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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 For the Fiscal Year Ended February 29, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NUMBER: 333-109667-01
THE TRUST CREATED FEBRUARY 25, 1986
(Exact name of registrant as specified in its charter)
OREGON 91-1797880
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3850 THREE MILE LANE, McMINNVILLE, OREGON 97128-9496
(Address of principal executive offices) (Zip Code)
(503) 472-9361
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, 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 12 preceding 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. Yes No X
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate the number of shares of outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Class Outstanding as
of February 29, 2004 Trust Equity None
TABLE OF CONTENTS
PART I
Item 1. Business.............................................................
Item 2. Properties...........................................................
Item 3. Legal Proceedings....................................................
Item 4. Submission of Matters to a Vote of Security Holders..................
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholders Matters.................................................
Item 6. Selected Consolidated Financial Data.................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........
Item 8. Consolidated Financial Statements and Supplementary Data.............
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................
Item 9A. Controls and Procedures..............................................
PART III
Item 10. Directors and Executive Officers of the Registrant...................
Item 11. Executive Compensation...............................................
Item 12. Security Ownership of Certain Beneficial Owners and Management.......
Item 13. Certain Relationships and Related Transactions.......................
Item 14. Principal Accounting Fees and Services...............................
PART IV
Item 15. Exhibits, Signatures, Financial Statement Schedules, and
Reports on Form 8-K..................................................
PART I
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Annual Report on Form 10-K, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations", contains certain
statements that describe our beliefs concerning future business conditions,
prospects, growth opportunities, and our financial outlook based upon currently
available information. Wherever possible, we have identified these
"forward-looking" statements (as defined in Section-21E of the Securities
Exchange Act of 1934, as amended) by words such as "anticipates", "believes",
"could", "may", "intends", "estimates", "expects", "projects", and similar
phrases. These forward-looking statements are based upon assumptions we believe
are reasonable.
Such forward-looking statements are subject to risks and uncertainties
that could cause our actual results, performance and achievements to differ
materially from those expressed in, or implied by, these statements, including,
but not limited to:
o Our reliance on a few customers, particularly the U.S. Air Force Air
Mobility Command and the U.S. revenue. Postal Service, with whom we
currently have contracts to provide services that generate a large
portion of our
o Our future compliance with the terms of our debt agreements and other
material contracts.
o General conditions in the aviation industry, including competition and
demand for air cargo services.
o Our ability to adequately maintain our fleet.
o The effect of government laws and regulations, particularly those
relating to aviation and transportation.
o The effect of national, international and regional political and
economic conditions, and fluctuations in currency rates.
o Risks related to our operations in dangerous locations and the
hazardous cargo we carry.
o Risks related to war, terrorist attacks, expropriation of our property
and hostilities directed at U.S. companies abroad.
o Our dependence on certain key personnel.
o Our ability to maintain adequate insurance coverage at favorable
prices.
o Fluctuations in the cost of fuel.
o Our ability to adequately comply with the requirements of the
Sarbanes-Oxley Act.
o Our ability to address and correct material weaknesses within our
internal controls, which could affect our ability to provide accurate
financial statements.
Forward-looking statements made by us or on our behalf are subject to
these factors. We undertake no obligation to publicly update or revise our
forward-looking statements included in this Annual Report on Form 10-K, whether
as a result of new information, future events or otherwise, except as required
by law. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Annual Report on Form 10-K might not
occur.
ITEM 1. BUSINESS
OVERVIEW
Evergreen Holdings, Inc. ("Holdings"), an Oregon corporation organized
in 1997, is the parent company of Evergreen International Aviation, Inc. (or
"Aviation," "Evergreen," the "Company," "we," "us," or "our") and its
subsidiaries. Evergreen is a leading integrated provider of worldwide airfreight
transportation, aircraft ground handling and logistics, helicopter, small
aircraft, aircraft maintenance and repair services. Mr. Delford M. Smith, our
Chairman, founded Evergreen in 1960 with three helicopters. Today we have a
fleet of 76 commercial aircraft and helicopters, including ten Boeing B747s and
seven DC9s, with the capability of providing aviation services throughout the
world. We have provided air services to locations in over 150 countries while
maintaining a reputation for safety and reliability. We generally provide our
services under U.S. dollar-denominated contracts to a broad base of
long-standing customers, including the U.S. Air Force Air Mobility Command
("AMC"), the U.S. Postal Service ("USPS"), freight forwarders, domestic and
foreign airlines, industrial manufacturers and other government agencies. We are
the largest commercial provider of B747 wide body air cargo services to the U.S.
military based on entitlement for the military fiscal year beginning October 1,
2003. Over the past two years, we have redeployed our wide-body fleet to more
profitable business by transitioning away from freight forwarders and other
commercial customers and toward the U.S. military. Our diverse customer base,
our commitment to the U.S. military and our ability to deploy aircraft to match
market conditions give us the agility to respond to changes in the demand for
our services within different economic sectors.
DEFAULTS UNDER OUR DEBT OBLIGATIONS
The Company was in default of its fixed charge coverage ratio with PNC
Bank, under its revolving credit facility at February 29, 2004. Paying off all
obligations related to PNC BANK cured the default. The source of the payoff were
funds obtained on May 13, 2004, when the Company and certain of its subsidiaries
entered into a financing arrangement and refinanced its existing senior secured
credit facility. The new financing arrangement is a three-year senior secured
credit facility with Wells Fargo Foothill, part of Wells Fargo & Company and
Ableco Finance LLC. See Note 5 of the "Notes to Consolidated Financial
Statements" in Part II, Item 8 of this Annual Report on Form 10-K.
BUSINESS SEGMENTS
The following chart outlines our business segments and the respective
historical contribution to our consolidated operating revenues by those
segments, after inter-company eliminations.
OPERATING REVENUES
(in millions)
FISCAL 2004 FISCAL 2003 FISCAL 2002
----------- ----------- -----------
(As restated)
Evergreen International Airlines .............. $ 350.0 65.3% $ 374.5 65.2% $ 267.5 59.7%
Evergreen Aviation Ground Logistics Enterprises 100.4 18.7% 129.7 22.6% 122.3 27.3%
Evergreen Helicopters ......................... 39.3 7.3% 35.2 6.1% 28.1 6.3%
Evergreen Air Center .......................... 31.9 5.9% 23.9 4.2% 20.1 4.5%
Evergreen Aircraft Sales & Leasing ............ 7.0 1.3% 5.3 0.9% 5.7 1.3%
Evergreen Agricultural Enterprises ............ 7.0 1.3% 5.7 1.0% 4.0 0.9%
----- ----- ----- ----- ----- -----
Total ......................................... $ 535.6 100.0% $ 574.3 100.0% $ 447.7 100.0%
======== ====== ======== ====== ======== ======
Totals and percentages may not add due to rounding.
EVERGREEN INTERNATIONAL AIRLINES
Through Evergreen International Airlines, or "EIA", we provide wide and
narrow-body airfreight services throughout the world. We currently operate a
fleet of ten B747 aircraft and seven DC9 aircraft. We deploy B747 aircraft to
perform long-haul, wide-body, international operations and DC9 aircraft for
short-haul domestic operations. Approximately 95%, 94% and 90% of our EIA
revenue for fiscal year 2004, 2003, and 2002 respectively, came from our B747
service. We believe the composition of our fleet matches the markets in which we
operate based on cargo lift capability, range, utilization and yield. We have
flown B747s since 1986 and have significant expertise in the maintenance and
operation of these aircraft for cargo applications.
Although we are active year-round, revenue departures historically
increase during September through December because of the build-up of inventory
in anticipation of the holiday shopping season and increased U.S. Postal Service
shipping volume during that period. Our dispatch reliability for our B747 fleet
and for our DC9 fleet, measured within six minutes of scheduled time of
departure, averaged 95.7% and 98.7% respectively during fiscal year 2004, 97.5%
and 99.0% respectively during fiscal year 2003 and 97.5% and 99.5% respectively
during fiscal year 2002.
The vast majority of our freight is general cargo. We also carry
sensitive or hazardous cargo for AMC. In addition, we carry express mail,
parcels and letters for United Parcel Service and the U.S. Postal Service. Asian
cargo consists primarily of high tech goods and fashion items. Our transatlantic
cargo is mainly general cargo such as spare parts on the outbound leg from the
United States and electronics, fashion items and other high value goods on the
return leg.
The U.S. Department of Transportation, or "DOT", has issued to us
authority to engage in domestic and foreign air transportation of cargo on both
a scheduled and charter basis. We have authority to transport cargo between the
United States and 168 foreign countries. Most of these rights are of an
indefinite duration. We have exemption authority of limited duration to
transport cargo to all points in Argentina, Colombia, Iraq and four cities in
Russia. Although we have exemption authority from the DOT to fly into Iraq, the
FAA has currently prohibited U.S. commercial aircraft from operating in Iraq.
See Risk Factors - We depend on continued business with the U.S. Air Force Air
Mobility Command. If our AMC business declines significantly, it could have a
material adverse effect on our operations. Contracts
We generally charge customers for our services on the basis of: hours
flown, or "block hours"; space utilized, or "block space"; miles traveled, or
per trip. We generally are not responsible for securing freight for our aircraft
and, based on the nature of our contracts, we generally receive revenues based
on routes flown rather than capacity carried. Block hours are measured in
sixty-minute periods or fractions of such periods, from the time the aircraft
moves from its departure point to the time it comes to rest at its destination,
and block space is measured by the number of pallet positions utilized.
We use four main types of contracts, depending on the particular
requirements of the customer and the service required.
o All-in Contracts. "All-in" contracts require us to pay all of the
expenses to operate the aircraft, including flight crews, maintenance,
insurance, navigation fees, aircraft handling, landing fees and fuel.
Under all-in arrangements, we generally protect ourselves against
volatility in fuel prices by providing fuel price adjustment mechanisms
that limit our exposure to fuel price escalation. All-in contracts
typically have original terms of one to three years and contain terms
and conditions permitting cancellation under certain limited
circumstances.
o Block Space Agreements. Block space agreements are typically all-in
contracts with freight forwarders signed on an annual basis. We
currently enter into these types of arrangements on an ad hoc basis
based on customer demand. We anticipate that we will resume entering
into contracted block space arrangements as demand in the commercial
sector recovers. Under these agreements, the forwarder commits to
deliver a certain amount of freight for a specific flight. Under the
agreement, the forwarder must pay for the space committed, whether it
delivers the freight to us or not. We aim to achieve sufficient
commitments from freight forwarders to achieve fully paid flights.
o ACMI Contracts. We enter into Aircraft, Crew, Maintenance and
Insurance, or "ACMI", contracts or "wet lease" arrangements when demand
warrants. Under this type of contract, with customers including DHL, we
provide the aircraft, crew, maintenance and insurance and the customer
bears all other operating expenses, including fuel, fuel servicing,
cargo handling, landing fees, navigation fees, crew positioning, and
ground handling. These contracts are structured to allow for a minimum
term and minimum block hour utilization on a monthly basis.
o Express Delivery Contracts. Our express delivery contracts, with
customers including United Parcel Service, are similar to ACMI
contracts in that we provide the aircraft, crew, maintenance and
insurance. In addition, we also provide ground handling and logistics
services. All other expenses are the responsibility of the customers.
We generate a large portion of our revenues from arrangements with
customers that are not long-term contracts. We cannot assure you that in any
given year we will be able to generate similar revenues from these arrangements
as we did in the previous year. See item 7, Management's Discussion and Analysis
of Financial Conditions and Results of Operations "Risk Factors - Many of our
arrangements with customers are not long-term contracts." As a result, we cannot
assure you that we will be able to continue to generate similar revenues from
these arrangements."
Customers
We have established long-term relationships with many leading airlines,
freight forwarders and government agencies. Our largest customer is AMC,
representing 87.8%, 73.9%, and 51.5% of operating revenues from our EIA segment
and 57.4%, 48.2% and 30.8% of total revenues for fiscal year 2004, 2003 and 2002
respectively. We have provided air cargo services to the U.S. military since
1981, and to AMC since its inception in 1992. Although we have elected not to
renew any block space agreements with freight forwarders since the end of fiscal
year 2002, we continue to provide air freight transportation services to freight
forwarders on a charter basis.
Air Mobility Command: The Civil Reserve Air Fleet, or "CRAF", is made
up of US civil air carriers who are committed by contract to providing operating
and support personnel for the Department of Defense, or "DOD". The CRAF program
is designed to quickly mobilize our nation's airlift resources to meet DOD force
projection requirements. Since its inception in 1992, we have continuously
contracted with AMC, which administers CRAF, to transport various types of
military freight, including equipment, weapons, ordinance and supplies,
primarily between the United States and various overseas locations. Our recent
missions have involved assisting the U.S. military's equipment build-up in the
Middle East in connection with Operation Iraqi Freedom and its continuing
efforts in the global war on terrorism.
CRAF is a voluntary partnership between the Department of Defense and
commercial air carriers designed to bolster the nation's military mobility
resources by committing commercial aircraft to support the Department of Defense
airlift requirements in national emergencies when the need for airlift exceeds
the capability of available military aircraft. Airlines that participate in CRAF
contractually pledge aircraft and crews, ready for activation when needed. To
provide incentives for commercial carriers to commit these aircraft to the CRAF
program, and to assure the United States of adequate aircraft reserves in times
of national emergency, AMC awards peacetime airlift contracts to commercial
airlines that are prepared to commit aircraft to CRAF.
CRAF has three main segments: international, national and aero medical
evacuation. The international segment is further divided into the long-range and
short-range sections and the national segment into the domestic and Alaskan
sections. We participate in the international long-range section by committing
all of our B747 aircraft for cargo operations. Most AMC requests for wide-body
cargo require an aircraft with capacity of 90 tons or greater, the same as that
of a B747 aircraft, but slightly more than that of aircraft such as the MD11 and
the DC10. The 90-ton capacity of the B747 provides AMC with greater lift
capability and the ability to load ports as quickly as possible, because the
B747 has more capacity and larger doors. In addition, B747s can carry
standard-sized bulk cargo pallets without the need for disassembling them and
rebuilding them.
Since the allocation of AMC business is based, in part, on the size of
the pledged fleet, some airlines have formed teams to maximize the value of
potential awards. We participate in CRAF through a teaming arrangement with
other major air carriers, known as the North American Contractor Team. Other
teams that share CRAF work are the FedEx Team and a group of independent
operators.
The following chart outlines the teams that compete for AMC long-range
international business in the current military fiscal year ending September 30,
2004, according to the 2003 calendar year AMC review.
Long-Range Aircraft Committed
Carriers Total Cargo over Cargo up to Passenger
90 tons 90 tons
North American Contractor Team:
Core Team Members
Evergreen International Airlines 10 10 -- --
World Airways 10 -- 5 5
North American Airlines 7 -- -- 7
Menlo Worldwide Forwarding -- -- -- --
Non-core members
American Airlines 92 -- -- 92
US Airways 9 -- -- 9
Continental Airlines 62 -- -- 62
Delta Airlines 58 -- -- 58
United Airlines 95 -- -- 95
United Parcel Service 11 11 -- --
Astar Air Cargo 7 -- 7 --
--- --- --- ---
Subtotal 361 21 12 328
FedEx Team:
FedEx 111 -- 111 --
Northwest Airlines 66 12 -- 54
Polar 12 12 -- --
Atlas 29 29 -- --
Omni 11 -- 2 9
Gemini 15 -- 15 --
ATA 33 -- -- 33
Kalitta Air 11 11
--- --- --- ---
Subtotal 288 64 128 96
Independents:
ABX Air 9 -- 9 --
Arrow 10 -- 10 --
ATI 10 -- 10 --
Hawaiian 4 -- -- 4
Ryan 1 -- -- 1
Southern Air 2 2 -- --
--- --- --- ---
Subtotal 36 2 29 5
--- --- --- ---
Total 685 87 169 429
=== === === ===
(1) Core carriers of the North American Contractor Team actually fly
freight under contract with AMC while non-core members commit planes to
the team but do not typically fly missions.
(2) Emery Air Freight Corporation is a core member of the North American
Contractor Team and provides certain cargo management services to the
team but does not fly missions.
Our team is governed through two agreements that are renewed annually
with each AMC contract. The core team agreement is among the core carriers and
the contractor team agreement is among all team members. Core carriers are
airlines that typically fly freight under contract with AMC. Non-core members
commit planes to the team, and are compensated by the team for such commitment,
but do not typically fly missions. Team members that do fly for AMC are
generally required to pay a percentage of all flight revenues received from AMC
into a pooled fund that is shared among all non-flying team members. The core
carriers are responsible for governing the team. Core carriers cannot be added
to the team without the unanimous consent of all core carriers. In addition, no
core carrier can assign or transfer its rights to another party without the
unanimous consent of all core carriers. If a core carrier withdraws its
aircraft, ceases to operate all or a significant part of its AMC business or
does not make any required payments, it may be replaced as a core carrier upon
the unanimous consent of the other core carriers.
AMC awards points to air carriers acting alone or through teaming
arrangements in proportion to the number and capacity of aircraft made available
to CRAF. AMC awards have two components: basic and expansion. The basic, or
fixed, award provides for known and determinable amounts of revenue during the
military fiscal year, which runs from October 1st to September 30th. In
addition, CRAF participants may be awarded additional, or expansion, missions
beyond those specified in the fixed awards.
The following table shows our actual revenue from AMC for each of our
last three fiscal years:
Fiscal Year
(in millions)
2004 2003 2002
----- ----- -----
Basic revenue earned $39.8 48.2 $44.7
Expansion revenue earned 267.5 228.6 93.0
----- ----- ----
Total $307.3 $276.8 $137.7
====== ====== ======
Due to the size of its pledged fleet, the North American Contractor
Team has been granted the majority of AMC business. For the U.S. government
fiscal years 2004, 2003, and 2002, the North American Contractor Team has been
allocated 51%, 52%, and 65% respectively, of all AMC basic business. The drop in
percentage in U.S. government fiscal year 2003 was due to the move by Northwest
Airlines from the North American Contractor Team to the Fedex Team at the end of
the 2002 U.S. government fiscal year, which had the effect of reducing our
team's overall award. Because we are the only core carrier within the North
American Contractor Team that provides B747 cargo service, we have the right to
fly all B747 cargo services allocated to our team. If we choose not to provide
these services, those missions are first offered to other North American
Contractor Team members. If they decline, other teams are then given the
opportunity to provide these services to AMC.
The North American Contractor Team is entitled to the same percentage
of expansion work as corresponds to their portion of the basic award in any
given year. Since September 2001, our AMC expansion revenues have increased due
to the war against terrorism and the build-up of equipment in the Middle East
supporting Operation Iraqi Freedom. Our switch from predominantly commercial
revenues to predominantly AMC revenues after September 11, 2001 illustrates our
ability to adapt to market conditions. We expect AMC business to be stable given
the war on terrorism and Operation Iraqi Freedom over the short and medium term.
Additionally, even if the military were to withdraw from Afghanistan, Iraq and
other theaters throughout the world where the U.S. military is engaged today,
AMC expansion work would continue due to the significant effort to withdraw U.S.
forces and equipment, or to support troops in overseas bases.
One of the considerations used by AMC in allocating its business is the
proportion of each carrier's business that is derived from commercial air
transportation. If less than 60% of a carrier's business for the prior calendar
year is derived from commercial air transportation revenues, then that carrier's
points, which are used to allocate AMC business, may be reduced. Currently, less
than 12% of our business is derived from commercial air transportation revenues.
On June 9th, 2003, we received a waiver of this requirement from AMC for the
fiscal year 2003-2004 contracting year and we have requested a waiver for the
fiscal year 2004-2005 contracting year.
Although AMC contracts are all-in contracts, the AMC contract includes
a fuel price reconciliation process, whereby AMC compensates the carrier to the
extent fuel costs exceed a fixed price and the carrier reimburses AMC to the
extent fuel costs are below this fixed price. The fuel price reconciliation
process covers not only all miles flown for AMC, but also the first leg after a
one-way trip. The AMC contract also differs from our other all-in contracts
because on AMC flights we avoid costs of aircraft handling and landing fees at
military airports where the military services the plane at no cost to us.
The AMC contract rates are a function of the blended cost of all the
carriers participating in the program, which provides lower-cost operators such
as us with enhanced margins. However, other carriers could significantly reduce
their cost structure; particularly lease expense, as a result of bankruptcy. If
so, this could reduce the contract rates used by AMC and, hence, reduce our
margins. In addition, due to the diminished opportunities in many locales for
being able to arrange a return flight with commercial freight, AMC pays 155% of
the standard one-way rate for basic business, 180% for expansion business and up
to 195% for contingency expansion business for missions operated during national
emergency. We are generally able to coordinate one-way AMC flights with our
other cargo operations so that we operate commercial transport on the return
flights after completing our AMC flight. This is permitted by AMC and enables us
to maximize the yield per hour, further improving our margins.
Due to our participation in the CRAF program, we are subject to
inspections approximately every two years by the Department of Defense as a
condition to retaining our eligibility to perform military charter flights. The
last such inspection was completed in January 2004 and we met the requirements
for continued participation in the CRAF program. AMC may terminate our contract
at its convenience, if we fail to pass inspection or otherwise default based on
performance. If our AMC contract were to be terminated for convenience, we
generally would be entitled to receive payment for work completed and allowable
termination or cancellation costs.
Freight Forwarders: Historically, when market rates support such
agreements, we have entered into one-year block space agreements with freight
forwarders in Asia, including Hellmann, Emery Worldwide, Bax Global and
Expeditors Hong Kong. We currently do not have block space agreements with
freight forwarders due to the decline in demand for these services and our
preference to operate more profitable AMC flights. However, we continue to
maintain relationships with a broad range of these customers through ad hoc
charter services to meet customer needs. When operating one-way flights to the
Middle East on behalf of AMC, we are often able to structure return trips via
Asia, which increases our revenue from these flights. We are thus able to take
advantage of the one-way contingency rates offered by AMC for such one-way
flights. As demand in the commercial sector recovers after the economic
slowdown, which started in 2000-2001, we expect to reintroduce scheduled charter
services, particularly with our Asia-based freight forwarder customers.
U.S. Postal Service: We have provided services to the U.S. Postal
Service since 1992. We most recently provided daily DC9 mail transport service
under an all-in contract between Seattle, Washington and Juneau, Ketchikan and
Sitka, Alaska. This Alaskan mail transport contract ended during fiscal year
2004. In addition, we provide the U.S. Postal Service additional Alaskan service
using B747s and DC9s to meet increased demand during the Christmas holiday
season.
Commercial Airlines: We have historically operated under various
contract arrangements with commercial airlines such as DHL. We have operated a
west coast ACMI program with DHL since September 1999, and we currently provide
service between Portland, OR; Seattle, WA; San Francisco, CA; Los Angeles, CA;
Salt Lake City, UT; Boise, ID; and Denver, CO. In addition, for fiscal years
ended 2004 and 2003, we provided a Christmas peak service for United Parcel
Service utilizing four of our B747s. Maintenance
We maintain our aircraft in accordance with Federal Aviation
Administration ("FAA") approved maintenance programs at our Evergreen Air
Center, ("Air Center" or "EAC"), in Marana, Arizona, and at other third party
maintenance facilities. In addition, our own certified mechanics perform line
maintenance on our aircraft. Through coordination, scheduling and planning of
maintenance we are able to reduce maintenance costs and out-of-service time,
achieve a high level of reliability, and extend the useful life of our aircraft.
Our maintenance and engineering personnel coordinate all routine and non-routine
maintenance operations, including tracking the maintenance status of each
aircraft, scheduling and planning heavy maintenance, consulting with
manufacturers and vendors about procedures for performance enhancing
improvements, and training our line maintenance personnel on the requirements of
the maintenance program.
Maintenance required by the FAA for our B747 aircraft includes:
o Routine daily inspection at least once every 24 hours (a "Transit
Check").
o Scheduled inspection and maintenance every 50 flight hours (a
"Service Check").
o Scheduled inspection and maintenance every 280 flight hours (an "A
Check").
o Scheduled inspection and maintenance every 1,250 flight hours or
seven months, whichever comes first (a "B Check").
o Scheduled inspection and major maintenance work every 5,000 flight
hours or 24 months, whichever comes first (a "C Check").
o Inspection and a major maintenance overhaul every 24,000 flight hours
or nine years, whichever comes first (a "D Check").
Maintenance required by the FAA for our DC9 aircraft includes:
o Routine daily inspection and daily maintenance (a "Service Check").
o Scheduled inspection and maintenance every 120 flight hours (an "A
Check").
o Scheduled inspection and major maintenance work every 2,000 flight
hours or 24 months, whichever comes first (a "C Check").
o Inspection and a major maintenance overhaul every 19,000 flight hours
or ten years, whichever comes first (a "D Check").
We generally schedule major maintenance on our aircraft during periods
of lower seasonal utilization and spent $19.3 million, $24.1 million and $21.4
million on C and D Checks during fiscal year 2004, 2003 and 2002 respectively.
These costs are capitalized and amortized to operating expense over the
estimated useful life of such maintenance.
The greatest percentage of our airline maintenance costs relate to the
overhaul and repair of engines, which are generally performed by Air Canada,
Volvo Aero Services LP, Israel Aircraft Industries Ltd. and Pratt & Whitney, a
division of United Technologies Corporation. We have developed an overhaul
program that extends the amount of time between major shop visits and reduces
hourly costs. In addition, our own engineering department, which includes power
plant and airframe engineering capability, allows us to comply with
airworthiness directives in a more efficient manner. Training
We believe having high quality personnel supplemented with intensive
training is a key factor in our record of safety and reliability. We operate our
own professional training schools where we conduct aviation training programs
required for our certified personnel, and rent flight simulator time from other
airlines for additional crew training. We also conduct virtually all of our own
maintenance training. All of our training programs have received required FAA
approvals. Security
Our security procedures comply with FAA regulations. Existing customers
are required to inform us in writing of the nature and composition of their
airfreight and participate in the Known Shipper Program, an FAA-approved program
that permits streamlined security procedures for known customers. We require new
customers to provide extensive background information. In addition, we conduct
tests for pressure sensitive devices and perform frequent cargo searches for
hazardous materials, weapons, explosive devices and illegal freight. We believe
we maintain excellent cooperative relationships with the U.S. Customs Service,
the U.S. Department of Agriculture, the U.S. Drug Enforcement Administration,
and the U.S. Immigration and Naturalization Service. Under the Security
Improvement Act of 2002, we are also required to have an approved security
program. We are currently in compliance with the Transportation Security
Administration ("TSA") policies and procedures and are in the process of
developing a manual for a security program for our airline.
EVERGREEN AVIATION GROUND LOGISTICS ENTERPRISES (EAGLE)
Through Evergreen Aviation Ground Logistics Enterprises, which we refer
to as "EAGLE," we currently provide ground handling, logistics and other support
services to the U.S. Postal Service and over 116 commercial airlines customers
at 34 U.S. airports, including New York (JFK), Los Angeles, Chicago-O'Hare,
Miami, Atlanta, Indianapolis and Anchorage. Our range of services includes mail
handling, aviation hub management, aircraft handling, cargo loading and
unloading, container build up and break down, ground equipment maintenance,
ground equipment sales and leasing, aircraft line maintenance, aircraft de-icing
and washing, check-in and ticketing, baggage acceptance and seat selection and
passenger cabin cleaning. We are one of only a few airfreight transportation
companies in the world that is able to provide a broad range of services to its
own fleet, thereby ensuring timely service and quality control. In addition, we
believe our affiliation with our airline improves EAGLE's services as we have
first-hand knowledge of the needs of airlines.
Ground Handling and Logistics Industry
Ground handling and logistics services generally can be classified into
four categories:
o Passenger handling services, such as counter services, security
services, lounge services and intra-airport transportation.
o Cargo handling services, such as cargo loading, sorting,
deconsolidation and warehousing.
o Ramp services, such as baggage handling, cleaning, fueling, de-icing,
snow removal, movement of air bridges and aircraft pushback.
o Operations management services, such as ramp and aircraft management,
load planning, operations supervision, data reporting and airport
coordination.
We believe growth in this industry may be fueled by several key trends,
including the airline industry's increasing willingness to outsource non-core
services, underlying growth of the cargo industry, airlines' greater focus on
using fewer service providers, and the increasing liberalization of airport
markets worldwide. Airlines and integrated express parcel and cargo operators
are increasingly focusing on their core competency of operating transportation
networks while reducing expenses by outsourcing services they deem non-core to
their product offering. Substantial capital expenditures for core operations
means airlines often cannot or prefer not to invest in ground handling
operations networks. Additionally, as third-party providers of handling services
increase in network size, expertise and perceived quality, they are often able
to offer higher quality services at lower costs than the airlines themselves.
Customers
U.S. Postal Service: The U.S. Postal Service represented 12.5%, 18.3%
and 26.1% of our total operating revenues and 61.2%, 71.3%, and 68.8% of our
EAGLE segment revenues for fiscal year 2004, 2003, and 2002 respectively. We
primarily provide the U.S. Postal Service with package and mail ground handling
services, facilitating the transfer of mail between aircraft and local and
regional U.S. Postal Service mail processing plants. We load and unload
aircraft, unload, sort and reload containers of mail, provide data entry and
scanning services, maintain and manage facilities and associated systems,
provide maintenance on ground equipment and provide security for the premises.
o Shared Network ("S-NET"). Our S-NET contract with the U.S. Postal
Service was awarded in 2001, with a five-year term with three
consecutive one-year extensions. The services provided under our S-NET
contract accounted for 46.7%, 46.8% and 12.7% of our EAGLE segment
revenues for fiscal year 2004, 2003 and 2002 respectively. Under this
contract, we are the preferred ground handling services provider to the
U.S. Postal Service at 23 locations in the Southeast, Great
Lakes/Midwest and Pacific regions of the United States. In addition, we
handle all increased activity during the Christmas peak period at S-NET
cities. This includes handling for the increased volumes in the S-NET
program and any peak aircraft operations that are contracted by the
U.S. Postal Service for additional lift. We have provided peak season
programs at Ontario, California, San Francisco, California, Oakland,
California and Indianapolis, Indiana because of these additional
operations. We provided temporary mail and aircraft handling at the two
temporary U.S. Postal Service mail hubs located in Ontario, California
and Indianapolis, Indiana, which were used during the peak Christmas
season.
o Hub and Spoke Program ("HASP"). Under the Hub and Spoke Program
contract with the U.S. Postal Service, we provide the U.S. Postal
Service with parcel and mail handling services similar to those
provided under the S-NET contract, except that these services are
provided solely for the unloading, sorting and reloading of cargo for
ground transportation. We currently provide these services to the U.S.
Postal Service in Indianapolis, Indiana and Atlanta, Georgia, two of
the four U.S. Postal Service contractor-operated HASP locations. Our
HASP contract for Indianapolis was awarded in 2002 and expires in 2004,
and our HASP contract for Atlanta was awarded in 2001 and expires in
2006. The services provided under the HASP contracts accounted for
13.4%, 11.0% and 4.6% of our EAGLE segment revenues for fiscal year
2004, 2003 and 2002 respectively.
Commercial Airlines: While the U.S. Postal Service is our principal
customer, we also provide services to various passenger and cargo airlines. The
airlines we service include EIA, British Airways, Lufthansa in Dallas and
Portland, Virgin Atlantic in Miami, Singapore Airlines in Los Angeles and other
domestic and international carriers. Our contracts with these airlines have
terms of one to five years. We typically use a standard ground handling
agreement established by the International Air Transport Association with
initial terms of at least one year so that we may provide the same customer with
a broad range of services at multiple locations, including:
o Cargo Handling. We perform loading and unloading of freight and
baggage onto and off of aircraft and to and from storage warehouses and
trucks.
o Ramp Services. These services include aircraft towing and pushback,
marshaling, lavatory waste disposal, potable water tank servicing,
ground power unit services, air start, and other services as necessary.
o Other Services. Other revenue generating services we have been able
to establish, using our U.S. Postal Service relationship as a
foundation, include airport property and facilities maintenance, ground
equipment leasing, sales and maintenance, aircraft de-icing, passenger
check-in, ticketing and processing, cabin cleaning, cargo buildup and
breakdown, cargo warehousing, storage and security services, and
aircraft interior cleaning. We are capable of providing any of our
contract services and emergency ramp services on short notice, 24-hours
a day.
EVERGREEN HELICOPTERS, INC.
Evergreen Helicopters Inc., or "EHI", has a fleet of helicopters and
small fixed-wing aircraft, which are well suited to provide a variety of
services in remote or inaccessible locations. Our fleet is used in connection
with forest fire fighting, health services, aerial spraying, heavy lift
construction, law enforcement, helicopter logging, petroleum support services,
search and rescue, peacekeeping and relief support, helicopter skiing and
agriculture. Customers
EHI has a diverse geographical presence and range of experience with
the ability to match the aircraft to the mission. We provide services to a broad
range of customers, including the U.S. Forest Service, the U.S. Department of
the Interior, the U.S. Department of Defense, the World Health Organization,
various state forestry agencies and major petroleum and timber companies. Some
of our recent missions have included:
o Fire Fighting. Through contracts with the U.S. Department of the
Interior and the U.S. Forest Service, we help fight forest fires
throughout the United States.
o Petroleum Support. We transport workers, cargo and equipment to and
from oil platforms in the Gulf of Mexico supporting offshore drilling
and petroleum production. In addition, we operate helicopters in
support of seismic exploration and pipeline construction activities.
o Peacekeeping Missions and Law Enforcement. We provide support to
peacekeeping missions throughout the world by providing military
logistics and transporting personnel and cargo. We have served the
United Nations, the Department of Defense, the U.S. Armed Forces and
foreign governments. EHI served most recently in Angola, Cambodia,
Kenya, Kuwait, Liberia, Mozambique, Sierra Leone, Somalia, Western
Sahara and Yugoslavia. We provided helicopter support for fire fighters
who put out oil well fires in Kuwait after the Gulf War, provided
airline service for passengers and cargo and transported ground
equipment.
o Health Services. We have been involved with the Onchocerciasis
Control Program ("OCP"), which is managed by the World Health
Organization, for over 20 years. Onchocerciasis, known as "river
blindness," is a parasitic disease transmitted by the black fly. Severe
infections of the disease can lead to blindness. Our helicopters and
aircraft aerially apply insecticide in eleven Western African countries
in an effort to combat the spread of the river blindness disease. We
also provide emergency medical transportation services in Alaska to
various customers.
o Aerial Spraying. Our aerial spraying experience includes aerial
forestry fertilization; forestry herbicide; and gypsy moth, tussock
moth, spruce budworm, mosquito and black fly suppression and
eradication projects. We have performed aerial spraying in Canada,
Mexico, Peru, Ecuador, Belize, Pakistan, Togo, Ivory Coast, Burkina
Faso, Benin, Niger, Mali, Senegal, Guinea, Guinea Bissau, Ghana and
Ethiopia.
Contracts
We typically provide helicopter and small aircraft services on a
contract basis to reduce the risks associated with fuel prices, currency
fluctuations and local duties and fees. Our contracts typically have terms of
one to five years and generally have a fuel escalation clause to adjust for
upward or downward trends in the cost of fuel. We typically charge customers a
monthly availability fee in addition to an hourly charge for missions flown or
by hour with a minimum number of hours per day. Our pricing methods differ
according to the type of service provided. We charge customers based on cubic
meters if the mission relates to logging, by acre if it is agricultural, or by
number of pick-ups if the job involves construction. We avoid hourly charges
whenever possible in contracted work, with a view to increasing profitability if
a mission is completed more quickly and efficiently than contemplated.
Generally, in most of these contracts, variable operating costs are passed
through to the customers. For example, direct operating costs, including fuel,
are always charged on an hourly basis. We contract with the U.S. Forest Service
to provide fire fighting services under two types of contracts, exclusive use,
which has a set term and charges a daily and hourly rate, and call-when-needed,
which is on an as-needed basis and charges an hourly rate. We also generate
revenue through ad hoc work. This is generally at higher rates, but is a less
secure earnings stream. Examples of ad hoc work include TV commercials and
movies, sporting events, and one-time ad hoc personal charters. Charges are
typically based on a set hourly rate with a guaranteed minimum number of hours
per day.
Maintenance
We provide helicopter and light fixed-wing aircraft technical and
maintenance services at four technologically advanced facilities in McMinnville,
Oregon; Warwick, Rhode Island; Anchorage, Alaska; and Galveston, Texas. Our
maintenance facilities allow us to service our operating fleet and supplement
our revenues by providing similar maintenance services to third parties. These
services include aircraft refurbishment, hydraulic systems repair and overhaul,
avionics modification and installations, dynamic component repair and overhaul,
aircraft flight line maintenance and aircraft electrical system maintenance.
EVERGREEN AIR CENTER
Through EAC we operate a full-service aircraft maintenance, repair,
overhaul and aircraft storage facility. EAC has operated since 1975 and is
located on our 1,300 acre facility, located in the non-corrosive desert
environment of Marana, Arizona. EAC is an unlimited Class IV airframe
maintenance and repair station certified by the FAA with Accessory Class I and
III certificates, Radio Class I, II and III, Limited Powerplant, Limited
Accessories, Limited Instruments, Limited Non Destructive Inspection, Testing
and Processing and Limited Propeller ratings. The Class IV rating permits EAC to
perform maintenance services on all-metal construction of large aircraft over
12,500 lbs. In addition, we hold a number of foreign certifications, including a
registration certificate from the International Organization for Standardization
(ISO 9002) for aircraft repair and storage, and maintenance certificates from
Joint Aviation Authorities, to which 26 European countries belong, and the Civil
Aviation Authority of China.
EAC primarily charges for services based on billable hours per job. For
fiscal year 2004, 2003, and 2002, approximately 43.7%, 51.8%, and 38.1%
respectively, of our EAC segment revenues were generated by services to EIA.
Revenues generated by these services to EIA are eliminated in segment reporting
to EAC.
Services
EAC performs aircraft maintenance, repair and overhaul services on most
types of commercial aircraft for our own airline, aircraft leasing companies and
other commercial carriers. Our services include aircraft storage, airframe heavy
maintenance, component overhaul and repair, fuel sales, line maintenance,
non-destructive testing, dismantling, reclamation, strip, paint and polish,
structural modifications and training. In addition, we provide maintenance
services to NASA for its B747 that transports the space shuttle. EAC has one of
the world's largest secured civilian aircraft storage facilities and is one of
only a small number of Boeing-authorized redelivery centers in the United
States.
EASL
Through Evergreen Aircraft Sales & Leasing, or "EASL," we buy, sell,
lease and broker commercial aircraft, helicopter engines and spare parts,
including sales on a consignment basis. On the occasions where we purchase
aircraft outright, we generally presell the significant parts, which make
recoupment of the investment more certain. We focus on facilitating an efficient
and cost-effective transition between missions through the disposal and
acquisition of aircraft types, particularly helicopters, and by managing the
associated spare parts and material inventories. This provides us with an
efficient method to procure the parts we need for our fleet and sell the parts
we do not need.
Since 1985, we have sold and traded aircraft and inventory to our
customer base of over 1,200 accounts. EASL's major customers include APAC
Aerospace, Austin Aerotech, AAR Aircraft, Right Angles of Pompano, Israel
Aircraft Industries Ltd., Chromalloy, Wood Group Fuel Systems, Lufthansa
Airomotive, Turbo Meca, Volvo, Ultimate A/C Composite, Aerothrust and Revima, in
addition to our regular business for our EIA and EHI segments.
OTHER BUSINESSES
Evergreen Agricultural Enterprises, or "EAE," or "OTHER," accounted for
approximately 1% of our total revenue in each of the fiscal years ended 2004,
2003 and 2002. Through EAE, we operate a nursery and farming enterprise that
produces over 200 varieties of nursery stock. Other crops in production include
grapes, grass seed for turf, Christmas trees and orchard crops.
COMPETITION
Our primary competitors are different in each market in which we
compete. EIA competes in the international air cargo market with other freight
carriers, such as Atlas Air, Polar Air, FedEx Corporation, Kalitta Air, Cargolux
and United Parcel Service and, on a limited basis, with freight operations of
passenger airlines. Domestically, EIA competes primarily with several smaller
contract carriers. Competition tends to be more intense in domestic and regional
markets where smaller aircraft can meet contract requirements, making more
operators eligible to compete for available work. We believe that the basis for
competition in our primary air freight transportation markets are size,
availability of aircraft with required performance characteristics, price and
safe and reliable service. In addition, possession of broad operating
authorities is an important factor in the ability of international cargo
carriers to compete effectively. Our ability to successfully compete could be
adversely affected by the entry of additional large carriers with greater
financial resources into the contract freight carriage market.
EAGLE's principal competitors include nationally operated ground
service providers such as Swissport, Hudson General Corporation (a subsidiary of
GlobeGround), Menzies Aviation Group (formerly Ogden Aviation Corporation),
Worldwide Flight Services, Inc. and Servisair, as well as many smaller companies
that operate regionally or at individual airports. In addition, we indirectly
compete with various airlines that perform a large portion of their ground
services in-house. The principal competitive factors in this industry are price,
reputation, quality of service, breadth of service and experience.
EAC competes primarily with the internal maintenance units of major
airlines and other independent third party maintenance providers within the
United States and abroad. Several of our competitors are as large or larger than
EAC in terms of their maintenance facilities and financial resources. The major
independent maintenance businesses include HAECO, UNC Incorporated, ST Mobile
Aerospace Engineering, Inc., Dee Howard Aircraft Maintenance L.P., TIMCO
Aviation Services, Inc., Lockheed Martin Corporation and BF Goodrich Aerospace
(formerly TRAMCO, Inc.). In addition, the manufacturers themselves and certain
corporate aircraft owners operate their own maintenance facilities. Competition
in this segment is principally based upon price and the quality of the services
provided.
EHI competes with other companies in specialized markets such as
peacekeeping, logging, offshore petroleum support, and fire suppression. In
addition to general competitors such as Canadian Helicopters, EHI competes with
other companies in specialized markets, such as heavy lift construction, oil
support and aerial spraying. Competitors include Erickson Air-Crane Incorporated
and Columbia Helicopters, Inc. in the heavy lift construction market, Petroleum
Helicopters, Inc. and ERA Aviation, Inc. in the petroleum support market and
Agrotors in the aerial spraying market. In addition, many of our customers and
potential customers in the oil and gas industry operate their own helicopter
fleets, which impacts demand for and prices for our services. Factors that
affect competition in this segment include safety, price, reliability,
availability and quality of service.
EVERGREEN HOLDINGS, INC.
Holdings, our parent company, also holds all the outstanding common
stock of Evergreen Vintage Aircraft, Inc., which owns a collection of vintage
aircraft and a 120,000 square foot Evergreen Aviation Museum building on
approximately 84.2 acres in McMinnville, Oregon. Evergreen Vintage Aircraft,
Inc., leases this building and land to The Captain Michael King Smith Evergreen
Aviation Educational Institute, a non-profit corporation.
REGULATION
The Company is subject to regulation under U.S. laws and the laws of
the various countries to which we fly our aircraft. We are also subject to
various international bilateral and multilateral air services agreements between
the United States and the countries to which we provide cargo services and must
obtain permission from the applicable foreign government to provide service to
that country.
Domestic Regulation
We are subject to the jurisdiction of the FAA with respect to aircraft
maintenance, repair and operations, including flight operations, equipment,
aircraft noise, ground facilities, dispatch, communications, weather
observation, flight time, crew qualifications, aircraft registration, and other
matters affecting air safety. FAA regulations are designed to ensure that all
aircraft and aircraft equipment are continuously maintained in proper condition
to ensure safe operation of the aircraft. FAA regulations also require us to
comply with certain safety and security measures with respect to the ground
handling services our EAGLE segment provides.
We must obtain and maintain from the FAA, certificates of airworthiness
for all of our aircraft and an air carrier certificate for our
aircraft-operating entities. The FAA has the authority to suspend temporarily or
revoke permanently our authority to operate or our licensed personnel for
failure to comply with regulations promulgated by the FAA and to assess
substantial civil penalties for such failure. Our aircraft, flight personnel and
flight and emergency procedures are subject to periodic inspections and tests by
the FAA. The FAA also conducts safety audits and has the power to impose fines
and other sanctions for violations of airline safety regulations. Under FAA
regulations, all aircraft must be maintained under a FAA approved continuous
airworthiness maintenance program and must periodically undergo thorough
inspection and maintenance. The inspection, maintenance and repair procedures
for the various types of aircraft and aircraft equipment are prescribed by
regulatory authorities and can be performed only by certified repair facilities
utilizing trained and approved technicians. The FAA also has jurisdiction over
the transportation of hazardous materials. Shippers and air carriers of
hazardous materials generally share responsibility for compliance with these
regulations, and shippers are responsible for proper packaging and labeling.
Substantial monetary penalties can be imposed on both shippers and air carriers
for infractions of these regulations as well as possible criminal penalties.
To provide air cargo transportation services under long-term contracts
with major international airlines, we rely primarily on our worldwide charter
authorities. FAA and DOT approval is required for long-term wet lease contracts
but not dry leases.
The DOT and the FAA have authority under the Aviation Safety and Noise
Abatement Act of 1979, as amended and re-codified, and under the Airport Noise
and Capacity Act of 1990, to monitor and regulate aircraft engine noise. All of
our fleet of airplanes complies with Stage III Standards, which is currently the
highest FAA standard applicable to our aircraft.
The FAA also has the power to issue airworthiness directives, the
effect of which may require us to modify our aircraft, at our expense, to meet
perceived inadequacies throughout the airline industry. Under the FAA's
directives issued under its "Aging Aircraft" program, we are subject to
extensive aircraft examinations and have been required to undertake structural
modifications to our fleet to address the problem of corrosion and structural
fatigue. In November 1994, Boeing issued Nacelle Strut Modification Service
Bulletins, which have been converted into airworthiness directives by the FAA.
All of our B747 aircraft are in compliance with such directives. As part of the
FAA's overall Aging Aircraft program, it has issued directives requiring
Section 41 additional aircraft modifications to be accomplished prior to an
aircraft reaching 20,000 cycles. Nine of our ten B747 aircraft have already
undergone such modifications and are in compliance. The modifications for the
remaining B747 is scheduled to be completed by July 2004 and based on past
history we estimate that the modification costs for this aircraft will be
approximately $3 million. Our DC9 aircraft are not required to undergo
modifications for at least 13 years. Other directives have been issued that
require inspections and minor modifications to our B747 aircraft. On April 2,
2003, the FAA mandated the installation of traffic collision avoidance systems
("TCAS") on all aircraft over 33,000 pounds by January 1, 2005 to reduce the
risk of a midair collision. TCAS were installed on each of our B747 aircraft in
1999, but the FAA mandate will also require installation of TCAS in each of our
DC9 aircraft. We estimate that the total cost of TCAS installation in our DC9
fleet will be $1.1 million. In addition, on March 29, 2001, the FAA mandated
that terrain awareness and warning system ("TAWS") be installed on all
turbine-powered aircraft by March 29, 2005. TAWS are designed to provide pilots
with increased situational awareness in any weather conditions. All of our B747
and DC9 aircraft will require TAWS installation, and we estimate the total cost
of installation to be $1.8 million. On May 10, 2002, the FAA issued a proposed
rule that would require aircraft operating between 29,000 and 39,000 feet in
designated airspace to be certified by the U.S. Domestic Reduced Vertical
Separation Minimum Program. Under the proposed rule, we would be required to be
certified by late 2004 or early 2005. Reduced vertical separation minimum
("RVSM") is the use of reduced vertical separation of 1,000 feet (from the
current 2,000 feet) for approved aircraft operating between 29,000 and 39,000
feet in designated airspace. All of our DC9 aircraft will require RVSM
certification. All of our B747 aircraft were RVSM-certified in 1997. At this
time, we are unable to estimate the costs of compliance with this directive, as
the certification process has not yet begun. If we do not comply with
airworthiness directives, we would be unable to operate the aircraft.
Our Air Center is also subject to regulation by the FAA. The Air Center
is a certified FAA-approved repair station and holds numerous certificates
issued by the FAA in order to perform its maintenance, repair and overhaul
services. In addition, certain Air Center employees hold FAA certificates
authorizing them to perform the maintenance, repair and overhaul services that
the Air Center provides.
Department of Transportation
The DOT maintains economic regulatory authority over air
transportation. In order to engage in our air transportation business, we are
required to maintain a Certificate of Public Convenience and Necessity ("CPCN")
and other of our entities providing air transportation has registered with the
DOT as air taxis. The DOT has issued to us various CPCNs to engage in domestic
and foreign air transportation of cargo on both a scheduled and charter basis.
Prior to issuing a CPCN, the DOT examines a company's managerial competence,
financial resources and plans and compliance record in order to determine
whether the carrier is "fit, willing and able" to engage in the transportation
services it has proposed to undertake. The authority under our CPCNs is of
indefinite duration, unless we were to cease all operations or were found by the
DOT not to be "fit, willing and able." If we were to cease such operations, this
authority would be suspended and revoked for dormancy if our operations did not
resume within one year. The DOT also examines whether a carrier conforms to the
requirement under Title 49 of the United States Code (formerly the Federal
Aviation Act of 1958, as amended) that the transportation services proposed are
consistent with the public convenience and necessity. Among other things, a
company holding a CPCN must qualify as a United States citizen, which requires
that it be organized under the laws of the United States or a state, territory
or possession thereof; that its president and at least two-thirds of its board
of directors and other managing officers be United States citizens; that not
more than 25% of its voting stock be owned or controlled, directly or
indirectly, by foreign nationals; and that it not otherwise be subject to
foreign control. With respect to scheduled foreign air transportation of cargo,
we have authority to transport cargo between the United States and points in 168
foreign countries. The DOT has granted us rights to transport cargo to 163 of
these foreign countries, which rights are of indefinite duration. We have DOT
exemption authority of limited duration to transport cargo to all points in
Argentina, Colombia, Ecuador, Iraq and four cities in Russia. Although we have
exemption authority from the DOT to fly into Iraq, the FAA has currently
prohibited U.S. commercial aircraft from operating in Iraq. See Risk Factors -
We depend on continued business with the U.S. Air Force Air Mobility Command. If
our AMC business declines significantly, it could have a material adverse effect
on our operations. Our exemption authority expires on February 31, 2006 for
Argentina, March 16, 2006 for Ecuador, July 29, 2005 for Iraq and October 25,
2004 for Russia. We have applied for an extension of our exemption authority for
Columbia and our authority for Columbia remains in place while that application
is in process. Many carriers operate under such exemption authority, which is
granted for up to a period of two years and typically renewed by the DOT. CPCNs
and grants of exemption authority are subject to standard DOT terms, conditions
and limitations and may be conditioned, suspended or withdrawn.
DOT approval is required for long-term wet lease contracts with foreign
air carriers. Wet lease contracts of fewer than 60 days do not require DOT
approval, unless the wet lease is part of a series of contracts that all run
together for more than 60 days. In addition, international air services are
generally governed by a network of bilateral civil air transport agreements in
which rights are exchanged between governments, which then select and designate
air carriers authorized to exercise such rights. These bilateral agreements may
be open skies agreements which contain no restrictions or limitations, or they
may specify the city-pair markets that may be served; restrict the number of
carriers that may be designated; provide for prior approval by one or both
governments of the prices the carriers may charge; limit frequencies or the
amount of capacity to be offered in the market; and, in various other ways,
impose limitations on the operations of air carriers. To obtain authority under
a restrictive bilateral agreement, it is often necessary to compete against
other carriers in a DOT proceeding. At the conclusion of the proceeding, the DOT
awards all route authorizations. The provisions of bilateral agreements
pertaining to charter services vary considerably from country to country. Some
agreements limit the number of charter flights that carriers of each country may
operate. We are subject to various international bilateral air services
agreements between the U.S. and the countries to which we provide services.
We also operate on behalf of foreign flag air carriers between various
foreign points without serving the U.S. These services are subject to the
bilateral agreements of the other respective governments. Furthermore, these
services require FAA approval but not DOT approval. We must obtain permission
from the applicable foreign governments to provide service to foreign points.
Such approval requirements may limit our growth opportunities in these
locations. The DOT also has jurisdiction over the transportation of hazardous
materials.
Transportation Security Administration
The Aviation and Transportation Security Act ("ATSA") was enacted in
November 2001, creating a new government agency, the Transportation Security
Administration ("TSA"). The TSA, now part of the United States Department of
Homeland Security, is responsible for aviation security. The ATSA mandates that
the TSA provide for the screening of all passengers and property, including U.S.
mail, cargo, carry-on and checked baggage. Under a rule known as the
"Twelve-Five Rule," the TSA has mandated that operators of aircraft with a
maximum certificated takeoff weight of 12,500 pounds or more conduct criminal
history background checks through fingerprinting of pilots and certain other
flight personnel, as well as limit access to the cockpit. The deadline for
compliance with this rule was May 1, 2003 and we are in full compliance with
this rule.
Other Domestic Regulations
Several aspects of airline operations are subject to regulation or
oversight by Federal agencies other than the FAA or the DOT. For instance, labor
relations in the air transportation industry are generally regulated under the
Railway Labor Act, which vests in the National Mediation Board certain
regulatory powers with respect to disputes between airlines and labor unions. In
addition, we are subject to the jurisdiction of other governmental entities,
including the Federal Communication Commission regarding use of radio
facilities; the Bureau of Industry and Security within the Commerce Department
regarding export controls for international transportation of cargo; the
Department of Homeland Security, through the Bureau of Customs and Border
Protection, the Bureau of Immigration and Customs Enforcement and the Bureau of
Citizenship and Immigration Services, regarding inspection of cargo imported
from our international destinations, the citizenship of our employees, the
inspection of animals, plants and produce imported from our international
destinations regarding our international operations, and other customs,
immigration and inspection functions; the Environmental Protection Agency
regarding hazardous waste; and the Department of Labor (including the Office of
Federal Contract Compliance Programs) regarding our employees. We believe that
we are in material compliance with all applicable laws and regulations of such
governmental entities.
Foreign Regulations
To the extent required to do so, we obtain authority to conduct foreign
operations from applicable aeronautical and other governmental authorities. As
with the certificates and licenses obtained from U.S. authorities, we must
comply with all applicable rules and regulations imposed by foreign governmental
authorities or are subject to the suspension, amendment or modification of its
operating authorities. We believe we are in compliance with all such rules and
regulations.
INSURANCE AND RISK MANAGEMENT
We purchase insurance to cover standard risks in the aviation industry,
including policies to cover aviation, workers compensation, auto liability, and
property and casualty risks. Our insurance rates are based upon our safety
record as well as trends in the insurance industry. In fiscal year 2002 and
2003, our aviation insurance rates increased by 69% and 86%, respectively,
without any significant change in our insurance coverage. In fiscal year 2004,
our rates decreased by 15%. Following September 11, 2001, commercial
underwriters declined to write war risk liability insurance with limits over
$50 million. Given most major carriers require limits from $1 billion to $2
billion, the U.S. government under the Airline Stabilization Act agreed to
provide this coverage to all domestic airlines. In addition, this program
provides hull physical damage coverage.
We are vulnerable to potential losses, which may be incurred in the
event of an aircraft accident. Any such accident could involve not only repair
or replacement of a damaged aircraft and its consequent temporary or permanent
loss from service, but also potential claims involving injury to persons or
property. We are required by the DOT to carry liability insurance on each of our
aircraft. We purchase policies for hull physical damage, liability risks and
aviation ground risk with aircraft physical damage on a declared value basis to
provide coverage for total losses and repair expenses in the event of a partial
loss, effectively subject to a $0.5 million deductible for our B747 aircraft and
DC9 aircraft. We maintain baggage and cargo liability insurance if not provided
by our customers under ACMI contracts. To insure against risks associated with
our maintenance, we maintain aviation and airline products liability, premises
and hangar keepers insurance in amounts and on terms generally consistent with
industry practice. To date, we have not experienced any significant uninsured or
insured claims related to our aircraft maintenance business. We also maintain
workers compensation insurance policies that are retrospective in that the cost
per year will vary dependent upon level and severity of claims in the policy
year. Our workers compensation policy includes stop loss policies that minimize
the loss associated with a single incident. Our other policies cover auto
liability, property and casualty and other risks identified by management.
We are legally responsible to our customers for the safe delivery of
cargo to its ultimate destination, subject to contractual and legal limitations
on liability of $20.00 per kilogram ($9.07 per pound) for international flights.
We believe we carry adequate insurance for these claims.
Although we believe our insurance coverage is adequate, we cannot
assure you that the amount of such coverage will not be changed upon renewal or
that we will not be forced to bear substantial losses from accidents.
Substantial claims resulting from an accident could have a material adverse
effect on our financial condition and could affect our ability to obtain
insurance in the future. We have had a favorable claim experience and believe we
enjoy a good reputation with our insurance providers.
SALES AND MARKETING
We maintain dedicated sales and marketing personnel who aim to
strengthen long-standing relationships with existing customers and build upon
our reputation to develop new customer relationships. We have a global network
of sales offices and sales professionals in North and South America, Europe,
Africa, Middle East, and Asia. We maintain our commercial relationships through
our domestic and international sales network in over 50 cities. All our sales
professionals communicate regularly with senior management to ensure that quoted
prices are profitable and in line with our capabilities.
EMPLOYEES
We had 1,435 full-time and 2,507 part-time employees as of February 29,
2004. As of February 29, 2004 our full-time employee counts were 434 for our EIA
segment, 401 for our EAGLE segment, 303 for our EAC segment, 189 for our EHI
segment, 37 for our EASL segment, and 71 for our OTHER segment. The majority of
our part-time employees are employed by EAGLE, which had 2,422 part-time
employees at February 29, 2004.
EIA is party to a collective bargaining agreement with The Aviators
Group ("TAG"). TAG represents EIA's pilots and flight engineers and is not
affiliated with any national or international unions. The agreement expires on
December 31, 2004, and covers compensation and benefits matters and contains,
among other provisions, no strike/no lockout, management rights and successors
and assigns clauses. None of our other employees belong to a union or are party
to any collective bargaining or similar agreement.
Our EAGLE and EIA employees are screened to maintain airport and
aircraft safety and security, including a full background check, in accordance
with Federal Aviation Regulation 107, similar to the screening and processing
for commercial airline employees. We also screen our part-time employees in the
same manner as full-time employees. We conduct the screening and submit the
results to the local airport authority for approval.
ENVIRONMENTAL
We are subject to numerous federal, state and local environmental laws
and regulations governing discharges to air and water, as well as handling,
transportation and disposal practices for solid and hazardous substances. If we
violate such laws, we may incur substantial fines, costs or other liabilities.
Moreover, if we were to be convicted of a criminal violation of the Federal
Clean Air Act or the Federal Clean Water Act, the facilities involved in the
violation (and possibly other facilities owned or operated by us) would be
barred from participating in government contracts until the Federal
Environmental Protection Agency had certified that the condition giving rise to
the conviction had been corrected.
In addition, we also may be liable under environmental laws and
regulations for the costs of cleaning up sites of past spills or disposals of
hazardous substances. The presence of contamination from such substances, or the
failure to remediate contaminated property properly, may adversely affect our
ability to sell such property or to use it as collateral for a loan.
The costs of defending against claims of environmental liability or
remediating contaminated property, and the costs of complying with environmental
laws have not had a material adverse effect on our financial condition and
results of operations in the past. However, there can be no assurance that such
matters will not have such an effect in the future.
GEOGRAPHIC INFORMATION
The majority of the Company's revenues in fiscal years 2004, 2003, and
2002 were attributable to its U.S. operations. In fiscal years 2004, 2003, and
2002, no single foreign customer accounted for 10% or more of the Company's net
sales.
The Company had no material long-lived assets held in foreign locations
at February 29, 2004, or at February 28, 2003.
AVAILABLE INFORMATION
We make available on our website, www.evergreenaviation.com, our
filings made with the Securities Exchange Commission, including our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the
Securities and Exchange Act of 1934, as amended.
ITEM 2. PROPERTIES
Our principal business offices are located at 3850 Three Mile Lane,
McMinnville, Oregon. Our largest base for EIA is located in New York, NY at John
F. Kennedy Airport (or "JFK"). Generally, our facilities consist of office
space, hangars, maintenance facilities and warehouse and storage space. Some of
our hangar facilities are constructed on property leased from airport owners. We
also have various agreements with municipalities and governmental authorities
that own and operate airports throughout the United States. These agreements
generally relate to our use of general airport facilities, but may also include
leases or licenses to use hangar and maintenance space. The majority of our
properties are subject to leases with terms ranging from one month to five
years. Historically, we have not experienced any difficulty in renewing our
leases. We believe that our facilities are adequate for our current and
near-term future needs.
Our EAC facilities are located 30 miles northwest of Tucson in Marana,
Arizona. A 6,850-foot runway makes the facility capable of handling any
commercial aircraft. Our main hangar has approximately 60,000 square feet of
hangar space and can accommodate one B747-200 or four B-737 aircraft at one
time. EAC has 20 million square feet of ramp and storage area with the capacity
to store over 400 aircraft, and the arid climate of Arizona provides favorable
conditions to prevent corrosion. The storage business also acts as a feeder for
the maintenance business because some level of regular maintenance is usually
required to ensure that aircraft coming out of storage are fully operable. In
addition, there are over 350,000 square feet of buildings and improvements. The
storage business also complements EASL when the owner elects to sell the
aircraft or parts on a consignment basis. In addition, we have technologically
advanced commercial strip, paint and polish facilities and a fuel depot
facility. Roving security guards and base-wide overt and covert intrusion
detection systems contribute to a thorough security system.
The business offices of EAGLE are located in McMinnville, OR. EAGLE
provides ground handling, logistics and other support services at over 34
locations, including New York, NY; Los Angeles, CA; Chicago, IL; Miami, FL;
Atlanta, GA; Indianapolis, IN; and Anchorage, AK.
Bases supporting EHI are located in Anchorage, Alaska; Galveston,
Texas; Providence, Rhode Island; McMinnville, Oregon; Togo (Africa), and Panama.
Evergreen Holdings, Inc., also holds all outstanding common stock of
Evergreen Vintage Aircraft, Inc., which owns a collection of vintage aircraft
and a 120,000 square foot Evergreen Aviation Museum building on approximately
84.2 acres in McMinnville, Oregon. Evergreen Vintage Aircraft, Inc., leases this
building and land to The Captain Michael King Smith Evergreen Aviation
Educational Institute, a non-profit corporation.
We also lease buildings owned by our affiliates, Evergreen Ventures,
Inc. and Mr. Delford M. Smith. EAE owns or manages approximately 4,972 acres of
farmland, certain parcels of which are owned subject to encumbrances.
LOCATION OF MAJOR FACILITIES
The following is a summary of our major facilities:
Location Description Segment Owned or Leased
-------- ----------- ------- ----------------
3850 Three Mile Lane, McMinnville, OR Corporate headquarters, operations All Owned
center and hangar
Hangar #16, JFK Int'l Airport, Jamaica, NY Offices and warehouse EIA Leased (1)
3501 and 3511 Postmark Drive, Ted Stevens Warehouse EAGLE Leased
Anchorage Int'l Airport, Anchorage, AK
12921 Crenshaw Blvd., Hawthorne, CA Warehouse EAGLE Leased
1451 East Mission Blvd., Ontario, CA Industrial building EAGLE (2) Leased
Building #83, JFK Int'l Airport, Jamaica, NY Offices and land EAGLE Leased
Tradeport Place IV, 4254 Frontage Rd., Warehouse EAGLE Leased
Hapeville, GA
7240 Edgewater Dr., Oakland, CA Offices and warehouse EAGLE Leased
7001 NW 25th St., Miami, FL Warehouse EAGLE Leased
7550 22nd Ave. South, Minneapolis-St. Paul Offices and warehouse EAGLE Leased
Int'l Airport, Minneapolis, MN
Pinal Airpark, Marana, AZ Airport, hangar, Air Center Leased
offices and storage facilities
T.F. Green State Airport, Warwick, RI Hangar Helicopters Leased
Merrill Field, Anchorage, AK Hangar Helicopters Leased
2001 Terminal Dr., Scholes Int'l Airport, Hangar/FBO Helicopters Leased
Galveston, TX
Abbeville Crusta Memorial Municipal Airport, Hanger/FBO Helicopters Leased
Abbeville, LA
(1) Original lease has expired and EIA currently occupies the premises on a
month-to-month basis.
(2) Premises are leased by EIA, but occupied and used by EAGLE.
FLEET
Two of our B747-200 aircraft are equipped with nose loading
capabilities and three have side loading capabilities. Nose loading allows us to
handle over-sized cargo items. All five B747-200 aircraft are equipped with
Pratt & Whitney JT9D-7J engines. The five B747-100 series aircraft are side
loading and are equipped with Pratt & Whitney JT9D-7A, F or J engines. Unlike
other wide-body aircraft, the B747 aircraft utilize pallets, which are built up
with the same contour profile as the military's C-17 aircraft and therefore
allow the military to easily transfer cargo between different aircraft types.
Our entire fleet of B747s is Stage III compliant, the most stringent noise
standard applicable to our aircraft in the United States, and is also compliant
with most international equivalents of this standard. Our B747s are also
equipped with technologically advanced avionics, including triple Global
Positioning System (GPS) navigation systems, Ground Proximity Warning System
(GPWS), Traffic Alert and Collision Avoidance System (TCAS) and digital engine
instrument systems with automatic recording functions. All of our DC9 aircraft
comply with Stage III, and most international equivalents of this standard, and
are powered by Pratt & Whitney JT8D-9A engines. Three of the DC9-30 series
aircraft are also equipped with GPS navigational update systems. Standardization
of this fleet of B747s and DC9s streamlines pilot training and reduces
maintenance costs. The average age of our B747-200, B747100, DC9-15 and DC9-30
fleet is 29 years, 31 years, 36 years and 30-35 years respectively.
Our diverse fleet of helicopters and small aircraft match specific
requirements for a wide variety of missions, including those that involve
extreme environments, altitudes, heavy loads and missions that put a priority on
agility and precision. We engage in strategic acquisitions of rotor and
fixed-wing aircraft for specific contracts to create additional flexibility in
our operating fleet. We acquire aircraft that can either be added to our fleet
on a long-term basis or sold or leased profitably after the contract is
completed. From time to time, we engage in discussions with third parties
regarding possible acquisitions of aircraft that could expand our operations,
and engage in discussions with third parties regarding possible sales of
aircraft to improve the mix and age of our fleet. We are in discussions with
third parties for the possible acquisition and sale of aircraft for 2005 and
beyond.
The Company sells aircraft whenever they (i) become obsolete, (ii) do
not fit into future plans, or (iii) are surplus to the Company's needs. Our
current fleet includes:
Large Aircraft Type Owned Leased Total
- ------------------- ----- ------ -----
Boeing 747 200 Freighter Cargo transport 5 (1) 0 5
Boeing 747 100 Freighter Cargo transport 5 0 5
Douglas DC-9-15 Freighter Cargo transport 2 0 2
Douglas DC-9-30 Freighter Cargo transport 3 (1) 2 5
----- ------ -----
Total 15 2 17
Helicopter Type Capability Owned Leased Total
- --------------- ---------- ----- ------ -----
Sikorsky S-64E 20,000 pound lift 1 0 1
Sikorsky S61R 8,000 pound lift 1 0 1
Bell 212 (VFR/IFR) 14 passenger, twin engine 7 1 8
Bell 205A1 14 passenger 1 0 1
Eurocopter BO105CBS 4 passenger or internal cargo 0 1 1
Eurocopter BK 117 2 patients, 2 medics 0 1 1
Bell 206L-III 6 passenger 4 6 10
Eurocopter SA315B Lama 4 passenger, high altitude aircraft 3 0 3
Eurocopter 350B2 5 passenger 0 5 5
Eurocopter 350B3 5 passenger 0 4 4
Hughes 500 D/E 4 passenger 5 0 5
Bell 206B-III 4 passenger 4 1 5
----- ------ -----
Total 26 19 45
Small Aircraft Type Capability Owned Leased Total
- ------------------- ---------- ----- ------ -----
Gulfstream IV 15 passenger corporate jet 0 1 1
Lear 35 8 passenger corporate jet 1 0 1
Casa 212 Passenger or cargo, twin turbine 4 0 4
Cessna 206 Support aircraft 2 0 2
King Air Medical transport 1 1 2
C-130 Cargo transport 2 0 2
Cessna 172 Support aircraft 0 2 2
----- ------ -----
Total 10 4 14
----- ------ -----
Total: All aircraft types 51 25 76
===== ====== =====
(1) One B747 and three DC9 aircraft are owned by a trust. Mr. Delford M. Smith
owns a one-third beneficial ownership interest in the portion of the trust that
owns the B747 aircraft. We own the remaining two-thirds beneficial ownership
interest in the portion of the trust that owns the B747 aircraft and the entire
beneficial ownership interest in that portion of the trust that owns three DC9
aircraft. The trust leases the aircraft to EIA.
Property and equipment at February 29, 2004 and February 28, 2003
consisted of the following (in thousands):
2004 2003
---- ----
Aircraft $704,322 $711,664
Overhauls, net 91,698 89,121
Machinery and equipment 102,787 84,501
Buildings and improvements 42,956 42,194
Land and improvements 15,646 15,444
Construction in progress and other 11,755 12,568
-------- --------
Property and equipment, at cost 969,164 955,492
-------- -------
Accumulated depreciation (423,767) (401,756)
-------- --------
Total $545,397 $553,736
======== ========
The Company owns an aviation museum facility, which has a net book
value (in thousands) of $16,595 at February 29, 2004. This facility is currently
being leased to a not-for-profit entity at no charge and is included in the
table above.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in certain legal proceedings as
discussed below. We plan to vigorously defend against these lawsuits, however,
because of uncertainties related to both the potential amount and range of loss
from pending litigation, management is unable to make a reasonable estimate of
the liability that could result if there were an unfavorable outcome in any of
these legal proceedings. As additional information becomes available, we will
re-assess the potential liability related to pending litigation and revise the
estimates accordingly. Revisions of our estimates of such potential liability
could materially impact its results of operations, financial condition or cash
flows. While we are party to other claims and actions arising in the ordinary
course of business, we do not believe that these claims and actions to be
materially adverse to our financial condition or operations.
On September 19, 2001, we instituted proceedings in the United States
District Court for the District of Oregon against Asiana Airlines ("Asiana") to
recover certain amounts owed to us pursuant to a freighter service agreement
with Asiana, which began January 28, 2000 and expired February 28, 2003. The
agreement required us to provide the aircraft (B747), crew, maintenance and
insurance. Asiana was required to pay all other costs incurred in the
performance of the contract. The contract provided for minimum payments based on
guaranteed block hour utilization as defined in the agreement. On August 28,
2001, Asiana paid us block hour utilization for the first week of September and
gave notice that no further payments would be made. Asiana did not reimburse us
for certain costs that we incurred during performance under the terms of the
contract. We completed the mission in progress and returned the aircraft to the
United States. Since the agreement was in force until February 28, 2003 and
Asiana ceased minimum payments without notice, we sought damages to compensate
us for the revenue that would have been earned had Asiana continued to meet its
contractual obligations. On February 28, 2003, a jury returned a verdict of US
$16.6 million in our favor against Asiana. On April 22, 2003, the court denied
our motion for prejudgment interest. On April 28, 2003, the court entered
judgment in our favor in the amount of $16.6 million. On May 2, 2003, Asiana
moved to stay the execution of the judgment pending hearing on post-judgment
motions. On May 5, 2003, the court granted the stay of execution, as of the date
Asiana posts sufficient bond. In May 2003, Asiana posted a cash bond in the
amount US $17.4 million. An order denying Asiana's post-judgment motions and
awarding us $38,053 in costs was entered on September 26, 2003. On October 24,
2003 Asiana filed a notice of appeal. The court ordered a settlement assessment
conference for December 18, 2003 which was recorded and conducted on January 5,
2004 at which time it was determined that further settlement discussions were
not likely to be fruitful and that the briefing schedule stood as issued.
Briefing on the appeal began on February 23, 2004. We filed our answer brief to
affirm the judgment on April 7, 2004. Asiana's reply was filed on May 10, 2004.
The Ninth Circuit Court of Appeals has not yet scheduled an oral argument.
On August 19, 2002, we instituted proceedings against the United States
of America in the United States District Court for the district of Alaska for a
declaration that the Rural Service Improvement Act of 2002 (the "Rural Service
Act") is unconstitutional. The Rural Service Act, which went into effect on
August 2, 2002, prohibits EIA from bidding on contracts for the delivery of
Alaska non-priority bypass mail. We subsequently consolidated our claims with a
prior lawsuit asserting similar claims filed by Alaska Central Express, Inc.
Plaintiffs, including EIA, and the defendant, the U.S. government, have filed
cross-motions for summary judgment on the constitutional claims. Briefing on
these motions closed on May 9, 2003. The district court granted the U.S.
government's motion for summary judgment and dismissed our claim with prejudice
on September 29, 2003. On October 30, 2003, EIA filed an appeal to the decision
to the Ninth Circuit Court of Appeals. EIA also filed a takings claim for money
damages to recover for the economic loss of the use of assets that were
committed to performance of the bypass mail operations. EIA has not yet fully
quantified those losses. This claim was transferred to the U.S. Court of Claims
in Washington, D.C. and is stayed pending decision on the constitutionality
claim by the District Court in Alaska. The outcome of these proceedings will not
impact our ability to operate services for the U.S. Postal Service in the Alaska
market. Although we have not generated significant revenues from non-priority
bypass mail services in the past, an adverse outcome of these proceedings would
prevent us from offering these services in the future. We filed the opening
brief in the US Court of Claims on February 13, 2004 and the Government's
response brief was filed April 30, 2004. Oral arguments are anticipated for
December 2004.
On August 2, 2001, Airfreight Express Ltd. and AFX Capital Ltd. filed
suit in the Pima County Superior Court in Arizona State Court against us
alleging among other things breach of contract and fraud and seeking
approximately $10 million in compensatory and punitive damages, attorneys' fees
and costs. On October 3, 2001, we moved to dismiss the complaint on the grounds
that it was barred by a previous settlement agreement. The court denied our move
to dismiss on February 5, 2002. The plaintiff amended its complaint on June 28,
2002 to claim breach of contract, breach of the covenant of good faith and fair
dealing and for a declaratory judgment that the release was void for duress and
lack of consideration and fraud. On November 1, 2002, we filed a motion for
security of costs requesting the plaintiff post a $50 thousand security bond.
The court ordered the plaintiff to post a security bond in the amount of $15
thousand and AFX complied with the order by posting cash. On November 13, 2002,
we cross-claimed that the claims were barred by the settlement agreement and
that the settlement agreement was fully enforceable. We also claimed breach of
contract of the settlement agreement, breach of the covenant of good faith and
fair dealing, and unjust enrichment. We filed a motion to dismiss plaintiff's
second amended complaint on March 21, 2003 and a motion for summary judgment on
March 27, 2003. On September 22, 2003, the court denied the motion to dismiss.
We filed our second motion to dismiss on October 13, 2003. The court granted the
second motion to dismiss on October 30, 2003. On November 5, 2003, Evergreen
filed its Application for Attorney's Fees in the amount of $409 thousand and
costs in the amount of $28 thousand. On November 18, 2003, Evergreen conveyed an
offer to settle with AFX for $200 thousand in attorney's fees, otherwise an
amended counterclaim would be filed for malicious prosecution. On January 20,
2004 the court entered judgment in favor of Evergreen's application for attorney
fees and costs in the amount of $187 thousand. Evergreen applied and received
the $15 thousand cost bond. On April 22, 2004 the court found that EAC had
proved its claim AFX on breach of contract and further order that EAC can seek
costs on attorney fees. The court did not find EAC to be successful on its fraud
claim.
On February 11, 2003, Tridair Repair and Manufacturing, Inc. filed a
complaint against us in the United States District Court for the Central
District of California, alleging, among other things, fraud and breach of
contract (California Action). The allegations related to an aircraft salvage
contract, entered into on or about June 3, 2002, under which we performed
aircraft salvage services for Tridair in return for payment. After Tridair
transferred its litigation rights to an entity named Diversified Aero Asset
Management, Inc. (which also sued Evergreen Air Center in the same court for
similar claims on February 14, 2003), Diversified amended its complaint to
include the Tridair claims on March 17, 2003. Diversified claims fraud, breach
of contract, claim and delivery and conversion, and seeks $10.6 million plus the
fair market value of the parts. On April 2, 2003, we filed a motion to dismiss
for lack of jurisdiction, or in the alternative, to transfer the case to federal
court in Arizona. The California Action has been dismissed, and the parties have
filed competing claims on the same matters in Arizona State court. The Arizona
State court actions are in the initial pleading stages. We filed a motion for
summary judgment on August 22, 2003. The hearing was held on October 20, 2003.
The judge took the matter under advisement and denied our motion for Summary
Judgment. Discovery is continuing. Trial is scheduled for November 30, 2004. We
believe we have meritorious defenses to the allegations in the complaint and
intend to defend the case vigorously.
On or around May 22, 2003, Bank of America Securities LLC filed suit in
the Superior Court of the County of Meeklenburg for the State of North Carolina
against Evergreen International Aviation and certain of its subsidiaries. The
complaint alleges claims for breach of contract and quantum meruit, arising out
of the agreements with the plaintiff to act as our financial agent and payment
of related fees. The damages were unspecified and we retained local counsel. On
August 25, 2003, we filed a motion to dismiss for lack of jurisdiction, to
dismiss for failure to state a claim, and to stay. On November 10, 2003, the
North Carolina Superior Court denied our motions. On November 12, 2003, we
appealed the motion to dismiss for lack of jurisdiction. On February 6, 2004,
the North Carolina Court of Appeals denied our petition for writ of certiorari
and our motion to consolidate or Stay, however the personal jurisdiction appeal
is pending. On March 29, 2004 we filed our Opening Brief. Oral arguments are
expected to be set for mid to late June 2004. We believe we have meritorious
defenses to the allegations in the complaint and intend to defend the case
vigorously.
We received a letter dated July 22, 2003 from the Pinal County ("the
County"), Arizona County Manager with regards to alleged non-compliance of
contractual facility maintenance issues and notification of his intent to pursue
termination of the lease between the County and Evergreen Air Center, Inc. We
retained counsel and have met with the County and FAA to further clarify the
issues and each party's responsibilities regarding the issues. We currently are
in negotiations with the County which we believe will settle all disputed
issues. Terms of the resolution are anticipated to include making available
approximately 740 of the 1,300 acres to other lessors and limited third party
access to the flight line and runway. The resolution is not expected to impact
our aircraft repair and maintenance business or the aircraft storage business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our common stock.
There are two beneficial owners of our common stock. See Item 12 - Security
Ownership of Certain Beneficial Owners and Management.
We have not declared cash dividends on our common stock for the two
most recent fiscal years. In addition, our senior credit facility and our 12%
senior second secured notes due 2010 restrict our ability to pay dividends on
our common stock. For a description of such restrictions, see Note 5 of "Notes
to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report
on Form 10-K.
Since March 1, 2001, the Company has not sold any shares of its common
stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below have been
derived from our consolidated financial statements. For comparability of
results, this information should be read in conjunction with the consolidated
financial statements and related notes, and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere in this
Annual Report on Form 10-K.
As discussed in Note 14 of "Notes to Consolidated Financial Statements"
in Part II, Item 8 of this Annual Report on Form 10-K, we restated our
consolidated statement of operations for the year ended February 28, 2002 to
present the $7.2 million claim received under the Air Transportation Safety and
System Stabilization Act as a separate component of operating expenses. This
amount was previously reported in operating revenues (support services and
other). The following management,s discussion and analysis of financial
condition and results of operations gives effect to this restatement.
Fiscal
-------------------------------------------------------------------
2004 2003 2002 2001 2000
(As restated)
------- ------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (in thousands)
Operating revenues:
Flight revenue $ 377,650 $ 400,603 $ 284,293 $ 317,898 $ 362,691
Sales of aircraft, parts and other assets 17,357 12,137 13,270 32,705 10,290
Ground logistics services 99,790 129,724 122,287 104,419 89,834
Support services and other 40,837 31,871 27,857 32,458 29,129
------- ------- ------- ------- -------
Total operating revenues 535,634 574,335 447,707 487,480 491,944
------- ------- ------- ------- -------
Operating expenses:
Flight costs 73,756 69,808 54,645 49,014 54,831
Fuel 97,159 100,195 69,559 69,112 66,559
Maintenance 73,205 69,740 61,279 77,625 93,246
Aircraft and equipment 49,612 44,139 48,269 47,136 49,160
Cost of sales of aircraft, parts and other
property and equipment 13,709 8,888 9,291 26,214 6,370
Cost of ground logistics services 89,150 104,559 104,598 87,444 71,852
Support services and other 38,957 32,636 23,168 29,054 40,444
Selling, general, and administrative 73,921 62,729 52,616 56,086 55,639
Impairment charge on aircraft(1) -- -- 16,000 20,000 --
Unusual credits-net(2) -- -- -- (57,874) --
Claims under the Air Transportation Safety --
and Systems Stabilization Act -- -- (7,204) -- --
------- ------- ------- ------- -------
Income from operations 509,469 492,694 432,221 403,811 438,101
------- ------- ------- ------- -------
Operating income 26,165 81,641 15,486 83,669 53,843
------- ------- ------- ------- -------
Other (expense) income:
Interest expense (34,840) (30,576) (34,297) (46,461) (41,444)
Other (expense) income, net 4,386 1,508 836 51 (1,113)
------- ------- ------- ------- -------
Other expense, net (30,454) (29,068) (33,461) (46,410) (42,557)
------- ------- ------- ------- -------
(Loss) income before minority interest and
income taxes (4,289) 52,573 (17,975) 37,259 11,286
Minority interest(3) (1,116) (962) (879) (814) (694)
------- ------- ------- ------- -------
(Loss) income before income taxes (5,405) 51,611 (18,854) 36,445 10,592
Income tax benefit (expense) 835 (19,804) 6,420 (16,374) (8,340)
------- ------- ------- ------- -------
Net (loss) income ($ 4,570) $ 31,807 ($ 12,434) $ 20,071 $ 2,252
========= ========= ========= ========= =========
Other Financial Data:
Cash capital expenditures ($ 62,352) $ 60,826 $ 35,694 $ 68,574 $ 85,744
Consolidated rental expense 39,436 33,150 28,751 12,299 20,070
Cash flows provided by (used in):
Operating activities 56,474 100,302 107,528 51,856 121,125
Investing activities (62,616) (52,199) (16,835) (43,351) (91,258)
Financing activities 4,575 (51,387) (87,397) (18,906) (19,985)
At the End of Fiscal
--------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 4,071 $ 5,638 $ 8,922 $ 5,626 $ 16,027
Working capital (deficit)(4) (5,939) (279,135) (317,272) (39,290) (71,141)
Total assets 678,735 692,102 690,337 786,056 740,605
Long-term debt 296,853 18,455 26,198 327,853 347,641
Total debt(5) 308,433 303,858 355,245 422,843 416,685
Total stockholders' equity 190,864 195,434 163,627 176,061 155,990
(1) On a periodic basis, we review the carrying value of our aircraft. We
recognize an impairment loss when the sum of the expected future and
undiscounted net cash flows to be derived from the assets is less than their
carrying amount on our balance sheet. In fiscal year 2001, we recognized an
impairment charge of $20 million on two of our B747 aircraft as a result of our
decision to take these aircraft out of service rather than take corrective
action required by an FAA directive. These aircraft will not be returned to
service. In fiscal year 2002, we recognized an impairment charge of $16 million
on our DC9 fleet as a result of under utilization of the fleet. For a more
detailed discussion of impairment charges, see Note 1 of "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K.
(2) Unusual credits-net consist of:
o $58.7 million of net proceeds from a lawsuit settlement recorded in
fiscal year 2001. In February 2001, we received $75 million, offset by
$16.3 million of related legal costs and vendor settlements, over a
dispute regarding structural modification services performed on three
of our B747-100 aircraft.
o A one-time pre-tax charge of $0.8 million recorded in fiscal year
2001 related to the write-off of net assets associated with a labor
classification dispute on one of our EAGLE contracts.
(3) Represents a one-third beneficial ownership interest held by Mr. Delford M.
Smith, our Chairman, in that portion of the Trust Created February 25, 1986's
property that consists of one B747 aircraft. We own the remaining two-thirds
beneficial ownership interest in that portion of the trust's property that
consists of the B747 and the entire beneficial ownership interest in that
portion of the trust's property that consists of three DC9 aircraft. We lease
all four of these aircraft from the trust. Lease payments relating to the
minority interest in the B747 were approximately $1.9 million, $1.9 million,
$1.9 million, $1.9 million, and $1.8 million for fiscal year 2004, 2003, 2002,
2001, and 2000 respectively.
(4) Working capital (deficit) represents total current assets less total current
liabilities.
(5) Total debt is total current portion of long-term debt plus non-current
portion of long-term debt plus current portion of the note payable to affiliate
plus, for fiscal year 2000, short-term notes payable and the non-current portion
of the note payable to affiliate.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
About Forward Looking Statements
The Company is subject to certain risks and uncertainties that could
affect its expected and actual future results. Except for the historical
information contained in this Annual Report on Form 10-K, this Form 10-K
contains forward-looking statements that involve risks and uncertainties. See
"Statement Regarding Forward-Looking Disclosure."
BUSINESS OVERVIEW
Evergreen is a leading integrated provider of worldwide airfreight
transportation, aircraft ground handling and logistics, helicopter and small
aircraft, aircraft maintenance and repair services. Mr. Delford M. Smith, our
Chairman, founded Evergreen in 1960 with three helicopters. Today we have a
fleet of 76 commercial aircraft and helicopters, including ten Boeing B747s and
seven DC9s, with the capability of providing aviation services throughout the
world. We have provided air services to locations in over 150 countries while
maintaining a reputation for safety and reliability. We generally provide our
services under U.S. dollar-denominated contracts to a broad base of
long-standing customers, including the U.S. Air Force Air Mobility Command
("AMC"), the U.S. Postal Service, freight forwarders, domestic and foreign
airlines, industrial manufacturers and other government agencies. We were the
largest commercial provider of B747 air cargo services to the U.S. military for
its 2003 fiscal year ending September 30, 2003. Over the past two years, we have
redeployed our wide-body fleet to more profitable business by transitioning away
from freight forwarders and other commercial customers and toward the U.S.
military. Our diverse customer base and our ability to deploy aircraft to match
market conditions give us the agility to respond to changes in the demand for
our services within different economic sectors.
We provide our services through six reporting segments: Evergreen
International Airlines (EIA), Evergreen Aviation Ground Logistics Enterprise
(EAGLE), Evergreen Helicopters (Helicopters or EHI), Evergreen Air Center (Air
Center or EAC), Evergreen Aircraft Sales & Leasing (EASL) and Evergreen
Agricultural Enterprises (OTHER). Operating revenues and income from operations
for each of our segments for fiscal year 2004, 2003 and 2002 are set forth in
the following table:
Fiscal Years
2002
2004 2003 (as restated)
--------- --------- ---------
Operating revenues: (in millions)
EIA $ 350.0 $ 374.5 $ 267.5
EAGLE 100.4 129.7 122.3
EHI 39.3 35.2 28.1
EAC 31.9 23.9 20.1
EASL 7.0 5.3 5.7
OTHER 7.0 5.7 4.0
--------- --------- ---------
Total $ 535.6 $ 574.3 $ 447.7
========= ========= =========
Totals may not add due to rounding
Fiscal Years
2002
2004 2003 (as restated)
--------- --------- ---------
Income (loss) from operations: (in millions)
EIA $ 35.9 $ 61.0 $ 3.8
EAGLE (2.3) 15.9 11.3
EHI (7.5) 0.8 0.1
EAC 5.0 2.9 (0.2)
EASL (2.4) 2.3 2.3
OTHER (2.5) (1.3) (1.8)
--------- --------- ---------
Total $ 26.2 $ 81.6 $ 15.5
========= ========= ==========
Totals may not add due to rounding.
OPERATING REVENUES OVERVIEW
The following is a summary of the methods by which each of our six
business segments generates revenue and contributes to our results of
operations:
EIA
Through EIA we provide international long-range and domestic
short-range air cargo services. Revenues in this segment are recorded
predominantly as flight revenue. We primarily charge customers based on miles
traveled, space utilized or "block space", hours flown or "block hours" or trips
taken. This contrasts with other integrated freight carriers that generally
charge based on the weight of the cargo carried. Accordingly, we generally are
not responsible for securing freight for our aircraft, and receive revenues
based on routes flown rather than capacity carried. Block hours are measured in
sixty minute periods, or fractions of such periods, from the time the aircraft
moves from its departure point to the time it comes to rest at its destination.
Block space is measured by the number of pallet positions utilized. Flight
revenue is primarily recorded as flights are completed and can be measured in
block hours regardless of the method of charging customers.
Many of our contracts are structured as "all-in" contracts, under which
we are responsible for the full range of operating expenses, including fuel
costs. Other contracts are "ACMI" or "wet lease" arrangements, under which we
provide only the aircraft, crew, maintenance and insurance, and the customer is
responsible for all other operating expenses, such as fuel, ground handling,
crew accommodations and the cost of obtaining freight. Under ACMI contracts, the
customer also bears the additional risk of ensuring that the capacity of the
aircraft is fully utilized. As a result, we receive higher revenues per block
hour flown with all-in contracts than we do with ACMI contracts. To reduce the
impact of fuel price volatility, we include fuel cost adjustment mechanisms in
most of our all-in contracts. In many cases, customers, such as AMC, bear the
risk of escalation in fuel prices above a specified cost, and we forego the
benefit of any decrease in fuel prices below such cost. Our annual AMC contract
is an all-in contract. However, it differs from our other all-in contracts
because on AMC flights we avoid costs of aircraft handling and landing fees at
military airports where the military provides these services at no cost to us.
Our agreements with freight forwarders, including our ad hoc
arrangements, are typically structured as block space agreements, where the
forwarder commits to deliver a certain amount of freight for a specific flight.
Under the agreement, the forwarder must pay for the space committed, whether it
delivers the freight to us or not. Our express delivery contracts are similar to
ACMI contracts in that we provide the aircraft, crew, maintenance and insurance,
but we also provide ground handling and logistics services. All other expenses
are the responsibility of the customers.
Fluctuations in flight revenues are principally dependent upon the
quantity of block hours flown, the prevailing market rates, the mix among our
contract types, and the composition of our operating fleet.
EAGLE
Through EAGLE, we provide full-service aviation ground handling and
logistics services, including mail handling, aviation hub management, aircraft
handling, cargo loading and unloading, container build up and break down, ground
system management, ground equipment maintenance, ground equipment sales and
leasing, aircraft line maintenance, terminal services, aircraft de-icing and
washing, check-in and ticketing, baggage acceptance and seat selection, and
passenger cabin cleaning. Most revenues in this segment are recorded as Ground
logistics services revenues. Ground handling and logistics revenues are
typically generated under contracts with the U.S. Postal Service, domestic and
international passenger and cargo airlines, and express delivery customers. We
typically provide services through contracts with a term of one year or more,
with scheduled rates for a range of services at one or more locations throughout
the United States. Fluctuations in revenues from our EAGLE segment are primarily
dependent upon general demand for our services, the degree to which air carriers
outsource ground logistics services to specialized providers in lieu of
supporting these activities in-house, and the level of our business from the
U.S. Postal Service. Revenues in this segment are recorded when services are
rendered.
EHI
We provide helicopter and small fixed-wing aircraft services throughout
the world in markets in connection with forest fire fighting, health services,
aerial spraying, heavy lift construction, law enforcement, helicopter logging,
petroleum support services, search and rescue, peacekeeping and relief support,
helicopter skiing and agriculture. Revenues in our Helicopters segment are
recorded primarily as flight revenue and, to a lesser extent, as support
services and other revenue. Services are typically provided under one to
five-year contracts. We typically charge customers a monthly availability fee in
addition to an hourly charge for missions flown or by hour with a minimum number
of hours per day. We often modify our pricing methods to match the
characteristics of a mission, which may involve pricing based on cubic meter if
the mission relates to logging, by acre if agricultural or by number of pick-ups
if construction. Fluctuations in revenues from our Helicopters segment are
primarily dependent upon the type of aircraft operated, market rates for
aircraft, and the types of missions to which such aircraft are deployed.
Revenues in this segment are recorded when services are rendered.
EAC
Through Air Center, an unlimited Class IV airframe repair station
certified by the FAA, we perform aircraft maintenance, repair and overhaul
services. Most revenues in this segment are recorded as support services and
other revenue. Aircraft maintenance and repair revenues are generally derived
from heavy maintenance ("C" checks and "D" checks) on aircraft, aircraft storage
and other aircraft and storage services. Fluctuations in aircraft maintenance
and repair revenues are primarily a function of air carriers' heavy maintenance
needs, and the degree to which air carriers outsource aircraft maintenance and
repair services to specialized providers in lieu of supporting these activities
in-house. Additionally, fluctuations in aircraft maintenance and repair revenues
are dependent upon: labor revenues, which are a function of total billable hours
and labor rates; material revenues, which are a function of materials sold and
the associated market rates; fueling operations, which are a function of the
volume of fuel sold and the associated market rates; and other revenues,
primarily resulting from the rental of certain facilities at the Air Center.
Revenues in this segment are recorded when services are rendered.
EASL
EASL is our aircraft trading business through which we selectively buy,
sell, lease and broker commercial aircraft, helicopters and spare parts.
Revenues in this segment are predominantly derived from sales of aircraft, parts
and other assets, including sales on a consignment basis. Revenues generated
from the sale of our assets are recorded within the segment from which the
assets originated. Revenues from asset sales within EASL relate solely to assets
acquired and sold by EASL. Similarly, revenues generated from leasing of
aircraft are recorded within the segment that controls those assets. EASL
generates revenues in the form of commissions in connection with the sale and
leasing of assets for third parties and our Evergreen entities.
OTHER
We operate a nursery and farming enterprise through Evergreen
Agricultural Enterprises, Inc. Our agricultural business is compensated based on
delivery of nursery and agricultural products to wholesale and retail customers.
Revenues from this segment are recorded as support services and other revenues.
All of our subsidiaries in this segment are non-guarantor unrestricted
subsidiaries for purposes of the indenture relating to the notes.
HOLDINGS
Evergreen Holdings, Inc., the registrant, owns all the outstanding
common stock of Evergreen International Aviation, Inc. ("EA" or "Aviation"), all
the outstanding common stock of Evergreen Vintage Aircraft, Inc. ("Vintage"),
and owns two-thirds beneficial ownership interest in the Trust Created February
25, 1986 ("The Trust").
EA owns all the outstanding common stock of Evergreen International
Airlines, Evergreen Aviation Ground Logistics Enterprises, Evergreen
Helicopters, Evergreen Air Center, Evergreen Aircraft Sales & Leasing, and
Evergreen Agricultural Enterprises.
Vintage owns a collection of vintage aircraft and a 120,000 square foot
Evergreen Aviation Museum building on approximately 84.2 acres in McMinnville,
Oregon. Vintage leases this building and land to The Captain Michael King Smith
Evergreen Aviation Educational Institute, a non-profit corporation.
The Trust owns one B747 and three DC9 aircraft. Mr. Delford M. Smith
owns a one-third beneficial ownership interest in the portion of the Trust that
owns the B747 aircraft. Evergreen Holdings, Inc. owns a two-thirds beneficial
ownership interest in the portion of the Trust that owns the B747 aircraft and
the entire beneficial ownership interest in that portion of the trust that owns
the three DC9 aircraft. The Trust leases the aircraft to Evergreen International
Airlines.
Evergreen Holdings, Inc. is predominantly a holding company and it
recognizes any income and expenses in the period incurred. Its primary assets
are the shares of Evergreen International Aviation, Inc. and Evergreen Vintage
Aircraft, Inc. In addition, it owns rural property with improvements, and incurs
maintenance expense in relation to that property. Evergreen Holdings, Inc. also
holds approximately $15.8 million in notes receivable from affiliates as of
February 29, 2004.
OPERATING EXPENSES OVERVIEW
Our consolidated operating expenses consists of: flight costs; fuel
expenses; maintenance expenses; aircraft and equipment expenses; the cost of
sales of aircraft, parts and other property and equipment; cost of ground
logistics services; support services and other expenses; selling, general and
administrative expenses; impairment charges on aircraft; and unusual
credits-net; and for fiscal year 2002, a claim under the Air Transportation
Safety and System Stabilization Act. Selling, general and administrative
expenses are not related to a single segment, but rather relate to our
consolidated operations, as a whole. Flight costs consist principally of flight
crew costs, international air traffic control fees and commissions payable to
other members of our CRAF team. Fuel expenses are primarily generated by EIA
and, to a much lesser extent, Helicopters. Flight crew costs and fuel expenses
fluctuate based on changes in both fuel prices and the degree to which increases
in such prices are either absorbed by us under all-in contracts or passed
through to customers under ACMI contracts.
In addition to the cost of maintaining our EIA fleet, including
amortization of C checks and D checks and overhauls of engines and major
aircraft components, our maintenance expenses reflect the cost of maintaining
equipment utilized in all of our aviation services for EIA and EHI. As a result,
maintenance expenses increase as block hours flown increase and as our EAGLE
segment expands. We expense our light maintenance of aircraft ("A" checks and
"B" checks) and capitalize our heavy maintenance of aircraft ("C" checks and "D"
checks). Our aircraft and equipment expenses, which consist principally of
depreciation, insurance, and engine and aircraft rental, are primarily driven by
air freight transportation services provided by EIA, but are also impacted by
our overall business mix. The cost of sales of aircraft, parts, and other
property and equipment are recorded in the segment that sold the relevant asset.
Our cost of ground logistics services includes labor and facility costs for
EAGLE. Our support services and other expenses consist primarily of labor and
materials costs for Air Center, and landing fees, aircraft and cargo handling
and other operational support costs for EIA.
MATERIAL TRENDS AND UNCERTAINTIES
We pay close attention to, and monitor various trends and uncertainties
emerging in the markets we serve. The markets we serve are impacted by
government regulations and policies, world wide economic and political changes
and the emergence of new competition in the various markets we serve.
Our EIA segment operates in a highly competitive environment, which can
be impacted by the emergence of new competitors offering low cost service. We
maintain strong customer relations and provide a higher quality of service to
combat potential competition. In addition, we are subject to governmental
regulations covering where we can operate and how we operate. We track changing
regulations to ensure our operating authority is as broad as possible and to
ensure that we are eligible to operate in the markets we serve. Maintenance
costs related to our aircraft increase as the age of the fleet increases. As
younger aircraft under economically favorable financing arrangements enter the
market we anticipate shifting the older aircraft into other markets which will
extend their useful lives and add more competitive aircraft to maintain our
market share.
Our EAGLE segment tracks U.S. Postal Service and Integrated Carriers
volume, their market positions and their rate structures, which allow us to be
in position to provide the type and volume of service customers require. We also
trace traffic and route authority filings for foreign flag carriers. We maintain
a high quality of service to maintain pricing and market share.
Our EAC segment provides a broad range of services, which provides us a
competitive advantage, but we are subject to changing technology issues. We
upgrade equipment as needed and we provide the necessary training to our
employees to maintain our competitive position. We must continue to upgrade our
facilities in order to help us maintain our market share due to pressure from
our International competition, which has also been adding capabilities, and
operating facilities.
Our EHI segment can be impacted by trends in the oil and gas industry,
forest and land management practices and changing governmental regulations. We
maintain strong relationships with our customers, and we have a diverse fleet of
aircraft which allows us to meet our customer's needs. We also provide services
to a wide variety of markets, which enables us to minimize the impact of
fluctuations in any individual market.
Our EIA segment depends on continued business with the U.S. Air Force
Air Mobility Command. If our AMC business declines significantly, it could have
a material adverse effect on our operations. We expect that revenues from AMC
will continue to be the primary source of our revenue for the foreseeable
future. The volume of AMC business is sensitive to changes in national and
international political priorities and the U.S. federal budget. During January
and February of fiscal year 2004, our flight revenues and income from operations
were adversely affected by a decrease in our AMC business. This decrease in AMC
business was caused by a decision by the U.S. Air Force Air Mobility Command to
shift away from commercial aircraft in favor of organic military transport
aircraft for movements of cargo directly into Iraq. U.S. commercial aircraft are
currently prohibited from operating in Iraq by the FAA. The impact of this
change on our AMC expansion revenues was a decrease in flight revenues of
approximately $13.3 million during January and February of fiscal year 2004.
This estimate was based on average AMC expansion revenues through the first
three quarters of fiscal year 2004 against actual AMC expansion revenue for
January and February 2004. This trend continued through March and April, however
AMC expansion revenue has returned to previous revenue levels in May 2004. If
AMC elects to fly directly into Iraq or use alternative methods of
transportation, we may experience a decline in our consolidated operating
revenues again, which could have a material adverse impact on our results of
operations.
Our EAGLE segment tracks U.S. Postal Service and Integrated Carriers
volumes and their market positions and rate structures, which allow us to be in
position to provide the type and volume of service that our targeted customers
require. Traffic and route authority filings for foreign flag carriers are also
tracked. We maintain a high quality of service to maintain pricing and market
share.
The broad range of services provided by our EAC segment gives us a
competitive advantage. We are continuously upgrading equipment and provide
training to our employees as required in order to maintain that competitive
advantage. We have been facing an increasing number of foreign competitors that
are adding capabilities and operating facilities. This increased competition is
creating a challenge to our ability to maintain our market share.
Our EHI segment is impacted by changes in the oil and gas industry,
forest and land management practices and changing governmental regulations.
Contracts are awarded in part based on safety records and a company's ability to
maintain their aircraft. Our safety record and maintenance infrastructure makes
us competitive in the marketplace. We maintain strong relationships with our
customers and have available a diverse fleet of aircraft in order to meet our
customer's needs. We also provide services to a wide variety of markets, which
enables us to minimize the impact of fluctuations in any individual market.
CRITICAL ACCOUNTING POLICIES
This section is based upon our consolidated financial statements. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to impairment
of property and equipment and goodwill, allowance for bad debts, inventory
reserves and valuation for income taxes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The following critical accounting policies
and related judgments and estimates affect the preparation of our consolidated
financial statements. Property and equipment
We had approximately $545.4 million and $553.7 million in operating
property and equipment, net as of February 29, 2004 and February 28, 2003,
respectively. In addition to the original cost of these assets, their recorded
value is impacted by a number of policy elections made by us, including the
estimation of useful lives, residual values and, in fiscal year 2002, impairment
charges on aircraft.
We record aircraft at acquisition cost upon delivery. Depreciable life
is determined by using economic analysis, reviewing existing fleet plans, and
comparing estimated lives to other airlines operating similar fleets. Older
generation aircraft are assigned lives that are consistent with our experience
and other airlines. As aircraft technology has improved, useful life has been
extended. Residual values are estimated based on our historical experience with
regard to the sale of both aircraft and spare parts, and are established in
conjunction with the estimated useful lives of the aircraft. Residual values are
based on current dollars when the aircraft are acquired and typically reflect
values for assets that have not reached the end of their physical lives. Both
depreciable lives and residual values are revised annually to recognize changes
in our fleet plans and changes in conditions. The values reflected on our
balance sheet do not necessarily reflect the fair market value or appraised
value of these assets. See "Risk Factors-Volatility of aircraft values may
affect our ability to obtain financing secured by our aircraft." Effective as of
September 1, 2003, the Company changed the estimated useful lives of the
aircraft in its EHI segment to more accurately reflect its current estimate of
their useful lives. The estimated useful lives of these aircraft were increased
from 10 years to 20 years. See Note 3 of "Notes to Consolidated Financial
Statements" in Part II, Item 8 of this Annual Report on Form 10-K.
We evaluate the recoverability of a long-lived asset or asset group in
accordance with FAS-144, Accounting for the impairment or Disposal of Long-Lived
Assets." Accordingly, an impairment loss is recognized only if the carrying
amount of a long-lived asset or asset group is not recoverable and exceeds its
fair value. The recoverability of the carrying amount of long-lived assets is
determined by comparing the sum of the expected future, undiscounted net cash
flows to be derived from the related assets to the net book value of the assets;
an impairment loss is then recognized as the difference between the fair value
and the net book value of the long- lived assets. The undiscounted cash flows
estimate includes only cash flows that are directly associated with and that is
expected to arise as a direct result of the use of the assets and incorporates
our own assumptions about the use of the assets. The assumptions incorporate our
internal budgets and projections based on historical use, existing contracts
currently in place as well as the existing service potential of the assets at
the date they are tested. For our fleet of B747s and DC9s aircraft, each
aircraft is depreciated until an economic point in time, regardless of when the
aircraft was purchased. DC9s are depreciated through 2023 and B747s are
depreciated until a point in time that ranges from 2020 until 2028, depending
upon the aircraft model. For our fleet of helicopters, each helicopter has an
estimated useful life of twenty years. Revenues and expenses incorporated in the
undiscounted cash flows analysis are estimated based on the existing service
potential of the assets, which is consistent with the estimated useful lives.
If our projections of future undiscounted cash flows do not support the
recoverability of our long-lived assets, an impairment charge is recorded to
reduce the carrying value of our fleet to its fair value. The fair value of our
long-lived assets for purposes of our assessment, are determined based on the
amount at which an asset could be bought or sold in a current transaction
between willing parties, discounted cash flows, or internal or external
appraisals. The estimated magnitude of any such potential impairment charge
could have a significant impact on our financial statements.
In fiscal year 2002, we recorded an impairment charge of $16 million
for our DC9-33 aircraft fleet, resulting from the anticipated decrease in future
cash flows in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", see Note 1 of "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K. For
fiscal year 2004 and fiscal year 2003, we evaluated our fleet in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Utilizing our current cash flow projections, and current analysis of aircraft
value, management determined that no further impairment charge was necessary.
Allowance for doubtful accounts
We maintain allowances for estimated losses resulting from the
inability of our customers to make required payments and from contract disputes.
The extension and revision of credit is established by obtaining credit rating
reports or financial information of a potential customer. Trade receivable
balances are evaluated at least monthly. If it is determined that the customer
will be unable to meet its financial obligation to us as a result of a
bankruptcy filing, deterioration in the customer's financial position, a
contract dispute, or other similar events, a specific allowance is recorded to
reduce the related receivable to the expected recovery amount given all
information presently available. A general allowance is recorded for all other
customers based on certain other factors including the length of time the
receivables are past due and historical collection experience with individual
customers. As of February 29, 2004 and February 28, 2003, the accounts
receivable balance of $38.7 million and $55.6 million, respectively, is reported
net of allowances for doubtful accounts of $1.9 million and $33.5 million,
respectively. If a customer's financial condition were to deteriorate, resulting
in its inability to make payments, an additional allowance may need to be
recorded, which would result in additional selling, general and administrative
expenses being recorded for the period in which such determination was made.
During fiscal year 2004, EAGLE reduced the allowance for doubtful
accounts by $6.1 million with write-offs related to U.S. Postal Service
contracts.
We had a freighter service agreement with Asiana Airlines (Asiana),
which began January 28, 2000 and expired February 28, 2003. The agreement
required the Company to provide the aircraft (B747), crew, maintenance and
insurance. Asiana was required to pay all other costs incurred in the
performance of the contract. The contract provided for minimum payments based on
guaranteed block hour utilization as defined in the contract. On August 28,
2001, Asiana paid the Company for block hour utilization for the first week of
September and gave notice that no further payments would be made. Asiana did not
reimburse the Company for certain costs incurred by the Company during
performance under the terms of the contract. The Company completed the mission
in progress and returned the aircraft to the United States.
On September 19, 2001, the Company instituted proceedings in the United
States District Court for the State of Oregon against Asiana Airlines to recover
certain amounts owed to the Company pursuant to the freighter service agreement
with Asiana. On April 28, 2003, the court entered judgment in our favor in the
amount of $16.6 million. In May 2003, Asiana posted a cash bond in the amount US
$17.4 million. The court ordered a settlement assessment conference for December
18, 2003 which was recorded and conducted on January 5, 2004 at which time it
was determined that further settlement discussions were not likely to be
fruitful and that the briefing schedule stood as issued. Briefing on the appeal
began on February 23, 2004. We filed our answer brief to affirm the judgment on
April 7, 2004. Asiana's reply was filed on May 10, 2004. Matters are still
pending with the Ninth Circuit Court of Appeals and the court has not yet
scheduled an oral argument.
Since the agreement was in force until February 28, 2003 and Asiana
ceased making minimum payments without notice, the Company believes it is
entitled to the revenue, which it would have earned had Asiana continued to meet
its contractual obligation. At February 28, 2003, the Company had recorded an
account receivable of $27.2 million however, such amount was fully reserved and
no income was recorded for this program since Asiana ceased making payments.
During fiscal year 2004, the account receivable of $27.2 million was written off
against the fully reserved balance resulting in no change to the net receivables
and no income effect. See "Item 3. Legal Proceedings" of this Annual Report on
Form 10-K.
Goodwill
On March 1, 2002, we adopted SFAS 142, which addresses financial
accounting and reporting for goodwill and other intangible assets, including
when and how to perform impairment tests of recorded balances. We have two
reporting units, EAGLE and Helicopters that have assigned goodwill of $5.5
million. Quoted stock market prices are not available for these individual
reporting units. Accordingly, consistent with SFAS 142, our methodology for
estimating the fair value of each reporting unit primarily considers discounted
future cash flows. In applying this methodology, we make assumptions about each
reporting unit's future cash flows based on capacity, expected revenue,
operating costs and other relevant factors, and discount those cash flows based
on each reporting unit's weighted average cost of capital. Changes in these
assumptions may have a material impact on our consolidated financial statements.
Income taxes
In conjunction with preparing our consolidated financial statements, we
must estimate our income taxes in each of the jurisdictions in which we operate.
This process involves estimating actual current tax expense, and assessing
temporary differences resulting from the different treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the consolidated balance sheets. We must then
assess the likelihood that the deferred tax assets will be recovered from future
taxable income, and to the extent management believes that recovery is not
likely, a valuation allowance must be established. Significant management
judgment is required in determining our provision for income taxes, deferred tax
assets and liabilities, and any valuation allowance recorded against net
deferred tax assets. Due to our acceleration of depreciation on property and
equipment, we could have a loss for accounting purposes but would still owe tax.
A discussion of the income tax provision and the components of the deferred tax
assets and liabilities can be found in Note 6 of the "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K.
Revenue recognition
Our principal sources of revenue are from air freight transportation
services, ground logistics services, aircraft maintenance and repair services,
helicopter and small aircraft services, and aviation sales, leasing and other
services. Revenues from air freight transportation services are primarily
recorded as cargo flights are completed. We enter into fixed-price contracts for
flight activity, with some containing clauses for reimbursement of certain
direct costs. Revenue from our ground logistic services, aircraft maintenance
and repair services, helicopter and small aircraft services, and aviation sales,
leasing and other services are recorded when services are rendered or goods are
provided. To the extent our contracts contain provisions where customers pay
fees for early termination, we record such fees when received.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the FASB issued FASB Interpretation No.46 (FIN 46),
Consolidation of Variable Interest Entities-an Interpretation of ARB No.51
Consolidated Financial Statements, and subsequently revised in December 2003,
with the issuance of FIN 46-R. Interpretation addresses how variable interest
entities are to be identified and how an enterprise assesses its interests in a
variable interest entity to decide whether to consolidate that entity .The
Interpretation also requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among the parties involved. We are required to adopt
FIN 46-R as of the period ending May 31, 2005. While we have not completed our
final assessment of the impact of FIN 46-R, based upon our preliminary
assessment, management believes we may be the primary beneficiaries of certain
related party entities including, but not limited to, Ventures Holdings and
Ventures Acquisitions. We lease certain assets, consisting primarily of
buildings and aircraft, from these entities. The financial statements of these
entities may be included in our financial statements in the period of adoption
and beyond. Such inclusion is not expected to have a material impact on our
consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after September
15, 2003. This standard is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. On November 7, 2003,
FASB issued FASB Staff Position No. FAS 150-3 (FSP 150-3), "Effective Date,
Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests under FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." FSP 150-3
deferred certain aspects of FAS 150. The adoption of FAS 150 and FAS 150-3 did
not have a material impact on our results of operations, financial position or
cash flows.
On December 17, 2003, the Staff of the SEC issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue Recognition, which supersedes SAB 101,
Revenue Recognition in Financial Statements. SAB 104's primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superceded as a result of the issuance of EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." Additionally,
SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had
been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ
have been incorporated into SAB 104. While the wording of SAB 104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of SAB
101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104
did have a material impact on our revenue recognition policies, results of
operations, financial position or cash flows.
RISK FACTORS
Our business, operations and financial condition are subject to various
risks. Investors and prospective investors should carefully consider the
following risk factors in conjunction with other information provided in this
Annual Report on Form 10-K.
There is uncertainty regarding the Company's ability to comply with
certain of these debt covenants, which would place the debt in the position to
be called due. This would raise substantial doubt about the Company's ability to
continue as a going concern.From time to time over the last ten years, we have
been in default under our debt agreements. As a result of this and other
matters, our audited financial statements included audit opinions by our
external auditors that included an emphasis of a matter paragraph regarding the
Company's ability to continue as a going concern in fiscal years 1994, 1995,
1996 and 2002 and 2004. We were in default of our Fixed Charge Coverage Ratio
with PNC Bank, under our revolving credit facility at February 29, 2004 and at
times we have not always had sufficient cash flows from operations and available
borrowings to meet our liquidity requirements. Paying off all obligations
related to PNC BANK cured the default. See notes 1 and 5 of "Notes to
Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on
Form 10-K. In fiscal year 2002, the going concern matter was the result of the
maturity of our existing credit facility within one year of the end of the
fiscal year end, given our working capital position, uncertainty as to our
ability to refinance our existing credit facility or have its maturity extended
beyond one year. Accordingly, we were required to classify such debt as a
current liability. In certain other years we obtained waivers from our lenders
and did not receive a going concern comment. In addition, in the past we have
not always complied with our covenants under our smaller debt instruments,
including covenants to make payments thereunder and to deliver compliance
certificates to our lenders.
There are weaknesses with our internal controls, which could affect our
ability to provide accurate financial statements and comply with the
Sarbanes-Oxley Act. Our auditors have noted "reportable conditions" and
"material weaknesses" with respect to our financial statements from time to
time. Reportable conditions involve significant deficiencies in the design or
operation of a company's internal controls that could adversely affect the
company's ability to record, process, summarize and report financial data.
Beginning in fiscal year 1994, our accountants noted reportable conditions in
fiscal year 1994, 2000, 2001 and 2002. For fiscal year 2004, our auditors noted
material weaknesses relating to our failure to ensure that all transactions were
recorded properly and all of our accounts were reconciled on a consistent and
timely basis. In May, 2004, the Company's principal executive officer and
principal financial officer, with the assistance of our current registered
public accounting firm, analyzed the facts and circumstances surrounding the
quantity and magnitude of the adjusting journal entries within certain
subsidiaries at year end. After reviewing the adjustments and restatement
entries and performing an evaluation of the internal controls within our
reporting entities we concluded that, as of the end of such period, the
Company's current controls and procedures require further enhancements to ensure
that the Company's disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act. At this time, management has determined that disclosure
controls and procedures may not be sufficient to ensure that data errors,
control problems or acts of fraud are detected and to confirm that appropriate
corrective action, including process improvements, is undertaken. After
reviewing the restatement adjustments and performing an evaluation of our
controls and disclosure procedures, management concurs with our current
registered public accountants that improvements to internal controls are needed
relating to: (1) establishment of policies and procedures regarding
capitalization and amortization of balances, (2) establishment of policies and
procedures for recording and processing transactions, (3) establishment of
standards to review journal entries, account balances and financial statements.
During fiscal year 2004 and subsequent, we began a project to improve our
internal controls and believe that we have made significant progress in this
regard that will address the causes of the deficiencies noted by our auditors
during fiscal year 2004. See item 9, "Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure." We also believe that we
have improved the core competencies of our accounting staff and we are adding
new accounting positions including internal audit, reporting and oversight
functions. In addition, as a previously private company with no prior public
reporting obligations, we are in the process of instituting changes to our
internal procedures in order to satisfy the requirements of the Sarbanes-Oxley
Act of 2002, when and as such requirements become applicable to us. Implementing
these changes may require a significant period of time and specific compliance
training of our directors, officers and personnel. If we fail to maintain the
adequacy of our internal controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to provide accurate financial
statements and comply with the Sarbanes-Oxley Act.
We depend on continued business with the U.S. Air Force Air Mobility
Command. If our AMC business declines significantly, it could have a material
adverse effect on our operations. In fiscal year 2004, 2003 and 2002, AMC was
our principal customer, accounting for approximately 57.4% 48.2% and 30.8%
respectively of our consolidated operating revenues and 87.8%, 73.9% and 51.5%,
respectively of our total EIA segment revenues. During January and February of
fiscal year 2004, our flight revenues and income from operations were adversely
affected by a decrease in our AMC business. This decrease in AMC business was
caused by a decision by the U.S. Air Force Air Mobility Command to shift away
from commercial aircraft in favor of organic military transport aircraft for
movements of cargo directly into Iraq. U.S. commercial aircraft are currently
prohibited from operating in Iraq by the FAA. The impact of this change on our
AMC expansion revenues was a decrease in flight revenues of approximately $13.3
million during January and February of fiscal year 2004. This estimate was based
on average AMC expansion revenues through the first three quarters of fiscal
year 2004 against actual AMC expansion revenue for January and February 2004.
This trend continued through March and April but AMC expansion revenue has
returned to previous earnings levels in May 2004. If AMC elects to fly directly
into Iraq or use alternative methods of transportation, we may experience a
decline in our consolidated operating revenues, which could have a material
adverse impact on our results of operations. We expect that revenues from AMC
will continue to be the primary source of our revenue for the foreseeable
future. However, our revenues from AMC are derived from one-year contracts that
AMC is not obligated to renew. In addition, AMC can terminate or modify its
contract with us for convenience if we fail to perform or if we fail to pass
bi-annual inspections. Any such termination could also expose us to liability
and hinder our ability to compete for future contracts. If our AMC business
declined significantly, it could have a material adverse effect on our results
of operations and financial condition. Even if AMC continues to award business
to us, we cannot assure you that we will continue to generate the same level of
revenues we currently derive from AMC business. The volume of AMC business is
sensitive to changes in national and international political priorities and the
U.S. federal budget.
Our revenues from AMC could decline as a result of the system AMC uses
to allocate business to commercial airlines that participate in the Civil
Reserve Air Fleet. Each year, AMC grants a certain portion of its business to
different airlines based on a point system. The number of points an airline can
accrue is determined by the amount and type of aircraft pledged to the Civil
Reserve Air Fleet ("CRAF"). We participate in CRAF through a teaming arrangement
with other airlines, known as the North American Contractor Team. We are
currently the only core B747 wide-body cargo member of our CRAF team, which is
the team that has accumulated the most points for the current contract year. The
formation of competing teaming arrangements that have larger partners than those
in our team, an increase by other air carriers in their commitment of aircraft
to the program, or the withdrawal of our team's current partners, could
adversely affect the amount of our AMC business in future years. For example, in
2002, Northwest Airlines left our team to join another CRAF team. This resulted
in our team's entitlement of AMC business dropping from 65% for the U.S.
government's 2002 and 2001 fiscal years to 51% for the U.S. government's 2003
fiscal year. All of the current North American Contractor Team members will
participate in the North American Contractor Team for the government fiscal year
2005. Some of our current team members are currently facing financial
difficulties. If any of our team members were to cease or restructure their
operations, the number of planes pledged to CRAF by our team would be reduced.
As a result, the number of points allocated to our team would be reduced and our
allocation of AMC business would probably decrease.
We also depend on continued business with the U.S. Postal Service. If
our business with the U.S. Postal Service declines significantly or if the U.S.
Postal Service fails to renew any of our contracts, it could have a material
adverse effect on our results of operations and financial condition. In fiscal
years 2004, 2003, and 2002, the U.S. Postal Service accounted for approximately
12.5%, 18.3%, and 26.1% respectively of our total operating revenues. The U.S.
Postal Service account consists of five separate contracts, which range in
original duration from one to five years. Our largest contract comes up for
renewal in 2006. Our contracts with the U.S. Postal Service represented
approximately 61.2%, 71.3%, and 68.8% of our EAGLE segment revenues for fiscal
years 2004, 2003, and 2002 respectively. We cannot assure you that any of these
agreements will remain in effect for their scheduled terms or that they will be
renewed upon their expiration. Any such termination or non-renewal of any of
these agreements by the U .S. Postal Service or any significant decline in our
income from our business with the U.S. Postal Service, for any reason, could
have a material adverse effect on our results of operations and financial
condition.
Our operating cash flows may be subject to fluctuations related to our
ability to promptly collect accounts receivable, which may limit our ability to
borrow against our revolving credit facility. A significant decline in operating
cash flows may require us to seek additional financing sources to fund our
working capital requirements. Historically, we have experienced fluctuations in
our operating cash flows as the result of fluctuations in our collection of
accounts receivable. These fluctuations have been due to various issues,
including amendments and changes to existing contracts and the commencement of
operations under new agreements. If we cannot successfully collect a significant
portion of such accounts receivable over 90 days old, we may be required to set
aside additional reserves or write off a portion of such receivables in
accordance with generally accepted accounting principles. If we are not able to
maintain or reduce our aged receivables, our ability to borrow against our
revolving credit facility entered into subsequent to fiscal year 2004, on May
13, 2004, may be restricted due to the fact that borrowings are limited to 85%
of eligible receivables, as defined, which excludes receivables over ninety days
old. If our operating cash flows significantly decline as a result of such
fluctuations, we may be required to seek alternative financing sources, in
addition to our revolving credit facility, to fund our working capital
requirements.
Our fleet consists of older aircraft which may have higher maintenance
costs than new aircraft and which could require substantial maintenance
expenses. Our fleet consists of ten B747s and seven DC9s, manufactured between
1967 and 1975. As of February 29, 2004, the average age of our operating
aircraft was approximately 33 years. Because many aircraft components wear out
and are required to be replaced after a specified number of flight hours or
take-off and landing cycles, and because older aircraft may need to be refitted
with new aviation technology, older aircraft tend to have higher maintenance
costs than new aircraft. Maintenance and related costs can vary significantly
from period to period as a result of government-mandated inspections and
maintenance programs and the time needed to complete required maintenance
checks. In addition, the age of our aircraft increases the likelihood that we
will need significant capital expenditures in the future to replace our older
aircraft. The incurrence of substantial additional maintenance expenses for our
aircraft, or the incurrence of significant capital expenditures to replace an
aircraft, could have a material adverse effect on our results of operations, and
our ability to make payments on our debt obligations.
Volatility of aircraft values may affect our ability to obtain
financing secured by our aircraft. We have historically relied upon the market
value of our aircraft as a source of additional capital. The market for used
aircraft, however, is volatile, and it can be negatively affected by excess
availability due to factors such as the potential bankruptcy of existing
airlines. As a result, the value of aircraft reflected on our balance sheet does
not necessarily reflect the fair market value or appraised value of these
aircraft. Accordingly if we sell our aircraft or obtain financing secured by our
aircraft, or are involved in a bankruptcy, liquidation, and reorganization or
other winding up, there can be no assurance that our aircraft would receive a
favorable valuation at such time. Moreover, if we were to sell our aircraft now,
they would probably not generate proceeds equal to their carrying value on our
balance sheet.
We depend on the availability of our wide-body aircraft for the
majority of our flight revenues. In the event that one or more of our B747
aircraft are out of service for an extended period of time, we may have
difficulty fulfilling our obligations under one or more of our existing
contracts. As a result, we may have to lease or purchase replacement aircraft
or, if necessary, convert an aircraft from passenger to freighter configuration.
There can be no assurance that suitable replacement aircraft could be located
quickly or on acceptable terms. Due to the relatively small size of our B747
fleet, the loss of revenue resulting from any such business interruption or
costs to replace aircraft could have a material adverse effect on our results of
operations and our ability to make payments on our debt obligations.
We do not have insurance against losses arising from any business
interruption. If we fail to keep our aircraft in service, we may have to take
impairment charges in the future and our results of operations would be
adversely affected. The loss of our aircraft or the grounding of our fleet could
reduce our capacity utilization and revenues, require significant capital
expenditures to replace such aircraft and could have a material adverse affect
on us and on our ability to make payments on our debt obligations. Moreover, any
aircraft accident could cause a public perception that some of our aircraft are
less safe or reliable than other carriers' aircraft, which could have a material
adverse effect on our results of operations and our ability to make payments on
our debt obligations.
The industries in which we operate are highly competitive and our
failure to effectively compete would adversely affect our results of operations
and financial condition. Our industry is highly competitive and susceptible to
price discounting due to excess capacity. Because we offer a broad range of
aviation services, our competitors vary by geographic market and type of
service. Each of the markets we serve is highly competitive, fragmented and,
other than ground handling and logistics, can be capital intensive. Competition
in each of these industries depends on safety, price, reliability and the
availability and quality of service. In addition, some of our contracts are
awarded based on a competitive bidding process. Competition arises primarily
from other international and domestic contract carriers, regional and national
ground handling and logistic companies, internal maintenance units of major
airlines and third party maintenance providers, some of which have substantially
greater financial resources and more extensive fleets and facilities than we do.
Some of our airline competitors are currently facing financial difficulties and
as a result could resort to drastic pricing measures with which we may not be
able to compete. In addition, some of these airlines have larger fleets of newer
wide-body cargo aircraft. Once these airlines resolve their financial
difficulties, they will be able to resume operations with these newer larger
fleets and compete with us, both in the commercial market and also in AMC
business. Some of our competitors may be able to substantially reduce their
costs, particularly interest and lease expense, in bankruptcy. We may also
compete with our customers who may establish "in- house" operations and stop
using our services, because it moved these services in-house. In addition,
traffic rights to many foreign countries are subject to bilateral air services
agreements between the United States and the foreign country and are allocated
only to a limited number of U.S. carriers and are subject to approval by the
applicable foreign regulators. Consequently, our ability to provide air cargo
service in some foreign markets depends in part on the willingness of the DOT to
allocate limited traffic rights to us rather than to competing U .S. airlines
and on the approval of the applicable foreign regulators. If we are unable to
compete successfully, we may not be able to generate sufficient revenues and
cash flow to meet our debt obligations.
Many of our arrangements with customers are not long-term contracts. As
a result, we cannot assure you that we will be able to continue to generate
similar revenues from these arrangements. We generate a large portion of our
revenues from arrangements with customers with terms of one year or less, under
ad hoc arrangements and through "call when needed" contracts. Further, we
generate a large portion of our revenues from AMC expansion business, which is
not fixed by contract and is dependent on AMC requirements that are not
predictable. There is a risk that customers may not continue to seek the same
level of services from us as they have in the past or that they do not renew
these arrangements or terminate them at short notice. In the past, several of
our larger contracts have not been renewed due to reasons unrelated to our
performance, such as the financial position of our customers or their decision
to move the services we provided to them in-house. In addition, some of our
contracts have not been signed, although we continue to provide services and
receive payments under these arrangements. Accordingly, we cannot assure you
that in any given year we will be able to generate similar revenues from our
customers as we did in the previous year.
The cost of fuel is a major operating expense, and fuel shortages and
increases in the price of fuel could adversely affect our operations. The cost
of fuel is a major operating expense for all airlines, including ours. Fuel
costs are also significant for our EAGLE and EHI operations. For fiscal years
2004, 2003 and 2002, fuel costs were approximately 19.1%, 20.7% and 16.1%,
respectively, of our total operating expenses. Also, because of the relative age
of our fleet, our aircraft tend to be less fuel-efficient than newer aircraft,
and fuel costs tend to be a higher percentage of our operating costs than for
other airlines. Both the cost and availability of fuel are subject to many
worldwide economic and political factors and events, which are beyond our
control, including taxes. The price we pay for fuel varies directly with market
conditions, and we have no guaranteed long-term sources of supply. We do not
regularly enter into hedging arrangements. If we elect to hedge fuel prices in
the future, through the purchase of futures contracts or options or otherwise,
there can be no assurance that we will be able to do so successfully.
Our ability to pass on increased fuel costs may be limited by economic
and competitive conditions. We generally pass fuel costs on to our customers
either through price increases or contracts that provide for fuel price
adjustment mechanisms. However, if fuel costs increase significantly, our
customers may reduce the volume and frequency of cargo shipments or find less
costly alternatives for cargo delivery, such as land and sea carriers.
Accordingly, an increase in fuel costs could have a material adverse effect on
our operating results. Similarly, a reduction in the availability of fuel,
resulting from a disruption of oil imports or other events, could have a
material adverse effect on our results of operations and our ability to make
payments on our debt obligations.
Changes in general economic and political conditions may have a
material adverse effect on our results of operations and financial performance.
The commercial air freight industry is highly sensitive to general economic and
political conditions, particularly fluctuations in demand for products from
abroad. Any negative change in the economic or political climate or a reduction
in demand in the world air freight market could increase our security costs,
increase the cost or limit the availability of insurance or reduce our capacity
utilization, all of which could have a material adverse effect on our results of
operations or financial performance.
We are subject to extensive regulation and our failure to comply with
these regulations in the United States and abroad, or the adoption of any new
laws, policies or regulations may have an adverse effect on our business. Our
operations are subject to complex aviation and transportation laws and
regulations, including Title 49 of the United States Code (formerly the Federal
Aviation Act of 1958, as amended), under which the United States Department of
Transportation ("DOT") and the Federal Aviation Administration ("FAA") exercise
regulatory authority over air carriers. In addition, we are subject to
regulation by various other federal, state, local and foreign authorities,
including the Department of Defense and the Environmental Protection Agency.
These laws and regulations may require us to maintain and comply with a wide
variety of certificates, permits, licenses, noise abatement standards and other
requirements, the failure of which to maintain or comply with could result in
substantial fines. The DOT, the FAA and other regulatory agencies have the
authority to modify, amend, suspend or revoke the authority and licenses issued
to us for failure to comply with provisions of law or applicable regulations,
and may impose civil or criminal penalties for violations of applicable rules
and regulations. Such actions, if taken, could have a material adverse effect on
our results of operations and our ability to make payments on our debt
obligations.
In addition, the DOT and the FAA may adopt new regulations, directives
or orders that could require us to take additional compliance steps or result in
the grounding of some of our aircraft, which could increase our costs or result
in a loss of revenues, which could have a material adverse effect on our results
of operations and our ability to make payments on our debt obligations.
We may be subject to extensive future regulation by various government
agencies intended to prevent terrorist attacks. In response to the terrorist
attacks of September 11, 2001, various government agencies, including the
Transportation Security Administration ("TSA"), the Department of Homeland
Security and the U.S. Customs Service, have adopted, and may adopt in the
future, new rules, policies or regulations or changes in the interpretation or
application of existing laws, rules, policies or regulations, compliance with
which could increase our costs or result in loss of revenues, which could have a
material adverse effect on our results of operations and our ability to make
payments on our debt obligations. The TSA may adopt security-related
regulations, including new requirements for screening of cargo and our
reimbursement to the TSA for the cost of security services. These new
regulations could have an adverse impact on our ability to efficiently process
cargo or could increase our costs.
Our business outside of the United States exposes us to uncertain
conditions in overseas markets. A portion of our revenues comes from air freight
services to customers outside the United States, which exposes us to the
following risks:
o Potential adverse changes in the diplomatic relations between foreign
countries and the United States.
o Risks of insurrections or hostility from local populations directed
at U.S. companies.
o Government policies against businesses owned by non-nationals.
o Expropriations of property by foreign governments.
o The instability of foreign governments.
o Adverse effects of currency exchange controls.
At some foreign airports, we are required by local governmental
authorities or market conditions to contract with third parties for ground and
cargo handling and other services. The performance by these third parties or
boycott of such services is beyond our control, and any operating difficulties
experienced by these third parties could adversely affect our reputation or
business.
Volatility in international currency markets may adversely affect
demand for our services. We provide services to numerous industries and
customers that experience significant fluctuations in demand based on economic
conditions and other factors beyond our control. The demand for our services
could be materially adversely affected by downturns in the businesses of our
customers. Although we price our services and receive payment for our services
almost exclusively in U.S. dollars, many of our customers' revenues are
denominated in foreign currencies. Any significant devaluation in such
currencies relative to the U.S. dollar could have an adverse effect on such
customers' ability to pay us or their demand for our services, which could have
a material adverse effect on our results of operations and our ability to make
payments on our debt obligations. Conversely, if there is a significant decline
in the value of the U .S. dollar against foreign currencies, the demand for some
of the products we transport could decline. Such a decline could reduce demand
for our services and thereby have a material adverse effect on our results of
operations and our ability to make payments on our debt obligations.
We operate in dangerous locations and carry hazardous cargo, either of
which could result in a loss of, or damage to, our aircraft. Our operations are
subject to conditions that could result in losses of, or damage to, our
aircraft, or death or injury to our personnel. These conditions include:
o Geopolitical instability in areas through which our flight routes
pass, including areas where the United States is conducting military
activities.
o Future terrorist attacks.
o Casualties incidental to the services we provide in support of U.S.
military activities, particularly in or near Afghanistan, Kuwait and
elsewhere in the Middle East.
We regularly carry sensitive military cargo including weaponry,
ammunition and other volatile materials. The inherently dangerous nature of this
cargo increases our risk of aircraft damage or loss.
The success of our business depends on the services of certain key
personnel. We believe that our success depends to a significant extent upon the
services of Mr. Delford M. Smith, our founder and Chairman of our Board of
Directors, who is currently 74, and certain other key members of our senior
management including those with primary responsibility for each business
segment. The loss of the services of Mr. Smith or other key members of our
management could have a material adverse effect on us and our ability to make
payments on our debt obligations.
Our insurance coverage does not cover all risks. Our operations involve
inherent risks that subject us to various forms of liability. We carry insurance
against those risks for which we believe other participants in our industry
commonly insure, however, we can give no assurance that we are adequately
insured against all risks. If our liability exceeds the amounts of our coverage,
we would be required to pay any such excess amounts, which amounts could be
material. For more information on our insurance policies and risk management,
see "Business-Insurance and Risk Management."
Our insurance coverage has become increasingly expensive and difficult
to obtain. Aviation insurance premiums historically have fluctuated based on
factors that include the loss history of the industry in general and the insured
carrier. Since September 11, 2001, our premiums have increased significantly.
Future terrorist attacks involving aircraft, or the threat of such attacks,
could result in further increases in insurance costs, and could affect the
availability of such coverage.
Although we believe our current insurance coverage is adequate and
consistent with current industry practice, there can be no assurance that we
will be able to maintain our existing coverage on terms favorable to us, that
the premiums for such coverage will not increase substantially or that we will
not bear substantial losses and lost revenues from accidents. Substantial claims
resulting from an accident in excess of related insurance coverage or a
significant increase in our current insurance expense could have a material
adverse effect on our financial condition and our ability to make payments on
our debt obligations.
If we ship hazardous or undisclosed illegal cargo, it could damage our
aircraft, subject us to fines or penalties or result in our aircraft being
impounded. If we fail to discover any undisclosed weapons, explosives, illegal
drugs or other hazardous or illegal cargo, or if we mislabel, mishandle or
otherwise ship hazardous materials in violation of federal or foreign
regulations, we may suffer possible aircraft damage or liability, as well as
fines, penalties or flight bans or impoundment of our aircraft, imposed by both
the country of origin and the country of destination. Any of these events could
have a material adverse effect on our ability to make payments on our debt
obligations. As a U.S. government contractor, we are subject to a number of
procurement and other rules and regulations. In order to do business with
government agencies, we must comply with and are affected by many laws and
regulations, including those relating to the formation, administration and
performance of U.S. government contracts. These laws and regulations, among
other things:
o Require, in some cases, certification and disclosure of all cost and
pricing data in connection with contract negotiations.
o Impose accounting rules that define allowable costs and otherwise
govern our right to reimbursement under certain cost-based U.S.
government contracts.
o Restrict the use and dissemination of information classified for
national security purposes and the exportation of certain products and
technical data.
These laws and regulations affect how we do business with our customers
and, in some instances, impose added costs on our business. A violation of these
laws and regulations could result in the imposition of fines and penalties or
the termination of our contracts. In addition, the violation of certain other
generally applicable laws and regulations could result in our suspension or
debarment as a government contractor.
All of our outstanding shares are controlled by two principal
shareholders, whose interests may conflict with those of our bondholders. A
trust controlled by Mr. Delford M. Smith, who is the chairman of our board of
directors, beneficially owns 75.1% of our outstanding shares. In addition, Mr.
Mark Smith, the son of Mr. Delford M. Smith, beneficially owns 24.9% of
Evergreen Holdings, Inc.'s outstanding shares. As a result of this ownership,
Mr. Delford M. Smith is able to direct the affairs of Evergreen and to approve
any matter requiring the approval of our shareholders. Such matters include the
election of directors, the adoption of amendments to our certificate of
incorporation and approval of mergers or sales of substantially all our assets
and certain related party transactions of the nature and type described in Item
13, "Certain Relationships and Related Transactions." There can be no assurance
that the interests of our principal shareholders will not conflict with the
interests of our bondholders.
RESULTS OF OPERATIONS
This discussion highlights trends and year-to-year changes in results
of operations of each of our businesses as they impact our results of operations
on a consolidated basis. This discussion should be read in conjunction with the
consolidated financial statements of Evergreen Holdings, Inc., including the
related notes and the reports of independent accountants. Inter-company revenues
and expenses have been eliminated in the discussion of consolidated and segment
revenues and expenses.
The report of our predecessor independent registered public accounting
firm for the year ended February 28, 2002 includes an explanatory paragraph
regarding the existence of a substantial doubt of our ability to continue as a
going concern.
The report of our current independent registered public accounting firm
for the year ended February 29, 2004, included an explanatory paragraph
regarding the existence of substantial doubt of our ability to continue as a
going concern. The report of our current registered public accounting firm for
the year ended February 28, 2003, dated April 25, 2003, included an explanatory
paragraph stating that there was substantial doubt about our ability to continue
as a going concern because we believed that we may not have been able to make
the payments on our debt as it came due. However, as disclosed in Notes [1] and
[5] of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of
this Annual Report on Form 10-K, we repaid that debt with proceeds obtained from
the sale of the senior second secured notes due 2010 and from proceeds
obtained from a revolving line of credit obtained with PNC Bank. Accordingly,
upon re-issuance of their report on May 16, 2003 and October 10, 2003, the
explanatory paragraph discussing the existence of substantial doubt of our
ability to continue as a going concern was removed.
As discussed in Note 14 of the "Notes to Consolidated Financial
Statements" in Part II, Item 8 of this Annual Report on Form 10-K, we restated
our consolidated statement of operations for the year ended February 28, 2002 to
present the $7.2 million claim received under the Air Transportation Safety and
System Stabilization Act as a separate component of operating expenses. This
amount was previously reported in operating revenues (support services and
other). The following management's discussion and analysis of financial
condition and results of operations gives effect to this restatement.
RESULTS OF OPERATIONS FOR FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
The following information relating to fiscal year 2004 and 2003 is
derived from the audited consolidated financial statements of Evergreen
Holdings, Inc. for fiscal year 2004 and 2003, which are included in this Annual
Report on Form 10-K.
Fiscal
---------------------------------
Total
2004 2003 Change
-------- -------- -------
(in millions)
Operating revenues:
Flight revenue $ 377.7 $ 400.6 $ (22.9)
Sales of aircraft, parts, and other assets 17.3 12.1 5.2
Ground logistics services 99.8 129.7 (29.9)
Support services and other 40.8 31.9 8.9
-------- -------- -------
Total operating revenues 535.6 574.3 (38.7)
Operating Expenses:
Flight costs 73.8 69.9 3.9
Fuel 97.1 100.2 (3.1)
Maintenance 73.2 69.7 3.5
Aircraft and equipment 49.6 44.1 5.5
Costs of sales of aircraft, parts, and other
property and equipment 13.7 8.9 4.8
Cost of ground logistics services 89.1 104.6 (15.5)
Support services and other 39.0 32.6 6.4
Selling, general, and administrative 73.9 62.7 11.2
-------- -------- -------
Total operating expenses 509.4 492.7 16.7
-------- -------- -------
Income from operations $ 26.2 $ 81.6 $ (55.4)
======== ======== =======
(Totals may not add due to rounding)
OPERATING REVENUES
Our consolidated operating revenues decreased $38.7 million, or 6.7%,
to $535.6 million for fiscal year 2004 from $574.3 million in fiscal 2003 as a
result of the following:
Flight Revenues
Flight revenue decreased $22.9 million, or 5.7%, to $377.6 million for
fiscal year 2004 from $400.6 million for fiscal year 2003. Flight revenues in
our EIA segment decreased $26.4 million, or 7.1%, to $342.9 million from $369.2
million. EIA flight revenue derived by the B747 fleet accounted for $20.4
million of the decrease and EIA flight revenue derived by the DC9 fleet
accounted for $5.1 million decrease in EIA flight revenue. This decrease in EIA
flight revenue was offset by an increase in our EHI segment of $3.4 million, or
10.9%, to $34.8 million for fiscal year 2004 from $31.4 million for fiscal 2003
in our EHI segment. These changes in flight revenue resulted from the following:
o EIA segment's flight revenue derived from AMC business in the B747
fleet increased $30.5 million, or 11.0%, to $307.3 million for fiscal
year 2004 from $276.8 million for fiscal year 2003 driven primarily by
the ongoing requirement of the AMC in support of the war on terrorism.
o EIA segment's flight revenue derived from Asian charters flown by the
B747 fleet decreased $44.2 million to $12.3 million for fiscal year
2004 from $56.5 million for fiscal year 2003. The Asian charter revenue
for fiscal year 2003 was generated in large part by the West Coast dock
strike.
o EIA segment's flight revenue derived from the B747 Finnair contract
decreased $5.5 million, or 60.2%, to $3.6 million for fiscal year 2004
from $9.1 million for fiscal year 2003 as a result of the completion of
the contract in fiscal year 2004.
o EIA segment's flight revenue derived from DC9 contracts decreased
$5.1 million, or 31.2%, to $11.4 million for fiscal year 2004 from
$16.5 million for fiscal year 2003 as a result of a decrease in USPS
contracts primarily providing service to S.E. Alaska.
The following table details EIA block hours by aircraft and contract
type for fiscal year 2004 and fiscal year 2003.
747 Block Hour Comparison:
2004 2003 Change
------ ------ ------
AMC 26,410 22,967 3,443
Other All-In 1,613 5,426 (3,813)
------ ------ ------
Total All In 28,023 28,393 (370)
------ ------ ------
ACMI 463 583 (120)
------ ------ ------
Total 747 Hours 28,486 28,976 (490)
------ ------ ------
DC9 Block Hour Comparison:
2004 2003 Change
------ ------ ------
ALL-IN 1,169 2,482 (1,313)
ACMI 3,302 2,985 317
------ ------ ------
Total DC 9 Hours 4,471 5,467 (996)
------ ------ ------
Total Block Hours 32,957 34,443 (1,486)
====== ====== ======
EHI flight revenue increased $3.4 million, or 10.9%, to $34.8 million
for the fiscal year 2004 from $31.4 million for fiscal year 2003. The increase
in EHI flight revenue was due primarily to the following:
o New air ambulance service in Alaska accounted for an increase of $1.9
million in flight revenues for fiscal year 2004.
o UNOCAL contract revenues related primarily to offshore oil support
work support resulted in increased revenues of $1.2 million for fiscal
year 2004.
o NASA shuttle recovery work accounted for increased flight revenues of
$0.7 million for fiscal year 2004.
Sales of Aircraft, Parts, and Other Assets
Sales of aircraft, parts, and other assets increased $5.3 million, or
43.0%, to $17.4 million for the fiscal year 2004 from $12.1 million for fiscal
year 2003 due to the following:
o EIA segment had an increase of $2.9 million, or 75.3%, to $6.9
million for fiscal year 2004 from $4.0 million for fiscal year 2003.
This increase was generated by the sale of a Gulfstream II aircraft for
$3.8 million offset by a lower volume of aircraft parts and material
sales.
o EAGLE segment had an increase of $0.5 million to $0.5 million for
fiscal year 2004 from $0.0 million for fiscal year 2003 due to the sale
of two de-icing trucks.
o EASL segment had an increase of $1.7 million, or 32.9%, to $7.0
million for fiscal year 2004 from $5.3 million for fiscal year 2003.
This increase in sales was driven by higher aircraft part out sales.
Major part out sales programs during fiscal year 2004 consisted of $4.5
million in sales from two B-767 and $0.9 million in sales from two
A-300.
Ground Logistics Services Revenues
Ground logistics services revenues, which are wholly comprised of
revenues generated by our EAGLE segment, decreased $29.9 million, or 23.1%, to
$99.8 million for fiscal year 2004 from $129.7 million for fiscal year 2003 due
to a decrease in USPS revenue of $31.1 million. This decrease was driven by the
elimination of the $14.3 million U.S. Postal Service Christmas Network (or
"CNET") operation and a reduction of Shared Network (or "SNET") volume, which
caused a decrease of $13.8 million. These decreases were partially offset by an
increase in third party revenue of $1.2 million related to the growth in
domestic and international markets.
Support Services and Other Revenues
Support services and other revenues increased $8.9 million, or 28.1%,
to $40.8 million for fiscal year 2004 from $31.9 million for fiscal year 2003
due to the following:
o EAC segment's support services revenue increased $7.5 million, or
31.8%, to $31.0 million for fiscal year 2004 from $23.5 million for
fiscal year 2003. The factors contributing to this increase was a
contract for heavy maintenance checks with a major aircraft leasing
company and EAC implementation of an aggressive marketing campaign that
was targeted at increasing heavy maintenance revenues from airlines and
leasing companies in the fiscal year 2004. In addition, EAC had
additional support service revenues from aircraft storage as the number
of aircraft in storage increased by 61 to 258 at February 29, 2004 from
197 at February 28, 2003.
o OTHER segment's support services and other revenue increased $1.3
million, or 22.8%, to $7.0 million for fiscal year 2004 from $5.7
million for fiscal year 2003 as a result of a $0.5 million increase in
Christmas tree sales and an increase in other agricultural sales
generated by reduced margins on excess inventory.
OPERATING EXPENSES
Flight Costs
Flight costs increased $3.9 million, or 5.7%, to $73.7 million for
fiscal year 2004 compared from $69.8 million for fiscal year 2003.
o EIA segment's flight costs increased $3.3 million, or 5.2%, to $65.7
million for fiscal year 2004 from $62.4 million for fiscal year 2003,
due to a $3.9 million increase in our overflys related directly to the
increase in the AMC flying into Europe.
o EHI segment's flight costs increased $0.7 million, or 9.4% to $8.1
million for fiscal year 2004 from $7.4 million for fiscal year 2003,
related to an associated increase in flight revenue.
Fuel Expenses
Fuel expense decreased $3.0 million, or 3.0%, to $97.2 million for
fiscal year 2004 from $100.2 million for fiscal year 2003.
o EIA segment's fuel costs decreased $3.6 million, or 3.6%, to $94.8
million for fiscal year 2004 from $98.4 million for fiscal year 2003.
$2.0 million of the decrease was primarily the result of actual
decreases in gallons purchased and an excise tax credit of $1.63
million received during the fiscal year 2004 drove the increase as
well.
o EHI segment's fuel costs increased $0.6 million, or 28.7%, to $2.4
million for fiscal year 2004 from $1.8 million for fiscal year 2003, as
a result of higher flight activity related to the light and medium
helicopters and general increases in our fuel prices.
Maintenance Expenses
Maintenance expense increased $3.5 million, or 5.0%, to $73.2 million
for fiscal year 2004 from $69.7 million for fiscal year 2003 as a result of the
following:
o EIA segment's maintenance expense decreased $1.9 million, or 3.1%, to
$59.8 million for fiscal year 2004 from $61.7 million for fiscal year
2003 due to a reduction of engine overhauls amortization of $4.6
million as a result of an increase in engine leases. This was offset by
$7.7 million increase in our airframe amortization due to increasing C
Check costs offset by a $0.8 million decrease in B Check costs. In
addition, DC9 amortization decreased $3.4 million and routine
maintenance decreased $0.5 million as a result of fewer hours flown.
o EHI segment's maintenance costs increased $5.4 million, or 66.6%, to
$13.4 million for fiscal year 2004 from $8.0 million for fiscal year
2003. These changes were due primarily as a result of higher flight
hours, an increase in the fleet size, a shift in flight activity to the
medium and light helicopters, and higher configuration costs. Medium
and light helicopters generate higher maintenance costs compared to the
heavy lift helicopters. Expenses associated with aircraft configuration
costs are costs that are incurred subsequent to the acquisition of new
contracts, but prior to commencement of services under the terms of
such contracts. The term configuration, in this case, refers to changes
made to a helicopter to make it suitable for services as specified in a
given contract.
Aircraft and Equipment Expenses
Aircraft and equipment expenses increased $5.5 million, or 12.4%, to
$49.6 million for fiscal year 2004 from $44.1 million for fiscal year 2003 as a
result of the following:
o EIA segment's aircraft and equipment costs increased $2.5 million, or
6.8%, to $39.5 million for fiscal year 2004 from $37.0 million for
fiscal year 2003. This increase, which resulted from an increase in the
number of leased engines being utilized, accounting for a $3.5 million
increase in engine rentals.
o EHI segment's aircraft and equipment costs increased $2.9 million, or
41.2%, to $10.0 million for fiscal year 2004 from $7.1 million for
fiscal year 2003 as a result of additional leased aircraft.
Costs of Sales of Aircraft, Parts, and Other Property and Equipment
Costs of sales of aircraft, parts, and other property and equipment
increased $4.8 million, or 54.2%, to $13.7 million for fiscal year 2004 from
$8.9 million for fiscal year 2003 because of the following:
o EIA segment's costs of sales of aircraft, parts, and other property
and equipment increased $4.6 million, or 246.4%, to $6.5 million for
fiscal year 2004 from $1.9 million for fiscal year 2003 primarily from
the sale of a Gulfstream II aircraft that carried costs of $4.8
million.
o EAC segment's costs of sales of aircraft, parts, and other property
and equipment decreased $0.8 million, or 100%, to $0.0 million for
fiscal year 2004 from $0.8 million for fiscal year 2003 from reduced
sales activity.
o EASL segment's costs of sales of aircraft, parts, and other property
and equipment increased $1.3 million, or 35.5%, to $5.0 million for
fiscal year 2004 from $3.7 million for fiscal year 2003. This was due
to increased third party aircraft part out sales.
o EHI segment's costs of sales of aircraft, parts, and other property
and equipment decreased $0.5 million, or 20.9%, to $1.8 million for
fiscal year 2004 from $2.3 million for fiscal year 2003 from reduced
third party sales.
Cost of Ground Logistics Services
Cost of ground logistics services decreased $15.4 million, or 14.7%, to
$89.2 million for fiscal year 2004 from $104.6 million for fiscal year 2003 due
primarily to reduced revenue activities resulting in decreases in labor
expenses, travel expenses, equipment expenses, and outside services expenses of
$10.4 million, $0.8 million, $1.9 million and $1.8 million respectively.
Support Services and Other Expenses
Support services and other expenses increased $6.3 million, or 19.4%,
to $38.9 million for fiscal year 2004 from $32.6 million for fiscal year 2003
because of the following:
o EIA segment's support services and other expenses decreased $0.4
million, or 3.1%, to $13.1 million for fiscal year 2004 from $13.5
million for fiscal year 2003, primarily due to a lower flight activity
and a shift from commercial flights to AMC whose contracts pass through
a higher percentage of other expenses such as ground handling expenses.
o EAC segment's support services and other expenses increased $4.2
million, or 30.1%, to $18.3 million for fiscal year 2004 from $14.1
million for fiscal year 2003 related to increased operating revenue.
o OTHER segment's support services and other expenses increased $2.5
million, or 49.4%, to $7.6 million for fiscal year 2004 from $5.1
million for fiscal year 2003 as a result of higher costs of goods sold
related to increased sales activity.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $11.2 million,
or 17.8%, to $73.9 million for fiscal year 2004 from $62.7 million for fiscal
year 2003 as a result of the following:
o EIA segment's selling, general and administrative expenses increased
$2.5 million, or 7.7%, to $34.8 million for fiscal year 2004 from $32.3
million for fiscal year 2003 as the result of higher administrative
costs associated with a one-time $4.0 million bonus paid to our Chief
Executive Officer, Mr. Delford M. Smith, see Note 11 of the "Notes to
Consolidated Financial Statements" in Part II, Item 8 of this Annual
Report on Form 10-K. This bonus expense was partially offset by a
reduction in bank, legal and professional fees incurred in connection
with our analysis of refinancing alternatives, debt restructuring and
obtaining waivers and amendments under our old credit facility which
included a $1.0 million bank charge in fiscal 2003 associated with our
granted request for a waiver and an extension.
o EAGLE segment's selling, general and administrative expenses
increased $3.8 million, or 39.8%, to $13.2 million for fiscal year 2004
from $9.4 million for fiscal year 2003, primarily due to a $2.1 million
charge for worker's compensation expenses and a $2.0 charge for bad
debt expense related to U.S. Postal Service receivables.
o EHI segment's selling, general and administrative expenses increased
$2.7 million, or 31.9%, to $11.0 million for fiscal year 2004 from $8.3
million for fiscal year 2003 as the result of increased marketing
activities, strengthening management in response to the increase in
revenues and the addition of field overhead costs supporting operations
in the Gulf of Mexico.
o EAC segment's selling, general and administrative expenses increased
$1.7 million, or 24.3%, to $8.5 million for fiscal year 2004 from $6.8
million for fiscal year 2003 due primarily to higher sales and
administrative expenses associated with increased sales activity.
o EASL segment's selling, general and administrative expenses increased
$0.7 million, or 17.0%, to $4.5 million for fiscal year 2004 from $3.8
million for fiscal year 2003 due to a $0.3 million increase in travel
expenses and a $0.2 million increase in rent expense.
INCOME FROM OPERATIONS
Consolidated income from operations decreased $55.4 million, or 68.0%,
to $26.2 million for fiscal year 2004 from $81.6 million for fiscal year 2003.
This decrease resulted primarily from the decrease in income from operations in
our EIA and EAGLE segments. EIA's income from operations decreased primarily due
to the reduction in Asian charter revenues of $44.2 million from the West Coast
dock strike in fiscal year 2003 that yielded premium rates compared to the AMC
revenue which replaced it in fiscal year 2004. In addition, we experienced a
decrease of 3.4% in the AMC rates with the contract year that began in October
2003 impacting revenues by approximately $3.8 million. EAGLE's income from
operations decreased primarily due to reduction of ground logistics services
revenue caused by the decrease in U.S. Postal Service volume.
OTHER (NON-OPERATING) INCOME AND EXPENSE
Interest Expense
Interest expense increased $4.2 million, or 13.9%, to $34.8 million for
fiscal year 2004 from $30.6 million for fiscal year 2003, primarily as a result
of:
o An increase in our average borrowing rate that resulted from our
refinancing in May 2003 including the issuance of the 12% senior second
secured notes due 2010.
o $1.1 million in higher interest charges by a former loan syndicate in
exchange for a term extension while refinancing arrangements with new
loan sources were arranged.
Other Income and Expense
Income from non-recurring charges increased $2.9 million, or 200.8%, to
$4.4 million in income for fiscal year 2004 from $1.5 million in income for
fiscal year 2003 due to the following:
o Foreign currency exchange gains and losses incurred by EIA as a
result of transactions associated with contracts denominated in foreign
currencies. We do not have significant foreign currency transactions.
Losses on foreign currency contracts increased $0.2 million to $0.2
million during fiscal year 2004 from $0.0 during fiscal year 2003.
o EIA Segment's income classified as non-recurring charge/aircraft and
other increased $4.5 million to $4.5 million for fiscal year 2004 from
$0.0 in fiscal year 2003 due primarily to a non-recurring $4.1 million
gain on an insurance settlement to repair a damaged aircraft and other
infrequent charges related to obsolete inventory write-offs
o Our OTHER segment's income classified as non-recurring
charge/aircraft and other decreased $1.5 million to $0.0 for fiscal
year 2004 from $1.5 million in fiscal year 2003 due to the absence of
land sales during fiscal year 2004 but which had occurred during fiscal
year 2003.
INCOME TAX EXPENSE
We had an income tax benefit of $0.8 million for fiscal year 2004 on a
loss before income taxes of $5.4 million. We had income tax expense of $19.8
million in fiscal year 2003 on income before taxes of $51.6 million. The benefit
in fiscal 2004 and the expense in fiscal 2003 were computed at the statutory
rates of 34.0% for Federal tax and a blended rate of approximately 4.0% for
state taxes in fiscal years 2004 and 2003, respectively (net of the Federal tax
benefit of the State tax deduction). In addition there were other adjustments.
The following table illustrates the calculation of our income tax benefit
(expense) in fiscal years 2004 and 2003:
Fiscal
-------------------------
2004 2003
-------- --------
(in thousands)
Income (loss) before income taxes ($ 5,405) $ 51,611
Combined federal and state tax rates 38.1% 38.0%
-------- --------
"Expected" income tax benefit (expense) before other adjustments $ 2,061 ($19,612)
Other adjustments (1) ($ 1,226) ($ 192)
-------- --------
Income tax benefit (expense) $ 835 ($19,804)
======== ========
(1) Other is comprised of permanent differences, predominately meals,
entertainment, fines and other penalties.
NET LOSS
Our net income decreased $36.4 million, or 114.4%, to a net loss of
$4.6 million for fiscal year 2004 from net income of $31.8 million for fiscal
year 2003 as a result of the factors discussed above.
RESULTS OF OPERATIONS FOR FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
The following information relating to fiscal years 2003 and 2002 is
derived from the audited consolidated financial statements of Evergreen
Holdings, Inc. for fiscal year 2003 and 2002, which are including in this Annual
Report on Form 10-K.
Fiscal
-----------------------------------
Total
2003 2002 Change
-------- -------- --------
(in millions)
Operating revenues:
Flight revenue $ 400.6 $ 284.3 $ 116.3
Sales of aircraft, parts, and other assets 12.1 13.3 (1.2)
Ground logistics services 129.7 122.3 7.4
Support services and other 31.9 27.8 4.0
-------- -------- --------
Total operating revenues 574.3 447.7 126.5
Operating expenses:
Flight costs 69.8 54.6 15.2
Fuel 100.2 69.6 30.6
Maintenance 69.8 61.3 8.4
Aircraft and equipment 44.1 48.3 (4.2)
Costs of sales of aircraft, parts, and other
property and equipmment 8.9 9.3 (0.4)
Cost of ground logistics services 104.6 104.5 --
Support services and other 32.6 23.2 9.4
Selling, general, and administrative 62.7 52.6 10.1
Impairment charge on aircraft -- 16.0 (16.0)
Claim under the Air Transportation Safty and
System Stabilization Act -- (7.2) 7.2
-------- -------- --------
Total operating expenses 492.7 432.2 60.5
-------- -------- --------
Income from operations $ 81.6 $ 15.5 $ 66.1
======== ======== ========
(Totals may not add due to rounding)
OPERATING REVENUES
Our consolidated operating revenues increased $126.6 million, or 28.8%,
to $574.3 million for fiscal year 2003 from $447.7 million for fiscal year 2002.
The majority of this increase resulted from an increase in flight revenue of
$116.3 million, or 40.9%.
Flight Revenues
Flight revenues are derived principally from the operations of our EIA
segment and, to a lesser extent, our EHI segment. Flight revenue increased
$116.3 million, or 40.9%, to $400.6 million for fiscal year 2003 from $284.3
million for the fiscal year ended February 28, 2002. The increase in flight
revenue generated by our EIA segment was due to the following factors:
o AMC business increased $139 million as a result of the redeployment
of our wide-body fleet to U.S. military business and the U.S. military
buildup in the Middle East in the lead up to Operation Iraqi Freedom,
and activities of the U.S. military in connection with the ongoing
global war on terrorism following September 11, 2001.
o Flight revenue from Asian points of origin increased $21.3 million
due to a stronger Christmas peak season in fiscal year 2003, and
additional air freight demand arising from the West Coast dock workers'
strike in September 2002.
o Revenues under our Finnair contract increased $3.5 million as a
result of a full year of operations for this contract in fiscal year
2003.
The increase in revenues was offset by reductions in business from ACMI
contracts, the U.S. Postal Service and Qantas of $10.1 million, $22.5 million
and $20.5 million, respectively, reflecting the expiration of ACMI and U.S.
Postal Service contracts with EIA and our shift in operations away from
commercial customers in favor of AMC.
The following table details EIA block hours by aircraft and contract
type for fiscal year 2003 and 2002:
747 Block Hour Comparison:
2003 2002 Change
------- ------- -------
AMC 22,967 11,510 11,457
Other All-In 5,426 8,270 (2,844)
------- ------- -------
Total All In 28,393 19,780 8,613
------- ------- -------
ACMI 583 5,227 (4,644)
------- ------- -------
Total 747 Hours 28,976 25,007 3,969
------- ------- -------
DC9 Block Hour Comparison:
2003 2002 Change
------- ------- -------
ALL-IN 2,482 3,069 (587)
ACMI 2,985 1,504 1,481
------- ------- -------
Total DC 9 Hours 5,467 4,573 894
------- ------- -------
Total Block Hours 34,443 29,580 4,863
======= ======= =======
Flight revenue from our EHI segment increased $5.6 million, or 21.7%,
to $31.4 million for fiscal year 2003 from $25.8 million for fiscal year 2002.
This increase was principally the result of the following factors:
o Our Sikorsky S-64E Skycrane helicopter was available for the full
year in fiscal year 2003, which resulted in an increase in flight
revenue of $3.7 million, compared to fiscal year 2002, in which this
helicopter was not available for the first three months of the fire
season as a result of the delay in certification of an external tank
for use in fire fighting activities; and
o The addition to our fleet of two Eurocopter AS 350B helicopters,
which together generated an additional $1.4 million in flight revenue,
predominantly from fire fighting activities, and a Bell 206L-3
helicopter which generated an additional $0.4 million in flight revenue
from petroleum support missions.
Revenues from Sales of Aircraft, Parts and Other Assets
Revenues from sales of aircraft, parts and other assets, which are
primarily comprised of sales of aircraft parts, decreased $1.2 million, or 9.0%,
to $12.1 million for fiscal year 2003 from $13.3 million for fiscal year 2002.
Ground Logistics Services Revenues
Ground logistics services, which are wholly comprised of revenues
generated by our EAGLE segment, increased $7.4 million, or 6.0%, to $129.7
million for fiscal year 2003 from $122.3 million for fiscal year 2002. This
increase was primarily a result of the expansion of our U.S. Postal Service
business, including the opening of two new bases in fiscal year 2003, and the
full year of revenue for fiscal year 2003 generated by 15 bases opened during
fiscal year 2002.
Support Services and Other Revenues
Support services and other revenues, which are primarily comprised of
revenues generated by our Air Center segment, increased $4.0 million, or 14.3%,
to $31.9 million for fiscal year 2003 from $27.9 million for fiscal year 2002.
This increase was primarily the result of an increase in revenue generated by
our Air Center segment of $3.8 million, or 18.9%, to $23.9 million for fiscal
year 2003 from $20.1 million for fiscal year 2002, due to marketing efforts
expanding third party revenues.
OPERATING EXPENSES
Operating expenses increased $60.4 million, or 14.0%, to $492.7 million
for fiscal year 2003 from $432.2 million for fiscal year 2002.
Flight Costs
Flight costs are generated by EIA and, to a much lesser extent, EHI.
Flight costs increased $15.2 million, or 27.8%, to $69.8 million for fiscal year
2003 from $54.6 million for fiscal year 2002, primarily due to increased flight
activity and a $5.8 million increase in commissions payable to other members of
our CRAF team due to the increase in our AMC revenues.
Fuel Expenses
Fuel costs are attributable principally to the operations of our EIA
segment and, to a lesser extent, our Eagle and EHI segments. Fuel costs were
$100.2 million in fiscal 2003 compared with $69.6 million in fiscal 2002, $30.6
million of the increase was due to an increase in all-in hours, primarily with
AMC, and $6.1 million of the increase was due to an increase in the average
price paid for fuel.
Maintenance Expenses
Maintenance expense is attributable principally to the operations of
our EIA segment and, to a lesser extent, our EAGLE and EHI segments. Maintenance
expense increased $8.5 million, or 13.8 %, to $69.7 million for fiscal year 2003
from $61.3 million for fiscal year 2002 as a result of increases in flight
activity in our EIA and EHI segments.
Aircraft and Equipment Expenses
Aircraft and equipment expense decreased $4.2 million, or 8.7%, to
$44.1 million for fiscal year 2003 from $48.3 million for fiscal year 2002. This
was predominantly due to the following factors:
o We had a decrease of $3.4 million in aircraft rental cost, which
related primarily to the discontinuation of a lease of a B747 that we
operated in fiscal year 2002.
o We had a decrease in depreciation of $3.4 million, which reflects the
write-off of the remaining cost basis of six B-727 aircraft in fiscal
year 2002.
o EIA and EHI segment's had an increase in insurance costs of $1.8
million.
Cost of Sales of Aircraft, Parts and Other Property and Equipment
Cost of sales of aircraft, parts and other property and equipment
decreased $0.4 million, or 4.3%, to $8.9 million for fiscal year 2003 from $9.3
million for fiscal year 2002, which reflects the lower cost of assets sold in
fiscal year 2003.
Cost of Ground Logistics Services
Cost of ground logistics services remained relatively unchanged at
$104.6 million in both fiscal year 2002 and fiscal year 2003. This is despite
the corresponding decrease in ground logistics services revenue for fiscal year
2002 due to a more profitable business mix driven by the first full year of USPS
Shared Network (SNET) revenue that were recorded in fiscal year 2002.
Support Services and Other Expenses
Support services and other expenses increased $9.4 million, or 40.9%,
to $32.6 million for fiscal year 2003 from $23.2 million for fiscal year 2002 as
a result of a number of factors, including:
o EIA segment's support services and other expenses increased $6.9
million due to an increase in operating revenues in connection with our
shift in operations away from commercial customers in favor of AMC, and
increased related ground handling and other support costs;
o Eagle segment's support services and other expenses increased $1.0
million due to the overall increase in Eagle's support services
revenue; and
o All of our other support services and other expenses for EHI, EASL
and our OTHER segment decreased by $3.7 million from fiscal year 2003
to fiscal year 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.2 million,
or 19.4%, to $62.8 million for fiscal year 2003 from $52.6 million for fiscal
year 2002. This increase was the result of a number of factors, which included:
o EIA segment's selling, general and administrative expense increased
$4.4 million due to an increase in bank, legal and professional fees
incurred in connection with our analysis of refinancing alternatives,
debt restructuring and obtaining certain waivers and amendments under
our old credit facility, and other increases relating to additional
personnel and other support in connection with increased flight
activity;
o EAGLE segment's selling, general and administrative expense increased
$2.7 million primarily due to an increase in a reserve for anticipated
settlement adjustments related to a receivables dispute with the U.S.
Postal Service;
o EHI segment's selling, general and administrative expense increased
$0.9 million as a result of increased marketing costs and additional
administrative costs arising from increased flight activity; and
o Selling, general and administrative expense in our OTHER segment
increased $1.3 million, representing an increase in marketing costs
associated with our expansion into products such as wine, grape juice
and hazelnut products, and commencement of direct sales of some of our
agricultural products.
There were no impairment charges on aircraft or unusual charges or
credits for fiscal year 2003. In fiscal year 2002, we took an impairment charge
of $16.0 million relating to under-utilization of our DC9 fleet.
In fiscal year 2002, we received $7.2 million for our claim for losses
pursuant to the Air Transportation Safety and System Stabilization Act. Since
payment of claims under the Air Transportation Safety and System Stabilization
Act are subject to a DOT audit, the DOT may seek to recover all or a portion of
this amount.
INCOME FROM OPERATIONS
Consolidated income from operations increased $66.1 million to $81.6
million for fiscal year 2003 from $15.5 million for fiscal year 2002. This
increase resulted primarily from the increase in EIA flight revenues which were
primarily due to increased AMC business which resulted from the redeployment of
our wide-body fleet to U.S. military business, flight revenue from Asian points
of origin due to a stronger Christmas peak season in fiscal year 2003, and
additional air freight demand arising from the West Coast dock workers' strike
in September 2002.
NON-OPERATING INCOME AND EXPENSES
Interest Expense
Interest expense decreased $3.7 million, or 10.8%, to $30.6 million for
fiscal year 2003 from $34.3 million for fiscal year 2002. This was predominantly
the result of a reduction in interest expense of $3.7 million in fiscal year
2003, of which $4.9 million was due to a reduction in outstanding borrowings,
offset by $1.2 million related to an increase in average interest rates.
Other Income and Expense
In fiscal year 2003, we sold a parcel of land resulting in net gain on
sale of $1.5 million. As this transaction was outside our normal operations, the
gain has been presented as other non-operating income.
Income Tax Expense
In fiscal year 2003, we recorded a tax expense of $19.8 million. In
fiscal year 2002, we recorded a tax benefit of $6.4 million because of our loss
in that year. These benefits and expenses were computed at the statutory rates
of 34.0% for Federal tax and an approximately 4.0%, blended rate for state taxes
for fiscal year 2003 and 2002, respectively (net of the Federal tax benefit of
the state tax deduction). In addition, there were other adjustments. The
following table illustrates the calculation of our income tax benefit (expense)
for fiscal year 2003 and 2002:
Fiscal
-------------------------
2003 2002
-------- --------
(in thousands)
Income (loss) before income taxes $ 51,611 $(18,854)
Combined federal and state tax rates 38.0% 38.0%
-------- --------
"Expected" income tax (expense) benefit before other adjustments (19,612) 7,172
Other adjustments (1) (192) (752)
-------- --------
Income tax (expense) benefit $(19,804) $ 6,420
======== ========
(1) Other is comprised of permanent differences, predominately meals,
entertainment, fines and other penalties.
NET INCOME
Our net income (loss) increased $44.2 million to net income of $31.8
million for fiscal year 2003 from a net loss of $12.4 million for fiscal year
2002, as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements
Our capital requirements relate mostly to the maintenance of our
aircraft and other equipment, and working capital requirements. Our working
capital requirements typically peak at the end of our fiscal third quarter and
during our fiscal fourth quarter, which coincide with our peak revenue
generation season. Historically, we have funded our cash requirements through
our cash flows from operations, borrowings and the sale of assets.
Major Customers
Our largest customer, the AMC, had reduced expansion mission requests
for the months of January and February 2004 due to the AMC's operation of
missions with military transport aircraft in place of using commercial aircraft.
This was occurring in order to move cargo by airlift into Iraq because of the
FAA's continued prohibition of U.S. carriers operating into Iraq. The Company
has and will take actions to minimize the impact to liquidity by reducing
operating costs, fixed costs and capital expenditures. The impact of this change
on our AMC expansion revenues was a decrease in flight revenues of approximately
$13.3 million during January and February of fiscal year 2004. This estimate was
based on average AMC expansion revenues through the first three quarters of
fiscal year 2004 against actual AMC expansion revenue for January and February
2004. This trend continued through March and April but AMC expansion revenue has
returned to previous earnings levels in May 2004. If AMC elects to fly directly
into Iraq or use alternative methods of transportation, we may experience a
decline in our consolidated operating revenues, which could have a material
adverse impact on our results of operations.
Seasonality
While flight revenue generated by our AMC contract is not affected by
seasonal fluctuations, other aspects of our business are seasonal in nature.
Flight revenue generated by our contracts with the U.S. Postal Service,
commercial airlines and freight forwarders has historically been higher from
September through December of each year as the levels of flight activity
increase with the build-up of inventories by retailers in anticipation of the
holiday season. Revenues in our EAGLE segment also reflect similar seasonal
fluctuations with a peak over the same months. The seasonality for our EAGLE
segment is predominantly the result of increased volumes of mail and packages
being processed by the U.S. Postal Service and United Parcel Service in the lead
up to the holiday season. The months of higher revenue for our Helicopters
segment typically occur in June and July as a result of increased forest fire
fighting activities during these months.
Capital Resources
On May 16, 2003, the Company issued $215 million in aggregate principal
amount of 12% senior second secured notes (the "Notes") that will mature in
2010. The Notes were sold for 100% of their face amount. The Notes have interest
payments of $12.9 million to be paid on May 15 and November 15 of each year.
Concurrent with the issuance of the Notes, Aviation entered into a $100 million
revolving credit facility (the "PNC Credit Facility"). The PNC Credit Facility
had an interest rate of the lesser of LIBOR plus 3% or the prime rate plus 2%
and was due in 2006. The Company initially borrowed $72.1 million under the PNC
Credit Facility on May 16, 2003. The proceeds from the refinancing were used to
repay $264.7 million outstanding under a previous credit facility. In securing
the refinancing, $19.0 million in loan acquisition costs were incurred. These
costs are being amortized over the lives of the two loans using the effective
interest method. For further discussion see Note 5 of "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K.
The PNC Credit Facility and the indenture governing the Notes impose
certain restrictions on Aviation, including restrictions that limit its
restricted subsidiaries' ability to, among other things: (i) incur additional
debt; (ii) pay dividends, acquire shares of capital stock, make payments on
subordinated debt or make investments; (iii) place limitations on distributions
from restricted subsidiaries; (iv) issue or sell capital stock of restricted
subsidiaries; (v) issue guarantees; (vi) sell or exchange assets; (vii) enter
into transactions with shareholders and affiliates; (viii) make capital
expenditures; (ix) create liens; and (x) effect mergers and other changes of
control. In addition, the PNC Credit Facility contains financial covenants
requiring the Company to meet various financial ratios, such as a minimum
tangible net worth ratio, maximum capital expenditures, and a minimum fixed
charge coverage ratio. These covenants include requirements to, at all times,
maintain undrawn availability of not less than $5.0 million on the PNC Revolver,
a minimum consolidated tangible net worth of $150.0 million through February 29,
2004 and increasing tangible net worth based on net income in subsequent
periods, a fixed charge coverage ratio of 1.5:1 and an interest coverage ration
of 2.5:1. Additionally, capital expenditures are limited to $75.0 million per
year.
If Aviation or its restricted subsidiaries violates these covenants and
are unable to obtain waivers from the lenders or noteholders, its debt under
these agreements would be in default and could be accelerated by the lenders or
noteholders. Cross default provisions exist in the indenture governing the Notes
whereby a default on the Notes would occur if an event of default under issues
of indebtedness of Aviation, any subsidiary guarantor or other significant
subsidiary having an outstanding principal amount of $10 million or more in the
aggregate for all such issues of all such persons and such default causes the
holder to declare the indebtedness due and payable prior to its stated maturity
and such indebtedness is not discharged in full or such acceleration is not
rescinded or annulled within 30 days.
As of February 29, 2004, Aviation had approximately $70.5 million in
outstanding borrowings and $15.5 million available upon application of borrowing
base limitations as such borrowing base is available on March 1, 2004 and
subject to applicable covenants. Aviation must maintain $5 million of excess
availability under the PNC Credit Facility, which may only be reduced with the
consent of each of the lenders under the PNC Credit Facility. Substantially all
of the assets of the Company are pledged as collateral under the various debt
agreements.
The Company was in default of its Fixed Charge Coverage Ratio with PNC
Bank, under its revolving credit facility at February 29, 2004. Paying off all
obligations related to PNC Bank cured the default. The source of the payoff,
were funds obtained on May 13, 2004, when Evergreen International Aviation,
Inc., and certain of its subsidiaries entered into a new financing arrangement
paid off its existing PNC Credit Facility. The new financing arrangement is a
three-year senior secured credit facility with Wells Fargo Foothill, part of
Wells Fargo & Company (NYSE: WFC), and Ableco Finance LLC. The new credit
facility (the "New Credit Facility') consists of a $50 million revolving loan,
subject to a borrowing base based on eligible receivables and eligible
inventory, and a $50 million term loan and is secured by substantially all of
the assets of the Company and its domestic subsidiaries, other than those
subsidiaries that operate the Company's agricultural business. Approximately $83
million was funded at closing and used to prepay and terminate the Company's PNC
Credit Facility, as Administrative Agent, and to pay certain related transaction
costs. The new agreement has interest rates of LIBOR plus 5.5% or the prime rate
plus 3.0% on the term debt and interest rates of LIBOR plus 3.0% or the prime
rate plus 0.5% on the revolving credit facility and is due in 2007.
In the past, we have not always had sufficient cash flows from
operations and available borrowings to meet our liquidity requirements,
including debt service payments. We have also failed at various times to comply
with several of our covenants in our debt agreements. These covenants include
failure to maintain our Fixed Charge Coverage Ratio, Debt to EBITDA Ratio,
failure to timely provide financial statement reports, purchasing a new aircraft
through our revolving credit facility instead of with proceeds from a special
tranche of term loans, failure to comply with the transactions with affiliates
covenant and the loan covenant, failure to comply with the covenant that limited
our capital expenditures, and merging a subsidiary with another subsidiary when
an event of default or default had occurred and was continuing. In fiscal 2003
and 2002, our audited financial statements were subject to "going concern"
comments due to the maturity of our old credit facility within twelve months of
the end of such fiscal years and, given our working capital position,
uncertainty as to our ability to refinance our existing credit facility or have
its maturity extended beyond twelve months. Accordingly, we were required to
classify such debt as a current liability. Subsequently, comments regarding
"going concern" were removed from the report of independent registered public
accounting firm on our fiscal 2003 audited financial statements because we
repaid outstanding debt as it came due with proceeds obtained from the sale of
bonds and funds available under our revolving credit facility in May 2003. For a
more detailed discussion of defaults on our debt agreements, see "Risk
Factors-We failed to comply with financial and other covenants in our debt
instruments in the past." In addition, from time to time, due to a lack of
liquidity and restrictive covenants in our existing credit agreement, we have
not been able to acquire helicopters required to meet the demand for our
services. On a number of these occasions, we have been able to obtain leases of
the required helicopters from Mr. Delford M. Smith and his affiliates, as
described in Item 13, "Certain Relationships and Related Transactions."
If we were to fail to comply with certain of these debt covenants, the
debt could be called due, which would raise substantial doubt about are ability
to continue as a going concern. As a result, our audit report contains an
explanatory paragraph that states that, due to the historical difficulty we have
had in meeting our debt covenants, there is substantial doubt as to our ability
to continue a going concern. Our ability to continue as a going concern is
dependent on future financial results and, should we be in breach of the
covenants on our debt, our ability to restructure or otherwise amend the terms
of that debt. The financial statements do not include any adjustments to reflect
the possible future effects on the revoverability and classification of assets
or the amounts and classifications of liabilities that might result from the
outcome of this uncertainty.
Although there can be no assurances, we believe that our cash flow from
operations and availability under our revolving credit facility will provide us
with sufficient liquidity and capital resources to operate our business and pay
our contractual obligations, including the obligations under the notes and our
revolving credit facility. In addition, we may conduct sales of equity in the
future. In the event that we do not have adequate liquidity under the revolving
credit facility, we believe we would have access to additional liquidity through
additional borrowings and asset sales. We cannot assure you, however, that these
sources will generate sufficient cash flows or that future borrowings will be
available in an amount sufficient to enable us to make principal and interest
payments on our debt, including the notes, or to fund our other liquidity needs,
or that we will able to comply with the financial covenants in the New Credit
Facility.
Cash and cash equivalents decreased $1.5 million to $4.1 million at
February 29, 2004 compared to cash and cash equivalents of $5.6 million at
February 28, 2003.
Operating Activities
Cash flows from operating activities have historically been driven by
net income (loss) combined with fluctuations in accounts receivable and accounts
payable balances.
We generated cash in operating activities of $56.5 million, $100.3
million and $107.5 million during the fiscal years ended February 29, 2004, and
February 28, 2003 and 2002 respectively. Cash provided by operations decreased
$43.8 million from fiscal year 2003 to fiscal year 2004. The decrease in cash
provided by operations was primarily the result of a net loss of $4.6 million
adjusted primarily for non-cash charges such as depreciation and amortization,
and a $16.9 million decrease in accounts receivable. The decrease in accounts
receivable was primarily associated with the settlement agreement we entered
into with the U.S. Postal Service for $17.6 million that was subject to certain
terms and conditions of which we collected $15.6 million during the year and
wrote off $2.0 million. Other adjustments to reconcile net income to net cash
provided by operating activities included a $12.5 million decrease in accounts
payable and accrued liabilities related mostly to our new financing
arrangements, a $2.8 million decrease in income taxes payable, a $3.2 million
increase in prepaid expenses and other assets, and a $4.1 million net gain from
an insurance settlement.
Cash flows used in investing activities include purchases of property,
equipment, and overhauls; proceeds from the sale of property and equipment;
notes receivable from affiliates; and changes to other assets. Capital
expenditures on purchases of property and equipment, and engine overhauls
primarily comprise purchases of additional parts, aircraft, investments in
airframes, engine overhauls and enhancements to aircraft. To a lesser extent,
net cash used in investing activities includes purchases of equipment purchases
associated with our EAGLE locations and expansion at existing EAGLE locations.
We used cash in investing activities of $62.6 million, $52.2 million
and $16.8 million during the fiscal years ended February 29, 2004, and February
28, 2003 and 2002 respectively. Cash used by investing activities decreased
$10.4 million from fiscal year 2003 to fiscal year 2004.
During the twelve months ended February 29, 2004, proceeds from asset
sales were $9.5 million. We also received proceeds of $8.2 million from an
insurance settlement to repair a damaged aircraft, and $4.1 million of these
proceeds were used to buyout related leases. Prepaid expenses and other assets
increased $6.9 million due partially to a $1.9 million deposits related to the
purchase of a Gulfstream IV aircraft, and $0.5 million for a standby letter of
credit in connection with a contract for our Helicopters segment.
Cash capital expenditures for fiscal 2004, 2003 and 2002 were $62.3
million, $60.8 million and $35.7 million respectively. In fiscal 2002, our lower
capital expenditures were largely the result of lower levels of flight activity.
In fiscal 2004, our capital expenditures included approximately $19.3 million in
heavy maintenance of our aircraft ("C" checks and "D" checks) and approximately
$10.4 million in engine overhauls. Increasing aircraft utilization and
escalating maintenance costs related to engine and airframe overhauls has
resulted in increasing capital expenditures since fiscal 2002.
Capital expenditures for the twelve months ended February 29, 2004
consisted of $45.8 million of expenditures by the EIA segment primarily for
normal airframe overhauls and system upgrades on our fleet of B747s and DC9s,
rotables repairs, equipment acquisitions and engine acquisitions. Capital
expenditures for the twelve months ended February 29, 2004 by the EHI segment
were $12.5 million and consisted primarily of aircraft purchases and deferred
overhauls and configuration costs during the twelve months ended February 29,
2004.
Cash flows used in financing activities primarily represent payments on
borrowings under our bank term loans, revolving credit facilities, financed
engine overhauls, and interest payments and fees associated with the May 2003
refinancing. The refinancing was composed of Aviation's issuance of $215 million
senior second secured notes that mature in 2010 and a $100 million
collateralized revolving credit facility with $70.5 million outstanding as of
February 29, 2004.
We had cash provided by financing activities of $4.6 million in fiscal
year 2004. We had cash used in financing activities of $51.4 million and $87.4
million for fiscal years 2003 and 2002 respectively. Cash used in financing
activities decreased $55.9 million from fiscal year 2003 to fiscal year 2004,
due primarily to a refinancing of the Company's long-term debt.
Proceeds from the refinancing on May 16, 2003 resulted in $215 million
from the issuance of senior secured notes that mature in 2010 and $72.1 million
from a collateralized revolving credit facility. The proceeds from the
refinancing were used to repay $264.7 million outstanding debt under a previous
credit facility. In securing the refinancing, $19.0 million in loan acquisition
costs were incurred. These costs are being amortized over the lives of the two
loans using the effective interest method. The Company made its first two
semi-annual $12.9 million interest payments on November 15, 2003 and May 15,
2004 respectively. For further discussion see Note 5 of "Notes to Consolidated
Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K.
Commitments
The following table summarizes our contractual cash obligations as of
February 29, 2004 (does not consider the effect of the May 13, 2004 refinancing
as described in Note 5 of the "Notes to Consolidated Financial Statements" in
Part II, Item 8 of this Annual Report on Form 10-K):
Long- Short- Operating
Term Term Lease Other
Fiscal Debt Debt Obligations Obligations Total
------ ------- ------- ----------- ------------ -----
(in millions)
2005 $ 0.0 $ 11.6 $ 20.5 $ 3.0 $ 35.1
2006 6.5 0.0 11.8 3.0 21.3
2007 72.7 0.0 7.5 3.0 83.2
2008 1.7 0.0 4.7 3.0 9.4
2009 0.8 0.0 3.7 3.0 7.5
Thereafter $ 215.1 $ 0.0 $ 6.6 $ 3.0 $ 224.7
Other obligations consist exclusively of contractual obligations
payable pursuant to an employment agreement we entered into in May 2003 with our
Chief Executive Officer and Chairman, Mr. Smith. The employment agreement
provides for compensation at the rate of $3 million per year and a one-time
bonus in the amount of $4 million, which was paid after completion of the
refinancing of our old credit facility in May 2003.
During July 2003, we entered into arrangements with two of our major
engine repair vendors to finance over 12 month and 15 month periods,
respectively, payables incurred for certain engine overhauls. It is anticipated
that the total cost of the overhauls will approximate $2.5 million. We cannot
assure you that the engine purchases and overhaul financing arrangements will
continue as expected. In addition, we are required to perform certain scheduled
maintenance inspections and structural modifications.
The FAA has mandated the installation of traffic collision avoidance
systems ("TCAS") on all aircraft over 33,000 pounds by January 1, 2005. We have
installed TCAS on all our B747 aircraft. However, the FAA mandate also applies
to our DC9 aircraft. We estimate the total cost of installation of TCAS for our
DC9 fleet will be approximately $1.1 million. The FAA has also mandated that a
terrain awareness and warning system ("TAWS") be installed on all
turbine-powered aircraft by March 29, 2005. All of our B747 and DC9 aircraft
will require TAWS installation and we estimate the total cost of installation
will be $1.8 million.
There is a possibility that we may be asked to return all or a portion
of the $7.2 million that we received in fiscal 2002 for our claims for losses
pursuant to the Air Transportation Safety and System Stabilization Act. As of
February 29, 2004, we have received no further correspondence and have not
participated in any further negotiations regarding this matter and we do not
anticipate that we will be required to pay any additional amounts. To the extent
we need to actually pay these amounts, we believe cash on hand and amounts
expected to be available under our revolving credit facility will be sufficient.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
With respect to interest rate risks at February 29, 2004, we had fixed
rate debt of $227.3 million, and variable rate debt of $81.1 million. Based on
the outstanding balances at February 29, 2004, each 1% change in interest
recalculated on our variable rate debt would have increased or decreased our
annual interest cost by approximately $.04 million, and a 1% increase in
interest rates would decrease the fair market value of our fixed rate debt by
approximately $2.2 million. We have not entered into any obligations for trading
purposes.
The table below presents principal amounts and related weighted average
interest rates by year for our cash and cash equivalents and debt obligations.
The following summarizes our contractual cash obligations as of
Expected Maturity Dates
----------------------------------------------------------------------------------
There- Fair
2005 2006 2007 2008 2009 after Total Value
(in millions)
----------------------------------------------------------------------------------
Debt obligations:
Long-term debt
Senior Secured Debt $ -- $ -- $ -- $ -- $ -- $ 215.0 $ 215.0 $ 148.4 -
Average Interest Rate 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%
Other Fixed Rate Debt $ 7.5 $ 4.2 $ 0.5 $ 0.1 $ -- $ -- $ 12.3 $ 10.7
Average Interest Rate 9.5% 9.6% 8.5% 6.7% 6.7% 7.3% 6.0%
Variable Rate Debt $ 4.1 $ 2.3 $ 72.2 $ 1.6 $ 0.8 $ 0.1 $ 81.1 $ 81.1
Average Interest Rate 6.4% 6.0% 6.0% 7.0% 6.9% 3.9% 5.3%
February 29, 2004 (does not consider the effect of the refinancing May 13, 2004
as described in Note 5 of the "Notes to Consolidated Financial Statements" in
Part II, Item 8 of this Annual Report on 10-K.
With respect to foreign currency exchange rate risks, although some of
our revenues are derived from foreign customers, substantially all revenues and
substantially all expenses are denominated in U.S. dollars. We maintain minimal
balances in foreign bank accounts to facilitate payment of expenses.
We are not exposed to commodity price risks except with respect to the
purchase of aviation fuel. However, fluctuations in the price of fuel have not
had a significant impact on our results of operations in recent years because,
in general, our contracts with customers limit our exposure to increases in fuel
prices. We purchase no fuel under long-term contracts nor do we enter into
futures or swap contracts at this time.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Evergreen Holdings, Inc. and Subsidiaries
Index to Consolidated Financial Statements
The following financial statements are not solely the financial
statements of the issuer of the securities (Evergreen International Aviation,
Inc.), but are the consolidated financial statements of Evergreen Holdings Inc.,
the parent company of the issuer of the bonds. The subsidiary issuer and all
subsidiary guarantors, other than the Trust Created February 25, 1986, are
wholly owned by Evergreen Holdings, Inc., this guarantee is full and
unconditional, and the guarantees are joint and several. Accordingly, in lieu of
full financial statements of the subsidiary issuer, condensed consolidating
financial statements are included in Note 15 of the Consolidated Financial
Statements.
Consolidated Financial Statements of Evergreen Holdings, Inc. and its
Subsidiaries:
Report of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm.........................................................
Report of Deloitte & Touche LLP, Independent Registered
Public Accounting Firm.........................................................
Consolidated Balance Sheets as of February 29, 2004 and
February 28, 2003..............................................................
Consolidated Statements of Operations for the Years Ended February 29, 2004,
February 28, 2003 and 2002 (restated)..........................................
Consolidated Statement of Stockholders' Equity for the Years Ended
February 29, 2004, February 28, 2003 and 2002..................................
Consolidated Statements of Cash Flows for the Years Ended
February 29, 2004, February 28, 2003 and 2002..................................
Notes to Consolidated Financial Statements......................................
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Evergreen Holdings, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Evergreen Holdings, Inc. and its subsidiaries (the Company) at February 29, 2004
and February 28, 2003, and the results of their operations and their cash flows
for each of the two years in the period ended February 29, 2004 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has historically had violations of certain of
its debt covenants. The Company's failure to comply with existing covenants
would make debt callable. This raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Portland, OR
June 11, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Evergreen Holdings, Inc.
McMinnville, Oregon
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Evergreen Holdings, Inc. and subsidiaries (the "Company") for
the year ended February 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Evergreen
Holdings, Inc. and subsidiaries for the year ended February 28, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements for the year ended February 28, 2002 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company's difficulties in
meeting its loan agreement covenants and its negative working capital position
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 14, the accompanying consolidated statement of operations
for the year ended February 28, 2002 has been restated.
Deloitte & Touche LLP
Portland, Oregon
July 16, 2002 (April 25, 2003 as to Note 12, October 10, 2003
as to Note 15, and November 20, 2003 as to Note 14)
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
(In thousands)
2004 2003
-------- --------
ASSETS
Current assets:
Cash $ 4,071 $ 5,638
Accounts receivable, less allowance of $1,900 and
$33,516 for doubtful accounts
Trade 37,143 51,907
Other 1,503 3,667
Receivable and notes from affiliates, net 2,199 112
Inventories 14,719 17,786
Prepaid expenses and other assets 6,965 3,746
Income taxes receivable 583 --
Deferred tax asset 11,955 10,444
-------- --------
Total current assets 79,138 93,300
Assets held for sale 6,760 6,968
Notes receivable from affiliates 15,563 18,038
Property and equipment, net 545,397 553,736
Capitalized loan acquisition costs 15,531 5,707
Other assets 10,852 8,859
Goodwill 5,494 5,494
-------- --------
Total assets $678,735 $692,102
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Current portion of long-term debt $ 11,580 $285,403
Accounts payable 43,204 63,699
Accrued liabilities 20,081 18,759
Accrued interest 7,735 1,857
Affiliate trade and notes payable 2,477 348
Income taxes payable -- 2,257
-------- --------
Total current liabilities 85,077 371,318
Long-term debt 296,853 18,455
Deferred income and other 101 495
Deferred tax liabilities 105,840 105,395
-------- --------
Total liabilities 487,871 496,668
-------- --------
Commitments and contingencies (Notes 8 and 9)
STOCKHOLDERS' EQUITY
Stockholders' equity:
Common stock, no par value; 20,000,000 shares
authorized, 10,054,749 issued and outstanding 7,568 7,568
Retained earnings 183,296 187,866
-------- --------
Total stockholders' equity 190,864 195,434
Total liabilities and stockholders' equity $678,735 $692,102
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
FEBRUARY 29 2004, AND FEBRUARY 28, 2003 AND 2002 (AS RESTATED)
(In thousands)
2002
(as restated
2004 2003 see note 14)
--------- --------- ---------
Operating revenue:
Flight revenue $ 377,650 $ 400,603 $ 284,293
Sales of aircraft, parts, and other assets 17,357 12,137 13,270
Ground logistics services 99,790 129,724 122,287
Support services and other 40,837 31,871 27,857
--------- --------- ---------
Total operating revenues 535,634 574,335 447,707
--------- --------- ---------
Operating expenses:
Flight costs 73,756 69,808 54,645
Fuel 97,159 100,195 69,559
Maintenance 73,205 69,740 61,279
Aircraft and equipment 49,612 44,139 48,269
Costs of sales of aircraft, parts, and other
property and equipment 13,709 8,888 9,291
Cost of ground logistics services 89,150 104,559 104,598
Support services and other 38,957 32,636 23,168
Selling, general, and administrative 73,921 62,729 52,616
Impairment charge on aircraft -- -- 16,000
Claim under the Air Transportation Safety
and System Stabilization Act -- -- (7,204)
--------- --------- ---------
Total operating expenses 509,469 492,694 432,221
--------- --------- ---------
Income from operations 26,165 81,641 15,486
--------- --------- ---------
Other (expense) income:
Interest expense (34,840) (30,576) (34,297)
Other income, net 4,386 1,508 836
--------- --------- ---------
Other expense, net (30,454) (29,068) (33,461)
--------- --------- ---------
(Loss) income before minority interest and income taxes (4,289) 52,573 (17,975)
Minority interest (1,116) (962) (879)
--------- --------- ---------
(Loss) income before income taxes (5,405) 51,611 (18,854)
Income tax benefit (expense) 835 (19,804) 6,420
--------- --------- ---------
Net (loss) income $ (4,570) $ 31,807 $ (12,434)
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
(In thousands, except share data)
Common Stock Retained
Shares Amount Earnings Total
---------- ---------- ---------- ----------
Balance, February 28, 2001 10,054,749 $ 7,568 $ 168,493 $ 176,061
Net loss -- -- (12,434) (12,434)
---------- ---------- ---------- ----------
Balance, February 28, 2002 10,054,749 7,568 156,059 163,627
Net income -- -- 31,807 31,807
---------- ---------- ---------- ----------
Balance, February 28, 2003 10,054,749 7,568 187,866 195,434
Net loss -- -- (4,570) (4,570)
---------- ---------- ---------- ----------
Balance, February 29, 2004 10,054,749 $ 7,568 $ 183,296 $ 190,864
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
FEBRUARY 29 2004, FEBRUARY 28, 2003 AND 2002
(In thousands)
2004 2003 2002
--------- --------- ---------
Cash Flows from operating activities:
Net (loss) income $ (4,570) $ 31,807 $ (12,434)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 24,303 25,676 28,626
Amortization 42,352 43,453 38,078
Deferred income taxes (1,066) 22,417 (11,414)
Gain on sale of property and equipment (741) (4,904) (947)
Gain on insurance settlement (4,093) -- --
Impairment charges on aircraft -- -- 16,000
Deferred (income) loss and other (394) 69 --
Foreign currency exchange loss (gain) 207 (16) (48)
Minority interest income 1,116 962 879
Changes in operating assets and liabilities:
Accounts receivable 16,928 (3,358) 60,132
Receivables from affiliates (2,087) -- (896)
Inventories 3,067 (2,299) (4,669)
Prepaid expenses and other assets (3,219) (10,107) 2,133
Accounts payable and accrued liabilities (12,489) 2,318 (11,530)
Income taxes payable (2,840) (5,716) 3,618
--------- --------- ---------
Net cash provided by operating activities 56,474 100,302 107,528
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, equipment, and overhauls (62,352) (60,826) (35,694)
Proceeds from disposal of property and equipment 9,464 7,480 10,899
Early payment of operating leases with insurance settlements (4,090) -- --
Proceeds from insurance settlements 8,183 -- --
Repayments on notes receivable from affiliates (112) 3,435 2,529
Advances on notes receivable from affiliates -- (2,574) (6,522)
Other assets (13,709) 286 11,953
--------- --------- ---------
Net cash used in investing activities (62,616) (52,199) (16,835)
--------- --------- ---------
Net cash provided by financing activities:
Proceeds from long term debt 284,491 367 2,330
Payments on long term debt (125,462) (6,304) (85,127)
Proceeds from operating loans and short term debt (1,500) 6,987 20,200
Payments on operating loans and short term debt (152,954) (52,396) (23,000)
Payments on notes payable to affiliates -- (41) (1,800)
--------- --------- ---------
Net provided by (used in) financing activities 4,575 (51,387) (87,397)
--------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (1,567) (3,284) 3,296
Cash and cash equivalents, beginning of period 5,638 8,922 5,626
--------- --------- ---------
--------- --------- ---------
Cash and cash equivalents, end of period $ 4,071 $ 5,638 $ 8,922
========= ========= =========
Supplemental cash flow information:
Interest $ 25,225 $ 28,329 $ 36,494
Income taxes $ 3,635 $ 1,059 $ 1,394
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE YEARS ENDED FEBRUARY 29 2004, FEBRUARY 28, 2003 AND 2002
(In thousands)
Supplemental schedule of noncash investing and financing activities:
Fiscal year 2004:
None
Fiscal year 2003:
The Company converted $14,974 of receivables from affiliates to notes
receivable from affiliates.
Fiscal year 2002:
The Company exchanged an aircraft with a net book value of $25,570 and
incurred a liability of $8,800 to acquire another aircraft.
The Company purchased $9,590 of engine and aircraft overhauls through
long-term financing.
The Company purchased $1,250 of property and equipment through
long-term financing.
The accompanying notes are an integral part of the consolidated financial
statements.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Evergreen Holdings, Inc. (Holdings), (dba Evergreen International
Aviation Group) (the "Company") and its wholly-owned subsidiaries Evergreen
International Aviation, Inc. (EA), Evergreen International Airlines, Inc. (EIA),
Evergreen Aviation Ground Logistics Enterprise, Inc. (EAGLE), Evergreen
Helicopters Inc. (EHI), Evergreen Air Center, Inc. (Air Center), Evergreen
Aircraft Sales and Leasing Co. (EASL), Evergreen Agricultural Enterprises, Inc.
(EAE), Evergreen Vintage Aircraft, Inc. (Vintage), and Evergreen Aviation
Services, Inc. (the foreign subsidiary), provide highly diversified aviation
services through the following operating segments:
o EIA engages primarily in domestic short-range and international
long-range cargo operations, as well as air freight brokerage services.
o EAGLE primarily provides mail handling, hub management, aircraft
handling, cargo loading and unloading, and terminal services.
o EHI provides flight services throughout the world in markets
including international peacekeeping and health operations,
agriculture, oil exploration and development, and forest control and
provides aircraft maintenance and repair services.
o EAC performs required Federal Aviation Administration (FAA)
inspections, scheduled and unscheduled maintenance and repairs, light
engine maintenance, stripping and painting, aircraft storage and
complete airframe overhauls of commercial aircraft at an unlimited
airframe maintenance and repair station.
o EASL includes aircraft and parts brokerage operations.
o OTHER services include farming and nursery production and vintage
aircraft restoration operations.
Pursuant to Statement of Financial Accounting Standards (SFAS) No.131,
Disclosures about Segments of an Enterprise and Related Information, the Company
has determined that its core business activities are comprised of six distinct
operations, which are EIA, EAGLE, EHI, EAC, EASL, and OTHER. The Company's EIA
segment consists of Holdings, EA, and EIA. The Company's OTHER segment consists
of EAE and Vintage.
LIQUIDITY
The Company's consolidated financial statements as of February 29, 2004
and for the year ended have been prepared on a going concern basis, which
contemplates the realization of assets and settlements of liabilities and
commitments in the normal course of business.
The Company was in default of its Fixed Charge Coverage Ratio with PNC
Bank, under its revolving credit facility at February 29, 2004. Paying off all
obligations related to PNC Bank cured the default. The source of the payoff,
were funds obtained on May 13, 2004, when Evergreen International Aviation,
Inc., and certain of its subsidiaries entered into a financing arrangement and
refinanced its existing PNC Credit Facility. The new financing arrangement is a
three-year senior secured credit facility with Wells Fargo Foothill, part of
Wells Fargo & Company (NYSE: WFC), and Ableco Finance LLC. The new credit
facility (the "New Credit Facility") consists of a $50 million revolving loan,
subject to a borrowing base based on eligible receivables and eligible
inventory, and a $50 million term loan and is secured by substantially all of
the assets of the Company and its domestic subsidiaries, other than those
subsidiaries that operate the Company's agricultural business. Approximately $83
million was funded at closing and used to prepay and terminate the Company's PNC
Credit Facility, as Administrative Agent, and to pay certain related transaction
costs. The new agreement has interest rates of LIBOR plus 5.5% or the prime rate
plus 3.0% on the term debt and interest rates of LIBOR plus 3.0% or the prime
rate plus 0.5% on the revolving credit facility and is due in 2007.
Additionally, the Company was in default of covenants associated with
its line of credit with Merrill Lynch Business Financial Securities, Inc. at
February 29, 2004. The line of credit was amended whereby the covenants were
modified such that the Company is in compliance at February 29, 2004.
In the past, the Company has not always had sufficient cash flows from
operations and available borrowings to meet its liquidity requirements,
including debt service payments. The Company has also failed at various times to
comply with several of its covenants in its debt agreements. These covenants
include failure to maintain its Fixed Charge Coverage Ratio, Debt to EBITDA
Ratio, failure to timely provide financial statement reports, purchasing a new
aircraft through the revolving credit facility instead of with proceeds from a
special tranche of term loans, failure to comply with the transactions with
affiliates covenant and the loan covenant, failure to comply with the covenant
that limited its capital expenditures, and merging a subsidiary with another
subsidiary when an event of default or default had occurred and was continuing.
In fiscal 2003 and 2002, the audited financial statements were subject to "going
concern" comments due to the maturity of its old credit facility within twelve
months of the end of such fiscal years and, given the working capital position,
uncertainty as to the ability to refinance the existing credit facility or have
its maturity extended beyond twelve months. Accordingly, the Company was
required to classify such debt as a current liability. Subsequently, comments
regarding "going concern" were removed from the report of independent registered
public accounting firm on the fiscal 2003 audited financial statements because
the Company repaid outstanding debt as it came due with proceeds obtained from
the sale of bonds and funds available under the revolving credit facility in May
2003. In addition, from time to time, due to a lack of liquidity and restrictive
covenants in the existing credit agreement, the Company has not been able to
acquire helicopters required to meet the demand for the Company's services. On a
number of these occasions, the Company has been able to obtain leases of the
required helicopters from Mr. Delford M. Smith and his affiliates.
There is uncertainty regarding the Company's ability to comply with
certain of these debt covenants which would place the debt in the position to be
called due. This would raise substantial doubt about the Company's ability to
continue as a going concern. As a result, the audit report contains an
explanatory paragraph that states that, due to the historical difficulty it has
had in meeting debt covenants, there is substantial doubt as to the Company's
ability to continue as a going concern. The Company's ability to continue as a
going concern is dependent on future financial results and, should the Company
be in breach of the covenants on the debt, its ability to restructure or
otherwise amend the terms of that debt. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
might result from the outcome of this uncertainty.
Management's plan in regard to these matters are also described below.
As described above, The Company refinanced its existing PNC Credit
Facility with a three year senior secured credit facility with Wells Fargo
Foothill, a part of Wells Fargo & Company, and Abceco Financial LLC that
includes covenants that The Company believes will be achieved.
If the Company were to be in default of its covenants in the future, it
would, as it has in the past, seek to obtain amendments to the debt of waivers
of the covenants so that the Company was no longer in violation.
The Company has instituted various cost controls to reduce operating
expenses including the timely monitoring of labor, aircraft maintenance and
selling, general and administrative costs. These include:
o The reduction of labor costs as a percentage of revenue in certain
subsidiaries by approximately five percent on $5,400.
o The renegotiation of insurance costs to reduce the transport expenses
on fixed winged aircraft by approximately nineteen percent or $ 700.
o Overall reduction of professional services costs as the Company
begins to take some of these functions in-house.
o Consolidation of certain accounting functions within the various
subsidiaries.
o Focus on reducing non-essential maintenance costs.
Additionally, the Company continues to enhance it system of internal
controls such that timely financial reporting will assist in the frequent
monitoring of these costs.
The Company's consolidated financial statements as of February 28, 2002
and for the year then ended were prepared on a going concern basis, which
contemplated the realization of assets and settlement of liabilities and
commitments in the normal course of business. The Company was in default of one
of its covenants, a fixed charge coverage ratio, under its term loans and its
revolving credit agreement as of February 28, 2002. This difficulty in meeting
loan agreement covenants, along with its negative working capital position,
raised substantial doubt about the Company's ability to continue as a going
concern. The Company obtained waivers of certain of these covenant violations
until August 15, 2002. As a result of obtaining only a temporary waiver of
certain of the covenant violations, the Company classified term loans of
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
$263,000 and the borrowings under the revolving credit agreement of $38,000 as
current on the Company's balance sheet as of February 28, 2002.
The Company was in default of several of its covenants under its
revolving credit facility at February 28, 2003. On May 16, 2003, the Company
completed a $215,000 debt offering and borrowed $72,100 under a new revolving
credit facility (see Note 5).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its domestic and foreign subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
The operations of the Company's active foreign subsidiary are not significant.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company bases estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances at that time. On an ongoing basis the Company evaluates
and updates its estimates as appropriate. Actual results could differ from those
estimates under different assumptions or conditions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash balances and other
short-term, highly liquid, income-producing investments. Investments with
maturities of three months or less on their acquisition date are classified as
cash equivalents. These balances are located at high credit quality financial
institutions. At times, such balances may be in excess of Federal Deposit
Insurance Corporation limits. At February 29, 2004 and February 28, 2003, the
Company had no cash equivalents.
INVENTORIES
Inventories consist primarily of expendable parts and supplies for
aircraft maintenance and for sale to third parties, which are carried at the
lower of average cost or net realizable value, and agricultural crops and
nursery products, which are carried at the lower of first-in, first-out cost or
net realizable value. Maintenance inventories are charged to operations as
issued for use and agricultural and all other inventories are charged to
operations when sold. The nature of these inventories generally results in their
utilization over an operating cycle in excess of one year. The Company
periodically reviews inventories for potential obsolescence and records
adjustments, as
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
necessary, to reflect the lower of cost or net realizable value. The Company had
no material adjustments related to obsolete inventory during fiscal 2004 or
fiscal 2003.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. All major renewals,
modifications and overhauls, such as "C" and "D" checks, are capitalized. The
cost and accumulated depreciation related to assets sold or retired are removed
from the accounts and charged to income in the period sold.
Depreciation to estimated residual values is provided on the
straight-line method over the estimated useful lives of depreciable assets.
Aircraft, aircraft engines and rotable assets are depreciated from 8 to 38
years, machinery and equipment from 3 to 10 years, and buildings and
improvements from 10 to 40 years.
Effective as of September 1, 2003, the Company changed the estimated
useful lives of the aircraft in its EHI segment to more accurately reflect it
current estimate of their useful lives (see Note 3).
Overhauls of aircraft and rotable assets are accounted for as follows:
o Large fixed-wing aircraft overhauls: Upon acquisition, the cost of
major aircraft overhaul components included in the purchase price is
segregated from the cost of equipment. Overhaul component costs and
subsequent capitalized major overhauls are amortized to expense over
the period until the next scheduled overhaul, generally ten years or
less.
o Helicopters, medium and light fixed-wing aircraft overhauls: Major
overhaul components purchased with the aircraft are depreciated as part
of the cost of equipment. Subsequent major overhauls are capitalized
and amortized over operating hours to the succeeding overhaul,
generally two years or less.
o Rotable asset overhauls: The cost of rotable asset overhauls for
large fixed-wing aircraft and helicopters is capitalized and amortized
over estimated useful lives, generally five years or less. The cost of
repairing rotable assets is expensed as incurred.
Management evaluates the recoverability of the carrying value of
property and equipment at each balance sheet date or when events or changes in
circumstances indicate that a carrying amount may not be recoverable. An
impairment loss is recognized when the sum of the expected future undiscounted
net cash flows to be derived from the related assets is less than the carrying
amount of the assets. The amount of the impairment loss is based on the
difference between the related assets carrying value and the expected future
discounted net cash flows. The factors considered by management in performing
this assessment includes current operating results, trends and prospects as well
as the effects of obsolescence, demand, competition and other economic factors.
Based on management's reviews, an adjustment related to impairment associated
with the carrying value of capitalized assets was not required in fiscal year
2004 and 2003. In fiscal year 2002, an impairment loss of $16,000 was recognized
on the Company's DC9-33 fleet, which was determined based on a forecast of the
net present value of expected future cash flows to be earned by the aircraft.
LEASED AIRCRAFT OVERHAULS
The costs of required major maintenance and inspection of engines and
airframes for leased aircraft are capitalized and amortized to expense over the
period with the next scheduled overhaul, generally ten years or less, or the
termination of the lease.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
ASSETS HELD FOR SALE
Aircraft parts and other assets held for sale are recorded at the lower
of cost or net realizable value. Cost of aircraft held for sale includes the
amount of related unamortized overhauls.
CAPITALIZED LOAN ACQUISITION COSTS
On May 16, 2003, the Company completed a refinancing program which
included costs associated with the issuance of the 12% senior secured notes due
2010 and a $100,000 revolving credit facility (see Note 5). The costs associated
with the refinancing were capitalized and are being amortized over the lives of
the loans using the effective interest method in accordance with APB. No. 21,
Interest on Receivables and Payables. Amortization of capitalized loan
acquisition costs for fiscal year 2004 was $3,500.
CAPITALIZED INTEREST
Interest on funds used to finance the acquisition and structural
conversion of aircraft and the construction of certain facilities to the date
the asset is placed in service is capitalized. The Company capitalized no
interest charges in fiscal years 2004, 2003 and 2002.
INTANGIBLE ASSETS - GOODWILL
Goodwill represents the excess of cost over the fair value of net
assets acquired. The Company has two reporting units, EAGLE and EHI, with
assigned goodwill of $5,500. Quoted stock market prices are not available for
these individual reporting units.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.141, Business
Combinations, and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No.141
supersedes Accounting Principles Board (APB) Opinion No.16 and eliminates
pooling of interests accounting. It also provides guidance on purchase
accounting related to the recognition of intangible assets and accounting for
negative goodwill. SFAS No.142 changes the accounting for goodwill from an
amortization method to an impairment only approach. Under SFAS No.142, goodwill
and non-amortizing intangible assets shall be adjusted whenever events or
circumstances occur indicating that goodwill has been impaired. Accordingly,
consistent with SFAS 142, management's methodology for estimating the fair value
of each reporting unit primarily considers the discounted future cash flows. In
applying this methodology, management makes assumptions about each reporting
unit's future cash flows based on capacity, expected revenue, operating costs
and other relevant factors, and discount future cash flows based on each
reporting unit's weighted average cost of capital. The Company has completed its
impairment testing of the valuation of its goodwill as of February 29, 2004 and
has determined that there is no impairment for the year ended February 29, 2004.
Upon adoption of SFAS No.142, amortization of goodwill ceased. The
Company adopted SFAS No.142 on March 1,2002, the beginning of fiscal year 2003.
Application of the non-amortization provisions of SFAS No. 142 to goodwill,
which had previously been amortized over 15 years, would have resulted in an
increase in net income of $474 for the year ended February 28, 2002.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
The following table summarizes the impact of SFAS 142 on net loss had
SFAS 142 been in effect for fiscal year 2002:
Year Ended
Feb 28, 2002
------------
Net loss $(12,434)
Amortization of goodwill, net of tax of $300 474
---------
Net loss as adjusted $ (11,960)
=========
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains allowances for estimated losses resulting from
the inability of customers to make required payments and from disputed balances.
The Company periodically reviews past due balances to identify the reasons for
non-payment, and adjusts the allowance for doubtful accounts as appropriate.
In September 2001, the Company instituted proceedings in the United
States District Court for the State of Oregon against Asiana Airlines to recover
certain amounts owed to us pursuant to a freighter service agreement with
Asiana. On February 28, 2003, a jury returned a verdict in our favor against
Asiana. At February 28, 2003, the Company had recorded an account receivable of
$27,169 and an allowance against the receivable in the same amount. No income
had been recorded for this program since Asiana ceased making payments. During
fiscal year 2004, the account receivable of $27,169 was written off against the
fully reserved balance resulting in no change to net receivables and having no
effect on income.
During fiscal year 2004, EAGLE reduced the allowance for doubtful
accounts by $6,100 with write-offs related to U.S. Postal service contracts.
The Company believes the allowances for doubtful accounts as of
February 29, 2004 are adequate. If the customers' financial conditions were to
deteriorate, resulting in their inability to make payments, additional
allowances may need to be recorded, which would result in additional expenses
being recorded for the period in which such determination was made.
REVENUE RECOGNITION
The following describes the revenue recognition policy by segment:
EIA revenue recognition
Revenues in this segment are recorded predominantly as flight revenue.
The Company primarily charges customers based on miles traveled, space utilized
("block space",) hours flown ("block hours",) or trips taken. The Company
generally is not responsible for obtaining freight for its aircraft and receives
revenues based on routes flown rather than capacity carried. Block hours are
measured in 60 minute periods, or fractions of such periods, from the time the
aircraft moves from its departure point to the time it comes to rest at its
destination. The number of pallet position utilized measures Block space. Flight
revenue is primarily recorded as flights are completed.
Many of the contracts are structured as "all-in" contracts, under which
the Company is responsible for the full range of operating expenses, including
fuel costs. Other contracts are Aircraft Crew Maintenance and Insurance, "ACMI"
or "wet lease" arrangements, under which the Company provides only the aircraft,
crew, maintenance and insurance, and the customer is responsible for all other
operating expenses, such as fuel, ground handling, crew accommodations and the
cost of obtaining freight.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
The agreements with freight forwarders are typically structured as
block space agreements, where the forwarder commits to deliver a certain amount
of freight for a specific flight. Under the agreement, the forwarder must pay
for the space committed, whether or not it delivers the freight to the Company.
EAGLE revenue recognition
All revenues in this segment are recorded as ground logistics services.
Ground handling and logistics revenues are typically generated under contracts
with the U.S. Postal Service, domestic and international passenger and cargo
airlines, and express delivery customers. The Company typically provides
services through contracts with a term of one year or more, with scheduled rates
for a range of services at one or more locations throughout the United States.
Revenues in this segment are recorded when services are rendered.
EHI revenue recognition
Services are typically provided under one to five year contracts. The
Company typically charges customers a monthly availability fee in addition to an
hourly charge for missions flown or by hour with a minimum number of hours per
day. The Company often modifies its pricing methods to match the characteristics
of a mission, which may involve pricing based on weight if the mission is
transport-related, by acre if agricultural or by number of pick-ups if
construction. Revenues in this segment are recorded when services are rendered.
EAC revenue recognition
All revenues in this segment are recorded as support services. Aircraft
maintenance and repair revenues are generally derived from heavy maintenance (C
checks and D checks) on aircraft, aircraft storage and other aircraft and
storage services. Revenues in this segment are recorded when services are
rendered.
EASL revenue recognition
All revenues in this segment are predominantly derived from sales of
aircraft, parts and other assets, typically on a consignment basis. Revenues
generated from the sale of the Company's assets are recorded within the segment
from which the assets originated. Revenues from asset sales within EASL relate
solely to assets acquired and sold by EASL. Similarly, revenues generated from
leasing of aircraft are recorded within the segment that controls those assets.
EASL generates revenues in the form of commissions in connection with the sale
and leasing of assets owned by third parties and the Company's other operating
segments.
OTHER segment revenue recognition
Revenues from this segment are recorded as support services.
MAJOR CUSTOMERS
Revenues generated under various contracts with numerous agencies of
the U.S. Government accounted for approximately 73%, 68%, and 61% of the total
revenues for fiscal years 2004, 2003, and 2002 respectively. Amounts receivable
from these agencies were $25,033 and $39,870 at February 29, 2004 and February
28, 2003 respectively.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
INCOME TAXES
Income taxes are accounted for in accordance with SFAS No.109,
Accounting for Income Taxes. Under SFAS No.109, deferred income tax liabilities
and assets are determined based on the difference between the financial
reporting amounts and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based upon enacted tax laws and
rates in effect for the years in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
CONCENTRATION OF CREDIT RISKS
The Company grants credit to customers throughout the world. The
Company's primary customer base consists of various agencies of the U.S.
Government and large well established foreign and domestic airlines. Credit
strength of this customer base is derived from its geographical diversity and
from its long history of payment on services provided. The Company evaluates
each customer's credit worthiness on a case-by-case basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, revolving credit facility and accrued liabilities approximate
fair value because of the short-term maturity of these items. The carrying
amounts of the Company's variable rate long-term debt approximate fair value due
to variable interest rates correlating to changes in market conditions. The
Company's fixed rate debt of $227,300 and $20,208 as of February 29, 2004 and
February 28, 2003 respectively (see Note 5), and had a fair value of $159,000
and $17,059 as of February 29, 2004 and February 28, 2003 respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No.46 (FIN 46),
Consolidation of Variable Interest Entities-an Interpretation of ARB No.51
Consolidated Financial Statements, and subsequently revised in December 2003,
with the issuance of FIN 46-R. Interpretation addresses how variable interest
entities are to be identified and how an enterprise assesses its interests in a
variable interest entity to decide whether to consolidate that entity .The
Interpretation also requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among the parties involved. The Company is required
to adopt FIN 46-R as of the period ending May 31,2005. While Management has not
completed their final assessment of the impact of FIN 46-R, based upon their
preliminary assessment, management believes that the Company may be the primary
beneficiary of certain related party entities including, but not limited to,
Ventures Holding and Ventures Acquisitions. The Company leases certain assets,
consisting primarily of buildings and aircraft, from these entities. The
financial statements of these entities may be included in its financial
statements in the period of adoption and beyond. Such inclusion is not expected
to have a material impact on its consolidated financial statements.
In May 2003, the FASB issued SFAS No.150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. On November 7, 2003 FASB issued FASB staff Position NO. FAS 150-3
(FSP150-3) "Effective Date, Disclosure, and Transition for Mandatorily
Redeemable Financial Instruments of Certain Non-public Entities and Certain
Mandatorily Redeemable Noncontrolling Interests under FASB Statements 150,
Accounting for Certain Financial Instruments with Characteristics of both
liabilities and Equity". FSP 150-3 deferred certain aspects of FAS 150. It
requires issuers to classify financial instruments within its scope as
liabilities (or an asset in some cases). Prior to SFAS No. 150, many
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
of these instruments may have been classified as equity. This Statement
is effective for financial instruments entered into or modified after May
31,2003 and otherwise is effective at the beginning of the first interim period
beginning after September 15, 2003. This standard is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance of SFAS No. 150. The adoption
of FAS 150 and FAS 150-3 did not have a material effect on the Company's ongoing
results of operations, financial position or cash flows.
On December 17, 2003, the Staff of the SEC issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue Recognition, which supersedes SAB 101,
Revenue Recognition in Financial Statements. SAB 104's primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superceded as a result of the issuance of EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." Additionally,
SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had
been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ
have been incorporated into SAB 104. While the wording of SAB 104 has changed to
reflect the issuance of EITF 00-21, the revenue recognition principles of SAB
101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104
did have a material impact on the Company's revenue recognition policies,
results of operations, financial position or cash flows.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements and notes have
been reclassified to conform to the current year presentation. Previously
reported net income (loss) or cash flows were not affected by these
reclassifications.
2. PROPERTY AND EQUIPMENT
Property and equipment at February 29, 2004 and February 28, 2003
consisted of the following:
2004 2003
-------- --------
Flight equipment
Aircraft $704,322 $711,664
Overhauls, net 91,698 89,121
Construction in progress 11,755 11,069
-------- --------
807,775 811,854
-------- --------
Other property and equipment
Machinery and equipment 102,787 84,501
Buildings and improvements 42,956 42,194
Land and improvements 15,646 15,444
Construction in progress 0 1,499
-------- --------
161,389 143,638
-------- --------
Property and equipment, at cost 969,164 955,492
Accumulated depreciation (423,767) (401,756)
-------- --------
Total $545,397 $553,736
======== ========
The Company owns an aviation museum facility, which is not being
depreciated and which has a net book value of $16,072 at February 29, 2004 and
at February 28, 2003. This facility is currently being leased to a
not-for-profit entity at no charge and is included in the table above.
Depreciation expense for fiscal years 2004, 2003 and 2002 was $24,303,
$25,676 and $28,626 respectively.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
3. CHANGE IN ACCOUNTING ESTIMATES
Effective as of September 1, 2003, the Company changed the estimated
useful lives of the aircraft in its EHI segment to more accurately reflect its
current estimate of their useful lives. The estimated useful lives of these
aircraft were increased from 10 years to 20 years. The change lowered total
depreciation expense $400 for fiscal year 2004.
4. OTHER ASSETS
Other assets at February 29, 2004 and February 28, 2003 consisted of the
following:
Year Ended
----------
Feb 29, Feb 28,
2004 2003
------- ------
Deposits $3,884 $5,010
Noncurrent agricultural products 5,703 3,078
Other 1,265 771
------- ------
Total $10,852 $8,859
======= ======
5. DEBT OBLIGATIONS
On May 16, 2003, the Company issued $215,000 in aggregate principal
amount of 12% Senior Second Secured Notes (the "Notes") that will mature in
2010. The Notes were sold for 100% of their face amount. The Notes are
unconditionally guaranteed, jointly and severally, by Holdings and all of
Aviation' s subsidiaries except Evergreen Agricultural Enterprises, Inc. and its
subsidiaries, and by Aviation's foreign subsidiaries. The Notes are secured by a
second priority lien, subject to permitted liens, on substantially all of the
assets that secure obligations under the new revolving credit facility. The
Notes (i) have interest payment dates of May 15 and November 15 of each year;
(ii) are senior second secured obligations, rank equally with all of Aviation's
existing and future senior, or unsubordinated, debt and are senior to any of
Aviation's future senior subordinated or unsubordinated debt; and (iii) are
redeemable after the dates and at the prices (expressed in percentages of
principal amount on the redemption date) as set forth below:
Redemption
If Redeemed during the 12-month period commencing Price
------------------------------------------------- ----------
May 15, 2007 106%
May 15, 2008 103%
May 15, 2009 and thereafter 100%
Concurrent with the issuance of the Notes, Aviation entered into a
$100,000 revolving credit facility (the "PNC Credit Facility"), for which PNC
Capital Markets, Inc. acted as arranger, and PNC Bank, National Association
acted as the agent. The PNC Credit Facility had an interest rate of the lesser
of LIBOR plus 3% or the prime rate plus 2% and was due in 2006. The obligations
under the PNC Credit Facility are guaranteed by all of the guarantors under the
Notes. Borrowings under the PNC Credit Facility were secured by a first priority
security interest in substantially all of the Company's existing and hereafter
acquired personal property, including all of the capital stock or membership
interests of all of its subsidiaries that are guarantors under the PNC Credit
Facility. This security interest is subject to certain exceptions and permitted
liens, including existing liens on two B- 747 aircraft and three DC9 aircraft.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
The Company initially borrowed $72,100 under the PNC Credit Facility on
May 16, 2003. The Proceeds from the refinancing were used to repay $264,700
outstanding under a previous credit facility. In securing the refinancing,
$19,000 in loan acquisition costs were incurred. These costs are being amortized
over the lives of the two loans using the effective interest method.
The PNC Credit Facility and the indenture governing the Notes impose
certain restrictions on Aviation, including restrictions that limit its
restricted subsidiaries' ability to, among other things: (i) incur additional
debt; (ii) pay dividends, acquire shares of capital stock, make payments on
subordinated debt or make investments; (iii) place limitations on distributions
from restricted subsidiaries; (iv) issue or sell capital stock of restricted
subsidiaries; (v) issue guarantees; (vi) sell or exchange assets; (vii) enter
into transactions with shareholders and affiliates; (viii) make capital
expenditures; (ix) create liens; and (x) effect mergers and other changes of
control. In addition, the PNC Credit Facility contained financial covenants
requiring the Company to meet various financial ratios, such as a minimum
tangible net worth ratio, maximum capital expenditures, and a minimum fixed
charge coverage ratio. These covenants included requirements to, at all times,
maintain undrawn availability of not less than $5,000 on the PNC Revolver, a
minimum consolidated tangible net worth of $150,000 through February 29, 2004
and increasing tangible net worth based on net income in subsequent periods, and
a fixed charge coverage ratio of 1.5:1. Additionally, capital expenditures are
limited to $75,000 per year.
As of February 29, 2004, Aviation had approximately $70,500 in
outstanding borrowings under the credit facility and $15,500 available upon
application of borrowing base limitations as such borrowing base is available on
March 1, 2004 and subject to applicable covenants. Aviation must maintain $5,000
of excess availability under the PNC Credit Facility, which may only be reduced
with the consent of each of the lenders under the PNC Credit Facility.
Substantially all of the assets of the Company are pledged as collateral under
the various debt agreements.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Long-term debt consisted of the following at February 29, 2004 and February 28,
2003:
2004 2003
--------- ---------
12% Senior Second Secured Notes due 2010 $ 215,000 --
Revolving credit facility, variable rate interest at LIBOR plus 6% plus 2%
principal in kind (9.38% at February 29, 2003) (starting March 1, 2003
interest becomes LIBOR plus 10%), due in May 2003, total borrowings
available of $40,000 as of February 28, 2003 -- 28,000
Revolving credit facility, variable rate interest at PNC's prime rate plus 1% 70,530 --
or PNC's eurodollar rate plus 3.5%, due in May 2006
Term loans, variable rate interest at LIBOR plus 6% plus 2% principal in
kind (9.38% at February 28, 2003) (starting March 1, 2003 interest
becomes LIBOR plus 10%),quarterly payments of principal and interest
through May 2003 -- 239,607
Notes payable, LIBOR plus 6% plus 2% principal in kind (9.38% at
February 28, 2003) (starting March 1, 2003 interest becomes LIBOR
plus 10%), monthly payments of principal and interest through August
2006 -- 4,033
Term loan, interest at 10.44%, monthly payments of principal and interest
through March 29, 2007 7,955 14,289
Long-term vendor financing, variable rate interest at LIBOR plus 6% plus
2% principal in kind (9.38% at February 29, 2004) (starting March 1,
2003 interest becomes LIBOR plus 10%) 1,332 3,614
Other term loans 9,039 9,787
Capital leases 4,577 4,528
--------- ---------
308,433 303,858
Current maturities of long-term obligations (11,580) (285,403)
--------- ---------
Total long-term obligations $ 296,853 $ 18,455
========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
At February 29, 2004 scheduled maturities of long-term debt areas follows:
Debt obligations:
2005 $9,125
2006 5,155
2007 72,223
2008 1,600
2009 753
Thereafter 215,000
--------
$303,856
========
Capital leases (net of interest):
2005 $2,455
2006 1,315
2007 543
2008 85
2009 79
Thereafter 100
------
$4,577
======
The Company was in default of its Fixed Charge Coverage Ratio with PNC
Bank, under its revolving credit facility at February 29, 2004. Paying off all
obligations related to PNC BANK cured the default. The source of the payoff,
were funds obtained on May 13, 2004, when Evergreen International Aviation,
Inc., and certain of its subsidiaries entered into a financing arrangement and
refinanced its PNC Revolver. The new financing arrangement is a three-year
senior secured credit facility with Wells Fargo Foothill, part of Wells Fargo &
Company (NYSE: WFC), and Ableco Finance LLC. The new credit facility (the "New
Credit Facility") consists of a $50,000 revolving loan, subject to a borrowing
base based on eligible receivables and eligible inventory, and a $50,000 term
loan and is collateralized by substantially all of the assets of the Company and
its domestic subsidiaries, other than those subsidiaries that operate the
Company's agricultural business. Approximately $83,000 was funded at closing and
used to prepay and terminate the Company's PNC Revolver, as Administrative
Agent, and to pay certain related transaction costs. The new agreement has
interest rates of LIBOR plus 5.5% or the prime rate plus 3.0% on the term debt
and interest rates of LIBOR plus 3.0% or the prime rate plus 0.5% on the
revolving credit facility and is due in May 2007. Under the terms of the $50,000
term loan, the Company is required to repay in consecutive monthly installments,
commencing on June 1, 2004 and continuing on the first day of each month
thereafter until paid in full, each in a principal amount equal to $542.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
The new debt as well as repayment of the old facility creates a new
schedule of maturities of long term debt as follows:
Before After
Total debt obligations: May 13,2004 May 13,2004
--------------------- ---------------------
2005 $10,799 $15,674
2006 8,609 11,909
2007 79,656 8,564
2008 1,684 66,809
2009 561 561
Thereafter 215,087 215,087
--------------------- ---------------------
$316,396 $318,604
===================== =====================
The Company is subject to various covenants under this new debt
agreement. These covenants include a requirement to at all times maintain
undrawn availability of not less than $5,000 on the revolving line, a minimum
threshold measuring consolidated EBITDA, a ratio requiring a minimum fixed
charge coverage and a limit on capital expenditures of $75,000 provided $10,000
is funded by indebtedness other than revolving credit advances. If Aviation or
its restricted subsidiaries violates these covenants and are unable to obtain
waivers from the lenders or noteholders, its debt under these agreements would
be in default and could be accelerated by the lenders or noteholders. Cross
default provisions exist in the indenture governing the Notes whereby a default
on the Notes would occur if an event of default under issues of indebtedness of
Aviation, any subsidiary guarantor or other significant subsidiary having an
outstanding principal amount of $10,000 or more in the aggregate for all such
issues of all such persons and such default causes the holder to declare the
indebtedness due and payable prior to its stated maturity and such indebtedness
is not discharged in full or such acceleration is not rescinded or annulled
within 30 days.
In connection with the new financing arrangement, Evergreen Aircraft
Sales & Leasing Co. amended its existing WCMA Loan Agreement with Merrill Lynch
Business Financial Services, Inc. The amendment conforms the financial covenants
in the loan agreement to the financial covenants in the new credit facility.
In addition on May 13, 2004, when Evergreen International Aviation,
Inc. and certain of its subsidiaries entered into a new financing arrangement
with Wells Fargo Foothill and refinanced its existing PNC Revolver, the
remaining unamortized balance of deferred financing costs relating to the PNC
Revolver of $4,293 was written off and charged to expense.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
6. INCOME TAXES
The components of the Company's income tax benefit (expense) for the
years ended February 29, 2004 and February 28, 2003 and 2002 are as follows:
2004 2003 2002
2004 2003 2002
------------- ------------- -------------
Current:
Federal -- ($2,339) $4,226
State 231 (274) 768
------------- ------------- -------------
231 (2,613) 4,994
------------- ------------- -------------
Deferred:
Federal (745) 20,057 (9,594)
State (321) 2,360 (1,820)
------------- ------------- -------------
(1,066) 22,417 (11,414)
------------- ------------- -------------
Total ($835) $19,804 ($6,420)
============= ============= =============
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at February 29, 2004 and February 28, 2003
are presented below:
2004 2003
---------- ----------
Deferred tax assets, current:
Accounts receivable $4,736 $4,103
Other 7,219 6,341
---------- ----------
Total deferred tax assets, current 11,955 10,444
========== ==========
Deferred tax liabilities, noncurrent
Net operating loss carryforwards 31,506 17,901
Alternative minimum tax credit carryforwards 10,528 12,983
Property and equipment (146,339) (136,279)
Other (1,535) --
---------- ----------
Total deferred tax liabilities, noncurrent ($105,840) ($105,395)
========== ==========
The Company's effective tax rate for the years ended February 29, 2004
and February 28, 2003 and 2002 differs from the federal statutory tax due
primarily to the following:
2004 2003 2002
-------- --------- ---------
Tax (benefit) expense computed
at statutory rate $(1,838) $ 17,548 $ (6,410)
State income taxes,
net of federal effect (223) 2,064 (762)
Other (1) 1,226 192 752
------- -------- ---------
Income tax (benefit) expense $ (835) $ 19,804 $ (6,420)
======= ======== =========
(1) Other is comprised of permanent differences, predominately meals,
entertainment, fines and other penalties.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Business tax credits and the related valuation allowance of
approximately $1,100 were netted at February 28, 2002 because such credits are
not expected to be realized.
At February 29, 2004 and February 28, 2003, the Company had federal
income tax net operating loss carryforwards of $85,705 and $71,827 respectively.
At February 29, 2004 and February 28, 2003, the Company had state income tax net
operating loss carryforwards of $31,466 and $25,033 respectively. These net
operating loss carryforwards expire in the years 2007 through 2024. During the
year ended February 29, 2004 and February 28, 2003, the Company reduced its
taxes currently payable by $0 and $16,179 respectively from the utilization of
net operating loss carryforwards. The Company has an alternative minimum tax
(AMT) credit available of $10,528 at February 29, 2004 and February 28, 2003
which is available to offset future regular taxes that are in excess of future
alternative minimum taxes. Under current tax law, the carryforward period for
the AMT credit is unlimited.
7. EMPLOYEE BENEFIT PLANS
Effective March 1, 2002, we amended our Cash or Deferred Savings Plan
and established the Evergreen Savings and Retirement Plan (the "Plan"). We
transferred the assets of the Evergreen Pension Plan and The Evergreen Profit
Sharing Plan effective March 15, 2002 into the Plan, whereby the Evergreen
Savings and Retirement Plan was the sole surviving plan.
The Plan is a defined contribution plan covering all full-time
employees of the Company who have been credited with one year of service, are
age 21 or older, are not covered by a collective bargaining agreement, and are
not a temporary employee. Under the Plan, we match 50% of the first 8% of base
compensation that a participant contributes to the Plan. We also make a basic
contribution equal to 4% of the annual compensation of each participant who has
completed the minimum required hours of service during the Plan year. We may
make additional discretionary contributions at the option of the Board of
Directors.
The Company contributed $3,981, $3,815 and $3,400 for the years ended
February 29, 2004, February 28, 2003 and 2002, respectively. We made no
discretionary contributions to the Plan for the years ended February 29, 2004,
February 28, 2003 and 2002.
Participants direct the investment of their contributions and the
employer contributions into various investments options offered by the Plan.
Participant contributions in the plan vest immediately. Plan participants accrue
employer benefits at the completion of two years of service, at which time the
participants are 20% vested. Additional vesting occurs at a rate of 20% per year
until fully vested.
8. COMMITMENTS
The Company leases aircraft, land, buildings and equipment under
cancelable and noncancelable arrangements through third party and related party
entities. Nine of the Company's helicopters and turbo prop aircraft are leased
under operating leases ranging from six to ten years. Eight of these aircraft
include options to purchase the aircraft at anniversary dates ranging from three
to five years. In the event of early termination of these leases, the Company
has guaranteed future lease commitment buyouts of approximately $8,376 as of
February 29, 2004. The Company also leases a Gulfstream G-IV under an operating
lease which includes an option to purchase the aircraft at the fifth anniversary
of the lease arrangement at its fair value at this time. In the event of early
termination, the Company has guaranteed a future lease commitment buyout of
approximately $9,182 as of February 29, 2004.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Four of the Company's aircraft engines are leased under operating
leases that include termination guarantees of approximately $5,638 as of
February 29, 2004. Rental commitments under noncancelable operating leases
having an original term of one year or more at February 29, 2004 are as follows:
Fiscal Related Other Total
Party
------ ------------- -------------- -------------
2005 $5,831 $14,709 $20,540
2006 2,040 9,733 11,773
2007 565 6,887 7,452
2008 0 4,676 4,676
2009 0 3,732 3,732
Thereafter 0 6,595 6,595
------------- -------------- -------------
$8,436 $46,332 $54,768
============= ============== =============
In addition, the Company leases aircraft and engines under short-term
agreements on an as needed basis.
Total rental expense for the years ended February 29, 2004, and
February 28, 2003 and 2002 was $39,436, $33,150 and $28,751 respectively,
including related party rentals (see Note 11).
9. CONTINGENCIES
On September 19, 2001, we instituted proceedings in the United States
District Court for the District of Oregon against Asiana Airlines ("Asiana") to
recover certain amounts owed to us pursuant to a freighter service agreement
with Asiana, which began January 28, 2000 and expired February 28, 2003. The
agreement required us to provide the aircraft (B747), crew, maintenance and
insurance. Asiana was required to pay all other costs incurred in the
performance of the contract. The contract provided for minimum payments based on
guaranteed block hour utilization as defined in the agreement. On August 28,
2001, Asiana paid us block hour utilization for the first week of September and
gave notice that no further payments would be made. Asiana did not reimburse us
for certain costs that we incurred during performance under the terms of the
contract. We completed the mission in progress and returned the aircraft to the
United States. Since the agreement was in force until February 28, 2003 and
Asiana ceased minimum payments without notice, we sought damages to compensate
us for the revenue that would have been earned had Asiana continued to meet its
contractual obligations. On February 28, 2003, a jury returned a verdict of US
$16.6 million in our favor against Asiana. On April 22, 2003, the court denied
our motion for prejudgment interest. On April 28, 2003, the court entered
judgment in our favor in the amount of $16.6 million. On May 2, 2003, Asiana
moved to stay the execution of the judgment pending hearing on post-judgment
motions. On May 5, 2003, the court granted the stay of execution, as of the date
Asiana posts sufficient bond. In May 2003, Asiana posted a cash bond in the
amount US $17.4 million. An order denying Asiana's post-judgment motions and
awarding us $38,053 in costs was entered on September 26, 2003. On October 24,
2003 Asiana filed a notice of appeal. The court ordered a settlement assessment
conference for December 18, 2003 which was recorded and conducted on January 5,
2004 at which time it was determined that further settlement discussions were
not likely to be fruitful and that the briefing schedule stood as issued.
Briefing on the appeal began on February 23, 2004. We filed our answer brief to
affirm the judgment on April 7, 2004. Asiana's reply was filed on May 10, 2004.
The Ninth Circuit Court of Appeals has not yet scheduled an oral argument. Since
the agreement was in force until February 28, 2003 and Asiana ceased making
minimum payments without notice, the Company believes it is entitled to the
revenue, which it would have earned had Asiana continued to meet its contractual
obligation. At February 28, 2003, the Company had recorded an account receivable
of $27,169. This amount was fully reserved and no income was recorded for this
program since Asiana ceased making
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
payments. During fiscal year 2004, the account receivable of $27,169 was written
off against the fully reserved balance resulting in no change to the net
receivables and no income effect.
On February 11, 2003, Tridair Repair and Manufacturing, Inc. filed a
complaint against us alleging, among other things, fraud and breach of contract
(California Action) related to an aircraft salvage contract. After Tridair
transferred its litigation rights to an entity named Diversified Aero Asset
Management, Inc. (which also sued Evergreen Air Center in the same court for
similar claims), Diversified amended its complaint to include Tridair.
Diversified seeks $10,600 plus the fair market value of the parts. We filed a
motion to dismiss, or in the alternative, to transfer the case to court in
Arizona. The California Action was dismissed, and the parties filed competing
claims on the same matters in Arizona court. The Arizona court actions are in
the initial pleading stages. Discovery is continuing and trial is scheduled for
November 30, 2004. We believe we have meritorious defenses to the allegations in
the complaint and intend to defend the case vigorously.
On or around May 22, 2003, Bank of America Securities LLC filed suit
for the State of North Carolina against Evergreen International Aviation and
certain of its subsidiaries. The complaint alleges claims for breach of contract
and quantum meruit, arising out of the agreements with the plaintiff to act as
our financial agent and payment of related fees. The damages were unspecified
and we retained local counsel. On March 29, 2004 we filed our Opening Brief.
Oral arguments are expected to be set for mid to late June 2004. We believe we
have meritorious defenses to the allegations in the complaint and intend to
defend the case vigorously. The Company is a party to certain legal proceedings
and claims that arise in the ordinary course of business. While the results of
these matters cannot be predicted with certainty, management believes, based on
its examination of such matters, experience to date and discussion with legal
counsel, that the final outcome of such matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
10. EFFECT OF THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001
Immediately following the terrorist attacks on September 11, 2001 the
FAA closed the United States airspace. The Company resumed operations on
September 14, 2001 after the FAA order was rescinded. During the period in which
the flight operations were suspended, the Company experienced contract revenue
losses and incurred incremental expenses associated with crew and aircraft
repositioning and added security measures.
In September 2001 the Company filed a claim for $22,100 under the Air
Transportation Safety and System Stabilization Act, which provides direct
compensation to the U.S. airlines for direct and incremental losses that
resulted from the terrorist attacks for the period September 11,2001 through
December 31, 2001. In May 2002 an amended claim for $15,100 was filed. In
September 2001, the federal government paid the Company $7,200 as an initial
payment of the claim under the Air Transportation Safety and System
Stabilization Act. No further payments have been received. Payment of the
balance of the claim is dependent upon finalization of the Department of
Transportation (DOT) rules and guidelines related to the audit of the claims
that have been filed by the airlines. Since payment of claims under the Act are
subject to a DOT audit, there can be no assurances that the balance will be paid
by the DOT or, that upon the audit of the claim, the DOT will not seek to
recover amounts already paid to the Company. Accordingly, the Company has not
recorded a receivable in their 2004 financial statements.
11. RELATED PARTY TRANSACTIONS
Transactions under Mr. Delford M. Smith's employment agreement
On May 16, 2003, the Company completed a $215,000 debt offering and
borrowed $72,100 under a new revolving credit facility (see note 5.) In
conjunction with the completion of the new financing arrangement, the Company
paid its Chief Executive Officer, Mr. Delford M. Smith ("Mr. Smith"), a one-time
bonus in the amount of
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
$4,000. This expense was recognized in selling, general and administrative
expenses. Also on May 16, 2003, the Company entered into an employment agreement
(the "agreement") with Mr. Smith. Pursuant to this agreement, Mr. Smith will
serve as the Company's Chief Executive Officer and Chairman of the Board. The
agreement provides for compensation at the rate of $3,000 per year. The term of
Mr. Smith's agreement is five years from the completion of the refinancing (May
16,2003) and is automatically extended each day so that the remaining term is
always five years. Upon Mr. Smith's termination under certain circumstances as
defined in the agreement, Mr. Smith will be paid five times his base annual
compensation plus an amount equal to five times the average of the annual bonus
paid to him in the five years immediately preceding the termination. Such
payment will only be made upon approval of two-thirds of the directors then in
office, other than Mr. Smith. Pursuant to the agreement, the board may, in its
discretion, grant Mr. Smith annual bonuses, provided, however, that the amount
of such bonuses shall be used solely (i) to satisfy any of Mr. Smith's or his
affiliates obligations to Holdings or its subsidiaries or (ii) to satisfy any
taxes payable by Mr. Smith as a result of the receipt of such bonus or the
satisfaction of such obligations. The agreement was entered into concurrent with
Mr. Smith's execution of certain promissory notes to us to provide for repayment
of existing indebtedness, (see Note 13), "Subsequent Events."
INDEBTEDNESS OF MR. DELFORD M. SMITH AND AFFILIATED ENTITIES
As of February 29, 2004 and February 28, 2003, entities owned or
controlled by Mr. Smith owed the Company approximately $15,300 and $18,150,
respectively, (including $600 owed to the Trust Created February 25, 1986). The
majority of this debt is evidenced by several promissory notes which bear
interest at the rate of 4% per annum. Annual installments of principal and
interest total approximately $2,000. Each note is due and payable on March 31,
2013. Each note is secured by a pledge of Mr. Smith's interest in the trust that
owns approximately 2.7 million shares of common stock of Evergreen Holdings,
Inc. The receivable of $15,300 owed by these affiliated entities to the Company
at February 29, 2004 is net of accounts payable of $1,738 not evidenced by
promissory notes, and a note payable of $739 evidenced by a signed promissory
note bearing interest at 6%.
LEASE TRANSACTIONS
The Company rents aircraft and buildings under operating leases from
entities owned or controlled by Mr. Smith. Rent expense for these leases
amounted to $7,298, $5,426, and $6,214 for the years ended February 29, 2004,
and February 28, 2003, and 2002, respectively.
PURCHASE TRANSACTIONS
Our agricultural business segment sells bulk hazelnuts to wholesalers
and distributors, produces hazelnut products, sell pinot noir grape juice and
wine, and sells bulk pinot noir grapes to wineries. During fiscal 2004, the
Company purchased $197 in pinot noir grapes from our Chairman, Mr. Delford M.
Smith. During fiscal 2003, the Company purchased hazelnuts and pinot noir grapes
grown on and produced on Mr. Smith's properties totaling approximately $600 and
$1,000, respectively. During fiscal 2002, the Company purchased hazelnuts grown
on Mr. Smit's properties totaling $1,600.
OTHER RELATED PARTY TRANSACTIONS
During fiscal years 2004, 2003 and 2003, the Company had sales of $11,
$99 and $19 with various related-party affiliates.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
OWNERSHIP INTEREST IN AIRCRAFT
In addition, Mr. Smith has a one-third ownership interest in a certain
B747 aircraft of which the Company has the remaining two-thirds interest. His
share of the income for the one-third ownership interest being leased to the
Company was $1,116, $962 and $879, respectively for the years ended February 29
2004, and February 28, 2003 and 2002.
NOTES RECEIVABLE FROM AFFILIATES AND NOTES PAYABLE TO AFFILIATES
Notes receivable from affiliates and Notes payable to affiliates at
February 29, 2004 and February 28, 2003 consisted of the following:
2004 2003
------------- ------------
Notes receivable from Ventures Holdings, Inc.
(an entity controlled by the Company's majority shareholder)
due in annual installments totaling $1,134
beginning March 31, 2004 including interest of 4% $10,672 $10,365
Notes receivable from Ventures Acquisitions Company LLC
(an entity controlled by the Company's majority shareholder)
due in annual installments totaling $146
beginning March 31, 2004 including interest of 4% 1,233 1,198
Notes receivable from the controlling shareholder due in ten
annual installments totaling $802 beginning March 31, 2004
including interest of 4% 5,094 4,948
Notes receivable from the controlling shareholder due in
annual installments equal to the earnings distributed on
aircraft N471, including interest of 8% 602 1,639
Note payable to Ventures Acquisitions Company LLC
(an entity controlled by the Company's majority shareholder)
due in monthly installments of $108
including interest of 6% (739) --
------------- -------------
$16,863 $18,150
============= =============
Evergreen Aviation Museum
The Company owns a collection of vintage aircraft and a 120,000 square
foot Evergreen Aviation Museum building on approximately 84.2 acres in
McMinnville, Oregon. The Company leases this building and land to The Captain
Michael King Smith Evergreen Aviation Educational Institute, a non-profit
corporation. The initial lease term is for 25 years, with a nominal rental
payment obligation of one dollar per year. Over the past four years to
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
cover start-up, payroll and operational expenses, the Company made a series of
loans to the Evergreen Aviation Museum, and on February 28, 2003, we forgave
these loans in the amount of $716.
12. BUSINESS SEGMENTS
The Company has adopted SFAS No.131, Disclosures about Segments of an
Enterprise and Related Information, which requires disclosure of financial
information about the Company's reportable operating segments. The operating
segments reported below are based on the nature of the services and products
sold by the Company and are the segments of the Company for which separate
financial information is available and for which operating results are regularly
evaluated by executive management to make decisions about resources to be
allocated to the segment and assess its performance. Management evaluates
segment performance based on segment gross profit. There were transfers between
segments in the periods presented.
The following are distinct operating segments of the Company:
o EIA engages primarily in international long-range and domestic short
range cargo operations, as well as air freight brokerage services.
o EAGLE provides mail handling, hub management, aircraft handling,
cargo loading and unloading, and terminal services.
o EAC performs required Federal Aviation Administration (FAA)
inspections, scheduled and unscheduled maintenance and repairs, light
engine maintenance, stripping and painting, aircraft storage and
complete airframe overhauls of commercial aircraft at an Unlimited
Repair Station.
o EHI provides flight services throughout the world in markets
including international peacekeeping and health operations,
agriculture, oil exploration and development, and forest control and
provides aircraft maintenance and repair services.
o EASL includes aircraft and parts brokerage operations.
o Other includes farming and nursery production and vintage aircraft
restoration and one active foreign subsidiary.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Based on the location of the consumer, the Company revenues are derived
from the United States and throughout the world. As of February 29, 2004, all
material long-lived assets are located in the United States.
Fiscal Year End
---------------
2004 2003 2002
--------- --------- ---------
(as restated
see note 14)
Operating Revenues:
EIA $ 350,016 $ 374,486 $ 267,446
EAGLE 100,407 129,724 122,287
EHI 39,343 35,163 28,064
EAC 31,864 23,938 20,134
EASL 7,010 5,274 5,733
OTHER 6,994 5,750 4,043
--------- --------- ---------
Total $ 535,634 $ 574,335 $ 447,707
========= ========= =========
Inter-company revenues: *
EIA $ 9,036 $ 4,605 $ 7,756
EAGLE 1,936 3,079 4,437
EHI 1,813 1,164 1,895
EAC 26,238 26,827 14,125
EASL 4,448 5,171 4,849
OTHER 306 67 71
--------- --------- ---------
Total $ 43,777 $ 40,913 $ 33,133
========= ========= =========
Income from operations:
EIA $ 35,898 $ 61,028 $ 3,765
EAGLE (2,332) 15,943 11,353
EHI (7,438) 759 116
EAC 5,022 2,920 (177)
EASL (2,444) 2,300 2,267
OTHER (2,541) (1,309) (1,838)
--------- --------- ---------
Total $ 26,165 $ 81,641 $ 15,486
========= ========= =========
Interest expense, net:
EIA $ 34,498 $ 29,875 $ 33,363
EAGLE 339 520 616
EHI (16) 28 40
EAC (5) (23) 67
EASL -- 118 138
OTHER 24 58 73
--------- --------- ---------
Total $ 34,840 $ 30,576 $ 34,297
========= ========= =========
* Amounts are eliminated in consolidation.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Fiscal Year End
---------------
2004 2003 2002
--------- --------- --------
(as restated
Depreciation and amortization see note 14)
of property and equipment:
EIA $ 52,926 $ 55,474 $ 54,253
EAGLE 2,483 2,677 2,302
EHI 4,892 5,262 3,320
EAC 1,057 1,048 1,199
EASL 155 165 707
OTHER 456 416 419
-------- -------- --------
Total $ 61,969 $ 65,042 $ 62,200
======== ======== ========
Capital expenditures:
EIA $ 45,827 $ 46,280 $ 43,394
EAGLE 1,485 2,865 1,440
EHI 12,477 10,029 9,316
EAC 2,148 1,129 549
EASL -- 6 7
OTHER 415 517 628
-------- -------- --------
Total $ 62,357 $ 60,826 $ 55,334
======== ======== ========
Total assets:
EIA $513,113 $521,367 $539,863
EAGLE 48,588 64,040 55,296
EHI 64,302 53,579 47,341
EAC 16,503 17,250 15,555
EASL 7,676 7,315 5,495
OTHER 28,553 28,551 26,787
-------- -------- --------
Total $678,735 $692,102 $690,337
======== ======== ========
Operating revenues by geographic area:
United States of America $473,258 $510,640 $361,296
Foreign 62,376 63,695 86,411
-------- -------- --------
Total $535,634 $574,335 $447,707
======== ======== ========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
13. SUBSEQUENT EVENTS
On March 26, 2004, Mr. Smith was granted a $2,900 bonus by the board of
directors in accordance with his employment agreement (see Note 11), from which
$2,100 was used to satisfy $1,400 in principal and $700 in interest on his
affiliated obligations to Holdings and its subsidiaries and $800 was used to
satisfy the taxes payable by Mr. Smith which resulted from the granting of the
bonus. This bonus was recorded to selling, general and administrative expense in
the first quarter of fiscal year 2005.
On May 13, 2004, EA completed a refinancing of its revolving credit
facility. The new credit facility consists of a $50,000 revolving loan, subject
to a borrowing base based on eligible receivables and eligible inventory, and a
$50,000 term loan (see Note 5.)
14. RESTATEMENT
The Company received $7,200 as an initial payment of its claim under
the Air Transportation Safety and System Stabilization Act. Subsequent to the
issuance of the Company's fiscal year 2002 consolidated financial statements,
the Company's management determined that the $7,200 initial payment of the claim
received under the Air Transportation Safety and Stabilization Act should have
been recorded as a separate line item in operating expenses within its
consolidated statement of operations for the year ended February 28,2002. As
previously reported, this amount was included in support services and other, a
component of operating revenues. As a result, the accompanying consolidated
statement of operations for the year ended February 28, 2002 has been restated
from amounts previously reported. The correction of this error reduced operating
revenues and operating expenses by $7,200; however, it had no effect on net loss
for the year ended February 28, 2002 as previously reported.
15. GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES
The Company's payment obligations under the 12% Senior Subordinated
Notes due 2010 are fully and unconditionally guaranteed on a joint and several,
senior subordinated basis by substantially all of the Company's consolidated
subsidiaries (collectively, and excluding Non-Guarantor Subsidiaries (as defined
below), the "Guarantor Subsidiaries") except for Evergreen Agricultural
Enterprises, Inc., Evergreen Vintage Aircraft Inc. and Foreign Subsidiaries
(together, the "Non-Guarantor Subsidiaries").
Subsidiary financial information for the Non-Guarantor subsidiaries is
presented in the column titled "Other Subsidiaries". Balance sheet data is
presented as of February 29, 2004 and February 28, 2003. Statement of operations
and statement of cash flows data are presented for the years ended February 29,
2004 and February 28, 2003 and 2002.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Investments in subsidiaries are accounted for by Evergreen Holdings,
Inc. ("Parent Company"), and Guarantor Subsidiaries using the equity method of
accounting. Net income of Guarantor and Non-Guarantor Subsidiaries is,
therefore, reflected in the Parent Company's and Guarantor Subsidiaries'
investments in and advances to (from) subsidiaries. Net income of the Guarantor
and Non-Guarantor Subsidiaries is reflected in Guarantor Subsidiaries and Parent
Company as equity in consolidated subsidiaries. The elimination entries
eliminate investments in Other Subsidiaries and inter-company balances and
transactions for consolidated reporting purposes.
Presented below is the consolidated condensed financial information of
the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries. Financial information for Trust Created February 25, 1986 is
presented separately as the Company owns less than 100% of this Guarantor.
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Statement of Operations
Fiscal 2004
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
---------------------------------------------------------------------------------------
Operating revenues .................... $ -- $ 12,786 $ 551,829 $ 7,496 $ 7,300 $ (43,777) $ 535,634
Operating expenses .................... -- 4,786 457,040 373 7,890 (34,541) 435,548
Selling, general and administrative ... 26 20,632 60,439 -- 1,860 (9,036) 73,921
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ......... (26) (12,632) 34,350 7,123 (2,450) (200) 26,165
Interest expense ...................... 609 (1,186) (33,129) (1,110) (24) -- (34,840)
Other income (expense), net ........... -- -- 4,286 -- 100 -- 4,386
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interest,
income taxes and equity in earnings . 583 (13,818) 5,507 6,013 (2,374) (200) (4,289)
Equity in earnings of subsidiaries .... (5,153) 4,903 -- -- -- 250 --
--------- --------- --------- --------- --------- --------- ---------
(Loss) income before minority interest
and income taxes .................... (4,570) (8,915) 5,507 6,013 (2,374) 50 (4,289)
Minority interest ..................... -- (1,116) -- -- -- -- (1,116)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ..... (4,570) (10,031) 5,507 6,013 (2,374) 50 (5,405)
Income tax benefit (expense) .......... -- 4,911 (5,085) -- 933 76 835
--------- --------- --------- --------- --------- --------- ---------
Net (loss) income ..................... $ (4,570) $ (5,120) $ 422 $ 6,013 $ (1,441) $ 126 $ (4,570)
========= ========= ========= ========= ========= ========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Statement of Operations
Fiscal 2003
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
---------------------------------------------------------------------------------------
Operating revenues .................... $ -- $ 4,306 $ 596,839 $ 7,987 $ 7,136 $ (41,933) $ 574,335
Operating expenses .................... -- -- 459,589 330 5,184 (35,138) 429,965
Selling, general and administrative ... 575 10,248 54,837 -- 2,648 (5,579) 62,729
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ......... (575) (5,942) 82,413 7,657 (696) (1,216) 81,641
Interest expense ...................... -- (253) (28,559) (1,706) (58) -- (30,576)
Other income (expense), net ........... -- -- 46 -- 1,462 -- 1,508
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interest,
income taxes and equity in earnings . (575) (6,195) 53,900 5,951 708 (1,216) 52,573
Equity in earnings of subsidiaries .... 28,646 38,326 -- -- -- (66,972) --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interest
and income taxes .................... 28,071 32,131 53,900 5,951 708 (68,188) 52,573
Minority interest ..................... -- (962) -- -- -- -- (962)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes ..... 28,071 31,169 53,900 5,951 708 (68,188) 51,611
Income tax (expense) benefit .......... 3,736 -- (22,774) -- -- (766) (19,804)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ..................... $ 31,807 $ 31,169 $ 31,126 $ 5,951 $ 708 $ (68,954) $ 31,807
========= ========= ========= ========= ========= ========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Statement of Operations
Fiscal 2002
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
---------------------------------------------------------------------------------------
Operating revenues $ 1,827 $ 4,461 $ 460,475 $ 8,040 $ 6,036 $ (33,132) $ 447,707
Operating expenses -- -- 396,796 611 5,396 (31,994) 370,809
Selling, general and administrative 83 6,061 45,465 -- 1,007 -- 52,616
Impairments and unusual charges - net -- -- 6,982 9,018 -- -- 16,000
Claim under Air Transportation Safety
and System Stabilization Act -- -- (7,204) -- -- -- (7,204)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations 1,744 (1,600) 18,436 (1,589) (367) (1,138) 15,486
Interest expense (733) (510) (30,879) (2,102) (73) -- (34,297)
Other income (expense), net -- -- 836 -- -- -- 836
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interest
income taxes and equity in earnings 1,011 (2,110) (11,607) (3,691) (440) (1,138) (17,975)
Equity in earnings of subsidiaries (13,445) (11,729) -- -- -- 25,174 --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before minority interest
and income taxes (12,434) (13,839) (11,607) (3,691) (440) 24,036 (17,975)
Minority interest -- (879) -- (0) -- -- (879)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes (12,434) (14,718) (11,607) (3,691) (440) 24,036 (18,854)
Income tax benefit (expense) -- 811 5,093 -- 715 (199) 6,420
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (12,434) $ (13,907) $ (6,514) $ (3,691) $ 275 $ 23,837 $ (12,434)
========= ========= ========= ========= ========= ========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Balance Sheet
Fiscal 2004
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
---------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents ............. $ -- $ 1,001 $ 2,723 $ -- $ 347 $ -- $ 4,071
Accounts and assets receivable, net ... -- 13 37,485 -- 1,148 -- 38,646
Other current assets .................. 836 10,292 18,514 -- 7,103 (324) 36,421
Total current assets .................. 836 11,306 58,722 -- 8,598 (324) 79,138
--------- --------- --------- --------- --------- --------- ---------
Properties, net ....................... 1,753 3,744 492,803 12,105 37,078 (2,086) 545,397
Notes receivable ...................... 13,738 155 872 -- 798 -- 15,563
Investment in subsidiaries ............ 207,249 233,560 -- -- -- (440,809) --
Other assets including goodwill ....... -- 17,628 13,896 1,241 5,872 -- 38,637
--------- --------- --------- --------- --------- --------- ---------
Total assets ............................. $ 223,576 $ 266,393 $ 566,293 $ 13,346 $ 52,346 $(443,219) $ 678,735
Liabilities and stockholders' equity .... ========= ========= ========= ========= ========= ========= =========
Current liabilities:
Accounts payable ...................... $ -- $ 6,682 $ 35,734 $ -- $ 788 $ -- $ 43,204
Current portion long-term debt ........ -- 66 5,652 5,059 803 -- 11,580
Accrued liabilities ................... -- 5,366 14,621 -- 94 -- 20,081
Accrued Interest ...................... -- 7,727 -- -- 8 -- 7,735
Income taxes payable .................. -- 64 2,318 -- 95 -- 2,477
--------- --------- --------- --------- --------- --------- ---------
Total current liabilities ............. -- 19,905 58,325 5,059 1,788 -- 85,077
Long-term debt and capital leases ..... 74,076 61,338 132,946 2,898 25,595 -- 296,853
Deferred income taxes ................. (41,364) 2,937 142,554 -- 1,713 -- 105,840
Other liabilities ..................... -- -- (4,698) 4,799 -- -- 101
Stockholders' equity .................... 190,864 182,213 237,166 590 23,250 (443,219) 190,864
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 223,576 $ 266,393 $ 566,293 $ 13,346 $ 52,346 $(443,219) $ 678,735
========= ========= ========= ========= ========= ========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Balance Sheet
Fiscal 2003
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
---------------------------------------------------------------------------------------
Cash and cash equivalents ................ $ -- $ 854 $ 4,714 $ -- $ 70 $ -- $ 5,638
Accounts and assets receivable, net .... -- -- 55,022 -- 552 -- 55,574
Other current assets ................... -- 4,890 16,514 -- 10,572 -- 31,976
--------- --------- --------- --------- --------- --------- ---------
Total current assets ................... -- 5,744 76,250 -- 11,194 -- 93,188
--------- --------- --------- --------- --------- --------- ---------
Properties, net ........................ 1,777 8,349 496,998 12,479 36,019 (1,886) 553,736
Notes receivable ....................... 14,290 1,034 300 1,639 887 -- 18,150
Investment in subsidiaries ............. 212,404 208,153 -- -- -- (420,557) --
Other assets including goodwill ........ -- 3,205 26,130 -- 3,128 (5,435) 27,028
--------- --------- --------- --------- --------- --------- ---------
Total assets.............................. $ 228,471 $ 226,485 $ 599,678 $ 14,118 $ 51,228 $(427,878) $ 692,102
========= ========= ========= ========= ========= ========= =========
Liabilities and stockholders' equity
Accounts payable ....................... $ -- $ 4,375 $ 58,920 $ -- $ 752 $ -- $ 64,047
Current portion long-term debt ......... -- 145,008 135,600 4,702 93 -- 285,403
Accrued liabilities .................... -- 5,624 12,768 124 243 -- 18,759
Accrued Interest ....................... -- 201 1,647 -- 9 -- 1,857
Income taxes payable ................... 1,204 2,983 1,416 -- 617 (4,968) 1,252
--------- --------- --------- --------- --------- --------- ---------
Total current liabilities .............. 1,204 158,191 210,351 4,826 1,714 (4,968) 371,318
Long-term debt and capital leases ...... 73,195 (108,209) 27,201 7,829 18,439 -- 18,455
Deferred income taxes .................. (41,362) 5,475 135,880 -- 1,046 5,361 106,400
Other liabilities ...................... -- -- (3,408) 3,903 5,435 (5,435) 495
Stockholders' equity ..................... 195,434 171,028 229,654 (2,440) 24,594 (422,836) 195,434
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 228,471 $ 226,485 $ 599,678 $ 14,118 $ 51,228 $(427,878) $ 692,102
========= ========= ========= ========= ========= ========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Statement of Cash Flows
Fiscal 2004
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
Net cash provided by (used in)
operating activities ................. $ -- $ (2,608) $ 53,456 $ 8,038 $ (4,074) $ 1,662 $ 56,474
--------- --------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property, equipment,
and overhauls ...................... -- (1,731) (60,145) -- (476) -- (62,352
Proceeds from sale of property &
equipment ........................... -- 3,750 5,727 -- -- (13) 9,464
Notes receivable & other assets ..... (880) (16,940) 11,360 1,035 (2,655) (1,648) (9,728)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities ................. (880) (14,921) (43,058) 1,035 (3,131) (1,661) (62,616)
--------- --------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long term debt ........ -- 282,065 1,983 -- 443 -- 284,491
Payments on long term debt .......... -- (116,992) (2,139) (6,331) -- -- (125,462)
Other financing sources ............. 880 (147,396) (12,234) (2,742) 7,039 (1) (154,454)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ................. 880 17,677 (12,390) (9,073) 7,482 (1) 4,575
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash ....... -- 148 (1,992) -- 277 -- (1,567)
Cash, begining of period .............. -- 854 4,714 -- 70 -- 5,638
--------- --------- --------- --------- --------- --------- ---------
Cash, end of period ................... $ -- $ 1,002 $ 2,722 $ -- $ 347 $ -- $ 4,071
========= ========= ========= ========= ========= ========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Statement of Cash Flows
Fiscal 2003
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
Net cash provided by (used in)
operating activities ............... $ (17,371) $ (7,926) $ 154,391 $ 3,834 $ 581 $ (33,207) $ 100,302
--------- --------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property, equipment,
and overhauls ..................... -- (744) (59,363) -- (719) -- (60,826)
--------- --------- --------- --------- --------- --------- ---------
Proceeds from sale of property &
equipment .......................... -- -- 5,722 -- 1,758 -- 7,480
Notes receivable & other assets ..... 17,371 (27,515) (2,103) 1,795 (690) 12,289 1,147
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities ............... 17,371 (28,259) (55,744) 1,795 349 12,289 (52,199)
--------- --------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long term debt ....... -- -- 367 -- -- -- 367
Payments on long term debt ......... -- -- (2,759) (3,608) 63 -- (6,304)
Other financing sources ............ -- 35,476 (98,827) (2,021) (997) 20,919 (45,450)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ............... -- 35,476 (101,219) (5,629) (934) 20,919 (51,387)
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash ..... -- (709) (2,572) -- (4) -- (3,284)
Cash, begining of period ............ -- 1,563 7,285 -- 74 -- 8,922
--------- --------- --------- --------- --------- --------- ---------
Cash, end of period ................. $ -- $ 854 $ 4,713 $ -- $ 70 $ -- $ 5,638
========= ========= ========= ========= ========= ========= =========
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
Supplemental Consolidating Statement of Cash Flows
Fiscal 2002
-----------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
Net cash provided by (used in)
operating activities ............... $ (12,240) $ (14,360) $ 107,236 $ 2,873 $ (3,991) $ 28,010 $ 107,528
--------- --------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property, equipment,
and overhauls ..................... -- (19) (41,965) -- (2,728) 9,018 (35,694)
Proceeds from sale of property &
equipment ......................... -- -- 10,899 -- -- -- 10,899
Notes receivable & other assets .... 12,240 11,273 10,223 2,529 2,107 (30,412) 7,960
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities ............... 12,240 11,254 (20,843) 2,529 (621) (21,394) (16,835)
--------- --------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long term debt ....... -- -- 2,330 -- -- -- 2,330
Payments on long term debt ......... -- (39,850) (41,646) (3,558) (73) -- (85,127)
Other financing sources ............ -- 43,310 (44,139) (1,844) 4,689 (6,616) (4,600)
--------- --------- --------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ............... -- 3,460 (83,455) (5,402) 4,616 (6,616) (87,397)
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash ..... -- 354 2,938 -- 4 1 3,296
Cash, begining of period ............ -- 1,209 4,347 -- 70 -- 5,626
--------- --------- --------- --------- --------- --------- ---------
Cash, end of period ................. $ -- $ 1,563 $ 7,285 $ -- $ 74 $ 1 $ 8,922
========= ========= ========= ========= ========= ========= =========
SUPPLEMENTARY FINANCIAL DATA
The following table summarizes the Company's unaudited consolidated
quarterly results of operations for 2004 and 2003. In the opinion of management,
this quarterly information has been prepared on the same basis as the
consolidated financial statements and includes all adjustments necessary to
present fairly the information for the periods presented. The results of
operations for any quarter are not necessarily indicative of results for the
full year or for any future period.
Fiscal 2004
Three Months Ended
(in thousands)
May 31 Aug. 31 Nov. 30 Feb. 29 (1)
Operating revenues $137,586 $147,555 $134,161 $116,332
Income from operations 10,700 16,990 10,049 (11,574)
Net income (loss) $435 $7,464 $453 ($12,922)
Fiscal 2003
Three Months Ended
(in thousands)
May 31 Aug. 31 Nov. 30 Feb. 28
Operating revenues $125,006 $142,821 $161,213 $145,295
Income from operations 14,799 20,535 25,457 20,850
Net income $4,335 $8,631 $10,745 $8,096
(1) In fiscal year 2004, we had AMC expansion mission requests transporting
cargo for delivery to military locations in the Middle East. Current FAA
regulations prohibit U.S. carriers from flying into Iraq. In the past, we had
transported cargo into neighboring locations from which the cargo was
transported over land to its ultimate destination. Due to spoilage and other
issues, AMC elected to fly the cargo on its own planes into Iraq directly
beginning in the fourth quarter of fiscal year 2004. Due to the decline in this
business, we experienced a decline in our operating revenues in the fourth
quarter of fiscal year 2004. While we are actively negotiating alternative means
of transporting the cargo into the region and working towards obtaining waivers
from the FAA, we may not be able to achieve a satisfactory alternative that will
allow us to continue to provide this service at previous levels. If AMC elects
to continue to fly directly into Iraq or use alternative methods of
transportation, we may experience a continued decline in our consolidated
operating revenues, which could have a material adverse effect on our
operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES
On March 12, 2003, Evergreen Holdings, Inc. dismissed Deloitte & Touche
LLP ("Deloitte & Touche") and engaged PricewaterhouseCoopers LLP ("PwC") as its
independent registered public accounting firm for the 2003 fiscal year. The
consolidated financial statements of Evergreen Holdings, Inc. and subsidiaries
for the year ended February 28, 2002, included in this Annual Report on Form
10-K have been audited by Deloitte & Touche LLP, independent registered public
accounting firm, as stated in their report appearing herein, (which report
expresses an unqualified opinion and includes explanatory paragraphs, relating
to the Company's ability to continue as a going concern and to the restatement
described in Note 14).
As discussed in Note 1 of the "Notes to Consolidated Financial
Statements" in Part II, Item 8 of this Annual Report on Form 10-K, the Company's
difficulties in meeting its loan agreement covenants and its negative working
capital position raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans concerning these matters are also
described in Note 1 of the "Notes to Consolidated Financial Statements" in Part
II, Item 8 of this Annual Report on Form 10-K. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 14 of the "Notes to Consolidated Financial
Statements" in Part II, Item 8 of this Annual Report on Form 10-K, the
accompanying consolidated statement of operations for the year ended
February 28, 2002 has been restated.
There have been no disagreements with our independent registered public
accounting firm on our accounting or financial reporting or auditing scope of
procedure that would require our independent registered public accounting firm
to make reference to such disagreements in their report on our consolidated
financial statements or otherwise require disclosure in this Annual Report on
Form 10-K.
ITEM 9A. CONTROLS AND PROCEDURES
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's
principal executive officer and principal financial officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of February 29, 2004. This evaluation
included various steps that management undertook in an effort to ensure that
information required to be disclosed in the Company's Exchange Act filings is
recorded, processed, summarized, and reported within the required time frame.
This evaluation also included considerations of the Company's internal controls
and procedures for the preparation of the Company's financial statements. Based
on such evaluation, the Company's principal executive officer and principal
financial officer have concluded that, as of the end of such period, the
Company's current controls and procedures require further enhancements to ensure
that the Company's disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act. At this time, management has determined that disclosure
controls and procedures may not be sufficient to ensure that data errors,
control problems or acts of fraud are detected and to confirm that appropriate
corrective action, including process improvements, is undertaken.
In connection with its audit of, and in the issuance of an unqualified
report on, the Company's financial statements for the year ended February 29,
2004, PricewaterhouseCoopers LLP advised the Company that it plans to deliver to
the Company's disclosure committee a letter identifying deficiencies that
existed in the design and operation of our internal controls that it considers
to be material weaknesses in the effectiveness of the Company's internal
controls pursuant to standards established by the American Institute of
Certified Public Accountants. A "material weakness" is a reportable condition in
which the design or operation of one or more of the specific internal control
components has a defect or defects that could have a material adverse effect on
the Company's ability to record, process, summarize and report financial data in
the financial statements in a timely manner. The material weaknesses identified
by the independent registered accounting firm include the following weaknesses
in certain divisions of the Company:
o Failure to reconcile certain general ledger accounts on a timely and
regular basis and lack of management review of certain reconciliations.
o Inconsistent application of accounting policies, including
capitalization policies and procedures for determining unrecorded
liabilities.
o Failure of financial management in certain operating segments to
properly supervise personnel, enforce and follow policies and
procedures, and perform their assigned duties.
o Lack of adequately staffed accounting departments.
In order to review the financial condition and prepare the financial
disclosures in this document, management has been responding to recommendations
from the Company's current independent registered public accounting firm to
properly and accurately account for the financial information contained in this
Form 10-K. Detailed validation work was done by internal personnel with respect
to all consolidated balance sheet account balances to substantiate the financial
information and the related disclosures that are contained in this Form 10-K.
Additional analysis was performed on consolidated income statement amounts and
compared to prior year amounts for reasonableness.
Based on this review, management has determined that controls and
procedural enhancements should include: (i) quarterly diligence by an appointed
disclosure committee; (ii) monthly review of transactional account activity and
financial statements by management and (iii) monthly review of selected account
balances by management and (iv) monthly reconciliations of certain of its
accounts to limit financial statement adjustments. Management is in the process
of implementing these enhancements.
In May, 2004, the Company's principal executive officer and principal
financial officer, with the assistance of our current registered public
accounting firm, analyzed the facts and circumstances surrounding the quantity
and magnitude of the adjusting journal entries within certain subsidiaries at
year end. After reviewing the adjusting entries and performing an evaluation of
the internal controls within certain subsidiaries, we concluded that, as of the
end of such period, the Company's current controls and procedures require
further enhancements to ensure that the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act. At this time,
management has determined that disclosure controls and procedures may not be
sufficient to ensure that data errors, control problems or acts of fraud are
detected and to confirm that appropriate corrective action, including process
improvements, is undertaken. After reviewing the adjustments and performing an
evaluation of our controls and disclosure procedures, management concurs with
our current registered public accountants that improvements to internal controls
are needed relating to: (1) establishment of policies and procedures regarding
capitalization and amortization of balances, (2) establishment of policies and
procedures for recording and processing transactions, (3) establishment of
standards to review journal entries, account balances and financial statements.
Management believes its new controls and procedures will address the
deficiencies identified. Management plans to continue to monitor the
effectiveness of its internal controls and procedures on an ongoing basis and
will take further action as appropriate. We have taken the following incremental
steps as a result of the aforementioned control deficiencies to ensure that all
material information about certain subsidiaries is accurately disclosed in this
report include:
1. Has made, and is in the process of making, appropriate personnel
changes;
2. Enhance policies and procedures for capitalization of all balances
into deferred overhauls and construction in progress;
3. Instituted an additional level of approval for capitalized items;
and
4. Strengthened segregation of duties by adding an additional level of
review authorization and review of significant transactions.
In addition, in order to address further the deficiencies described
above and to improve our internal disclosure and control procedures for future
periods, we will:
1. Review, and consider selecting and implement enhancements to our
current accounting system at certain subsidiaries;
2. Perform regular detailed analysis of fixed assets and accumulated
depreciation accounts by preparing detailed account reconciliations,
account analysis' and reviews of significant transactions;
3. Enhance quarterly accounting review procedures requiring an
independent review of material general ledger accounts and reserves;
4. Require all non recurring journal entries to be reviewed by an
independent reviewer;
5. Establish the internal audit function to conduct audit procedures
and control testing in order to ensure procedures for transactional
recording, transactional review, segregation of duties and adherence to
applicable policies and procedures are followed.
6. Enhance staffing to provide sufficient resources to accomplish the
foregoing objectives.
These steps will constitute significant changes in internal controls.
We will continue to evaluate the effectiveness of our disclosure
controls and internal controls and procedures on an ongoing basis, and
will take further action as appropriate.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The table below sets forth certain information regarding directors and
executive officers of Evergreen Holdings, Inc. and its subsidiaries as of
February 29, 2004. (1)(2)
Name Age Position
Delford M. Smith(3) 74 Chief Executive Officer and Chairman of the Board
of Directors - Evergreen; Chairman of the Board of
Directors - EIA, EHII, EHA,EAGLE; Director - Air
Center, EAGLE, Equity, Sys-tems LogistiX, EHA,
EASL Helicopters and Holdings
Timothy G. Wahlberg(3) 58 Director and President - Evergreen, Holdings, EIA,
Helicopters, Equity and Sys-tems LogistiX;
Chairman of the Board of the Directors - Air
Center and EASL; Director - EAGLE, EHII and EHA
Brian T. Bauer 36 Director - Evergreen; Director and President
- EAGLE
Thomas P. Feddersen 41 Director - Air Center; Senior Vice President of
Administration - EASL
Timothy F. Hannigan 40 Director - Evergreen
Elsie Henry 63 Director - Air Center
Michael A. Hines 37 Director - Evergreen, Air Center, Helicopters and
EHA; Vice President of Material - EIA; Director
and President - EASL
John A. Irwin(3) 48 Director, Chief Financial Officer Treasurer and
Vice President of Risk Management - Evergreen;
Director and Treasurer - Holdings, EAGLE, EHII,
EASL and Sys-tems LogistiX; Director and Vice
President of Finance and Treasurer - EIA; Director
- Air Center; Director and Senior Vice President
of Finance and Treasurer - Helicopters; Director,
Vice President and Treasurer - Equity and EHA
John M. Kiesler 57 Director - Helicopters and EHA
Terrence MacGowan 66 Vice President of Administration - Air Center
Michael F. Melvin 38 Vice President of Finance and Treasurer
- Air Center
Scott Parkinson 40 Vice President of Sale and Marketing - Helicopters
Thomas E. Pitzer 54 Director - Air Center
James A. Porter 57 President - EHII
David B. Rath 25 Exec. VP - Evergreen Helicopters,
Inc.; President - Evergreen
Agricultural Enterprises
Gerard H. Rock 46 President - Evergreen Helicopters of Alaska
Ranjit Seth 39 Director - Evergreen; Senior Vice President of
Sales and Marketing - EIA
Ryan M. Smith 26 Vice President of Administration and Finance - EIA
Daniel F. Van Dyke 44 Director - Evergreen
Trevor R. VanHorn 58 President - Air Center
Robert A. Warren 63 Director - Evergreen; Vice President of Flight
Operations - EIA
Gwenna R. Wootress 46 Secretary and Acting In-house Counsel - Evergreen
; Director and Secretary - Holdings, Airlines,
EAGLE, Air Center, Helicopters, EHII, EHA and EASL
; Secretary - Sys-tems LogistiX and Holdings
Robert J. Wueste 51 Director - Evergreen
(1) In this "Management" section:
A reference to: Shall mean:
- ---------------------- -----------------------------------------------------
Evergreen Evergreen International Aviation, Inc.
Holdings Evergreen Holdings, Inc.
EIA Evergreen International Airlines, Inc.
EAGLE Evergreen Aviation Ground Logistics Enterprise, Inc.
Air Center or EAC Evergreen Air Center, Inc.
Helicopters or EHI Evergreen Helicopters, Inc.
EHII Evergreen Helicopters International, Inc.
EHA Evergreen Helicopters of Alaska, Inc.
EASL Evergreen Aircraft Sales & Leasing Co.
Equity Evergreen Equity, Inc.
Sys-tems LogistiX Sys-tems LogistiX Inc.
(2) The Trust Created February 25, 1986 is a trust, which does not have
directors, but is operated and managed pursuant to the Second Amended and
Restated Trust Agreement, dated as of September 29,1995, among the Wilmington
Trust Company, as owner trustee, and 747, Inc. King, Christian Inc., Evergreen
and Delford M. Smith, as amended. Mr. Smith holds a one-third beneficial
ownership interest in that portion of the trust that owns the B 747 aircraft. We
own the remaining two-thirds interest in that portion of the trust that owns the
B747 and all of that portion of the trust that owns the three DC9 aircraft.
(3) Member of the Executive Committee for Evergreen, Holdings, EIA, EAGLE, Air
Center, Helicopters, EHII, EHA, EASL, Equity and Sys-tems LogistiX.
Mr. Anthony E. Bauckham, Mr. Carson R. Cole and Dr. Brian Shaffer
resigned as Directors of Evergreen. The effective date of their resignation was
March 5, 2004.
Delford M. Smith founded Evergreen in 1960 and since its inception, has
been the Chairman of the Board of Directors and controlling shareholder of
Evergreen. Mr. Smith formerly served as a member of the board of directors for
each of the Air Transport Association and the National Transportation Defense
Association Airlift Committee, and also formerly served as president of
Helicopter Association International. He has been honored with the Napoleon Hill
Gold Medal Award for Entrepreneurial Achievement, the Helicopter Association
International Lawrence Bell Memorial Award and the Profession Pilot Aviation
Humanitarian of the Year Award. Mr. Smith received his B.S. degree in Psychology
and Business from the University of Washington and received Honorary Doctorate
Degrees in Aeronautical Science from Salem College, Salem, West Virginia, and in
Business Administration from Johnson and Wales College, Providence, Rhode
Island. In 1993, the National Defense Transportation Association granted him the
National Transportation Award. In 1999, he was awarded the Wright Brothers
Memorial Trophy, an award given annually at the National Aeronautic Association
to a living person who has made significant contributions to aviation in the
United States. In 2002, Mr. Smith was inducted into the Horatio Alger
Association and, since April 2003, he has served as director of this
association.
Timothy G. Wahlberg, our President and one of our directors, joined
Evergreen in 1969 and has been our President since 1994. In addition,
Mr. Wahlberg has been President of EIA since April 2002 and President of
Helicopters since December 1992. Previous positions include President of EIA
from January 1986 until December 2001, President of Air Center from May 1984 to
August 1986 and President of EASL from December 1991 to July 2002.
Brian T. Bauer, one of our directors, joined Evergreen in 1989 and has
been the President of EAGLE since October 1995. Since September 1995, Mr. Bauer
has also served as the President of Evergreen Agricultural Enterprises, Inc.
and, since April 2003, as our Executive Vice President. From July 1994 until
September 1995, Mr. Bauer held the position of Executive Vice President of
EAGLE. From May 1993 until July 1994, Mr. Bauer served as Vice President for the
Eastern Region for EAGLE, from October 1990 until March 1993, as the Eastern
Region Director for EAGLE and from 1992 until 1994, as Vice President of
Operations for EAGLE. Mr. Bauer has held various other positions within
Evergreen and its subsidiaries, including Station Manager of EAGLE from October
1990 until March 1992, Manager of Sales and Service for Hong Kong, India and Sri
Lanka for EIA from May 1990 until October 1990, International Operations
Representative for Singapore from January 1990 until February 1990, Assistant to
our Chairman of the Board of from January 1990 until February 1990, Ground
Services Analyst from October 1989 until January 1990 and Systems Operations
Agent at EIA from the time he joined Evergreen in September 1989 until October
1989.
Thomas P. Feddersen has served as the Executive Vice President for EASL
since January 2003. From September 2001 until January 2003, Mr. Feddersen served
as the Vice President of Marana Sales for EASL, from January 2001 until
September 2001, served as the Senior Vice President of Finance and Contracts for
Air Center, and from March 1999 until January 2001, served as the Senior Vice
President of Finance and Administration for Air Center. Prior to joining
Evergreen in 1999, Mr. Feddersen owned a sales and distribution company, RRR
Resources, which sold and distributed industrial equipment.
Timothy F. Hannigan joined Evergreen as one of our directors in August
2003. Mr. Hannigan has been a managing director for Wexler and Walker, Public
Policy Associates since 1997.
Elsie Henry has been our Vice President of Payroll/Personnel since 1993
and a director of Air Center since 1992. From 1988 until 1993, Ms. Henry served
as our Vice President of Corporate Payroll.
Michael A. Hines has been the President of EASL since May 2002 and Vice
President of Material of EIA since October 1997. Mr. Hines joined Evergreen
Holdings, Inc. in 1989 as a financial analyst and served as the Vice President
of Material for Helicopters from April 1996 until October 1997.
John A. Irwin, one of our directors, has been the Chief Financial
Officer since October 2003. Since July 1991, he has served as Vice President of
Risk management and, since March 1999, as our Treasurer. Mr. Irwin was also our
Vice President of Finance for EIA from November 2000 through October 2003 and
Senior Vice president of Finance of Helicopters from November 1990 through
October 2003. Previous positions include Vice President of Finance of
Helicopters and Controller of Evergreen. Mr. Irwin received his degree in
Business Administration with a concentration in Accounting and Finance from
Oregon State University.
John M. Kiesler has been the Vice President of Maintenance Operations
for Helicopters since April 2001. Mr. Kiesler joined Evergreen in 1973 and has
previously served as President of Quality for Helicopters from August 1999 until
April 2001 and as Vice President of Maintenance for Helicopters from April 1996
until August 1999.
Terrence MacGowan joined Evergreen in November 2002 as the Vice
President of Administration for Air Center. Prior to joining Evergreen, Mr.
MacGowan served as the director of Resource Planning & Contracts for Airport
Group International, Inc., a company that provides ground logistics services and
airport facility, operation, maintenance and management services, from April
1989 until November 2002.
Michael F. Melvin joined Evergreen in September 2000 as the Vice
President of Finance and Treasurer of Air Center. Prior to joining Evergreen,
Mr. Melvin was the controller of Visionquest National, Ltd, a youth services
corporation, from September 1988 until September 2000.
Scott Parkinson, our Vice President of Sales and Marketing, joined
Evergreen Helicopters, Inc. in March 2004. Before he came to Evergreen he served
as an Acting General Manager for San Pedro & Southwestern Railroad in Arizona.
Other titles he held before that were Officer-In-Charge of US Military Flight
line at Bahrain from February 2003 to August 2003, Vice President of Sales with
CSI Aviation from 1997-2003. Scott's educational background includes a Master's
in Business Administration from the University of New Mexico awarded in 1998 and
a Bachelor of Science in Hotel and Restaurant Administration from Cornell
University in 1987.
Thomas E. Pitzer joined Evergreen in 1974. Mr. Pitzer has been the
Senior Vice President of Maintenance, Engineering & Material for EIA since 2003.
Prior to 2003, Mr. Pitzer served as the Vice President of Maintenance for EIA
from 1994 until 2003, the Senior Director of Line Maintenance for EIA (Japan)
from 1991 until 1993.
James A. Porter returned to Evergreen in February 2002 as the President
of EHII. Prior to returning to Evergreen, Mr. Porter was the president, chief
executive officer and owner of Samoa Aviation dba Samoa Air, a company, which
provided scheduled passenger/commuter flights, from July 1986 until November
2001.
David B. Rath has been the Executive Vice President of Helicopters
since July 2003. He joined Evergreen in August 2001 as a cost/financial analyst
and has held various positions related to Administration and Risk Management.
Gerard H. Rock, one of our directors, has served as the President of
Evergreen Helicopters of Alaska, Inc. since joining Evergreen in 1995. Since
September 2001, Mr. Rock has served as our Vice President of Government Affairs.
Ranjit Seth, one of our directors, joined Evergreen in 1997. Since
February 2003, Mr. Seth has served as Senior Vice President of Sales and
Marketing for EIA. From May 2000 until January 2003, Mr. Seth served as Vice
President of Commercial-Asia for EIA. Prior to that, Mr. Seth served as Senior
Director of Sales-Asia from May 1999 until April 2000 and as Director of
Sales-South Asia from August 1997 until March 1999 for EIA.
Ryan M. Smith has been the Vice President of Finance for EIA since
October 2003 and the Vice President of Administration and Material for EASL
since 1999. Mr. Smith also served as the Controller for EIA from March 2003 to
October 2003.
Daniel F. Van Dyke returned to Evergreen as one of our directors in
August 2002. Since October 1993, Mr. Van Dyke has been the owner and operator of
VanDyke Grain Elevators, Inc. a commodity brokerage and handling and
transportation company and Van Dyke Warehouses, LLC, a property management
company. From June 1990 until September 1993, Mr. VanDyke served in various.
capacities at Evergreen, including Vice President of Warranty and Material Sales
for Evergreen and from June 1990 until August 1992 as Vice President of Material
for EIA and Helicopters.
Trevor R. Van Horn joined Evergreen in 2000 and has been the President
of Air Center since November 2000. From 1999 until joining Evergreen, Mr. Van
Horn acted as Vice President and General Manager of Agrimond L.L.C. From 1998
until 1999 he served as President of the Southeast Division of USA Parking
Systems. Mr. Van Horn is a member of the Airport Minority Advisory Council, the
American Association of Airport Executives, the National Parking Association,
and the Airport Council International-North America.
Robert A. Warren, one of our directors, joined Evergreen in 1988. Mr.
Warren has served as Vice President of Flight Operations for EIA since September
2000. From March 1998 until September 2000, Mr. Warren served as System Chief
Pilot for EIA.
Gwenna R. Wootress, our Secretary and acting in-house counsel, has been
with Evergreen for over five years. Ms. Wootress joined Evergreen in 1997
serving as Legal Counsel to EASL. In 1998, she was appointed Secretary of
Evergreen, and Air Center. Since 2000, Ms. Wootress has also served as the
Secretary of EIA, Helicopters, Evergreen Helicopters of Alaska, Inc., EAGLE,
EASL and Evergreen Helicopters International, Inc. Ms. Wootress received her
juris doctor from Case Western Reserve School of Law.
Robert J. Wueste has served as one of our directors since October 2003.
Since February 2003, Mr. Wueste has served as the Chairman of the Board of
Directors and the Chief Executive Officer of Samuel Aaron International, a
retail jewelry company. From 1989 until February 2003, Mr. Wueste has served as
a partner and the President and Chief Executive Officer of Samuel Aaron
International.
BOARD OF DIRECTORS
As of February 29, 2004: (i) Evergreen International Aviation, Inc.'s
Board of Directors was composed of 14 directors; (ii) Holdings' Board of
Directors was composed of three directors; (iii) EIA' s Board of Directors was
composed of four directors; (iv) EAGLE's Board of Directors was composed of five
directors; (v) Air Center's Board of Directors was composed of nine directors;
(vi) Helicopters' Board of Directors was composed of nine directors; (vii)
EHII's Board of Directors was composed of five directors; (viii) EHA's Board of
Directors was composed of eight directors; (ix) EASL' s Board of Directors was
composed of six directors; (x) Equity's Board of Directors was composed of three
directors; and (xi) Sys-tems LogistiX's Board of Directors was composed of three
directors.
Each director serves an annual term, and until his successor is elected
and qualified. Directors are elected at the annual stockholders meeting on the
first Tuesday of March, at which the directors are elected. Mr. Delford M.
Smith, as the controlling shareholder of Holdings, has the power to name and
replace all of our directors.
None of the boards of directors have an audit committee. The entire
board of directors oversees accounting and financial reporting processes and
audits of financial statements. The board of directors of Evergreen Holdings,
Inc. has determined that John Irwin is a "financial expert," within the meaning
of SEC rules. Mr. Irwin is not "independent," within the meaning of SEC rules.
The Board of Directors of holdings has adopted a Code of Ethics for its
Chief Executive and Senior Financial Officers which is posted on our website,
www.evergreenaviation.com. Any amendment to, or waiver of the Code of Ethics for
Chief Executive and Senior Financial Officers will be disclosed on the Company's
website.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee
The Executive Committee of the Board of Directors of each of the
registrants (other than the Trust Created February 25, 1986), except as limited
by applicable state law, is empowered to exercise all of the powers of the Board
of Directors. The members of the Executive Committee of each of the registrants
(other than the Trust Created February 25, 1986) are Delford M. Smith, Timothy
G. Wahlberg and John A. Irwin.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning cash
compensation paid by Evergreen to its five most highly compensated executive
officers (collectively, the "named executive officers") for services rendered in
all capacities to Evergreen during fiscal year 2004 and 2003:
ANNUAL COMPENSATION
All Other Cash
Name and Principal Position Year Salary Bonus Compensation
--------------------------------------------------
Delford M. Smith
Chairman of the Board 2004 $4,063,120 $4,000,000(1) $ 18,200(2)
Ranjit Seth
Senior Vice President of Sales and Marketing EIA 2004 $ 164,800 -- --
Timothy G. Walberg 2004 $ 140,833 -- $ 9,833(2)
President - Evergreen International Aviation;
President - EIA; President - Helicopters
Trevor R. Van Horn 2004 $ 130,750 -- $ 10,430(2)
President - Air Center
Brian T. Bauer 2004 $ 129,807 -- $ 6,442(2)
President - EAGLE
ANNUAL COMPENSATION
All Other Cash
Name and Principal Position Year Salary Bonus Compensation (1)
--------------------------------------------------
Delford M. Smith
Chairman of the Board 2003 $1,433,333 - $ 14,000
Ranjit Seth
Senior Vice President of Sales and Marketing EIA 2003 $ 165,600 - --
Timothy G. Walberg
President - Evergreen International Aviation;
President - EIA; President - Helicopters 2003 $ 140,000 - $ 8,120
Trevor R. Van Horn
President - Air Center 2003 $ 130,000 - $ 9,200
Brian T. Bauer
President - EAGLE 2003 $ 124,615 - $ 5,253
(1) Amount shown is pursuant to the employment agreement entered into
with Mr. Smith as disclosed below.
(2) Represents our contribution under our Savings and Retirement Plan
on behalf of each executive.
We have entered into an employment agreement with Mr. Delford M Smith,
pursuant to which agreement Mr. Smith will serve as our Chief Executive Officer
and Chairman of the Board. The agreement provides for compensation at the rate
of $3,000 per year and a one-time bonus in the amount of $4,000, which was paid
after completion of the refinancing of the existing credit facility. In
addition, the Board, in its discretion, may grant Mr. Smith annual bonuses,
provided, however, that the amount of such bonuses shall be used solely (i) to
satisfy any of Mr. Smith's or his affiliates obligations to Holdings or its
subsidiaries or (ii) to satisfy any taxes payable by Mr. Smith as a result of
the receipt of such bonus or the satisfaction of such obligations. For a
description of such bonuses paid subsequent to February 29, 2004, see Note 11 of
the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this
Annual Report on Form 10-K. The employment agreement was entered into concurrent
with Mr. Smith's execution of certain promissory notes to us to provide for
repayment of existing indebtedness. See Item 13 of this Annual Report on Form
10-K, "Certain Relationships and Related Transactions."
The term of Mr. Smith's agreement is for five years from the completion
of the refinancing and is automatically extended each day so that the remaining
term is always five years. If Mr. Smith's employment is terminated by reason of
his death or disability, by us without "cause" or by Mr. Smith for "good
reason", Mr. Smith, or his estate, as the case may be, will be entitled to (i) a
portion of his annual bonus for the year in which the termination occurs,
prorated through the date of such termination and (ii) any "contingent payment"
which becomes due and payable in accordance with the terms of the agreement. If
Mr. Smith's employment is terminated by reason of his death or disability, the
amount will be payable over five years. In all other cases, the amount will be
payable in a lump sum.
If Mr. Smith's employment is terminated by us without "cause" or by Mr.
Smith for "good reason", he will be entitled to company-paid health coverage for
period of five years following termination. "Cause" means (i) Mr. Smith's
conviction of or guilty plea to a felony; or (ii) any acts of material personal
dishonesty, theft or fraud by Mr. Smith in connection with his duties as an
officer and intended to result in his personal gain. "Good reason" means: (i)
any assignment to Mr. Smith of duties inconsistent with his position or an
adverse change in the status, position, or conditions of his employment; or the
nature of his responsibilities, or his removal from, or any failure to re-elect
him to any of such positions, (ii) any reduction in Mr. Smith's base salary,
(iii) certain relocations of our principal offices, (iv) our failure to pay Mr.
Smith any portion of his base salary within seven (7) days of the due date, (v)
our failure to continue in effect any benefit or compensation plan in which Mr.
Smith participates or (vi) our failure to obtain an agreement from any successor
to assume and agree to perform Mr. Smith's agreement. A "contingent payment'
means an amount equal to (i) five times Mr. Smith's base salary then in effect
plus (ii) an amount equal to five times the average of the annual bonuses paid
to him in the five years immediately preceding the termination.
Evergreen will not be required to pay if all of its directors then in
office other than Mr. Smith determine by more than two-thirds vote of such
directors that it would be in the best interests of Evergreen not to make such
payment. The vote will be held at a meeting of the board, properly called in
accordance with the its bylaws, and held within two weeks of such disability or
death.
We maintain a qualified Savings and Retirement Plan that covers all of
our employees who meet the eligibility requirements set forth in the plan. The
plan provides for employer matching contributions equal to 50% of a
participant's pre-tax contributions up to a maximum of 8% of a participant's
eligible compensation. Participants also receive an employer basic contribution
equal to 4% of their eligible compensation. All employer contributions vest as
to 20% after the completion of two years of service, and an additional 20% per
year thereafter.
In addition, we may from time to time give our executive officers
additional benefits, none of which we believe to be material.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
All of the shares of Evergreen International Aviation Inc.'s
outstanding capital stock are owned by Holdings. Other than the Trust Created
February 25, 1986, all of the outstanding capital stock of each of the other
subsidiaries is directly or indirectly owned by Holdings. Other than Mr. Delford
M. Smith, no director or officer beneficially owns any shares of Holdings common
stock. The table below sets forth, as of February 29, 2004, information
concerning the beneficial ownership of all outstanding shares of Holdings common
stock. Except as otherwise noted, Mr. Delford M. Smith has sole voting power and
sole investment power with respect to the shares set forth below. Evergreen has
not declared any dividends during the past two years.
Percent
Name and Address Shares of class
----------------------------------------------------------------
Mr. Delford M. Smith 7,553,038(1) 75.1%
22800 Fulquartz Road
Dundee, OR 97115
Mr. Mark C. Smith 2,501,711(2) 24.9%
22800 Fulquartz Road
Dundee, OR 97115
(1) Includes (a) 2,500,000 shares of Holdings common stock held by Mr. Delford
M. Smith, as trustee of the Delford M. Smith Revocable Trust, and (b) 5,053,038
shares of Holdings common stock that are owned by Ventures Holdings, Inc. All of
the capital stock of Ventures Holdings, Inc. is owned by the Delford M. Smith
Revocable Trust. Mr. Delford M. Smith, our Chairman of the Board, is the sole
trustee and sole beneficiary of such trust.
(2) Includes (a) 1,000,000 shares of Holdings common stock held by Mr. Delford
M. Smith, as trustee under Declaration of Trust dated March 5, 1976, for the
benefit of Mr. Mark C. Smith, (b) 1,200,000 shares of Holdings common stock held
by Wells Fargo Bank, as trustee under Declaration of Trust dated December 23,
1976, for the benefit of Mr. Mark C. Smith, (c) 1,711 shares of Holdings common
stock held by Mr. Delford M. Smith, as trustee under Declaration of Trust dated
June 1, 1984, for the benefit of Mr. Mark C. Smith, and (d) 300,000 shares of
Holdings common stock held by Mr. Mark C. Smith.
The Trust Created February 25, 1986 is a trust formed pursuant to the
Second Amended and Restated Trust Agreement, dated as of September 29, 1995,
among the Wilmington Trust Company, as owner trustee, and 747, Inc., King,
Christian Inc., Evergreen and Delford M. Smith, as amended. Mr. Smith holds a
one-third beneficial ownership interest in that portion of the trust that owns
the B747 aircraft. We own the remaining two-thirds interest in that portion of
the trust that owns the B747 and all of that portion of the trust that owns the
three DC9 aircraft.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASE TRANSACTIONS
From time to time, we have entered into leases with Mr. Delford M.
Smith, our Chairman, founder and principal shareholder, and entities owned or
controlled by him. Each of the current leases has a term of three years and
provides for monthly payments. The assets leased, as of February 29, 2004 and
related payments are summarized below:
Asset ID or Tail # Monthly Payment
DC-9 airplane (including two JT8D-9A jet engines) N941EV $115,000
DC-9 airplane (including two JT8D-9A jet engines) N942EV 115,000
Pratt & Whitney JT9D-7J jet engine 662327 50,000 (1)
Pratt & Whitney JT8D-9A jet engine 653627 30,000
Eurocopter BK117 helicopter N141LG 50,000
Bell 212 helicopter N5410N 30,000 (2)
Eurocopter 350-B3 helicopter N3530 25,000
Eurocopter 350-B3 helicopter N356EV 25,000
Eurocopter 350-B3 helicopter N355EV 25,000
Eurocopter 350-B2 helicopter N350EV 21,600
Eurocopter 350-B2 helicopter N353EV 21,600
Eurocopter BO-105CBS helicopter N204PC 15,000
Bell 206 L-3 helicopter N85TC 12,000
Bell 206 L-3 helicopter N33AZ 12,000
Bell 206 L-3 helicopter N3195S 12,000
EAGLE office space and meeting complex,
McMinnville, OR 17,500
EIA office and meeting complex,
McMinnville, OR 17,500 (3)
EIA training center, McMinnville, OR 11,000
EIA payroll and personnel office,
McMinnville, OR 11,000
Guest House 2,000
----------
Total $618,200
==========
(1) In addition to the monthly payment specified, we pay hourly charges in the
amount of $100 per hour, with a minimum of 200 hours per month.
(2) This helicopter is beneficially owned three-fourths by Mr. Delford M. Smith
and one-fourth by Mr. Mark C. Smith. We pay lease payments of $22,500 and
$7,500, per month, to Mr. Delford M. Smith and Mr. Mark C. Smith, respectively.
(3) Original lease has expired, the premises is currently leased on a
month-to-month basis.
Each of our airplane and helicopter leases is terminable by mutual
consent between the lessor and us. We have the option to purchase the Bell 206
L-3 helicopters at the end of the lease terms at a fair value. Our real property
leases are terminable at the landlord's option in the event of a default under
the leases. An event of default under each of the real property leases include,
among other customary terms, our failure to pay rent for a period of ten days
after it becomes due.
We formerly leased a Pratt & Whitney JT9D-7J jet engine from Ventures
Acquisition Company, LLC. Due to an engine fire, the leased engine was not
operational. We terminated the lease and settled our remaining obligations under
the lease for $1.3 million in cash plus a note payable in the amount of $1.3
million over 12 months with a 6% interest rate.
The Trust Created February 25, 1986
Together with Mr. Delford M. Smith, we hold 100% of the beneficial
ownership interests in the 1986 Trust, which owns one B747 and three DC9
aircraft. Mr. Smith holds a one-third beneficial ownership interest in that
portion of the trust that owns the B747 aircraft. We own the remaining
two-thirds interest in that portion of the trust that owns the B747 and all of
that portion of the trust that owns the three DC9 aircraft. We lease all of
these planes from the trust at a cost of $0.7 million per month. The portion of
the rental payments allocable to Mr. Smith's one-third interest in the B747 is
approximately $0.2 million per month. Based on our ownership of the trust, we
consolidate its operations and reflect Mr. Smith's ownership as minority
interest. The trust allocates the portion of its net income to which Mr. Smith
is entitled and this is applied in reduction of a note receivable owed by Mr.
Smith to the trust. This receivable balance was generated by reclassification of
negative trust beneficial ownership interests caused by book losses by the trust
arising from a deficiency of rental income compared to trust expenses. As of
February 29, 2004, Mr. Smith owed the 1986 Trust $0.6 million. The debt bears
interest at a rate of 4% per annum. Mr. Smith is obligated to make payments on
this debt on an annual basis in an amount equal to 100% of the portion of the
net income of the 1986 Trust that is attributable to him for such fiscal year.
In no event is Mr. Smith obligated to use funds other than the 1986 Trust's
income that is attributable to him to pay the principal and interest owed on
this debt. This debt is secured by a pledge by Mr. Smith of all of his interests
in the Delford M. Smith Revocable Trust, which owns approximately 2.7 million
shares of Holdings common stock. However, if Mr. Smith receives a subsequent
valuation of his interests in the trust by an independent third party, each time
such valuation exceeds the amounts then owing under this note, the 1986 Trust
will release the security interest in the percentage of the pledged trust
interest equal in value to such excess amount. The net income of this trust
applied in reduction of this note receivable for the benefit of Mr. Smith was
$1.1 million, $1.0 million and $0.9 million in fiscal year 2004, 2003 and 2002,
respectively.
Indebtedness of Mr. Delford M. Smith and affiliated entities
On May 16, 2003, the Company completed a $215.0 million debt offering
and borrowed $72.1 million under a new revolving credit facility (see Note 5.)
In conjunction with the completion of the new financing arrangement , the
Company entered into an employment agreement (see note 11) whereby we paid our
Chief Executive Officer, Mr. Delford M. Smith, a one-time bonus in the amount of
$4 million. Also pursuant to this agreement, the board may also, in its
discretion, grant Mr. Smith annual bonuses, provided, however, that the amount
of such bonuses shall be used solely (i) to satisfy any of Mr. Smith's or his
affiliates obligations to Holdings or its subsidiaries or (ii) to satisfy any
taxes payable by Mr. Smith as a result of the receipt of such bonus or the
satisfaction of such obligations. The employment agreement was entered into
concurrent with Mr. Smith's execution of certain promissory notes to us to
provide for repayment of existing indebtedness, (see Note 13), "Subsequent
Events."
As of February 29, 2004, we had approximately $16.9 million of net
notes receivable (including $0.6 million owed to the Trust Created February 25,
1986) and as of February 28, 2003, we had approximately $18.2 million of notes
receivable (including $0.9 million owed to the Trust Created February 25, 1986)
owed by Mr. Delford M. Smith and entities directly or indirectly owned by him.
The notes are evidenced by several promissory notes, which bear interest at the
rate of 4% per annum. Annual installments of principal and interest total
approximately $2.0 million. Each note is due and payable on March 31, 2013. Each
note is secured by a pledge of Mr. Smith's interest in the trust that owns
approximately 2.5 million shares of common stock of Evergreen Holdings, Inc.
Stock for Stock Exchange
Prior to August 1998, Evergreen Ventures Inc. was a wholly owned
subsidiary of Ventures Holdings, Inc., which is wholly owned by Mr. Delford M.
Smith. In August 1998, we conducted a stock for stock exchange pursuant to which
we received all of the outstanding common stock of Evergreen Ventures, Inc. in
exchange for an issuance of common stock of Evergreen Holdings, Inc. to Ventures
Holdings, Inc. Following the exchange, we merged Evergreen Ventures, Inc. and
its subsidiaries with Evergreen Holdings, Inc. and most assets and liabilities
were transferred to our subsidiaries. Prior to the merger, Mr. Smith and
Ventures Holdings, Inc. had certain debt obligations to Evergreen Ventures,
Inc., which were assigned to us in the merger. Balances Related to Leased
Aircraft and Engines
From time to time, we have requested Ventures Acquisition Company, LLC,
which is indirectly wholly owned by Mr. Smith, to procure and finance aircraft
and engines, which we in turn lease and operate. In some instances the financing
available to Ventures Acquisition Company, LLC has been less than the total
purchase price. In these circumstances, we have agreed to cover the difference
between the amount financed and the purchase price and we have recorded these
differences as amount owing to us by Ventures Acquisition Company, LLC. The
amounts owed to us at February 29, 2004 through these arrangements are
approximately:
o $0.3 million owed to Evergreen Holdings, Inc. related to two DC9
aircraft and one JT8D-9A engine.
o $0.7 million owed to Evergreen Holdings, Inc. related to one JT9D-7J
engines.
o $0.3 million owed to Helicopters related to one America Eurocopter
AS350-B3. Miscellaneous
From time to time, we have incurred expenses for the benefit of Mr.
Smith and his wholly owned entities. The amounts owed to us at February 29, 2004
through these arrangements are approximately:
o $1.3 million owed by Ventures Holdings Inc. to Evergreen Holdings,
Inc. related to various operating and administrative expenses including
for payroll, office supplies and services related to
telecommunications;
o $0.1 million owed by Mr. Smith to Evergreen Holdings, Inc. in
facilities maintenance and improvements on properties leased by us from
Ventures Holdings Inc.;
o $0.9 million owed by Mr. Smith to EAE in payroll and other operating
expenses for employees working on Mr. Smith's agricultural properties;
and
o $0.2 million owed by Ventures Holdings Inc. to Evergreen Holdings,
Inc. related to an advance on current equipment leases.
Agriculture Transactions
Our agricultural business segment sells bulk hazelnuts to wholesalers
and distributors, produces hazelnut products, sell pinot noir grape juice and
wine, and sells bulk pinot noir grapes to wineries. Through our OTHER business
segment, we sell bulk hazelnuts to wholesalers and distributors, and we produce
hazelnut products such as cookies, biscotti and roasted hazelnuts, through
outsourcing arrangements and market these products at both wholesale and retail
levels. We sell bulk pinot noir grapes to wineries and, through outsourcing
arrangements, we produce pinot noir grape juice and wine for sale under our own
labels.
During fiscal 2004, the Company purchased $0.2 million in pinot noir
grapes from our Chairman, Mr. Delford M. Smith. During fiscal year 2003, we
purchased hazelnuts and pinot noir grapes grown on and produced on Mr. Smith's
agricultural properties totaling approximately $0.6 million and $0.1 million,
respectively. Purchases of hazelnuts in fiscal year 2002 amounted to
approximately $1.6 million. Evergreen Aviation Museum
We lease a museum building of approximately 120,000 square feet on
approximately 84.2 acres in McMinnville, Oregon to The Captain Michael King
Smith Evergreen Aviation Educational Institute ("Evergreen Aviation Museum") a
non-profit corporation. The initial lease term is for 25 years, with a nominal
rental payment obligation of $1.00 per year. Mr. Delford M. Smith serves as
chairman of the board of directors, and certain of our directors and officers
also serve on the board of directors, of the Evergreen Aviation Museum. The
museum houses the Howard Hughes HK-1 or H4 Flying Boat, or "the Spruce Goose",
and other vintage aircraft. Over the past four years to cover start-up, payroll
and operational expenses, we have made a series of loans to the Evergreen
Aviation Museum, and on February 28, 2003, we forgive these loans totaling $0.7
million. No such loans were forgiven in Fiscal year 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
FEES PAID TO THE INDEPENDENT AUDITOR
PricewaterhouseCoopers LLP ("PwC"), independent registered public
accounting firm, served as our independent auditor for fiscal year 2004 and
fiscal year 2003 and will continue as our independent registered public
accounting firm for fiscal year 2005. Deloitte & Touche LLP, ("Deloitte"),
served as our independent registered public accounting firm for fiscal year 2002
and fiscal year 2001. The aggregate fees billed or allocated to use for
professional accounting services by each of PWC and Deloitte for fiscal year
2004 and fiscal year 2003 are summarized in the table below.
2004 2003
------------------- -------------------
(dollars in thousands)
Audit fees $799,328 $473,771
Audit-related fees 1,216,055 37,800
Tax fees 0 2,317
------------------- -------------------
Subtotal 2,015,383 513,888
All other fees 0 0
------------------- -------------------
Total fees $2,015,383 $513,888
=================== ===================
For purposes of the preceding table, the professional fees are classified as
follows:
Audit Fees
Audit fees are fees for professional services billed for the audit of
our annual consolidated financial statements, the reviews of the consolidated
financial statements included in our Form 10-K filing for Fiscal year 2004, the
review of consolidated financial statements included in our Form 10-Q filings
during fiscal year 2004, comfort letters, consents and assistance with and
review of documents filed with the Securities and Exchange Commission, excluding
our S-4 Registration Statement. The fees in the 2004 column include amounts
billed to us through the date of this Form 10K for fiscal year 2004 and
additional actual and estimated billings related to the fiscal year 2004 audit
received subsequent to February 29, 2004. The fees in the 2003 column include
amounts billed through the date of this Form 10-K for fiscal year 2003.
Audit-Related Fees
Audit-related fees are fees for professional services rendered by our
independent auditors for statutory and regulatory filings, including our
registration statement filed on Form S-4; the audit of certain of our
subsidiaries financial statements including our EAGLE subsidiary; the audit of
our Savings and Retirement Plan; due diligence services related to mergers,
acquisitions and dispositions; internal control reviews; attestation services
that are not required by statute or regulation; and audits of the financial
statements of certain of our subsidiaries required in connection with
acquisitions or dispositions of such subsidiaries.
Tax Fees
Tax fees are fees for all professional services performed by our
independent auditors' tax division, other than services related to the audit of
our consolidated financial statements. Tax fees include fees for tax compliance,
tax planning and tax advice. Tax compliance involves preparation of original and
amended tax returns, refund claims and tax payment services. Tax planning and
tax advice includes assistance with tax audits and appeals, tax advice related
to mergers, acquisitions and dispositions, and requests for rulings or technical
advice from taxing authorities.
All Other Fees
All other fees are fees for professional services rendered by our
independent auditors, other than audit, audit-related or tax services.
PRE-APPROVAL POLICIES AND PROCEDURES
Our registration statement became effective on February 27, 2004 and as
such, we were not a reporting company prior to such date. Our board of directors
has ratified and approved all audit, audit-related, tax and other services
performed by PWC during fiscal year 2004. In addition, the board of directors
has concluded that the provision of the audit, audit-related, tax and other
services by PWC during fiscal year 2004 was compatible with the maintenance of
the firm's independence in the conduct of its auditing functions and has
approved the engagement of PWC for fiscal year 2005. The board of directors has
also determined that certain audit-related and tax services can be provided by
our independent auditor without impairing the auditor's independence and has
adopted an Audit and Non-Audit Services Pre-Approval Policy to provide
procedures for the pre-approval of such services by the board of directors and
procedures for the engagement of the auditor each year. The policy provides,
among other things, for the board of directors' general pre-approval annually of
audit services and certain audit-related and tax compliance services by our
independent auditor, and all anticipated fees for such services, and further
provides that the board of directors must specifically pre-approve any
engagement of the auditor for services outside the scope of the annual general
pre-approval. The policy also requires that the board of directors specifically
pre-approve any engagement of the independent auditor for which the anticipated
fee is expected to exceed certain pre-established thresholds and for our
management to provide the board of directors with periodic and annual
reconciliations of actual fees paid to the auditor compared to the fees that
were pre-approved. The policy also allows the board of directors to delegate to
one or more of its members pre-approval authority with respect to permitted
services.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. The Consolidated Financial Statements of Evergreen Holdings, Inc.
Report of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of February 29, 2004 and February 28, 2003
Consolidated Statement of Operations for the Fiscal Year Ended February
29, 2004 and February 28, 2003 and 2002 (Restated)
Consolidated Statements of Stockholders' Equity for the Years Ended
February 29, 2004 and February 28, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended February 29, 2004
and February 28, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
3. List of Exhibits
Exhibit No. Description
3.1+ Articles of Incorporation of Evergreen International Aviation, Inc.
3.2+ Articles of Amendment to the Articles of Incorporation of Evergreen
International Aviation, Inc., filed December 15, 1980.
3.3+ Articles of Amendment to the Articles of Incorporation of Evergreen
International Aviation, Inc., filed September 24, 1992.
3.4+ Articles of Amendment to the Articles of Incorporation of Evergreen
International Aviation, Inc., filed February 25, 1993.
3.5+ Amended and Restated By-Laws of Evergreen International Aviation, Inc.
3.6+ Articles of Incorporation of Evergreen Air Center, Inc., filed January 24,
1979.
3.7+ Amended and Restated Bylaws of Evergreen Air Center, Inc.
3.8+ Articles of Incorporation of Evergreen Aircraft Sales and Leasing Co.,
filed October 11, 1984.
3.9+ Amendment of Articles of Incorporation of Evergreen Aircraft Sales and
Leasing Co., filed November 13, 1984.
3.10+ Amended and Restated By-Laws of Evergreen Aircraft Sales and Leasing Co.
3.11+ Certificate of Incorporation of Evergreen Aviation Ground Logistics
Enterprise, Inc., filed December 6, 1984.
3.12+ Certificate of Amendment of Certificate of Incorporation of Evergreen
Aviation Ground Logistics Enterprise, Inc., filed July 11, 1986.
3.13+ Amended and Restated By-Laws of Evergreen Aviation Ground Logistics
Enterprise, Inc.
3.14+ Articles of Incorporation of Evergreen Equity, Inc., filed on February 20,
1984.
3.15+ Amended and Restated Bylaws of Evergreen Equity, Inc.
3.16+ Restated Certificate of Incorporation of Evergreen Helicopters of Alaska,
Inc., filed March 31, 1976.
3.17+ Amended and Restated Bylaws of Evergreen Helicopters of Alaska, Inc.
3.18+ Restated Articles of Incorporation of Evergreen Helicopters, Inc., filed
October 22, 1975.
3.19+ Amended and Restated Bylaws of Evergreen Helicopters, Inc.
3.20+ Articles of Incorporation of Evergreen Helicopters International, Inc.,
filed November 17, 1989.
3.21+ Amended and Restated Bylaws of Evergreen Helicopters International, Inc.
3.22+ Articles of Incorporation of Evergreen Holdings, Inc., filed on April 15,
1997.
3.23+ Articles of Amendment to the Articles of Incorporation of Evergreen
Holdings, Inc., filed on August 31, 1998.
3.24+ Amended and Restated By-Laws of Evergreen Holdings, Inc.
3.25+ Articles of Incorporation of Evergreen International Airlines, Inc., filed
April 16, 1974.
3.26+ Articles of Amendment to the Articles of Incorporation of Evergreen
International Airlines, Inc., filed October 16, 1975.
3.27+ Articles of Amendment to the Articles of Incorporation of Evergreen
International Airlines, Inc., filed February 25, 1993.
3.28+ Articles of Amendment to the Articles of Incorporation of Evergreen
International Airlines, Inc., filed May 14, 2003.
3.29+ Amended and Restated Bylaws of Evergreen International Airlines, Inc.
3.30+ Certificate of Incorporation of Sys-tems LogistiX, filed June 1, 2001.
3.31+ Certificate of Amendment of Certificate of Incorporation of Sys-tems
LogistiX, filed June 6, 2003.
3.32+ Amended and Restated By-Laws of Sys-tems LogistiX, Inc.
3.33+ Second Amended and Restated Trust Agreement, dated as of September 29,
1995, among Wilmington Trust Company, as owner trustee, 747 Inc., Delford M.
Smith, and King, Christian Inc.
3.34+ Amendment to the Second Amended and Restated Trust Agreement, dated as of
May 8, 2003, among Wilmington Trust Company, as owner trustee, Delford M. Smith
and Evergreen International Aviation, Inc.
3.35+ Second Amendment to the Second Amended and Restated Trust Agreement, dated
as of January 14, 2004, among the Wilmington Trust Company, Evergreen
International Aviation, Inc. and Delford M. Smith.
4.1+ Indenture, dated as of May 16, 2003, by and among Evergreen International
Aviation, Inc., Evergreen Holdings, Inc., the initial subsidiary guarantors
named therein and Bank One, N.A., as trustee.
4.2+ Registration Rights Agreement, dated as of May 16, 2003, by and among
Evergreen International Aviation, Inc., the guarantors named therein, Morgan
Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated
and PNC Capital Markets, Inc.
4.3+ Form of Evergreen International Airlines, Inc. 12% Senior Second Secured
Note due 2010 (included in Exhibit 4.1).
10.1+ Credit, Guaranty and Security Agreement, dated as of May 16, 2003, by and
among Evergreen International Aviation, Inc., the guarantors named therein, PNC
Bank, National Association and GE Capital Public Finance, Inc.
10.2+ Security Agreement, dated as of May 16, 2003, by and among Evergreen
International Aviation, Inc., the guarantors named therein and Bank One, N.A.,
as trustee
10.3+ Intercreditor Agreement, dated as of May 16, 2003, by and between PNC
Bank, National Association and Bank One, N.A.
10.4+ AMC Award/Contract No. F11626-03-D-0024, effective as of October 1, 2003,
issued by HQ AMC/DOYAI to North American Airlines Contractor Team.
10.5+ Employment Agreement, dated as of April 30, 2003, by and between Evergreen
International Aviation, Inc. and Delford M. Smith.
10.6+ Amended Lease, dated as of June 12, 1992, by and between Pinal County and
Evergreen Air Center, Inc.
10.7+ Amendment of Correction to Amended Lease, dated July 1, 1998, by and
between Pinal County and Evergreen Air Center, Inc.
10.8+ Second Amendment to Amended Lease, dated August 16, 2000, by and between
Pinal County and Evergreen Air Center, Inc. Amended Lease, entered into on June
12, 1992, by and between Pinal County and Evergreen Air Center, Inc.
10.9+ United States Postal Service Solicitation for Air Terminal Handling
Services, Solicitation No. HQ 2001-12, Shared Network-SNET for Contract Term
August 27, 2001 - August 26, 2006.
10.10+ Amendment 1 to United States Postal Service Solicitation for Air Terminal
Handling Services, Solicitation HQ-2001-12, dated April 27, 2001.
10.11+ Amendment 2 to United States Postal Service Solicitation for Air Terminal
Handling Services, Solicitation HQ-2001-12, dated May 4, 2001.
10.12+ Amendment 3 to United States Postal Service Solicitation for Air Terminal
Handling Services, Solicitation HQ-2001-12, dated May 11, 2001.
10.13+ Amendment 4 to United States Postal Service Solicitation for Air Terminal
Handling Services, Solicitation HQ-2001-12, dated May 17, 2001.
10.14+ Amendment 5 to United States Postal Service Solicitation for Air Terminal
Handling Services, Solicitation HQ-2001-12, dated May 21, 2001.
10.15+ Amendment 1 to Transportation Services Contract (Contract No.
SNET-01-GLR) by and between the United States Postal Service and Evergreen
Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06
(Great Lakes/Midwest region).
10.16+ Amendment 2 to Transportation Services Contract (Contract No.
SNET-01-GLR) by and between the United States Postal Service and Evergreen
Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06
(Great Lakes/Midwest region).
10.17+ Amendment 3 to Transportation Services Contract (Contract No.
SNET-01-GLR) by and between the United States Postal Service and Evergreen
Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06
(Great Lakes/Midwest region).
10.18+ Amendment 1 to Transportation Services Contract (Contract No. SNET-01-PR)
by and between the United States Postal Service and Evergreen Aviation Ground
Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Pacific region).
10.19+ Amendment 2 to Transportation Services Contract (Contract No. SNET-01-PR)
by and between the United States Postal Service and Evergreen Aviation Ground
Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Pacific region).
10.20+ Amendment 3 to Transportation Services Contract (Contract No. SNET-01-PR)
by and between the United States Postal Service and Evergreen Aviation Ground
Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Pacific region).
10.21+ Amendment 1 to Transportation Services Contract (Contract No.
SNET-01-SER) by and between the United States Postal Service and Evergreen
Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06
(Southeast region).
10.22+ Amendment 2 to Transportation Services Contract (Contract No.
SNET-01-SER) by and between the United States Postal Service and Evergreen
Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06
(Southeast region).
10.23+ Amendment 3 to Transportation Services Contract (Contract No.
SNET-01-SER) by and between the United States Postal Service and Evergreen
Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06
(Southeast region).
10.24+ Amendment No. 58 to Transportation Services Contract (Contract No.
TNET-93-01) by and between the United States Postal Service and Evergreen
Aviation Ground Logistics Enterprise, Inc. for Contract Term 9/7/02 - 9/10/04
(Indianapolis).
10.25+ Secured Loan Agreement, dated as of May 7, 1997, among Finova Capital
Corporation as Lender, Wilmington Trust Company, in its capacity as Owner
Trustee, as Borrower, and 747 Inc., Delford M. Smith and King, Christian Inc. as
Owner Participants.
10.26+ Amendment Agreement, dated as of May 9, 2003, among Finova Capital
Corporation, Wilmington Trust Company, 747 Inc., Delford M. Smith and King
Christian, Inc.
10.27+ Second Amended and Restated Lease Agreement, dated as of September 29,
1995 between Wilmington Trust Company and Evergreen International Airlines, Inc.
10.28+ Third Amendment to Lease Agreement, dated as of May 7, 1997, between
Wilmington Trust Company and Evergreen International Airlines, Inc.
10.29+ Guaranty and Subordination Agreement, dated as of May 7, 1997, for the
benefit of Wilmington Trust Company by Evergreen International Aviation, Inc.
10.30+ First Priority Chattel Mortgage and Security Agreement, dated May 7,
1997, between Wilmington Trust Company and Finova Capital Corporation.
10.31+ Loan Agreement, dated as of August 22, 1997, by and between Evergreen
International Airlines, Inc. and UT Finance Corporation
10.32+ Security Agreement, dated as of December 10, 1997, by and between
Evergreen Aviation Ground Logistics Enterprise, Inc. and Heller Financial, Inc.
10.33+ WCMA Reducing Revolver Loan Agreement No .54F-07164, dated as of August
12, 2003, by and between Merrill Lynch Business Financial Services, Inc. and
Evergreen Aircraft Sales and Leasing Co.
10.34+ WCMA Reducing Revolver Loan Agreement No. 54F-07230, dated as of April
25, 2001 between Evergreen International Airlines, Inc., and Merrill Lynch
Business Financial Services, Inc.
10.35+ Amendment to WCMA Reducing Revolver Loan Agreement No. 54F-07230, April
23, 2003, by and between Merrill Lynch Business Financial Services Inc. and
Evergreen International Airlines, Inc., Evergreen Aircraft Sales and Leasing,
Co. and Evergreen International Aviation, Inc.
10.36+ First Amendment to Credit, Guaranty and Security Agreement, dated as of
August 14, 2003, by and among Evergreen International Aviation, Inc., the
subsidiaries listed on the signature page thereto, Evergreen Holdings, Inc.,
1986 Trust, Evergreen Aircraft Trust, PNC Bank, National Association and GE
Capital Public Finance, Inc.
10.37+ Second Amendment to Credit, Guaranty and Security Agreement, dated as of
August 15, 2003, by and among Evergreen International Aviation, Inc., the
subsidiaries listed on the signature page thereto, Evergreen Holdings, Inc.,
1986 Trust, Evergreen Aircraft Trust, PNC Bank, National Association and GE
Capital Public Finance, Inc.
10.38+ Amendment 6 to United States Postal Service Solicitation for Air Terminal
Handling Services, Solicitation HQ-2001-12, dated June 28, 2001.
10.39+ Amendment to Letter Agreement, effective as of April 30, 2003, by and
between Delford M. Smith and Evergreen International Aviation, Inc.
10.40+ Third Amendment to Credit, Guaranty and Security Agreement, dated as of
October 14, 2003, by and among Evergreen International Aviation, Inc., the
subsidiaries listed on the signature page thereto, Evergreen Holdings, Inc.,
1986 Trust, Evergreen Aircraft Trust, PNC Bank, National Association and GE
Capital Public Finance, Inc.
10.41+ Amendment to Loan Agreement, dated as of December 1, 2003, by and between
Evergreen International Airlines, and UT Finance Corporation.
10.42+ First Amendment to Security Agreement, dated as of February 25, 2004, by
and among Evergreen International Aviation, Inc., Evergreen Holdings, Inc., the
subsidiary guarantors party thereto and J.P. Morgan Trust Company, National
Association.
10.43+ Fourth Amendment to Credit, Guaranty and Security Agreement, dated as of
February 24, 2004, by and among Evergreen International Aviation, Inc.,
Evergreen Holdings, Inc., the subsidiaries listed on the signature pages
thereto, the 1986 Trust, PNC Bank, National Association, as administrative
agent, and GE Capital Public Finance, Inc. as documentation agent.
10.44+ Loan and Security Agreement by and among Evergreen International
Aviation, Inc. and Each of Its Subsidiaries that are Signatories Hereto, as
Borrowers, the Lenders that are Signatories Hereto, as the Lenders, and Wells
Fargo Foothill, Inc., as the Arranger and Administrative Agent, dated as of May
13, 2004.
10.45+ Letter Agreement by and between Merrill Lynch Business Financial
Services, Inc. and Evergreen Aircraft Sales and Leasing Co., dated as of May 12,
2004.
10.46+ Intercreditor Agreement, dated as of May 13, 2004, by and between JP
Morgan Trust Company, National Association, as successor to Bank One, National
Association, a national banking association, and Wells Fargo Foothill, Inc., a
California corporation.
12.1+ Statement regarding the computation of ratio of earnings to fixed charges
for Evergreen Holdings, Inc.
21.1+ Subsidiaries of Evergreen Holdings, Inc.
31.1* Certification of the Chief Executive Officer of Evergreen Holdings, Inc.
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2* Certification of the Chief Financial Officer of Evergreen Holdings, Inc.
pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.2* Certificate of the Chief Executive Officer and the Chief Financial Officer
of Evergreen Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
+ Previously filed.
(b) Reports on Form 8-K.
On May 24, 2004, the Company furnished a Current Report on Form 8-K
dated May 24, 2004. The Form 8-K reported at Item 12 that the Company issued a
press release announcing that it completed a refinancing of its credit facility.