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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report -- June 11, 1996
UNC INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 1-7795 54-1078297
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(State of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
175 Admiral Cochrane Drive Annapolis, Maryland 21407-7394
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(Address of principal executive offices) (Zip Code)
(410) 266-7333
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(Registrant's telephone number, including area code)
Not Applicable
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(Former Address)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
UNC Incorporated (the "Company") has consummated the previously announced
acquisition of substantially all of the assets and business of Garrett Aviation
Services ("Garrett") on May 30 1996. Certain information concerning the terms of
the transaction (the "Acquisition") is set forth below. Audited Garrett
financial statements and certain related revised pro-forma financial information
are included elsewhere in this Current Report on Form 8-K.
Garrett is a leading provider of aviation services to the $3.4 billion
worldwide business aviation aftermarket. Garrett provides a full range of
overhaul services to approximately 2,000 business aviation and regional airline
customers, including complete engine and airframe repair and overhaul
capabilities, full interior and exterior refurbishments, new aircraft
completions, avionics installation and spare parts distribution. Garrett
currently specializes in providing aircraft, engine and avionics aftermarket
services to aircraft powered by AlliedSignal turbofan engines, which are the
leading engine type for the business jet aviation market. Garrett provides its
aircraft and engine maintenance and support through six "fly-in" service centers
across the United States. The Company believes that Garrett enjoys a 50 year
reputation for quality and market leadership in its industry segment.
For the year ended December 31, 1995, Garrett recorded approximately $338.1
million in total revenues and approximately $21.7 million of earnings from
continuing operations before extraordinary item, interest, taxes and
depreciation amortization. Interest taxes, depreciation and amortization
("EBITDA"). For the year ended December 31, 1995, on a pro forma basis assuming
consummation of the Acquisition and the related transactions described herein,
the Company would have generated approximately $865.3 million in revenues and
approximately $65.5 million of EBITDA.
Garrett benefits from a 15-year services agreement with AlliedSignal (the
"AlliedSignal Operating Agreement"), which appoints Garrett as the "Exclusive
Factory Sponsored Service and Support Center" for certain AlliedSignal engines
in specified markets. The current AlliedSignal Operating Agreement, which
extends through June 30, 2009, was assigned to the Company as part of the
Acquisition. The AlliedSignal Operating Agreement, among other things: (a)
specifies the terms on which Garrett purchases engine parts from AlliedSignal;
(b) commits Garrett to purchase its engine parts requirements from AlliedSignal
or certain approved vendors; (c) commits Garrett to provide aftermarket support
to AlliedSignal products in the marketplace; (d) defines a working relationship
between the two companies in a number of areas, including technical training,
quality systems and other support, exchange of customer marketing information,
and future programs.
A major advantage to Garrett under the AlliedSignal Operating Agreement is
that AlliedSignal provides Garrett with its required engine parts inventory on a
consignment basis. Garrett's customers are also able to access AlliedSignal
engines from the AlliedSignal engine rental pool during the period of engine
overhauls. The consignment inventory and the engine pool availability have
allowed Garrett to reduce significantly the level of its inventory and fixed
asset investment relative to what otherwise would be required.
Garrett was sold by AlliedSignal, Inc. ("AlliedSignal") to a group of
investors in June 1994, and they have now sold Garrett to the Company. The
purchase price for the Acquisition was approximately $144.6 million in cash and
the assumption of certain Garrett liabilities (including capitalized lease
obligations recorded at approximately $5.4 million). Pursuant to the terms of
the Garrett Acquisition Purchase Agreement described below (the "Purchase
Agreement"), the Garrett sellers have retained approximately $29.1 million in
net accounts receivable at closing. The Company financed the Acquisition by
issuing $125.0 million aggregate principal amount of 11% Senior Subordinated
Notes due 2006 (the "Notes"), by issuing $25.0 million of 8.5% convertible
preferred stock (the "Preferred Stock") and with borrowings under its revolving
credit facility.
The Company has recently reevaluated its capital requirements as a result
of several factors, including (i) the improved operating performance for the
quarter ended March 31, 1996 of both the Company and Garrett and the anticipated
growth of the combined business, (ii) a recent amendment to the purchase price
adjustment provision of the Purchase Agreement, pursuant to which the Garrett
sellers retained approximately $29.1 million of net accounts receivable which
has resulted in an anticipated short-term need to access working capital
following the Acquisition, and (iii) the Company's agreement with AlliedSignal
(described below) regarding the timing of payment to AlliedSignal of Garrett's
unpaid invoices. As a result of the foregoing factors, the Company has amended
its Revolving Credit Facility to provide for a revolving line of credit of up to
$110 million.
Terms of Garrett Acquisition Purchase Agreement
Under the terms of the Purchase Agreement, the Company paid Garrett
approximately $144.6 million in cash at the closing and assumed all of the
obligations, liabilities and commitments of Garrett arising out of the Garrett
business with respect to the operation of the Garrett business prior to the
closing date. Obligations and liabilities in respect of borrowed money and
current portions of long-term bank financing and liabilities relating to or
arising from the Acquisition were not assumed by the Company. Pursuant to the
originally executed Purchase Agreement, the cash portion of the purchase price
was to be adjusted following closing based on the net asset value of the assets
and liabilities the Company acquires and assumes on the closing date, determined
based upon post-closing audit procedures. If such net asset value was less than
$47.075 million, the purchase price would have been decreased to the extent of
the difference between such amounts. If such net asset value was greater than
$47.575 million, the purchase price would have been increased to the extent of
the difference between such amounts. The Company and Garrett subsequently
entered into an amendment to the Purchase Agreement pursuant to which the
Garrett sellers prepared an estimate prior to closing of the net asset value of
the assets and liabilities of Garrett to be acquired by the Company. At the
closing, the Garrett sellers retained net accounts receivable in an aggregate
face amount equal to approximately $29.1 million, the amount by which the
estimated net asset value exceeded $47.575 million. The final net asset value of
the Garrett assets and liabilities acquired by the Company will continue to be
determined pursuant to a post-closing audit, following which any necessary
adjustment to the cash portion of the purchase price paid by the Company will be
made in accordance with the terms of the Purchase Agreement described above.
In the Purchase Agreement the Garrett sellers agreed to indemnify the
Company for breaches of representations and warranties and other matters subject
to important limitations, including a $3 million aggregate limitation on the
sellers' indemnification obligations thereunder. In connection with the purchase
of the Garrett engine overhaul division from Al1iedSignal in 1994, Garrett
entered into a purchase agreement with AlliedSignal which contained
representations and warranties and indemnities from AlliedSignal (the
AlliedSignal Purchase Agreement"), including indemnification for certain
environmental matters relating to the conduct of the business prior to the sale
of the business by AlliedSignal to Garrett. Under the terms of the Purchase
Agreement, at the closing of the Acquisition the Company was assigned and
succeeded to all of Garrett's rights and obligations under the AlliedSignal
Purchase Agreement, including the right to seek indemnification for breaches of
the representations and warranties made by AlliedSignal relating to the conduct
of the business prior to its acquisition by Garrett and related environmental
matters.
Hart-Scott-Rodino Proceedings
UNC Airwork, a subsidiary of the Company ("Airwork"), performs overhaul and
repair services on several aircraft engines, including the AlliedSignal TFE731
engine. Prior to the consummation of the Acquisition Airwork was authorized by
AlliedSignal to perform among other things, compressor zone inspections and
related repair services ("Heavy Maintenance") on the AlliedSignal TFE731 engine.
For the year ended December 31, 1995, the Heavy Maintenance Business had
revenues of approximately $10.0 million. Garrett is also authorized to perform
these services and the terms of the AlliedSignal Operating Agreement prohibit
AlliedSignal from authorizing additional heavy maintenance service centers
without Garrett's prior consent during the term of the AlliedSignal Operating
Agreement.
In connection with its review of the Acquisition under the
Hart-Scott-Rodino, Antitrust Improvements Act of 1977, the United States
Department of Justice (the "Justice Department") raised certain issues
concerning the Heavy Maintenance aspects of the Garrett and Airwork businesses.
Following discussions with the Justice Department, the Justice Department agreed
that it would not object to completion of the Acquisition if the Company and
Garrett proceeded on the basis of the arrangements discussed below.
The Company, Garrett and AlliedSignal agreed that Airwork would transfer
Airwork's Heavy Maintenance Business and the related authorization from
AlliedSignal to Sabreliner Corporation ("Sabreliner") an existing provider of
aircraft engine overhaul and repair services. This transaction was consummated
immediately prior to the Acquisition. Pursuant to the terms of an asset purchase
agreement, the Company sold to Sabreliner certain assets for their approximate
book value (including tooling, inventory and test equipment which had a book
value at December 31, 1995 of approximately $2.0 million). Airwork used those
assets in connection with the conduct of the Heavy Maintenance Business. Under
the terms of the Sabreliner asset purchase agreement, Airwork will perform
certain Heavy Maintenance services on behalf of Sabreliner for a transition
period following the closing. Airwork will be required to pay AlliedSignal a
royalty in connection with the performance of certain of these services after a
ten month transition period. Following the sale of the Heavy Maintenance
Business to Sabreliner, Garrett will continue to perform heavy maintenance
services. The Company does not believe that the divestiture of the Heavy
Maintenance Business to Sabreliner will have a material effect on the financial
condition, liquidity or results of operations of the Company.
UNC/AlliedSignal Agreement
As noted above Airwork transferred its existing AlliedSignal authorization
to conduct the Heavy Maintenance Business to Sabreliner. This authorization has
been replaced by a new AlliedSignal repair agreement (the "UNC/AlliedSignal
Agreement"). Under the terms of the UNC/AlliedSignal Agreement, the Company is
authorized to perform repairs on certain AlliedSignal parts and components.
Under the terms of this agreement, AlliedSignal will limit purchase orders to
the Company totaling $15.0 million annually in parts and component repairs
through December 31, 1997. This $15.0 million annual commitment will be pro
rated for any partial year during the terms of the UNC/AlliedSignal Agreement.
The Company has agreed to perform these repairs for AlliedSignal at a price
which is 6% below that offered to AlliedSignal by other authorized vendors.
Under the terms of the UNC/AlliedSignal Agreement, the Company is granted
the right for a limited period of time to perform AlliedSignal TFE731 parts and
component repair services directly for Sabreliner so that Airwork can meet its
obligations to provide Sabreliner with the transistors repair services discussed
above. The Company is also authorized to continue to perform AlliedSignal TFE731
parts and components repairs for certain specified customers other than
AlliedSignal and Sabreliner through December 31, 1997. Airwork must pay
AlliedSignal a royalty equal to 20% of the price Airwork charges such customers,
net of the costs of any parts or components used in connection with such repairs
which are purchased directly from AlliedSignal, taxes and shipping costs.
Other than the $15.0 million in annual repairs which AlliedSignal is
required to purchase from the Company, repairs the Company may perform for
Sabreliner during the transition period and repairs the Company is authorized to
perform for the specified customers discussed above, Airwork is not authorized
by AlliedSignal to perform repairs on any AlliedSignal TFE731 or TPE331 parts
and components during the term of the UNC/AlliedSignal Agreement.
The UNC/AlliedSignal Agreement expires on December 31, 1997. The agreement
provides that the parties will hold good faith business discussions concerning
all elements of the relationship among the Company, Garrett and AlliedSignal.
While the Company has no reason to believe that these discussions will not
proceed favorably, there can be no assurance that the UNC/Allied Signal
Agreement will be extended beyond December 31, 1997 or that it will be extended
on terms as favorable to the Company as those presently in effect. However, the
Operating Agreement between Garrett and AlliedSignal is to remain in effect
through June 30, 2009.
AlliedSignal, Garrett and the Company have also agreed that AlliedSignal
shall be entitled to appoint one heavy maintenance service center in addition to
the center being conveyed to Sabreliner by Airwork and to make successor
appointments in respect of such additional center.
The Company has paid AlliedSignal $1.5 million in consideration of being a
party to the arrangements discussed above.
In connection with the Acquisition and the various related transactions,
the Company also recently agreed with AlliedSignal that it will cause
Garrett to pay all AlliedSignal unpaid invoices issued on or prior to 30 days
before the closing of the Acquisition, subject to adjustment to resolve disputed
invoice amounts. Such payment will be made within 10 days following the closing
of the Acquisition. In addition, the Company and AlliedSignal have agreed to
shorten the payment period with respect to the utilization of AlliedSignal's
consigned parts inventory.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GARRETT AVIATION SERVICES
Information concerning Management's Discussion and Analysis of Financial
Condition and Results of Operations of Garrett for the period June 30, 1994
through December 31, 1995 is included in the Company's Current Report on Form
8-K dated May 7, 1996 and is incorporated herein by reference. The following
discussion relates to the three-month periods ended March 31, 1996 and March 31,
1995.
Revenues for the three month period ended March 31, 1996 of $87.7
million for Garrett increased from $75.8 million (16%) compared to the
corresponding period of 1995. Gross profit increased during the same period from
$8.9 million to $12.5 million, an increase of $3.6 million (40%). Gross profit
for the current quarter includes $1.0 million in income related to a change in
estimated cost on certain contracts.
Revenues from engine overhaul and repair operations, including parts and
services, increased in the 1996 period by $5.4 million (10%) over the first
three months of 1995 to $58.2 million. These increases are principally
attributable to increased volume of overhaul and repair services for the TFE 731
turbofan engines. Engine overhaul and repair volume is subject to variations
from period to period driven principally by engine hours flown which determines
the timing of scheduled and unscheduled engine maintenance events. Gross profit
decreased by $0.2 million (3%) over the corresponding 1995 period, to $6.0
million.
Non-engine revenues increased $6.5 million (28%) to $29.5 million for the
three months ended March 31, 1996, compared to the corresponding period for
1995. The increase is due principally to a major refurbishment at The Jet Center
and increased volume in other non-engine related sales. Gross profit increased
$3.8 million (41%) compared to the corresponding period of 1995, to $6.5
million. The improvement in non-engine revenues and margins reflects the results
of Garrett's continued emphasis on non-engine services marketing efforts, along
with certain cost efficiencies.
Selling, general and administrative expenses increased $1.2 million (20%)
to $7.5 million during the first three months of 1996 over the first three
months of 1995. This increase is primarily due to increased personnel and
systems related costs.
Net interest expense increased $22,000 to $846,000 (3%) due to increased
borrowings under the revolving loans, offset somewhat by lower interest rates.
Liquidity and Capital Resources
Total debt was essentially unchanged between the two years, decreasing from
$40.2 million at December 31, 1994 to $40.1 million at December 31, 1995. Debt
to capitalization improved from 75.3% to 67.8% as a result of increased earnings
during 1995.
Total debt at March 31, 1996 was $50.4 million, an increase of $10.3
million compared with December 31, 1995. Of this amount $3.6 million was used to
fund net operating activities (comprising $5.8 million generated from operations
adjusted for non-cash charges, offset by $9.4 million used to fund working
capital requirements), $0.8 million was used for capital expenditures, $1.5
million was distributed to Garrett's partners and the remainder was used to
increase Garrett's cash balance. Debt to capitalization at March 31, 1996 was
70.3% compared to 67.8% at December 31, 1995.
Garrett generated $14.7 million of cash from operations during 1995, of
which $5.8 million was invested in capital expenditures and $6.2 million was
distributed to partners. Cash and cash equivalents increased to $11.2 million at
the end of 1995, a portion of which is to be distributed to Garrett partners to
cover partners' income tax obligations.
Capital expenditures of $5.8 million in 1995 included the significant
investment in a new company-wide computer system which was put into operation in
October, 1995. Although it is uncertain at this time how the acquisition of
Garrett by the Company will affect future capital expenditures, on a stand alone
basis, Garrett anticipates capital expenditures for 1996 would be approximately
$8.0 million.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) & (b) Financial Statements of Business Acquired and Pro Forma Financial
Information
The following financial statements and pro forma financial information are
hereby filed in this Current Report on Form 8-K:
The audited Consolidated Financial Statements of Garrett Aviation Services
as of December 31, 1995 and 1994, and for the year ended December 31, 1995,
and for the period July 1, 1994 (date of inception) to December 31, 1994,
and the unaudited Consolidated Financial Statements of Garrett Aviation
Services as of March 31, 1996 and March 31, 1995 and for the three month
periods ended March 31, 1996 and March 31, 1995.
Pro Forma Combined Financial Statements for the year ended December 31,
1995 and the quarter ended March 31, 1996.
Certain audited financial statements with respect to the operations of the
Garrett business prior to its divestiture by AlliedSignal are not presently
available and it is impracticable to provide these required financial statements
at the time this Current Report on Form 8-K is filed. The Company expects to
file these financial statements as an amendment to this Current Report on
Form 8-K no later than 60 days after the date on which this Current Report on
Form 8-K must be filed in accordance with Item 7(a)(4) of the instructions to
Current Report on Form 8-K.
Exhibit No. Description of Exhibit
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1 The audited Consolidated Financial Statements of
Garrett Aviation Services as of December 31, 1995 and
1994, and for the year ended December 31, 1995, and
for the period July 1, 1994 (date of inception) to
December 31, 1994, and the unaudited Consolidated
Financial Statements of Garrett Aviation Services
as of March 31, 1996 and March 31, 1995 and for the
three month periods ended March 31, 1996 and
March 31, 1995.
2 Pro forma Combined Financial Statements for the year
ended December 31, 1995 and the three months ended
March 31, 1996.
3 Consent of Ernst & Young LLP.
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UNC INCORPORATED
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNC INCORPORATED
By: /s/ Robert L. Pevenstein
--------------------------------
Robert L. Pevenstein
Senior Vice President and
Chief Financial Officer
Date: June 11, 1996
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Exhibit 1
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REPORT OF INDEPENDENT AUDITORS
The Partners of
CFC Aviation Services, L.P. (dba Garrett Aviation Services)
We have audited the accompanying consolidated balance sheets of CFC Aviation
Services, L.P. (dba Garrett Aviation Services) as of December 31, 1995 and
1994, and the related consolidated statements of income, partners' capital and
cash flows for the year ended December 31, 1995 and for the period from July 1,
1994 (date of inception) to December 31, 1994. These financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Garrett Aviation
Services at December 31, 1995 and 1994, and the consolidated results of their
operations and their cash flows for the year ended December 31, 1995 and for
the period from July 1, 1994 (date of inception) to December 31, 1994, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
March 1, 1996
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GARRETT AVIATION SERVICES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31, ----------------
1996 1995 1994
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(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 15,641 $ 11,247 $ 8,753
Accounts receivable, net of allowance for
doubtful accounts of $1,553,000 at March 31,
1996, $1,547,000 at December 31, 1995 and
$500,000 at December 31, 1994.................. 57,693 44,649 38,680
Inventories, net................................ 25,615 21,281 14,482
Prepaid expenses and other current assets....... 2,026 1,334 956
-------- -------- -------
Total current assets.............................. 100,975 78,511 62,871
Property and equipment, net....................... 27,753 28,402 27,226
Excess of purchase price over net assets, net..... 4,791 4,954 6,297
-------- -------- -------
Total assets...................................... $133,519 $111,867 $96,394
======== ======== =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable................................ $ 46,025 $ 39,321 $32,023
Accrued expenses and other liabilities.......... 15,767 13,375 10,948
Current maturities of long-term debt............ 5,500 8,250 5,000
-------- -------- -------
Total current liabilities......................... 67,292 60,946 47,971
Revolving credit agreement........................ 23,000 10,000 8,000
Long-term debt.................................... 21,896 21,858 27,209
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Total liabilities................................. 112,188 92,804 83,180
Partners' capital:
General......................................... 213 190 132
Limited......................................... 21,118 18,873 13,082
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21,331 19,063 13,214
-------- -------- -------
Total liabilities and partners' capital........... $133,519 $111,867 $96,394
======== ======== =======
</TABLE>
See accompanying notes.
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GARRETT AVIATION SERVICES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
THREE MONTHS ENDED (DATE OF
MARCH 31 INCEPTION) TO
-------------------- YEAR ENDED DECEMBER 31,
1996 1995 DECEMBER 31, 1995 1994
--------- --------- ----------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 87,688 $ 75,809 $338,104 $144,200
Cost of sales........... 75,216 66,912 294,382 130,224
--------- --------- -------- --------
Gross profit............ 12,472 8,897 43,722 13,976
Selling, general and
administrative......... 7,542 6,305 28,261 9,990
--------- --------- -------- --------
Operating profit........ 4,930 2,592 15,461 3,986
Interest expense........ 846 824 3,334 1,810
Other income............ (117) (178) (315) (68)
--------- --------- -------- --------
Net income.............. $ 4,201 $ 1,946 $ 12,442 $ 2,244
========= ========= ======== ========
</TABLE>
See accompanying notes.
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GARRETT AVIATION SERVICES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
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<S> <C> <C> <C>
Initial contributions of cash........................ $120 $11,880 $12,000
Net income........................................... 22 2,222 2,244
Distributions provided............................... (10) (1,020) (1,030)
---- ------- -------
Partners' capital at December 31, 1994............... 132 13,082 13,214
Net income........................................... 124 12,318 12,442
Distributions provided............................... (66) (6,527) (6,593)
---- ------- -------
Partners' capital at December 31, 1995............... 190 18,873 19,063
Net income (unaudited)............................... 42 4,159 4,201
Distributions provided (unaudited)................... (19) (1,914) (1,933)
---- ------- -------
Partners' capital at March 31, 1996 (unaudited)...... $213 $21,118 $21,331
==== ======= =======
</TABLE>
See accompanying notes.
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GARRETT AVIATION SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1994
THREE MONTHS ENDED (DATE OF
MARCH 31, YEAR ENDED INCEPTION) TO
-------------------- DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
--------- --------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................... $ 4,201 $ 1,946 $ 12,442 $ 2,244
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation and
amortization............... 1,576 1,571 5,954 2,984
Provision for doubtful
accounts................... -- -- 1,246 500
Provision for obsolete
inventory.................. -- 602 695 395
Accretion of lease
obligation................. 38 37 149 77
Changes in operating assets
and liabilities:
Accounts receivable....... (13,044) (5,533) (7,215) (8,413)
Inventories............... (4,334) 567 (7,494) (359)
Prepaid expenses and other
current assets........... (692) 235 (378) (744)
Accounts payable.......... 6,704 3,669 7,298 27,478
Accrued expenses and
other.................... 1,935 2,445 1,998 4,392
--------- -------- -------- --------
Net cash provided by (used in)
operating activities......... (3,616) 5,539 14,695 28,554
INVESTING ACTIVITIES
Acquisitions, net of cash
received..................... -- -- -- (64,603)
Purchases of property and
equipment.................... (764) (2,063) (5,787) (2,176)
--------- -------- -------- --------
Net cash used in investing
activities................... (764) (2,063) (5,787) (66,779)
FINANCING ACTIVITIES
Proceeds from revolving credit
agreement.................... 14,000 2,000 29,000 18,000
Repayment of revolving credit
agreement.................... (1,000) (5,000) (27,000) (10,000)
Proceeds from issuance of
debt......................... -- -- -- 52,277
Payments of debt.............. (2,750) -- (2,250) (25,277)
Cash contributions from
partners..................... -- -- -- 12,000
Cash distributions to
partners..................... (1,476) (43) (6,164) (22)
--------- -------- -------- --------
Net cash (used in) provided by
financing activities......... 8,774 (3,043) (6,414) 46,978
--------- -------- -------- --------
Net increase in cash and cash
equivalents.................. 4,394 433 2,494 8,753
Cash and cash equivalents at
beginning of period.......... 11,247 8,753 8,753 --
--------- -------- -------- --------
Cash and cash equivalents at
end of period................ $ 15,641 $ 9,186 $ 11,247 $ 8,753
========= ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995 AND
PERIOD FROM JULY 1, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Formation and Description of Operations
Garrett Aviation Services (Garrett) is the d.b.a. of a limited partnership
with the legal name of CFC Aviation Services, L.P. The partnership was formed
as of June 30, 1994 and began operations July 1, 1994 upon the acquisition of
certain assets and the assumption of certain liabilities of AlliedSignal
discussed in the "Acquisitions" footnote herein. Garrett is owned 99 percent by
CFC Aviation Holding, L.P. as the limited partner and 1 percent by CFC
Aviation, Inc. as the general partner.
Garrett provides turbine-powered airframe maintenance and related services,
technical support and turbine engine repair, overhaul and related services on
turbine engine products to general aviation operators and regional commercial
airlines. The services are provided at airport hangar locations throughout the
United States.
Basis of Presentation
The financial statements include all accounts of Garrett and its 99 percent
owned subsidiary (see "Acquisitions" below) after elimination of all
significant intercompany transactions and balances.
Cash and Equivalents
Garrett maintains zero-balance accounts to maximize its cash flows through
its disbursement arrangements. At March 31, 1996, December 31, 1995 and 1994,
there was $19,208,000, $24,742,000, and $9,598,000, respectively, of checks
which had been drawn and are either being held by Garrett or have not yet been
presented for payment against Garrett's cash accounts. Such amounts are
included in accounts payable. Cash and equivalents include instruments with
remaining maturities of three months or less at the time of acquisition and at
March 31, 1996, December 31, 1995 and 1994 included $15,400,000, $11,200,000,
and $7,200,000, respectively, that was invested in money market mutual funds
consisting of bank certificates of deposit, repurchase agreements, bankers
acceptances, commercial paper and other short-term obligations. These
investments are stated at cost which approximates market.
Inventories
Materials inventory consists of purchased parts and is stated at the lower of
cost or market, with cost being determined on the average cost basis. Work-in-
process consists principally of maintenance and repair projects in process and
includes material, labor and related overhead. Consigned inventory of engine
parts is not reflected in the inventory balance of Garrett and is purchased and
immediately charged to cost of sales upon sale of the related parts to the
customer.
Property and Equipment
Property and equipment is recorded at cost, and depreciation is computed over
the estimated useful lives of the assets using the straight-line method. Assets
recorded under capital leases and leasehold improvements are amortized over the
shorter of their useful lives or the term of the related leases by use of the
straight-line method.
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
Excess of Purchase Price Over Net Assets
The excess of purchase price over net assets consists of the excess over fair
value on the purchase transactions which is amortized over fifteen years based
upon the life of the operating agreement between Garrett and AlliedSignal (see
Operating Agreements footnote) and direct acquisition costs which are amortized
over one to five years based on the nature of the cost. Accumulated
amortization at March 31, 1996, December 31, 1995, and 1994 was $2,535,000,
$2,319,000, and $976,000, respectively.
Concentration of Credit Risk
Substantially all of the revenues are derived from customers in the general
aviation market by direct sales and through repairs and overhaul operations.
Garrett also derives revenues from AlliedSignal for prepaid maintenance service
and warranty programs sponsored by AlliedSignal, who also is a major supplier
of virtually all of the related engine parts.
Revenue Recognition
Revenue from engine and airframe maintenance services is recognized upon
completion of the repair. Revenue from parts sales is recognized upon shipment
of the part to customers.
Advertising
The Company expenses advertising as incurred. Advertising expense during the
three months ended March 31, 1996 and March 31, 1995, the year ended
December 31, 1995, and for the period from July 1, 1994 (date of inception) to
December 31, 1994 was approximately $120,000, $70,000, $450,000, and $250,000,
respectively.
Income Taxes
Under the Internal Revenue Code, a partnership is not a taxable entity, and
accordingly, no provision for income taxes has been included in the
accompanying financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
During the quarter ended March 31, 1996, the Company performed a review of
certain of its completed contracts and determined that $1,000,000 worth of
credits that had been established for future costs were no longer required.
Accordingly, this amount was reflected as a reduction of cost of sales during
the three months ended March 31, 1996.
Reclassifications
Certain reclassifications have been made to the 1994 amounts to conform them
to the 1995 presentation.
ACQUISITIONS
Garrett entered into an agreement effective June 30, 1994 to acquire the
"Hangar Facilities" of AlliedSignal. The final price was $62,490,000 and was
financed through $12,000,000 of partners' capital with
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
the balance being funded with debt. The acquisition was accounted for as a
purchase. The purchase price was allocated to assets acquired based upon their
fair market values at the date of acquisition, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Accounts receivable......................................... $29,236
Inventories................................................. 13,194
Prepaid expenses and other current assets................... 148
Property and equipment...................................... 24,434
Excess of purchase price over net assets.................... 6,762
Accounts payable............................................ (2,218)
Accrued expenses............................................ (3,934)
Capital lease obligations................................... (5,132)
-------
$62,490
=======
</TABLE>
On October 26, 1994, Garrett purchased 99 percent of certain assets and
assumed certain liabilities relating to an airframe maintenance, support and
fueling business known as "The Jet Center" for $2,420,000. The results of
operations of the acquired business have been included in the Garrett financial
statements from the date of acquisition. The one percent of The Jet Center not
owned by the Partnership is owned by CFC Aviation, Inc.
The acquisition of The Jet Center was accounted for by the purchase method of
accounting. The purchase price was allocated to assets acquired based upon
their fair market values at the date of acquisition, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash........................................................ $ 307
Accounts receivable......................................... 1,531
Inventories................................................. 1,324
Prepaid expenses and other current assets................... 64
Property and equipment...................................... 2,624
Excess of purchase price over net assets.................... 511
Accounts payable............................................ (2,327)
Accrued expenses............................................ (1,614)
-------
$ 2,420
=======
</TABLE>
OPERATING AGREEMENTS
In conjunction with the purchase of the Hangar Facilities, the Partnership
entered into an Operating Agreement with AlliedSignal for a minimum term of 15
years covering certain critical aspects of the business. As a result of the
agreement, Garrett conducts a significant amount of business with the seller.
Some of the key provisions of the agreement include:
CONSIGNED INVENTORY. Garrett is permitted to hold on consignment certain
new spares, repair parts and exchange parts supplied by the seller. Such
inventory is held under the control of Garrett but is not purchased by
Garrett until the part is sold to the ultimate customer. Included in cost
of sales for the three months ended March 31, 1996 and March 31, 1995, the
year ended December 31, 1995 and for the period from July 1, 1994 (date of
inception) to December 31, 1994, were purchases of approximately
$42,000,000, $38,000,000, $175,000,000, and $68,000,000, respectively,
under this arrangement.
PREPAID MAINTENANCE SERVICE PLANS. Garrett performs certain maintenance
services for eligible customers under the provisions of prepaid maintenance
service plans offered by AlliedSignal. Garrett is reimbursed for its costs
adjusted for performance incentives and disincentives as defined in the
Operating
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
Agreement. Total revenue from these plans was approximately $31,000,000,
$25,000,000, $101,000,000, and $43,000,000 for the three months ended March
31, 1996, March 31, 1995, the year ended December 31, 1995 and the period
from July 1, 1994 (date of inception) to December 31, 1994, respectively.
WARRANTY. Garrett also performs certain warranty services for the benefit
of the seller which is recorded as revenue based upon the agreed upon
repair schedule in the Operating Agreement. Revenue recognized on these
services for the three months ended March 31, 1996, and March 31, 1995, the
year ended December 31, 1995 and for the period from July 1, 1994 (date of
inception) to December 31, 1994, was approximately $9,000,000, $6,000,000,
$24,000,000, and $10,000,000, respectively.
The Operating Agreement is subject to termination subsequent to the
expiration of its 15-year term with one-year prior notice. It is further
subject to earlier termination under certain circumstances which include, but
are not limited to, mutual agreement, certain breaches, bankruptcy, customer
satisfaction deficiencies and other criteria. At March 31, 1996, December 31,
1995 and 1994, Garrett had accounts receivable from AlliedSignal
of $13,979,000, $4,228,000, and $15,782,000, respectively, and had accounts
payable to AlliedSignal of $21,271,000, $25,801,000, and $17,634,000,
respectively.
INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31 ---------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Materials......................................... $14,423 $10,259 $ 8,319
Work-in-process................................... 13,596 13,428 7,874
------- ------- -------
28,019 23,687 16,193
Less: reserves.................................... 2,404 2,406 1,711
------- ------- -------
$25,615 $21,281 $14,482
======= ======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31 ---------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Leasehold improvements.......................... $ 7,935 $ 7,946 $ 7,946
Machinery and equipment......................... 20,599 20,507 19,007
Information systems and data handling
equipment...................................... 6,174 6,038 431
Construction in progress........................ 1,075 530 1,850
------- ------- -------
35,783 35,021 29,234
Less: accumulated depreciation and
amortization................................... 8,030 6,619 2,008
------- ------- -------
$27,753 $28,402 $27,226
======= ======= =======
</TABLE>
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
Property and equipment held under capital leases consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31 --------------
1996 1995 1994
-------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Leasehold improvements............................ $3,319 $3,319 $3,319
Accumulated amortization.......................... (251) (216) (72)
------ ------ ------
$3,068 $3,103 $3,247
====== ====== ======
</TABLE>
Amortization under capital leases is included with depreciation expense.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31 ---------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Customer progress payments....................... $ 6,101 $ 2,317 $ 1,643
Accrued vacation................................. 3,038 2,895 2,458
Other............................................ 6,628 8,163 6,847
------- ------- -------
$15,767 $13,375 $10,948
======= ======= =======
</TABLE>
REVOLVING CREDIT AGREEMENT
Garrett has a Revolving Credit Agreement (Revolver) as part of its primary
Bank Credit Agreement (the overall agreement collateralizes substantially all
of Garrett's assets), which matures December 31, 1999 unless it is in default,
and provides for maximum borrowings of up to $27,000,000, subject to reduction
for outstanding letters of credit of up to $5,000,000. Unused borrowings
available at March 31, 1996 and December 31, 1995 are $4,000,000 and
$17,000,000, respectively, which is further reduced by outstanding letters of
credit of $354,000 at both March 31, 1996 and December 31, 1995. Interest rates
are determined at the time of borrowing and are based on the lender's base
rate, plus a margin of 0.75 percent to 0.0 percent based on operating
performance measures, or a Eurodollar rate, plus a margin of 2.0 percent to 1.0
percent based on operating performance measures. Interest on outstanding
balances under the Revolver is payable either monthly, quarterly or
semiannually dependent upon whether the borrowing is a base rate or Eurodollar
rate loan. At March 31, 1996 and December 31, 1995, $23,000,000 and
$10,000,000, respectively, was outstanding under the Revolver of which the
interest rate was 6.94 percent. The weighted average interest rate of the
Revolver for the year ended December 31, 1995 and for the period from July 1,
1994 (date of inception) to December 31, 1994 was 7.65 percent and 7.20
percent, respectively. The Bank Credit Agreement contains various restrictive
covenants on financial ratios, capital expenditures and distributions among
other restrictions.
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
LONG-TERM DEBT
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31 ---------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Term loan........................................ $22,000 $24,750 $27,000
Lease obligations................................ 5,396 5,358 5,209
------- ------- -------
27,396 30,108 32,209
Less current maturities.......................... 5,500 8,250 5,000
------- ------- -------
$21,896 $21,858 $27,209
======= ======= =======
</TABLE>
The Term Loan had an initial principal amount of $27,000,000 and annual
principal payments of $5,000,000 in 1995 and $5,500,000 thereafter. Interest on
the Term Loan is payable on the same basis and at the same rates as set forth
for the Revolving Credit Agreement. The term loan is part of the Bank Credit
Agreement that also includes the Revolving Credit Agreement. Significant terms,
interest and collateral are the same as set forth above in the Revolving Credit
Agreement footnote. At March 31, 1996 and December 31, 1995, the interest rate
on the term loan was 6.56 and 8.50 percent on $2,750,000 and $2,800,000,
respectively, of the balance and 6.50 and 7.00 percent on $19,250,000 and
$21,950,000, respectively, of the remaining balance.
Garrett is required under the terms of its credit agreement to maintain an
interest rate swap to the extent of $20,000,000 from August 5, 1994 through
August 5, 1996, and has elected to enter into a $10,000,000 swap from August 6,
1996 to August 5, 1997 which effectively adjusts the variable interest rate on
this portion of Garrett's debt to a fixed 6.67 percent plus the margin as
defined in the Bank Credit Agreement (the actual rate as defined in the swap at
March 31, 1996 and December 31, 1995 was 5.31 and 5.91 percent, respectively,
plus the margin). Garrett is required to make quarterly settlements on the rate
differentials and records a charge or credit to interest expense at the end of
each period for the impact of the swap. At March 31, 1996 and December 31,
1995, Garrett had accrued $24,000 and $23,000, respectively, for the impact of
the swap for the periods ended March 31, 1996 and December 31, 1995,
respectively.
Lease obligations include two leases, the first of which relates to amounts
accrued in relation to a lease funded by a municipality through a $4,254,000
issue of tax-exempt bonds to finance certain hangar leasehold improvements
which is accounted for as a capital lease. These bonds were issued by the
respective city's airport authority prior to the acquisition and were
guaranteed by AlliedSignal. At the time of the acquisition, Garrett assumed the
$4,254,000 lease obligation and related leasehold improvement asset, and under
a sublease agreement, Garrett reimburses a monthly lease payment to
AlliedSignal in the amount of the monthly rental due on the lease which equals
the municipality's interest costs on the tax exempt bonds. This monthly payment
is recorded as interest expense. The $4,254,000 is due in October 2016. The
second lease has a $4,400,000 balloon payment due in September 2018 and Garrett
records annual rent expense in an amount which equals the lessor's interest
costs on the debt issued for the leasehold, and records an additional expense
of approximately $150,000 annually to establish the liability necessary to
satisfy the final payment. At March 31, 1996 and December 31, 1995, $1,142,000
and $1,104,000, respectively, has been accrued toward the final obligation.
Interest rates on both obligations are guaranteed by AlliedSignal at four
percent through June 1997 and five percent through December 1999. Thereafter,
the interest rates will be variable based on the rate attached to the bonds.
Principal maturities on long-term debt at December 31, 1995, in the aggregate
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996........................................................ $ 8,250
1997........................................................ 5,500
1998........................................................ 5,500
1999........................................................ 5,500
2000........................................................ --
Thereafter.................................................. 5,358
-------
$30,108
=======
</TABLE>
Total interest expense paid by Garrett for the three months ended March 31,
1996 and March 31, 1995, the year ended December 31, 1995 and for the period
from July 1, 1994 (date of inception) to December 31, 1994 on all forms of
borrowing was approximately $1,156,000, $1,343,000, $3,430,000, and $650,000,
respectively.
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
LEASE COMMITMENTS
The Company has various noncancelable operating leases relating principally
to real property, which expire at various dates through 2018. Rental expense
for the three months ended March 31, 1996 and March 31, 1995, the year ended
December 31, 1995 and for the period from July 1, 1994 (date of inception) to
December 31, 1994 was approximately $765,000, $772,000, $3,023,000, and
$1,374,000, respectively. At December 31, 1995, future minimum rental
commitments under noncancelable operating leases with a term in excess of one
year are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996........................................................ $ 2,621
1997........................................................ 2,282
1998........................................................ 2,100
1999........................................................ 1,527
2000........................................................ 725
Thereafter.................................................. 3,204
-------
$12,459
=======
</TABLE>
GENERAL CONTINGENCIES
From time to time, the Company is involved in certain litigation matters
through the normal course of business. Management does not believe that the
outcome of these matters will result in uninsured losses that will have a
material impact to the Company.
RELATED PARTIES
Garrett paid approximately $105,000, $75,000, $360,000, and $150,000,
respectively, for the three months ended March 31, 1996 and March 31, 1995, the
year ended December 31, 1995 and for the period from July 1, 1994 (date of
inception) to December 31, 1994 for management fees to entities that are
partners in Garrett. Such management fee arrangements call for payment of
$300,000 per year beginning July 1, 1994 to one of the partner groups which is
to continue as long as their ownership interest equals or exceeds 20 percent of
their initial ownership interest, and an additional $120,000 per year to
another of the partner groups beginning July 1, 1995 which is to continue as
long as their ownership interest exceeds 20 percent of their ownership
interest.
Under the terms of the Bank Credit Agreement, Garrett is permitted to
distribute to its partners an amount equal to the maximum federal and state tax
rates applied to taxable income from the partnership attributable to the
partners. For the three months ended March 31, 1996 and March 31, 1995, the
year ended December 31, 1995 and for the period from July 1, 1994 (date of
inception) to December 31, 1994, Garrett paid cash distributions of
approximately $1,476,000, $43,000, $6,164,000, and $22,000, respectively. At
March 31, 1996 and December 31, 1995, Garrett has accrued an additional
$1,893,000 and $1,437,000, respectively, which is scheduled to be paid
subsequent to that date relating to operating results as of each of the
respective dates.
BENEFIT PLAN
During 1994, Garrett established the Garrett Aviation Services Savings Plan
covering substantially all employees who have completed 12 consecutive months
of service with Garrett or its predecessor businesses. Under the terms of the
Plan, employees may make voluntary contributions up to 15 percent of their base
compensation subject to Internal Revenue Service limitations. The Company will
match 50 percent of employee contributions up to six percent of an employee's
base compensation. Contributions to the Plan for the three months ended March
31, 1996 and 1995, the year ended December 31, 1995 and for the period from
July 1,
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS
UNAUDITED)
1994 (date of inception) to December 31, 1994 were approximately $190,000,
$182,000, $786,000, and $316,000, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long and short-term debt: The carrying amounts of the Company's
borrowings under its short-term revolving credit agreement approximates its
fair value. The fair values of the Company's long-term debt are estimated
using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. At
March 31, 1996 and December 31, 1995, the carrying amount of the Company's
long-term debt approximates its fair value.
SUBSEQUENT EVENT
In 1996, an unrelated third party has entered into a definitive agreement to
acquire substantially all of the assets and business of Garrett for
approximately $145 million in cash and the assumption of certain liabilities.
The transaction is subject to various matters so there is no assurance that it
will ultimately be consummated.
<PAGE>
Exhibit 2
---------
PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth unaudited pro forma combined financial data of
the Company for the year ended December 31, 1995 and the three months ended
March 31, 1996. The pro forma combined financial data is derived from the
historical Consolidated Financial Statements of Garrett and the historical
Consolidated Financial Statements of the Company, adjusted to give pro forma
effect to the Acquisition, the Offering, the issuance of the Preferred Stock,
the UNC/AlliedSignal Agreement and the sale of the Heavy Maintenance Business to
Sabreliner. The pro forma balance sheet data give effect to the Acquisition, the
Offering, the issuance of the Preferred Stock, the UNC/AlliedSignal Agreement
and the divestiture of the Heavy Maintenance Business as if they were
consummated on March 31, 1996 and the pro forma statement of operations data
give effect to the Acquisition, the Offering, the issuance of the Preferred
Stock, the UNC/AlliedSignal Agreement and the divestiture of the Heavy
Maintenance Business as if they were consummated on January 1, 1995. The
adjustments relating to the Acquisition and the related transactions are
described in the accompanying notes. The pro forma adjustments are based upon
available information and certain assumptions that management of the Company
believes are reasonable. The pro forma financial data does not purport to
represent what the Company's financial position or results of operations would
actually have been had the Acquisition and such other transactions, in fact,
occurred on such dates, or to project the Company's financial position at any
future date or results of operations for any future period. The pro forma
combined financial data should be read in conjunction with the historical
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" of the Company and Garrett in
the Company's Annual Report on Form 10-K, the Company's Current Report on
Form 8-K dated May 7, 1996, the Company's Quarterly Report for Quarter ended
March 31, 1996, and this Current Report on Form 8-K.
PRO FORMA COMBINED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA
COMPANY GARRETT ADJUSTMENTS PRO FORMA
----------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
(A):
Sales and operating rev-
enues.................. $ 536,243 $ 338,104 $(9,022)(b) $ 865,325
Costs and operating ex-
penses................. 456,935 294,382 (7,437)(b) 736,611
----------- ----------- -----------
(7,269)(c)
Gross profit............ 79,308 43,722 128,714
Selling, general and ad-
ministrative expenses.. 56,952 28,261 (380)(b) 85,122
----------- ----------- -----------
(2,720)(c)
3,009 (d)
Operating income........ 22,356 15,461 43,592
Interest expense........ (19,514) (3,334) (11,071)(e) (33,919)
Other, net.............. 116 315 431
----------- ----------- -----------
Earnings before income
taxes.................. 2,958 12,442 10,104
Provision for income
taxes.................. 1,035 2,501 (f) 3,536
----------- ----------- -----------
Net earnings........... 1,923 12,442 6,568
Preferred dividends..... 2,125 (g) 2,125
----------- ----------- -----------
Net earnings attribut-
able to common stock... $ 1,923 $ 12,442 $ 4,443
=========== =========== ===========
Earnings per common
share.................. $ .11 $ .25
Weighted average number
of common shares....... 17,666 17,666
</TABLE>
22
<PAGE>
PRO FORMA COMBINED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
----------------------- PRO FORMA
COMPANY GARRETT ADJUSTMENTS PRO FORMA
----------- ---------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
(A):
Sales and operating rev-
enues.................. $ 141,509 $ 87,688 $(2,059)(b) $ 227,138
Costs and operating ex-
penses................. 120,936 75,216 (1,777)(b) 192,558
----------- ---------- -----------
(1,817)(c)
Gross profit............ 20,573 12,472 34,580
Selling, general and ad-
ministrative expenses.. 14,708 7,542 (95)(b) 22,304
----------- ---------- -----------
(790)(c)
939 (d)
Operating income........ 5,865 4,930 12,276
Interest expense........ (4,864) (846) (2,929)(e) (8,639)
Other, net.............. (324) 117 (207)
----------- ---------- -----------
Earnings before income
taxes.................. 677 4,201 3,430
Provision for income
taxes.................. 203 826 (f) 1,029
----------- ---------- -----------
Net earnings........... 474 4,201 2,401
Preferred dividends..... 531 (g) 531
----------- ---------- -----------
Net earnings attribut-
able to common stock... $ 474 $ 4,201 $ 1,870
=========== ========== ===========
Earnings per common
share.................. $ .03 $ .11
Weighted average number
of common shares....... 17,769 17,769
</TABLE>
23
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------ PRO FORMA
UNC GARRETT ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash.............................. $ 1,671 $ 11,247 $(11,247)(h) $ 1,671
Accounts receivable............... 102,462 44,649 1,513 (i) 148,624
Unbilled costs and accrued profits
on contracts in progress......... 11,128 11,128
Inventories....................... 91,130 21,281 343 (j) 111,211
(1,543)(k)
Assets held for sale.............. 5,099 5,099
Other............................. 10,156 1,334 11,490
-------- -------- --------
Total current assets............ 221,646 78,511 289,223
Assets held for sale--noncurrent.... 12,796 12,796
Property, plant and equipment, net.. 48,068 28,402 6,619 (j) 82,632
(457)(k)
Cost in excess of net assets of ac-
quired companies, net(a)........... 136,298 4,954 107,571 (j) 248,823
Other noncurrent assets............. 27,453 27,453
-------- -------- --------
Total assets.................... $446,261 $111,867 $660,927
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUI-
TY:
Current liabilities:
Current portion of long-term
debt............................. $ 1,748 $ 8,250 $ (8,250)(l) $ 1,748
Accounts payable.................. 39,614 39,321 78,935
Accrued expenses.................. 54,794 13,375 (30)(k) 68,139
Income taxes payable.............. 1,392 1,392
-------- -------- --------
Total current liabilities....... 97,548 60,946 150,214
Long-term Bank Revolving Credit Fa-
cility............................. 37,181 10,000 (5,034)(l) 42,147
9 1/8% Senior Notes................. 100,000 100,000
Other Long-term Senior Debt......... 1,352 21,858 (16,500)(l) 6,710
11% Senior Subordinated Notes ...... 125,000 (l) 125,000
7 1/2% Convertible Subordinated
Debentures Due 2006................ 64,800 64,800
Other noncurrent liabilities........ 45,228 45,228
SHAREHOLDERS' EQUITY:
Convertible preferred stock......... 25,000 (m) 25,000
Partners' capital................... 19,063 (19,063)(n)
Common stock........................ 3,679 3,679
Additional paid-in capital.......... 123,717 1,676 (o) 125,393
Retained earnings (deficit)......... (15,450) (15,450)
-------- -------- --------
Total............................... 111,946 19,063 138,622
Less:
Treasury stock.................... 8,750 8,750
Minimum pension liability
adjustment....................... 1,801 1,801
Unearned compensation--restricted
stock............................ 1,243 1,243
-------- -------- --------
Total shareholders' equity.......... 100,152 19,063 126,828
-------- -------- --------
Total liabilities and shareholders'
equity............................. $446,261 $111,867 $660,927
======== ======== ========
</TABLE>
24
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------ PRO FORMA
UNC GARRETT ADJUSTMENTS PRO FORMA
-------- -------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash.............................. $ 2,129 $ 15,641 $(15,641)(h) $ 2,129
Accounts receivable............... 108,916 57,693 1,513 (i) 159,611
(8,511)(j)
Unbilled costs and accrued profits
on contracts in progress......... 10,385 10,385
Inventories....................... 100,664 25,615 339 (j) 125,075
(1,543)(k)
Assets held for sale.............. 4,858 4,858
Other............................. 9,715 2,026 11,741
-------- -------- --------
Total current assets............ 236,667 100,975 313,799
Assets held for sale--noncurrent.... 12,243 12,243
Property, plant and equipment, net.. 48,962 27,753 8,030 (j) 84,288
(457)(k)
Cost in excess of net assets of ac-
quired companies, net(a)........... 135,101 4,791 106,513 (j) 246,405
Other noncurrent assets............. 28,579 28,579
-------- -------- --------
Total assets.................... $461,552 $133,519 $685,314
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUI-
TY:
Current liabilities:
Current portion of long-term
debt............................. $ 5,317 $ 5,500 $ (5,500)(l) $ 5,317
Accounts payable.................. 40,135 46,025 86,160
Accrued expenses.................. 57,280 15,767 (30)(k) 73,017
Income taxes payable.............. 1,412 1,412
-------- -------- --------
Total current liabilities....... 104,144 67,292 165,906
Long-term Bank Revolving Credit Fa-
cility............................. 52,722 23,000 (18,072)(l) 57,650
9 1/8% Senior Notes................. 100,000 100,000
Other Long-term Senior Debt......... 1,235 21,896 (16,500)(l) 6,631
11% Senior Subordinated Notes ...... 125,000 (l) 125,000
7 1/2% Convertible Subordinated
Debentures Due 2006................ 60,600 60,600
Other noncurrent liabilities........ 41,450 41,450
SHAREHOLDERS' EQUITY:
Convertible preferred stock......... 25,000 (m) 25,000
Partners' capital................... 21,331 (21,331)(n)
Common stock........................ 3,700 3,700
Additional paid-in capital.......... 124,344 1,676 (o) 126,020
Retained earnings (deficit)......... (14,976) (14,976)
-------- -------- --------
Total............................... 113,068 21,331 139,744
Less:
Treasury stock.................... 8,750 8,750
Minimum pension liability
adjustment....................... 1,801 1,801
Unearned compensation--restricted
stock............................ 1,116 1,116
-------- -------- --------
Total shareholders' equity.......... 101,401 21,331 128,077
-------- -------- --------
Total liabilities and shareholders'
equity............................. $461,552 $133,519 $685,314
======== ======== ========
</TABLE>
25
<PAGE>
- --------
(a) The Acquisition will be accounted for as a purchase pursuant to APB
Opinion No. 16 "Business Combinations." The purchase cost will be
allocated to the assets and liabilities of Garrett based on their relative
fair values. Such allocations are subject to final determination based on
valuations and other studies to be performed subsequent to the Closing. The
final values may differ from those set forth in the table above.
(b) In connection with the Acquisition, the Company has sold the Heavy
Maintenance Business to Sabreliner at approximately book value. Assuming the
sale occurred on January 1, 1995, the effect on the Company's operations as
a result of the divestiture of the Heavy Maintenance Business would have
been:
<TABLE>
<CAPTION>
PERIOD ENDED
----------------------
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Reduction in sales and operating revenues......... $9,022 $2,059
Reduction in costs and operating expenses......... 7,437 1,777
Reduction in selling, general and administrative
expenses......................................... 380 95
------ ------
Reduction in operating income.................... $1,205 $ 187
====== ======
</TABLE>
(c) The Company has specifically identified cost reductions and other operating
income enhancements resulting from a business integration plan which is
expected to be followed subsequent to the Acquisition. The business
integration plan contemplates: (i) implementation of the UNC/AlliedSignal
Agreement which will provide the Company with $15.0 million in annual orders
for the repair of AlliedSignal parts and components during the term of the
agreement, which will include parts and components sent by Garrett to
AlliedSignal for such service; and (ii) eliminating certain management fees
and consulting fees and reducing certain other administrative costs such as
insurance and professional fees previously paid by Garrett. For a
description of the Company's agreement with AlliedSignal, See
"UNC/AlliedSignal Agreement" included elsewhere in this Current Report on
Form 8-K.
The Company's business integration plan provides for the events generating
these reductions to occur in phases, beginning in the initial year. The pro
forma expected cost savings for the year ended December 31, 1995 and the
quarter ended March 31, 1996 reflect savings and operating efficiencies the
Company expects during the initial year following the consummation of the
Acquisition. The Company expects to realize other benefits during the three
years following the Acquisition. Assuming the Acquisition occurred on
January 1, 1995 and the phase-in of the business integration plan commenced
as of such date, the expected cost reductions, on a pro forma basis, for the
year ended December 31, 1995 and the quarter ended March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED
----------------------
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Reduction in costs and operating expenses......... $7,269 $1,817
Reduction in selling, general and administrative
expenses......................................... 2,720 790
------ ------
Total cost reductions............................ $9,989 $2,607
====== ======
</TABLE>
(d) Represents the amortization of the cost in excess of net assets acquired
from Garrett of $4,406 for the year ended December 31, 1995 and $1,102 for
the quarter ended March 31, 1996, assuming the acquisition had been
consummated on January 1, 1995, offset by the elimination of $1,397 and
$163 of cost applicable to Garrett's amortization of intangible assets for
the year ended December 31, 1995 and the quarter ended March 31, 1996,
respectively.
(e) Reflects the additional interest expense of $14,019 and $3,683 (at the
actual rate of 11% on the Notes offered hereby), for the year ended
December 31, 1995 and the quarter ended March 31, 1996, respectively, that
would have been incurred had the Acquisition, the Offering, the
UNC/AlliedSignal Agreement and the sale of the Heavy Maintenance Business
taken place on January 1, 1995, offset by elimination of interest of
$2,948 and $754 of Garrett for the year ended December 31, 1995 and the
quarter ended March 31, 1996, respectively, on senior debt that is not
being assumed by the Company.
(f) Represents the accrual of estimated income taxes on pro forma earnings at
the effective income tax rate of 35% for 1995 and 30% for the 1996 period.
(g) Reflects the cumulative preferred dividends at the rate of 8.5% on the
Preferred Stock.
(h) Reflects the elimination of the cash balance of Garrett, which is an asset
that is not being acquired.
(i) Represents a $1,513 note received in connection with the Company's
divestiture of the Heavy Maintenance Business.
(j) These adjustments reflect the allocation of the purchase price for Garrett
to present the inventory, property, plant and equipment and intangibles at
their estimated fair market value and, at March 31, 1996, the elimination of
$8,511 of trade receivables being retained by the Sellers (See discussion of
the terms of the Garrett Acquisition Purchase Agreement included eslewhere
in this Current Report on Form 8-K)
(k) Reflects the sale of inventory and equipment, net of related engine
overhaul reserves, to Sabreliner in connection with the Company's
divestiture of the Heavy Maintenance Business.
(l) At December 31, 1995 these adjustments reflect the issuance of $125,000 of
long-term senior subordinated notes and an increase of $4,966 in the
Company's Revolving Credit Facility to fund certain related costs, offset
by the elimination of $34,750 of Garrett's senior debt that is not being
assumed in the Acquisition. The senior debt of Garrett includes $10,000 of
revolving credit and $24,750 of senior term loans of which $8,250 is
classified as a current liability. At March 31, 1996 these adjustments
reflect the issuance of $125,000 of long-term senior subordinated notes
and an increase of $4,928 in the Company's Revolving Credit Facility to
fund certain related costs, offset by the elimination of $45,000 of
Garrett's senior debt that is not being assumed in the Acquisition. The
senior debt of Garrett at March 31, 1996 includes $23,000 of revolving
credit and $22,000 of senior term loans of which $5,500 is classified as a
current liability.
(m) Reflects $25,000 of Preferred Stock being issued as a part of the
Acquisition.
(n) Reflects the elimination of partner's capital which is not being assumed
in the Acquisition of Garrett.
(o) In connection with the Acquisition, UNC agreed to issue an aggregate of
225,000 shares of its Common Stock to certain Garrett executives the Company
intends to employ following closing at a purchase price of $5.75 per share,
the closing price on the date the Purchase Agreement was executed. These
executives have also been granted options to purchase an aggregate of
450,000 shares of the Company's Common Stock at a purchase price of $6.90
per share. These options are to vest in three equal installments on each of
the first three anniversary dates of Closing. This adjustment reflects the
difference between the purchase price of the stock and the estimated market
value at consummation of the Acquisition.
26
<PAGE>
Exhibit 3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated March 1, 1996, with respect to the
financial statements of Garrett Aviation Services included in the Form 8-K
Current Report of UNC Incorporated dated June 11, 1996.
Ernst & Young LLP
Phoenix, Arizona
June 7, 1996.
