UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
Commission File Number 0-22706
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GREENWICH AIR SERVICES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 58-1758941
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 522187, Miami, Florida 33152
4590 NW 36th Street, Miami, Florida 33122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 526-7000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value Class B Common Stock, par value
$.01 per share $.01 per share
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(Title of Class) (Title of Class)
8% Convertible Subordinated Debentures
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
As of December 13, 1996: (a) 6,971,213 shares of Class A Common Stock, par
value $.01 per share of the Registrant (the "Class A Common Stock" or the
"Common Stock") were outstanding, and 9,778,176 shares of Class B Common Stock,
par value $.01 per share of the Registrant (the "Class B Common Stock") were
outstanding; (b) the number of shares of the voting Class A Common Stock held by
non-affiliates was 3,307,194; (c) based upon the closing sale price of $231/2
per share of Class A Common Stock on December 13, 1996, the aggregate market
value of the voting shares held by non-affiliates was $77,719,059.
DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on March 21, 1997 - Part III
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PART I
ITEM 1. BUSINESS
GENERAL
Greenwich Air Services, Inc. and its subsidiaries (collectively, the
"Company") is the largest and most diversified independent gas turbine engine
repair and overhaul company in the world. The Company provides repair and
overhaul services for gas turbine aircraft engines used to power Boeing 707,
727, 737, 747 and 767; McDonnell Douglas DC-8, DC-9, DC-10, MD-11, MD-80 and
MD-90; Airbus A-300, A-319, A-320, A-321, A-330 and A-340; Lockheed L-1011; and
a variety of military aircraft. The Company also services aeroderivative engines
used in a variety of industrial and marine applications and turboprop engines
predominately used by regional air carriers. In addition, the Company manages
government and military service and maintenance programs and provides for the
sale and refurbishment of gas turbine power plants (with electrical power output
of up to 120 megawatts) in various countries around the world.
The Company provides services to more than 500 customers, including
passenger airlines; freight and package air carriers; utilities and industrial
users; and military and government programs. Such services are provided on a
worldwide basis through four major engine repair and overhaul service centers
located in Dallas, Texas; Miami, Florida; East Granby, Connecticut; and
Prestwick, Scotland. These service centers are supported by engine components
repair facilities in Miami, Florida and McAllen, Texas; an engine repair and
testing facility in Fort Worth, Texas; and an engine testing facility at JFK
International Airport in New York, New York.
The Company markets its services through three marketing and technical
groups: (i) commercial aircraft engine services, (ii) government programs, and
(iii) aeroderivative engine services. These groups comprised approximately 81%,
11%, and 8%, respectively, of the Company's fiscal 1996 net sales.
The Company's net sales have increased from $75.8 million in fiscal 1991 to
$397.9 million in fiscal 1996 and, notwithstanding costs incurred in connection
with its growth strategy, the Company increased net income during such period
from $3.5 million to $11.8 million. On a pro forma basis for fiscal 1995, after
giving effect to its acquisition of the "Aviall Business" described below, the
Company would have had combined sales of $701.1 million and earnings before
interest, taxes, depreciation and amortization ("EBITDA") of approximately $63.1
million. In the fourth quarter of fiscal 1996, the Company's net sales, EBITDA
and net income were $179.7 million, $17.6 million and $4.7 million,
respectively.
COMPANY HISTORY
The Company was formed in October 1987 to acquire substantially all of the
operating assets and business of a Miami-based aircraft service corporation
established in 1944 to service military aircraft. At the time of the
acquisition, the corporation was primarily engaged in structural airframe
maintenance and the repair and servicing of low by-pass Pratt & Whitney JT3D
engines and components operated by affiliates of its former owners, with sales
to such entities accounting for approximately 30% of its net sales. Upon
obtaining control, the Company's management established strategic goals of
expanding the number and lines of gas turbine engines serviced and increasing
the existing customer base to include more package and freight air carriers,
industrial and marine users, and military and government agencies.
In 1992, the Company moved its principal operations from an approximately
200,000 square foot facility near the cargo center of Miami International
Airport to the almost 500,000 square foot engine service center formerly
operated by Eastern Airlines. Concurrent with entering into a favorable
thirty-year lease for the larger facility, which includes three on-site engine
test cells, the Company acquired from the Eastern Airlines estate substantially
all of the equipment and tooling necessary for the repair and maintenance of
Rolls Royce RB211-22B and General Electric ("GE") CF6-50 high by-pass aircraft
engines. This paved the way for the Company's entry into the servicing market
for these larger and more efficient
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engines, which are used to power wide-body aircraft such as the Airbus A300,
Boeing 747, Lockheed L-1011 and McDonnell-Douglas DC-10.
In November 1993, the Company raised approximately $23.7 million in capital
through its initial public offering of Common Stock and 8% Convertible
Subordinated Debentures due 2000 (the "Debentures"). Using a portion of the
proceeds from that offering along with additional bank financing, in April 1994
the Company acquired the operating assets and business of Gas Turbine
Corporation East Granby Division (the "GTC Division") from Chromalloy Gas
Turbine Corporation ("Chromalloy"), a competitor of the Company that had the
capability to repair certain engine lines and models that the Company did not
then service, including the Pratt & Whitney JT8D-200 medium by-pass aircraft
engine and GG4 industrial engine. The acquisition also provided the Company with
additional test cell capabilities for high by-pass engines, including the Pratt
& Whitney JT9D. The Company also acquired the GTC Division's well-established
power station design and installation operation. In fiscal 1994, the operations
of the GTC Division contributed sales of $28.9 million for the five and one-half
months during which it was owned by the Company, which increased in fiscal 1995
to $72.4 million, reflecting a full year of operations. The operations of the
GTC Division have been consolidated in Greenwich Air Services Connecticut, Inc.,
a wholly-owned subsidiary of the Company (hereinafter "Greenwich-Connecticut").
RECENT EVENTS
THE AVIALL ACQUISITION
On June 10, 1996, the Company acquired the commercial gas turbine engine
service and engine components repair business (the "Aviall Business") of Aviall,
Inc. and Aviall Services, Inc. (collectively, "Aviall"), the leading independent
provider of gas turbine aircraft engine maintenance and engine components repair
services. The combination of the Company and the Aviall Business has made the
Company the largest and most diversified independent gas turbine engine repair
and overhaul company in the world.
Aviall's engine repair and overhaul operations date back to 1932, and in
1955, it became the world's first major independent gas turbine engine repair
facility. These operations were owned by Aviall since Aviall was spun-off from
Ryder System, Inc. in 1993. The Aviall Business' net sales increased to $504.8
million in calendar 1995 from $482.9 million in calendar 1993. Prior to the
Company's acquisition of the Aviall Business, Aviall had spent in excess of
$84.0 million over five years to build state-of-the-art engine repair and
overhaul facilities in Dallas and Fort Worth, Texas and in Prestwick, Scotland.
However, its operating income declined significantly over this period. These
declines in profitability can be attributed to a variety of factors, including
unfavorable pricing granted to certain customers, inefficiencies in its overhaul
operations, expenses associated with reengineering its facilities, and
significant costs and penalties on specific contracts where the Aviall Business
was unable to meet contractual requirements.
The Aviall Business consisted of: (a) substantially all of the assets and
business of Aviall's commercial engine services divisions located in Dallas and
Fort Worth, Texas and the engine component repair business located in McAllen,
Texas, and (b) all of the issued and outstanding shares of capital stock of
Aviall Limited, a subsidiary of Aviall located in Prestwick, Scotland
(hereinafter "Greenwich Caledonian Limited"). The purchase price for the Aviall
Business, net of assumed liabilities and indebtedness and as adjusted in
accordance with the Purchase Agreement, was approximately $230.1 million. The
Company paid the entire net purchase price of the Aviall Business (the "Net
Purchase Price") in cash. The Net Purchase Price was financed with certain of
the proceeds from concurrent public offerings of $100 million of the Company's
Class B Common Stock and $160 million principal amount of 10-1/2% Senior Notes
due 2006, and a new credit facility. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital
Resources," "-- New Credit Facility," "-- Senior Note Offering" and "-- Use of
Proceeds from Equity Offering and Senior Note Offering and New Credit Facility."
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COMPETITIVE ADVANTAGES
The Company believes that the principal competitive advantages resulting
from the Aviall acquisition are:
/bullet/ WORLDWIDE LEADER. The Company has become the world's largest
independent gas turbine engine repair and overhaul company with major facilities
located in the United States and in Europe. In addition, the Company believes
that its base of over 500 customers is the largest and most diversified of all
independent providers of gas turbine repair and overhaul services.
/bullet/ FULL SERVICE PROVIDER. The Company now provides repair and
overhaul services on 14 engine lines and 50 engine models, supporting the
world's five leading gas turbine engine manufacturers - CFM International, GE,
International Aero Engines, Pratt & Whitney and Rolls Royce. The Company
believes that no other gas turbine engine overhaul operation has this breadth of
capabilities.
/bullet/ STRONG ENTREPRENEURIAL MANAGEMENT TEAM. The Company's management
team has demonstrated with the operating success of Greenwich-Connecticut its
ability to integrate substantial operations following their acquisition. The
Company believes that it will also be successful in integrating the Aviall
Business, and will continue to provide its customers with a high level of
service at competitive prices.
/bullet/ FLEXIBILITY IN PRODUCTION PLANNING. The Company has the ability
to shift work between four engine service centers in order to optimize
efficiencies and meet customers' requirements on a real-time basis.
/bullet/ CROSS-SELLING OF SERVICES. Many of the engine lines and models
serviced by the Aviall Business were not serviced by the Company prior to the
acquisition, and many of the engine lines and models serviced by the Company
were not previously serviced by the Aviall Business. The Company has commenced
to implement its strategy of "cross-selling" services to former customers of the
Company and the Aviall Business for engine lines and models previously serviced
by competitors. Prior to the acquisition of the Aviall Business, Continental
Airlines was the only major customer serviced by both the Company and the Aviall
Business.
COMPANY STRATEGY
INTEGRATION PLAN
The Company's strategy following the Aviall acquisition is to improve the
profitability of the Aviall Business, enhance services offered to the Company's
customers and to maintain the Company's historical efficiency. The Company is
currently implementing this strategy by:
/bullet/ ACHIEVING COST REDUCTIONS. Eliminating duplicative functions
performed by both the Company and the Aviall Business in the areas of
administration, finance, sales, marketing, purchasing, technical and field
services, and management information systems. In addition, the Company believes
that it will benefit by utilizing the Aviall Business' components repair
facility to perform work that the Company formerly contracted out to third
parties.
/bullet/ IMPROVING OPERATING EFFICIENCIES. The Company believes that it
is one of the most efficient providers of gas turbine engine repair and overhaul
services. The Company has implemented its program to achieve greater production
and operating efficiencies in the Aviall Business through more flexible
collective bargaining agreements entered into in 1996 and by realigning engine
repair and overhaul services among its several facilities.
/bullet/ IMPROVING CONTRACTUAL PERFORMANCE. The Company believes that its
experienced and entrepreneurial management team will enable the Aviall Business
to improve engine turnaround time and reduce related contractual penalties
through increased productivity of the Aviall Business' workforce and improved
operating and production efficiencies.
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EQUITY AND SENIOR NOTE OFFERINGS
STOCK DISTRIBUTION AND EQUITY OFFERING
On May 8, 1996 the Company distributed to holders of the Company's Class A
Common Stock one share of Class B Common Stock for each share of Class A Common
Stock outstanding. The rights of the holders of Class A Common Stock and Class B
Common Stock are identical, except that the Class B Common Stock has no voting
rights.
Concurrently with the Aviall acquisition, the Company consummated a public
offering (the "Equity Offering") of 4,000,000 shares of Class B Common Stock. Of
the 4,000,000 Class B shares sold in connection with the Equity Offering,
3,400,000 Class B shares were sold by the Company, and 600,000 Class B Shares
were sold by Eugene P. Conese, the Chairman and Chief Executive Officer of the
Company (sometimes referred to herein as the "Selling Stockholder"). The total
proceeds to the Company and the Selling Stockholder, net of underwriting
discounts and expenses, were approximately $80.7 million and $14.3 million,
respectively. The Company did not receive any of the proceeds from the sale of
Class B Common Stock by the Selling Stockholder in the Equity Offering.
SENIOR NOTE OFFERING
Also concurrently with the Aviall Acquisition, the Company consummated a
public offering (the "Senior Note Offering") of $160.0 million aggregate
principal amount of its 10-1/2% Senior Notes due 2006 (the "Notes"). The total
proceeds to the Company, net of underwriting discounts and expenses, were
approximately $154.7 million.
NEW CREDIT FACILITY
Concurrently with the Aviall acquisition and the related Equity Offering
and Senior Note Offering, the Company refinanced substantially all of its
indebtedness under its existing credit facility through a new loan and security
agreement (the "New Credit Facility") with a group of secured lenders (the
"Senior Lenders"). Under the New Credit Facility, the Senior Lenders have
provided the Company with two senior secured revolving credit facilities in the
aggregate amount of up to $175.0 million, a portion of which was utilized to
finance a portion of the purchase price for the Aviall acquisition.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources" for more information
concerning the Equity Offering, the Senior Note Offering and the terms of the
New Credit Facility.
LONG-TERM STRATEGIC OBJECTIVES
The Company's long-term strategic objectives are to improve its
profitability, maintain its position as the world's largest independent provider
of gas turbine engine repair and overhaul services, and accelerate its growth.
The Company's strategy to achieve these objectives may be summarized as follows:
/bullet/ SERVICE NEW ENGINE LINES AND MODELS. The Company will continue
its historical strategy of increasing the number of engine lines and models
serviced by its facilities and seek to develop servicing capabilities for
additional gas turbine engines. The Company believes that this strategy creates
new market opportunities while offering its customers one-stop shopping
capability, as some of the Company's customers use engines for which the Company
currently has no servicing capabilities.
/bullet/ EXPAND AERODERIVATIVE ENGINE SERVICES. Certain of the engine
lines serviced by the Company for its airline and cargo customers have
aeroderivative engine lines used in industrial, marine and military
applications. The Company has been successful in providing service to the
aeroderivative gas turbine engine market, resulting in sales growth in these
services from $10.5 million in 1992 to $31.7 million in 1996.
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/bullet/ EXPAND SERVICE TO REGIONAL CARRIERS. The Aviall Business was a
leading provider of engine repair and overhaul services for the PW-100, an
engine predominantly used by regional carriers. The Company believes that this
market has the potential for substantial growth and that the Company will be
well-positioned to capture a larger share of this market.
/bullet/ PURSUE BUSINESS COMBINATIONS. The Company has been successful in
utilizing strategic business combinations to accelerate its growth, specifically
the acquisitions of Greenwich-Connecticut and the Aviall Business. Management
will continue to analyze and attempt to consummate opportunistic business
combinations that arise, whether in the form of acquisitions, joint ventures, or
strategic alliances.
ENGINE AND COMPONENT SERVICES
GENERAL
The Company provides its gas turbine engine services primarily through four
state-of-the-art engine repair and overhaul service centers located in Dallas,
Texas; East Granby, Connecticut; Miami, Florida; and Prestwick, Scotland. These
facilities are supported by engine components repair facilities in Miami and
McAllen, Texas: an engine repair and testing facility in Fort Worth, Texas; and
an engine testing facility at JFK International Airport in New York. The Company
also warehouses spare parts in a separate facility in Chicopee, Massachusetts.
The engine repair and overhaul services provided by the Company at these
locations include (i) engine disassembly, (ii) cleaning of parts, (iii)
inspection and nondestructive testing for wear and damage, including cracks,
erosion and sizing, (iv) evaluation of necessary repairs, (v) the repair or
replacement of parts, accessories or components, (vi) reassembly and (vii)
performance testing. The Company identifies and tracks the parts from each
individual engine throughout the overhaul process in order to maintain the
integrity of the engines it services. The engine services offered by the Company
also include 24-hour emergency repairs whereby the Company will dispatch its
personnel to repair engine components or replace parts while the engine is
mounted on the aircraft.
There are three primary reasons for removing an engine from an aircraft for
servicing: (i) an engine has been utilized to the point where the life limit for
one or more of its parts has been reached and the part must be replaced, (ii)
the engine has been damaged or (iii) the aircraft instrumentation system
indicates that the engine is not performing optimally. The cost of servicing an
engine that has been removed for these or other reasons may vary from $100,000
to more than $1.5 million, depending upon the age, size and model of engine, and
the extent of the customer-authorized repairs being performed.
In addition to its gas turbine engine repair and overhaul services, the
Company also maintains engine components and accessory repair operations in
McAllen, Texas and Miami, Florida. The McAllen operation provides gas turbine
engine blade and vane repairs which require a high level of expertise, advanced
technology and sophisticated equipment. These services were primarily provided
to the engine repair and overhaul service centers of the Aviall Business in
Dallas, Texas and Prestwick, Scotland as support for the engine repair and
overhaul operations conducted at those facilities. As a result of the Aviall
acquisition, such support is now offered to all of the Company's service center
operating facilities, including those in Miami, Florida and East Granby,
Connecticut. The accessory refurbishment services offered by the Company also
include the repair, refurbishment and overhaul of numerous accessories and
components mounted on gas turbine engines, aircraft wings and frames or
fuselages. Engine accessories include fuel pumps, generators and fuel controls.
Components include pneumatic valves, starters and actuators, turbo compressors
and constant speed drives, hydraulic pumps, valves and actuators,
electro-mechanical equipment and auxiliary power unit accessories.
COMMERCIAL AIRCRAFT ENGINE SERVICES
The commercial aircraft industry continues to represent the Company's
largest market for gas turbine engine services, growing from approximately $66.5
million, or 63% of the Company's total net sales in fiscal 1994 to $323.6
million, or 81% of total net sales in fiscal 1996.
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Since the early 1990's, several regional and mid-sized air carriers have
begun operations, all of which outsource their engine service requirements.
During this period, a number of major carriers, as well as many freight and
package carriers, began actively outsourcing their engine service work to
independent repair facilities such as the Company. Market and customer
requirements have prompted the leading engine manufacturers to de-emphasize or
discontinue production of the older, less fuel-efficient engine lines, such as
the low by-pass Pratt & Whitney JT3D and JT8D, and focus on the production of
high by-pass engines such as the GE CF6 series, Rolls Royce RB211 series, CFM
International CFM56 series and International Aero Engines V2500 engines.
However, many airlines are strategically operating both older and newer engines
in an effort to maximize asset utilization. As a result, the Company believes
that, in addition to increasing demand for high by-pass engine services, there
will be a continued opportunity to service low by-pass engines.
While manufacturers introduce new engine lines infrequently, they routinely
offer derivative models of existing engines. The Company continually evaluates
new engine lines, models and derivatives to determine whether the potential
demand for overhaul services justifies the expenditures required for inventory
and modifications to tooling and equipment.
The Company also maintains a limited inventory of aircraft engines for
short-term rental to its overhaul customers. Such rental engines are generally
rented to customers for the period during which the customers' engines are
undergoing service by the Company's repair and overhaul operations.
GOVERNMENT PROGRAMS
The Company provides engine, aircraft and accessory repair and overhaul
services to the United States military and other domestic and foreign government
agencies, as well as material distribution and logistics management services.
The Company provides these services directly as a prime contractor and as a
subcontractor to other major defense contractors. Net sales to military and
other government agencies has grown from approximately $21.1 million, or 20% of
total net sales in fiscal 1994 to $42.5 million, or 11% of total net sales in
fiscal 1996.
During fiscal 1996, the Company strengthened its presence in the foreign
military market with contracts from the Israeli Ministry of Defense, Royal
Moroccan Air Force, and Colombian Air Force. The Company has also received
additional orders from the U.S. Navy for the refurbishment of aeroderivative
marine engines. Furthermore, significant follow-on contracts were awarded to the
Company by Northrop Grumman Aerospace to repair engines for the U.S. Army/Air
Force Joint STARS program. The Company anticipates that total revenues from
these multi-year contracts will exceed $20 million.
AERODERIVATIVE ENGINE SERVICES
Industrial and marine gas turbine engines are used for an increasing
variety of applications, including driving pumps and compressors for oil and gas
pipelines, generating electric power for electric utilities, cogeneration
projects and industrial applications, and powering commercial and naval vessels.
In addition to repair and overhaul services, the Company provides worldwide
management services for the design, sale, refurbishment, and installation of
complete gas turbine power plants with electrical power output of up to 120
megawatts. The services provided include the repair and overhaul of industrial
and marine engines, free turbines and modules, as well as the installation of
the equipment, start up, training, and on-site testing. Depending on customer
needs, the Company offers complete turnkey operations or equipment only. In
addition, the Company offers total turbine on-site services worldwide. Net sales
from aeroderivative engine services has grown from approximately $17.5 million,
or 17% of the Company's total net sales in fiscal 1994 to $31.7 million, or 8%
of total net sales in fiscal 1996.
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SALES AND MARKETING
The Company's marketing organization is comprised of three marketing and
technical groups: (i) commercial aircraft engine services, (ii) government
programs, and (iii) aeroderivative engine services. Members of the Company's
senior management are responsible for the coordination and overall performance
of each of these groups. Direct sales personnel include key employees with
contacts in their respective industries. In addition, the Company advertises in
trade, technical and industrial journals and maintains close working
relationships with engine and aircraft manufacturers, as well as with industrial
and marine engine users.
The Company believes that the critical factors for customers in selecting
an engine repair and overhaul vendor are dependable performance through prompt
turnaround time and engine reliability, proactive engineering support,
responsiveness, price, and flexibility. The Company's gas turbine engine repair
and overhaul operation attempts to differentiate itself from the competition
through flexibility and customer responsiveness. This includes meeting delivery
commitments, providing around-the-clock service, customizing work scopes to the
specific requirements of each engine overhauled and offering state-of-the-art
technical facilities and expertise, including the development of new repairs. In
marketing its services, the Company emphasizes its experience in the repair,
maintenance, refurbishment and overhaul of aircraft gas turbine engines of
various sizes and thrust capacities and aeroderivative gas turbine engines. The
Company also emphasizes its domestic and international service capabilities; its
turnaround time performance; quality of work performed; extensive technical
libraries; staff of more than 60 engineers; employee training programs; and
competitive pricing structures.
The Company generally provides services for regular customers under service
agreements providing for payments based upon any one of the following
arrangements:
/bullet/ A time and materials formula normally predicated upon a
negotiated hourly labor rate multiplied by the actual hours
expended plus a charge for materials used and other subcontracted
vendor services;
/bullet/ Fixed price arrangements for components, modules and accessories,
as well as total engine overhauls based on specific work scopes;
and
/bullet/ For customers who wish to enter into long-term arrangements for
scheduled engine overhauls with predefined and scheduled payment
terms, the Company offers "rate-per-hour" ("RPH") agreements. An
RPH agreement requires the customer to pay for engine services
over the life of the agreement based on an hourly rate multiplied
by the greater of actual flight hours or a minimum number of
monthly flight hours established in advance.
CUSTOMERS
The Company provides services to more than 500 customers, primarily in the
commercial aviation industry, the natural resources and electrical utility
industries and government and military agencies. Only one customer, Continental
Airlines, accounted for more than 10% of the Company's revenues in fiscal 1996,
with sales totaling approximately 11% of total revenues. On a pro forma basis
(assuming the Aviall acquisition had been consummated on October 1, 1995), in
fiscal 1996, Continental Airlines would have accounted for approximately 13% of
the Company's total net sales, the top five customers of the Company would have
accounted for approximately 42% of the Company's net sales, and sales to foreign
customers would have accounted for approximately 26% of the Company's net sales.
On September 23, 1996, the Company announced that USAir, one of its five
largest customers, had elected not to renew its 5-year agreement for CFM56-3
engine services. The loss of this contract was anticipated by the Company prior
to the Aviall acquisition and was therefore not factored into management's
plans. The Company's contracts with Southwest Airlines, another of its five
largest customers, for CFM56 and Pratt & Whitney JT8D engine services expire in
March 1997. Southwest Airlines is currently accepting bids from the Company and
its competitors for new long-term commercial engine service agreements. Although
the Aviall Business performed these services for Southwest Airlines since the
late 1970s, no
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assurance can be given that the Southwest Airlines agreements and/or other
agreements with major customers scheduled to expire will be renewed with the
Company upon commercially reasonable terms or at all. Since the end of fiscal
1995, the Company has signed long-term agreements with Air Hong Kong, Federal
Express, LOT Polish Airlines, and Northrop Grumman Aerospace.
COMPETITION
The Company believes that the primary competitive factors in its industry
are engineering support, quality, turnaround time, overall customer service, and
price. The Company believes that it competes favorably on the basis of the
foregoing factors. Additionally, the Company believes that the large number of
engine lines and models it services provide it with a competitive advantage. The
Company does not believe that the location of its facilities is a significant
factor to its customers in selecting the Company, because substantially all of
the engines serviced by the Company are transported by common carrier to the
Company's facilities for service.
The Company believes that the most significant competitive pressures in the
foreseeable future will come from GE, Pratt & Whitney, and other major OEMs, who
maintain gas turbine engine service centers which provide repair and overhaul
services for the aircraft and aeroderivative gas turbine engines they
manufacture. Certain of these OEMs are also actively seeking to provide engine
services on new and used gas turbine engines manufactured by rival OEMs. In
addition to OEMs, competition for engine repair and overhaul business comes from
passenger airlines, many of which own and operate engine and aircraft
maintenance service centers. Although these repair operations are primarily for
their own equipment, certain airlines also provide engine repair and overhaul
services for third parties. Other independent engine service organizations also
compete for the repair and overhaul of gas turbine engines.
GOVERNMENT REGULATION
The Federal Aviation Administration ("FAA") and the British Civil Aviation
Administration ("BCAA") regulate providers of services on aircraft engines and
frames. As the holder of FAA Class 3 power plant repair station certificates for
its facilities in Dallas, Texas; Miami, Florida; and East Granby, Connecticut,
the Company is authorized to service all lines and models of gas turbine
aircraft engines. These certificates provide the Company with the competitive
advantage of not being required to obtain separate FAA certification for each
line of gas turbine aircraft engine it elects to service. The Company also has
separate FAA airframe and accessory class ratings. The Company's FAA
certificates cover all of the Company's operating facilities in the United
States. Greenwich Caledonian Limited holds a certification from the BCAA. Aside
from its FAA and BCAA certifications, the Company does not hold any material
patents, trademarks or licenses.
MANUFACTURER'S AUTHORIZATIONS
The Company has contractual relationships with OEMs that provide access to
OEM resources such as engineering data and support and test cell calibration.
These agreements outline the training and support services which the
manufacturer will furnish to the Company. Such contractual relationships take
the form of general terms agreements or more formal approval and authorization
agreements and licensing authorizations to perform proprietary repairs.
The Company's licensing authorization from GE to perform proprietary
repairs at the McAllen, Texas component repair facility, and general terms
agreements for OEM support services at the Dallas and Prestwick facilities will
expire in February, 1997. GE has traditionally renewed these agreements with the
Company's predecessor, Aviall, and the Company knows of no reason for GE to vary
from this practice. Although the Company's management believes that its
relations with GE and other OEMs are good, no assurance can be given that these
or other agreements will be renewed upon commercially reasonable terms or at
all.
BACKLOG
8
<PAGE>
The Company is engaged in a service business and charges many of its
customers on a time and materials basis or on an hourly basis. The Company
cannot determine, when customer orders are received, the extent of services and
resulting price for a repair, refurbishment or overhaul of a particular engine,
and generally determines the final price during the process of servicing such
engine. Accordingly, the Company does not have a backlog of orders which can be
reported.
EMPLOYEES
As of December 13, 1996, the Company had approximately 3,300 full-time
employees.
The Company's employees located in Miami, Florida; East Granby,
Connecticut; McAllen, Texas; and Prestwick, Scotland are not represented by any
labor union. The Company believes that its relations with employees at these
locations are good.
Prior to the Aviall Acquisition, none of the Company's employees were
covered by collective bargaining agreements. The Aviall Business had
approximately 570 hourly employees in Dallas and Fort Worth, Texas, who were
covered by collective bargaining agreements. Upon consummation of the Aviall
Acquisition, the Company hired substantially all of such employees to work for
the Company in Dallas and Fort Worth, Texas, but, according to the terms of the
Purchase Agreement with Aviall, was not required to, and did not, assume the
existing collective bargaining agreements. In June 1996, the Company entered
into four-year collective bargaining agreements with the unions covering the
Dallas and Fort Worth hourly employees. The Company believes that its relations
with such employees and their collective bargaining representatives are good.
In order to respond to changes in technology and new types of engines,
accessories and components, the Company conducts both formal classroom and
on-the-job training programs. The training programs include instruction on gas
turbine engines, components and airframes. Customers and vendors often utilize
the Company's training department to assist them in training both their
experienced personnel and apprentices on newly assigned equipment.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive, and frequently changing,
federal, state and local environmental laws and substantial related regulation
by government agencies, including the United States Environmental Protection
Agency ("EPA") and the United States Occupational Safety and Health
Administration ("OSHA"). Among other matters, these regulatory authorities
impose requirements that regulate the operation, handling, transportation and
disposal of hazardous materials, the health and safety of workers and require
the Company to obtain and maintain licenses and permits in connection with its
operations. This extensive regulatory framework imposes significant compliance
burdens and risks on the Company. Notwithstanding these burdens, the Company
believes that it is in material compliance with all federal, state and local
laws and regulations governing its operations.
The Company is principally subject to the requirements of the Clean Air Act
of 1970 ("CAA"), as amended in 1990; the Clean Water Act of 1977 ("CWA"); the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"); the Resource Conservation Recovery Act of 1976 ("RCRA"); and the
Hazardous and Solid Waste Amendments of 1984 ("HSWA"). The following is a
summary of the material regulations that are applicable to the Company.
The CAA imposes significant requirements upon owners and operators of
facilities that discharge air pollutants into the environment. The CAA mandates
that facilities which emit air pollutants comply with certain operational
criteria and secure appropriate permits. Additionally, authorized states such as
Florida, Connecticut, Texas and New York may implement various aspects of the
CAA and develop their own regulations for air pollution control. The Miami
facility presently holds an air emission permit for its engine test cells issued
by Dade County, Florida. The Company has conducted an air emissions inventory of
the Miami facility and is currently assessing the results to determine if it is
necessary to secure additional permits and/or to install additional control
technology, which could result in the initiation of an enforcement action, the
imposition of penalties and the possibility of substantial capital expenditures.
9
<PAGE>
CERCLA, as amended by the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), is designed to respond to the release of hazardous substances.
CERCLA's most notable objectives are to provide criteria and funding for the
cleanup of sites contaminated by hazardous substances and impose strict
liability on parties responsible for such contamination namely, owners and
operators of facilities or vessels from which such releases or threatened
releases occur, and persons who generated, transported or arranged for the
transportation of hazardous substances to a facility from which such release or
threatened release occurs.
Ground water contamination was documented at the Miami facility and
surrounding areas prior to the Company's occupation. Ground water contamination
is also suspected at the western portion of the Miami International Airport
(where the Company formerly conducted operations) and adjoining areas.
Remediation of the impacted ground water by Dade County is currently underway.
Under the terms of its lease of the Miami facility, Dade County has agreed to
indemnify the Company for all remediation and cleanup costs associated with
pre-existing contamination, unless such contamination occurred as a result of
the Company's operations. If Dade County were to default in its indemnification
obligations, the Company could potentially incur liability under CERCLA and/or
Florida law for hazardous substances released at or from the Miami facility and
for conditions in existence prior to the Company's occupancy. To date, the
Company has not been held liable for any investigation or cleanup costs at
either of these sites.
Ground water and soil contamination was also detected at the New York
facility prior to the Company's occupancy. The sources of contamination were not
positively identified and may be related to past facility operations or
originating from off-site. The site leases with the Port Authority of New York
("PANY") provide that the Company will be fully indemnified for pre-existing
conditions and for any off-site contamination migrating onto the leasehold,
except if related to underground storage tanks ("USTs"). The Company will be
responsible for any increase in contamination above the levels established as
pre-existing conditions. If PANY defaults in its indemnification obligations,
the Company could incur liability under CERCLA and/or New York law for the
remediation of the contamination. To date, the Company has not been held liable
for any investigation or cleanup costs at this site.
On April 19, 1996, the Texas Natural Resource Conservation Commission
("TNRCC") issued a letter to Aviall requiring the submittal of a plan and
associated schedule for the characterization, assessment and potential
remediation of documented levels of trichlorethylene in the ground water at the
Dallas facility. Groundwater contamination has also been documented at the
McAllen facility. Aviall intends to submit its plan and schedule in a timely
manner. Depending upon the results of the characterization and assessment,
remediation of the ground water may be required. Under the terms of the Purchase
Agreement, Aviall agreed to indemnify the Company for all remediation and
cleanup costs associated with pre-existing conditions at the Texas facilities
prior to the consummation of the Aviall Acquisition. If remediation of the
ground water is required and if Aviall defaults on its indemnification
obligations, then the Company could incur costs associated with such
remediation. To date, the Company has not been held liable for any investigation
or cleanup costs at these sites.
RCRA established the basic framework for regulation of hazardous waste.
RCRA governs the generation, transportation, treatment, storage and disposal of
hazardous waste through a comprehensive system of hazardous waste management
techniques and requirements. RCRA requires facilities such as the Company's that
treat, store, or dispose of hazardous waste to comply with specified operating
standards. The Company believes that its facilities are in material compliance
with all applicable RCRA requirements, hold all applicable permits required
under RCRA and are operating in material compliance with the terms of all such
permits.
Many states, including Florida, have created programs similar to RCRA for
the purpose of issuing annual operating permits and conducting routine
inspections of such facilities to ensure regulatory compliance. A routine
inspection of the Miami facility in October 1995 by the Florida Department of
Environmental Protection ("FDEP") identified potential hazardous waste
violations, primarily concerning the proper identification and storage of
hazardous waste. The Company has subsequently addressed each of the items
identified in the FDEP inspection, and is negotiating a settlement with FDEP.
The associated penalties are not expected to have a material adverse effect on
the Company.
10
<PAGE>
As part of the HSWA, Congress enacted federal regulations governing the
underground storage of petroleum products and hazardous substances. The federal
UST regulatory scheme mandates that EPA establish requirements for leak
detection, construction standards, reporting of releases, corrective actions,
on-site practices and record-keeping, closure standards and financial
responsibility. Some states, including Florida, have promulgated their own
performance criteria for USTs, including requirements for spill and overfill
protection, UST location, and primary and secondary containment. The Company
believes that its facilities are in material compliance with the federal and
state UST regulatory requirements and performance criteria.
All USTs located at the Miami facility have been tightness-tested and are
properly permitted and registered. By December 1998, these USTs are required
under Florida law to be retrofitted with secondary containment and leak
detection devices. To date, Dade County, which regulates the tanks on a local
level, has not directed that the tanks be retrofitted nor has it assessed any
penalties for operation without secondary containment or leak detection devices.
Under the terms of the lease of the Miami facility, Dade County agreed to
indemnify the Company for liabilities due to pre-existing conditions, which
would include the USTs. If Dade County does not provide this indemnification
under the lease, the Company could be subject to an enforcement action and
penalties for failure to replace or upgrade the tanks and could incur additional
costs in replacing or upgrading the tanks.
All USTs at the New York facility were transferred to the Company at the
time of sale, and the Company assumed all associated risks. During recent audits
conducted at the New York facility, several additional USTs were identified; the
status and permitting requirements for these tanks and potential discharges are
currently being assessed. Although unknown at this point, the Company could be
subject to an enforcement action and penalties, as well as be required to make
capital expenditures, to replace or upgrade these tanks in the future. In regard
to these USTs, Chromalloy, the Company's predecessor in interest, would be
responsible for conditions in existence prior to March 21, 1994. If Chromalloy
were to default on its obligations, then the Company could incur liability for
pre-existing conditions related to these USTs.
Ground water and soil contamination from spills and leaking USTs was also
documented at the Company's Texas and Prestwick, Scotland facilities.
Remediation of the impacted ground water and soil at the Texas facilities has
been undertaken by Aviall, which intends to seek closure from the TNRCC. Based
upon the Company's environmental assessment activities at its Prestwick
facility, the Company has initiated additional assessment work and remediation
of the contaminated soil and ground water. Under the terms of the Purchase
Agreement, Aviall agreed to remediate the contamination and has agreed to
indemnify the Company for all remediation and cleanup costs associated with
pre-existing conditions at the facility prior to the acquisition. If Aviall were
to default on its indemnification obligations, then the Company could incur
liability for petroleum product releases at or from the Texas and Prestwick,
Scotland facilities or from conditions in existence prior to the Company's
occupancy of these facilities.
The Company is also subject to a variety of environmental-related worker
and community safety laws. OSHA mandates general requirements for a safe
workplace for all employees. In particular, OSHA provides special procedures and
measures for the handling of certain hazardous and toxic substances. In
addition, specific safety standards have been promulgated for workplaces engaged
in the treatment, disposal or storage of hazardous waste. Requirements under
state law, in some circumstances, may mandate additional measures for facilities
handling materials specified as extremely dangerous. The Company believes that
its operations are in material compliance with OSHA's health and safety
requirements, and anticipates upgrading its facilities at a cumulative cost that
may exceed $100,000; however, the Company believes that such expenditures will
not materially affect the Company's financial conditions or operating results.
11
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the fiscal years ended September
30, 1992, 1993, 1994, 1995 and 1996 have been derived from the audited financial
statements of the Company and should be read in conjunction therewith. The
selected financial data for the fiscal year ended September 30, 1996 gives
effect to the acquisition of the Aviall Business under the "purchase" method of
accounting, the Equity Offering and Senior Note Offering and the initial
drawdown under the Company's New Credit Facility.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA (IN THOUSANDS): YEARS ENDED SEPTEMBER 30,
- ------------------------------------------- ---------------------------------------------------------
1992 1993 1994(3) 1995 1996(4)
---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Net Sales ........................... $ 62,009 $ 69,467 $ 105,233 $ 196,319 $ 397,913
Cost of sales (1) ................... 49,230 55,076 87,974 164,957 342,956
Gross profit ........................ 12,779 14,391 17,259 31,362 54,957
Selling, general and administrative . 5,064 5,553 7,006 13,637 23,033
expense
Income from operations .............. 6,902 8,698 10,253 17,725 31,924
Interest expense .................... 2,950 3,039 4,758 7,950 12,654
Income before income taxes .......... 4,046 5,707 5,566 10,166 19,774
Provision for income taxes .......... 1,540 2,333 2,220 3,964 7,981
----- ----- ----- ----- -----
Net Income .......................... $ 2,506 $ 3,374 $ 3,346 $ 6,202 $ 11,793
========= ========= ========= ========= =========
Fully-diluted weighted average number
of shares (2) ....................... 9,648 8,000 12,575 12,836 14,253
Fully diluted earnings per share (2) $ 0.26 $ 0.42 $ 0.33 $ 0.54 $ 0.83
Cash dividends declared per common
share ............................... -- -- -- -- $ 0.01
OTHER FINANCIAL DATA:
EBITDA (5) ........................ $ 7,803 $ 9,696 $ 11,609 $ 19,931 $ 37,657
Cash flows provided (used) by
operating activities ..... (1,421) (921) (3,341) 6,680 (8,232)
Cash flows provided (used) by
investing acivities ...... (1,791) (5,127) (42,763) (2,724) (234,037)
Cash flows provided (used) by
financing activities ..... 3,073 6,309 46,144 (4,246) 242,423
Depreciation and amortization ..... 807 950 1,285 1,815 5,229
Capital expenditures .............. 1,791 5,128 1,691 2,724 3,956
BALANCE SHEET DATA (IN THOUSANDS): SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------
1992 1993 1994(3) 1995 1996(4)
---- ---- ------- ---- -------
Working capital...................... $39,430 $46,010 $76,078 $87,829 $273,595
Total assets......................... 59,102 67,708 138,423 185,620 625,080
Short-term debt...................... 1,400 1,383 3,515 3,437 3,150
Long-term debt....................... 28,011 34,303 71,470 64,443 233,366
Stockholders' equity................. 13,126 15,951 27,963 36,788 139,047
<FN>
- ----------
(1) Cost of sales in 1993 is net of approximately $7.1 million of additional
costs incurred in the servicing of engines as a result of the disruption to
business caused by Hurricane Andrew which struck South Florida in August
1992, which costs were offset by a like amount of insurance recoveries.
(2) Gives retroactive effect to a 100% stock distribution of one share of Class
B Common Stock for each outstanding share of Class A Common Stock effected
in May 1996.
12
<PAGE>
(3) Fiscal 1994, 1995, and 1996 give effect to the acquisition of
Greenwich-Connecticut and the Company's initial public offering, both of
which were consummated during fiscal 1994.
(4) Fiscal 1996 gives effect to the Aviall acquisition, the Equity Offering,
the Senior Note Offering and the New Credit Facility, all of which were
consummated in fiscal 1996.
(5) EBITDA represents net income (loss) before the cumulative effect of change
in accounting plus provisions for income taxes, interest expense,
depreciation and amortization, restructuring costs, and any charge related
to any premium or penalty paid in connection with redeeming and retiring
any indebtedness prior to its stated maturity. While EBITDA should not be
construed as a substitute for income from operations, net income (loss) or
cash flows from operating activities in analyzing the Company's operating
performance, financial position and cash flows, the Company has included
EBITDA because it is commonly used by certain investors to analyze and
compare companies on the basis of operating performance, leverage and
liquidity and to determine the Company's ability to service debt. The
reader should be cautioned that the information provided herein relating to
EBITDA may not be comparable to EBITDA information provided by other
companies.
</FN>
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUARTERLY COMPARISONS AND SEASONALITY.
The following table sets forth operating data of the Company, including such
data as a percentage of net sales, for the eight quarters ended September 30,
1996. This quarterly information is unaudited, but in management's opinion
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR 1995
QUARTER ENDING DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
- -------------- ------------------ ------------------ ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total net sales ... $39,048 100.0% $44,099 100.0% $50,936 100.0% $62,237 100.0%
Gross profit ...... 6,209 15.9% 7,019 15.9% 8,162 16.0% 9,973 16.0%
Operating income .. 3,549 9.1% 4,207 9.5% 4,942 9.7% 5,027 8.1%
Net income ........ 1,038 2.7% 1,322 3.0% 1,816 3.6% 2,026 3.3%
===== === ===== === ===== === =====
Earnings per share:
Primary .......... $ 0.10 $ 0.13 $ 0.18 $ 0.20
Fully Diluted .... $ 0.10 $ 0.12 $ 0.16 $ 0.17
FISCAL YEAR 1996
QUARTER ENDING DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
- -------------- ------------------- ------------------ ------------------ ------------------
Total net sales ... $ 58,595 100.0% $ 60,030 100.0% $ 99,601 100.0% $179,687 100.0%
Gross profit ...... 9,362 16.0% 9,341 15.6% 12,679 12.7% 23,575 13.1%
Operating income .. 5,539 9.5% 5,422 9.0% 7,265 7.3% 13,698 7.6%
Net income ........ 2,093 3.6% 2,325 3.9% 2,720 2.7% 4,655 2.6%
===== === ===== === ===== === =====
Earnings per share:
Primary .......... $ 0.17 $ 0.19 $ 0.20 $ 0.28
Fully Diluted .... $ 0.16 $ 0.18 $ 0.19 $ 0.27
</TABLE>
Generally, the Company's operations are not seasonal in nature, however
sales from power station installations, which can exceed $10 million, may create
the appearance of erratic sales performance when comparing quarterly operating
data.
13
<PAGE>
FINANCIAL STATEMENTS
See Index to Financial Statements, which appears on page F-1 hereof.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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 on June 5, 1997.
GREENWICH AIR SERVICES, INC.
s/b EUGENE P. CONESE, JR.
-------------------------------------
Eugene P. Conese, Jr.,
President and Chief Operating Officer
14
<PAGE>
INDEX TO FINANCIAL STATEMENTS
GREENWICH AIR SERVICES, INC.
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of September 30, 1995 and 1996 F-4
Consolidated Statements of Income
for the years ended September 30, 1994, 1995 and 1996 F-5
Consolidated Statements of Stockholders' Equity for
the years ended September 30, 1994, 1995 and 1996 F-6
Consolidated Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 F-7
Notes to Consolidated Financial Statements F-8
GREENWICH CALEDONIAN, LTD.
Independent Auditors' Report F-31
Balance Sheet as of September 30, 1996 F-32
Statement of Income for the period of June 11 to September 30, 1996 F-33
Statement of Stockholder's Equity for the period of June 11 to
September 30, 1996 F-34
Statement of Cash Flows for the period of June 11 to September 30, 1996 F-35
Notes to Financial Statements F-36
AVIALL LIMITED
Report of Independendent Accountants F-44
Consolidated Statements of Operations for the years
ended November 30, 1994, 1995, and for the period
of December 1, 1995 to June 10, 1996 F-45
Consolidated Balance Sheet as of November 30, 1995 F-46
Consolidated Statements of Shareholder's Equity for the
years ended November 30, 1994, 1995, and for the period
December 1, 1995 to June 10, 1996 F-47
Consolidated Statements of Cash Flows for the years ended
November 30, 1994, 1995, and for the period of December 1,
1995 to June 10, 1996 F-48
Notes to Consolidated Financial Statements F-49
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Greenwich Air Services, Inc:
We have audited the accompanying consolidated balance sheets of Greenwich Air
Services, Inc. and subsidiaries (the "Company") as of September 30, 1995 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Miami, Florida
December 19, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Our report dated December 19, 1996 covering the financial statements of
Greenwich Air Services, Inc., filed as a part of the annual report on Form 10-K
for the year ended September 30, 1996 is hereby extended to relate to such
financial statements as hereby amended.
DELOITTE & TOUCHE LLP
Miami, Florida
June 5, 1997
F-3
<PAGE>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
1995 1996
---- ----
ASSETS
Current Assets:
Cash $ 180 $ 334
Accounts receivable 35,176 139,401
Inventories 120,933 318,013
Prepaid expenses and other current assets 1,267 20,004
----- ------
Total current assets 157,556 477,752
------- -------
Property, Plant and Equipment 25,658 134,885
Deferred financing costs and other assets 2,406 12,443
----- ------
Total Assets $185,620 $625,080
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 37,684 $106,556
Accrued expenses and current portion of
long term liabilities 16,102 68,215
Customer deposits and deferred revenues 15,675 21,912
Income taxes payable 266 7,474
--- -----
Total current liabilities 69,727 204,157
------ -------
Deferred Income Taxes 4,840 23,000
Other Liabilities 9,822 25,510
Long Term Debt 50,386 70,851
Senior Notes 160,000
Convertible Subordinated Debentures 14,057 2,515
Stockholders' Equity 36,788 139,047
------ -------
Total Liabilities and Stockholders' Equity $185,620 $625,080
======== ========
See notes to consolidated financial statements
F-4
<PAGE>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
---- ---- ----
Net Sales $105,233 $196,319 $397,913
Cost of Sales 87,973 164,957 342,956
------ ------- -------
Gross Profit 17,260 31,362 54,957
Selling, General and Administrative
Expenses 7,006 13,637 23,033
----- ------ ------
Income from Operations 10,254 17,725 31,924
------ ------ ------
Nonoperating (Income) Expense:
Interest Expense 4,759 7,950 12,654
Other (income) / expense, net (71) (391) (504)
--- ---- ----
Total Nonoperating (Income) Expenses 4,688 7,559 12,150
----- ----- ------
Income Before Provision for Income Taxes 5,566 10,166 19,774
Provision for Income Taxes 2,220 3,964 7,981
----- ----- -----
Net Income $3,346 $6,202 $11,793
====== ====== =======
Earnings per share:
Primary $0.34 $0.61 $0.86
Fully Diluted $0.33 $0.54 $0.83
===== ===== =====
See notes to consolidated financial statements.
F-5
<PAGE>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED TREASURY
SHARES AMOUNT PAR VALUE EARNINGS STOCK TOTAL
------ ------ --------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
At September 30, 1993 4,000,000 $ 40 $ 1,410 $ 14,501 $ 15,951
Issuance of common stock in public
offering 1,078,000 11 8,655 8,666
Net Income 3,346 3,346
--------- --- ------ ------ ----- -----
At September 30, 1994 5,078,000 51 10,065 17,847 27,963
Cost of treasury shares purchased ($217) (217)
Issuance of treasury shares under stock
purchase plan (74) 205 131
Warrant transactions 9,000 0
Conversion of convertible debentures 251,445 2 2,707 2,709
Net Income 6,202 6,202
--------- --- ------ ----- ----- -----
At September 30, 1995 5,338,445 53 12,698 24,049 (12) 36,788
Cost of treasury shares purchased (1,590) (1,590)
Issuance of treasury shares under
stock purchase plan (209) 557 348
Warrant transactions 161,321 2 214 216
Options exercised 64,175 1 239 240
Cash dividends paid (121) (121)
GCL Merger 310 7 7
Issuance of Class B shares in public
offering 3,400,000 34 80,667 80,701
Conversion of convertible debentures 1,033,546 10 10,655 10,665
One for one Class B stock dividend
paid on May 8, 1996 6,322,147 63 (63) 0
Net Income 11,793 11,793
---------- -------- -------- -------- ------- --------
At September 30, 1996 16,319,944 $ 163 $104,271 $ 35,658 ($ 1,045) $139,047
========== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,346 $ 6,202 $ 11,793
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 1,762 2,452 5,891
Provision for doubtful accounts receivable 174 2,806 2,144
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (5,464) 51 (25,532)
Inventories (8,497) (50,814) (35,442)
Prepaid expenses & other current assets (91) (565) (12,910)
Other assets (264) (11) (3,927)
Notes receivable (1,161) 1,161 0
Accounts payable 3,736 22,036 19,374
Accrued expenses (1,460) 2,949 19,972
Customer deposits & deferred revenues 2,875 11,297 7,813
Other non current liabilities 1,043 8,778 (7,770)
Income taxes payable (486) 199 3,228
Deferred income taxes payable 1,146 139 7,134
----- --- -----
Net cash provided (used) by operating activities (3,341) 6,680 (8,232)
------ ----- ------
Cash flows from investing activities:
Capital expenditures (1,691) (2,724) (3,956)
Acquisition of net assets (41,072) (230,081)
------- --------
Net cash provided (used) by investing activities (42,763) (2,724) (234,037)
------- ------ --------
Cash flows from financing activities:
Net change in revolving credit facilities 17,350 (648) 18,797
Proceeds from issuance of long-term debt 8,000
Repayments of long-term debt (2,050) (3,437) (7,938)
Issuance of common stock, net of expenses 8,666 80,701
Issuance of convertible subordinated debt 16,999
Issuance of senior notes 160,000
Purchase of treasury shares (217) (1,590)
Proceeds from sale of treasury shares 131 348
Deferred financing costs (1,821) (75) (8,237)
Subordinated debt repaid (1,000)
Options exercised and warrant transactions 456
GCL merger 7
Cash dividends paid (121)
----
Net cash provided (used) by financing activities 46,144 (4,246) 242,423
------ ------ -------
Net (decrease) increase in cash 40 (290) 154
Cash, beginning of period 430 470 180
--- --- ---
Cash, end of period $ 470 $ 180 $ 334
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
ORGANIZATION - Greenwich Air Services, Inc. ("GASI") and its subsidiaries
(collectively, the "Company") overhauls, repairs and refurbishes gas
turbine aircraft engines and services aeroderivative gas turbine engines
used in a variety of industrial and marine applications including driving
pumps and compressors on oil and gas pipelines, generating electric power
for electric utilities and powering naval vessels. The Company also manages
government and military service and maintenance programs, and provides
management services for the sale, refurbishment, and worldwide installation
of complete gas turbine power plants with electrical output of up to 120
megawatts.
1994 ACQUISITION - On April 22, 1994, the Company, through its
newly-formed, wholly-owned subsidiary Greenwich Air Services Connecticut,
Inc. formerly known as Gas Turbine Corporation, a Delaware corporation
("Greenwich-Connecticut"), purchased for approximately $41 million,
exclusive of acquisition costs, substantially all of the assets of the Gas
Turbine Corporation East Granby Division (the "Division") of Chromalloy Gas
Turbine Corporation (the "Seller"), and the capital stock of Greenwich
Turbine Test Corporation, formerly known as Gas Turbine Test Corporation
("GTT"), and the assumption by Greenwich-Connecticut of certain liabilities
of the Division and GTT.
The acquisition was accounted for using the purchase method of accounting
and therefore the accompanying financial statements include the accounts of
Greenwich-Connecticut since April 22, 1994. The purchase price (including
the approximate $1.5 million acquisition payable discussed in note 7) was
allocated based on the fair market value of assets acquired and liabilities
assumed. The following is a summary of assets and liabilities acquired,
taking into consideration the allocation of the purchase acquisition costs
and the related financing (amounts in thousands):
Current assets $35,401
Property and equipment and other assets 18,212
------
Total Assets 53,613
Less: Current liabilities 12,541
------
Net assets acquired $41,072
=======
The following summarized, unaudited pro forma results of operations for the
year ended September 30, 1994, assume the acquisition occurred as of the
beginning of the period:
Net sales (in thousands) $141,136
Net income (in thousands) $3,520
Fully diluted earnings per share $0.36
These pro forma results are not indicative of either future financial
performance or actual results which would have occurred had the acquisition
been made as of those dates.
1996 ACQUISITION - On June 10, 1996, the Company, through its newly-formed,
wholly-owned subsidiary GASI Engine Services Corporation, purchased (a)
substantially all of the assets and business of the commercial engine
services divisions (the "CES Divisions") of Aviall, Inc. ("Aviall"), and
(b) all of the issued and outstanding shares of Aviall Limited, a
subsidiary of Aviall (collectively, the "Former Aviall Operations"). The
CES Divisions included (i) all of the engine repair and overhaul operations
of Aviall located in Dallas and Fort Worth, Texas (now known as Greenwich
Texas, LLP) and (ii) the components and parts repair business of Aviall
located in McAllen, Texas (now known as McAllen Components, LLP). Aviall
Limited, which has been renamed Greenwich Caledonian , Ltd.
("Greenwich-Caledonian"), operates an engine repair and overhaul facility
in Prestwick, Scotland.
F-8
<PAGE>
The purchase price (paid in cash) was estimated at $230,081,000 (based upon
the book value of the acquired assets, net of assumed liabilities). The
funds used for the acquisition were provided by an additional stock
offering (see "Capital Stock" below), the sale of Senior Notes (see Note
10), and borrowings under the New Credit Facility (see Note 8). The
acquisition has been accounted for using the purchase method of accounting
and therefore the accompanying financial statements include the accounts of
GASI Engine Services Corporation since June 10, 1996. Prior to June 10,
1996, GASI Engine Services Corporation had no operations.
The allocation of the purchase price to the net assets acquired is based on
currently available information and estimates as of the date of the
financial statements. Adjustments to the purchase price allocation may
occur for a period of up to twelve months from the date of purchase as
management obtains the information necessary (such as appraisals of the net
assets acquired) to finalize this allocation. There is a possibility of
significant future adjustments to the purchase price allocation.
The following is a summary of the computation of the net purchase price and
the estimated allocation of that price to the assets and liabilities
acquired as of June 10, 1996, taking into consideration other direct costs
of the acquisition (Amounts in thousands):
PURCHASE PRICE DETERMINATION:
Gross purchase price $330,000
Less contractual purchase price adjustments for:
Current assets (16,512)
Assumed liabilities (86,639)
Acquisition costs 3,232
-----
Net purchase price $230,081
========
PURCHASE PRICE ALLOCATION:
Current assets $248,307
Property, plant and equipment 110,500
Accounts payable and accrued expenses (68,474)
Deferred taxes (11,027)
Assumed indebtedness (9,319)
Fair value adjustments of certain long-term engine
maintenance contracts, and liabilities related to
engine product line relocation costs, customer and
supplier transfer approvals, licenses
and other liabilities (39,906)
-------
Net purchase price $230,081
========
Fair value adjustments are being amortized over the life of the related
contracts, generally one to three years.
The pro forma results that follow are unaudited and reflect purchase price
accounting adjustments assuming the acquisition occurred at the beginning
of each period presented. These results have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisitions been made at the beginning of the periods
presented, or of the results which may occur in the future.
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1995 1996
---------- ----------
Net sales (in thousands) $701,075 $803,463
Net income (in thousands) $18,124 $13,392
Fully diluted earnings per share $1.16 $0.81
F-9
<PAGE>
BASIS OF PRESENTATION - These financial statements are presented on a
consolidated basis, and include GASI and its majority owned subsidiaries.
All significant intracompany transactions and accounts have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is
established by charges to income through the provision for doubtful
accounts receivable. Trade accounts receivables which are considered by
management to be uncollectible are charged off to the allowance and
recoveries of amounts previously charged off are credited to the allowance.
The provision for doubtful accounts totaled approximately $174,000,
$2,806,000 and $2,144,000 for the years ended September 30, 1994, 1995 and
1996, respectively and trade accounts receivables charged off, net of
recoveries, totaled approximately $283,000, $2,170,000 and $512,000 for the
years ended September 30, 1994, 1995 and 1996, respectively.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost
is determined on the basis of the moving weighted-average cost of materials
and supplies and actual cost for labor and overhead included in the
work-in-process inventory. Reserves for inventory obsolescence are recorded
when, in the opinion of management, the value of specific inventory items
has been impaired.
DEFERRED FINANCING COSTS - Debt issuance costs and transaction fees, which
are associated with the issuance of notes payable, are being amortized (and
charged to interest expense) over the term of the related loan (see Notes
3, 7 and 9) on a method which approximates the level yield method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is carried at
cost. Depreciation and amortization are provided using the straight-line
and accelerated methods over the estimated useful lives of the assets (3 to
30 years). When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the period. The cost of maintenance
and repairs is charged to income as incurred, and significant renewals and
betterments that extend the lives of the assets are capitalized.
REVENUE RECOGNITION - Revenue from engine maintenance services which are
short-term in nature, is recognized at the time of performance test
acceptance of engines (completed contract method). Revenues from power
plant installations and from long-term contracts and programs are
recognized under the percentage of completion method. Revenue from part
sales is recognized upon shipment of the product to customers. Revenues
billed but not earned are deferred and are recognized in the period the
cost is incurred (see Note 16).
WARRANTY COSTS - Warranty costs are accrued based on management's estimate
of such costs and historical sales percentages.
ENVIRONMENTAL COSTS - A liability for environmental assessments and cleanup
is accrued when it is probable a loss has been incurred and such loss is
estimable. Generally, the timing of these accruals coincides with the
identification of an environmental obligation through the Company's
internal procedures or upon notification from regulatory agencies.
FOREIGN EXCHANGE AND FORWARD EXCHANGE CONTRACTS. - Greenwich-Caledonian
utilizes the U.S. dollar as its functional currency. Translation gains and
losses are included in earnings. Greenwich-Caledonian enters into forward
exchange contracts to hedge certain of its foreign currency commitments.
Gains and losses on forward contracts are recognized concurrently with the
related transaction gains and losses. Total translation and transaction
gains or (losses) included in earnings were $288,000 in 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
include accounts receivable, forward exchange contracts, accounts payable,
senior notes, convertible subordinated debentures, and long-term debt. The
fair values of such financial instruments have been determined using
available market information and interest rates as of September 30, 1996.
F-10
<PAGE>
At September 30, 1996, the fair value of the 8% Subordinated Debentures due
2000 was $12,038,000 compared to the carrying value of $2,515,000. The fair
value of all other financial instruments were not materially different than
their carrying value.
INCOME TAXES - Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Under this method, deferred tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities, and are measured using the tax rates and laws that will be in
effect when the differences are expected to reverse. Additionally, deferred
tax balances are adjusted in periods that include the enactment of tax rate
changes.
Prior to the adoption of Statement No. 109, income tax expense was
determined using the liability method prescribed by Statement of Financial
Accounting Standards No. 96, Accounting for Income Taxes. The adoption of
Statement 109 was made on a prospective basis and did not have a material
impact on the Company for the year ended September 30, 1994.
CAPITAL STOCK - The Company is authorized to issue 25,000,000 shares of
Class A common stock, $.01 par value, 25,000,000 shares of Class B common
stock, $.01 par value, and 2,500,000 shares of preferred stock, $.01 par
value. No preferred stock has been issued to date. There were 2,116 and
58,800 treasury shares as of September 30, 1995 and 1996, respectively.
On May 8, 1996, the Company paid a dividend of one share of the Company's
Class B common stock to holders of record of each share of Class A common
stock on April 18, 1996. Retained earnings was charged $63,221 during the
nine months ended June 30, 1996 as a result of the issuance of 6,322,147
shares of Class B common stock. All income per share, dividend per share,
common shares outstanding, and price per share information has been
retroactively restated to reflect this stock dividend.
On June 4, 1996, the Company sold 3,400,000 shares of Class B common stock
through a public offering that generated proceeds of approximately $80.7
million, (net of $4.3 million in related expenses). Proceeds from this
offering were used primarily to fund the 1996 Acquisition.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - Earnings per common and
common equivalent shares are computed by dividing net income by the
weighted average number of common shares and dilutive common share
equivalents outstanding for each period. Common share equivalents include
the dilutive effect of stock warrants and stock options using the treasury
stock method, in applicable periods. Fully diluted earnings per common
share assumes, in addition to the above, (i) that convertible debentures
were converted at the beginning of each period with earnings being
increased for interest expense, net of taxes, that would not have been
incurred had conversion taken place at the beginning of each period and
(ii) the additional dilutive effect from the stock warrants and stock
options discussed above. Quarterly and year-to-date computations of per
share amounts are made independently; therefore, the sum of per share
amounts for the quarters may not equal per share amounts for the year.
Shares used to calculate earnings per share are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding 9,934,302 10,153,452 13,441,779
Dilutive stock options and warrants 13,498 79,782 268,435
---------- ---------- ----------
Shares for primary earnings per share 9,947,800 10,233,234 13,710,214
Assumed conversion of debentures 2,626,854 2,402,906 429,915
Additional dilution of stock options and warrants -- 200,266 113,165
---------- ---------- ----------
Shares for fully diluted earnings per share 12,574,654 12,836,406 14,253,294
========== ========== ==========
</TABLE>
F-11
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121),
effective for fiscal years beginning after December 15, 1995. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The adoption of this statement is not expected to have
a material effect on the Company's financial position or results of
operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123). SFAS No. 123 does not rescind or interpret existing accounting rules
for employee stock-based arrangements. Under SFAS No. 123, the Company may
continue to follow existing rules to recognize and measure compensation,
but they will now be required to disclose the pro forma amounts of net
income and earnings per share that would have to be reported had the
Company elected to follow the "fair value" recognition provisions of SFAS
No. 123. SFAS No. 123 will apply to the Company for the year ended
September 30, 1997. The Company has not determined whether it will elect to
recognize and measure compensation expense under SFAS No. 123 and has not
yet determined its effect on the Company's financial position or results of
operations.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1994
and 1995 financial statements to conform to the 1996 presentation.
2. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996
-------- --------
<S> <C> <C>
Trade receivables 36,050 144,434
Less: Allowance for doubtful accounts 874 5,033
-------- --------
Total accounts receivable $ 35,176 $139,401
======== ========
<CAPTION>
Inventories consisted of the following (dollars in thousands):
SEPTEMBER 30,
1995 1996
-------- --------
<S> <C> <C>
Parts $ 48,297 $136,424
Engines 11,624 21,393
Work in process 46,663 144,116
Inventories substantially applicable to long-term programs 14,349 16,080
-------- --------
Total $120,933 $318,013
======== ========
<CAPTION>
3. DEFERRED FINANCING COSTS
Deferred financing costs consisted of the following (dollars in thousands):
SEPTEMBER 30,
1995 1996
-------- --------
<S> <C> <C>
Deferred financing costs $ 3,889 $ 9,210
Less accumulated amortization 2,172 794
-------- --------
$ 1,717 $ 8,416
======== ========
</TABLE>
Amortization expense (charged to interest expense) for deferred financing
costs for the years ended September 30, 1994, 1995, and 1996, were
$477,000, $683,000, and $662,000, respectively.
F-12
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (dollars in
thousands):
SEPTEMBER 30,
1995 1996
------- --------
Machinery and equipment $26,169 $88,765
Land, buildings, and improvements 2,596 44,397
Other property and equipment 4,035 8,633
Capital projects in progress 147 5,608
------- --------
Total 32,947 147,403
Less accumulated depreciation and amortization 7,289 12,518
------- --------
Property, plant and equipment $25,658 $134,885
======= ========
Depreciation and amortization expense for property, plant and equipment for
the years ended September 30, 1994, 1995 and 1996, approximated $1,285,000,
$1,814,000, and $5,229,000, respectively.
5. ACCRUED EXPENSES AND CURRENT PORTION OF LONG TERM DEBT
Accrued expenses and current portion of long-term debt consisted of the
following (dollars in thousands):
SEPTEMBER 30,
1995 1996
------- --------
Accrued payroll and related expenses $4,237 $12,848
Accrued outside service cost 1,353 12,925
Other accrued expenses 5,307 16,790
Reserve for warranty costs 1,246 5,912
Current portion of other liabilities 522 16,590
Current portion of long term debt 3,437 3,150
------- --------
Total $16,102 $68,215
======= =======
F-13
<PAGE>
6. INCOME TAXES
Income before provision for income taxes consists of the following:
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
------ ------- -------
Domestic $5,566 $10,166 $16,853
Foreign -- -- 2,921
Total $5,566 $10,166 $19,774
====== ======= =======
The components of the provision for income taxes are as follows (dollars in
thousands):
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
------ ------- -------
Current:
Federal $635 $3,077 $7,134
Foreign 2,838
State 239 749 686
------ ------- -------
874 3,826 10,658
------ ------- -------
Deferred:
Federal 1,116 48 (1,124)
Foreign (1,772)
State 230 90 219
------ ------- -------
1,346 138 (2,677)
------ ------- -------
Total $2,220 $3,964 $7,981
====== ======= =======
The provision for income taxes differs from the amount obtained by applying
the statutory federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Income tax at statutory rate 34.0% 34.0% 35.0%
State taxes, net of federal income tax benefit 5.6% 5.4% 3.2%
Other 0.3% (0.4%) 2.2%
---- ---- ----
Provision for income taxes 39.9% 39.0% 40.4%
==== ==== ====
</TABLE>
F-14
<PAGE>
The tax effects of significant items comprising the Company's net deferred
tax liability consisted of the following (dollars in thousands):
SEPTEMBER 30,
1995 1996
------- --------
Deferred tax assets:
Accounts receivable $252 $791
Accrued expenses 489 14,037
Other 4 45
------- --------
Total deferred tax assets 745 14,873
------- --------
Deferred tax liabilities:
Inventory 2,929 5,160
Property, plant and equipment 2,642 19,414
Other 14 3,488
------- --------
Total deferred tax liabilities 5,585 28,062
------- --------
Net deferred tax liability ($4,840) ($13,189)
======= ========
Included in prepaid expenses and other current assets at September 30, 1996
are net deferred tax assets of approximately $9,811,000.
U.S. income taxes or foreign withholding taxes are not provided on
undistributed earnings of the foreign subsidiary which are considered to be
indefinitely reinvested in the operations of such subsidiary. The amount of
such earnings was approximately $1,855,000 at September 30, 1996.
Determination of the net amount of unrecognized U.S. income tax, if any,
with respect to these earnings is not practicable.
7. OTHER LIABILITIES
Other liabilities consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996
------- -------
<S> <C> <C>
Acquisition payable $ 1,044 $ 522
Fair value adjustments of certain long-term engine maintenance
contracts, and liabilities related to engine product line relocation costs,
customer and supplier approvals, licenses and other liabilities 34,278
Inventory purchase payable 13,300 11,300
------- -------
Total 14,344 46,100
------- -------
Less current portion
- included in accrued expenses 522 16,590
- included in customer deposits 4,000 4,000
------- -------
Total current portion 4,522 20,590
------- -------
Other liabilities, net of current portion $ 9,822 $25,510
======= =======
</TABLE>
ACQUISITION PAYABLE - In connection with the Company's acquisition of
Greenwich-Connecticut, the Company agreed to pay the Seller the remaining
purchase price due of approximately $1,566,000 in three equal annual
non-interest bearing installments of approximately $522,000 each, starting
in fiscal year 1995. The current portion as of September 30, 1996 and 1995
of approximately $522,000 has been included in accrued expenses.
F-15
<PAGE>
INVENTORY PURCHASE PAYABLE - On May 1, 1995, the Company purchased
approximately $17.6 million of engine parts inventories from a customer.
The Company paid $2.5 million in cash and offsets against receivables and
agreed to pay the balance due of $15.1 million in the form of service
credits applied against qualified invoices for services to be provided to
such customer. Management estimates that approximately $4 million of
service credits will be utilized within one year and has therefore included
$4 million in customer deposits as of September 30, 1996 and 1995.
FAIR VALUE ADJUSTMENTS - Fair value adjustments of certain long term engine
maintenance contracts are being amortized over the life of the related
contracts which expire within one to three years. Management estimates that
approximately $11.9 million will be utilized within one year and has
therefore included $11.9 million in accrued expenses as of September 30,
1996.
8. LONG-TERM DEBT
Long-term debt consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996
------- -------
<S> <C> <C>
Revolving Credit Facilities $40,448 $59,246
Term Loan 6,019 4,778
Connecticut Term Loan 5,333 3,555
Loan payable to WAL 2,023 1,604
Borrowing facility 4,818
------- -------
Total 53,823 74,001
------- -------
Less current portion
- Term loans 3,019 2,687
- Loan payable to WAL 418 463
------- -------
Total current portion (included in accrued expenses) 3,437 3,150
------- -------
Long term debt - net of current portion $50,386 $70,851
======= =======
</TABLE>
REVOLVING CREDIT FACILITIES - As of September 30, 1995, the Company had a
$55 million "Revolving Credit Facility." Interest, payable monthly, was
calculated as (i) a certain bank's prime rate of interest plus 1.0%, or
(ii) the federal funds interest rate plus 1.5%. The Company also had the
option to fund up to one-half of the borrowings at either the 30, 60 or
90-day LIBOR plus 2.75%. Concurrent with the acquisition of the Former
Aviall Operations (see Note 1), the Class B Common Stock Offering (see Note
1), and the sale of the Senior Notes (see Note 10), the Company refinanced
the Revolving Credit Facility by entering into the "New Credit Facility".
The New Credit Facility, comprised of two senior secured revolving credit
facilities in the aggregate amount of $175 million, is secured by the
Company's accounts receivable, inventories and contract rights and by a
pledge of 65% of the capital stock of Greenwich-Caledonian. Advances under
the New Credit Facility are based upon percentages of outstanding eligible
accounts receivable and inventories, and are borrowed at either (i) the
lender's prime rate plus 0.875% or (ii) the London Interbank Offering Rate
("LIBOR") plus 2.375%. Expenses related to the refinancing of the New
Credit Facility aggregated $2.9 million and were recorded as deferred
financing costs. As of September 30, 1996, the prevailing prime interest
rate under the New Credit Facility was 9.13%, and the prevailing LIBOR
interest rate was 8.03%. Interest is payable monthly, and the new credit
facility matures in June 2001.
The New Credit Facility at September 30, 1996, was classified as long-term,
as the Company had the intent and the ability, supported by the terms of
its existing Revolving Credit Facility, to maintain through October 1997,
principal amounts outstanding under the agreement.
F-16
<PAGE>
PROTECTED INTEREST RATE AGREEMENTS - Because the Company's obligations
under the Revolving Credit Facilities bear interest at floating rates, the
Company is subject to changes in prevailing interest rates. In September
1994, the Company entered into protected interest rate agreements ("Cap
Agreements") with a financial institution in order to reduce the Company's
exposure to interest rate fluctuations. Under the Cap Agreements, the
Company has $12,500,000 of prime rate coverage protection at 11.75%, and
$12,500,000 of 90 day LIBOR rate protection at 9.0% through August 31,
1997. If the prevailing interest rate exceeds the contracted rate, the
financial institution will pay to the Company an amount equal to the
excess.
Transaction fees paid in connection with the Cap Agreements are being
amortized to interest expense over the life of the Cap Agreements on a
method which approximates the level yield method. Any payments by the
financial institution will reduce the interest costs associated with the
borrowings protected.
OTHER DEBT
TERM LOAN. In November 1992, the Company entered into a loan and security
agreement with a commercial lender (the "Term Lender") for a five year, $9
million term loan expiring in November 1997 (the "Term Loan"). The Term
Loan is secured by equipment and tooling with a net book value of
$10,920,000 as of September 30, 1996. This term loan bears interest at
8.75% per annum, payable in 59 monthly installments (including principal
and interest) of $143,205 each, and a final payment of approximately $3.3
million due on November 1, 1997.
CONNECTICUT TERM LOAN. On May 26, 1994 the Company and
Greenwich-Connecticut entered into a separate loan and security agreement
with the Term Lender for a five year, $8 million term loan expiring on May
26, 1999 (the "Connecticut Term Loan"). The Connecticut Term Loan is
secured by substantially all of Greenwich-Connecticut's fixed assets
(excluding real estate) with a net book value of $16,121,000, bears
interest at a rate of 8.99% per annum, payable monthly in arrears.
Principal repayments remaining under this agreement are monthly
installments of $111,111 each, with all such payments ending on May 26,
1999.
LOAN PAYABLE TO WAL. In November 1992, the Company entered into a loan and
security agreement with World Air Lease, Inc. ("WAL"), an affiliate of the
Company, for a five year, $3 million Term Loan expiring in November 1997
(the "WAL Loan"). The WAL Loan is co-secured by the same equipment and
tooling as the Term Loan, and bears interest at 10.25% per annum, payable
in 59 monthly installments (including principal and interest) of $50,519
each, and a final payment of approximately $1.1 million due on November 1,
1997. In April l, 1994, subject to the terms and conditions of the
Greenwich-Connecticut Term Loan, WAL agreed to grant a priority lien
position to the Term Lender on Greenwich-Connecticut's fixed assets. In
return, WAL was granted a priority lien position on specific tooling, and
was granted a first mortgage on certain real property that the Company owns
in East Granby, Connecticut.
BORROWING FACILITY. Greenwich-Caledonian has borrowings directly from a
financial institution in the United Kingdom which consists of a (pound)4.0
million ($6.3 million as of September 30, 1996) unsecured overdraft
facility payable on demand (the "Borrowing Facility"). Borrowings under
this facility bear interest at the Bank's Base Rate plus 1.75%, (7.5% as of
September 30, 1996). As of September 30, 1996, approximately $4.8 million
was outstanding under this borrowing facility.
RESTRICTIVE COVENANTS AND MATURITIES - The Company's credit agreements each
contain various restrictive covenants which include, among other things,
minimum tangible net worth, maintenance of minimum working capital,
limitations on the payment of dividends, restrictions on capital
expenditures, restrictions on certain additional indebtedness and
requirements to maintain certain financial ratios.
F-17
<PAGE>
Scheduled debt maturities subsequent to September 30, 1996, are as follows
(dollars in thousands):
PERIOD ENDING SEPTEMBER 30, AMOUNT
--------------------------- -------
1997 $3,150
1998 5,899
1999 889
2000 0
2001 64,063
--------------------------- -------
Total $74,001
=========================== =======
9. CONVERTIBLE SUBORDINATED DEBENTURES
The Company's $2,515,000 publicly-traded debentures (the "Debentures")
outstanding as of September 30, 1996, ($14,057,000 outstanding as of
September 30, 1995) mature on November 15, 2000 and pay interest at 8% per
annum, payable on March 15 and September 15 every year until maturity. The
Debentures are convertible into shares of the Company's Class A Common
Stock at any time prior to maturity, unless previously redeemed by the
Company, at a conversion price of $5.85 per share, subject to adjustment in
certain events. The Debentures are not redeemable by the Company prior to
November 15, 1996. Thereafter, the Debentures are redeemable at a
redemption price equal to 100% of the principal amount thereof plus accrued
interest, provided that the Debentures may not be redeemed unless the
closing price of the Company's Class A Common Stock has equaled or exceeded
$6.75 for 20 consecutive trading days.
In 1995, $2,942,000 principal amount of debentures were converted into
251,445 shares of the Company's Class A Common Stock (based on a conversion
rate of $11.70 per share) or approximately 85 shares for each $1,000 face
amount of debentures. In 1996, $11,542,000 principal amount of debentures
were converted into 1,033,546 shares of the Company's Class A Common Stock
($10,982,000 prior to May 9, 1996, based on a conversion price of $11.70
per share and $560,000 on or after May 8, 1996 based on a conversion price
of $5.85 per share or approximately 171 shares for each $1,000 face amount
of debentures).
10. SENIOR NOTES
On June 4, 1996, the Company sold $160 million principal amount of 10 1/2%
Senior Notes due 2006 (the "Senior Notes" or the "Notes") through a public
offering. Proceeds from this offering, net of underwriting discounts and
expenses approximating $5.3 million, were used primarily to fund the Aviall
Acquisition (see Note 1). The Notes are senior unsecured obligations of the
Company, which rank pari passu with all unsubordinated unsecured
indebtedness of the Company, and rank senior in right of payment to all
existing and future subordinated indebtedness of the Company.
The Notes are not redeemable prior to June 1, 2001; however, at any time on
or after June 1, 2001, the Notes are redeemable at the Option of the
Company, in whole or in part, on not less than 30 nor more than 60 days'
notice, at redemption prices (expressed as percentages of principal amount)
equal to: (a) 105.25%, if redeemed during the 12-month period commencing
June 1, 2001; (b) 103.50%, if redeemed during the 12-month period
commencing June 1, 2002; (c) 101.75%, if redeemed during the 12-month
period commencing June 1, 2003; and (d) 100%, if redeemed thereafter,
beginning June 1, 2004.
The Notes contains limitations on, among other things, the incurrence of
additional indebtedness, payment of dividends, issuance of new stock, and
certain other transactions as defined. The Notes are also fully,
unconditionally, jointly and severally guaranteed on a senior unsecured
basis by each of the Company's wholly owned domestic subsidiaries
(guarantor subsidiaries) and are secured by a pledge of 65% of the capital
stock of Greenwich-Caledonian (non-guarantor subsidiary). Separate audited
financial statements of each of the guarantor subsidiaries are not
presented herewith because management has determined that they would not be
material to investors. Condensed combined financial statements of the
parent company, guarantor subsidiaries, and non-guarantor subsidiaries are
presented in Note 18.
F-18
<PAGE>
11. STOCK OPTION, STOCK WARRANTS, AND OTHER PLANS
1992 STOCK OPTION PLAN - In July 1992, the Company's Board of Directors and
stockholders approved the establishment by the Company of the 1992 Employee
Incentive and Non-Qualified Stock Option Plan (the "1992 Stock Option
Plan"), pursuant to which officers and other key employees of the Company
can receive incentive options and non-qualified options to purchase an
aggregate of 584,125 shares of the Company's Common Stock. During fiscal
1996, the plan was amended to allow the granting of Class B Common Stock
only after May 8, 1996.
The exercise price for shares purchased upon the exercise of non-qualified
options granted under the 1992 Stock Option Plan is determined by the
Compensation Committee at the time of option grant. The exercise price of
an incentive stock option granted under the 1992 Stock Option Plan must be
at least equal to 100% of the fair market value of the Common Stock on the
date such option is granted (110% of the fair market value for stockholders
who, at the time the option is granted, own more than 10% of the total
combined classes of stock of the Company or any subsidiary). No employees
may be granted incentive stock options in any year for shares having a fair
market value, determined as of the date of grant, in excess of $100,000.
No incentive option granted under the 1992 Stock Option Plan may have a
term of more than 10 years (five years for 10% or greater stockholders).
Options, whether incentive or nonqualified options, generally may be
exercised only if the option holder remains continuously associated with
the Company or a subsidiary from the date of grant to the date of exercise.
However, options may be exercised upon termination of employment or upon
the death or disability of an employee within certain specified periods.
The Company may grant non-qualified options with exercise prices which are
less than the fair market value of the Common Stock on the date of grant.
The Company does not intend to grant non-qualified options at exercise
prices which are less than 85% of the fair market value of the Common Stock
on the date of grant.
On May 20, 1994, the Company granted certain officers and other key
employees the option to purchase an aggregate of 106,500 (213,000 after
effect of May 8, 1996 stock dividend) shares of the Company's common stock.
These incentive options were granted at an exercise price of $6.00 ($3.00
after effect of May 8, 1996 stock dividend) per share and are exercisable
beginning one year after the date of grant for 25% of the shares, with the
balance to become exercisable cumulatively in two installments each year
thereafter of 25% and 50% in years two and three, respectively. During
fiscal 1995, the Company granted other key employees the option to purchase
an additional 18,000 (36,000 after effect of May 8, 1996 stock dividend)
shares of common stock at an option price of $7.00 for 10,000 ($3.50 for
20,000 after effect of May 8, 1996 stock dividend) shares and $12.38 for
8,000 ($6.19 for 16,000 after effect of May 8, 1996 stock dividend) shares.
During fiscal 1996 the Company granted the option to purchase an additional
131,000 shares of common stock to key employees at an average option price
per share of $13.56.
1992 Stock Option Plan activity is shown below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
SHARES UNDER OPTION 1995 1996
------- -------
<S> <C> <C>
Outstanding at beginning of period 121,500 137,000
Granted 18,000 131,000
Exercised - (64,175)
Canceled (2,500) (5,250)
Distributed as part of May 8, 1996 stock dividend - 186,125
------- -------
Outstanding at end of period 137,000 384,700
======= =======
</TABLE>
As of September 30, 1996, options for 31,250 shares were exercisable at an
option price of $3.00.
F-19
<PAGE>
1994 STOCK OPTION PLAN - In August 1994, the Company's Board of Directors
approved the establishment of a stock option plan (the "1994 Stock Option
Plan") pursuant to which outside directors of the Company can receive
incentive options and non-qualified options to purchase an aggregate of
15,000 (30,000 after effect of May 8, 1996 stock dividend) shares of the
Company's common stock. As of September 30, 1996 all 30,000 options had
been granted and 24,200 were exercisable at an exercise price of $2.69 per
share.
STOCK WARRANTS - In connection with the Company's initial public offering
in November 1993, the Company agreed to sell to underwriters (or its
assigns) warrants to purchase up to $1,500,000 principal amount of
debentures at 130% of their initial public offering price and up to 100,000
(200,000 after effect of May 8, 1996 stock dividend) shares of the
Company's common stock at $11.70 ($5.85 after effect of May 8, 1996 stock
dividend) per share. These warrants are exercisable through November 1998.
Through September 30, 1996, 170,321 shares of the Company's common stock
(9,000 as of September 30, 1995) were issued in connection with the
exercise of warrants to purchase $1,275,000 of debentures and 200,000
shares of common stock. All exercises of warrants were cashless with the
exception of certain stock warrants which were exercised to purchase 36,600
common shares in 1996 for approximately $214,000 in cash. As of September
30, 1996, warrants to purchase of up to $225,000 in debentures remain
outstanding and exercisable.
1995 STOCK PURCHASE PLAN - In July 1992, the Company's Board of Directors
authorized and directed the Compensation Committee of the Board and the
officers of the Company to develop a stock purchase plan available to
Company employees to serve as an additional employment incentive.
During 1995, the Company's Board of Directors and stockholders approved the
adoption of the "1995 Stock Purchase Plan" as developed by Company's
management. During 1996, the plan was amended to increase the number of
shares and to provide for the purchase of Class B Common Stock only after
June 30, 1996. Under this plan all full-time employees with at least one
year of service may purchase up to an aggregate of 200,000 shares of the
Company's common stock. The 1995 Stock Purchase Plan allows participating
employees to purchase, through payroll deductions, shares of the Company's
common stock at 85 percent of the fair market value at specified times.
During fiscal 1995 and 1996, employees purchased a total of 37,884 and
18,851 shares, respectively, at $3.46 and $17.72 per share. At September
30, 1996, 143,265 shares remained available for purchase through the plan.
401(K) PLAN - During 1990, the Company adopted a 401(K) Plan (the "Plan")
which allows eligible employees to contribute to the Plan up to 25% of
their compensation for services rendered in any year, not to exceed amounts
prescribed under statutory limits. The Company may elect to make
contributions to the Plan at its discretion. The Company contributions to
the Plan for the years ended September 30, 1994, 1995, and 1996 were
approximately $20,000, $28,000, and $70,000, respectively.
12. RELATED PARTY TRANSACTIONS
During fiscal 1995 and 1996, the Company purchased engine parts from WAL
totaling $171,930 and $37,000, respectively. During fiscal 1995 and 1996,
the Company performed engine parts repair services for WAL and another
company affiliated through common ownership aggregating approximately
$103,000 and $63,000, respectively.
In March 1995, the Company purchased an aircraft engine from another
company affiliated through common ownership and concurrently entered into
an agreement to sell the engine to a customer under substantially the same
terms. The Company received a brokerage fee of $10,000 and was reimbursed
for its costs and expenses.
In June 1995, the Company entered into an aircraft engine lease agreement
with a company affiliated through common ownership to provide a replacement
engine while a customer's engine was being served by the Company.
Concurrent to entering into the lease, the Company and the customer entered
into a sub-lease under substantially the same terms.
F-20
<PAGE>
In June 1995, the Company purchased an unserviceable engine at its
approximate fair market value of $550,000 from an affiliated company. This
engine was disassembled to provide parts for an engine being repaired by
the Company for an unaffiliated third party.
In May 1996, the Company completed the servicing of an engine partly owned
by a company affiliated through common ownership, which services aggregated
to $640,000. This affiliate is a passive investor with a minority interest
in, and no management control of the engine serviced.
The terms of the above transactions are believed by the Company's
management to have been on a market basis not materially different from
those which would have prevailed in a transaction on an arms-length basis
with an unrelated person.
A Director of the Company is a senior partner in a law firm which has
received legal fees from the Company in connection with professional
services provided to the Company.
13. COMMITMENTS AND CONTINGENCIES
As security for performance and advances on long term contracts, the
Company is contingently liable as of September 30, 1996, in the amount of
$3,280,000, under standby letter of credits and bonds.
The Company conducts certain operations from leased warehouses and office
facilities and uses certain data processing, transportation, and other
equipment under lease agreements expiring at various dates during the next
five years, excluding renewal options. In most cases, management expects
that in the normal course of business, leases that expire will be renewed
or replaced by other leases.
Rent expense for the years ended September 30, 1994, 1995 and 1996, under
these leases was approximately $1,974,000, $5,142,000 and $6,308,000,
respectively.
Aggregate future minimum lease payments under these noncancelable operating
leases are as follows (dollars in thousands):
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- -------
1997 $7,896
1998 7,078
1999 6,283
2000 5,501
2001 5,289
------------------------- -------
Total $32,047
========================= =======
The Company's existing and anticipated customers include passenger
airlines, air freight and package carriers, industrial and marine users,
government and leasing companies. Economic and other factors may adversely
affect the airline industry, particularly the major passenger airlines. As
a result, certain of these customers may pose credit risks to the Company.
To date, the Company has not been significantly impacted by these factors,
however, the Company cannot predict whether these conditions will adversely
affect the Company's results of operations in the future.
The Company has entered into employment agreements with two of its officers
expiring on September 30, 1996. Under such agreements, as amended, the
Company paid the officers base salaries of $400,000 and $200,000 per annum,
plus deferred compensation of $80,000 and $20,000, respectively.
Additionally these officers are entitled to annual bonuses, based on the
Company achieving certain pre-determined base income. For fiscal 1996 the
bonuses were not to exceed an aggregate of $1,000,000 per annum.
F-21
<PAGE>
The Company is subject to extensive and frequently changing Federal and
State environmental laws and regulations. The Company believes that it is
in material compliance with all applicable environmental laws and
regulations. Although unaware of any violations, the Company could be held
liable as a former operator at locations where formerly conducted
operations, as well as at the newly acquired locations although the Company
has been indemnified by prior owners of most of its current facilities. The
Company may be subject to enforcement actions, environmental remediation,
installation of appropriate control technology and/or penalties. Since the
existence and, if violations are asserted, the ultimate outcome of these
matters are not certain and no significant provision has been made in the
accompanying financial statements.
It is anticipated that new regulations, or new interpretations of existing
environmental regulations, which the Company is subject to, may be
promulgated which may necessitate material capital expenditures on the part
of the Company. The Company is currently unable to estimate the extent of
any capital expenditures that may be required in the future to effect such
compliance.
The Company is a defendant in a lawsuit with a previous customer in
connection with an aircraft maintenance service agreement, for the repair
of an aircraft and engine in which damages in excess of $2,000,000 against
the Company are claimed. Based upon legal proceedings, discovery to date,
and the advice of legal counsel management believes that the Company's
liability, if any, will not exceed $300,000 as a result of this action, and
it is the Company's intention to defend this suit vigorously.
From time to time, the Company is involved in litigation routine to its
operations. The Company believes, with advice of legal counsel, that the
ultimate outcome of such routine litigation will not have a significant
impact on the Company's financial position or results of operations.
14. PENSION PLAN
Greenwich-Caledonian maintains a defined benefit pension plan. The benefits
for this plan are based upon a final-pay benefit formula. The funding
policy for the plan is to contribute such amounts as are necessary on an
actuarial basis to provide the plan with sufficient assets to meet the
benefits payable to plan participants. The plan's assets are primarily
invested in equities and interest-bearing accounts.
The following tables reflect the components of net pension expense and the
funded status for the plan (in thousands):
FOR THE YEAR ENDED
SEPTEMBER 30, 1996
------------------
Service cost - benefits earned during the year $416
Interest cost on projected benefit obligation 659
Actual return on plan assets (677)
Net amortization and deferral (219)
----
$179
Net pension expense ====
F-22
<PAGE>
AS OF SEPTEMBER 30,
FUNDED STATUS 1996
-------------------
Plan assets at fair value $29,141
-------
Actuarial present value of benefit obligations:
Vested benefits 19,010
Nonvested benefits 202
-------
Accumulated benefit obligation 19,212
Additional benefits based on projected future
salary increases 7,306
-------
Projected benefit obligation 26,518
-------
Plan assets greater than projected benefit obligation 2,623
Unrecognized net (gains) (1,099)
Unrecognized prior service cost 19
-------
Prepaid pension expense $1,543
=======
The following table sets forth the year end actuarial assumptions used in
the accounting for the plan:
Discount rate for determining projected benefit obligation 8.25%
Rate of increase in compensation levels 5.75%
Expected long-term rate of return on plan assets 9.50%
Actuarial gains and losses and plan amendments are amortized over the
average remaining service lives of participants expected to receive
benefits and transition amounts are amortized over 13 to 19 years.
15. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
Sales to one major unaffiliated customer during the year ended September
30, 1996 amounted to $45,508,000, representing approximately 11% of the
Company's net sales for such year. Sales to two major unaffiliated
customers during the year ended September 30, 1995 amounted to $34,779,000
and $20,255,000, representing approximately 18% and 10%, respectively, of
the Company's net sales for such year. No one customer represented over 10%
of sales for the year ended September 30, 1994.
Sales under government contracts and sub-contracts aggregated 20%, 14%, and
11% of total net sales for the years ended September 30, 1994, 1995 and
1996 respectively. Government contracts are customarily subject to
cancellation or renegotiation at the Government's election. However, the
Company is not aware of any such actions or pending actions that would have
a material affect on the Company's financial position or results of
operations.
Sales to foreign customers aggregated 21%, 18%, and 24% of total net sales
for the years ended September 30, 1994, 1995 and 1996, respectively. The
Company's customers are located throughout the world, and those outside the
United States are not concentrated in any one geographic area.
The Company operates in the aviation industry and reports its activities as
one business segment. The Company's foreign sales and pretax earnings
emanate entirely from its repair facility in Prestwick, Scotland. There
were no foreign operations prior to 1996. Financial information by
geographic area follows (in thousands):
F-23
<PAGE>
1996
-------
Net sales:
United States 331,824
United Kingdom 66,089
-------
Operating profit:
United States 27,663
United Kingdom 4,261
-------
Identifiable assets:
United States 434,815
United Kingdom 190,265
-------
There were no transfers between geographic areas. Operating profit is net
sales less operating expenses. In computing operating profit, none of the
following items has been added or deducted: interest expense, other
(income)/expense, and income taxes. Domestic operations profit is net of
corporate and general and administrative expenses.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area.
16. LONG-TERM MAINTENANCE CONTRACTS
The Company is a party to several long-term engine maintenance contracts
with customers for specified engine fleets over specific periods of time.
These contracts, with remaining terms at September 30, 1996 of one to three
years, use long-term contract accounting which requires various estimates
to predict the contract profitability over the life of the contract.
Revenues are recognized upon test acceptance based on rates per hour
(power-by-the-hour) applied to each completed engine's hours flown since
last shop visit. Customers are billed monthly for fleet hours flown during
the period. Costs are recognized for completed engines based on an average
gross margin assumption over the life of the contract.
Estimates used include failure removal rates, productivity changes,
overhaul cost projections and customer and fleet specific variables.
Changes to these estimates and the resulting cumulative contract-to-date
catchup adjustments may result in material changes to profitability in any
given time period. The estimates used represent management's best estimate
of expected future contract results based on available information. Actual
results could differ significantly (positive or negative) from estimates
currently used should operating performance or other factors change.
The balance sheet components associated with these long-term contracts
include deferred receivables, costs, charges and revenues. Deferred
receivable is the contract-to-date cumulative variance between the amounts
invoiced at contract rates and the average rate over the contract's life.
Deferred cost is the cumulative difference between the costs projected to
date based on the total estimated contract profitability and the actual
costs incurred to date. This amount is classified according to the
remaining term of the related contract. Deferred charge (revenue) is the
cumulative variance between the fleet hours flown at the contract rate per
hour and the revenue recognized to date.
F-24
<PAGE>
The following table sets forth the assets (liabilities) related to the
long-term engine maintenance contracts as of September 30:
(IN THOUSANDS) 1995 1996
-------- -------
Current deferred receivable $3,329
Current deferred cost 4,404
Long-term deferred cost 4,275
Current deferred charge (revenue) ($1,853) (953)
Long-term deferred charge (revenue) (1,032)
17. OTHER STATEMENT OF CASH FLOWS INFORMATION
Cash paid for interest was $4,008,000, $7,072,000, and $7,534,000 in 1994,
1995 and 1996, respectively. Cash paid for income taxes was $1,576,000,
$4,436,000, and $7,082,000 in 1994, 1995 and 1996, respectively.
In 1995 and 1996, $2,942,000 and $11,542,000, respectively, of Convertible
Subordinated Debentures were converted into 251,445 and 1,033,546 shares of
common stock, respectively. The related unamortized deferred issue costs
for the debentures converted of $(233,000) and $(877,000) for 1995 and
1996, respectively, were charged to additional paid in capital. The
unamortized deferred issue costs is determined as of the date of
conversion.
In 1995 and 1996, 9,000 and 161,321 shares, respectively, of the Company's
common stock were issued in connection with the cashless exercise of
warrants to purchase debentures and shares of common stock (see note 11).
Non-cash assets and liabilities obtained in the 1996 Acquisition described
in Note 1 were (amounts in thousands):
Current assets $248,307
Property, plant and equipment 110,500
Current liabilities 83,722
Non-current liabilities 45,004
18. GUARANTOR SUBSIDIARIES
In June 1996, the Company issued $160 million principal amount of 10 1/2%
Senior Notes due 2006 (the "Notes", see Note 10). The Notes are guaranteed
by certain of the Company's subsidiaries in the manner described below.
Each subsidiary guarantor unconditionally guarantees, jointly and
severally, to be liable for the Company's obligations under the Notes.
The Notes are jointly and severally guaranteed on a senior, unsecured basis
by each of the Company's domestic subsidiaries and are secured on a pari
passu basis with the indebtedness under the Company's senior credit
facility by a pledge of 65% of the capital stock of Greenwich-Caledonian
Limited, a wholly-owned subsidiary of the Company. Notwithstanding the
ranking of the Notes, the Company has additional outstanding indebtedness
under a revolving credit facility and various fixed term loans. The Notes
will effectively be subordinated to this additional indebtedness to the
extent that the additional indebtedness is secured by the assets of the
guarantor subsidiaries.
F-25
<PAGE>
The following condensed consolidating information presents condensed financial
statements as of September 30, 1995 and 1996 and for the years ended September
30, 1994, 1995 and 1996 of:
(a) the Company on a parent company only basis (carrying its
investments in the subsidiaries under the equity method),
(b) the Guarantor Subsidiaries,
(c) the Non-Guarantor Subsidiary,
(d) elimination entries necessary to consolidate the Parent Company
and its subsidiaries, and
(e) the Company on a consolidated basis.
<TABLE>
<CAPTION>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET NON-
SEPTEMBER 30, 1995 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- -------------- -------------- -------------- --------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash $ 96 $ 84 $0 $ 0 $ 180
Accounts receivable 21,159 14,017 35,176
Inventories 86,778 34,155 120,933
Prepaid expenses and other current assets 157 1,110 1,267
------------- -------------- -------------- -------------- --------------
Total current assets 108,190 49,366 0 0 157,556
------------- -------------- -------------- -------------- --------------
Property, Plant and Equipment 9,240 16,418 25,658
Deferred financing costs and other assets 1,825 581 2,406
Investments in and advances to subsidiaries 21,787 0 (21,787) 0
------------- -------------- -------------- -------------- --------------
Total Assets $141,042 $66,365 $0 ($21,787) $185,620
============= ============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $25,805 $11,879 $0 $0 $37,684
Accrued expenses and current portion of
long term liabilities 7,059 9,043 16,102
Customer deposits and deferred revenues 11,527 4,148 15,675
Income taxes payable (1,165) 1,431 266
Total current liabilities 43,226 26,501 0 0 69,727
------------- -------------- -------------- -------------- --------------
Deferred Income Taxes 4,840 0 4,840
Equity of and advances from parent 0 21,787 (21,787) 0
Other Liabilities 8,778 1,044 9,822
Long Term Debt 38,459 11,927 50,386
Senior Notes 0 0 0
Convertible Subordinated Debentures 14,057 0 14,057
Stockholders' Equity 31,682 5,106 36,788
------------- -------------- -------------- -------------- --------------
Total Liabilities and Stockholders' Equity $141,042 $66,365 $0 ($21,787) $185,620
============= ============== ============== ============== ==============
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET NON-
SEPTEMBER 30, 1996 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- -------------- -------------- -------------- --------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash $ 219 $ 109 $ 6 $ 0 $ 334
Accounts receivable 45,472 60,067 33,862 139,401
Inventories 94,880 120,136 102,997 318,013
Prepaid expenses and other current assets (205) 16,435 3,774 20,004
------------- -------------- -------------- -------------- --------------
Total current assets 140,366 196,747 140,639 0 477,752
------------- -------------- -------------- -------------- --------------
Property, Plant and Equipment 10,920 74,339 49,626 134,885
Deferred financing costs and other assets 8,075 4,368 0 12,443
Investments in and advances to subsidiaries 247,174 0 0 (247,174) 0
------------- -------------- -------------- -------------- --------------
Total Assets $406,535 $275,454 $190,265 ($247,174) $625,080
============= ============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $27,041 $53,155 $26,360 $0 $106,556
Accrued expenses and current portion
of long term liabilities 17,693 36,598 13,924 68,215
Customer deposits and deferred revenues 13,981 5,549 2,382 21,912
Income taxes payable (251) 2,730 4,995 7,474
Total current liabilities 58,464 98,032 47,661 0 204,157
------------- -------------- -------------- -------------- --------------
Deferred Income Taxes 1,523 11,484 9,993 23,000
Equity of and advances from parent 0 121,234 54,348 (175,582) 0
Other Liabilities 11,300 14,210 0 25,510
Long Term Debt 44,973 21,060 4,818 70,851
Senior Notes 160,000 0 0 160,000
Convertible Subordinated Debentures 2,515 0 0 2,515
Stockholders' Equity 127,760 9,434 73,445 (71,592) 139,047
------------- -------------- -------------- -------------- --------------
Total Liabilities and Stockholders' Equity $406,535 $275,454 $190,265 ($247,174) $625,080
============= ============== ============== ============== ==============
</TABLE>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF INCOME NON-
FOR THE YEAR ENDED SEPTEMBER 30, 1994 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales $76,315 $29,580 ($662) $105,233
Cost of Sales 65,012 23,623 (662) 87,973
------------- -------------- -------------- -------------- --------------
Gross Profit 11,303 5,957 0 0 17,260
Selling, General and Administrative Expenses 5,686 1,320 7,006
------------- -------------- -------------- -------------- --------------
Income from Operations 5,617 4,637 0 0 10,254
Nonoperating (Income) Expense: 0
Interest expense 3,479 1,280 4,759
Other (income) expense (229) 158 (71)
------------- -------------- -------------- -------------- --------------
Total nonoperating expenses 3,250 1,438 0 0 4,688
------------- -------------- -------------- -------------- --------------
Income Before Provision for Income Taxes 2,367 3,199 0 0 5,566
Provision for Income Taxes 934 1,286 2,220
------------- -------------- -------------- -------------- --------------
Net Income $1,433 $1,913 $0 $0 $3,346
============= ============== ============== ============== ==============
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME NON-
FOR THE YEAR ENDED SEPTEMBER 30, 1995 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 123,956 $ 75,627 $ 0 ($ 3,264) $ 196,319
Cost of Sales 106,069 62,152 (3,264) 164,957
--------- --------- --------- --------- ---------
Gross Profit 17,887 13,475 0 0 31,362
Selling, General and Administrative Expenses 8,013 5,624 13,637
--------- --------- --------- --------- ---------
Income from Operations 9,874 7,851 0 0 17,725
Nonoperating (Income) Expense: 0
Interest expense 4,994 2,956 7,950
Other (income) expense (52) (339) (391)
--------- --------- --------- --------- ---------
Total nonoperating expenses 4,942 2,617 0 0 7,559
--------- --------- --------- --------- ---------
ncome Before Provision for Income Taxes 4,932 5,234 0 0 10,166
Provision for Income Taxes 1,763 2,201 3,964
--------- --------- --------- --------- ---------
Net Income $ 3,169 $ 3,033 $ 0 $ 0 $ 6,202
========= ========= ========= ========= =========
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME NON-
FOR THE YEAR ENDED SEPTEMBER 30, 1996 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 158,792 $ 181,014 $ 66,089 ($ 7,982) $ 397,913
Cost of Sales 135,176 157,733 58,029 (7,982) 342,956
--------- --------- --------- --------- ---------
Gross Profit 23,616 23,281 8,060 0 54,957
Selling, General and Administrative Expenses 9,974 9,260 3,799 23,033
--------- --------- --------- --------- ---------
Income from Operations 13,642 14,021 4,261 0 31,924
Nonoperating (Income) Expense: 0
Interest expense 4,717 6,301 1,636 12,654
Other (income) expense (191) (17) (296) (504)
--------- --------- --------- --------- ---------
Total nonoperating expenses 4,526 6,284 1,340 0 12,150
--------- --------- --------- --------- ---------
Income Before Provision for Income Taxes 9,116 7,737 2,921 0 19,774
Provision for Income Taxes 3,663 3,252 1,066 7,981
--------- --------- --------- --------- ---------
Net Income $ 5,453 $ 4,485 $ 1,855 $ 0 $ 11,793
========= ========= ========= ========= =========
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NON-
FOR THE YEAR ENDED SEPTEMBER 30, 1994 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
--------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities ($ 2,691) ($ 650) $ 0 $ 0 ($ 3,341)
Cash Flows from investing activities:
Capital expenditures (1,457) (234) (1,691)
Acquisition of net assets 0 (41,072) (41,072)
-------- -------- -------- -------- --------
Net cash provided (used) by investing activities (1,457) (41,306) 0 0 (42,763)
Cash flows from financing activities:
Net change in revolving credit facilities 20 17,330 17,350
Net cash transfers to (from) parent (18,384) 18,384 0
Proceeds from issuance of long term debt 8,000 8,000
Repayments of long term debt (1,383) (667) (2,050)
Issuance of common stock, net of expenses 8,666 8,666
Issuance of convertible subordinated debt 16,999 16,999
Deferred financing costs (1,121) (700) (1,821)
Repayment of subordinated debt (1,000) (1,000)
Cash dividends paid 0 0
-------- -------- -------- -------- --------
Net cash provided by financing activities 3,797 42,347 0 0 46,144
Net increase (decrease) in cash (351) 391 0 0 40
Cash, beginning of period 430 0 0 0 430
-------- -------- -------- -------- --------
Cash, end of period $ 79 $ 391 $ 0 $ 0 $ 470
======== ======== ======== ======== ========
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NON-
FOR THE YEAR ENDED SEPTEMBER 30, 1995 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
-------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 16,707 ($10,027) $ 0 $ 0 $ 6,680
Cash Flows from investing activities:
Capital expenditures (2,337) (387) (2,724)
Acquisition of net assets 0
-------- -------- -------- -------- --------
Net cash provided (used) by investing activities (2,337) (387) 0 0 (2,724)
Cash flows from financing activities:
Net change in revolving credit facilities (9,606) 8,958 (648)
Net cash transfers to (from) parent (3,149) 3,149 0
Repayments of long term debt (1,437) (2,000) (3,437)
Purchase of treasury shares (217) (217)
Proceeds from sale of treasury shares 131 131
Deferred financing costs (75) (75)
Cash dividends paid 0
-------- -------- -------- -------- --------
Net cash provided by financing activities (14,353) 10,107 0 0 (4,246)
Net increase (decrease) in cash 17 (307) 0 0 (290)
Cash, beginning of period 79 391 470
-------- -------- -------- -------- --------
Cash, end of period $ 96 $ 84 $ 0 $ 0 $ 180
======== ======== ======== ======== ========
</TABLE>
F-29
<PAGE>
<TABLE>
<CAPTION>
GREENWICH AIR SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NON-
FOR THE YEAR ENDED SEPTEMBER 30, 1996 PARENT GUARANTOR GUARANTOR
(DOLLARS IN THOUSANDS) COMPANY SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED
---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities ($ 9,874) $ 4,805 ($ 3,163) $ 0 ($ 8,232)
Cash Flows from investing activities:
Capital expenditures (2,596) (1,310) (50) (3,956)
Acquisition of net assets (111,856) (118,225) (230,081)
--------- --------- --------- --------- ---------
Net cash provided (used) by investing
activities (2,596) (113,166) (118,275) 0 (234,037)
Cash flows from financing activities:
Net change in revolving credit facilities 8,329 10,468 18,797
Net cash transfers to (from) parent (225,641) 99,680 125,961 0
Repayments of long term debt (1,659) (1,762) (4,517) (7,938)
Issuance of common stock, net of expenses 80,701 80,701
Issuance of senior notes 160,000 160,000
Purchase of treasury shares (1,590) (1,590)
Proceeds from sale of treasury shares 348 348
Deferred financing costs (8,237) (8,237)
Issuance of shares under option and
warrant transactions 456 456
GCL merger 7 7
Cash dividends paid (121) (121)
--------- --------- --------- --------- ---------
Net cash provided by financing activities 12,593 108,386 121,444 0 242,423
Net increase (decrease) in cash 123 25 6 0 154
Cash, beginning of period 96 84 0 180
--------- --------- --------- --------- ---------
Cash, end of period $ 219 $ 109 $ 6 $ 0 $ 334
========= ========= ========= ========= =========
</TABLE>
19. SUBSEQUENT EVENTS
On October 2, 1996, Greenwich's Board of Directors authorized the
redemption of all of the Company's outstanding 8% Convertible Subordinated
Debentures, due in the year 2000. The redemption date was November 25,
1996. The redemption price was 100% of the principal amount plus any
unpaid interest accrued to that date. The debentures are convertible into
Class A Common Stock at a conversion price of $5.85 per share. Prior to
the redemption, all $2.5 million of the then outstanding debentures were
converted into approximately 430,000 shares of Class A Common Stock by the
holders thereof. If the conversion had occurred at the beginning of fiscal
year 1996, primary earnings per share would have been $0.83.
On November 25, 1996, Greenwich's Board of Directors elected to declare a
$.012 per share cash dividend to shareholders of record as of January 10,
1997. The cash dividend is payable on shares of both Class A and Class B
Common Stock and will be paid on January 30, 1997.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Greenwich Caledonian, Ltd.:
In our opinion, the accompanying balance sheet and the related statements of
income, of shareholder's equity and of cash flows present fairly, in all
material respects, the financial position of Greenwich Caledonian, Ltd. at
September 30, 1996 and the results of their operations and their cash flows for
the period of June 11 to September 30, 1996, in conformity with United States
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards in
the United Kingdom and the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Deloitte & Touche
Chartered Accountants
Glasgow, Scotland
December 19, 1996
F-31
<PAGE>
GREENWICH CALEDONIAN, LTD.
BALANCE SHEET
SEPTEMBER 30, 1996
(Dollars in Thousands)
ASSETS
Current Assets:
Cash $ 6
Accounts receivable 33,862
Inventories 102,997
Prepaid expenses and other current assets 3,774
--------
Total current assets 140,639
--------
Property, Plant and Equipment 49,626
--------
Total Assets $190,265
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 26,360
Accrued expenses and current portion of long-term liabilities 13,924
Customer deposits and deferred revenues 2,382
Income taxes payable 4,995
--------
Total current liabilities 47,661
--------
Deferred Income Taxes 9,993
Borrowing Facility 4,818
Due to Greenwich 54,348
Stockholder's Equity:
Common stock 23,632
Capital in excess of par value 47,958
Retained earnings 1,855
--------
Total stockholder's equity 73,445
--------
Total Liabilities and Stockholder's Equity $190,265
========
See notes to financial statements.
F-32
<PAGE>
GREENWICH CALEDONIAN, LTD.
STATEMENT OF INCOME
FOR THE PERIOD OF JUNE 11 TO SEPTEMBER 30, 1996
(Dollars in Thousands)
Net Sales $ 66,089
Cost of Sales 58,029
--------
Gross Profit 8,060
Selling, General and Administrative Expenses 3,799
--------
Income from Operations 4,261
Nonoperating (Income) Expense:
Interest Expense 1,636
Other (income) / expense, net (296)
--------
Total Nonoperating (Income) Expenses 1,340
--------
Income Before Provision for Income Taxes 2,921
Provision for Income Taxes 1,066
--------
Net Earnings $ 1,855
========
See notes to financial statements
F-33
<PAGE>
<TABLE>
<CAPTION>
GREENWICH CALEDONIAN, LTD.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD OF JUNE 11 TO SEPTEMBER 30, 1996
(Dollars in Thousands)
COMMON STOCK CAPITAL IN
----------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
At June 11, 1996 23,069,272 $ 23,632 $ 47,958 $ 0 $ 71,590
Net Earnings 1,855 1,855
---------- ---------- ---------- ---------- ----------
At September 30, 1996 23,069,272 $ 23,632 $ 47,958 $ 1,855 $ 73,445
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-34
<PAGE>
GREENWICH CALEDONIAN, LTD.
STATEMENT OF CASH FLOWS
FOR THE PERIOD OF JUNE 11 TO SEPTEMBER 30, 1996
(Dollars in Thousands)
Cash flows from operating activities:
Net earnings $ 1,855
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,554
Provision for doubtful accounts receivable 128
Changes in assets and liabilities:
Accounts receivable 16,716
Inventories (29,769)
Prepaid expenses & other current assets (2,766)
Accounts payable 3,394
Accrued expenses and deferred revenues 5,743
Income taxes payable 1,016
Deferred income taxes payable (1,034)
--------
Net cash (used) by operating activities (3,163)
--------
Cash flows from investing activities:
Capital expenditures (50)
--------
Net cash (used) by investing activities (50)
--------
Cash flows from financing activities:
Net change in borrowing facility (4,517)
Net change in due to Greenwich 7,730
--------
Net cash provided by financing activities 3,213
--------
Net (decrease) increase in cash --
Cash, beginning of period 6
--------
Cash, end of period $ 6
========
See notes to financial statements.
F-35
<PAGE>
GREENWICH CALEDONIAN, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND
Greenwich Caledonian, Ltd. ("Greenwich-Caledonian") is engaged in the
maintenance and overhaul of turbine engines and components used primarily in
commercial aviation and provides its services on a worldwide basis. This
Prestwick, Scotland engine repair operation is a wholly owned foreign subsidiary
of Greenwich Air Services, Inc. ("Greenwich").
On June 10, 1996, Greenwich purchased (a) all of the assets and business of the
commercial engine services divisions of Aviall, Inc. ("Aviall"), and (b) all of
the issued and outstanding shares of Aviall Limited, a subsidiary of Aviall
(collectively, the "Former Aviall Operations"). The purchase price (paid in
cash) for the Former Aviall Operations, net of assumed liabilities and
indebtedness and as adjusted in accordance with the Purchase Agreement was
$230,081,000 of which approximately $71,590,000 represents the purchase price
for all of the issued and outstanding shares of Aviall Limited (now known as
Greenwich Caledonian, Ltd.). The acquisition has been accounted for using the
purchase method of accounting therefore the accompanying financial statements
are on a new basis of accounting.
The allocation of the purchase price to the net assets acquired and to the
individual subsidiaries is based on currently available information and
estimates as of the date of the financial statements. Adjustments to the
purchase price allocation may occur for a period of up to twelve months from the
date of purchase as management obtains the information necessary (such as
appraisals) to finalize this allocation. There is a possibility of significant
future adjustments to the purchase price allocation.
As a result of the Greenwich acquisition, the net assets of Greenwich-Caledonian
were recorded as follows as of June 11, 1996 (Amounts in thousands):
Current assets $ 124,949
Property, plant and equipment 51,129
Accounts payable and accrued expenses (37,508)
Deferred taxes (11,027)
Assumed indebtedness (55,953)
---------
Net purchase price $ 71,590
=========
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION.- The accompanying financial statements are prepared in
U.S. Dollars. The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and events
as of the date of the financial statements. Accordingly, upon settlement, actual
results may differ from estimated amounts.
REVENUE RECOGNITION - Revenue from engine maintenance services is recognized at
the time of performance test acceptance of engines (the "completed contract"
method). Revenue from long-term fixed-price contracts is recognized under the
"percentage-of-
F-36
<PAGE>
completion" method. Revenue from part sales is recognized upon shipment of the
product to its customers. Revenues billed but not earned are deferred and are
recognized in the period the cost is incurred (see Note 12).
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is
established by charges to income through the provision for doubtful accounts
receivable. Trade accounts receivable which are considered by management to be
uncollectible are charged off to the allowance and recoveries of amounts
previously charged off are credited to the allowance. In addition, a substantial
portion of Greenwich-Caledonian's accounts receivable balance is covered by
credit insurance. The provision for doubtful accounts totaled approximately
$128,000 for the period of June 11 to September 30, 1996 and trade accounts
receivable charge offs, net of recoveries, totaled approximately $2,000 for the
same period.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined on the basis of the moving weighted-average cost of materials and
supplies and actual cost for labor and overhead included in work-in-process
inventory. Reserves for inventory obsolescence are recorded when, in the opinion
of management, the value of specific inventory items has been impaired.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is carried at
cost. Depreciation and amortization is provided using the straight-line and
accelerated methods over the estimated useful lives of the assets; buildings and
improvements - 30 years, and machinery, equipment and tooling - 3 to 20 years.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized for the period. The cost of maintenance and repairs is
charged to income as incurred, and significant renewals and betterments that
extend the lives of the assets are capitalized.
WARRANTY COSTS - Warranty costs are accrued based on management's estimate of
such costs and historical sales percentages.
ENVIRONMENTAL COSTS - A liability for environmental assessments and cleanup is
accrued when it is probable a loss has been incurred and is estimable.
Generally, the timing of these accruals coincides with the identification of an
environmental obligation through internal procedures or upon notification from
regulatory agencies. Greenwich-Caledonian is not aware of any exposure to
environmental costs arising from its continuing operations that requires any
such liability to be recorded. Pursuant to the purchase agreement, Aviall has
agreed to indemnify Greenwich for any existing environmental obligations as of
the purchase date.
FOREIGN EXCHANGE AND FORWARD EXCHANGE CONTRACTS - Greenwich-Caledonian utilizes
the U.S. dollar as its functional currency. Translation gains and losses are
included in earnings. Greenwich-Caledonian enters into forward exchange
contracts to hedge certain of its foreign currency commitments. Gains and losses
on forward contracts are recognized concurrently with the related transaction
gains and losses. Total translation and transaction gains or (losses) included
in earnings were $288,000 for the period of June 11 to September 30, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Greenwich-Caledonian's financial
instruments include accounts receivable, forward exchange contracts and
overdraft facility. The fair value of such financial instruments have been
determined using available market information and interest rates as of September
30, 1996. The fair value of such financial instruments were not materially
different than their carrying value.
F-37
<PAGE>
INCOME TAXES - Greenwich-Caledonian accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Under this method, deferred tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities, and are measured using the tax rates and laws that will be in
effect when the differences are expected to reverse. Additionally, deferred tax
balances are adjusted in periods that include the enactment of tax rate changes.
IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS No. 121) effective for fiscal years beginning after
December 15, 1995. SFAS No. 121 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. The adoption of this
statement is not expected to have a material effect on Greenwich-Caledonian's
financial position or results of operations.
NOTE 3 - TRANSACTIONS WITH GREENWICH
GENERAL AND ADMINISTRATIVE SERVICES - Greenwich provides certain corporate
general and administrative services to Greenwich- Caledonian, including legal,
treasury, human resources and finance, among others. Costs related to these
services were allocated to Greenwich-Caledonian on a basis that approximated the
proportional share of the usage of the actual services provided and a
representative share of certain corporate fixed expenses. Management believes
these allocations are reasonable. Total allocated expenses included in "Selling,
General and Administrative Expenses" in the accompanying Statement of Income
were $1,194,000 for the period of June 11 to September 30, 1996.
INTERCOMPANY FINANCING AND INTEREST EXPENSE -"Due to Greenwich" in the
accompanying Balance Sheet represents Greenwich's net advances to
Greenwich-Caledonian resulting from cash and non-cash transfers and intercompany
allocations. The intercompany advances by Greenwich to Greenwich-Caledonian are
evidenced by a promissory note dated June 10, 1996 maturing on June 30, 2006.
The annual interest rate is based on Greenwich's average consolidated interest
rate. At September 30, 1996 the interest rate was 9.1%. Total intercompany
interest charged by Greenwich to Greenwich-Caledonian for the period of June 11
to September 30, 1996 was $1,461,000. The note may be prepaid by
Greenwich-Caledonian without penalty. Because Greenwich manages the cash and
financing requirements of the Company, it is not practicable to estimate cash
paid for interest and income taxes.
CORPORATE INSURANCE - Greenwich-Caledonian participated in Greenwich's combined
risk management programs for property and casualty insurance.
Greenwich-Caledonian was charged amounts which primarily represented an
allocation of third party premiums, including estimates of claims incurred but
not reported. Costs allocated under these programs were $266,000 for the period
of June 11 to September 30, 1996.
SECURITY FOR GREENWICH DEBT - On June 4, 1996, Greenwich sold $160 million
principal amount of 10-1/2% Senior Notes due 2006 (the "Senior Notes") through a
public offering. The Senior Notes are guaranteed on a senior unsecured basis by
each of Greenwich's domestic subsidiaries and are secured by a pledge of 65% of
the capital stock of Greenwich-Caledonian.
F-38
<PAGE>
NOTE 4 - ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable as of September 30, 1996, consisted of the following
(dollars in thousands):
Trade receivables $34,872
Less: Allowance for doubtful accounts 1,010
-------
Total accounts receivable $33,862
=======
Inventories as of September 30, 1996, consisted of the following (dollars in
thousands):
Parts $ 63,202
Engines 4,986
Work in process 33,139
Inventories substantially applicable to
long-term programs 1,670
--------
Total $102,997
========
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of September 30, 1996, consisted of the
following (dollars in thousands):
Machinery and equipment $28,252
Land, buildings, and improvements 16,458
Other property and equipment 2,415
Capital projects in progress 4,055
-------
Total 51,180
Less accumulated depreciation and
amortization 1,554
-------
Property, plant and equipment $49,626
=======
Depreciation and amortization expense for property, plant and equipment for the
period of June 11 to September 30, 1996, approximated $1,554,000.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses as of September 30, 1996, consisted of the following (dollars
in thousands):
Accrued payroll and related expenses $2,624
Accrued outside service costs 6,571
Other accrued expenses 2,820
Reserve for warranty costs 1,909
-------
Total $13,924
=======
NOTE 7 - BORROWING FACILITY
F-39
<PAGE>
Greenwich-Caledonian has borrowings directly from a financial institution in the
United Kingdom which consists of a (pound)4.0 million (approximately $6.3
million as of September 30, 1996) unsecured overdraft facility payable on demand
(the "Borrowing Facility"). Borrowings under this facility bear interest at the
Bank's Base Rate plus 1.75%, (7.5% as of September 30, 1996). As of September
30, 1996, approximately $4.8 million was outstanding under this borrowing
facility.
NOTE 8 - INCOME TAXES
The components of the provision for income taxes for the period of June 11 to
September 30, 1996 are as follows (dollars in thousands):
Current tax expense $ 2,838
Deferred tax benefit (1,772)
-------
Provision for income taxes $ 1,066
=======
A reconciliation of expected statutory tax expense (benefit) using the statutory
tax rate to the provision for income taxes is as follows:
Expected statutory tax expense (benefit) 33.0%
Meals and entertainment 1.8%
Miscellaneous items, net 1.7%
----
Provision for income taxes 36.5%
====
The significant temporary differences which gave rise to deferred income taxes
as of September 30, 1996 were as follows:
(IN THOUSANDS)
Deferred income tax assets:
Accounts receivable $ 783
Other items 27
--------
Deferred income tax assets 810
--------
Deferred income tax liabilities:
Property and equipment basis differences 9,993
Other items 72
--------
Deferred income tax liabilities 10,065
--------
Net deferred income tax liability ($ 9,255)
========
Included in prepaid expenses and other current assets at September 30, 1996 are
net deferred tax assets of approximately $738,000.
F-41
<PAGE>
NOTE 9 - PENSION PLAN
Greenwich-Caledonian maintains a defined benefit pension plan. The benefits for
this plan are based upon a final-pay benefit formula. The funding policy for the
plan is to contribute such amounts as are necessary on an actuarial basis to
provide the plan with sufficient assets to meet the benefits payable to plan
participants. The plan's assets are primarily invested in equities and
interest-bearing accounts.
The following tables reflect the components of net pension expense and the
funded status for the plan (in thousands):
FOR THE PERIOD OF
JUNE 11 TO
SEPTEMBER 30, 1996
------------------
Service cost - benefits earned during the year $ 416
Interest cost on projected benefit obligation 659
Actual return on plan assets (677)
Net amortization and deferral (219)
-----
Net pension expense $ 179
=====
AS OF SEPTEMBER 30,
FUNDED STATUS 1996
- ------------- --------------------
Plan assets at fair value $ 29,141
--------
Actuarial present value of benefit obligations:
Vested benefits 19,010
Nonvested benefits 202
--------
Accumulated benefit obligation 19,212
Additional benefits based on projected future salary
increases 7,306
--------
Projected benefit obligation 26,518
--------
Plan assets greater than projected benefit obligation 2,623
Unrecognized net (gains) (1,099)
Unrecognized prior service cost 19
--------
Prepaid pension expense $ 1,543
========
The following table sets forth the year end actuarial assumptions used in the
accounting for the plan:
Discount rate for determining projected benefit obligation 8.25%
Rate of increase in compensation levels 5.75%
Expected long-term rate of return on plan assets 9.50%
Actuarial gains and losses and plan amendments are amortized over the average
remaining service lives of participants expected to receive benefits and
transition amounts are amortized over 13 to 19 years.
NOTE 10 - COMMON STOCK
Greenwich-Caledonian is authorized to issue 1,000,000 (pound)1 par value shares
("A Ordinary Shares") and 36,000,000 $1 par value shares ("B Ordinary Shares").
Each A Ordinary Share has 1.8 votes per share and each B Ordinary Share has 1
vote per share. Dividends or other amounts payable to holders, whether on
liquidation or otherwise, are apportioned so that 1.8 times the amount payable
in respect of each B Ordinary Share is payable in respect of each A Ordinary
Share. All 1,000,000 A Ordinary Shares are issued and outstanding and 22,069,272
B Ordinary Shares are issued and outstanding.
F-41
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Greenwich-Caledonian is a party to various claims, legal actions and complaints
arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a material impact on the financial
condition or cash flows of the company.
Greenwich-Caledonian's existing and anticipated customers include passenger
airlines, air freight and package carriers, industrial and marine users,
government and leasing companies. Economic and other factors may adversely
affect the airline industry, particularly the major passenger airlines. As a
result, certain of these customers may pose credit risks. To date, the company
has not been significantly impacted by these factors, however, management cannot
predict whether these conditions will adversely affect Greenwich-Caledonian's
results of operations in the future.
NOTE 12 - LONG-TERM MAINTENANCE CONTRACTS
The Company is a party to several long-term engine maintenance contracts with
customers for specified engine fleets over specific periods of time. These
contracts, with remaining terms at September 30, 1996 of one to three years, use
long-term contract accounting which requires various estimates to predict the
contract profitability over the life of the contract. Revenues are recognized
upon test acceptance based on rates per hour (power-by-the-hour) applied to each
completed engine's hours flown since last shop visit. Customers are billed
monthly for fleet hours flown during the period. Costs are recognized for
completed engines based on an average gross margin assumption over the life of
the contract.
Estimates used include failure removal rates, productivity changes, overhaul
cost projections and customer and fleet specific variables. Changes to these
estimates and the resulting cumulative contract-to-date catchup adjustments may
result in material changes to profitability in any given time period. The
estimates used represent management's best estimate of expected future contract
results based on available information. Actual results could differ
significantly (positive or negative) from estimates currently used should
operating performance or other factors change.
The balance sheet components associated with these long-term contracts include
deferred receivables, costs, charges and revenues. Deferred receivable is the
contract-to-date cumulative variance between the amounts invoiced at contract
rates and the average rate over the contract's life. Deferred cost is the
cumulative difference between the costs projected to date based on the total
estimated contract profitability and the actual costs incurred to date. This
amount is classified according to the remaining term of the related contract.
Deferred charge (revenue) is the cumulative variance between the fleet hours
flown at the contract rate per hour and the revenue recognized to date.
The following table sets forth the assets (liabilities) related to the long-term
engine maintenance contracts as of September 30, 1996 (in thousands):
Current deferred cost $3,749
Current deferred charge (revenue) (2,310)
F-42
<PAGE>
NOTE 13 - OTHER INFORMATION
Greenwich-Caledonian operates in the aviation industry and reports its
activities as one business segment.
Net sales by geographic area for the period of June 11 to September 30, 1996,
were as follows (in thousands):
Export sales:
North America $30,496
Europe 12,120
Other 14,961
-------
57,577
United Kingdom 8,512
-------
$66,089
=======
Sales to customers that represent 10% or more of Greenwich-Caledonian's sales
for the period of June 11 to September 30, 1996, were as follows:
Continental Airlines 25.1%
Federal Express 11.1%
----
F-43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
AND SHAREHOLDER OF AVIALL LIMITED
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of Aviall
Limited and its subsidiaries (the "Company") at November 30, 1995, and the
results of their operations and their cash flows for the years ended November
30, 1994 and 1995, and for the period from December 1, 1995 to June 10, 1996, in
conformity with United States generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards in the United Kingdom and the United
States which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Chartered Accountants
GLASGOW, SCOTLAND
December 16, 1996
F-44
<PAGE>
<TABLE>
<CAPTION>
AVIALL LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEARS ENDED NOVEMBER PERIOD FROM
30, DECEMBER 1,
--------------------- 1995
1994 1995 TO JUNE 10, 1996
--------- --------- ----------------
<S> <C> <C> <C>
Net sales $ 204,505 $ 217,120 $ 124,448
Cost of sales 178,224 193,736 112,221
--------- --------- ---------
Gross profit 26,281 23,384 12,227
Operating and other expenses:
Selling and administrative expenses 12,099 9,784 6,247
Nonrecurring charges -- -- 2,764
Interest expense 6,080 7,143 3,079
--------- --------- ---------
18,179 16,927 12,090
--------- --------- ---------
Earnings before income taxes 8,102 6,457 137
Provision for income taxes 2,825 2,714 770
--------- --------- ---------
Net earnings (loss) $ 5,277 $ 3,743 ($633)
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
AVIALL LIMITED
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOVEMBER 30,
1995
------------
ASSETS
Current assets:
Cash $ 359
Receivables 63,815
Inventories 74,049
Prepaid expenses and other current assets 1,313
--------
Total current assets 139,536
--------
Property, plant and equipment 51,650
Intangible assets 20,649
--------
Total assets 211,835
--------
Liabilities And Shareholder's Equity
Current liabilities:
Current portion of long-term debt 10,117
Accounts payable 46,198
Accrued expenses 6,866
--------
Total current liabilities 63,181
--------
Long-term debt 7,392
Due to Aviall 39,454
Deferred income taxes 11,886
Shareholder's equity (includes A Ordinary Shares
of(pound) 1.00 par value with shares outstanding
at November 30, 1995 - 1,000,000 and B Ordinary
Shares of $1.00 par value with shares
outstanding at November 30, 1995 - 22,069,272) 89,922
--------
Total liabilities and shareholder's equity $211,835
--------
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
AVIALL LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ---------- -------- --------
At November 30, 1993 $ 23,632 $ 30,399 $ 26,871 $ 80,902
Net earnings -- -- 5,277 5,277
-------- -------- -------- --------
At November 30, 1994 23,632 30,399 32,148 86,179
Net earnings -- -- 3,743 3,743
-------- -------- -------- --------
At November 30, 1995 23,632 30,399 35,891 89,922
Net loss -- -- (633) (633)
-------- -------- -------- --------
At June 10, 1996 $ 23,632 $ 30,399 $ 35,258 $ 89,289
-------- -------- -------- --------
See accompanying notes to consolidated financial statements.
F-47
<PAGE>
<TABLE>
<CAPTION>
AVIALL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED NOVEMBER PERIOD FROM
30, DECEMBER 1,
----------------------- 1995
1994 1995 TO JUNE 10, 1996
-------- --------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 5,277 $ 3,743 ($633)
Nonrecurring charges -- -- 2,764
Depreciation and amortization 5,435 5,634 3,036
Deferred income taxes 240 (52) (991)
Changes in:
Receivables (7,351) (14,746) 11,457
Inventories (7,233) 13,257 821
Accounts payable 5,331 12,228 (17,108)
Accrued expenses 5,231 1,568 2,974
Other, net 181 (661) (1,295)
-------- -------- --------
7,111 20,971 1,025
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (6,821) (8,092) (1,203)
Sales of property, plant and equipment 148 150 109
Other, net 44 (27) --
-------- -------- --------
(6,629) (7,969) (1,094)
-------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in Due to Aviall 5,986 (12,176) 7,906
Net change in overdraft facility (527) 3,224 4,945
Debt repaid (5,041) (5,446) (13,135)
-------- -------- --------
418 (14,398) (284)
-------- -------- --------
Change in cash 900 (1,396) (353)
Cash, beginning of year 855 1,755 359
-------- -------- --------
Cash, end of year 1,042 359 6
-------- -------- --------
Cash paid for interest and income taxes:
Interest 2,740 2,068 1,172
Income taxes $ 596 $ 1,665 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE>
AVIALL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND
Aviall Limited (the "Company") is engaged in the maintenance and overhaul
of turbine engines used primarily in commercial aviation and provides its
services on a worldwide basis. The engine repair operation located in Prestwick,
Scotland is a wholly owned United Kingdom foreign subsidiary of Aviall, Inc.
("Aviall").
Based on a decision by the Aviall Board of Directors on January 24, 1996,
Aviall signed a letter of intent with Greenwich Air Services, Inc. ("GASI") for
the sale of its commercial engine services business which includes the Company.
A definitive agreement was signed on April 19, 1996. The sale transaction was
consummated on June 10, 1996.
NOTE 2 - NONRECURRING CHARGES
In accordance with Accounting Principles Board Opinion No. 30, Aviall
recorded in its consolidated financial statements a "discontinued operations"
charge of $212.5 million as of December 31, 1995 to reflect its estimate of the
loss it incurred upon sale of the discontinued commercial engine services
operations. The Company did not record in its 1995 financial statements any
amounts included in the charge related to the Company since this discontinued
operations treatment was not appropriate at this level. Direct costs estimated
at approximately $3.6 million are expected to be incurred by Aviall on behalf of
the Company. The consolidated financial statements for the period from December
1, 1995 to June 10, 1996 include $2.8 million of such expenses as nonrecurring
charges. Upon completion of the sale, GASI allocated its purchase price in
accordance with Accounting Principles Board Opinion No. 16 and thus established
different bases of certain assets and liabilities than are reflected in these
financial statements.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation. Prior to the
sale, the Company's fiscal year ended on November 30. Subsequent to the sale to
GASI, the Company's fiscal year end was changed to September 30. The
accompanying financial statements are prepared in U.S. dollars. The fair value
of current assets and liabilities approximates carrying value.
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
REVENUE RECOGNITION. Income from engine maintenance services is recognized at
the time of performance test acceptance of engines (the "completed contract"
method). Revenue from long-term fixed-price contracts, such as
"power-by-the-hour" or "flat-rate" contracts, is recognized under the
"percentage-of-completion" method.
INVENTORIES. Inventories are valued at the lower of cost or market. Cost is
determined on the basis of average cost of materials and supplies and actual
cost for labor and overhead included in work-in-process. Provision is made for
estimated excess and obsolete inventories. All inventory available for sale
during the course of the normal business cycle has been included in current
assets.
F-49
<PAGE>
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at cost
and depreciated over the estimated useful lives of the related assets using the
straight-line method. Lives assigned to asset categories are 40 years for
buildings and improvements and 4 to 15 years for machinery, equipment, tooling
and rental engines.
INTANGIBLE ASSETS. Goodwill is reported net of accumulated amortization of $5.9
million as of November 30, 1995. Goodwill represents the excess of the purchase
price over the fair value of the net assets acquired and is amortized using the
straight-line method over forty years.
The Company has reviewed the net realizable value of its goodwill through
an assessment of the estimated future cash flows related to such assets and has
concluded that there is no impairment of the net carrying value.
ENVIRONMENTAL COSTS. A liability for environmental assessments and cleanup is
accrued when it is probable a loss has been incurred and is estimable.
Generally, the timing of these accruals coincides with the identification of an
environmental obligation through the Company's internal procedures or upon
notification from regulatory agencies. The Company used certain chemicals
classified by various agencies as hazardous substances. As a result of Aviall's
decision to sell the Company, certain environmental exit costs are expected to
be incurred by Aviall. An estimate of $2.6 million for these environmental
related exit costs have been reflected in these financial statements for the
period from December 1, 1995 to June 10, 1996 as nonrecurring charges.
FOREIGN EXCHANGE AND FORWARD EXCHANGE CONTRACTS. The Company utilizes the U.S.
dollar as its functional currency. Translation gains and losses are included in
earnings. Aviall entered into forward exchange contracts on behalf of the
Company to hedge certain of its foreign currency commitments including loan
commitments with the European Investment Bank ("EIB") and certain labor costs.
Gains and losses on forward contracts are recognized by the Company concurrently
with the related transaction gains and losses. Total translation and transaction
gains or (losses) included in earnings were $(0.5) million and $1.2 million in
1994 and 1995, respectively, and $1.0 million for the period from December 1,
1995 to June 10, 1996.
INCOME TAXES. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
IMPAIRMENT OF LONG-LIVED ASSETS. In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
effective for fiscal years beginning after December 15, 1995. FASB Statement No.
121 requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. The adoption of this statement is not expected to have a
material effect on the Company's financial position or results of operations.
NOTE 4 - TRANSACTIONS WITH AVIALL
GENERAL AND ADMINISTRATIVE SERVICES. Aviall provided certain corporate general
and administrative services to the Company, including legal, treasury, human
resources and finance, among others. Costs related to these services were
allocated to the Company on a basis that approximated either the proportional
share of the Company's usage of the actual services provided or a representative
share of certain corporate fixed expenses. Management believes these allocations
are reasonable.
F-50
<PAGE>
Total allocated expenses included in "Selling and Administrative Expenses"
in the accompanying Consolidated Statements of Operations were $2.9 million and
$3.7 million in 1994 and 1995, respectively, and $1.7 million for the period
from December 1, 1995 to June 10, 1996.
INTERCOMPANY FINANCING AND INTEREST EXPENSE. "Due to Aviall" reflected in the
Consolidated Balance Sheet represents Aviall's net advances to the Company
resulting from cash and non-cash transfers, intercompany allocations and the
repayment of certain debt. The intercompany advances by Aviall to the Company
are evidenced by a promissory note dated December 7, 1993 maturing on December
31, 2000. The annual interest rate is agreed upon between the parties and was
equal to the quarterly floating London Interbank Offering Rate ("LIBOR") plus
3%. At November 30, 1995, the interest rate was 8.9%. Total intercompany
interest charged by Aviall to the Company in 1994 and 1995 was $3.4 million and
$4.4 million, respectively, and for the period from December 1, 1995 to June 10,
1996 was $1.9 million. The note was prepaid without penalty immediately after
the closing of the transaction described in Note 1.
CORPORATE INSURANCE PROGRAMS. The Company participated in Aviall's combined risk
management programs for property and casualty insurance, including aviation
products liability. The Company was charged $1.4 million and $1.6 million in
1994 and 1995, respectively, and $0.8 million for the period from December 1,
1995 to June 10, 1996, which represented an allocation of third party premiums.
GUARANTEES OF DEBT BY AVIALL. The Company's debt with the EIB was supported by
letters of credit issued under Aviall's credit facility. In addition, the
Company's (pound)4.0 million unsecured bank overdraft facility was guaranteed by
Aviall. The letters of credit and the guarantee were cancelled upon closing of
the transaction described in Note 1.
SECURITY FOR AVIALL DEBT. On March 25, 1996, Aviall amended its credit
facilities to provide for a maturity date of April 30, 1997. The amended credit
facilities contain various covenants, including financial covenants, limitations
on debt and limitations on capital expenditures. In the absence of obtaining the
amended agreement, Aviall would have been in default of the financial covenants
of its previously outstanding credit facilities. Aviall's amended credit
facilities were secured in part by a pledge of 65% of the stock of the Company.
SALE OF BATTERY SHOP. As of May 31, 1996, the net assets of a battery repair
shop located in London, England were sold to a subsidiary of Aviall for $0.8
million.
NOTE 5 - ACCOUNTS RECEIVABLE ALLOWANCES
The Company provides services to a wide variety of aviation-related
businesses, including several commercial airlines. Management believes that
sufficient allowances for doubtful accounts have been provided as of November
30, 1995. In addition, a substantial portion of the Company's accounts
receivable balance is covered by credit insurance. The following is a summary of
the accounts receivable allowances (in thousands):
NOVEMBER 30, JUNE 10,
----------------
1994 1995 1996
----- ----- --------
Balance at beginning of period $ 677 $ 644 $ 252
Provision for doubtful accounts 125 168 (138)
Write-off of doubtful accounts, net of
recoveries (158) (560) 8
----- ----- -----
Balance at end of period $ 644 $ 252 $ 122
----- ----- -----
F-51
<PAGE>
NOTE 6 - INVENTORIES NOVEMBER 30,
1995
(IN THOUSANDS) ------------
Repair parts $ 64,353
Work-in-process 12,521
Distribution parts 488
--------
77,362
Reserves for excess and obsolete inventories (3,313)
--------
$ 74,049
--------
The following is a summary of the reserve for excess and obsolete inventories
(in thousands):
NOVEMBER 30, JUNE 10,
-------------------
1994 1995 1996
------- ------- --------
Balance at beginning of period $ 2,014 $ 3,220 $ 3,313
Provision for excess and obsolete inventory 1,557 423 914
Write-off of excess and obsolete inventory (351) (330) (4)
------- ------- -------
Balance at end of period $ 3,220 $ 3,313 $ 4,223
------- ------- -------
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
NOVEMBER 30,
(IN THOUSANDS) 1995
------------
Land $ 461
Buildings and improvements 18,241
Machinery and equipment 49,452
Rental engines 11,320
Capital projects in progress 4,202
--------
83,676
Accumulated depreciation (32,026)
--------
$ 51,650
--------
NOTE 8 - ACCRUED EXPENSES
NOVEMBER 30,
(IN THOUSANDS) 1995
------------
Salaries, wages and benefits $1,187
Current income taxes 1,516
Other 4,163
------
$6,866
------
F-52
<PAGE>
NOTE 9 - DEBT
The Company's financing was provided primarily by Aviall's credit
facilities. In addition, the Company had borrowings directly from financial
institutions in the United Kingdom. The Company's credit facilities consisted of
(1) two ten-year amortizing unsecured term loans with the EIB payable
semiannually through 1996 ("Loans A and B"); (2) a ten-year amortizing unsecured
term loan with the EIB payable semiannually through 1998 ("Loan C"); and (3) a
(pound)4.0 million unsecured overdraft facility with a bank payable on demand
(the "Overdraft Facility"). The EIB loans could be prepaid with penalties based
on interest rates prevailing as of the prepayment date. The interest rates on
Loan A and Loan B were 7% and 7.5%, respectively, and the interest rate on Loan
C was 9.3%. Borrowings under the Overdraft Facility bear interest at LIBOR plus
1.625%.
NOVEMBER 30,
(IN THOUSANDS) 1995
------------
Loans A and B $ 2,721
Loan C 10,414
Overdraft Facility and other outstanding checks 4,374
--------
17,509
Less current portion (10,117)
-------
$ 7,392
--------
The EIB loans were repaid by Aviall prior to the closing of the transaction
described in Note 1. At November 30, 1995, the estimated fair value of the
Company's debt approximated the outstanding net book value.
NOTE 10 - INCOME TAXES
YEARS ENDED
NOVEMBER 30, PERIOD FROM
-------------------- DECEMBER 1, 1995
(IN THOUSANDS) 1994 1995 TO JUNE 10, 1996
------- ------- -----------------
Current tax expense $ 2,585 $ 2,766 $ 1,761
Deferred tax expense (benefit) 240 (52) (991)
------- ------- -------
Provision for income taxes $ 2,825 $ 2,714 $ 770
------- ------- -------
A reconciliation of expected statutory tax expense using the statutory tax
rate of 33% to actual tax expense follows (in thousands):
YEARS ENDED
NOVEMBER 30, PERIOD FROM
-------------------- DECEMBER 1, 1995
1994 1995 TO JUNE 10, 1996
------- ------- ----------------
Expected statutory tax expense $ 2,674 $ 2,131 $ 45
Amortization of goodwill 218 218 137
Meals and entertainment 97 116 99
Tax settlement through 1993 with
Inland Revenue -- -- 222
Miscellaneous items, net (164) 249 267
------- ------- -------
Actual tax expense $ 2,825 $ 2,714 $ 770
------- ------- -------
F-53
<PAGE>
At November 30, 1995, substantially all of the deferred tax liability
arises from temporary differences related to property and equipment basis
differences.
The Company's income tax returns are subject to review by Inland Revenue.
Returns through 1993 have been settled and the 1994 and 1995 returns are
currently under discussion.
NOTE 11 - PENSION PLANS
The Company maintains a defined benefit pension plan. The benefits for this
plan are based upon a final-pay benefit formula. The funding policy for the plan
is to contribute such amounts as are necessary on an actuarial basis to provide
the plan with sufficient assets to meet the benefits payable to plan
participants. The plan's assets are primarily invested in equities and
interest-bearing accounts.
The following tables reflect the components of net pension expense and the
funded status for the plan (in thousands):
Net Pension Expense YEARS ENDED
NOVEMBER 30, PERIOD FROM
------------------ DECEMBER 1, 1995
1994 1995 TO JUNE 10, 1996
------- ------- ----------------
Service cost - benefits earned during
the year $ 2,332 $ 1,203 $ 867
Interest cost on projected benefit
obligation 1,344 1,585 978
Actual return on plan assets 390 (2,993) (1,886)
Net amortization and deferral (3,005) 1,131 666
------- ------- -------
Net pension expense $ 1,061 926 625
------- ------- -------
FUNDED STATUS NOVEMBER 30,
1995
------------
Plan assets at fair value $23,607
-------
Actuarial present value of benefit obligations:
Vested benefits 16,819
Nonvested benefits 178
-------
Accumulated benefit obligation 16,997
Additional benefits based on projected future salary increases 6,464
-------
Projected benefit obligation 23,461
-------
Plan assets greater than projected benefit obligation 146
Unrecognized net losses 876
Unrecognized prior service cost 20
-------
Prepaid pension expense $ 1,042
-------
The following table sets forth the year end actuarial assumptions used in
the accounting for the plan:
NOVEMBER 30,
1995
------------
Discount rate for determining projected benefit obligation 8.0%
Rate of increase in compensation levels 5.5%
Expected long-term rate of return on plan assets 9.5%
F-54
<PAGE>
Actuarial gains and losses and plan amendments are amortized over the
average remaining service lives of active members expected to receive benefits
and transition amounts are amortized over 19 years.
NOTE 12 - COMMON STOCK
The Company is authorized to issue 1,000,000 (pound)1 par value shares ("A
Ordinary Shares") and 36,000,000 $1 par value shares ("B Ordinary Shares"). Each
A Ordinary Share has 1.8 votes per share and each B Ordinary Share has 1 vote
per share. Dividends or other amounts payable to holders, whether on liquidation
or otherwise, are apportioned so that 1.8 times the amount payable in respect of
each B Ordinary Share is payable in respect of each A Ordinary Share. All
1,000,000 A Ordinary Shares are issued and outstanding and 22,069,272 B Ordinary
Shares are issued and outstanding.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a material impact on the financial
condition, results of operations or cash flows of the Company.
NOTE 14 - OTHER INFORMATION
The Company operates in the aviation industry and reports its activities as
one business segment. For the years ended November 30, 1994 and 1995 and for the
period from December 1, 1995 to June 10, 1996, sales to Continental Airlines
amounted to 34%, 24% and 18%, respectively, of total net sales and sales to
Federal Express amounted to 19%, 15% and 22%, respectively, of total net sales.
Net sales by geographic area were as follows (in thousands):
YEARS ENDED
NOVEMBER 30, PERIOD FROM
----------------------- DECEMBER 1, 1995
1994 1995 TO JUNE 10, 1996
-------- -------- ----------------
Export sales:
North America $125,668 $111,889 $ 64,589
Europe 15,546 23,620 17,216
Other 32,376 43,942 31,461
-------- -------- --------
173,590 179,451 113,266
-------- -------- --------
United Kingdom 30,915 37,669 11,182
-------- -------- --------
$204,505 $217,120 $124,448
-------- -------- --------
F-55
