UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2003
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: 333-109667-04
EVERGREEN HOLDINGS, INC.
(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 November 30, 2003
Common stock, no par value 10,054,749 shares
EVERGREEN HOLDINGS, INC
INDEX
PAGE
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheet - November 30, 2003 and
February 28, 2003............................................... 1
Consolidated Statements of Operations - Three Months and Nine
Months Ended November 30, 2003 and 2002......................... 2
Consolidated Statements of Cash Flows - Nine Months Ended
November 30, 2003 and November 30, 2002......................... 3
Notes to Consolidated Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk....................................................... 42
Item 4. Controls and Procedures.................................. 43
Part II. Other Information
Item 1. Legal Proceedings........................................ 44
Item 6. Exhibits and Reports on Form 8-K......................... 45
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2003 AND FEBRUARY 28, 2003
(In thousands, except share data)
Unaudited February
November 30, 28, 2003
2003
------------------------------
Current assets:
Cash $ 707 5,638
Accounts receivable, less allowances of $28,560 and
$33,516 for doubtful accounts
Trade 43,527 51,907
Other 3,949 3,667
Current portion of notes receivable from affiliate 1,700 -
Inventories 18,334 17,786
Prepaid expenses and other assets 6,315 3,746
Deferred tax asset 10,443 10,444
-------------- --------------
Total current assets 84,975 93,188
Assets held for sale 6,942 6,968
Notes receivable from affiliates 16,711 18,150
Property and equipment, net 548,121 553,736
Other assets 33,631 14,566
Goodwill 5,494 5,494
-------------- --------------
Total assets $695,874 $692,102
============== ==============
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 12,531 285,403
Accounts payable 49,868 64,047
Accrued liabilities 18,512 18,759
Accrued interest 2,011 1,857
Income taxes payable 686 1,252
-------------- --------------
Total current liabilities 83,608 371,318
Long-term debt 298,776 18,455
Deferred income and other 378 495
Deferred tax liabilities 109,326 106,400
-------------- --------------
Total liabilities $ 492,088 $496,668
-------------- --------------
Commitments and contingencies (Notes 4 and 5)
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 196,218 187,866
-------------- --------------
Total stockholders' equity 203,786 195,434
-------------- --------------
Total liabilities and stockholders' equity $695,874 $692,102
============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 1
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three and Nine Months Ended November 30, 2003 and 2002
(UNAUDITED)
(In thousands)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
------------------------------------------------------------------
Operating revenues:
Flight revenue $ 97,542 $ 119,077 $ 304,430 $ 310,217
Sales of aircraft, parts, and other assets 3,351 2,985 11,390 9,450
Ground logistics services 24,213 28,539 74,450 82,724
Support services and other 9,055 10,612 29,032 26,649
---------------- --------------- ---------------- ---------------
Total operating revenues 134,161 161,213 419,302 429,040
---------------- --------------- ---------------- ---------------
Operating expenses:
Flight costs 18,617 16,809 58,556 52,498
Fuel 25,099 32,390 76,283 80,413
Maintenance 18,490 20,031 52,238 51,138
Aircraft and equipment 12,855 11,905 37,810 33,177
Costs of sales of aircraft, parts, and other
property and equipment 1,434 2,114 8,290 6,943
Costs of ground logistics services 22,454 23,711 66,660 70,571
Other support costs 10,203 11,766 28,746 26,313
Selling, general, and administrative 14,960 17,030 52,980 47,196
---------------- --------------- ---------------- ---------------
Total operating expenses 124,112 135,756 381,563 368,249
---------------- --------------- ---------------- ---------------
Income from operations 10,049 25,457 37,739 60,791
---------------- --------------- ---------------- ---------------
Interest income (expense):
Interest expense (8,796) (7,793) (27,268) (22,842)
Other income (expense), net (63) 64 4,258 1,793
---------------- --------------- ---------------- ---------------
Other expense, net (8,859) (7,729) (23,010) (21,049)
---------------- --------------- ---------------- ---------------
Income before minority interest and income
taxes 1,190 17,728 14,729 39,742
Minority interest (284) (168) (780) (693)
---------------- --------------- ---------------- ---------------
Income before income taxes 906 17,560 13,949 39,049
Income tax expense (453) (6,815) (5,597) (15,338)
---------------- --------------- ---------------- ---------------
Net income $ 453 $ 10,745 $ 8,352 $ 23,711
================ =============== ================ ===============
The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 2
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended November 30, 2003 and November 30, 2002
(UNAUDITED)
(in thousands)
--------------------------------------
November 30, 2003 November 30, 2002
--------------------------------------
Cash flows from operating activities:
Net income $ 8,352 $ 23,711
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 18,615 18,943
Amortization 29,485 32,058
Deferred income taxes 3,956 10,703
(Gain) loss on sale of property and equipment 40 (2,313)
Gain on insurance settlement (4,093) -
Deferred income and other 29 64
Foreign currency exchange loss (gain) 133 (35)
Minority interest income 713 358
Changes in operating assets and liabilities:
Accounts receivable 8,064 (4,284)
Prepaid expenses and other assets (6,552) (4,171)
Accounts payable and accrued liabilities (15,834) 7,966
Income taxes payable (1,596) 3,963
----------------- ----------------
Net cash provided by operating activities 41,312 86,963
Cash flows from investing activities:
Purchases of property and equipment (45,559) (41,365)
Proceeds from disposal of property and equipment 5,496 4,566
Early payment of operating leases related to insurance
settlement (4,125) -
Proceeds from insurance settlement 8,218 -
Repayments on notes receivable from affiliates 752 2,989
Advances on notes receivable from affiliates - (2,537)
Other assets (3,376) (5,714)
----------------- ----------------
Net cash used in investing activities (38,594) (42,061)
Cash flows from financing activities:
Proceeds from long term debt 283,825 421
Payments on long term debt (126,654) (24,848)
Proceeds from operating loans and short term debt 1,250 1,630
Payments on operating loans and short term debt (150,972) (17,057)
Deferred finance charges (15,098) -
----------------- ----------------
Net cash provided by financing activities (7,649) (39,854)
Net decrease in cash (4,931) 5,048
Cash, beginning of period 5,638 8,922
----------------- ----------------
Cash, end of period $ 707 $ 13,970
================= ================
The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 3
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim unaudited condensed consolidated financial statements of
Evergreen Holdings, Inc. (Evergreen, Holdings or the Company) include all of
its subsidiaries and have been prepared in accordance with accounting
principles generally accepted in the United States of America for the interim
financial information and with instructions to Form 10-Q of Regulation S-X. All
significant intercompany balances and transactions have been eliminated in
consolidation. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, these statements contain all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position,
results of operations and cash flows for the periods indicated. Results of
operations for the period presented herein are not necessarily indicative of
results of operations for the entire year. A description of critical accounting
policies and related judgement and estimates that affect the preparation of the
consolidated financial statements is set forth in the Amendment No. 1 to the
Company's Registration Statement on Form S-4 filed on December 16, 2003.
2. ORGANIZATION
Evergreen Holdings, Inc. and its wholly-owned subsidiaries Evergreen
International Aviation, Inc. (Aviation), Evergreen Vintage Aircraft, Inc.,
Evergreen International Airlines, Inc. (EIA), Evergreen Aviation Ground
Logistics Enterprises, Inc. (EAGLE), Evergreen Air Center, Inc. (EAC or Air
Center), Evergreen Helicopters Inc, (EHI or Helicopters), Evergreen Aircraft
Sales and Leasing Co. (EASL), Evergreen Agricultural Enterprises, Inc., and
Evergreen Aviation Services, Inc. (a foreign subsidiary) provide highly
diversified aviation services through its operating segments. The EIA segment
engages primarily in international long-range and domestic short range cargo
operations, as well as airfreight brokerage services. The EAGLE segment
primarily provides mail handling, hub management, aircraft handling, cargo
loading and unloading, and terminal services. The EAC segment 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. The Helicopters segment
provides flight services throughout the world in markets including
international peacekeeping and health operation, agriculture, oil exploration
and development, and forest control and provides aircraft maintenance and
repair services. The EASL segment includes aircraft and parts brokerage
operations. Other segment services include farming and nursery production and
vintage aircraft restoration operations.
3. CHANGE IN ACCOUNTING ESTIMATES
During the three months ended November 30, 2003, we changed the
estimated useful lives of the aircraft in our EHI segment to more accurately
reflect our 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 $0.2 million for the three months and nine months
ended November 30, 2003.
Page 4
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. REFINANCING OF EVERGREEN INTERNATIONAL AVIATION, INC.
On May 16, 2003, Aviation, a wholly owned subsidiary of 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 were issued pursuant to an Indenture, dated as of
May 16, 2003, by and among Aviation, Holdings, the subsidiary guarantors party
thereto and Bank One, N.A. 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 the
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:
If Redeemed during the 12-month period commencing Redemption 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
new $100 million revolving credit facility, for which PNC Capital Markets,
Inc. acts as arranger, and PNC Bank, National Association acts as agent (the
"New Revolving Credit Facility"). The New Revolving Credit Facility matures on
May 16, 2006. Upon our written request made at least 60 days prior to the end
of the applicable term, the term may be extended for an additional period upon
the written consent of all the lenders. Aviation will be obligated to pay
certain early termination fees if it terminates the revolving credit facility
within 5 years from May 16, 2003 unless we provide written notice at least 60
days prior to May 16, 2005, that we intend to refinance. The New Revolving
Credit Facility has an interest rate equal to PNC Bank's prime rate plus
1.00%, or PNC Bank's eurodollar rate plus 3.50%. We may choose prime rate or
eurodollar pricing and may elect interest periods of 30, 60 or 90 days for the
eurodollar borrowings. Interest on prime rate advances are payable monthly in
arrears. Interest on eurodollar borrowings are payable at the end of each
applicable interest period. Upon a default, interest will accrue at 2.0% over
the applicable rate.
Up to $100 million or such lesser amount determined in accordance
with a borrowing base formula is available under the New Revolving Credit
Facility. Aviation must maintain $5 million of excess availability under the
New Revolving Credit Facility, which may only be reduced with the consent of
each of the lenders under the New Revolving Credit Facility. Any amounts
outstanding that exceed our availability calculated under the borrowing base
formula must be repaid. Up to $5 million of the new revolving credit facility
is available for letters of credit.
The obligations under the New Revolving Credit Facility are
guaranteed by all of the guarantors under the Notes. Borrowings under the New
Revolving Credit Facility are secured by a first priority security interest in
substantially all of its existing and hereafter acquired personal property,
including all of the capital stock or membership interests of all of our
subsidiaries that are guarantors under the New Revolving 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.
The New Revolving 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 New Revolving 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.
Page 5
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
If Aviation or its restricted subsidiaries violate these covenants
and are unable to obtain waivers from the lenders or noteholders, our 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.
Initially, Aviation borrowed $69.3 million under the New Revolving
Credit Facility. As of November 30, 2003, Aviation had approximately $70.4
million in outstanding borrowings and $10.9 million available upon application
of borrowing base limitations as such borrowing base is available on December
1, 2003 and subject to applicable covenants. Aviation must maintain $5 million
of excess availability under the New Revolving Credit Facility, which may only
be reduced with the consent of each of the lenders under the New Revolving
Credit Facility.
Aviation used the net proceeds from the sale of the Notes and initial
borrowings under the New Revolving Credit Facility to, among other uses, repay
all outstanding balances, accrued interest on borrowings and letter of credit
participation fees related to its old senior credit facility, which matured on
May 7, 2003.
5. CONTINGENCIES
The Company is currently involved in certain legal proceedings as
discussed below. We currently plan to vigorously defend against these lawsuits,
however, because of uncertainties related to both the potential amount and
range of loss from the 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, the Company will re-assess the potential
liability related to pending litigation and revise the estimates accordingly.
Revisions of the Company's estimates of such potential liability could
materially impact its results of operations, financial condition or cashflows.
On September 19, 2001, we 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, which began January 28, 2000 and expired February 28, 2003. The
agreement required us to provide the aircraft (B-747), 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 for 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, a jury returned a verdict of $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 $17.4 million. An
order denying Asiana's post-judgment motions and awarding us $38.1 thousand 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 on
December 18, 2003 which was reconvened on January 5, 2004. At the settlement
conference it was determined that further settlement discussions are not likely
to be fruitful. Briefing on the appeal is scheduled to begin in February 2004.
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 nonpriority 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 which were committed to performance of the bypass mail
operations. EIA has not yet fully quantified those losses. This claim is being
transferred to the U.S. Court of Claims in Washington, D.C. and is expected to
be 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 nonpriority bypass mail
services in the past, an adverse outcome of these proceedings would prevent us
from offering these services in the future.
Page 6
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, which the court denied
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, Evergreen filed a motion for
security of costs requesting that the plaintiff post a $50,000 security bond.
The court ordered the plaintiff to post a security bond in the amount of
$15,000 and AFX complied with the order by posting cash. On November 13, 2002,
we crossclaimed 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. Evergreen 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. On October 13, 2003, Evergreen filed a second motion to dismiss.
The court granted the second motion to dismiss on October 30, 2003. Trial on
Evergreen's counterclaim is currently set for February 24, 2004. The Company
believes it has meritorious defenses to the allegations in the complaint and
intends to defend the case vigorously.
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 EAC 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 action is in the discovery stage. 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. Discovery is continuing. Trial is scheduled for
November 30, 2004. The Company believes it has meritorious defenses to the
allegations in the complaint and intends to defend the case vigorously.
On or around May 22, 2003, Banc 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
merit, arising out of the agreements with the plaintiff to act as our financial
agent and payment of related fees. The damages are unspecified. We have
retained local counsel but have not yet been required to respond to the
complaint. On August 25, 2003, we filed a motion to dismiss or stay for lack of
personal jurisdiction. On November 10, 2003, the North Carolina Superior Court
denied our motions. No written order has been issued. On November 12, 2003, we
appealed the motion to dismiss for lack of jurisdiction. The action is stayed
pending appeal of those issues and thus there will be no discovery or trial
until resolution of those appeals. The Company believes it has meritorious
defenses to the allegations in the complaint and intends to defend the case
vigorously.
We are a party to a number of other claims and lawsuits arising in the
normal course of our business. However, we do not consider the ultimate
liability with respect to those other claims and lawsuits to be material in
relation to our consolidated financial condition or operations.
6. RELATED PARTY TRANSACTIONS
Lease Transactions
The Company rents aircraft and building under operating leases from
entities owned or controlled by the controlling stockholder. Rent expense for
these leases amounted to $6.0 million, and $5.2 million for the nine months
ended November 30, 2003 and 2002, respectively, and $1.9 million and 2.0
million for the three months ended November 30, 2003 and 2002, respectively.
Page 7
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For the nine months ended November 30, 2003 and November 30, 2002 the
Company had purchases, from entities owned or controlled by the controlling
stockholder, of $2.5 million and $0.6 million respectively. The $2.5 million
purchase closed out an affiliated lease on an engine and eliminated lease
return requirements as required under the lease agreement, which included the
complete overhaul of the engine.
In addition, the controlling stockholder has a one-third ownership
interest in a certain B747 aircraft of which the Company has the remaining
two-thirds interest. Rent expense for the one-third ownership interest being
leased to the Company was $1.2 million and $1.2 million, for the nine months
ended November 30, 2003 and November 30, 2002, respectively.
Indebtedness of Mr. Delford M. Smith and Affiliated Entities
As of November 30, 2003 and February 28, 2003, we had approximately
$18.4 million and 18.2 million, respectively, of debt outstanding (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. All 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 $2.0
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 2.7
million shares of common stock of Evergreen Holdings, Inc.
Evergreen Aviation Museum
The Company leases a museum building to a related non-profit
corporation. The initial lease term is for 25 years, with a nominal rental
payment obligation of $1.00 per year. 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 forgave these
loans in the amount of $0.7 million.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for
Asset Retirement Obligations, which addresses financial accounting and
reporting for certain obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The provisions of
SFAS No. 143 were required to be applied by the Company beginning March 1,
2003. The impact of the adoption of this Statement has not had, and the
Company does not expect it to have, a material impact on the consolidated
financial statements.
In December 2003, the FASB revised FAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, This statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans
required by FASB Statements No. 87, Employers'Accounting for Pensions, No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. It requires additional
disclosures to those in the original Statement No. 132. This Statement is
effective for financial statements with fiscal years ending after December 15,
2003. The interim-period disclosures required by this Statement are effective
for interim periods beginning after December 15, 2003. The provisions of this
statement will be appropriately disclosed in the footnotes of the Company's
February 28, 2003 financial statements in accordance with the requirements of
this Statement.
Page 8
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, and Interpretation of SFAS 5, 57,
and 107 and Rescission of FIN 34. The Interpretation requires certain
disclosures to be made by a guarantor about its obligations under certain
guarantees that is has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods after December
15, 2002. The Company adopted FIN 45 during 2003 and there was no effect on the
Company's consolidated financial statements.
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 FIN46-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. Evergreen is required to
adopt FIN 46-R as of the period ending May 31, 2005. While the Company has not
completed its final assessment of the impact of FIN 46-R, based upon their
preliminary assessment, management believes the Company may be the primary
beneficiary of certain related party entities. The Company leases certain
assets, consisting primarily of buildings and aircraft, from these entities. The
financial statements of these entities may be included in the Company's
financial statements for the period ending May 31, 2005. Such inclusion is not
expected to have a material impact on the Company's 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. It requires issuers to classify financial instruments within its scope
as liabilities (or an asset in some cases). Prior to SFAS No. 150, many of
these instruments may have been classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003. For instruments issued prior to May 31, 2003, this standard is to be
implemented by reporting the cumulative effect of a change in accounting
principle as of July 1, 2003. The Company does not anticipate that the adoption
of this Statement will have a material impact on the results of operations,
financial position or cash flows of the Company.
Page 9
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. BUSINESS SEGMENTS
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
--------------------------------------------------------------
Operating Revenues:
Air freight transportation services (EIA) $ 89,917 $ 112,954 $ 279,121 $ 288,715
Ground logistics services (EAGLE) 24,489 28,539 74,736 82,724
Aircraft maintenance and repair services (EAC) 7,103 7,668 23,306 19,711
Helicopter and light aircraft services (EHI) 8,176 8,925 31,495 29,137
Aviation sales and leasing (EASL) 2,334 1,124 5,261 4,122
Other 2,142 2,003 5,383 4,631
-------------- -------------- -------------- --------------
Total $ 134,161 $ 161,213 $ 419,302 $ 429,040
Intercompany revenues: *
Air freight transportation services (EIA) $ 2,623 $ 1,070 $ 9,196 $ 3,467
Ground logistics services (EAGLE) 465 897 1,657 2,288
Aircraft maintenance and repair services (EAC) 9,112 4,803 24,645 15,852
Helicopter and light aircraft services (EHI) 456 133 1,165 832
Aviation sales and leasing (EASL) 960 1,542 3,006 3,930
Other 169 17 207 70
-------------- -------------- -------------- --------------
Total $ 13,785 $ 8,462 $ 39,876 $ 26,439
* Amounts are eliminated in consolidation.
Operating expenses
Air freight transportation services (EIA) $ 78,696 $ 89,294 $ 244,611 $ 236,238
Ground logistics services (EAGLE) 24,356 25,444 74,438 76,032
Aircraft maintenance and repair services (EAC) 5,811 6,631 18,886 17,766
Helicopter and light aircraft services (EHI) 9,894 10,077 30,626 26,720
Aviation sales and leasing (EASL) 2,470 1,862 6,166 5,370
Other 2,885 2,448 6,836 6,123
-------------- -------------- -------------- --------------
Total $ 124,112 $ 135,756 $ 381,563 $ 368,249
Income from operations:
Air freight transportation services (EIA) $ 11,221 $ 23,660 $ 34,510 $ 52,477
Ground logistics services (EAGLE) 133 3,095 298 6,692
Aircraft maintenance and repair services (EAC) 1,292 1,037 4,420 1,945
Helicopter and light aircraft services (EHI) (1,718) (1,152) 869 2,417
Aviation sales and leasing (EASL) (136) (738) (905) (1,248)
Other (743) (445) (1,453) (1,492)
--------------------------------------------------------------
Total $ 10,049 $ 25,457 $ 37,739 $ 60,791
Page 10
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
November 30, November 30, November 30, November 30,
2003 2002 2003 2002
Interest (income) / expense, net:
Air freight transportation services (EIA) $ 8,714 $ 7,619 $ 27,006 $ 22,297
Ground logistics services (EAGLE) 72 105 270 351
Aircraft maintenance and repair services (EAC) 2 (6) (47) 3
Helicopter and light aircraft services (EHI) 3 4 20 23
Aviation sales and leasing (EASL) - 30 - 90
Other 5 41 19 78
-------------- -------------- --------------- ---------------
Total $ 8,796 $ 7,793 $ 27,268 $ 22,842
Depreciation and amortization:
Air freight transportation services (EIA) $ 13,314 $ 13,925 $ 40,956 $ 43,994
Ground logistics services (EAGLE) 632 606 1,866 1,747
Aircraft maintenance and repair services (EAC) 247 249 788 773
Helicopter and light aircraft services (EHI) 1,147 1,397 2,684 4,049
Aviation sales and leasing (EASL) 46 41 117 126
Other 115 99 343 312
-------------- -------------- --------------- ---------------
Total $ 15,501 $ 16,317 $ 46,754 $ 51,001
Capital expenditures:
Air freight transportation services (EIA) $ 8,167 $ 10,492 $ 31,097 $ 31,174
Ground logistics services (EAGLE) 588 858 1,394 1,410
Aircraft maintenance and repair services (EAC) 887 381 1,753 550
Helicopter and light aircraft services (EHI) 745 2,820 9,840 7,935
Aviation sales and leasing (EASL) - - - 6
Other 61 140 129 290
-------------- -------------- --------------- ---------------
Total $ 10,448 $ 14,691 $ 44,213 $ 41,365
-------------------------------
Total Assets: November 30, February 28,
2003 2003
-------------------------------
Air freight transportation services (EIA) $ 526,520 $ 521,331
Ground logistics services (EAGLE) 49,517 64,040
Aircraft maintenance and repair services (EAC) 19,044 17,250
Helicopter and light aircraft services (EHI) 63,589 53,579
Aviation sales and leasing (EASL) 8,783 7,351
Other 28,421 28,551
--------------- ---------------
Total $ 695,874 $ 692,102
Page 11
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. 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 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").
The following financial statements are not solely the financial statements of
the issuer of the new notes dated May 16, 2003, but are the consolidated
financial statements of Evergreen Holdings Inc., the parent of the issuer. The
subsidiary issuer and all subsidiary guarantors, other than the 1986 Trust, 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 consolidated
financial statements are presented below.
In the condensed consolidated financial information of Evergreen Holdings,
Inc., financial information of the Guarantor Subsidiaries, the Non-Guarantor
Subsidiaries and the Trust Created February 25, 1986 are presented as the
Company owns less than 100% of the Trust, which is a Guarantor Subsidiary.
Financial information for the Non-Guarantor subsidiaries is presented in the
column titled "Non Gaurantors". Balance sheet data is presented as of February
28, 2003 and November 30, 2003. Statement of operations data are presented for
the nine months ended and three months ended November 30, 2003 and November 30,
2002. Statement of cash flows data are presented for the nine months ended
November 30, 2003 and November 30, 2002.
Investment in subsidiaries are accounted for by the Parent Company and the
issuer using the equity method of accounting. Net income of Guarantor and
Non-Guarantor Subsidiaries is, therefore, reflected in the Parent Company's and
the Issuer's Equity in Earnings of Subsidiaries. The elimination entries
eliminate equity in earnings of subsidiaries ,investments in Other Subsidiaries
and intercompany balances and transactions for consolidated reporting purposes.
Page 12
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
(In thousands)
Supplemental Consolidated Statement of Operations
For the Nine Months Ended November 30, 2003
-------------------------------------------------------------------------------------------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
-------------------------------------------------------------------------------------------
Operating revenues........... $ 1,480 $ 10,527 $ 434,938 $ 5,642 $ 6,954 $ (40,239) $ 419,302
Operating expenses........... - 4,786 348,785 280 5,598 (30,866) 328,583
Selling, general and
administrative............... 20 17,852 43,178 - 1,551 (9,621) 52,980
-------------------------------------------------------------------------------------------
Income from operations....... 1,460 (12,111) 42,975 5,362 (195) 248 37,739
Interest expense............. - (1,272) (24,911) (1,066) (19) - (27,268)
Other income (expense),net... - - 4,258 62 - (62) 4,258
-------------------------------------------------------------------------------------------
Other income (expense),net... - (1,272) (20,653) (1,004) (19) (62) (23,010)
Equity in earnings of
subsidiaries................. 6,892 15,630 - - - (22,522) -
-------------------------------------------------------------------------------------------
Income (loss) before minority
interest and income taxes..... 8,352 2,247 22,322 4,358 (214) (22,336) 14,729
Minority interest............. - (780) - - - - (780)
-------------------------------------------------------------------------------------------
Income (loss) before income
taxes......................... 8,352 1,467 22,322 4,358 (214) (22,336) 13,949
Income tax benefit
(expense)..................... - 4,053 (10,138) - 559 (71) (5,597)
-------------------------------------------------------------------------------------------
Net income (loss)............. $ 8,352 $ 5,520 $ 12,184 $ 4,358 $ 345 $ (22,407) $ 8,352
===========================================================================================
Page 13
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
(In thousands)
Supplemental Consolidated Statement of Operations
For the Nine Months Ended November 30, 2002
--------------------------------------------------------------------------------------------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
--------------------------------------------------------------------------------------------
Operating revenues.......... $ - $ 3,591 $ 441,308 $ 5,642 $ 5,703 $ (27,204) $ 429,040
Operating expenses.......... - - 338,715 236 4,452 (22,350) 321,053
Selling, general and
administrative.............. 31 9,673 40,469 - 2,266 (5,243) 47,196
--------------------------------------------------------------------------------------------
Income from operations (31) (6,082) 62,124 5,406 (1,015) 389 60,791
Interest expense............ - (226) (21,356) (1,182) (78) - (22,842)
Other income (expense),net.. - - 35 361 1,758 (361) 1,793
--------------------------------------------------------------------------------------------
Other income (expense),net.. - (226) (21,321) (821) 1,680 (361) (21,049)
Equity in earnings of
subsidiaries................ 23,742 28,257 - - - (51,999) -
--------------------------------------------------------------------------------------------
Income (loss) before minority
interest and income taxes... 23,711 21,949 40,803 4,585 665 (51,971) 39,742
Minority interest........... - (693) - - - - (693)
--------------------------------------------------------------------------------------------
Income (loss) before income
taxes....................... 23,711 21,256 40,803 4,585 665 (51,971) 39,049
Income tax benefit
(expense)................... - 1,981 (17,248) - (71) - (15,338)
--------------------------------------------------------------------------------------------
Net income (loss)........... $ 23,711 $ 23,237 $ 23,555 $ 4,585 $ 594 $ (51,971) $ 23,711
============================================================================================
Page 14
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(In thousands)
Supplemental Consolidated Statement of Operations
For the Three Months Ended November 30, 2003
--------------------------------------------------------------------------------------------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
--------------------------------------------------------------------------------------------
Operating revenues........... $ 282 $ 2,685 $ 141,128 $ 1,880 $ 2,392 $ (14,206) $ 134,161
Operating expenses........... - - 118,275 93 2,601 (11,817) 109,152
Selling, general and
administrative............... 6 5,158 12,588 - 256 (3,048) 14,960
--------------------------------------------------------------------------------------------
Income from operations....... 276 (2,473) 10,265 1,787 (465) 659 10,049
Interest expense............. - (4) (8,523) (264) (5) - (8,796)
Other income (expense),net... - - (63) 4 - (4) (63)
--------------------------------------------------------------------------------------------
Other income (expense),net... - (4) (8,586) (260) (5) (4) (8,859)
Equity in earnings of
subsidiaries................. 177 1,798 - - - (1,975) -
--------------------------------------------------------------------------------------------
Income (loss) before minority
interest and income taxes.... 453 (679) 1,679 1,527 (470) (1,320) 1,190
Minority interest............ - (284) - - - - (284)
--------------------------------------------------------------------------------------------
Income (loss) before income
taxes........................ 453 (963) 1,679 1,527 (470) (1,320) 906
Income tax benefit(expense).. - 731 (1,219) - 284 (249) (453)
--------------------------------------------------------------------------------------------
Net income (loss)............ $ 453 $ (232) $ 460 $ 1,527 $ (186) $ (1,569) $ 453
============================================================================================
Page 15
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
(In thousands)
Supplemental Consolidated Statement of Operations
For the Three Months Ended November 30, 2002
--------------------------------------------------------------------------------------------
Non Wholly
100% Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
--------------------------------------------------------------------------------------------
Operating revenues.............. $ - $ 1,863 $ 164,602 $ 1,880 $ 595 $ (7,727) $ 161,213
Operating expenses.............. - - 122,344 93 2,081 (5,792) 118,726
Selling, general and
administrative.................. 6 6,269 14,458 - 536 (4,239) 17,030
--------------------------------------------------------------------------------------------
Income from operations (6) (4,406) 27,800 1,787 (2,022) 2,304 25,457
Interest expense................ - (63) (7,407) (282) (41) - (7,793)
Other income (expense),net...... - - 64 103 1,758 (1,861) 64
--------------------------------------------------------------------------------------------
Other income (expense),net...... - (63) (7,343) (179) 1,717 (1,861) (7,729)
Equity in earnings of
subsidiaries.................... 10,751 13,121 - - - (23,872) -
--------------------------------------------------------------------------------------------
Income (loss) before minority
interest and income taxes....... 10,745 8,652 20,457 1,608 (305) (23,429) 17,728
Minority interest............... - (168) (0) - - - (168)
--------------------------------------------------------------------------------------------
Income (loss) before income
taxes........................... 10,745 8,484 20,457 1,608 (305) (23,429) 17,560
Income tax benefit(expense)..... - 1,385 (8,386) - 186 - (6,815)
--------------------------------------------------------------------------------------------
Net income (loss)............... $ 10,745 $ 9,869 $ 12,071 $ 1,608 $ (119) $(23,429) $ 10,745
============================================================================================
Page 16
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(In thousands)
Supplemental Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended November 30, 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 8,194 (923) 51,839 4,765 1,316 (23,879) 41,312
-------- ---------- ----------- ------------ ---------- ------------ ------------
Cash flows from investing activities:
Purchases of property, equipment,
and overhauls - (634) (44,732) - (193) - (45,559)
Proceeds from sale of property
and equipment - 3,750 1,746 - - - 5,496
Notes receivable and other assets (8,194) (13,836) (79) 1,488 (1,789) 23,879 1,469
-------- ---------- ----------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
investing activities (8,194) (10,720) (43,065) 1,488 1,982 23,879 (38,594)
-------- ---------- ----------- ------------ ---------- ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt - 281,596 2,281 - (52) - 283,825
Payments on long-term debt - (116,362) (5,527) (4,765) - - 126,654
Other financing sources - (154,460) (9,990) (1,488) 118 - (164,820)
-------- ---------- ----------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
financing activities - 10,774 (13,236) (6,253) 1,066 (1,033) (7,649)
-------- ---------- ----------- ------------ ---------- ------------ ------------
Net increase (decrease) in cash - (869) (4,462) - 400 - (4,931)
Cash, begining of period - 854 4,714 - 70 - 5,638
-------- ---------- ----------- ------------ ---------- ------------ ------------
Cash, end of period $ - $ (15) $ 252 $ - $ 470 $ - $ 707
======== ========== =========== ============ ========== ============ ============
Page 17
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(In thousands)
Supplemental Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended November 30, 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 12,979 9,772 112,424 2,592 (458) (50,346) 86,963
------------ ----------- ----------- ----------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, equipment,
and overhauls - (521) (40,544) - (290) - (41,365)
Proceeds from sale of property
and equipment - - 4,566 - - 4,566
Notes receivable and other assets (12,979) (14,380) (5,722) (2,592) 26 30,385 (5,262)
------------ ----------- ----------- ----------- --------- ---------- ----------
Net cash provided by (used in)
nvesting activities (12,979) (14,901) (41,710) (2,592) (264) 30,385 (42,061)
------------ ----------- ----------- ----------- --------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt - - 421 - - - 421
Payments on long-term debt - - (24,757) (2,592) (91) - (24,848)
Other financing sources - 11,345 (47,608) - 875 19,961 (15,427)
------------ ----------- ----------- ----------- --------- ---------- ----------
Net cash provided by (used in)
financing activities - 11,345 (71,944) (2,592) 784 19,961 (39,854)
------------ ----------- ----------- ----------- --------- ---------- ----------
Net increase (decrease) in cash - 6,216 (1,230) - 62 - (5,048)
Cash, begining of period - 1,563 7,285 - 74 - 8,922
------------ ----------- ----------- ----------- --------- ---------- ----------
Cash, end of period $ - $ 7,779 $ 6,055 $ - $ 136 $ - $ 13,970
============ =========== =========== =========== ========== ========== ==========
Page 18
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(In thousands)
Supplemental Consolidated Balance Sheet
At the end of November 30, 2003
-------------------------------------------------------------------------------------------
100% Non Wholly
Owned Owned
Holdings Evergreen Guarantor Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
-------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ -- $ (16) $ 253 $ -- $ 470 $ -- $ 707
Accounts and assets receivable, net -- 3 46,310 -- 1,163 -- 47,476
Other current assets -- 8,439 18,919 -- 9,434 -- 36,792
-------------------------------------------------------------------------------------------
Total current assets -- 8,426 65,482 -- 11,067 -- 84,975
-------------------------------------------------------------------------------------------
Properties, net 1,759 3,753 496,299 12,199 35,812 (1,701) 548,121
Notes receivable 12,821 1,158 812 895 1,025 -- 16,711
Investment in subsidiaries 220,764 257,471 -- -- -- (478,235) --
Other assets including goodwill -- 17,213 29,617 1,461 3,211 (5,435) 46,067
-------------------------------------------------------------------------------------------
Total Assets $ 235,344 $ 288,021 $ 592,210 $ 14,555 $ 51,115 $(485,371) $ 695,874
===========================================================================================
Liabilities and Stockholders'
Equity
Current Liabilities:
Accounts Payable $ -- $ 5,850 $ 43,286 $ -- $ 732 $ -- $ 49,868
Current portion long-term debt -- 127 6,960 5,354 90 -- 12,531
Accrued liabilities -- 3,987 13,769 210 546 -- 18,512
Accrued interest -- 1,775 233 -- 3 -- 2,011
Income taxes payable 2,235 2,082 (1,074) -- 616 (3,173) 686
-------------------------------------------------------------------------------------------
Total current liabilities 2,235 13,821 63,174 5,564 1,987 (3,173) 83,608
Long-term debt and capital leases 71,716 61,784 142,841 4,169 18,266 -- 298,776
Deferred income taxes (42,393) 738 146,857 -- 487 3,637 109,326
Other liabilities -- (2) (4,262) 4,638 5,436 (5,432) 378
Stockholders' equity 203,786 211,680 243,600 184 24,939 (480,403) 203,786
-------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 235,344 $ 288,021 $ 592,210 $ 14,555 $ 51,115 $(485,371) $ 695,874
===========================================================================================
Page 19
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(In thousands)
Supplemental Consolidated Balance Sheet
At the end of February 28, 2003
--------------------------------------------------------------------------------------------
100% Non Wholly
Owned Owned
Holdings Evergreen Guarantors Guarantor Non Consolidated
(Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total
--------------------------------------------------------------------------------------------
Assets
Current Assets:
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
Current Liabilities:
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 payabler 1,204 2,983 1,416 - 617 (4,968) 1,252
Current portion note payable
to affiliate - - - - - - -
Short term notes payable - - - - - - -
--------------------------------------------------------------------------------------------
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
============================================================================================
Page 20
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
ABOUT FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are qualified by and should be read together with
the cautionary statements and important factors included in our Registration
Statement on Form S-4, as amended. See "Summary."
We are including cautionary statements herein to make applicable and take
advantage of the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statements made by us, or on our
behalf, in this Form 10-Q. Although we believe that, in making any such
statements, our expectations are based on reasonable assumptions, any such
statement may be influenced by factors that could cause actual outcomes and
results to be materially different from those projected. When used in this
Form 10-Q, the words "anticipates," "believes," "expects," "intends" and
similar expressions, as they relate to us or our management, are intended to
identify such forward-looking statements. These forward-looking statements are
subject to numerous risks and uncertainties.
There are important factors that could cause our actual results to differ
materially from the results discussed or implied in forward-looking
statements, certain of which are beyond our control. These factors, risks and
uncertainties include the following:
o our reliance on a few customers, particularly the U.S. Air Force Air
Mobility Command and the U.S. Postal Service, with whom we currently
have contracts to provide services that generate a large portion of our
revenue;
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;
and
o fluctuations in the cost of fuel.
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 Form 10-Q, 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 Form 10-Q might not occur.
Page 21
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION, CONTINUED
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 have approximately $548 million and $554 million in operating
property and equipment, net as of November 30, 2003 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 2001 and 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.
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 are 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 ten years (See Note 3 of our
condensed consolidated financial statements). 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 estimated
magnitude of any such potential impairment charge could have a significant
impact on our financial statements; however, the exact potential loss is not
determinable as the exact resale value of our freighter aircraft is not
specifically known. The fair value of our fleet at any time is based on the
market conditions at the time and is affected by various factors most of which
relate to the volume of air freight cargo being moved in the market. The fair
value of an asset, for purposes of the assessment of impairment, is the amount
at which that asset could be bought or sold in a current transaction between
willing parties.
Page 22
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION, CONTINUED
In fiscal 2002 and 2001, we recorded an impairment charge of $16
million for our DC9-33 aircraft fleet, and $20 million for two B747s,
respectively, 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". For fiscal 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 Bad Debts
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 November 30, 2003 and February 28, 2003, the accounts
receivable balance of $47.6 million and $55.6 million, respectively, is reported
net of allowances for doubtful accounts of $28.6 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.
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
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.
Page 23
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION, CONTINUED
RECENT ACCOUNTING PRONOUONCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for
Asset Retirement Obligations, which addresses financial accounting and
reporting for certain obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The provisions of
SFAS No. 143 were required to be applied by the Company beginning March 1,
2003. The impact of the adoption of this Statement has not had, and the
Company does not expect it to have, a material impact on the consolidated
financial statements.
In December 2003, the FASB revised FAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, This statement
revises employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans required by FASB Statements No. 87, Employers' Accounting for Pensions,
No. 88, Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits, and No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. It requires
additional disclosures to those in the original Statement No. 132. This
Statement is effective for financial statements with fiscal years ending after
December 15, 2003. The interim-period disclosures required by this Statement
are effective for interim periods beginning after December 15, 2003. The
provisions of this Statement will be appropriately disclosed in the footnotes
to the financial statements in accordance with the requirements of this
statement, as they apply to the Company.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, and Interpretation of SFAS 5,
57, and 107 and Rescission of FIN 34. The Interpretation requires certain
disclosures to be made by a guarantor about its obligations under certain
guarantees that is has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial recognition
and measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of interim or annual periods after December
15, 2002. The Company adopted FIN 45 during 2003 and there was no effect on
the Company's consolidated financial statements.
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 FIN46-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. Evergreen is
required to adopt FIN 46-R as of the period ending May 31, 2005. While the
Company has not completed its final assessment of the impact of FIN 46-R,
based upon their preliminary assessment, management believes the Company may
be the primary beneficiary of certain related party entities. The Company
leases certain assets, consisting primarily of buildings and aircraft, from
these entities. The financial statements of these entities may be included in
the Company's financial statements for the period. Such inclusion is not
expected to have a material impact on the Company's 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. It requires issuers to classify financial instruments within its scope
as liabilities (or an asset in some cases). Prior to SFAS No. 150, many of
these instruments may have been classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31,
2003. For instruments issued prior to May 31, 2003, this standard is to be
implemented by reporting the cumulative effect of a change in accounting
principle as of July 1, 2003. The Company does not anticipate that the adoption
of the statement will have a material impact on the results of operations,
financial condition or cash flows of the Company.
Page 24
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION, CONTINUED
RESULTS OF OPERATIONS:
Three Months Ended November 30, 2003 Compared to the Three Months Ended
November 30, 2002
The following table sets forth information with respect to our
reportable segments relating to the three months ended November 30, 2003 and
November 30, 2002.
Three Months Ended
November 30, November 30,
2003 2002
------------------------------
(in millions)
Operating revenues:
Flight revenue $ 97.5 $ 119.1
Sales of aircraft, parts, and other assets 3.4 3.0
Ground logistics services 24.2 28.5
Support Services and other 9.1 10.6
------------ ------------
Total operating revenues 134.2 161.2
Operating expenses:
Flight costs 18.6 16.8
Fuel 25.1 32.4
Maintenance 18.5 20.0
Aircraft and equipment 12.9 11.9
Costs of sales of aircraft, parts, and
other property and equipment 1.4 2.1
Costs of ground logistics services 22.5 23.8
Other support costs 10.2 11.8
Selling, general and administrative 15.0 17.0
------------ ------------
Total operating expenses: 124.1 135.8
Consolidated Operating Revenues
Our consolidated operating revenues decreased $27.1 million, or
16.8%, to $134.2 million for the three months ended November 30, 2003 from
$161.2 million for the three months ended November 30, 2002. The decrease in
consolidated operating revenues for the three months ended November 30, 2003
was primarily the result of decreases in flight revenue, ground logistics
services revenue and other support services. Flight revenue, ground logistics
services revenue and other support services decreased $21.5 million, or 18.1%,
and $4.3 million, or 15.2%, and $1.5 million, or 14.7%, to $97.5 million, and
$24.2 million and $9.1 million from $119.1 million and $28.5 million and $10.6
million, respectively. Sales of aircraft, parts, and other assets increased
$0.4 million, or 11.7%, to $3.4 million from $3 million.
Flight revenue is derived principally from the operations of our EIA
segment and, to a lesser extent, our EHI segment. Flight revenues decreased
$21.5 million, or 18.1%, to $97.5 million for the three months ended November
30, 2003 from $119.1 million for the three months ended November 30, 2002.
Flight revenues in our EIA segment decreased $21.7 million, or 19.5%,
to $89.7 million for the three months ended November 30, 2003 from $111.4
million for the three months ended November 30, 2002, due to the following:
o We had a reduction in our Asia charter revenue of $30.0 million to $8.2
million for the three months ended November 30, 2003 from $38.2 million
for the three months ended November 30, 2002, due to higher flight
activity during the three months ended November 30, 2002 which was
related to the West Coast dock strike.
Page 25
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION - CONTINUED
o We had a reduction of $4.3 million due to the termination of two DC-9
contracts and a B-747 contract with Finnair.
o We had a 3.4% reduction in our new AMC contract rate which became
effective October 1, 2003.
These reductions of flight revenues in our EIA segment were partially
offset by an increase in AMC revenue of $13.8 million to $78.3 million for the
three months ended November 30, 2003, from $64.5 million for the three months
ended November 30, 2002, due to an increase in AMC block hours.
AMC block hours rose 1,454, or 22.0%, to 6,698 in the three months
ended November 30, 2003 from 5,244 for the three months ended November 30,
2002. This was primarily due to our higher charter flight activity during the
three months ended November 30, 2002 which was related to the West Coast dock
strike.
The following table details EIA block hours by aircraft and contract
type for the three months ended November 30, 2003 and November 30, 2002:
Three Months Ended
-----------------------
B747 Block Hour Comparison: November 30, 2003 November 30, 2002
----------------- -----------------
AMC 6,698 5,244
Other All-in 535 3,014
----------------- -----------------
Total All-in 7,233 8,258
ACMI - 8
Total B747 Hours 7,233 8,266
----------------- -----------------
DC9 Block Hour Comparison:
All-in 113 581
ACMI 824 725
----------------- -----------------
Total DC 9 Hours 937 1,306
----------------- -----------------
Total Block Hours 8,170 9,572
================= =================
Revenues from sales of aircraft, parts and other assets, which are
primarily composed of sales of aircraft parts, increased $0.4 million, or
12.3%, to $3.4 million for the three months ended November 30, 2003 from $3.0
million for the three months ended November 30, 2002. This was primarily due
to the following factors:
o EASL segment's revenue from sales of aircraft parts increased $1.2
million, or 107.7%, to $2.3 million for the three months ended November
30, 2003 from $1.1 million for the three months ended November 30, 2002,
from B-767 part sales.
o EIA segment's revenue from sales of aircraft parts decreased $1.1
million, which was primarily due to a $0.7 million JT-9 engine sale that
occurred during the three months ended November 30, 2002.
o EAC segment's revenue increased $0.3 million, or 129.2%, to $0.5 million
for the three months ended November 30, 2003 from $0.2 million for the
three months ended November 30, 2002, due primarily to aircraft
reclamation activity.
Page 26
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION - CONTINUED
Ground logistics services revenue decreased $4.3 million, or 15.2%,
to $24.2 million for the three months ended November 30, 2003 from $28.5
million for the three months ended November 30, 2002. United States Postal
Service (USPS) revenue decreased $2.6 million due to decreased SNET volume.
Other third party revenue decreased $1.7 million due to a reduction in
international air traffic.
Support services and other revenues, which are primarily comprised of
revenues generated by our EAC, decreased $1.6 million, or 14.7%, to $9.1
million for the three months ended November 30, 2003 from $10.6 million for
the three months ended November 30, 2002. This was primarily due to the
following factors:
o EAC segment's support service revenue decreased $0.8 million, or 10.9%,
to $6.7 million for the three months ended November 30, 2003 from $7.5
million for the three months ended November 30, 2002, due primarily to a
reduction in third party revenues which resulted form the shifting of
capacity in support of increased maintenance services provided to our
EIA segment.
o EHI segment's support service revenues decreased $0.6 million, or 72.6%,
to $0.3 million for the three months ended November 30, 2003 from $0.9
million for the three months ended November 30, 2002, primarily due to a
reduction in third party maintenance services.
o EIA segment's support service revenues decreased $0.2 million to $0.0
million for the three months ended November 30, 2003 from $0.2 million
for the three months ended November 30, 2002, due to a decrease in
brokerage revenue and a reduction in rental revenue related to
aircraft component