with respect to any Member, the ownership rights of the Member in the Company, including the right to receive distributions from the Company.  In the event any Interest is Transferred in accordance with the provisions of this Agreement, the transferee of such interest shall succeed to the Interest of his or its transferor to the extent it is Transferred.

13.11“Liquidating Event”

has the meaning set forth in Section 11.1.

13.12“LLC Percentage”

means, with respect to any Member at any time, the proportion (expressed as a percentage) of such Member’s Interests at such time to the aggregate number of all Interests then outstanding.  If any Interest is Transferred in accordance with the provisions of this Agreement, the transferee of such Interest shall succeed to the portion of the transferor’s LLC Percentage represented by the Transferred Interest.

13.13“Managers”

means the Persons serving as managers of the Company within the meaning of the Act and pursuant to the terms and conditions of this Agreement.

13.14“Member”

means any Person who is (a) the Initial Member, as designated in Section 2.1, or subsequently admitted as a Member pursuant to this Agreement, and (b) who owns an Interest.  “Members” means all such Persons.

13.15 “Person”

means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust (including any beneficiary of the trust), unincorporated organization, or government or any agency or political subdivision.

13.16“Profits” and “Losses”

means, for each fiscal year or other period, an amount equal to the Company’s taxable income or loss for such year or period, determined in accordance with Section 14.21.

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13.17“Transfer”

(a)           means, as a noun, any voluntary or involuntary assignment, transfer, sale, pledge, hypothecation or other disposition, and, as a verb, voluntarily or involuntarily to assign, transfer, sell, pledge, hypothecate or otherwise dispose of or to obtain a charging order against.  A “Transfer” includes a gift or transmutation of an Interest into another type of property interest or into an Interest jointly owned with another Person, including a gift or transmutation of a separate property Interest into a community or other joint property Interest with a spouse or another Person, or the partition of a community or other joint property Interest (whether voluntarily, pursuant to a divorce proceeding or otherwise).

14.ADDITIONAL TAX PROVISIONS

14.1Tax Classification

The Members intend that the Company shall be classified as a partnership for federal income tax purposes under Code Section 7701(a)(2) and the corresponding provisions, if any, of state and local law.

14.2Profits

After giving effect to the special allocations in Sections 14.4 (Minimum Gain Chargeback) through 14.12 (Order of Application), Profits for any fiscal year or other period shall be allocated to the Members in proportion to their LLC Percentages.

14.3Losses and Other Items

After giving effect to the special allocations in Sections 14.4 (Minimum Gain Chargeback) through 14.12 (Order of Application), Losses for any fiscal year or other period shall be allocated in the following order and priority:

(a)           Except as provided in Section 14.3(b), Losses shall be allocated to the Members in proportion to their LLC Percentages.

(b)           The Losses allocated pursuant to Section 14.3(a) shall not exceed the maximum amount of Losses that can be so allocated without causing any Member to have an Adjusted Capital Account Deficit at the end of any fiscal year.  If some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 14.3(a), the limitation set forth in this Section 14.3(b) shall be applied on a Member-by-Member basis so as to allocate the maximum permissible Losses to each Member under Section 1.704-1(b)(2)(ii)(d) of the Regulations.

Except as otherwise provided in this Agreement, all items of the Company income, gain, loss, deduction, credit and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Losses for the period.

14.4Minimum Gain Chargeback

Except as provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Article 14, if there is a net decrease in Minimum Gain during any fiscal year of the Company, each Member shall be specially

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allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to the portion of such Member’s share of the net decrease in Minimum Gain, determined in accordance with Section 1.704-2(g) of the Regulations.  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant to such Regulations.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations.  This Section 14.4 is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently with it.

14.5Member Nonrecourse Debt Minimum Gain

Except as provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this Article 14 except Section 14.4, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Company fiscal year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to the portion of such Member’s share of the net decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(4) of the Regulations.  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant to such Regulations.  The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations.  This Section 14.5 is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently with it.

14.6Qualified Income Offset

In the event any Member unexpectedly receives any adjustments, allocations or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 14.6 shall be made only if and to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 14.6 have been tentatively made as if this Section 14.6 were not in the Agreement.

14.7Gross Income Allocation

In the event any Member has a deficit Capital Account at the end of any Company fiscal year which is in excess of the sum of (1) the amount such Member is obligated to restore pursuant to any provision of this Agreement and (2) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations, each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 14.7 shall be made only if and to the extent that such Member would have a deficit Capital Account in

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excess of such sum after all other allocations provided for in Sections 14.4 through 14.10 have been tentatively made as if this Section 14.7 were not in the Agreement.

14.8Nonrecourse Deductions

Nonrecourse Deductions for any fiscal year or other period shall be specially allocated among the Members in proportion to their LLC Percentages.

14.9Member Nonrecourse Deductions

Any Member Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Section 1.704-2(i)(1) of the Regulations.

14.10Code Section 754 Adjustments

To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or 743(b) is required, pursuant to Section 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4) of the Regulations, to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of his or its interest in the Company, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in accordance with their Interests if such Section 1.704-1(b)(2)(iv)(m)(2) applies, or, if such Section 1.704-1(b)(2)(m)(4) applies, to the Member to whom such distribution was made.

14.11Curative Allocations

The allocations in the last sentence of the first paragraph of Section 14.3 (Losses and Other Items) and Sections 14.4 (Minimum Gain Chargeback), 14.5 (Member Nonrecourse Debt Minimum Gain), 14.6 (Qualified Income Offset), 14.7 (Gross Income Allocation), 14.8 (Nonrecourse Deductions), 14.9 (Member Nonrecourse Deductions) and 14.10 (Code Section 754 Adjustments) (the “Regulatory Allocations”) are intended to comply with certain requirements of the Regulations.  It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 14.11.  Therefore, notwithstanding any other provision of this Article 14 (other than the Regulatory Allocations), the Managers shall make such offsetting special allocations of Company income, gain, loss or deduction in whatever manner they determine appropriate so that, after such offsetting allocations are made, each Member’s Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Section 14.2.  In exercising their discretion under this Section 14.11, the Managers shall take into account future Regulatory Allocations under Sections 14.4 and 14.5 that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 14.8 and 14.9.

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14.12Order of Application

Sections 14.4 through 14.11 shall be applied in the order in which they are set forth in this Agreement.

14.13Allocation Method

For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Managers using any permissible method under Code Section 706 and the Regulations under it.

14.14Excess Nonrecourse Liabilities

Solely for purposes of determining a Member’s proportionate share of the “excess nonrecourse liabilities” of the Company within the meaning of Section 1.752-3(a)(3) of the Regulations, the Members’ interests in the Company’s Profits are in proportion to their LLC Percentages.

14.15Source of Distributions

To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the Managers shall endeavor to treat cash distributions to Members as having been made from the proceeds of Nonrecourse Liabilities or Member Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member.

14.16Tax Allocations: Code Section 704(c)

In accordance with Code Section 704(c), income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value (computed in accordance with Section 14.22(d)(1)).

If the Gross Asset Value of any Company asset is adjusted pursuant to Section 14.22(d)(3), subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations under it.

Any elections or other decisions relating to such allocations shall be made by the Managers in any manner that reasonably reflects the purpose and intention of this Agreement.  Allocations pursuant to this Section 14.16 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Person’s Capital Account or share of Profits, Losses, other items or distributions pursuant to any provision of this Agreement.

14.17Distributions and Allocations in Respect to Transferred Interests

If any Interest is Transferred during any accounting period in compliance with Article 8 (Restrictions on Transfer), then Profits, Losses, each item of Profit and Loss

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and all other items attributable to the Transferred Interest for such period shall be divided and allocated between the transferor and the transferee by taking into account their varying Interests during the period in accordance with Code Section 706(d), using any conventions permitted by law and selected by the Managers.

All distributions on or before the date of such Transfer shall be made to the transferor, and all distributions thereafter shall be made to the transferee.

14.18Tax Characterization of Payments to a Selling Partner

The Managers shall, to the greatest extent allowed by law, determine the tax classification of all payments by the Company or a Member to a Selling Member.  The parties intend that such payments shall, to the extent possible, be deductible to the Company and ordinary income to the Selling Member.

14.19Negative Capital Accounts: Tax Issues

When a Tax Liquidation occurs, any distributions required by Section 11.5((a)) shall be made in compliance with Section 1.704-1(b)(2)(ii)(b)(2) of the Regulations.

14.20Tax Matters Partner

The Initial Member shall be the Person designated to receive all notices from the Internal Revenue Service and other tax authorities that pertain to the tax affairs of the Company, and shall be the “tax matters partner” for purposes of Code Sections 6221 through 6233.  Each party agrees to be bound by those Code Sections.  The “tax matters partner” shall provide to each other Member in a timely manner the notices required to be provided by Section 301.6223(g)-1T of the Regulations and the corresponding provisions of state tax law.  The “tax matters partner” shall be reimbursed by the Company for expenses reasonably incurred in connection with his work as “tax matters partner.”  The “tax matters partner” shall not be otherwise compensated for such work; and if he or it resigns as “tax matters partner” or ceases to be a Member, then the Members shall select another “tax matters partner.”

14.21Tax Definitions

14.21(a)“Adjusted Capital Account Deficit”

means, with respect to any Member, the deficit balance, if any, in such Member’s Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments:

(1) Credit to such Capital Account any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and

(2) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations.

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The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently with it.

14.21(b)                Capital Accounts: Tax Issues

In determining the amount of any liability for purposes of Sections 13.1(a), 13.1(b), 13.5(a) and 13.5(b) there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations.

The provisions of Section 13.5 (Capital Account) and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Section 1.704-1(b) of the Regulations, and shall be interpreted and applied in a manner consistent with it.

If the Managers determine that to comply with the Regulations it is prudent to modify the manner in which the Capital Accounts, or any debits or credits to the Capital Accounts (including debits or credits relating to liabilities which are secured by property contributed to or distributed from the Company or which are assumed by the Company or Members), are computed, they may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Member pursuant to Article 10 (Dissolution) upon the dissolution of the Company.

The Managers also shall (a) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Company’s balance sheet, as computed for book purposes, in accordance with Section 1.704-1(b)(2)(iv)(g) of the Regulations, and (b) make any appropriate modifications if unanticipated events might otherwise cause this Agreement not to comply with Section 1.704-1(b) of the Regulations.

14.21(c)“Depreciation”

means, for each fiscal year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Managers.

14.21(d)  “Gross Asset Value”

means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:

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(1) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the contributing Member and the Company;

(2) The Gross Asset Value of any the Company asset distributed to any Member shall be the asset’s gross fair market value on the date of distribution;

(3) The Gross Asset Values of all the Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Managers, as of the following times: (a) the acquisition of an additional Interest by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of property as consideration for an interest in the Company if such adjustment is necessary or appropriate to reflect the relative economic interests of the Members in the Company; and (c) the Tax Liquidation of the Company; provided, however that adjustments pursuant to clauses (a) and (b) above shall be made only if the Managers reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company.

(4) The Gross Asset Values of the property of the Company shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Section 1.704-1(b)(2)(iv)(m) of the Regulations and Sections 14.10 (Code Section 754 Adjustments) and 14.22(j)(6) (Profits and Losses); provided, however, that Gross Asset Values shall not be adjusted pursuant to this Section 14.22(d)(4) to the extent the Managers determine that an adjustment pursuant to Section 14.22(d) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 14.22(d)(4).

(5) After the Gross Asset Value of an asset has been determined or adjusted pursuant to Section 14.22(d)(1), (3) or (4), such Gross Asset Value shall be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

14.21(e)“Member Nonrecourse Debt”

has the meaning set forth in Section 1.704-2(b)(4) of the Regulations.

14.21(f)“Member Nonrecourse Debt Minimum Gain”

means an amount, with respect to each Member Nonrecourse Debt, equal to the Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations.

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14.21(g)“Member Nonrecourse Deductions”

has the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations.

14.21(h)“Minimum Gain”

has the meaning set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations.

14.21(i)“Nonrecourse Deductions”

has the meaning set forth in Section 1.704-2(b)(1) of the Regulations.

14.21(j)“Nonrecourse Liability”

has the meaning set forth in Section 1.704-2(b)(3) of the Regulations.

14.21(k)  “Profits” and “Losses”

under Section 13.16 shall be determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

(1) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 14.22(j) shall be added to such taxable income or loss;

(2) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Regulations, and not otherwise taken into account in computing Profits or Losses pursuant to this Section 14.22(j) shall be subtracted from such taxable income or loss;

(3) If the Gross Asset Value of any Company asset is adjusted pursuant to Section 14.22(d)(3) or (4), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses;

(4) Gain or loss resulting from any disposition of property of the Company with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of such property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value;

(5) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with Section 14.22(c) (Depreciation);

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(6) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or 743(b) is required by Section 1.704–1(b)(2)(iv)(m)(4) of the Regulations to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member’s interest in the Company, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses; and

(7) Notwithstanding any other provision of this Section 14.22(j), any items which are specially allocated pursuant to Sections 14.4 (Minimum Gain Chargeback) through 14.12 (Order of Application) shall not be taken into account in computing Profits or Losses.

The amounts of the items of Company income, gain, loss, or deduction available to be specifically allocated pursuant to Sections 14.4 (Minimum Gain Chargeback) through 14.12 (Order of Application), shall be determined by applying rules analogous to those set forth in this Section 14.22(j).

14.21(l)                “Regulations”

means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time.

14.21(m)“Tax Liquidation”

means the liquidation of the Company within the meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations.

THIS AGREEMENT AFFECTS IMPORTANT RIGHTS.  EACH PARTY REPRESENTS TO EACH OTHER PARTY THAT HE OR IT HAS READ THIS AGREEMENT AND HAS HAD THE OPPORTUNITY TO SEEK INDEPENDENT TAX AND LEGAL ADVICE CONCERNING THIS AGREEMENT.

Initial Member:

DeCRANE AIRCRAFT HOLDINGS, INC.

By:	/s/ Richard J. Kaplan
	Richard J. Kaplan
	Senior Vice President, Chief Financial Officer,
	Secretary and Treasurer

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EX-21.1

EXHIBIT 21.1

LIST OF SUBSIDIARIES OF REGISTRANT

Subsidiaries of DeCrane Aircraft Holdings, Inc.

AEROSPACE DISPLAY SYSTEMS, LLC, a Delaware limited liability company.

AUDIO INTERNATIONAL, INC., an Arkansas corporation.

AVTECH CORPORATION, a Washington corporation.

CARL F. BOOTH & CO., LLC, a Delaware limited liability company.

COLTECH, INC., a Texas corporation.

CUSTOM WOODWORK & PLASTICS, LLC, a Delaware limited liability company.

DAH–IP HOLDINGS, INC., a Delaware corporation.

DAH–IP INFINITY, INC., a Delaware corporation.

DECRANE AIRCRAFT FURNITURE CO., LP, a Texas limited partnership.

DECRANE AIRCRAFT SEATING COMPANY, INC., a Wisconsin corporation.

DECRANE CABIN INTERIORS, LLC, a Delaware limited liability company.

DETTMERS INDUSTRIES, LLC, a Delaware limited liability company.

HOLLINGSEAD INTERNATIONAL, INC., a California corporation.

PATS, INC., a Maryland corporation.

PCI NEWCO, INC., a Delaware corporation.

PPI HOLDINGS, INC., a Kansas corporation.

PRECISION PATTERN, INC., a Kansas corporation.

THE INFINITY PARTNERS, LTD., a Texas limited partnership.

TRI–STAR ELECTRONICS EUROPE S.A., a Swiss company.

TRI–STAR ELECTRONICS INTERNATIONAL, INC., a California corporation.

TRI–STAR TECHNOLOGIES, a California general partnership.