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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