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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 -- May 7, 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 21401-7394
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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 5. OTHER EVENTS
As announced previously, UNC Incorporated (the "Company") has entered
into a definitive Purchase Agreement pursuant to which it agreed to acquire
substantially all of the assets and business of Garrett Aviation Services
("Garrett"). The Company expects to consummate the transaction during the month
of May, 1996. Certain information concerning the recent quarterly results of the
Company and Garrett and the terms of the Acquisition are set forth below.
Audited Garrett financial statements and certain related pro forma financial
information are also included elsewhere in this Current Report on Form 8-K. The
Company will file a Current Report on Form 8-K/A in accordance with applicable
Securities and Exchange Commission rules and regulations following the time that
the Acquisition is completed.
RECENT QUARTERLY RESULTS
The Company has reported selected operating results for its first
quarter ended March 31, 1996. Sales and operating revenues for the quarter
increased to $141.5 million from $125.7 million for the same period in 1995.
Operating income for the three months ended March 31, 1996 was $5.9 million
compared with $5.2 million for the first quarter of 1995. The Company's net
earnings for the 1996 first quarter increased to $0.5 million from $.05 million
for the same period in 1995. Earnings per share for the three months ended March
31, 1996 were $0.03, compared with $0.00 for last year's first quarter. EBITDA
for the quarter increased to $8.8 million from $7.9 million for the same period
in 1995.
Garrett's net sales for the three months ended March 31, 1996 increased
to $87.7 million from $75.8 million for the same period in 1995. Operating
income for Garrett for the first quarter of 1996 was $5.0 million compared with
$2.7 million for the 1995 first quarter. Garrett's EBITDA for the quarter
increased to $6.6 million from $4.3 million for the same period in 1995.
TERMS OF GARRETT ACQUISITION PURCHASE AGREEMENT
Under the terms of the Purchase Agreement, the Company has agreed to pay
Garrett approximately $144.6 million in cash at the closing and to assume 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 date on which the closing of the acquisition (the "Acquisition") occurs.
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 are not being assumed by the Company. The cash portion of the
purchase price is 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. The Company expects to consummate the Acquisition in May 1996.
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 AlliedSignal 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 will be
assigned and succeed 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. Airwork is currently 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 have agreed that Airwork will 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 will be
consummated immediately prior to the Acquisition. Pursuant to the terms of an
asset purchase agreement, the Company has agreed to sell 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 uses these 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, 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 will transfer its existing AlliedSignal
authorization to conduct the Heavy Maintenance Business to Sabreliner. This
authorization will be replaced by a new AlliedSignal repair agreement (the
"UNC/AlliedSignal Agreement"). Under the terms of the UNC/AlliedSignal
Agreement, the Company will be authorized to perform repairs on certain
AlliedSignal parts and components. Under the terms of this agreement,
AlliedSignal will submit purchase orders to the Company totalling $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
term 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 transition repair services discussed
above. The Company will also be authorized to continue to perform AlliedSignal
TFE731 parts and component 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 will not be 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/AlliedSignal
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 agreed to pay AlliedSignal $1.5 million in consideration of
being a party to the arrangements discussed above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GARRETT AVIATION SERVICES
The following is a discussion and analysis of the historical financial
condition and results of operations of Garrett, provided by the management of
Garrett. The discussion should be read in conjunction with the Consolidated
Financial Statements of Garrett included elsewhere in this Current Report on
Form 8-K. In order to provide comparative trend data subsequent to July 1,
1994, the following is a discussion and analysis of three six month periods,
including a comparison of the six month period ended June 30, 1995 with
the six month period ended December 31, 1994, and a comparison of the six
month period ended December 31, 1995 with the six month period ended
December 31, 1994.
GARRETT AVIATION SERVICES
SIX MONTH SUMMARY DATA
<TABLE>
<CAPTION>
AUDITED SIX UNAUDITED SIX UNAUDITED SIX AUDITED YEAR
MONTHS ENDED MONTHS ENDED MONTHS ENDED ENDED
12/31/94 6/30/95 12/31/95 12/31/95
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $144,200 $154,129 $183,975 $338,104
Cost of sales.......... 130,224 135,694 158,688 294,382
-------- -------- -------- --------
Gross profit........... 13,976 18,435 25,287 43,722
Selling, general and
administrative
expenses.............. 9,990 12,944 15,317 28,261
-------- -------- -------- --------
Operating income....... 3,986 5,491 9,970 15,461
Interest expense....... (1,810) (1,623) (1,711) (3,334)
Other income........... 68 183 132 315
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Net earnings(a)........ $2,244 $4,051 $8,391 $12,442
======== ======== ======== ========
OTHER DATA:
Depreciation and
amortization.......... $2,984 $3,188 $2,766 $5,954
Capital expenditures... 2,176 4,366 1,421 5,787
</TABLE>
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(a) Garrett is a limited partnership and, as such, does not record federal
income tax liability at the partnership level. The net income shown is
equivalent to pre-tax income for a corporate taxpayer.
RESULTS OF OPERATIONS
Overview
The Garrett business was acquired from AlliedSignal on June 30, 1994. The
following provides a comparison of the results of operations of Garrett for
each of the six months ended December 31, 1995 and the six months ended June
30, 1995, with the six months ended December 31, 1994. In connection with the
expansion of its non-engine services, on October 26, 1994 Garrett purchased
certain assets and assumed liabilities relating to an airframe maintenance,
modification and refurbishment business located in Van Nuys, California, known
as "The Jet Center." The results of operations of The Jet Center have been
included in the Garrett financial statements from the date of acquisition.
Subsequent to the acquisition of Garrett from AlliedSignal, Garrett
management implemented several changes, including an expansion of the work
force, to more adequately meet the customers' service needs. The number of
employees increased from approximately 700 at July 1, 1994 to approximately
1,100 by December 31, 1995. Garrett has also emphasized a more decentralized
approach to managing its six primary operating locations. Finally, Garrett has
increased its marketing efforts, focusing on full-service capabilities, with an
emphasis on non-engine services, including air frame maintenance and
modification. Such services were not emphasized when the business was owned by
AlliedSignal. These changes began to be reflected in the first half of 1995,
and had a more significant impact during the second half of 1995.
Six Months Ended December 31, 1995 Compared with Six Months Ended December 31,
1994
Revenues for Garrett increased from $144.2 million in the second half of 1994
to $184.0 million in the second half of 1995, an increase of $39.8 million
(28%). Gross profit increased during the same period from $14.0 million to
$25.3 million, an increase of $11.3 million (81%). Revenues and gross margins
were above those for the corresponding period in 1994 at all six of Garrett's
primary operating locations.
Revenues from engine overhaul and repair operations, including parts and
services, increased in the 1995 period by $29.0 million (30%) over the second
half of 1994 to $126.3 million. Gross profit increased by $4.3 million (42%)
over the corresponding 1994 period to $14.8 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.
Non-engine revenues increased $10.7 million (23%) to $57.6 million for the
six months ended December 31, 1995, compared to the corresponding period for
1994. This increase is due principally to a $9.4 million increase in revenues
from The Jet Center, which was acquired in October 1994, and to increased
volume at those hangers performing non-engine services. Gross profit increased
$7.0 million (198%) to $10.5 million over the last six months of 1994. The
improvement in non-engine revenues and margins reflects the results of
Garrett's increased emphasis on non-engine services marketing efforts, started
in late 1994 and early 1995, along with certain labor and cost efficiencies.
Selling, general and administrative expenses increased $5.3 million (53%) to
$15.3 million in the last six months of 1995 over the last six months of 1994.
This increase is due to additional costs associated with The Jet Center, which
was acquired in October 1994, and increased personnel, professional services
and marketing costs.
Net interest expense decreased from $1.8 million in the 1994 period to $1.7
million in the 1995 period, primarily reflecting lower average interest rates.
Six Months Ended June 30, 1995 Compared with Six Months Ended December 31,
1994
Revenues for Garrett for the six months ended June 30, 1995 were $154.1
million, compared to $144.2 million for the six months ended December 31, 1994,
an increase of $9.9 million (7%). Gross profit for the first half of 1995 was
$18.4 million, compared to $14.0 million for the second half of 1994, an
increase of $4.4 million (32%).
Revenue from engine overhaul and repairs, including parts and service,
increased $11.7 million (12%) to $109.0 million in the first half of 1995.
Gross profit for engine overhaul and repairs operations increased $2.4 million
(23%) to $12.8 million. These improvements are due to increased volume in
overhaul and repair of TFE 731 turbofan and TPE 331 turboprop engines and a
higher level of spare parts sales for both 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.
Revenues from non-engine operations, which include airframe maintenance,
avionics, repair and retrofits, and interior and exterior modification and
refurbishments, decreased $1.8 million (4%) to $45.1 million. This decrease in
revenue is attributable to an increase of $5.5 million in revenues generated by
The Jet Center, which was acquired in October 1994, offset by lower revenues of
the other Garrett service centers due to the timing of the delivery of major
airframe maintenance and modification contracts. Revenues from the airframe
maintenance and modification business are subject to quarterly, and to a lesser
extent, annual fluctuations due to the timing of delivery of completed aircraft
under these long-term contracts. In the 1994 period, Garrett delivered several
major aircraft modifications, while none were delivered during the 1995 period.
Gross profit increased $2.1 million (59%) to $5.6 million over the 1994 period
due to the acquisition of The Jet Center and improved labor efficiencies and
cost reductions.
Selling, general and administrative expenses increased $3.0 million (30%)
during the first six months of 1995 compared to the last six months of 1994.
The increase in selling, general and administrative expenses in the 1995 period
is due to additional costs associated with The Jet Center, which was acquired
in October 1994, and increased personnel, professional services and marketing
costs.
Interest expense declined between the periods, reflecting primarily lower
average 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.
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.
Environmental
Garrett's operations are subject to a variety of federal, state and local
laws and regulations relating to the environment. Several of Garrett's
facilities have potential liability resulting from past disposal of waste at
commercial disposal sites that are subject to remedial obligations under state
or federal law. Garrett's facilities also have incurred and are expected to
continue to incur environmental remedial obligations associated with past use
underground storage tanks, sumps and drains.
In the Acquisition 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 AlliedSignal 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 will be assigned and
succeed 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.
Garrett believes that its facilities are operated substantially in compliance
with applicable environmental laws and regulations on an overall basis. Garrett
management believes that these and other environmental matters will not have a
material adverse impact on Garrett's financial condition, results of operation
or liquidity.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) & (b) Financial Statements of Businesses 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.
Pro Forma Combined Financial Statements for the year ended December
31, 1995.
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.
2 Pro Forma Combined Financial Statements for the year ended
December 31, 1995.
3 Consent of Ernst & Young LLP.
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UNC INCORPORATED
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S I G N A T U R E
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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
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Robert L. Pevenstein
Senior Vice President and
Chief Financial Officer
Date: May 7, 1996
<PAGE>
Exhibit No. 1
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
Phoenix, Arizona
March 1, 1996
<PAGE>
GARRETT AVIATION SERVICES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1994
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 11,247 $ 8,753
Accounts receivable, net of allowance for doubtful accounts
of $1,547,000 at December 31, 1995 and $500,000 at December
31, 1994................................................... 44,649 38,680
Inventories, net............................................ 21,281 14,482
Prepaid expenses and other current assets................... 1,334 956
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Total current assets.......................................... 78,511 62,871
Property and equipment, net................................... 28,402 27,226
Excess of purchase price over net assets, net................. 4,954 6,297
-------- -------
Total assets.................................................. $111,867 $96,394
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LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable............................................ $ 39,321 $32,023
Accrued expenses and other liabilities...................... 13,375 10,948
Current maturities of long-term debt........................ 8,250 5,000
-------- -------
Total current liabilities..................................... 60,946 47,971
Revolving credit agreement.................................... 10,000 8,000
Long-term debt................................................ 21,858 27,209
-------- -------
Total liabilities............................................. 92,804 83,180
Partners' capital:
General..................................................... 190 132
Limited..................................................... 18,873 13,082
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19,063 13,214
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Total liabilities and partners' capital....................... $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 (DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -------------------
<S> <C> <C>
Net sales................................. $338,104 $144,200
Cost of sales............................. 294,382 130,224
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Gross profit.............................. 43,722 13,976
Selling, general and administrative....... 28,261 9,990
-------- --------
Operating profit.......................... 15,461 3,986
Interest expense.......................... 3,334 1,810
Other income.............................. (315) (68)
-------- --------
Net income................................ $ 12,442 $ 2,244
======== ========
</TABLE>
See accompanying notes.
<PAGE>
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
==== ======= =======
</TABLE>
See accompanying notes.
<PAGE>
GARRETT AVIATION SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM JULY 1,
1994 (DATE OF
YEAR ENDED INCEPTION) TO
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................. $ 12,442 $ 2,244
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 5,954 2,984
Provision for doubtful accounts....... 1,246 500
Provision for obsolete inventory...... 695 395
Accretion of lease obligation......... 149 77
Changes in operating assets and
liabilities:
Accounts receivable................. (7,215) (8,413)
Inventories......................... (7,494) (359)
Prepaid expenses and other current
assets............................. (378) (744)
Accounts payable.................... 7,298 27,478
Accrued expenses and other.......... 1,998 4,392
-------- --------
Net cash provided by operating
activities............................. 14,695 28,554
INVESTING ACTIVITIES
Acquisitions, net of cash received...... -- (64,603)
Purchases of property and equipment..... (5,787) (2,176)
-------- --------
Net cash used in investing activities... (5,787) (66,779)
FINANCING ACTIVITIES
Proceeds from revolving credit
agreement.............................. 29,000 18,000
Repayment of revolving credit
agreement.............................. (27,000) (10,000)
Proceeds from issuance of debt.......... -- 52,277
Payments of debt........................ (2,250) (25,277)
Cash contributions from partners........ -- 12,000
Cash distributions to partners.......... (6,164) (22)
-------- --------
Net cash (used in) provided by financing
activities............................. (6,414) 46,978
-------- --------
Net increase in cash and equivalents.... 2,494 8,753
Cash and cash equivalents at beginning
of period.............................. 8,753 --
-------- --------
Cash and cash equivalents at end of
period................................. $ 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
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 December 31, 1995 and 1994, there was
$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 December 31, 1995 and 1994
included $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.
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
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to five years based on the nature of the cost. Accumulated amortization at
December 31, 1995 and 1994 was $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
year ended December 31, 1995 and for the period from July 1, 1994 (date of
inception) to December 31, 1994 was approximately $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.
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 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>
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 year ended December 31, 1995 and for the period from July
1, 1994 (date of inception) to December 31, 1994, were purchases of
approximately $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 Agreement. Total revenue from these plans was approximately
$101,000,000 and $43,000,000 for 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 year ended December 31, 1995 and for the period from July
1, 1994 (date of inception) to December 31, 1994, was approximately
$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 December 31, 1995 and 1994,
Garrett had accounts receivable from AlliedSignal of $4,228,000 and
$15,782,000, respectively, and had accounts payable to AlliedSignal of
$25,801,000 and $17,634,000, respectively.
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES
Inventories at December 31 consisted of:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Materials.................................................. $10,259 $ 8,319
Work-in-process............................................ 13,428 7,874
------- -------
23,687 16,193
Less: reserves............................................. 2,406 1,711
------- -------
$21,281 $14,482
======= =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment at December 31 consisted of:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements.................................... $ 7,946 $ 7,946
Machinery and equipment................................... 20,507 19,007
Information systems and data handling equipment........... 6,038 431
Construction in progress.................................. 530 1,850
------- -------
35,021 29,234
Less: accumulated depreciation and amortization........... 6,619 2,008
------- -------
$28,402 $27,226
======= =======
</TABLE>
Property and equipment held under capital leases at December 31, consisted
of:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Leasehold improvements................................... $ 3,319 $ 3,319
Accumulated amortization................................. (216) (72)
------- -------
$ 3,103 $ 3,247
======= =======
</TABLE>
Amortization under capital leases is included with depreciation expense.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses at December 31 consisted of:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Customer progress payments................................ $ 2,317 $ 1,643
Accrued vacation.......................................... 2,895 2,458
Other..................................................... 8,163 6,847
------- -------
$13,375 $10,948
======= =======
</TABLE>
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1995 are $17,000,000, which is further reduced by
outstanding letters of credit of $354,000 at 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 December 31, 1995, $10,000,000 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.
LONG-TERM DEBT
Long-term debt at December 31 consisted of:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Term loan................................................. $24,750 $27,000
Lease obligations......................................... 5,358 5,209
------- -------
30,108 32,209
Less current maturities................................... 8,250 5,000
------- -------
$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 December 31, 1995, the interest rate on the term loan
was 8.50 percent on $2,800,000 of the balance and 7.00 percent on $21,950,000
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
December 31, 1995 was 5.91 percent 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 December 31, 1995, Garrett had accrued $23,000 for the impact of the
swap for the period ended December 31, 1995.
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
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1995,
$1,104,000 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 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 $3,430,000 and $650,000,
respectively.
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 year ended December 31, 1995 and for the period from
July 1, 1994 (date of inception) to December 31, 1994 was approximately
$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.
<PAGE>
GARRETT AVIATION SERVICES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
RELATED PARTIES
Garrett paid approximately $360,000 and $150,000 for 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 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 $6,164,000 and $22,000, respectively. At December 31, 1995,
Garrett has accrued an additional $1,437,000 which is scheduled to be paid by
March 31, 1996.
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 year ended December 31,
1995 and for the period from July 1, 1994 (date of inception) to December 31,
1994 were approximately $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
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. The pro forma combined
financial data is derived from the historical Consolidated Financial Statements
of Garrett included elsewhere in this Current Report on Form 8-K and the
historical Consolidated Financial Statements of the Company, adjusted to give
pro forma effect to the Acquisition, the Company's proposed Offering $125.0
million in Senior Subordinated Notes (the "Offering"), the issuance of $25.0
million of Preferred Stock, the UNC/AlliedSignal Agreement and the sale of the
Heavy Maintenance Business. 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 December 31, 1995 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.
<PAGE>
PRO FORMA COMBINED
STATEMENT OF OPERATIONS
YEAR ENDING 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) 84,896
----------- ----------- -----------
(2,720)(c)
2,783 (d)
Operating income........ 22,356 15,461 43,818
Interest expense........ (19,514) (3,334) (10,983)(e) (33,831)
Other, net.............. 116 315 431
----------- ----------- -----------
Earnings before income
taxes.................. 2,958 12,442 10,418
Provision for income
taxes.................. 1,035 2,611 (f) 3,646
----------- ----------- -----------
Net earnings........... 1,923 12,442 6,772
Preferred dividends..... 2,125 (g) 2,125
----------- ----------- -----------
Net earnings attribut-
able to common stock... $ 1,923 $ 12,442 $ 4,647
=========== =========== ===========
Earnings per common
share.................. $ .11 $ .26
Weighted average number
of common shares....... 17,666 17,666
</TABLE>
<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 4,954 104,914 (j) 246,166
Other noncurrent assets............. 27,453 27,453
-------- -------- --------
Total assets.................... $446,261 $111,867 $658,270
======== ======== ========
LIABILITIES AND STOCKHOLDERS' 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 (6,015)(l) 41,166
9 1/8% Senior Notes................. 100,000 100,000
Other Long-term Senior Debt......... 1,352 21,858 (16,500)(l) 6,710
% Senior Subordinated Notes being
offered............................ 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.......... 123,717 123,717
Retained earnings (deficit)......... (15,450) (15,450)
-------- -------- --------
Total............................... 111,946 19,063 136,946
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 19,063 125,152
-------- -------- --------
Total liabilities and shareholders'
equity............................. $446,261 $111,867 $658,270
======== ======== ========
</TABLE>
<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 prior 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 agreed to sell the
Heavy Maintenance Business to Sabreliner at approximately book value. See
the discussion of "Hart-Scott-Rodino Proceedings" included elsewhere in this
Current Report on Form 8-K. 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>
<S> <C>
Reduction in sales and operating revenues....................... $9,022
Reduction in costs and operating expenses....................... 7,437
Reduction in selling, general and administrative expenses....... 380
------
Reduction in operating income.................................. $1,205
======
</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 an agreement
between the Company and AlliedSignal providing 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 the discussion of the "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 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 are
as follows:
<TABLE>
<S> <C>
Reduction in costs and operating expenses....................... $7,269
Reduction in selling, general and administrative expenses....... 2,720
------
Total cost reductions.......................................... $9,989
======
</TABLE>
(d) Represents $4,180 of cost associated with the amortization of the cost in
excess of net assets acquired from Garrett, assuming the acquisition had
been consummated on January 1, 1995, offset by the elimination of $1,397
of cost applicable to Garrett's amortization of intangible assets for the
year ended December 31, 1995.
(e) Reflects the additional interest expense of $13,931 (assuming a pro forma
rate of 11% on the Notes offered hereby), for the year ended December 31,
1995 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 of Garrett on senior debt that is not being assumed by the Company.
(f) Represents the accrual of income taxes on pro forma earnings at the
effective income tax rate of 35%.
(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.
(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) Reflects the issuance of $125,000 of long-term senior subordinated notes
and $3,985 of additional borrowing under the Company's Revolving Credit
Facility, 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.
(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.
<PAGE>
EXHIBIT 3
CONSENT OF ERNST & YOUNG, 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 May 7, 1996.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 6, 1996
