<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
--------------- ----------------
Commission File Number 33-56532
EVERGREEN INTERNATIONAL AVIATION, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-0729079
---------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3850 Three Mile Lane
McMinnville, Oregon 97128
-------------------------
(Address of principal executive offices)
(503) 472-9361
---------------
(Registrant's telephone number, including area code)
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
----- -----
The number of shares outstanding of Registrant's Common Stock at July 3, 1996
was 5,580,110.
1
<PAGE>
TABLE OF CONTENTS
Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - At February 29, 1996 and
May 31, 1996. 3-4
Consolidated Statements of Earnings (Loss) - For the three
months ended May 31, 1995 and 1996 5
Consolidated Statements of Cash Flows - For the three
months ended May 31, 1995 and 1996 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 13-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 3. Defaults upon Senior Securities 19
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE>
PART I-FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
EVERGREEN INTERNATIONAL AVIATION, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS FEBRUARY 29, MAY 31,
1996 1996
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,559 $ 2,241
Accounts receivable, less allowance for
doubtful accounts of $3,754 and $2,583
Trade 35,687 26,481
Other 3,982 3,767
Inventories 3,306 3,717
Prepaid expenses and other assets 2,268 3,282
Receivables from affiliated company 6,186 8,272
Deferred income tax asset 3,173 3,173
----------- ------------
Total current assets 62,161 50,933
----------- ------------
PROPERTY AND EQUIPMENT:
Flight equipment 661,738 661,939
Other property and equipment 94,232 96,125
----------- ------------
755,970 758,064
Less accumulated depreciation 243,799 249,762
----------- ------------
512,171 508,302
----------- ------------
OTHER ASSETS (Notes receivable from affiliated
companies of $1,036 and $1,139; Investment in an
affiliated company of $2,960 and $2,971) 43,155 40,731
----------- ------------
TOTAL ASSETS $ 617,487 $ 599,966
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY FEBRUARY 29, MAY 31,
1996 1996
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term notes payable $ 1,826 $ 1,354
Accounts payable (Accounts payable to affiliated
companies of $15,213 and $14,411) 48,789 44,331
Accrued liabilities 19,188 18,193
Accrued interest (Interest due to affiliated
companies of $23 at February 29, 1996) 54,864 60,787
Income tax payable 2,217 654
Current portion of long-term debt (Note
payable to affiliated company of $542 and $483) 4,840 13,440
Long-term debt in default (Note 5) 231,390 176,861
Senior notes in default 125,000 125,000
----------- -----------
Total current liabilities 488,114 440,620
LONG-TERM DEBT, less current portion 6,664 42,133
Deferred rentals payable to subsidiary companies and other 4,217 4,534
DEFERRED INCOME TAXES 35,862 31,356
----------- -----------
Total liabilities 534,857 518,643
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 6,000,000 shares
authorized; 5,580,110 shares issued and outstanding
21,004 21,004
Retained earnings (Note 6) 61,626 60,319
----------- -----------
Total stockholders' equity 82,630 81,323
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 617,487 $ 599,966
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
------------------------------
1995 1996
---------- ----------
<S> <C> <C>
OPERATING REVENUES:
Flight $ 59,429 $ 55,601
Aircraft leasing 7,338 4,223
Sales of aircraft, parts and other property and
equipment 39,245 3,372
Support services (Revenues from affiliated
company of $30 and $24) 16,198 13,782
---------- ----------
OPERATING REVENUES 122,210 76,978
---------- ----------
OPERATING EXPENSES:
Flight costs 9,599 7,336
Fuel 10,568 8,856
Maintenance (Expenses from an affiliated company of
$382 during the three months ended May 31, 1996) 16,209 12,741
Aircraft and equipment (Rentals from
affiliated companies of $5,720 and $4,877) 14,200 13,005
Cost of sales of aircraft, parts and other property
and equipment 21,091 2,252
Selling, general and administrative 9,494 9,890
Other (Expenses from affiliated companies
of $243 and $213) 18,015 12,345
---------- ----------
OPERATING EXPENSES 99,176 66,425
---------- ----------
INCOME FROM OPERATIONS 23,034 10,553
NON-OPERATING EXPENSES:
Interest expense (Interest income from affiliated
companies of ($162) and ($184)) 14,185 11,983
Foreign currency exchange loss 1,229 100
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 7,620 (1,530)
INCOME TAX EXPENSE (BENEFIT) 2,880 (596)
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 4,740 (934)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt (Net of applicable
income tax benefit of $243) (382) -
---------- ----------
NET INCOME (LOSS) $ 5,122 $ (934)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,122 $ (934)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 7,174 7,220
Amortization 10,950 7,309
Increase (decrease) in deferred income taxes 2,865 (6,235)
Gain on sale of property and equipment (18,154) (1,120)
Extraordinary item (382) -
Changes in items affecting operations:
Accounts receivable 1,890 9,421
Inventories, prepaid expenses, and
receivables from affiliated companies 163 (3,511)
Accounts payable and accrued liabilities 676 (1,658)
----------- -----------
Net cash provided by operating activities 10,304 10,492
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, and overhauls (8,799) (8,982)
Proceeds from disposition of property and equipment 34,304 2,147
Notes receivable, deposits and other assets 145 2,167
----------- -----------
Net cash provided (used) by investing activities 25,650 (4,668)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from operating loans and short-term debt 75,988 73,480
Payments on long-term debt (31,646) (7,596)
Payments on operating loans and short-term debt (79,487) (77,026)
----------- -----------
Net cash used in financing activities (35,145) (11,142)
----------- -----------
Net increase (decrease) in cash and cash equivalents 809 (5,318)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD
584 7,559
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 1,393 $ 2,241
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
(In Thousands)
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
THREE MONTHS ENDED MAY 31, 1996:
A Guarantor Subsidiary converted accrued interest of $210 into long-term debt.
A Guarantor Subsidiary purchased engine and airframe overhauls under vendor
financing arrangements totaling $4,046.
A Guarantor Subsidiary sold assets in exchange for $1,225 in trade credit
against vendor payables.
THREE MONTHS ENDED MAY 31, 1995:
Proceeds of $4,261 from the sale of a DC8 aircraft by a Guarantor Subsidiary
are included in other assets at May 31, 1995.
A Guarantor Subsidiary sold assets in exchange for parts and overhaul purchases
totaling $680.
A Guarantor Subsidiary purchased $1,194 in engine overhauls under vendor credit
arrangements.
In May 1995, a Guarantor Subsidiary received $616 in debt forgiveness in
connection with a long-term debt refinancing arrangement.
See accompanying notes to consolidated financial statements.
7
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
(1) CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The consolidated interim financial statements included in this report
have been prepared by the Company and are unaudited. In the opinion of the
Company, all adjustments necessary for a fair presentation are reflected in
the interim financial statements. Such adjustments are of a normal and
recurring nature. This financial data should be read in conjunction with
the audited financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended February 29, 1996. Results
for the interim period presented are not necessarily indicative of results
for the year.
The Company's 13 1/2% Senior Notes due 1999 to 2002 (the "Senior
Notes") are jointly and severally guaranteed on a senior subordinated basis
by Evergreen International Airlines, Inc., Evergreen Helicopters, Inc. and
Evergreen Air Center, Inc. (the "Guarantor Subsidiaries"), each of which is
a wholly owned-subsidiary of the Company.
(2) FOREIGN CURRENCY TRANSACTIONS
Gains and losses resulting from foreign currency transactions
(transactions denominated in a currency other than the U.S. dollar) are
included in net income as a non-operating income or expense.
(3) INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax bases.
(4) EXTRAORDINARY ITEM
During fiscal 1996, one of the Guarantor Subsidiaries entered into a
refinancing agreement collateralized by rotor-wing aircraft which resulted
in the recognition of $382 in extraordinary gains from extinguishment of
debt, net of applicable income tax benefit of $243.
(5) LONG-TERM DEBT AND SENIOR NOTES
In February 1994, the Company withheld payments to certain creditors
of the Guarantor Subsidiaries and holders of the Company's Senior Notes and
commenced negotiations to restructure these agreements. Through May 31,
1996, the Company has restructured its obligations with B747 creditors by
reducing current amounts due through the extension of maturity dates and/or
deferral or reduction of periodic payments. The Company is continuing
negotiations with the holders of the Senior Notes and other lenders in an
effort to complete a restructuring of such obligations.
8
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
The aggregate principal outstanding of long-term debt and Senior Notes
in default and classified as a current liability because of such defaults
in the accompanying consolidated balance sheets at May 31, 1996 was
$301,681. The aggregate outstanding principal amount of Guarantor
Subsidiaries' debt in default classified as a current liability in the
condensed and combined consolidated balance sheets at May 31, 1996 was
$143,757 (see Note 7). At May 31, 1996, accrued and unpaid interest
related to the Senior Notes was $56,463.
As a result of the failure to meet debt service payment requirements
on its Senior Notes, the Company continues to be in violation of covenants
and non-payment provisions of its Senior Notes, and is in violation of
cross default and financial and other covenant provisions of certain other
financing agreements, primarily of the Guarantor Subsidiaries. These
violations would permit effected creditors to, among other things,
accelerate the due date of their debt. None of the effected creditors have
exercised their contractual remedies to date other than a holder of 44% of
the Senior Notes who has filed suit against the Company (see "Part II.
Other Information: Item 1. Legal Proceedings").
(6) ASSETS PURCHASED FROM AN AFFILIATE
During the first quarter of fiscal 1997, the Company purchased
aircraft related assets from an affiliate in exchange for cash or other
consideration. The difference between the consideration given by the
Company and the carrying value of the assets purchased was $373 and is
represented as a reduction to retained earnings at May 31, 1996.
9
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
(7) FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES
The Senior Notes are guaranteed by the Guarantor Subsidiaries. The
following presents condensed and combined, consolidated financial
information for the Guarantor Subsidiaries at February 29, 1996 and May 31,
1996 and for the fiscal quarters ended May 31, 1995 and 1996:
Balance Sheets
<TABLE>
<CAPTION>
FEBRUARY 29, MAY 31,
1996 1996
--------- ---------
<S> <C> <C>
Current assets $ 46,294 $ 32,763
Property and equipment, net 475,420 472,045
Other assets 33,415 33,002
--------- ---------
Total assets $ 557,129 $ 537,810
--------- ---------
--------- ---------
Current liabilities:
Notes payable $ 1,826 $ 1,354
Accounts payable, accrued liabilities and
accrued interest 64,056 58,552
Current portion of long-term debt 2,970 9,440
Long-term debt in default 192,673 143,757
--------- ---------
Total current liabilities 261,525 213,103
--------- ---------
Noncurrent liabilities 45,612 79,410
Intercompany payables 215,018 212,443
--------- ---------
Total noncurrent liabilities 260,630 291,853
--------- ---------
Stockholders' equity 34,974 32,854
--------- ---------
Total liabilities and stockholders' equity $ 557,129 $ 537,810
--------- ---------
--------- ---------
</TABLE>
10
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands)
(7) FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES (CONTINUED)
Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 31,
------------------------
1995 1996
--------- ----------
<S> <C> <C>
Operating revenues:
Flight $59,429 $55,601
Aircraft leasing 7,338 4,223
Sales of aircraft, parts and other
property and equipment 39,239 2,977
Support services 7,934 3,985
--------- ----------
Operating revenues 113,940 66,786
--------- ----------
Operating expenses:
Flight costs 9,599 7,336
Fuel 10,351 8,456
Maintenance 15,970 12,388
Aircraft and equipment 14,200 13,005
Cost of sales of aircraft, parts and
other property and equipment 21,065 2,115
Selling, general and administrative 7,419 6,929
Other 14,694 7,472
--------- ----------
Operating expenses 93,298 57,701
--------- ----------
Income from operations 20,642 9,085
Nonoperating expenses, primarily interest 14,211 11,965
--------- ----------
Income (loss) before taxes 6,431 (2,880)
Income tax expense (benefit) 2,428 (1,094)
--------- ----------
Net income (loss) $4,003 ($1,786)
--------- ----------
--------- ----------
</TABLE>
11
<PAGE>
EVERGREEN INTERNATIONAL AVIATION, INC.
AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands)
(7) FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES (CONTINUED)
Statements of Cash Flows
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
-----------------------------
1995 1996
--------- ----------
<S> <C> <C>
Net cash provided by operating activities $7,710 14,986
--------- ----------
Cash flows from investing activities:
Purchases of property, equipment
and overhauls (8,670) (8,265)
Proceeds from disposal of property and
equipment 34,298 1,752
Other 327 2,159
--------- ----------
Net cash provided (used) by investing activities 25,955 (4,354)
--------- ----------
Cash flows from financing activities:
Proceeds from operating loans and debt 2,219 200
Payments on operating loans and debt (35,661) (15,835)
--------- ----------
Net cash used in financing activities (33,442) (15,635)
--------- ----------
Net increase (decrease) in cash and cash equivalents 223 (5,003)
Cash and cash equivalents, at beginning of period (33) 6,616
--------- ----------
Cash and cash equivalents, at end of period $190 $1,613
--------- ----------
--------- ----------
</TABLE>
12
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Management's Discussion and Analysis of Results of Operations and Financial
Condition, presented below, relates to the operations of the Company as
reflected in its consolidated financial statements. Emphasis in this discussion
is placed upon contract flight operations, and sales of aircraft, components and
parts, as such activities generate the major portion of the Company's total
consolidated revenues. Support services primarily includes ground handling and
maintenance services provided by the Company's other operating subsidiaries.
GENERAL
The Company's largest operating subsidiary, Evergreen International
Airlines, Inc. ("EIA"), is a contract carrier that primarily charges customers
based on a block hour basis rather than a per seat or per pound basis as do
scheduled passenger carriers or overnight express carriers. A "block hour" is
defined as the elapsed time computed from the moment the aircraft moves to the
time it comes to rest at its destination. Fluctuations in flight revenues are
not necessarily indicative of true change in operating activities because of
shifts in the mix between "all-in" services and wet leases or ACMI services from
year-to-year. For all-in charters, EIA is responsible for the full range of
operating expenses, including fuel, and receives a correspondingly higher price
per block hour flown. For wet leases and contract charters, EIA typically
provides only aircraft, crew, maintenance and insurance ("ACMI"). The customer
is responsible for all other operating expenses, such as fuel, ground handling
and crew accommodations. As a result, wet lease and other ACMI contract
charters typically have lower block hour revenue rates. For this reason, it is
important to analyze the type of block hours flown in connection with changes in
actual revenues earned. EIA, as a matter of policy, includes fuel cost
adjustment mechanisms in certain all-in charters, including U.S. military
charters, thus minimizing the risk of fuel price volatility to EIA. In
addition, the Company also provides common carriage activity as well as
operating or "dry" lease activity.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 1996 TO THE THREE MONTHS ENDED
MAY 31, 1995
OPERATING REVENUES. Total operating revenue during the three months ended
May 31, 1996 declined by $45.2 million, or 37.0%, when compared to the three
month fiscal period ended May 31, 1995. The components of operating revenue are
flight revenue; aircraft leasing; sales of aircraft, parts and other property
and equipment; and support services.
Flight revenues declined by $3.8 million when comparing the three months
ended May 31, 1996 with the corresponding period of the prior year. The decline
is primarily attributed to the discontinuation of United States-China common
carriage activity and passenger service activity in August 1995 and a reduction
in aircraft capacity caused by the removal from service of three B747 aircraft
in January 1996 pending the approval of the method of compliance with an FAA
airworthiness directive (see "Liquidity and Capital Resources"). These declines
were partially offset by an increase in United States Air Force, Air Mobility
Command ("AMC") activity, the addition of contract freighter service between the
United States and the South Pacific and increased adhoc activity. In addition,
Evergreen Helicopters, Inc. ("EHI") realized revenue increases during the first
quarter of fiscal 1997 when compared to first quarter fiscal 1996 results,
primarily due to firefighting and helilogging activity.
13
<PAGE>
During the first quarter of fiscal 1997, block hours operated by EIA
decreased by 1,376 hours when compared to block hour totals recorded during the
first quarter of fiscal 1996. The block hour decline is due primarily to the
removal from service of three B747 aircraft in January 1996 and the sale of two
DC8 aircraft in March 1995. The following table details block hour totals by
aircraft type for the fiscal quarters ended May 31, 1995 and 1996:
- -------------------------------------------------------------------------------
BLOCK HOURS: THREE MONTHS ENDED MAY 31,
-------------------------------------
AIRCRAFT TYPE 1995 1996 NET CHANGE
- -------------------------------------------------------------------------------
B747 6,359 5,780 (579)
DC8 560 0 (560)
DC9 2,096 1,859 (237)
- -------------------------------------------------------------------------------
Totals 9,015 7,639 (1,376)
- -------------------------------------------------------------------------------
Aircraft leasing revenue declined by $3.1 million during the first quarter
of fiscal 1997 when compared to the corresponding period of the prior year,
primarily due to the return of two B747 aircraft from lease in June 1995 and
March 1996. The Company employed four B747 aircraft under dry leases during the
entire first quarter of fiscal 1996, compared to two B747 aircraft during the
first quarter of fiscal 1997. The Company anticipates the return to service of
the two remaining B747 aircraft under lease in August 1996 and January 1997.
Aircraft leasing revenues include maintenance reserves for scheduled engine and
airframe overhauls and inspections.
The composition of flight revenue during the first quarter of fiscal 1997,
when compared to the corresponding prior year period, indicates an increase in
ACMI block hours and a decline in all-in hours. The primary reason for the
decline in all-in hours is the discontinuance of United States-China common
carriage activity resulting from the sale of EIA's U.S.-China all cargo
operating authority in August 1995. All-in DC8 and B747 activity declined by
560 hours and 394 hours, respectively, when comparing first quarter fiscal 1997
block hour totals with those recorded during the first quarter of fiscal 1996.
In aggregate, the Company operated 4,522 all-in hours (59.2%) and 3,117 ACMI
hours (40.8%) during the three months ended May 31, 1996, compared to 5,713 all-
in hours (63.4%) and 3,302 ACMI hours (36.6%) operated during the same period of
the prior fiscal year.
Revenues from the sale of aircraft, parts and other property and equipment
declined by $35.9 million when comparing the first three months of fiscal 1997
and 1996. The decline is primarily attributable to the sale of two DC8 aircraft
in March 1995 for a total of $38.0 million.
Support services revenue during the three months ended May 31, 1996
declined by approximately $2.4 million when compared to the three months ended
May 31, 1995, primarily due to a decline in third party revenue at Evergreen Air
Center, Inc. ("EAC") during fiscal 1997.
14
<PAGE>
OPERATING EXPENSES. Operating expenses, exclusive of cost of sales of
aircraft, parts and other property and equipment declined by $13.9 million, or
17.9%. Total operating expenses declined by $32.8 million when comparing the
first quarter of fiscal 1997 to the first quarter of fiscal 1996. Categories of
operating expense include flight costs, fuel, maintenance, aircraft and
equipment, cost of sales of aircraft, parts and other property and equipment,
selling, general and administrative and other. Flight costs declined by $2.3
million during the three months ended May 31, 1996 when compared to prior year
first quarter totals, primarily due to a reduction in flight and cabin crew
costs and passenger catering resulting from the effect of the removal from
service of three B747 aircraft in January 1996 and the conversion of the
Company's remaining passenger aircraft to freighter configuration in August
1995. Despite an increase in average per gallon fuel prices, fuel costs
declined by $1.7 million when comparing the first three months of fiscal 1997
and 1996, primarily due to the reduction in all-in activity resulting from the
discontinuation of China common carriage activity in August 1995 and a greater
composition of ACMI services. Maintenance costs declined by $3.5 million during
the first quarter of fiscal 1997 when compared to the corresponding period of
the previous year, due primarily to reduced overhaul amortization expense and
line maintenance expense resulting from the removal from service of three B747
aircraft in January 1996. Aircraft and equipment costs, which represent
primarily aircraft rentals and depreciation, declined by $1.2 million during the
three months ended May 31, 1996 when compared to the corresponding period of
fiscal 1996 primarily due to renegotiated lease arrangements with affiliated
companies for B747 and DC9 aircraft. Cost of sales of aircraft, parts and other
property and equipment declined by $18.8 million during the first quarter of
fiscal 1997 when compared to fiscal 1996 first quarter totals, primarily due to
the book value of two DC8 aircraft sold in March 1995. Selling, general and
administrative costs remained relatively constant while other costs declined by
$5.7 million during the first quarter of fiscal year 1997 when compared to the
corresponding period of fiscal 1996, primarily due to a decline in third party
maintenance services at EAC and a reduction in aircraft and cargo ground
handling resulting from the decline in all-in activity.
NON-OPERATING EXPENSES. During the first quarter ended May 31, 1996, non-
operating expenses, which represents primarily interest, declined by
approximately $3.3 million when compared to the first quarter of the previous
fiscal year. This decline is primarily attributable to a reduction in interest
expense resulting from a reduction in interest bearing liabilities, primarily
long-term debt, during fiscal 1996. In addition, a reduction in foreign
accounts payable and improvement in the U.S. dollar relative to the Yen led to a
$1.0 million improvement in foreign currency exchange loss during the current
period when compared to the first quarter of fiscal 1996. These reductions were
partially offset by additional penalty interest recognized on the Senior Notes
during the first three months of fiscal 1997.
NET INCOME (LOSS). During the quarter ended May 31, 1996, net loss totaled
$.9 million, compared to $5.7 million in net income generated during the first
quarter of fiscal 1996. The primary reason for the decline in income when
comparing the two fiscal periods, is the sale of two DC8 aircraft in March 1995
which generated before tax income during the first quarter of fiscal 1996 of
approximately $18.0 million. Also contributing to the decline was the removal
from service of three B747 aircraft in January 1996 which adversely impacted
earnings, and an increase in penalty interest recognized on the Senior Notes
during the first quarter of fiscal 1997. These declines were partially offset
by a reduction in amortization expense and line maintenance expense and a
reduction in interest expense during the first quarter of fiscal 1997.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal internal sources of liquidity are cash flow from
operating activities and proceeds from the sales of assets. During the three
months ended May 31, 1996 cash flow generated from operating activities totaled
$10.5 million. The Company continued its efforts to partially satisfy
obligations through barter and trade arrangements and negotiate favorable credit
terms with certain of its trade and overhaul vendors which reduced cash
requirements during the quarter. These efforts reduced cash requirements by
approximately $5.3 million for capital and overhaul expenditures during the
three months ended May 31, 1996.
Historically, the Company has been successful in supplementing cash from
operations by generating additional liquidity from refinancing of aircraft and
aircraft related assets. Unlike many air carriers, the Company owns most of its
operating equipment, and has relied upon the use of term debt, rather than
leasing, to finance the acquisitions. However, due to the current status of the
Company's restructuring efforts, no assurance can be given that the Company will
be able to obtain new financing on commercially reasonable terms.
Operating capital is supplemented by a lending facility which commenced
in January 1992 wherein EIA, EHI, and EAGLE borrow jointly under an operating
loan agreement which next matures on August 23, 1996. Maturity date of the
agreement will automatically extend for 60 day periods until April 1997
unless the Company is notified to the contrary prior to the applicable
maturity date. There can be no assurance that the lender will continue to
extend the maturity date. This operating loan facility is collateralized by
substantially all of the Company's assets with the exception of aircraft,
engines and real property. The maximum credit under the agreement is $45.0
million, subject to inventory and accounts receivable levels and other
requirements. Actual availability at May 31, 1996 was $31.3 million of which
$29.6 million was outstanding. The line bears interest at prime plus 2.25%
per annum.
At May 31, 1996, the Company had consolidated long-term debt of $357.4
million, including the $125 million in Senior Notes and $29.6 million
outstanding under its operating loan. In addition, the Company had accrued
interest on the Senior Notes at May 31, 1996 of $56.5 million, including $8.8
million in penalty interest. Long-term debt and Senior Note obligations in
default at May 31, 1996 totaled $301.9 million and are classified in the current
liabilities section of the Company's consolidated balance sheet. These amounts
include $141.5 million in long-term debt in default and carried as a current
liability due solely to technical violations (i.e. cross defaults of parent
guarantor) of financing agreements unrelated to B747 and Senior Note obligations
being restructured. The Company intends to normalize the presentation of its
long-term debt as restructuring of the various agreements is completed.
The Senior Notes are primary obligations of the Company and are jointly and
severally guaranteed on a senior subordinated basis by the Guarantor
Subsidiaries. The rights of the holders of the Senior Notes under the
subsidiary guarantee are severally subordinated to all existing and future
Senior Indebtedness (as defined in the Indenture) of the Guarantor Subsidiaries.
Such Senior Indebtedness of EIA, EHI and EAC was $185.3 million, $6.6 million
and $.2 million, respectively, as of May 31, 1996, substantially all of which is
collateralized by the assets of such Guarantor Subsidiaries. Consolidated
Senior Indebtedness of the Company, including the Guarantor Subsidiaries, as of
May 31, 1996 totaled $226.8 million.
16
<PAGE>
Certain debt instruments to which EIA, EHI and EAC (the Guarantor
Subsidiaries) are parties include limitations concerning the ability of the
Guarantor Subsidiaries to pay dividends, make loans and advances or make other
distributions. In each case, however, these restrictions are subject to the
terms of the Indenture which, subject to certain exceptions, prohibits the
Company and any of its subsidiaries from permitting to exist any consensual
encumbrance, restriction or limitation on the ability of any Company subsidiary
to pay dividends, or make other distributions or loans and advances to the
Company. These provisions in the indenture do not permit the existence of any
restriction on the ability of Company subsidiaries to pay dividends or make
loans or advances in an amount sufficient to make payments of principal and
interest and other mandatory payments on the Senior Notes other than at such
time as such subsidiary is prohibited from making payments in respect of its
guarantee of the Senior Notes.
In February 1994, the Company withheld principal and interest payments on
certain of its long-term debt obligations and Senior Notes. The long-term debt
effected was primarily collateralized by B747 aircraft. In addition, the
Company withheld payments due to affiliated companies for leased aircraft and
equipment. None of the affected long-term debt creditors have exercised the
remedies entitled to them under their respective agreements. No principal or
interest payments have been made to the holders of the Senior Notes since August
1993. In April 1996, a 44% holder of the Senior Notes notified the Company it
had accelerated the principal and accrued and unpaid interest on the Senior
Notes. On April 25, 1996, the holder filed suit against the Company for payment
of principal and interest totaling approximately $78 million. On May 28, 1996
the holder filed a motion for summary judgment on approximately $22 million
of the interest portion of its claim. The Company has responded to the
complaint and to the motion for summary judgment and a hearing is scheduled for
July 3, 1996 with respect to the motion for summary judgment (see "Part II:
Item 1, Legal Proceedings"). The Company is continuing its efforts to reach a
consensual resolution with all of the holders of the Senior Notes (see "Part II:
Item 1. Legal Proceedings"). No assurances can be given that the Company will
be able to successfully renegotiate the remainder of its long-term debt and
leases or the Senior Notes.
If the Company is unable to successfully restructure each of its debt and
Senior Note instruments, the holder of any obligation remaining in default could
exercise remedies available to such holder, including, in many cases,
acceleration of the entire principal amount of the obligation. Under such
circumstances, the Company would be unlikely to have the liquidity to pay the
associated obligation, and could face the loss of use of any asset
collateralizing the obligation or of other assets attached to satisfy a
judgment. Under such circumstances, or other circumstances including the non-
extension of the maturity date of its operating loan facility, where actions
by its creditors impair the Company's continuing ability to operate and serve
its customers, the Company could choose to seek protection from its creditors
under applicable laws.
EIA is required to perform certain maintenance inspections and structural
upgrades and modifications to designated B747 and DC9 aircraft. All of EIA's
B747 aircraft are subject to Section 41 modification: five aircraft have
completed the modification; during fiscal 1997 two aircraft are scheduled for
completion, one of which is partially completed, and the remaining aircraft will
be scheduled, thereafter, as required. The Company anticipates the cost to be
approximately $1.1 million per aircraft and believes that adequate capital will
be available for these projects. In addition, the FAA will require all aircraft
flown in the United States to comply with Stage III noise regulations on a
phased-in basis through 1999. The Company has five McDonnell Douglas DC9
aircraft remaining to phase-in over the five year period and anticipates, given
technology available today, compliance will cost approximately $1.6 million per
aircraft. The DC8 aircraft is currently held for sale and the Company does not
anticipate Stage III conversion of this aircraft. EIA's B747 aircraft can
currently be operated under Stage III guidelines, however, certain aircraft must
be operated at reduced operating weights in order to
- -------------------------
(1) Mandated by the FAA in 1990, this modification consists of frame
replacement within Section 41 of the aircraft fuselage and must be
completed prior to 20,000 total aircraft cycles.
17
<PAGE>
comply with Stage III requirements. Modifications are available for EIA's four
B747-200 aircraft to eliminate any reduction in operating weights at an
estimated cost of $.8 million to $1.5 million per aircraft. As the time for
compliance approaches, the Company will evaluate and determine the most
advantageous alternatives for Stage III compliance for the remainder of the
fleet.
In addition, an FAA directive, which went into effect January 30, 1996,
requires structural enhancements to three of EIA's B747-100 aircraft. If the
directive is not complied with, the aircraft will be subject to substantial
weight limitations. The Company anticipates that the cost of these enhancements
will be borne by the original holder of the supplemental type certificate
("STC") under which the aircraft were originally modified to freighter
configuration. The required structural enhancements for these aircraft have been
partially completed and the Company is waiting for design by the STC holder and
approval from the FAA regarding engineering conformity for final completion.
It is anticipated two of these aircraft will remain out of service for a major
part of fiscal 1997 pending such approval while the third aircraft is expected
back in service sometime during the Company's third quarter.
In fiscal 1996, the Company entered into an agreement to purchase five Bell
407 helicopters at a rate of one per year until fiscal 2000. The Company
estimates the cost of these aircraft to be $1.4 million each and anticipates the
acquisition of the first aircraft during the fourth quarter of fiscal 1997.
Under the terms of the agreement the Company may elect to trade assets to
satisfy a portion of the purchase price.
In February 1996, the Company entered into an agreement to settle proposed
income tax adjustments related to Internal Revenue Service ("IRS") audits for
the fiscal years 1987 through 1989. The agreement resulted in a federal tax
adjustment of approximately $3.0 million with interest of approximately $3.5
million. In May 1996, the Company accepted an IRS proposal to settle taxable
income adjustments related to IRS audits for the fiscal years ended 1990 and
1991. The effect of these adjustments, net of interest, resulted in a Federal
overpayment of approximately $.7 million. The Company has paid $6.0 million as
of June 30, 1996 and has requested $.5 million of the $.7 million overpayment be
used to satisfy the amount still owing from 1987 through 1989. No other years
are currently under audit.
In May 1996, a jury awarded $1.3 million to a plaintiff in a wrongful
termination suit. The Company has established adequate reserves through its
operating loan facility for required funds during the motion for new trial and
appeals process (see "Part II. Other Information: Item 1.Legal Proceedings").
The Company believes that its expertise in asset management and its
knowledge of the aviation industry will permit it to continue to supplement
operations with its barter, trade, sale and lease activities. The Company also
may selectively sell a part or all of certain operating subsidiaries and other
equipment and assets to assist in providing the liquidity necessary to meet its
current obligations. The Company is currently pursuing the sale or
recapitalization of its various subsidiaries. No assurances can be given that
any such efforts, or the Company's ability to restructure certain of its long-
term and Senior Note instruments, will enable the Company to generate adequate
cash flows to meet its debt service and capital requirements and fund continuing
operations.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) On April 25, 1996, Cargill Financial Services Corporation ("Cargill")
filed suit against the Company and certain of its subsidiaries in the
United States District Court for the District of Oregon. Cargill's
complaint seeks payment in the amount of approximately $22 million in
unaccelerated interest payments alleged to be due and payable to it since
February 1994 under the Company's Senior Notes that were issued in October
1992 in the aggregate principal amount of $125 million. According to the
complaint, Cargill holds approximately 44% of the aggregate principal
amount of the Senior Notes. On April 15, 1996, Cargill notified the
Company that it had accelerated the principal and accrued and unpaid
interest on the Senior Notes. Cargill's complaint also makes contingent
claims for principal and accelerated interest alleged to be owing to it as
a result of Cargill's acceleration notice of April 15 which are contingent
on the trustee under the Indenture not asserting such claims within the
applicable time frame. The Trustee has taken no action to date. On
May 28, 1996 Cargill filed a motion for summary judgment on approximately
$22 million of the interest portion of its claim. The Company has
responded to the complaint and the motion for summary judgment and a
hearing is scheduled for July 3, 1996 on the motion for summary judgment.
The Company is continuing to seek a consensual resolution of this and
other matters relating to the Senior Notes. No assurance can be given
that the Company will be able to successfully renegotiate the Senior
Notes.
(b) In 1992 former EIA employee Andy Anderson filed a complaint in
the Circuit Court of Multnomah County alleging that he was wrongfully and
constructively discharged from his employment with the Company. After an
intervening appeal and two amendments to the complaint, the case proceeded
to trial on May 6, 1996. On May 15th the jury returned a verdict in favor
of the plaintiff in the sum of $1,250,000. Of this amount, the sum of
$800,000 is punitive damages. The Company has filed post trial motions
including motions for a new trial and for elimination or reduction of
punitive damages award. In the event the motions are denied, the Company
intends to prosecute an appeal.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Since February 1994, the Company has failed to make any of its semi-
annual interest payments on the Company's $125 million 13 1/2% Senior Notes
due August 15, 2002 (totaling approximately $42.2 million at May 31, 1996)
and is therefore in default with respect to its payment obligations as well
as certain financial and other covenants under the Senior Notes. In April
1996, all outstanding principal and accrued interest on the Senior Notes
was accelerated. At May 31, 1996, $125 million and $56.5 million in
interest (including $8.8 million in penalty interest) were outstanding
under the Senior Notes.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits filed with this Form 10-Q
None
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 3, 1996 concerning
the notice of acceleration on the Senior Notes
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
EVERGREEN INTERNATIONAL AVIATION, INC.
Date: July 2, 1996 /s/ Timothy G. Wahlberg
-------------------- -----------------------------------------
Timothy G. Wahlberg
President
Date: July 2, 1996 /s/ D. Michael Clark
-------------------- ------------------------------------------
D. Michael Clark
Chief Financial Officer
20
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