Item 1 of this Annual Report for a further discussion of the risks and uncertainties that impact us and the air transportation services industry.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are most important to the portrayal of a company's financial condition and results and which require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other significant accounting policies, see "Note 2 - Significant Accounting Policies" in Item 8 of this Annual Report.
Depreciation of Aircraft
We record our aircraft at acquisition cost upon delivery, and depreciate each aircraft, over its estimated remaining economic life, to its estimated residual value. We determine the estimated economic life and residual values of our aircraft by analyzing the current operating conditions for the aircraft, evaluating our economic expectations, and examining the estimated lives utilized by other airlines operating similar fleets.
Estimates of the economic lives of our aircraft are based both on our experience and the experience of other airlines with respect to similar aircraft. Based upon these estimates, we are depreciating our DC-9 aircraft through 2023 and our Boeing 747 aircraft through points in time ranging from 2020 until 2028, depending upon the aircraft model. Estimated residual values of aircraft are based on our historical experience regarding the sale of both aircraft and spare parts. We annually review and, if necessary, revise the estimated residual values and economic lives of our aircraft to reflect changes in our fleet plans, aircraft technology, and other economic conditions. For example, in September 2003, we changed the estimated economic life of our helicopter fleet from 10 years to 20 years in order to more accurately reflect current operating conditions and economic expectations.
We capitalize all costs of major renewals, modifications, and overhauls (such as "C" and "D" checks) of our aircraft. We amortize the costs of such major overhaul components as follows:
• Large fixed-wing aircraft - Upon acquisition of a large fixed-wing aircraft, we segregate the costs of major overhaul components from the cost of the rest of the aircraft. We amortize the major overhaul component costs until the next scheduled overhaul, generally a period of ten years or less. The capitalized costs of subsequent overhauls are likewise amortized until the next scheduled overhaul.
• Medium fixed-wing aircraft, light fixed-wing aircraft, and helicopters - The cost of major overhaul components are not separately amortized, but depreciated as a part of the cost of the aircraft. The cost of subsequent major overhauls are capitalized and amortized over the estimated operating hours, generally a period of two years or less.
• Rotable assets - We capitalize the costs of rotable asset overhauls for our large fixed-wing aircraft and helicopters and then amortize these costs over the estimated useful lives of the overhauls, generally a period of five years or less. The cost of repairing rotable assets is expensed as incurred.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets, primarily our aircraft and other property and equipment, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We evaluate recoverability when events and circumstances indicate that the net carrying value of our long-lived assets may not be recoverable. We recognize an impairment loss when the sum of the undiscounted cash flows estimated to be generated by our long-lived assets is less than the assets' net carrying value. Our cash flow estimates are based on historical results, as adjusted to reflect our best estimates of future market and operating conditions. The net carrying value of our long-lived assets determined to be not recoverable is reduced to fair value. During fiscal year 2005, we incurred $1.3 million of impairment charges on aircraft.
Leased Aircraft - Overhauls and Lease Return Condition Costs
We account for the overhaul and lease return condition costs of our leased aircraft in accordance with the applicable lease agreements. Generally, we capitalize the costs of the required major maintenance and inspection of engines and airframes for our leased aircraft. We then amortize such capitalized costs over the lesser of i) number of years until the next scheduled overhaul, generally a period of ten years or less, or ii) the termination of the lease.
Revenue Recognition
The revenue recognition policies for each of our business segments are stated below:
Airlines - Airlines generates most of its flight revenue under one of four types of contracts: an "all-in contract," a contract for the USAF Air Mobility Command/Civil Reserve Air Fleet program, a block space agreement, or an "ACMI" or "wet lease" agreement.
• All-In Contract - Under an "all-in contract," Airlines pays for all operating expenses of the aircraft, including fuel costs. The price for an all-in contract is generally fixed; however, most of Airlines' all-in contracts also allow Airlines to adjust the contract price for increases in fuel prices.
• USAF Air Mobility Command/Civil Reserve Air Fleet Programs - Under our agreement for the USAF Air Mobility Command/Civil Reserve Air Fleet program, we are paid on a per mile basis as adjusted for fuel prices. The contract price is inclusive of all costs incurred at commercial locations, and limited costs at military locations.
• Block Space Agreement - Under a block space agreement, a freight forwarder reserves a certain amount of cargo space on a specific flight. The freight forwarder must pay for the space committed, even if the cargo is not delivered to Airlines for shipment. The amount of block space reserved is measured in terms of the number of pallet positions occupied by the freight.
• ACMI Contract - Under an ACMI contract or "wet lease" arrangement, Airlines provides the aircraft, crew, maintenance, and insurance, while the customer bears all other operating expenses such as fuel and landing fees.
Regardless of the type of contract, Airlines records revenue for each completed flight segment and, at the end of each reporting period, for each flight segment in process.
EAGLE - EAGLE generates revenue by providing ground handling and logistics services to the U.S. Postal Service, passenger and cargo airlines, and express delivery customers. EAGLE typically provides these services under contracts that range in term from one to five years. Revenue is recorded when the services are rendered.
Helicopters - Helicopters generates flight revenue under service contracts that range in term from less than one year to five years. Helicopters typically charges by the number of hours flown, with a minimum number of hours per day, plus a monthly availability fee. Helicopters frequently modifies its general pricing structure in order to more closely match the characteristics of the mission. The various types of pricing methods utilized by Helicopters includes pricing by weight for transport of goods, pricing by acre for aerial spraying, and pricing by number of pickups for construction work. Revenue is recorded when services are rendered.
Air Center - The Air Center provides a range of support services to the air transportation industry. The types of support service revenues generated by the Air Center include aircraft maintenance and repair revenue, aircraft storage, and other support services. Revenue is recorded when services are rendered.
EASL - EASL generates revenue by:
• buying and selling aircraft, parts, and other aviation assets;
• purchasing aircraft, parts, and engines for part-out and resale;
• serving as a brokering agent for the sale of aviation assets owned by third parties; and
• assisting the other subsidiaries of Aviation in the procurement of aircraft, parts, and engines.
Revenue is recorded when the sale is closed.
Agriculture - Agriculture generates revenue through sales of crops, processed agricultural products, and nursery products. Revenue is recorded when the product is shipped.
Allowance for Doubtful Accounts
We maintain allowances for losses that may result from the inability of our customers to make required payments or from contract disputes. We also periodically record an allowance for the general collectibility of all other accounts receivable based upon factors such as the aging of receivables and historical collection experience. The February 28, 2005 and February 29, 2004 accounts receivable balances of $62.4 million and $39.4 million, respectively, are reported net of allowances for doubtful accounts of $1.7 million and $2.0 million, respectively.
We periodically evaluate the collectibility of our accounts receivable balances based upon information currently available. If we determine that a customer will be unable to meet its financial obligations to us, or if we determine that collectibility of an account is unlikely, we record a specific write-off in order to reduce the related receivable to the expected recovery amount. During fiscal year 2004, EAGLE reduced its allowance for doubtful accounts by $6.1 million due to a write-off of receivables related to U.S. Postal Service contracts.
In September 2001, we instituted proceedings against Asiana to recover certain amounts owed to us pursuant to a freighter service agreement with Asiana. See "Asiana Airlines" in Item 3 above. The freighter service agreement was in force until February 28, 2003 and we believe that we are entitled to the full amount that we would have earned if Asiana had continued to meet its contractual obligation. As of February 28, 2003, we had recorded an account receivable of
$27.2 million from Asiana, which was fully reserved on our books. We did not record any additional income after Asiana ceased making payments. Subsequently, during fiscal year 2004, the $27.2 million account receivable was written off against the fully reserved balance, resulting in no change to the net receivable and no income effect. Further information regarding the Asiana claim may be found in Item 3 of this Annual Report.
Goodwill
Two of our business segments, EAGLE and Helicopters, have a combined goodwill of $5.5 million. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, we evaluate the recoverability of the goodwill when events and circumstances indicate that the cash flows estimated to be generated by the reporting unit the goodwill is associated with are less than the goodwill's net carrying value. Our cash flow assumptions are based on historical experience with respect to capacity, expected revenue, operating costs, and other relevant factors. The net carrying value of goodwill determined to be not recoverable is reduced to fair value. During the last three fiscal years, we have not made any reductions to goodwill.
Income Taxes
We account for income taxes in accordance with Statement of Financial Standards No. 109 Accounting for Income Taxes ("SFAS No. 109"). We record provisions for deferred income tax assets and liabilities in order to reflect the net tax effects of temporary differences between i) the tax basis of assets and liabilities and ii) their reported amounts in our consolidated financial statements. Such provisions are based upon enacted tax laws and rates in effect for the years in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts expected to be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
Current Fiscal Year
Although a number of new accounting pronouncements were enacted during our fiscal year 2005, none of these pronouncements had, or is expected to have, a material effect on our consolidated financial statements.
Prior Fiscal Years
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51” (“FIN 46-R”). FIN 46-R addresses how a company should apply the provisions of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain variable interest entities. In particular, FIN 46-R will apply in those situations in which i) the company does not have a controlling financial interest in the variable interest entity or ii) the variable interest entity does not have sufficient equity at risk for the variable interest entity to finance its activities without additional subordinated financial support. In those situations, FIN 46-R requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among the parties involved.
The Company is required to adopt FIN 46-R as of the period ending May 31, 2005. Although management has not completed a final assessment of the impact of FIN 46-R on the Company, preliminary assessments have indicated that the Company may be the primary beneficiary of certain related party variable interest entities including, but not limited to, Ventures Holding and Ventures Acquisition Company. The Company leases certain assets consisting primarily of buildings and aircraft from these entities. Upon the Company’s adoption of FIN 46-R, management’s assessment may indicate that the financial statements of these entities should be included in the Company’s financial statements in the period of adoption and beyond. Such inclusion is not expected to have a material impact on the Company’s consolidated financial statements.
RESULTS OF OPERATIONS FOR FISCAL YEAR 2005 AS COMPARED TO FISCAL YEAR 2004
The following information is derived from the audited consolidated financial statements of Evergreen Holdings, Inc. for fiscal years 2005 and 2004, which are included in Item 8 of this Annual Report.
Operating Revenue
Total operating revenues for fiscal year 2005 were $580.9 million, which was a $45.3 million, or 8.5%, increase from total operating revenues of $535.6 million for fiscal year 2004.
Flight Revenue - Flight revenue accounted for $411.1 million, or approximately 70.8%, of our total operating revenues for fiscal year 2005. Compared to fiscal year 2004, we experienced a $33.4 million, or 8.8%, increase in our flight revenue.
• Airlines - During fiscal year 2005, Airlines generated $371.2 million of flight revenue, as compared to
$342.9 million during fiscal year 2004, resulting in a $28.3 million increase. The increase was primarily attributable to a $53.0 million increase in revenues from commercial air cargo contracts, as partially offset by a $24.7 million decrease in revenues from USAF Air Mobility Command contracts.
Commercial Contracts - During fiscal year 2005, flight revenue from our commercial customers increased by $53.0 million as compared to fiscal year 2004. Increased utilization of our Boeing 747 fleet for commercial flights out of Asia accounted for a $60.9 million increase in commercial flight revenue. However, those increases were partially offset by a $7.9 million decrease in DC-9 commercial flight revenue due to the completion of two air cargo contracts with DHL and the U.S. Postal Service.
USAF Air Mobility Command Contracts - Although we increased our USAF Air Mobility Command contract prices for pass-throughs of fuel price escalations and we were able to better utilize and position our aircraft on one-way flights to Europe, our total flight revenue from USAF Air Mobility Command missions during fiscal year 2005 decreased by $24.7 million, as compared to fiscal year 2004, primarily due to:
• during the first quarter of fiscal year 2005, a decision by the USAF Air Mobility Command to shift away from the use of commercial aircraft in favor of using organic military transport aircraft for movements of cargo into Iraq;
• a reduction in aircraft availability due to periodic maintenance and enhancement modifications; and
• a shift in the utilization of our Boeing 747 fleet capacity from USAF Air Mobility Command missions to commercial air cargo flights out of Asia.
• Helicopters - During fiscal year 2005, Helicopters generated $39.9 million of flight revenue, as compared to $34.8 million for fiscal year 2004, resulting in a $5.1 million increase in revenue. The increase in flight revenue was primarily attributable to new service contracts with the United Nations and additional long-term contracts with the
U.S. Navy. The increase in revenues generated from these new contracts was partially offset by a reduction in revenues generated from fire suppression contracts due to more favorable weather conditions during the summer of 2004.
Sales of Aircraft, Parts, and Other Property and Equipment - Revenue from sales of aircraft, parts, and other property and equipment was $13.3 million during fiscal year 2005 as compared to $17.3 million for fiscal year 2004, resulting in a $4.0 million, or 23.1%, decrease in sales revenue.
Ground Handling and Logistics Services Revenue - EAGLE generated $111.1 million of revenue from ground handling and logistics services during fiscal year 2005 as compared $99.8 million during fiscal year 2004, resulting in a
$11.3 million, or 11.3%, increase in revenue.
During fiscal year 2005, EAGLE expanded the volume of ground handling and logistics services provided to British Airways, resulting in a $5.9 million increase in revenue. EAGLE also increased the volume of ground handling and logistics services provided to its other domestic and foreign commercial customers, resulting in a $3.7 million increase in revenue.
In addition, we recognized a $1.7 million increase in revenues from our U.S. Postal Service contract. The increase was primarily attributable to a $4.1 million increase in the applicable labor rates for our Shared Network ("SNET") contracts with the U.S. Postal Service. See "Operating Expenses - Cost of Ground Handling and Logistics Services" below. This increase was partially offset by a $2.4 million decrease in volume of services provided.
Support Services and Other Revenue - Support services and other revenue was $45.4 million for fiscal year 2005, as compared to $40.8 million for fiscal year 2004, resulting in a $4.6 million, or 11.3%, increase in revenue.
• Aircraft Support Services - An increase in the level of aircraft maintenance and other aircraft support services provided by Airlines, Helicopters, and the Air Center to third parties resulted in a $6.1 million increase in aircraft support service revenues.
• Agriculture -During fiscal year 2005, Agriculture's revenues decreased by $1.5 million, primarily as a result of a decrease in the sale of hazelnuts. During fiscal year 2004, Agriculture purchased and then re-sold the hazelnut crop of Greenpatch Farms, which generated sales revenue for Agriculture. However, during fiscal year 2005, Agriculture did not purchase the hazelnut crop, but instead merely served as a broker for the sale of the crop by Greenpatch Farms.
The decrease in Agriculture's revenue during fiscal year 2005 was also partially attributable to i) a decrease in grass seed sales due to a lower crop yield and ii) decreased sales of processed agricultural products due to a change in marketing strategy.
Operating Expenses
Total operating expenses for fiscal year 2005 were $549.3 million, which was a $37.5 million, or 7.3%, increase from $512.6 million of expenses during fiscal year 2004.
Flight Costs - Flight costs were $75.9 million for fiscal year 2005, as compared to $73.8 million for fiscal year 2004, resulting in a $2.1 million, or 2.8% increase in expense.
• Airlines - A $0.6 million increase in flight costs for Airlines was driven by increases for USAF Air Mobility Command commissions, higher crew costs, and higher travel costs, which were offset by reductions in costs for European overflys and DC-9 flight costs, as discussed below.
Increases in Expense. A $3.1 million increase in Airlines' flight costs was attributable to increases in crew costs and travel-related expenses as a result of both the expansion and increase in the number of our commercial air cargo flights from Asia. In addition, the commission rate we pay to our USAF Air Mobility Command teaming member increased with the new contract, resulting in a $0.7 million increase in commissions expense.
Decreases in Expense. Better positioning of our aircraft on transatlantic flights resulted in a decrease in the number of flights that we flew to and through Europe, thereby reducing our flight costs by $1.5 million. We also recognized a $1.7 million reduction in flight costs due to the completion of a DHL air freight services contract.
• Helicopters - Flight costs for Helicopters increased by approximately $1.5 million, primarily due to the additional flight crew costs, training costs, and travel expenses associated with an increase in the number of helicopter contracts for fiscal year 2005, as compared to fiscal year 2004.
Fuel - Fuel expense was $123.8 million for fiscal year 2005, as compared to $96.8 million for fiscal year 2004, resulting in a $27.0 million, or 27.9%, increase in fuel expense.
• Airlines - Airlines' fuel expense increased by $25.8 million. Most of the increase in fuel expense was attributable to sharply rising prices for aviation fuel within the commercial flight sector. Fuel expense for USAF Air Mobility Command missions also increased, but only moderately, because the pegged contract fuel rate for military flights is more favorable than for commercial contracts.
• Helicopters - Helicopters' fuel expense increase of $1.2 million was primarily attributable to i) increased consumption due to increased flight activity and ii) general increases in aviation fuel prices.
Maintenance - Aircraft maintenance expense was $76.5 million for fiscal year 2005, as compared to $73.3 million for fiscal year 2004, resulting in a $3.2 million, or 4.4%, increase in expense.
• Airlines - Maintenance expense for Airlines increased by approximately $4.2 million. Our amortization expense for capitalized airframe maintenance costs increased by $4.8 million, primarily as a result of $5.0 million of maintenance expense incurred in connection with the scheduled lease expirations for two DC-9 aircraft. See "Note 7 - Expiration of Aircraft Lease" in Item 8 of this Annual Report. The increase in amortization expense was partially offset by decreases in our capitalized engine overhaul costs due to continued use of leased engines.
• Helicopters - Maintenance expense for Helicopters' aircraft decreased by approximately $0.9 million. The decrease was primarily attributable to a reduction in start-up and configuration costs during fiscal year 2005, as compared to fiscal year 2004.
Aircraft and Equipment Expense - Aircraft and equipment expense was $49.2 million for fiscal year 2005, as compared to $49.8 million for fiscal year 2004, resulting in a $0.6 million, or 1.2%, decrease in expense.
• Airlines - In general, during fiscal year 2005 Airlines was able to reduce its aircraft costs by $3.4 million primarily as a result of:
• a $2.3 million reduction in engine rental expense due to lower lease rates;
• a $0.5 million reduction in aircraft insurance costs; and
• a $0.6 million reduction in the depreciation of DC-9 aircraft components.
These reductions were partially offset by $1.3 million of impairment charges to the net carrying value of our DC-9 aircraft fleet. See "Note 6 - Impairment of Assets" in Item 8 of this Annual Report.
• Helicopters - An approximate $1.5 million increase in aircraft and equipment expense for Helicopters was primarily attributable to increases in helicopter lease expenses, as partially offset by decreases in depreciation expense.
Cost of Sales of Aircraft, Parts, and Other Property and Equipment - Cost of sales of aircraft, parts, and other property and equipment was $8.3 million for fiscal year 2005, as compared to $13.7 million for fiscal year 2004, resulting in a $5.4 million, or 39.4%, decrease in cost of sales.
• Approximately $4.8 million of the decrease was attributable to the sale of a Gulfstream II aircraft in fiscal year 2004 without a corresponding sale in fiscal year 2005.
• Approximately $2.4 million of the decrease was attributable to a reduction in aircraft and engine part-out sales from our Airlines, Helicopters, and Air Center segments.
These decreases were partially offset by a $1.8 million increase in EASL's cost of sales because, during fiscal year 2005, EASL assumed responsibility for sales of aircraft and engine part-outs.
Cost of Ground Handling and Logistics Services - Cost of ground handling and logistics services was $99.8 million for fiscal year 2005, as compared to $89.1 million for fiscal year 2004, resulting in a $10.7 million, or 12.0%, increase in expense. The increase was primarily attributable to:
• a $2.8 million increase in labor expense due to expansion of services provided to British Airways;
• a $3.8 million increase in the applicable labor rates for our SNET contracts with the U.S. Postal Service. See "Operating Revenue - Ground Logistics Services Revenue" above;
• a $2.3 million increase in expenses for equipment and fuel due to expansion of services for new customers;
• a $0.4 million charge for workmans compensation expense; and
• a $1.4 million reclassification of allocated corporate expenses from cost of ground logistics services to selling, general and administrative services.
Cost of Support Services and Other Revenue - Cost of support services and other revenue was $52.1 million for fiscal year 2005, as compared to $39.0 million for fiscal year 2004, resulting in a $13.1 million, or 33.6%, increase in support costs. Cost of support services increased in the following areas during fiscal year 2005:
•
approximately $8.0 million of the increase was attributable to increased landing fees and ground handling expenses in our Airlines segment due to increased flight activity;
• approximately $5.4 million of the increase was attributable to increased support costs at the Air Center due to an increase in the volume of aircraft maintenance services provided to third parties; and
•
approximately $2.4 million of the increase was attributable to additional support costs incurred by our Helicopters and EAGLE segments due to the increased volume of services in those segments.
Agriculture - In comparison to the above increases in other support costs, Agriculture's cost of goods sold decreased by $2.8 million during fiscal year 2005.
• Approximately $2.1 million of the decrease was attributable to a decrease in sales of hazelnuts during fiscal year 2005 as compared to fiscal year 2004. During fiscal year 2004, Agriculture purchased and then resold the hazelnut crop of Greenpatch Farms, which generated cost of goods sold for Agriculture. However, Agriculture did not purchase the fiscal year 2005 hazelnut crop, but instead merely served as the broker for the sale of the crop by Greenpatch Farms, resulting in a corresponding decrease in Agriculture's cost of goods sold with respect to the sale of Greenpatch Farms' fiscal year 2005 hazelnut crop.
• Agriculture's fiscal year 2005 cost of goods sold was also lower due to i) lower grass seed sales and ii) decreased sales of processed agricultural products due to a change in marketing strategy.
Selling, General, and Administrative - Total selling, general, and administrative expense for fiscal year 2005 was $64.3 million, as compared to $77.1 million for fiscal year 2004, resulting in an $12.8 million, or 16.6% decrease in expense. The decrease was primarily attributable to the following factors:
• approximately $7.1 million was attributable to company-wide reductions in payroll costs, professional fees, and travel expense;
• approximately $2.1 million was attributable to the professional fees and travel expenses incurred during fiscal year 2004 in conjunction with the restructuring of our long-term debt and issuance of the Indenture Notes in May 2003;
• approximately $2.0 million was attributable to a fiscal year 2004 increase in EAGLE's bad debt allowance;
• approximately $1.0 million was attributable to a decrease in the salary compensation paid to Mr. Smith under his Employment Agreement; and
• approximately $0.6 million was attributable to a reclassification by EASL of certain "selling, general, and administrative costs" as "costs of support services and other revenue."
Interest Expense
Interest expense for fiscal year 2005 was $35.9 million, which was a $1.1 million, or 3.2%, increase from $34.8 million in fiscal year 2004. The increase was primarily attributable to higher interest rates being charged by the Company's lenders during fiscal year 2005, as partially offset by approximately $0.5 million of interest charges and other fees incurred by us in connection with the restructuring of our long-term debt and issuance of the Indenture Notes during fiscal year 2004.
Other Non-Operating Expense and Income
During fiscal year 2005, we recognized $0.8 million of other non-operating expense, which was a $5.2 million increase in expense from $4.4 million of other non-operating income during fiscal year 2004.
During fiscal year 2005, we incurred $3.8 million of non-operating expense that was primarily attributable to loan prepayment penalties, legal fees, and the write-off of unamortized loan acquisition costs which were incurred in conjunction with the full repayment and termination of our revolving line of credit with PNC Bank, N.A. (“PNC Bank”) in May 2004. The expense was partially offset by i) a $1.9 million gain recorded by Airlines on insurance proceeds received from a bird strike incident (as discussed below) and ii) a $0.9 million gain realized on the sale of land and farming equipment in Agriculture.
Gains from Insurance Settlements - During fiscal year 2005, we received a $3.1 million settlement on an insurance claim related to damages sustained by a Boeing 747 engine as the result of a bird strike incident. After application of engine repair costs of $1.2 million, we realized a gain from insurance proceeds of $1.9 million.
In comparison, in fiscal year 2004, we settled an insurance claim related to damages to an aircraft and four engines (at the time, we were leasing two of the engines under operating leases). After application of a $1.0 million deductible and repair costs of $3.2 million, we realized net insurance proceeds of $8.2 million from the claim. We then expensed $4.1 million of the net insurance proceeds for a buy-out of the two leased engines, resulting in a $4.1 million gain on the insurance settlement.
In both of the settlements, the insurance company agreed to release the gross settlement amount of the insurance proceeds to us in exchange for a right of subrogation to all of our legal and equitable rights and remedies against any third party adjudged liable for the incident. Therefore, the insurance company has no right to proceed against us with respect to either settlement.
Income Tax Expense
Our income tax benefit for fiscal year 2005 was $1.7 million, as compared to an income tax benefit of $2.0 million for fiscal year 2004. The decrease in the income tax benefit was due primarily to a pre-tax loss of $7.0 million for fiscal year 2005, as compared to a pre-tax loss of $8.5 million for fiscal year 2004. The tax benefits in fiscal years 2005 and 2004 were computed at the statutory rates of 34.0% for federal tax and a blended rate of approximately 4.0% for state taxes.
The following table sets forth the calculation of our income tax benefit (expense) for fiscal years 2005 and 2004:
At February 28, 2005 and February 29, 2004, we had federal income tax net operating loss carryforwards of $96.0 million and $88.8 million, respectively. At February 28, 2005 and February 29, 2004, we had state income tax net operating loss carryforwards of $73.8 million and $34.5 million, respectively. These net operating loss carryforwards expire in the years 2007 through 2024. During fiscal years 2005 and 2004, we reduced our taxes currently payable by $0.9 million and $0, respectively, from the utilization of net operating loss carryforwards. At February 28, 2005 and February 29, 2004, we had an alternative minimum tax (AMT) credit available of $10.5 million which is available to offset future regular taxes that are in excess of future alternative minimum taxes. Under current tax law, the carryforward period for the AMT credit is unlimited.
RESULTS OF OPERATIONS FOR FISCAL YEAR 2004 AS COMPARED TO FISCAL YEAR 2003
The following information is derived from the audited consolidated financial statements of Evergreen Holdings, Inc. for fiscal years 2004 and 2003, which are included in Item 8 of this Annual Report.
Operating Revenue
Total operating revenues for fiscal year 2004 were $535.6 million, which was a $38.7 million, or 6.7%, decrease from total operating revenues of $574.3 million for fiscal year 2003.
Flight Revenue - Flight revenue accounted for $377.7 million, or approximately 70.5%, of our total operating revenues for fiscal year 2004. Compared to fiscal year 2003, we experienced a $22.9 million or 5.7% decrease in our flight revenue.
• Airlines - During fiscal year 2004, Airlines generated $342.9 million of flight revenue, as compared to
$369.2 million during fiscal year 2003, resulting in a $26.3 million decrease in revenue. Although Airlines experienced a $30.5 million increase in flight revenue from USAF Air Mobility Command contracts, flight revenue from commercial air cargo contracts decreased by $56.8 million.
USAF Air Mobility Command Contracts - The $30.5 million increase in flight revenue from USAF Air Mobility Command contracts was primarily attributable to increased requirements of the USAF Air Mobility Command for support of U.S. military activity in Iraq.
Commercial Contracts - The $56.8 million decrease in flight revenue from commercial air cargo contracts during fiscal year 2004, as compared to fiscal year 2003, was primarily attributable to the following factors:
• revenues from Asian charters was greater in fiscal year 2003 as the result of increased demand due to a West Coast dock strike;
• completion of an air cargo contract for Finnair during the early portion of fiscal year 2004 resulted in decreased revenues for the remainder of fiscal year 2004, as compared to fiscal year 2003; and
• in fiscal year 2004, a decrease in revenues from U.S. Postal Service contracts for provision of services primarily to southeastern Alaska.
• Helicopters - During fiscal year 2004, Helicopters generated $34.8 million of flight revenue, as compared to $31.4 million for fiscal year 2003, resulting in a $3.4 million, or 10.9%, increase in revenue. The increase in flight revenue was primarily attributable to the following factors:
• new air ambulance service in Alaska;
• an increase in offshore oil support work; and
• an increase in NASA shuttle recovery work.
Sales of Aircraft, Parts, and Other Property and Equipment - Revenue from sales of aircraft, parts, and other property and equipment was $17.3 million during fiscal year 2004, as compared to $12.1 million for fiscal year 2003, resulting in a $5.2 million, or 43.0%, increase in sales revenue. The increased sales revenue was primarily attributable to the following transactions during fiscal year 2004:
• sale of a Gulfstream II aircraft for $3.8 million;
• sales of two Boeing 767 aircraft for $4.5 million;
• sale of two A-300 aircraft for $0.9 million; and
• sale of two de-icing trucks for $0.5 million.
Ground Handling and Logistics Services Revenue - EAGLE generated $99.8 million of revenue from ground handing and logistics services during fiscal year 2004 as compared $129.7 million during fiscal year 2003, resulting in a
$29.9 million, or 23.1%, decrease in revenue. The decrease was primarily driven by the elimination of a $14.3 million U.S. Postal Service Christmas Network contract and a $13.8 million reduction in volume under a U.S. Postal Service Shared Network contract.
Support Services and Other Revenue - Support services and other revenue was $40.8 million for fiscal year 2004, as compared to $31.9 million for fiscal year 2003, resulting in a $8.9 million, or 27.9%, increase in revenue. Approximately $7.5 million of the increase was primarily attributable to an increase in the level of aircraft heavy maintenance, aircraft storage, and other support services provided by us to third parties.
During fiscal year 2004, revenues from our agricultural operations also increased by approximately $1.3 million, as compared to fiscal year 2003. The increased revenues during fiscal year 2004 were primarily due to increased Christmas tree sales, brokered sales of the hazelnut crop of Greenpatch Farms, and increased agricultural sales generated by reduced margins on excess inventory.
Operating Expenses
Total operating expenses for fiscal year 2004 were $512.6 million, which was a $19.9 million, or 4.0%, increase from $492.7 million during fiscal year 2003.
Flight Costs - Flight costs were $73.8 million for fiscal year 2004, as compared to $69.8 million for fiscal year 2003, resulting in a $4.0 million, or 5.7%, increase in expense.
• Airlines - A $3.3 million increase in flight costs for Airlines was primarily driven by increases in the number of European overflys on USAF Air Mobility Command missions.
• Helicopters - An increase in helicopter charters resulted in a corresponding $0.7 million increase in flight crew costs and travel expenses during fiscal year 2004, as compared to fiscal year 2003.
Fuel - Fuel expense was $96.8 million for fiscal year 2004, as compared to $100.2 million for fiscal year 2003, resulting in a $3.4 million, or 3.4%, decrease in fuel expense.
• Airlines - Airlines' fuel expense was $94.4 million for fiscal year 2004, as compared to $98.4 million for fiscal year 2003, resulting in a decrease of $4.0 million in fuel expense. Approximately $2.4 million of the decrease was attributable to reductions in gallons purchased. The remaining $1.6 million decrease was primarily attributable to an excise tax credit received during fiscal year 2004.
• Helicopters - Helicopters' fuel expense was $2.4 million for fiscal year 2004, as compared to $1.8 million for fiscal year 2003, resulting in a $0.6 million increase in fuel expense. The increase was primarily attributable to increased consumption due to higher flight activity and general increases in aviation fuel prices.
Maintenance - Aircraft maintenance expense was $73.3 million for fiscal year 2004, as compared to $69.7 million for fiscal year 2003, resulting in a $3.6 million, or 5.2%, increase in expense.
• Airlines - Maintenance expense for Airlines' aircraft decreased by approximately $1.9 million. The decrease in maintenance expense was primarily driven by a $4.6 million reduction in the amortization of engine overhauls, a
$3.4 million reduction in amortization of our DC-9 fleet, and $1.6 million of reductions in routine maintenance and "B" checks. Partially offsetting these reductions, Airlines also experienced a $7.7 million increase in amortization of heavy maintenance "C" check costs during fiscal year 2004.
• Helicopters - Maintenance expense for Helicopters' aircraft increased by $5.5 million. The increase was due primarily to i) additional start-up and configuration costs that were incurred during fiscal year 2004 in order to prepare the fleet for current year contracts, ii) an increase in fleet size, iii) a shift from medium to light helicopters, and
iv) greater flight activity.
Aircraft and Equipment - Aircraft and equipment expense was $49.8 million for fiscal year 2004, as compared to $44.1 million for fiscal year 2003, resulting in a $5.7 million, or 12.9%, increase in expense.
• Airlines - Aircraft and equipment expense for Airlines increased by $2.5 million during fiscal year 2004, as compared to fiscal year 2003. The increase was primarily attributable to an increase in the number of leased engines being utilized.
• Helicopters - Aircraft and maintenance expense for Helicopters increased by $3.2 million increase, primarily as a result of the use of additional leased aircraft.
Cost of Sales of Aircraft, Parts, and Other Property and Equipment - Cost of sales of aircraft, parts, and other property and equipment was $13.7 million for fiscal year 2004, as compared to $8.9 million for fiscal year 2003, resulting in a $4.8 million, or 53.9%, increase in cost of sales. The increase was primarily attributable to:
• the fiscal year 2004 sale in our Airlines segment of a Gulfstream II aircraft with carried costs of $4.8 million; and
• a $1.3 million increase in our EASL segment due to increased third party aircraft part out sales during fiscal year 2004.
These increases were partially offset by:
• a $0.8 million decrease in the Air Center's costs of sales of aircraft, parts, and other property and equipment as a result of reduced sales activity during fiscal year 2004; and
• a $0.5 million decrease in Helicopters' costs of sales of aircraft, parts, and other property and equipment during fiscal year 2004 as a result of reduced third party sales.
Cost of Ground Handling and Logistics Services - Cost of ground handling and logistics services was $89.1 million for fiscal year 2004, as compared to $104.6 million for fiscal year 2003, resulting in a $15.5 million, or 14.8%, decrease in expense. The decrease in expenses was primarily attributable to reduced revenue activities which resulted in decreased expenses for labor, travel, equipment, and outside services.
Cost of Support Services and Other Revenue - Cost of support services and other revenues was $39.0 million for fiscal year 2004, as compared to $32.6 million for fiscal year 2003, resulting in a $6.4 million, or 19.6%, increase in support costs. The increase was primarily attributable to a $4.2 million increase in support costs at the Air Center and a $2.5 million increase in the cost of agricultural goods sold due to increased brokered sales of hazelnuts. These increases were partially offset by a reduction of approximately $0.3 million in landing fees and other flight support costs for Airlines due to a shift of flight activity from commercial flight contracts to military contracts under which a higher percentage of such support costs were passed through to the USAF Air Mobility Command.
Selling, General, and Administrative - Total selling, general, and administrative expense for fiscal year 2004 was $77.1 million, as compared to $62.8 million for fiscal year 2003, resulting in a $14.3 million, or 22.8%, increase in expense. The increase was primarily attributable to the following:
• a $4.0 million bonus paid to Mr. Smith in fiscal year 2004;
• an increase of $1.6 million in legal and professional fees;
• an increase of $2.1 million for workers' compensation expense in our EAGLE segment;
• a $2.0 million charge by EAGLE for bad debt expense related to U.S. Postal Service receivables; and
• increased expenses of approximately $5.2 million for travel, rents, sales and administrative expenses, and field support costs.
Interest Expense
Interest expense for fiscal year 2004 was $34.8 million, which was a $4.2 million, or 13.7%, increase from $30.6 million in fiscal year 2003. The $4.2 million increase in interest expense was primarily attributable to:
• An increase in the average rate of interest on our outstanding debt obligations as a result of our May 2003 refinancing, which included the issuance of the Indenture Notes.
• Approximately $1.1 million of interest charged by a former loan syndicate in exchange for a term extension while a refinancing arrangement with new loan sources were arranged.
Other Non-Operating Expense and Income
Income from non-recurring transactions increased $2.9 million, or 193.3%, to $4.4 million in income for fiscal year 2004 from $1.5 million in income for fiscal year 2003. The increase was primarily attributable to a $4.1 million gain on an insurance settlement in fiscal year 2004, as partially offset by approximately $1.5 million of land sales which occurred in fiscal year 2003.
Gain from Insurance Settlement - In fiscal year 2004, we settled an insurance claim related to damages to an aircraft and four engines (at the time, we were leasing two of the engines under operating leases). After application of a $1.0 million deductible and repair costs of $3.2 million, we realized net insurance proceeds of $8.2 million from the claim. We then expensed $4.1 million of the net insurance proceeds for a buy-out of the two leased engines, resulting in a $4.1 million gain on the insurance settlement.
In exchange for the insurance company's agreement to release the gross settlement amount of the insurance proceeds to us, the insurance company was granted a right of subrogation to all of our legal and equitable rights and remedies against any third party adjudged liable for the incident. Therefore, the insurance company has no right to proceed against us with respect to the settlement.
Income Tax Expense
Our income tax benefit for fiscal year 2004 was $2.0 million, as compared to an income tax expense of $19.8 million for fiscal year 2003. The income tax benefit was due primarily to a pre-tax loss of $8.5 million for fiscal year 2004, as compared to pre-tax income of $51.6 million for fiscal year 2003. The effective tax rate, on an annualized basis, was 23.7% for fiscal year 2004 and 38.4% for fiscal year 2003. The change in the effective tax rate is primarily due to the effect of permanent differences in proportion to the applicable taxable income for the periods presented.
LIQUIDITY
At February 28, 2005, we had cash and cash equivalents of $2.7 million, as compared to cash and cash equivalents of $4.1 million and $5.6 million at February 29, 2004 and February 28, 2003, respectively.
Cash Flows from Operating Activities
During fiscal year 2005, we generated $70.6 million of cash from our operating activities, as compared to $53.1 million and $100.3 million during fiscal years 2004 and 2003, respectively.
Non-cash depreciation and amortization expenses of $70.9 million, and a $35.2 million increase in accounts payable balances accounted for most of our positive cash flow from operating activities during fiscal year 2005. Accounts payable balances increased primarily due to stricter management of cash disbursements. Payments received on accounts receivable from affiliates, decreases in prepaid expense accounts, non-cash impairment charges for two aircraft, and a non-cash write-off of unamortized loan acquisition costs also increased cash flow by approximately $10.8 million.
The positive cash flow from operating activities was partially reduced primarily as a result of i) our $5.3 million net loss for fiscal year 2005, ii) a $23.0 million increase in outstanding accounts receivable balances, primarily due to an increase in accounts receivable from U.S. Postal Service contracts, and iii) a $13.9 million increase in inventories due to increased purchases of aircraft spare parts by our EASL segment and increased purchases of agricultural products in anticipation of increased customer demand.
Cash Flows from Investing Activities
During fiscal year 2005, we used $67.6 million of cash for investing activities, as compared to uses of $62.3 million and $52.2 million during fiscal years 2004 and 2003, respectively.
Purchases of aircraft parts and airframes, scheduled overhauls of engines, and upgrades and enhancements for our aircraft resulted in a $69.8 million use of cash for capital expenditures. We also used approximately $2.4 million of cash for payment of deposits on aircraft purchase agreements and other non-fixed assets.
Disposals of aircraft parts, agricultural equipment and land resulted in $2.8 million of cash proceeds during fiscal year 2005. In addition, we received $3.1 million of insurance proceeds from an incident involving a bird strike on a Boeing 747 engine. See "Results of Operations for Fiscal Year 2005 as Compared to Fiscal Year 2004 - Other Non-Operating Expense and Income" above. We utilized $1.2 million of the insurance proceeds for repairs on the engine, resulting in net cash proceeds from the insurance settlement of $1.9 million.
As of the date of this report, we have entered into agreements to purchase two Boeing 747 aircraft and four helicopters. See "Flight Equipment - Aircraft Purchase Commitments" in Item 2
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of February 28, 2005, we had fixed rate debt of $220.9 million and variable rate debt of $86.2 million. Based on the outstanding balances at February 28, 2005, each 1% increase or decrease in the interest rate of our variable rate debt would increase or decrease our annual interest expense by approximately $0.9 million. A 1% increase in interest rates would decrease the fair market value of our Indenture Notes by approximately $2.2 million. We have not entered into any obligations for trading purposes.
The table below presents principal cash flows and related weighted average interest rate by year for our debt obligations.
Foreign Currency Exchange Rate Risks
Although some of our revenues are derived from foreign customers, substantially all of our revenues and expenses are denominated in U.S. dollars. We maintain minimal balances in foreign bank accounts to facilitate payments of expenses.
Commodity Price Risks
We are exposed to commodity price risk with respect to the purchase of aviation fuel. However, fluctuations in the price of fuel have not had a significant impact on our results of operations in recent years because, in general, the fuel price adjustment clauses in our customer contracts limit our exposure to increases in fuel prices. We do not enter into, or purchase any fuel under, long-term fuel contracts, nor do we enter into futures or swap contracts.
We are not exposed to any other commodity price risk.
PART II
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are the consolidated financial statements of Evergreen Holdings, Inc., the parent company of Evergreen International Aviation, Inc., and its subsidiaries.
Aviation is the issuer of the Indenture Notes, as defined in "Note 16 - Long-Term Debt Obligations" of the Notes to Consolidated Financial Statements below. The Indenture Notes are fully and unconditionally guaranteed on a joint and several, senior basis by Holdings, the Trust, and substantially all of the subsidiaries of Aviation.
Condensed consolidating financial statements which separately present the financial information for Holdings, Aviation, the subsidiary guarantors on a combined basis, the non-guarantor subsidiaries on a combined basis, consolidating adjustments, and total consolidated amounts are included in "Note 22 - Supplemental Financial Information for Guarantor Subsidiaries and Non-Guarantor Subsidiaries" below.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF GHP HORWATH, P.C.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Evergreen Holdings, Inc
We have audited the accompanying consolidated balance sheet of Evergreen Holdings, Inc. and subsidiaries (the "Company") as of February 28, 2005 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evergreen Holdings, Inc. and subsidiaries as of February 28, 2005, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Our audit referred to above includes an audit of the 2005 financial statement schedule II. In our opinion, this 2005 financial statement schedule presents fairly, in all material respects, in relation to the 2005 consolidated financial statements taken as a whole, the information required to be stated therein
/s/ GHP HORWATH, P.C.
Denver, Colorado
June 6, 2005, except for Note 23, as to which the date is June 14, 2005
REPORT OF PRICEWATERHOUSE COOPERS LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Evergreen Holdings, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying index, present fairly, in all material respects, the financial position of Evergreen Holdings, Inc. and its subsidiaries (the Company) at February 29, 2004, and the results of their operations and their cash flows for each of the two years in the period ended February 29, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index as of February 29, 2004 and for the two years in the period ended February 29, 2004, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has historically had violations of certain of its debt covenants. The Company's failure to comply with existing covenants would make debt callable. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
June 11, 2004
CONSOLIDATED BALANCE SHEETS
At February 28, 2005 and February 29, 2004
(in thousands, except share data)
(continued on the next page)
CONSOLIDATED BALANCE SHEETS - continued
At February 28, 2005 and February 29, 2004
(in thousands, except share data)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Years Ended
February 28, 2005, February 29, 2004, and February 28, 2003
(in thousands, except share data)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For Fiscal Years Ended
February 28, 2005, February 29, 2004, and February 28, 2003
(in thousands, except share data)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
February 28, 2005, February 29, 2004, and February 28, 2003
(in thousands)
(continued on next page)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Years Ended
February 28, 2005, February 29, 2004, and February 28, 2003 - continued
(in thousands)
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OVERVIEW
Corporate Summary
Evergreen Holdings, Inc. ("Holdings") is the parent company of Evergreen International Aviation, Inc. ("Aviation"), a leading provider of integrated air cargo transportation and aviation support services. Holdings, Aviation, and their consolidated subsidiaries (collectively, "Company", "we", "us", or "our") provide global air cargo shipping, ground handling and logistics services, helicopter transportation services, small aircraft charters, and aircraft maintenance and repair services.
Our fiscal year ends on the last day of February.
The Company conducts business in six major business segments through its wholly-owned subsidiaries:
• Evergreen International Airlines, Inc. ("Airlines") provides air cargo services for both international and domestic markets;
• Evergreen Aviation Ground Logistics Enterprise, Inc. ("EAGLE") provides full-service aviation ground handling and logistics services, including mail handling, aviation hub management, aircraft handling, cargo handling, ground system management, ground equipment maintenance, ground equipment sales and leasing, aircraft line maintenance, terminal services, aircraft de-icing and washing, check-in and ticketing, baggage acceptance and seat selection, and passenger cabin cleaning;
• Evergreen Helicopters, Inc. ("Helicopters") provides helicopter and small fixed-wing aircraft services throughout the world in connection with activities such as forest fire fighting, health services, aerial spraying, heavy lift construction, law enforcement, helicopter logging, petroleum support services, search and rescue, peacekeeping and relief support, helicopter skiing, and agriculture;
• Evergreen Air Center, Inc. ("the Air Center" or "Air Center") an unlimited Class IV airframe repair station certified by the FAA, performs aircraft maintenance, repair and overhaul services, and aircraft storage services;
• Evergreen Aircraft Sales and Leasing Co. (“EASL”) selectively buys, sells, leases, and brokers commercial aircraft, helicopters, and aircraft spare parts; and
• Evergreen Agricultural Enterprises, Inc. (“Agriculture”) conducts farming operations, nursery and horticulture operations, and delivers nursery and processed agricultural products to wholesale and retail customers.
Aviation also holds an approximate two-thirds beneficial interest in the Trust Created February 25, 1986 ("Trust"). The Trust was created pursuant to the Trust Agreement, dated as of February 25, 1986, as amended and restated pursuant to the Amended and Restated Trust Agreement, dated as of August 31, 1987, as amended on August 31, 1988, and as amended and restated pursuant to the Second Amended and Restated Trust Agreement, dated as of September 29, 1995, as amended by the First Amendment thereto as of May 8, 2003, as amended by the Second Amendment thereto as of January 14, 2004, and as amended by the Third Amendment thereto as of May 10, 2004, among Evergreen International Aviation, Inc. (an assignee of Evergreen Holdings, Inc., as successor to B-747, Inc. and King Christian, Inc.) and Mr. Delford M. Smith, as Beneficiaries, and Wilmington Trust Company, not in its individual capacity, but solely as Owner Trustee. The Trust assets consist primarily of one Boeing 747 aircraft and three DC-9 aircraft. The Trust leases these aircraft to Airlines.
Reclassifications
Certain amounts in the Company’s prior years’ financial statements and notes have been reclassified to conform to the current year presentation. Previously reported net income or net cash flows were not affected by these reclassifications.
Controlling Shareholder and Related Parties
Mr. Delford M. Smith, our founder and the chairman of the board of directors, has control, either directly or indirectly, over 85.1% of the outstanding shares of Holdings common stock. In addition, Mr. Smith owns or controls other entities, or does business under other trade names, including, but not limited to, the following:
• Ventures Acquisition Company LLC ("Ventures Acquisition Company");
• Ventures Holding, Inc. ("Ventures Holding");
• DMS Properties; and
• Greenpatch Farms.
From time to time, we engage in transactions with Mr. Smith and the entities owned by, or controlled by, Mr. Smith. See "Note 17 - Related Party Transactions" below.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of Holdings and its wholly-owned domestic and foreign subsidiaries. All intercompany accounts, transactions, and profits arising from our consolidated entities have been eliminated in consolidation. The operations of our active foreign subsidiaries are not significant.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
We classify as cash and cash equivalents those short-term, highly liquid investments which are readily convertible into cash and have a maturity of three months or less when purchased. At February 28, 2005 and February 29, 2004, we had no cash equivalents.
Inventories
Our inventories consist primarily of aircraft, rotable parts, expendable parts, and supplies for aircraft maintenance and sale to third parties (collectively, "aircraft parts inventories"). In addition, Agriculture maintains inventories of agricultural crops and nursery products (collectively, "agricultural inventories") for resale to both wholesale and retail customers.
Aircraft parts inventories are carried at the lower of average cost or net realizable value, and agricultural inventories are carried at the lower of first-in, first-out cost or net realizable value. Aircraft parts inventories that are utilized for aircraft maintenance are charged to operations when used. All other inventories, including agricultural inventories, are charged to operations when sold.
The nature of our inventories generally results in their utilization over an operating cycle in excess of one year. We periodically review our inventories for potential obsolescence and record adjustments, as necessary, to reflect the lower of cost or net realizable value. We did not have any material adjustments related to obsolete inventory during fiscal years 2005, 2004, or 2003.
Property and Equipment
Property and equipment is recorded at cost. We depreciate our property and equipment down to estimated residual values utilizing the straight-line method of depreciation over the estimated useful lives of the assets. The estimated useful lives for our primary property and equipment classes are as follows:
• Aircraft, aircraft engines, and rotable assets 8 to 38 years
• Machinery and equipment 3 to 10 years
• Buildings and improvements 10 to 40 years
Effective as of September 1, 2003, we changed the estimated useful lives of the aircraft in our Helicopters segment to more accurately reflect our current estimate of the useful lives of such aircraft. See "Note 5 - Property and Equipment" below.
When we sell or otherwise dispose of property or equipment, we charge to income the cost and accumulated depreciation of the asset in the period of disposal.
We capitalize all costs of major renewals, modifications, and overhauls (such as "C" and "D" checks) of our aircraft. We amortize the costs of such major overhaul components as follows:
• Large fixed-wing aircraft - Upon acquisition of a large fixed-wing aircraft, we segregate the costs of major overhaul components from the cost of the rest of the aircraft. We amortize the major overhaul component costs until the next scheduled overhaul, generally a period of ten years or less. The capitalized costs of subsequent overhauls are likewise amortized until the next scheduled overhaul.
• Medium fixed-wing aircraft, light fixed-wing aircraft, and helicopters - The cost of major overhaul components are not separately amortized, but depreciated as a part of the cost of the aircraft. The cost of subsequent major overhauls are capitalized and amortized over the estimated operating hours, generally a period of two years or less.
• Rotable assets - We capitalize the costs of rotable asset overhauls for our large fixed-wing aircraft and helicopters and then amortize these costs over the estimated useful lives of the overhauls, generally a period of five years or less. The cost of repairing rotable assets is expensed as incurred.
Impairment of Long-Lived Assets
We evaluate the recoverability of our long-lived assets, primarily aircraft and other property and equipment, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). We evaluate recoverability when events and circumstances indicate that the net carrying value of our long-lived assets may not be recoverable. We recognize an impairment loss when the sum of the undiscounted cash flows estimated to be generated by our long-lived assets is less than the assets' net carrying value.
Leased Aircraft - Overhauls and Lease Return Condition Costs
We account for the overhaul and lease return condition costs of our leased aircraft in accordance with the applicable lease agreements. Generally, we capitalize the costs of the required major maintenance and inspection of engines and airframes for our leased aircraft. We then amortize such capitalized costs over the lesser of i) number of years until the next scheduled overhaul, generally a period of ten years or less, or ii) the termination of the lease.
We generally do not accrue for future heavy maintenance costs unless we anticipate that such maintenance costs will be incurred in connection with the return of a leased aircraft. From the point in time that it is more probable than not that we will return a leased aircraft, we estimate the lease return costs, and we begin making periodic accruals to expense. We continue making such periodic accruals until the lease expires, at which time the entire estimated amount of cash payments for lease return condition costs should be fully accrued.
Assets Held for Sale
We record aircraft parts and other assets held for sale at the lower of cost or net realizable value. Cost of aircraft held for sale includes the unamortized portion of related capitalized overhauls.
Capitalized Loan Acquisition Costs
In May 2004, we incurred certain costs in connection with obtaining the Secured Credit Facility and completion of our debt refinancing program. See "Note 16 - Long-Term Debt Obligations" below. The costs associated with the refinancing were capitalized and are being amortized over the life of the Secured Credit Facility using the effective interest method in accordance with Statement of Financial Accounting Standards No. 21, Interest on Receivables and Payables. Amortization of capitalized loan acquisition costs during fiscal year 2005 was $3.8 million.
We utilized the funds that were advanced from the Secured Credit Facility to fully repay and terminate our revolving line of credit with PNC Bank. In conjunction with the full repayment of the revolving line of credit, we incurred $3.5 million of non-operating expense that was primarily attributable to loan prepayment penalties and a write-off of unamortized loan acquisition costs.
Revenue Recognition
The revenue recognition policies for each of our business segments are stated below:
Airlines - Airlines generates most of its flight revenue under one of four types of contracts: an "all-in contract," a contract for the USAF Air Mobility Command/Civil Reserve Air Fleet program, a block space agreement, or an "ACMI" or "wet lease" agreement.
• All-In Contract - Under an "all-in contract," Airlines pays for all operating expenses of the aircraft, including fuel costs. The price for an all-in contract is generally fixed; however, most of Airlines' all-in contracts also allow Airlines to adjust the contract price for increases in fuel prices.
• USAF Air Mobility Command/Civil Reserve Air Fleet Program - Under our agreement for the USAF Air Mobility Command/Civil Reserve Air Fleet program, we are paid on a per mile basis as adjusted for fuel prices. The contract price is inclusive of all costs incurred at commercial locations, and limited costs at military locations.
• Block Space Agreement - Under a block space agreement, a freight forwarder reserves a certain amount of cargo space on a specific flight. The freight forwarder must pay for the space committed, even if the cargo is not delivered to Airlines for shipment. The amount of block space reserved is measured in terms of the number of pallet positions occupied by the freight.
• ACMI Contract - Under an ACMI contract or "wet lease" arrangement, Airlines provides the aircraft, crew, maintenance, and insurance, while the customer bears all other operating expenses such as fuel and landing fees.
Regardless of the type of contract, Airlines records revenue for each completed flight segment and, at the end of each reporting period, for each flight segment in process.
EAGLE - EAGLE generates revenue by providing ground handling and logistics services to the U.S. Postal Service, passenger and cargo airlines, and express delivery customers. EAGLE typically provides these services under contracts that range in term from one to five years. Revenue is recorded when the services are rendered.
Helicopters - Helicopters generates flight revenue under service contracts that range in term from less than one year to five years. Helicopters typically charges by the number of hours flown, with a minimum number of hours per day, plus a monthly availability fee. Helicopters frequently modifies its general pricing structure in order to more closely match the characteristics of the mission. The various types of pricing methods utilized by Helicopters includes pricing by weight for transport of goods, pricing by acre for aerial spraying, and pricing by number of pickups for construction work. Revenue is recorded when services are rendered.
Air Center - The Air Center provides a range of support services to the air transportation industry. The types of support service revenues generated by the Air Center include aircraft maintenance and repair revenue, aircraft storage, and other support services. Revenue is recorded when services are rendered.
EASL - EASL generates revenue by:
• buying and selling aircraft, parts, and other aviation assets;
• purchasing aircraft, parts, and engines for part-out and resale;
• serving as a brokering agent for the sale of aviation assets owned by third parties; and
• assisting the other subsidiaries of Aviation in the procurement of aircraft, parts, and engines.
Revenue is recorded when the sale is closed.
Agriculture - Agriculture generates revenue through sales of crops, processed agricultural products, and nursery products. Revenue is recorded when the product is shipped.
Major Customers
Revenue generated under various contracts with numerous agencies of the U.S. government accounted for approximately 62%, 73%, and 68% of our total revenues for fiscal years 2005, 2004, and 2003, respectively. Amounts receivable from these agencies were $40.8 million and $25.0 million at February 28, 2005 and February 29, 2004, respectively.
Concentration of Credit Risks
We grant credit to customers throughout the world. Our primary customer base consists of various agencies of the United States government and large, well-established foreign and domestic airlines. The credit strength of this customer base is derived from its geographical diversity and from its long history of payment on services provided. We evaluate each customer's credit worthiness on a case-by-case basis.
Allowance for Doubtful Accounts
We maintain allowances for losses that may result from the inability of our customers to make required payments or from contract disputes. We also periodically record an allowance for the general collectibility of all other accounts receivable based upon factors such as the aging of receivables and historical collection experience. The February 28, 2005 and February 29, 2004 accounts receivable balances of $62.4 million and $39.4 million, respectively, are reported net of allowances for doubtful accounts of $1.7 million and $2.0 million, respectively.
We periodically evaluate the collectibility of our accounts receivable balances based upon information currently available. If we determine that a customer will be unable to meet its financial obligations to us, or if we determine that collectibility of an account is unlikely, we record a specific write-off in order to reduce the related receivable to the expected recovery amount. During fiscal year 2004, EAGLE reduced its allowance for doubtful accounts by $6.1 million due to a write-off of receivables related to U.S. Postal Service contracts.
In September 2001, we instituted proceedings against Asiana to recover certain amounts owed to us pursuant to a freighter service agreement with Asiana. The freighter service agreement was in force until February 28, 2003 and we believe that we are entitled to the full amount that we would have earned if Asiana had continued to meet its contractual obligation. As of February 28, 2003, we had recorded an account receivable of $27.2 million from Asiana, which was fully reserved on our books. We did not record in any additional income after Asiana ceased making payments. Subsequently, during fiscal year 2004, the $27.2 million account receivable was written off against the fully reserved balance, resulting in no change to the net receivable and no income effect. See "Asiana Airlines" in Item 3 of this Annual Report.
Goodwill
Two of our business segments, EAGLE and Helicopters, have a combined goodwill of $5.5 million. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, we evaluate the recoverability of goodwill when events and circumstances indicate that the undiscounted cash flows estimated to be generated by the reporting unit the goodwill is associated with are less than the goodwill's net carrying value. Our cash flow assumptions are based on historical experience with respect to capacity, expected revenue, operating costs, and other relevant factors. The net carrying value of goodwill determined to be not recoverable is reduced to fair value. During the last three fiscal years, we have not made any reductions to goodwill.
Income Taxes
We account for income taxes in accordance with Statement of Financial Standards No. 109 Accounting for Income Taxes ("SFAS No. 109"). We record provisions for deferred income tax assets and liabilities in order to reflect the net tax effects of temporary differences between i) the tax basis of assets and liabilities and ii) their reported amounts in our consolidated financial statements. Such provisions are based upon enacted tax laws and rates in effect for the years in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred income tax assets to the amounts expected to be realized.
Fair Market Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable, Secured Credit Facility, and accrued liabilities approximate fair market value because of the short-term maturity of these items. The carrying amounts of our variable rate long-term debt approximates fair market value because variable interest rates closely correlate to changes in market conditions. Our fixed-rate debt balances as of February 28, 2005 and February 29, 2004 were $220.9 million and $227.3 million, respectively. The fair market values of such debt as of February 28, 2005 and February 29, 2004 were
$160.2 million and $159.1 million, respectively. See "Note 16 - Long-Term Debt Obligations" below.
RECENT ACCOUNTING PRONOUNCEMENTS
Pronouncements in Current Fiscal Year
Although a number of new accounting pronouncements were enacted during our fiscal year 2005, none of these pronouncements had, or is expected to have, a material effect on our consolidated financial statements.
Pronouncements in Prior Fiscal Years
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51” (“FIN 46-R”). FIN 46-R addresses how a company should apply the provisions of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain variable interest entities. In particular, FIN 46-R will apply in those situations in which i) the company does not have a controlling financial interest in the variable interest entity or ii) the variable interest entity does not have sufficient equity at risk for the variable interest entity to finance its activities without additional subordinated financial support. In those situations, FIN 46-R requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the variable interest entities do not effectively disperse risks among the parties involved.
The Company is required to adopt FIN 46-R as of the period ending May 31, 2005. Although management has not completed a final assessment of the impact of FIN 46-R on the Company, preliminary assessments have indicated that the Company may be the primary beneficiary of certain related party variable interest entities including, but not limited to, Ventures Holding and Ventures Acquisition Company. The Company leases certain assets consisting primarily of buildings and aircraft from these entities. Upon the Company’s adoption of FIN 46-R, management’s assessment may indicate that the financial statements of these entities should be included in the Company’s financial statements in the period of adoption and beyond. Such inclusion is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 3 - LIQUIDITY
Risk of Default on Debt Obligations
We finance a portion of our capital expenditures and operations through long-term debt obligations. In particular, Aviation has obtained long-term financing by means of i) the issuance of $215.0 million of 12% senior second secured notes (the "Indenture Notes") and ii) a $100.0 million three-year senior secured credit facility financing agreement (the “Secured Credit Facility”). In addition, we have various other long-term debt instruments which consist primarily of equipment purchase notes.
Substantially all of our assets are pledged as collateral under our various debt agreements. Furthermore, the Indenture Notes and the Secured Credit Facility both contain cross-default provisions whereby certain events of default under one or more of the our debt obligations will result in an event of default under either, or both, the Indenture Notes and the Secured Credit Facility. In the event that we are unable to cure such defaults or obtain waivers with respect to such defaults, we are at risk that our payment obligations under either, or both, the Indenture Notes and the Secured Credit Facility will be accelerated, thereby forcing us to either obtain alternative financing or seek legal protection from our creditors.
Going Concern Explanatory Paragraph - Fiscal Year 2004
The audit report on our consolidated financial statements for fiscal year 2004 contains an explanatory paragraph which stated that due to our historical difficulty in meeting our debt covenants, there was substantial doubt as to our ability to continue as a going concern. Because of the various cross-default provisions that are contained in our long-term debt obligations, a failure by us to comply with the covenants of our long-term debt obligations could result in an acceleration of all of our outstanding debt obligations.
NOTE 4 - BUSINESS SEGMENTS
The following charts present selected financial information of the Company for fiscal years 2005, 2004, and 2003, as further segregated by each of our major business segments.
Revenue is classified as either domestic or foreign based upon the location of the customer's headquarters. As of February 28, 2005, all material long-lived assets are located in the United States.
NOTE 5 - PROPERTY AND EQUIPMENT
At February 28, 2005 and February 29, 2004, property and equipment consisted of the following:
Vintage owns the Evergreen Aviation Museum Building and certain vintage aircraft, which are not being depreciated. The February 28, 2005 and February 29, 2004 net carrying values of $16.1 million for the Evergreen Aviation Museum Building and $6.6 million for the vintage aircraft is included in the table above. Vintage leases the Evergreen Aviation Museum Building and the Evergreen Museum Land to The Captain Michael King Smith Evergreen Aviation Educational Institute, a not-for-profit entity, at no charge.
Depreciation expense for fiscal years 2005, 2004, and 2003 was $23.7 million, $24.3 million and $25.7 million, respectively.
NOTE 6 - IMPAIRMENT OF ASSETS
Airlines and DHL, an air freight carrier, were parties to an air freight services contract under which Airlines provided air freight services to various DHL locations along the west coast of the United States. Airlines substantially utilized its DC-9 aircraft fleet in performing the air freight services under the DHL contract.
The DHL contract expired by its own terms in August 2004, resulting in a substantial decrease in Airline's utilization of its DC-9 aircraft fleet. As a result of the decreased utilization, management performed an assessment on each of the DC-9 aircraft in Airlines' fleet in order to determine whether any impairment in asset value needed to be recorded on Airlines’ books in accordance with SFAS No. 144. During its assessment, management considered i) the impact of the completion of the DHL contract on the operating results for each of the DC-9 aircraft, ii) current trends and future prospects, and iii) the effects of obsolescence, customer demand, competition, and other economic factors.
Based upon the assessment, Airlines determined that the expected cash flows for two of the DC-9 aircraft were not sufficient to recover the net carrying value of the assets, and therefore the two DC-9 aircraft were impaired as defined by SFAS
No. 144. Consequently, Airlines reduced the net carrying value of these DC-9 aircraft by $1.3 million to reflect the appraised fair market value of the aircraft. This $1.3 million impairment charge in our Airlines segment is included within the line item of "Aircraft and equipment" on our consolidated statement of operations.
Our impairment analysis further indicated that the cash flows expected to result from the future use and eventual disposition of the remaining three DC-9 aircraft in Airlines' fleet was greater than the net carrying value of the aircraft. As a result, we determined that the remaining three DC-9 aircraft were not impaired. We will continue to evaluate the recoverability of the net carrying value of the remaining three DC-9 aircraft when events or changes in circumstances indicate that the net carrying amount may not be recoverable.
NOTE 7 - EXPIRATION OF AIRCRAFT LEASES
Airlines leased two DC-9 aircraft from Ventures Acquisition Company pursuant to two lease agreements scheduled to expire in January 2005. Due to the expiration of the DHL air freight services contract during fiscal year 2005, the two DC-9 aircraft were no longer required for Airlines' operations and Airlines decided to return the two DC-9 aircraft to Ventures Acquisition Company upon termination of the leases. Upon determining that it would be more likely than not that the two DC-9 aircraft would be returned to the lessor upon expiration of the leases, Airlines estimated that approximately $5.0 million of maintenance expense would be incurred for lease return condition costs. Because the leases expired before the end of fiscal year 2005, the entire $5.0 million of maintenance expense was recorded by Airlines during fiscal year 2005.
NOTE 8 - CHANGE IN ESTIMATES OF AIRCRAFT USEFUL LIVES
Effective as of September 1, 2003, we changed the estimated useful lives of the aircraft in our Helicopters segment in order to more accurately reflect our current estimate of their useful lives. The estimated useful lives of these aircraft were increased from 10 years to 20 years. The change lowered total depreciation expense by $0.7 million and $0.4 million for fiscal years 2005 and 2004, respectively.
NOTE 9 - PREPAID EXPENSES AND OTHER
Prepaid expenses and other at February 28, 2005 and February 29, 2004 consisted of the following:
NOTE 10 - OTHER ASSETS
Other assets at February 28, 2005 and February 29, 2004 consisted of the following:
NOTE 11 - SUPPORT SERVICES AND OTHER REVENUE
Support services and other revenue for fiscal years 2005, 2004, and 2003 consisted of the following:
NOTE 12 - COST OF SUPPORT SERVICES AND OTHER REVENUE
Cost of support services and other revenue for fiscal years 2005, 2004, and 2003 consisted of the following:
NOTE 13 - OTHER NON-OPERATING (EXPENSE) INCOME, NET
Other non-operating (expense) income, net for fiscal years 2005, 2004, and 2003 consisted of the following:
NOTE 14 - CASH FLOWS FROM INVESTING ACTIVITIES - USE OF PROCEEDS FROM INSURANCE SETTLEMENTS
Cash proceeds received from insurance settlements during fiscal years 2005, 2004, and 2003 were used as follows:
NOTE 15 - CASH FLOWS FROM INVESTING ACTIVITIES - OTHER ASSETS
Cash flows from investing activities - other assets during fiscal years 2005, 2004, and 2003 were as follows:
NOTE 16 - LONG-TERM DEBT OBLIGATIONS Long-term debt obligations at February 28, 2005 and February 29, 2004 consisted of the following:
The following table summarizes the scheduled maturities of our long-term debt and capital leases as of
February 28, 2005:
Indenture Notes
The 12% Senior Second Secured Notes due 2010 (the "Indenture Notes") were issued by Aviation on May 16, 2003, pursuant to an indenture agreement which was executed by Aviation, as issuer, by Holdings and substantially all of the subsidiaries of Aviation, as guarantors, and by J.P. Morgan Trust Company, N.A., as successor trustee to Bank One, N.A., as trustee.
The Indenture Notes are secured by a second priority lien, subject to certain permitted liens, on substantially all of the assets of Aviation and its domestic subsidiaries, excluding the assets of Agriculture. The Indenture Notes are designated as senior second secured obligations. As a result, the Indenture Notes rank equally with all of Aviation’s existing senior, or unsubordinated, debt, and are senior to any of Aviation’s future senior subordinated or unsubordinated debt.
To the extent of assets securing both the Indenture Notes and the Secured Credit Facility (see "Secured Credit Facility" below), the Indenture Notes are effectively second in priority to our indebtedness under the Secured Credit Facility. However, to the extent of the assets securing the Indenture Notes, the Indenture Notes are senior to our unsecured debt obligations In addition, the Indenture Notes are fully and unconditionally guaranteed, both jointly and severally, by Holdings, substantially all of Aviation’s subsidiaries, and the Trust. The only subsidiaries and affiliated entities that are not obligated as guarantors under the Indenture Notes are Evergreen Agricultural Enterprises, Inc., Evergreen Vintage Aircraft Inc., and the foreign subsidiaries of the Company.
The Indenture Notes bear interest at an annual fixed rate of 12%. Payments of interest are due semi-annually on May 15 and November 15 of each year.
On May 13, 2005, we made the semi-annual payment of accrued interest on the Indenture Notes in the amount of
$12.9 million. Payment of the accrued interest was funded from our operations.
The next semi-annual payment of accrued interest on the Indenture Notes, in the amount of $12.9 million, is due and payable on November 15, 2005. We intend to fund payment of the accrued interest from our operations.
The Indenture Notes will mature on May 15, 2010, at which time the outstanding principal of the Indenture Notes, plus all accrued and unpaid interest, will become due. However, we may elect to redeem the Indenture Notes prior to the maturity date. The Indenture Notes are redeemable after the dates and at the prices (expressed in percentages of principal amount on the redemption date) as set forth below:
If redeemed during the 12-month period commencing: Redemption Price
May 15, 2007 106 %
May 15, 2008 103 %
May 15, 2009 and thereafter 100 %
In addition, at any time prior to May 15, 2006, we may redeem, on one or more occasions, up to 35% of the principal amount of the Indenture Notes with the net cash proceeds from sales of certain kinds of capital stock at a redemption price of 112%, plus accrued and unpaid interest at the redemption date.
If a Change of Control (as defined in the Indenture Notes) occurs, each holder of Indenture Notes will have the right to require us to repurchase all or part of the holder's Indenture Notes at a price equal to 101% of the Indenture Notes' principal amount, plus any accrued and unpaid interest to the date of repurchase.
The Indenture Notes impose certain restrictions on Aviation and its restricted subsidiaries. Such restrictions include, but are not limited to, restrictions on the ability to:
•
incur additional debt or create liens;
•
pay dividends or acquire shares of capital stock;
•
make payments on subordinated debt or make investments;
•
make distributions from restricted subsidiaries;
•
issue or sell capital stock of restricted subsidiaries;
•
issue guarantees;
•
sell or exchange assets, or make capital expenditures;
•
enter into transactions with shareholders and affiliates; and
•
effect mergers and other changes of control.
Secured Credit Facility
On May 13, 2004, Aviation and certain of its subsidiaries entered into the Secured Credit Facility with Wells Fargo Foothill, Inc. and Ableco Finance LLC (collectively, “the Wells Fargo Lenders”). The Secured Credit Facility consists of two loans - a $50.0 million term loan and a $50.0 million revolving loan, as further described in "Term Loan Advances" and "Revolving Loan Advances" below. The Secured Credit Facility is secured by substantially all of the assets of Aviation and its domestic subsidiaries, excluding the assets of Agriculture.
At the closing of the Secured Credit Facility, approximately $83.0 million of the loan was funded. We utilized
$80.8 million of the funds to fully repay and terminate certain revolving credit obligations owed by Aviation to PNC Bank, N.A. (“PNC Bank”), while the remaining $2.2 million of loan proceeds was used to pay for part of the legal fees and other transaction costs incurred by the Company in connection with the closing of the Secured Credit Facility. We incurred a total of $2.4 million of legal and professional fees in connection with the closing of the Secured Credit Facility. We capitalized those legal and professional fees as loan acquisition costs and are amortizing the loan acquisition costs over the term of the Secured Credit Facility.
Interest Rates. The term loan bears interest at an annual rate of either LIBOR plus 5.5% or prime plus 3.0%, and the revolving loan bears interest at an annual rate of either LIBOR plus 3.0% or prime plus 0.5%. So long as we are not in default under the Secured Credit Facility, we may elect at any time to have interest on all or a portion of the advances on the revolving loan or the term loan calculated under the applicable LIBOR interest rate option. LIBOR interest rate elections are available for LIBOR periods of 1, 2, 3, or 6 months. Interest on a LIBOR rate loan is payable on the last day of the LIBOR period (if the elected LIBOR period is less than three months) or on the last day of each three month interval (if the elected LIBOR period is six months). For any portion of the term loan or revolving loan which is not covered by a LIBOR interest rate election, monthly payments of accrued interest are due on the first day of each month.
Term Loan Advances. The $50.0 million term loan was fully funded at the closing of the Secured Credit Facility. No additional advances are permitted under the term loan at any time, and any principal amount of the term loan which is repaid or prepaid may not be reborrowed. We are required to make payments of principal on the term loan in monthly installments of $0.5 million. Payment of the monthly principal installments commenced on June 1, 2004 and will continue on the first day of each succeeding calendar month throughout the term of the Secured Credit Facility. Then, unless paid in full earlier, all outstanding principal and accrued and unpaid interest of the term loan will be due and payable in full when the Secured Credit Facility terminates in May 2007.
Revolving Loan Advances. During the term of the Secured Credit Facility, we may receive advances of principal on the revolving loan at any time. However, the outstanding principal of the revolving loan may not at any time be greater than an amount which is determined by reference to certain eligible receivables and eligible inventory of the Company. See “Loan Balance and Availability” below. We may also make payments of principal on the revolving loan at any time. All outstanding principal and all accrued and unpaid interest of the revolving loan will be due and payable in full when the Secured Credit Facility terminates in May 2007.
Loan Balance and Availability. As of February 28, 2005, the outstanding balance of the Secured Credit Facility was
$79.3 million. Taking into consideration the limitations on our ability to obtain additional advances of principal from the revolving loan (see “Revolving Loan Advances” above) and the Minimum Availability Requirement (see "Covenant Compliance" below), as of February 28, 2005, our availability under the Secured Credit Facility was $4.9 million.
Covenant Compliance. We are subject to certain financial and non-financial covenants under the Secured Credit Facility. In particular, we must maintain: i) either a qualified cash reserve balance or an undrawn availability on the revolving loan of not less than $5.0 million ("Minimum Availability Requirement"), ii) minimum thresholds with respect to certain consolidated and non-consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”), and iii) a minimum ratio with respect to fixed charge coverages.
The following are the required covenant thresholds under the Secured Credit Facility for the twelve-month period ended February 28, 2005:
Consolidated EBITDA Covenant - The covenant requires a consolidated EBITDA in a minimum amount of $97.0 million. As of February 28, 2005, we were in compliance with this covenant.
Airlines EBITDA Covenant - The covenant requires an EBITDA for Airlines in a minimum amount of $82.0 million. As of February 28, 2005, we were in compliance with this covenant.
Fixed Charge Coverage Covenant - The covenant requires a fixed charge coverage in a minimum ratio of 1.10 to 1.00. As of February 28, 2005, we were in compliance with this covenant.
In addition, the amount of capital expenditures that may be made by us in any fiscal year is limited to $75.0 million, of which at least $10.0 million must be financed from sources other than the Secured Credit Facility. As of February 28, 2005, we were in compliance with this covenant.
If Aviation or any of its restricted subsidiaries violates these covenants and are unable to obtain waivers from the Wells Fargo Lenders, we would be in default under the Secured Credit Facility and the debt could be accelerated.
On June 1, 2005, the Wells Fargo Lenders notified us that the Wells Fargo Lenders believed that we were in violation, as of April 29, 2005, of certain covenants of the Secured Credit Facility, as discussed in "Note 23 - Subsequent Events" below.
Prior Loan Acquisition Costs
In connection with the full repayment and termination of the revolving credit obligations owed by Aviation to PNC Bank, we incurred $0.3 million of expense for pre-payment penalties and legal fees, and recognized a write-off of unamortized loan acquisition costs in the amount of $3.5 million in May 2004. The write-off of unamortized loan acquisition costs is included on our consolidated statement of operations as part of “Other non-operating (expense) income, net.”
WCMA Loan Agreement
On August 12, 2003, EASL entered into Working Capital Management Account Loan Agreement No. 54F-07164
(the “WCMA Loan”) with Merrill Lynch Business Financial Services, Inc. (“MLBFS”) for the purpose of obtaining an
$8.0 million reducing revolver credit facility. The WCMA Loan provides for a reducing revolver loan which is funded from a line of credit. EASL may repay the loan balance in whole or in part at any time without penalty, and may request a
re-borrowing of amounts repaid on a revolving basis. The WCMA Loan does not require monthly payments of principal. However, on the last business day of each calendar month, the maximum amount of the line of credit will be reduced by an amount equal to 1/60th of the loan amount. The WCMA Loan bears interest at the variable rate of LIBOR plus 3.0% and monthly payments of accrued interest are due and payable on the first business day of each calendar month. The WCMA Loan shall terminate on August 31, 2008, at which time all outstanding unpaid principal and all accrued and unpaid interest shall be due and payable in full.
On May 12, 2004, EASL and MLBFS executed an amendment letter to the WCMA Loan. The amendment letter establishes certain financial covenants for the WCMA Loan that are consistent with the financial covenants contained in the Secured Credit Facility. The amendment letter establishes i) a schedule for fixed charge coverage ratios to be measured on a quarter-end basis, ii) a $75.0 million maximum limit on capital expenditures of which at least $10.0 million must be funded by indebtedness, and iii) a minimum consolidated EBITDA that must be achieved by the Company on a quarter-end basis. Specifically, the amendment letter adjusted the fixed charge coverage ratios and minimum consolidated EBITDA requirements of the WCMA Loan to correspond with the fixed charge coverage ratios and consolidated EBITDA requirements of the Secured Credit Facility. See “Secured Credit Facility” above.
Covenant Compliance. As of February 28, 2005, we were in compliance with the covenants contained in the WCMA Loan. See “Secured Credit Facility” above.
FINOVA Note
In May 1997, the Trust entered into a $30.0 million Secured Loan Agreement with FINOVA Capital Corporation
(the "FINOVA Note"), with interest at the annual rate of 10.44%. Monthly installments of principal and interest were payable through April 2005, at which time the FINOVA Note matured with a final payment of approximately $2.5 million in principal, plus accrued interest, due upon maturity.
Effective as of April 29, 2005, the Trust and FINOVA have executed a Third Amendment Agreement to amend and extend the FINOVA Note (the "Third Amendment"). The Third Amendment extends the maturity date of the FINOVA Note to September 29, 2005, with the annual rate of interest remaining at 10.44%. Monthly installments of principal and interest in the amount of $471,650 are scheduled through the extended maturity date, resulting in a full amortization of the remaining outstanding principal balance. All outstanding principal and accrued, but unpaid interest, will be due upon maturity, as extended.
The Secured Loan Agreement is secured by means of a first priority security interest granted to FINOVA in the one Boeing 747 aircraft and three DC-9 aircraft owned by the Trust.
Intervest Note
On December 30, 2004, Vintage entered into a Construction Loan Agreement with Intervest-Mortgage Investment Company ("Intervest") whereby Intervest agreed to loan to Vintage a sum total of $9.0 million for the purpose of financing Vintage's construction of an IMAX theater on the Evergreen Museum Land. The Construction Loan Agreement is further evidenced by a Promissory Note from Vintage to Intervest in the principal sum of $9.0 million (the "Intervest Note").
The Intervest Note provides for an annual rate of interest equal to 1.00% in excess of the rate established for a Bank Prime Loan, as published in the Federal Reserve Statistical Release H.15 (the "Index"). The interest rate on all sums advanced under the Intervest Note shall be adjusted on the first day of each month following the date that the Bank Prime Loan rate changes in the Index, with such interest rate to be equal to 1.00% in excess of the week-ending average rate established for the Bank Prime Loan, as published in the Index. However, the interest rate shall never be less than 5.75% per annum. Accrued interest on the outstanding balance of sums advanced under the Intervest Note shall be due and payable on the first day of each month. In addition, following any default in the payment of interest under the Intervest Note, or any default under any of the other documents executed in connection with or to secure the Intervest Note (the "Loan Documents") and expiration of the applicable cure period, Intervest may elect to (i) declare the Intervest Note due and payable, and/or (ii) increase the rate of interest payable under the Intervest Note by three percent (3.00%) per annum.
The entire principal balance and any accrued, but unpaid, interest on the Intervest Note shall be due and payable on January 1, 2006. However, so long as Vintage is not in default under the provisions of the Construction Loan Agreement, Vintage may elect to extend the maturity date of the Intervest Note to July 1, 2006. Vintage may exercise its right to extend the maturity date by providing Intervest with at least 30 days prior written notice and paying to Intervest the amount of $67,500 in consideration for the extension period. In addition, Vintage may, at any time, prepay the whole or any part of the Intervest Note without penalty.
Vintage's obligations under the Intervest Note and Construction Loan Agreement are secured by a security interest in i) the Evergreen Museum Land, the Evergreen Aviation Museum Building, and the tangible personal property owned by Vintage which is located on or in the Evergreen Museum Land and the Evergreen Aviation Museum Building, ii) a pledge of all rents arising out of the operation of the Evergreen Museum Land and the Evergreen Aviation Museum Building, and iii) the aircraft owned by Vintage. In addition, Mr. Smith has guaranteed payment of the amounts due under the Intervest Note and Construction Loan Agreement.
The Construction Loan Agreement includes certain events of default, including: i) the filing of certain mechanics' liens against the Evergreen Museum Land, ii) failure to comply with the Construction Loan Agreement, the Intervest Note, the Loan Documents or any requirement of any governmental authority, iii) certain events of bankruptcy, iv) impairment of the security interest in the Evergreen Museum Land, and v) failure to construct the theater in accordance with written plans and specifications or within specified time periods.
Intervest has agreed, subject to certain conditions, to provide permanent financing for the theater following the completion of the theatre's construction.
NOTE 17 - RELATED PARTY TRANSACTIONS Mr. Delford M. Smith, the chairman of our board of directors, has control, either directly or indirectly, over approximately 85% of the outstanding shares of Holdings common stock. In addition, Mr. Smith owns or controls other entities, or does business under other trade names, including, but not limited to, the following:
• Ventures Acquisition Company LLC ("Ventures Acquisition Company");
• Ventures Holding, Inc. ("Ventures Holding");
• DMS Properties; and
• Greenpatch Farms.
Transactions Under Mr. Smith's Employment Agreement
Under an Employment Agreement dated May 16, 2003, Mr. Smith serves as our Chief Executive Officer and Chairman of the Board at a compensation rate of $3.0 million per year. In addition, Mr. Smith may be entitled to annual bonuses, at the discretion of the board of directors, provided that Mr. Smith uses the amount of such annual bonuses solely i) to satisfy any obligation of Mr. Smith or his affiliates to us and ii) to satisfy any taxes payable by Mr. Smith or his affiliates as a result of the receipt of such bonus or the satisfaction of such obligations.
During fiscal year 2005, the board of directors granted a $2.9 million bonus to Mr. Smith. Payment of the bonus was recorded by us as a part of selling, general, and administrative expenses. In accordance with the terms of the Employment Agreement, Mr. Smith utilized $2.0 million of the bonus to pay $1.4 million of principal and $0.6 million of accrued interest on obligations owed to us by Mr. Smith or his affiliates, and the remaining portion of the bonus was utilized to satisfy taxes payable by Mr. Smith or his affiliates as a result of the receipt of the bonus.
The Employment Agreement has a five-year term, but it automatically extends itself each day so that the remaining term is always five years. In the event Mr. Smith's employment is terminated either i) by reason of his death or disability, ii) by us without "cause", or iii) by Mr. Smith for "good reason" (as defined in the Employment Agreement), then Mr. Smith, or his estate, as the case may be, will be entitled to be paid an amount equal to five times his base annual compensation plus an amount equal to five times the average of the annual bonus paid to him in the five years immediately preceding the termination. In addition, if Mr. Smith's employment is terminated by us without "cause" or by Mr. Smith for "good reason", Mr. Smith will be entitled to company-paid health coverage for a period of five years following termination.
Sales Transaction
During fiscal year 2005, we had sales of approximately $7.7 million to various entities owned by, or controlled by, Mr. Smith, as follows:.
During fiscal year 2004, we had sales of approximately $11.0 million to various entities owned by, or controlled by, Mr. Smith.
Purchases of Agricultural Products
During fiscal year 2003, Agriculture purchased approximately $600,000 of hazelnuts and approximately $1.0 million of pinot noir grapes from Mr. Smith or entities owned by, or controlled by, Mr. Smith. During fiscal year 2004, Agriculture purchased approximately $197,000 of pinot noir grapes from Mr. Smith or entities owned by, or controlled by, Mr. Smith. During fiscal year 2005, Agriculture did not purchase any products from Mr. Smith or any entities owned by, or controlled by, Mr. Smith.
Lease Transactions
We rent aircraft and buildings from entities that are owned by, or controlled by, Mr. Smith. During fiscal years 2005, 2004, and 2003, we incurred rent expense for these leases in the aggregate amounts of $7.1 million, $7.3 million, and $5.4 million, respectively.
In addition, Aviation and Mr. Smith are co-beneficiaries of the Trust, which leases certain aircraft to Airlines. Specifically, Aviation and Mr. Smith share a beneficial interest in one of the assets of the Trust, a Boeing 747 aircraft. Mr. Smith holds a one-third beneficial interest in the Boeing 747, while Aviation holds the remaining two-thirds beneficial interest. Airlines leases the Boeing 747 from the Trust.
During each of fiscal years 2005, 2004, and 2003, Airlines incurred aircraft lease expense on the Boeing 747 in the amount of $7.5 million. Of these amounts in each fiscal year period, $2.4 million was attributable to Mr. Smith's one-third beneficial interest in the aircraft.
Expiration of Aircraft Lease
During fiscal year 2005, Airlines and Ventures Acquisition Company negotiated a settlement for lease return condition costs in connection with the scheduled expiration of two DC-9 aircraft leases. See "Note 7 - Expiration of Aircraft Leases" above.
Notes Receivable from Affiliates and Notes Payable to Affiliates
We also have a number of notes receivable from, and notes payable to, Mr. Smith, Ventures Holding, and Ventures Acquisition Company. The chart below summarizes the various notes receivable from, and notes payable to, Mr. Smith, Ventures Holdings, Inc., or Ventures Acquisition Company at February 28, 2005 and February 29, 2004:
Notes Receivable from Affiliates- During fiscal year 2005, we received $2.6 million of principal payments on notes receivable from affiliates. During the same time period, the principal balances of our notes receivable from affiliates increased by $0.6 million of accrued interest receivable.
Notes Payable to Affiliates- During fiscal year 2005, we made $0.7 million of principal payments on notes payable to affiliates.
Lease Return Costs Payable to Ventures Acquisition Company- As of February 28, 2005, Airlines had recorded a $2.0 million accrued liability payable to Ventures Acquisition Company for lease return condition costs recorded in connection with the termination of the two DC-9 aircraft leases. See "Note 7 - Expiration of Aircraft Leases".
Evergreen Aviation Museum Vintage owns both the Evergreen Aviation Museum Building and the Evergreen Museum Land in McMinnville, Oregon. In addition, Vintage also owns a collection of vintage aircraft. Vintage leases the Evergreen Aviation Museum Building and the Evergreen Museum Land to The Captain Michael King Smith Evergreen Aviation Educational Institute, a non-profit corporation (the "Institute"). The initial lease term is for 25 years, with a nominal rental payment obligation of one dollar per year.
During the initial years of the Institute's operations, we made a series of loans to the Institute to cover start-up, payroll, and operational expenses. The aggregate amount of the loans was approximately $716,000 and in February 2003 we forgave the loans.
NOTE 18 - INCOME TAXES
The components of our income tax (benefit) expense for fiscal years 2005, 2004, and 2003 were as follows:
The following table presents the tax effects of the temporary differences that gave rise to the deferred tax assets and deferred tax liabilities at February 28, 2005 and February 29, 2004:
Our effective tax rate for fiscal years 2005, 2004, and 2003 differs from the federal statutory tax rate due primarily to the following:
(1)Other is comprised of permanent differences, predominately meals, entertainment, fines, and other penalties.
At February 28, 2005 and February 29, 2004, we had federal income tax net operating loss carryforwards of $96.0 million and $88.8 million, respectively. At February 28, 2005 and February 29, 2004, we had state income tax net operating loss carryforwards of $73.8 million and $34.5 million, respectively. These net operating loss carryforwards expire in the years 2007 through 2024. During fiscal years 2005 and 2004, we reduced our taxes currently payable by $0.9 million and $0, respectively, from the utilization of net operating loss carryforwards. At February 28, 2005 and February 29, 2004, we had an alternative minimum tax (AMT) credit available of $10.5 million which is available to offset future regular taxes that are in excess of future alternative minimum taxes. Under current tax law, the carryforward period for the AMT credit is unlimited.
NOTE 19 - EMPLOYEE BENEFIT PLANS
Effective March 1, 2002, we established the Evergreen Savings and Retirement Plan (the "Plan"). The Plan is a defined contribution plan covering all full-time employees of the Company who have been credited with one year of service, are at least 21 years of age, are not covered by a collective bargaining agreement, and are not a temporary employee. Under the Plan, we make a basic contribution equal to 4% of the annual compensation of each participant who has completed the minimum required hours of service during the Plan year ("Basic Contributions"). In addition, we match, on a 50% matching basis, each participant's contribution which is not in excess of 8% of the participant's base compensation. ("Matching Contributions"). We may also make additional discretionary contributions at the option of the Board of Directors.
We made Matching Contributions of $1.2 million, $4.0 million, and $3.8 million during fiscal years 2005, 2004, and 2003, respectively. We made Basic Contributions of $2.8 million, $2.5 million, and $2.0 million during fiscal years 2005, 2004, and 2003, respectively. We did not make any discretionary contributions to the Plan during fiscal years 2005, 2004, or 2003.
Plan participants direct the investment of both their contributions and the Company's contributions into various investment options offered by the Plan. Participant contributions into the Plan vest immediately. Company contributions into the Plan start to vest when the participant has completed two years of service with the Company, at which time the participant will be 20% vested. Thereafter, additional vesting occurs at a rate of 20% per year until the participant is fully vested.
NOTE 20 - LEASE COMMITMENTS
We lease aircraft and engines under various agreements with both third parties and affiliates. Five of our small fixed-wing aircraft and 23 of our helicopters are leased under operating leases which have remaining lease terms ranging from six years to less than one year. Under many of these leases, we would be liable for a stipulated loss value if an event of default occurs and, in the event we prematurely terminate the lease, we would be liable for a lease termination fee. As of
February 28, 2005, the aggregate stipulated loss values for our aircraft leases was approximately $28.0 million, and the aggregate amount of lease termination fees was approximately $22.7 million.
A number of our small fixed-wing aircraft and helicopter leases include options to purchase the aircraft either at the expiration of the lease or on certain lease anniversary dates ranging from two to four years. Although most of the purchase options are based upon the fair market value of the aircraft as of the purchase date, some of the leases provide for a guaranteed purchase option price. As of February 28, 2005, the aggregate amount of the guaranteed purchase option prices for our leased aircraft was approximately $13.8 million.
We also lease land and buildings under various lease agreements with third parties and affiliates. In particular, EAGLE leases warehouse, office, and ramp space at the various airport locations served by EAGLE. In addition, we also lease corporate office space in McMinnville, Oregon from DMS Properties and Ventures Holdings.
At February 28, 2005, our commitments for future rentals under non-cancelable operating leases having an original term of one year or more were as follows:
In addition, we lease aircraft and engines under short-term agreements on an as-needed basis.
Total rental expense for fiscal years 2005, 2004, and 2003 was $45.1 million, $39.4 million, and $33.1 million, respectively, including related party rentals.
NOTE 21 - CONTINGENCIES AND COMMITMENTS
We are currently involved in a number of legal proceedings. While the results of these proceedings cannot be predicted with certainty, we believe, based on our examination of the subject matter of the proceedings, experience with similar proceedings, and discussion with legal counsel regarding possible outcomes, that the final outcome of such proceedings will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. As material developments related to pending litigation occur, we will reassess our potential liability and revise any estimates accordingly.
Banc of America We are a defendant in Banc of America Securities LLC v. Evergreen International Aviation, Inc. et al., which was filed on May 22, 2003 in the Superior Court of the County of Meeklenburg in the State of North Carolina. Banc of America has alleged claims for breach of contract and quantum meruit, arising out of agreements in which Banc of America agreed to act as our financial agent in exchange for the payment of certain fees. The plaintiff has not yet specified an amount for damages.
We filed a motion to dismiss for lack of jurisdiction, but both the trial court and the North Carolina Court of Appeals have denied the motion. We are currently evaluating further appellate and trial options.
Asiana Airlines
On January 28, 2000, we entered entered into a contract with Asiana Airlines (“Asiana”) whereby we agreed to provide air freight services to Asiana in exchange for minimum payments to be made by Asiana throughout the term of the contract. The minimum payments were based on guaranteed block hour utilization and the contract was to continue through February 28, 2003. On August 28, 2001, Asiana notified us that Asiana would not make any further payments under the contract.
On September 19, 2001, we filed proceedings in the United States District Court for the District of Oregon against Asiana to recover amounts owed by Asiana to us pursuant to the contract. On February 28, 2003, a jury returned a verdict in our favor and on April 28, 2003, the court entered a judgment for damages in the amount of $16.6 million in our favor. Asiana subsequently filed an appeal of the judgment with the Ninth Circuit Court of Appeals and oral appellate arguments were held on May 2, 2005. As of the date of this Annual Report, we have not yet received notice of a ruling on the appeal.
Tridair Repair and Manufacturing
On February 11, 2003, Tridair Repair and Manufacturing, Inc. (“Tridair”) filed a complaint against us in the United States District Court for the Central District of California (the “California Court”) alleging fraud and breach of contract. The allegations relate to an aircraft salvage contract under which we agreed to perform aircraft salvage services for Tridair in return for payments to be made by Tridair to us. Tridair subsequently transferred its litigation rights to Diversified Aero Asset Management, Inc. (“Diversified”), which had previously filed a complaint against the Air Center for similar claims. Diversified amended its complaint in order to seek $10.6 million in damages for fraud and breach of contract. Upon motion, the matter was transferred to the federal district court in Arizona and a jury trial was scheduled to begin on October 18, 2005.
Subsequently, on May 6, 2005, the parties entered into a Settlement Agreement and Release whereby each party agreed to dismiss all claims, with prejudice, in exchange for the release of such party's equipment and property held by the other party, with each party bearing its own fees and costs. The Settlement Agreement and Release was executed by all parties on May 15, 2005.
Ducor Express Airlines
On February 25, 2005, Ducor Express Airlines, Inc. ("Ducor") filed a claim against Airlines for breach of contract (the "Action") in the Supreme Court of New York, County of Queens. Ducor seeks damages of $41.7 million against Airlines in regard to certain agreements between the parties for Airlines to provide charter cargo flights from Hong Kong, China to Los Angeles, California during September 2004 through November 2004 (collectively, the "Charter Agreements"). On March 21, 2005, Airlines filed a counterclaim against Ducor in regard to the Charter Agreements. Subsequently, the parties have entered into negotiations for a Settlement Agreement whereby Ducor and Airlines i) will agree to file a stipulation of discontinuance of the Action with prejudice and ii) will agree to release and discharge the other from any and all claims and liabilities with respect to the Action.
Claim for Losses under the Air Transportation Safety and System Stabilization Act There is a possibility that we may be asked to return all or a portion of the $7.2 million that we received in fiscal year 2002 for claims pursuant to the Air Transportation Safety and System Stabilization Act. As of February 28, 2005, we have not received any further correspondence and have not participated in any further negotiations regarding this matter. Currently, we do not anticipate that we will be required to return any of $7.2 million. To the extent we need to actually pay any of these amounts, we believe that cash on hand and amounts expected to be available under our Secured Credit Facility will be sufficient.
Aircraft Purchase Commitments
As of the date of this report, we have entered into agreements to purchase the following aircraft:
Subject to finalization of financing or leasing arrangements, we expect to take delivery of all of the above-listed aircraft during fiscal year 2006. In addition, we anticipate that upon taking delivery, we will simultaneously sell and lease back the aircraft under operating lease agreements for lease terms not greater than three years.
NOTE 22 - SUPPLEMENTAL FINANCIAL INFORMATION FOR GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES
The Indenture Notes that were issued by Aviation are fully and unconditionally guaranteed, both jointly and severally, by Holdings, substantially all of Aviation’s subsidiaries (the “Guarantor Subsidiaries”), and the Trust (the “Non-Wholly Owned Guarantor Subsidiary”). The only subsidiaries and affiliated entities that are not obligated as guarantors under the Indenture Notes are Evergreen Agricultural Enterprises, Inc., Evergreen Vintage Aircraft Inc., and the foreign subsidiaries of the Company (collectively, the “Non-Guarantor Subsidiaries”).
The Company accounts for all investments in its subsidiaries utilizing the equity method of accounting. As a result, the net income and loss of each of the Company’s subsidiaries is reflected on the books of the Company as either an increase in, or reduction of, the Company’s equity in the earnings of each such subsidiary. For the purposes of reporting on a consolidated basis, eliminating entries are made by the Company at the holding company level in order to eliminate the balances of the Company’s investments in its subsidiaries against all intercompany balances and intercompany transactions.
The following supplemental consolidated financial statements separately present the results of operations for Evergreen Holdings, Inc., Evergreen International Aviation, Inc., the wholly-owned Guarantor Subsidiaries on a combined basis, the Non-Wholly Owned Guarantor , and the Non-Guarantor Subsidiaries on a combined basis, with consolidating adjustments and total consolidated amounts.
NOTE 23 - SUBSEQUENT EVENTS
Amendment to FINOVA Note Effective as of April 29, 2005, the Trust and FINOVA have executed the Third Amendment Agreement to amend and extend the FINOVA Note. See "FINOVA Note" in "Note 16 - Long-Term Debt Obligations" above.
Notice and Waiver of Specified Events of Default under Secured Credit Facility
On June 1, 2005, the Wells Fargo Lenders notified us that the Wells Fargo Lenders believed that we were in violation of certain covenants of the Secured Credit Facility (the "Specified Events of Default"), as follows:
i)
occurrence of a default at the final maturity, on April 29, 2005, of the obligations under the FINOVA Note;
ii)
failure to maintain insurance on the Collateral;
iii)
making an unpermitted investment toward the purchase of two Boeing 747 airplanes; and
iv)
unauthorized use of the proceeds from advances under the Secured Credit Facility to renovate the two Boeing 747 airplanes.
The Wells Fargo Lenders further notified us that, as a result of the Specified Events of Default, the Wells Fargo Lenders had elected to charge the default rate of interest, which, as set forth in the Secured Credit Facility, is a per annum rate equal to 2 percentage points above the per annum rate otherwise applicable. The default rate of interest will be charged retroactive to April 29, 2005, the date on which the Wells Fargo Lenders asserted a default occurred under the FINOVA Loan. At April 29, 2005, the per annum rates of interest on the Secured Credit Facility ranged from 6.09% to 8.75%.
Based upon the facts and circumstances, we do not believe that the Specified Events of Default constituted actual Events of Default, as defined under the Secured Credit Facility.
On June 14, 2005, we entered into an Amendment Number Two and Waiver to Loan and Security Agreement (the "Amendment Number Two") with the Wells Fargo Lenders whereby the Wells Fargo Lenders agreed to waive the Specified Events of Default, and both parties agreed to amend the Secured Credit Facility to allow the Company to maintain only all-risk ground insurance coverage for aircraft that the Company has grounded and taken out of service.
SUPPLEMENTARY QUARTERLY FINANCIAL DATA
The following table summarizes our unaudited consolidated quarterly results of operations during fiscal years 2005 and 2004. In the opinion of management, this quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments necessary to present fairly the information for the periods presented. The results of operations for any quarter are not necessarily indicative of results for the full year or for any future period.
(1) In fiscal year 2004, we had USAF Air Mobility Command expansion mission requests transporting cargo for delivery to military locations in the Middle East. Current FAA regulations prohibit U.S. carriers from flying into Iraq. In the past, we had transported cargo into neighboring locations from which the cargo was transported over land to its ultimate destination. Due to spoilage and other issues, USAF Air Mobility Command elected to fly the cargo on its own planes into Iraq directly beginning in the fourth quarter of fiscal year 2004. Due to the decline in this business, we experienced a decline in our operating revenues in the fourth quarter of fiscal year 2004.
Schedule II - Valuation and Qualifying Accounts
The following represents the additions and deletions to our inventory and equipment reserves during fiscal years 2005, 2004, and 2003.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's principal executive officer and principal financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, and are not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As a result of the Company's need to restate its financial statements for the fiscal year ended February 29, 2004, the Company retained a certified public accounting firm (the "Internal Audit Consultants") to provide certain internal audit services to the Company. The Internal Audit Consultants interfaced with the registered independent public accounting firm during the audit of the Company's financial statements for the fiscal year ended February 28, 2005, and performed analyses of major accounts included in the Company's financial statements. Although the Company was not able to file its Annual Report on Form 10-K for the fiscal year ended February 28, 2005 on the original due date, the Company believes that initiating the internal audit function improved the Company's effectiveness in recording, processing, summarizing and reporting financial information. In addition, the Company believes that the internal audit function, and the account analyses performed at, and for, the fiscal year ended February 28, 2005, will positively affect the Company's internal control over financial reporting, and will enhance the Company's ability to meet its future reporting requirements in a timely manner.
Internal Control Over Financial Reporting
Changes in Internal Control Over Financial Reporting - Except as discussed above, there have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended February 28, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 28, 2005, the following individuals served as directors of Holdings, directors of Aviation, and as executive officers of the Company.
Name
Age
Position
Company
Delford M. Smith (1)
Chairman of the Board of Directors
Holdings, Aviation
Chief Executive Officer
Holdings, Aviation, EAGLE, and Agriculture
Timothy G. Wahlberg (1)
Director
Holdings, Aviation
President
Holdings, Aviation, Airlines
(principal executive officer)
John A. Irwin (1)
Director
Holdings, Aviation
Chief Financial Officer and Treasurer
Holdings, Aviation
(principal financial officer and principal accounting officer)
Vice President Risk Management
Aviation
Senior Vice President of Finance
Helicopters
Brian T. Bauer
Director
Aviation
President
EAGLE, Agriculture, and Sys-tems LogistiX, Inc.
Executive Vice President
Aviation, Airlines
Timothy Hannigan
Director
Aviation
Michael A. Hines
Director
Aviation
President
EASL
Senior Vice President Material
Airlines
Robert E. McAndrew
Director
Aviation
President
Evergreen Air Center, Inc.
James A. Porter
Director
Aviation
President
Evergreen Helicopters International, Inc.
Gerard H. Rock
Director
Aviation
President
Evergreen Helicopters of Alaska, Inc.
Ranjit Seth
Director
Aviation
Senior Vice President Sales & Marketing
Airlines
Daniel Van Dyke
Director
Aviation
Samuel P. White, Jr.
Director
Aviation
Vice President - Washington DC
Aviation
Robert J. Wueste
Director
Aviation
A. Blythe Berselli
Vice President Administration
Aviation
Forrest Clayton
Vice President Human Resources
Aviation
Gwenna R. Wootress
Secretary
All companies
Vice President Legal Counsel
Aviation
(1) Members of the Executive Committee of the Board of Directors for Aviation.
Directors of Holdings and Aviation
Delford M. Smith - - Mr. Smith has been the chairman of the board of directors of Holdings and controlling shareholder of the Company since its inception in 1960. Mr. Smith formerly served as a member of the board of directors for each of the Air Transport Association and the National Transportation Defense Association Airlift Committee, and also formerly served as president of Helicopter Association International. He has been honored with the Napoleon Hill Gold Medal Award for Entrepreneurial Achievement, the Helicopter Association International Lawrence Bell Memorial Award and the Profession Pilot Aviation Humanitarian of the Year Award. Mr. Smith received his B.S. degree in Psychology and Business from the University of Washington and received Honorary Doctorate Degrees in Aeronautical Science from Salem College, Salem, West Virginia, and in Business Administration from Johnson and Wales College, Providence, Rhode Island. In 1993, the National Defense Transportation Association granted him the National Transportation Award. In 1999, he was awarded the Wright Brothers Memorial Trophy, an award given annually at the National Aeronautic Association to a living person who has made significant contributions to aviation in the United States. In 2002, Mr. Smith was inducted into the Horatio Alger Association and, since April 2003, he has served as a director of this association.
Timothy J. Wahlberg - - Mr. Wahlberg joined Evergreen in 1969 and has served as the President of Aviation since 1994. In addition Mr. Wahlberg has served as the President of Airlines since April 2002. Mr. Wahlberg also serves as the Chairman of the Board for EASL. Previous positions held by Mr. Wahlberg include President of Helicopters from December 1992 until November 2004, President of the Air Center from May 1984 to August 1986, and President of EASL from December 1991 to July 2002.
John A. Irwin - - Mr. Irwin has served as the Chief Financial Officer since October 2003. Mr. Irwin has also served as Treasurer of Holdings, Vice President of Risk Management for Aviation, and Senior Vice President of Finance for Helicopters, positions he has held since March 1999, July 1991, and November 1990, respectively. From November 2000 through October 2003, Mr. Irwin also served as the Vice President of Finance for Airlines. Previous positions include Vice President of Finance of Helicopters and Controller of Aviation. Mr. Irwin also serves as the principal executive officer of the Trust, a position he has held since January 2004.
Other Directors of Aviation
Brian T. Bauer- Mr. Bauer been employed by the Company since 1989. Mr. Bauer has served as the President of EAGLE since October 1995 and as the President of Agriculture since September 1995. In addition, in April 2003, Mr. Bauer was named Executive Vice President of Aviation, and in February 2005 he was named Executive Vice President of Airlines.
Timothy F. Hannigan - Mr. Hannigan has served as a director of Aviation since August 2003. Mr. Hannigan is the Managing Director for Wexler and Walker Public Policy Associates, a position he has held since 1997.
Michael A. Hines- Mr. Hines joined the Company in 1989 and has been the President of EASL since May 2002. In October 1997, Mr. Hines was named Vice President of Material of Airlines and served in that position until March 2005. At that time, Mr. Hines was promoted to Senior Vice President of Material and he currently holds that position in addition to his position as President of EASL.
Robert E. McAndrew - Mr. McAndrew re-joined the Company in August 2004 as the President of the Air Center. Previous positions held by Mr. McAndrew within the Company have included Vice President of Marketing for the Air Center (September 2000 to December 2003) and Vice President of Aircraft Sales for EASL (January 2003 to July 2003). Prior to originally joining the Company in September 2000, Mr. McAndrew served as the Vice President of IPB Aerospace in the United Kingdom (October 1998 to September 2000) and as the President of IBS & Associates, a consulting firm (July 1994 to September 1998).
James A. Porter - Mr. Porter has served as a director of Aviation since 2004. Mr. Porter returned to the Company in February 2002 as the President of Evergreen Helicopters International, Inc., a wholly-owned subsidiary of Helicopters. Prior to returning to the Company, Mr. Porter was the president, chief executive officer, and owner of Samoa Aviation dba Samoa Air from July 1986 until November 2001.
Gerard H. Rock - Mr. Rock has served as the President of Evergreen Helicopters of Alaska, Inc., a wholly-owned subsidiary of Helicopters, since joining the Company in 1995.
Ranjit Seth - Mr. Seth joined the Company in 1997. Since February 2003, Mr. Seth has served as Senior Vice President of Sales and Marketing for Airlines. Previous positions held by Mr. Seth in Airlines include Vice President of Commercial-Asia (May 2000 to January 2003), Senior Director of Sales-Asia (March 1999 to April 2000), and Director of Sales-South Asia (August 1997 to March 1999).
Daniel F. Van Dyke - Mr. Van Dyke has served as a director of the Company since August 2002. Since October 1993, Mr. Van Dyke has been the owner and operator of Van Dyke Grain Elevators, Inc. a commodity brokerage and handling and transportation company, and Van Dyke Warehouses, LLC, a property management company.
Samuel P. White, Jr. - Mr. White joined the Company in June 2002 as a Business Development Consultant and has served as the Vice President - Washington DC since August 2002. Prior to joining the Company, Mr. White served as the Director of Business Development, North America for HMS Software (February 2001 to May 2002) and as the Director of Business Development for MAC Aerospace Corporation (February 1993 to February 2001).
Robert J. Wueste - Mr. Wueste has served as a director of Aviation since October 2003. Mr. Wueste has served as the Chief Executive Officer and chairman of the board of directors Samuel Aaron International, a retail jewelry company, since February 2003. From 1989 until February 2003, Mr. Wueste served as the President and Chief Executive Officer of Samuel Aaron International.
Other Executive Officers of the Company
A. Blythe Berselli - Ms. Berselli joined the Company in August 2003 as the Vice-President of Administration. Ms. Berselli also serves as the President of Evergreen Humanitarian and Relief Services, a non-profit entity. Prior to joining the Company, Ms. Berselli was employed as a Senior Associate with DebtTraders, Inc.
Forrest Clayton - Mr. Clayton joined the Company as Vice President of Human Resources in September 2004. During the five years preceding Mr. Clayton's employment with the Company, Mr. Clayton served as the Vice President of Human Resources for SkyVax Corporation, LLC, the Regional Vice President of Human Resources for Affiliated Computer Services, and the Vice President of Human Resources for CyberRep, Inc.
Gwenna R. Wootress - Ms. Wootress joined the Company in 1997 as Legal Counsel. Ms. Wootress has served as Secretary of Aviation, the Air Center and Agriculture since 1997, and as Secretary of Airlines, Helicopters, and EAGLE since 2000. Ms. Wootress received her juris doctor from Case Western Reserve School of Law.
Committees of the Board of Directors
The Executive Committee of the board of directors of Aviation is empowered, except as limited by Oregon law, to exercise all of the powers of the board of directors. The members of the Executive Committee are Delford M. Smith (Chairman), Timothy G. Wahlberg, and John A. Irwin.
Financial Expert
The board of directors does not have an audit committee. The Executive Committee oversees the Company's accounting, financial reporting processes, and audits of consolidated financial statements. The board of directors has determined that Mr. John A. Irwin, a member of the board of directors and Executive Committee, is a "financial expert" within the meaning of SEC rules. Mr. Irwin is not "independent" within the meaning of SEC rules.
Code of Ethics for Senior Financial Officers
We have adopted a code of ethics that applies to the Company's principal executive officer, principal financial officer, controller, and persons performing similar functions within the Company. A copy of the code of ethics is attached to this Annual Report and is available on our web-site at www.evergreenaviation.com/invr_eth.html. We are required to disclose any changes to, or waivers from, the code of ethics for our principal executive officer and principal financial officer. We intend to use our web-site as a method of disseminating this disclosure as permitted by SEC rules.
The following table sets forth certain information concerning cash compensation paid by us to our chief executive officer and four most highly compensated executive officers (collectively, the "named executive officers") for services rendered in all capacities to the Company during fiscal years 2005 and 2004:
(1) Amount of bonus compensation shown is pursuant to the Delford M. Smith Employment Agreement, as disclosed below.
(2) Represents the Company's contribution to the Evergreen Savings and Retirement Plan on behalf of each executive.
(3) Mr. McAndrew serves as the President of the Air Center as a non-employee consultant.
Compensation of Directors
Non-employee directors are compensated for travel expenses incurred in connection with attendance at any board of directors meetings that are held in McMinnville, Oregon. The amount of compensation for each non-employee director is limited to $1,000 per meeting. During fiscal year 2005, no board of directors meetings were held in McMinnville and, as a result, no compensation was paid to any of the non-employee directors. Directors who are employees of the Company are not compensated for serving on the board of directors.
Delford M. Smith Employment Agreement
On May 16, 2003, we entered into an Employment Agreement with Mr. Delford M. Smith, pursuant to which Mr. Smith serves as our Chief Executive Officer and Chairman of the Board. The Employment Agreement provides for annual compensation to Mr. Smith of $3.0 million, with a one-time bonus compensation of $4.0 million, which was paid after completion of the credit facility and the issuance of the Indenture Notes.
In addition, Mr. Smith may be entitled to annual bonuses, at the discretion of the board of directors, provided that Mr. Smith uses such annual bonuses solely (i) to satisfy any obligation of Mr. Smith or his affiliates to us and ii) to satisfy any taxes payable by Mr. Smith or his affiliates as a result of the receipt of such bonus or the satisfaction of such obligations. During fiscal year 2005, the board of directors granted a $2.9 million bonus to Mr. Smith, in accordance with the terms of the Employment Agreement. Payment of the bonus was recorded by us as a part of selling, general, and administrative expenses.
The term of the Employment Agreement is for five years, but it automatically extends itself each day so that the remaining term is always five years. If Mr. Smith's employment is terminated by reason of i) his death or disability, ii) by us without cause, or ii) by Mr. Smith for "good reason" (as defined in the Employment Agreement), then Mr. Smith, or his estate, as the case may be, will be entitled to:
• a portion of his annual bonus for the year in which the termination occurs, prorated through the date of such termination; and
• a contingent payment of an amount equal to (i) five times Mr. Smith's base salary then in effect plus (ii) an amount equal to five times the average of the annual bonuses paid to him in the five years immediately preceding the termination.
If Mr. Smith's employment is terminated by reason of his death or disability, the amount will be payable over five years. In all other cases, the amount will be payable in a lump sum. In addition, if Mr. Smith's employment is terminated by us without cause or by Mr. Smith for good reason, he will be entitled to company-paid health coverage for a period of five years following termination.
Compensation Committee/Interlocks and Insider Participation
The Company does not have a compensation committee. The chairman of the board of directors of Aviation, with input from the Vice President of Human Resources, determines compensation for the executive officers of the Company.
Report on Executive Compensation
During fiscal year 2005, compensation for Mr. Smith, our chief executive officer, was paid in accordance with the terms of the Employment Agreement, as disclosed above. All other executive officers of the Company are compensated according to the compensation and employee benefits policies which are applicable to all employees of the Company.
The Board of Directors of Evergreen Holdings, Inc.
Delford M. Smith, Chairman
Timothy G. Wahlberg
John A. Irwin
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plans
The Company does not have any equity compensation plans.
Principal Shareholders of Holdings
The table below sets forth the beneficial ownership interests of all outstanding shares of Holdings common stock as of February 28, 2005. Except as otherwise noted, Mr. Delford M. Smith has sole voting power and sole investment power with respect to the shares set forth below.
(1) Includes:
• 2,500,000 shares of Holdings common stock held by Mr. Delford M. Smith, as trustee of the Delford M. Smith Revocable Trust (Mr. Delford M. Smith is the sole trustee and sole beneficiary of the Delford M. Smith Revocable Trust); and
• 5,053,038 shares of Holdings common stock that are owned by Ventures Holdings, Inc. All outstanding shares of the common stock of Ventures Holdings, Inc. is held by Mr. Delford M. Smith, as trustee of the Delford M. Smith Revocable Trust.
(2) Includes:
• 1,000,000 shares of Holdings common stock held by Mr. Delford M. Smith, as trustee under Declaration of Trust dated March 5, 1976, for the benefit of Mr. Mark C. Smith;
• 1,200,000 shares of Holdings common stock held by Wells Fargo Bank, N.A., as trustee under Declaration of Trust dated December 23, 1976, for the benefit of Mr. Mark C. Smith;
• 1,711 shares of Holdings common stock held by Mr. Delford M. Smith, as trustee under Declaration of Trust dated June 1, 1984, for the benefit of Mr. Mark C. Smith; and
• 300,000 shares of Holdings common stock held by Mr. Mark C. Smith.
Mr. Smith also holds a one-third beneficial ownership interest in that portion of the Trust that owns the Boeing 747 aircraft. Aviation holds the remaining two-thirds beneficial interest in that portion of the Trust that owns the Boeing 747 and all of that portion of the Trust that owns the three DC-9 aircraft.
Principal Shareholders of Aviation and Vintage
Holdings owns all of the outstanding shares of Vintage and Aviation. Through its ownership of Aviation, Holdings also indirectly holds i) an ownership interest in all of Aviation's wholly-owned subsidiaries and ii) an approximate two-thirds beneficial interest in the Trust.
Changes in Control
Pledges of Securities under the Secured Credit Facility - In connection with the execution of the Secured Credit Facility, the following beneficial interests and securities, among others, were pledged to Wells Fargo Foothills for the benefit of the Wells Fargo Lenders:
•
Holdings pledged its ownership interest in all of the outstanding common shares of Aviation; and
•
Aviation pledged all of its beneficial interest in the Trust.
In the event of a default under the Secured Credit Facility that is not cured or waived, Wells Fargo Foothills, on behalf of the Wells Fargo Lenders, may exercise its right to take ownership of or sell any of the pledged securities or beneficial interests. An exercise of such right by Wells Fargo Foothills with respect to Holding's ownership interest in Aviation would result in a change in control for Aviation. An exercise of such right with respect to Aviation's beneficial interest in the Trust would result in a change of control in the Trust.
Pledge of Securities under the Indenture Notes - In connection with the issuance of the Indenture Nutes, Holdings pledged its ownership interest in all of the outstanding common stock of Aviation for the benefit of the secured parties under the Indenture Notes. The pledge of Aviation's common stock under the Indenture Notes is subordinated to the pledge of the same shares of common stock under the Secured Credit Facility.
In the event of a default under the Indenture Notes that is not cured or waived, the collateral agent under the Indenture Notes, on behalf of the secured parties, may exercise the right to take ownership of or sell any of the pledged securities. An exercise of such right by the collateral agent under the Indenture Notes with respect to Holding's ownership interest in Aviation would result in a change in control for Aviation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease Transactions
From time to time, we have entered into leases with Mr. Smith and entities owned by, or controlled by, him. Each lease generally has a term of one to three years and provides for monthly payments. The table below summarizes the assets leased, and related monthly lease payments, as of February 28, 2005.
M-T-M: month-to-month lease.
(1) In addition to the monthly lease payment, we also pay an hourly use charge of $100 per hour, with a minimum of 200 hours per month.
(2) A three-fourths beneficial interest in this helicopter is held by Mr. Delford M. Smith, and the remaining one-fourth beneficial interest is held by Mr. Mark C. Smith. We make lease payments of $22,500 and $7,500, per month, to Mr. Delford M. Smith and Mr. Mark C. Smith, respectively.
Each of our airplane and helicopter leases is terminable by mutual consent between the lessor and us. Our real property leases are terminable at the landlord's option in the event of a default under the leases.
Sales Transaction
During fiscal year 2005, we had sales of approximately $7.7 million to various entities owned by, or controlled by, Mr. Smith, as follows:.
During fiscal year 2004, we had sales of approximately $11.0 million to various entities owned by, or controlled by, Mr. Smith.
Purchases of Agricultural Products
During fiscal year 2003, Agriculture purchased approximately $600,000 of hazelnuts and approximately $1.0 million of pinot noir grapes from Mr. Smith or entities owned by, or controlled by, Mr. Smith. During fiscal year 2004, Agriculture purchased approximately $197,000 of pinot noir grapes from Mr. Smith or entities owned by, or controlled by, Mr. Smith. During fiscal year 2005, Agriculture did not purchase any products from Mr. Smith or any entities owned by, or controlled by, Mr. Smith.
Expiration of Aircraft Lease
During fiscal year 2005, Airlines and Ventures Acquisition Company negotiated a settlement for lease return condition costs in connection with the scheduled expiration of two DC-9 aircraft leases. See "Note 7 - Expiration of Aircraft Leases" in Item 8 of this Annual Report.
Trust Created February 25, 1986
Aviation and Mr. Smith are co-beneficiaries of the Trust, which owns one Boeing 747 aircraft and three DC-9 aircraft. Mr. Smith holds a one-third beneficial interest in that portion of the Trust that owns the Boeing 747 aircraft. Aviation holds the remaining two-thirds beneficial interest in that portion of the Trust that owns the Boeing 747 and all of that portion of the Trust that owns the three DC-9 aircraft. Airlines leases all of the planes from the Trust at a cost of approximately $700,000 per month. The portion of the rental payments allocable to Mr. Smith's one-third beneficial interest in the Boeing 747 aircraft is approximately $200,000 per month. Based upon our beneficial interest in the Trust, the operations of the Trust are included in our consolidated financial statements. Mr. Smith's beneficial interest in the Trust is reported in our consolidated financial statements as a minority interest.
During each of fiscal years 2005, 2004, and 2003, Airlines incurred aircraft lease expenese on the Boeing 747 aircraft in the amount of $7.5 million. Of these amounts in each fiscal year period, $2.4 million was attributable to Mr. Smith's one-third beneficial interest in the aircraft.
At the beginning of fiscal year 2005, the Trust held a note receivable from Mr. Smith with an outstanding balance of $604,000. The note receivable bore interest at an annual rate of 4% and was secured by a pledge of approximately 2.5 million shares of Holdings common stock owned by the Delford M. Smith Revocable Trust. During fiscal year 2005, $604,000 of Mr. Smith's share of the Trust's net income was applied against the note receivable and, as of the end of fiscal year 2005, the note receivable was repaid in full. In fiscal years 2004 and 2003, net income of the Trust that was applied in reduction of the note receivable was $1.1 million and $1.0 million, respectively.
Promissory Notes from Mr. Smith and Affiliates
As of February 28, 2005, Mr. Smith and entities owned by, or controlled by, Mr. Smith were indebted to the Company and its subsidiaries by approximately $15.6 million. See "Notes Receivable from Affiliates and Notes Payable to Affiliates" in "Note 17 - Related Party Transactions" in Item 8 of this Annual Report.
During fiscal year 2005, the largest outstanding amount owed by Mr. Smith and entities owned by, or controlled by, Mr. Smith was $17.6 million. The indebtedness is evidenced by several promissory notes, which were executed on February 28, 2003. The promissory notes bear interest at the rate of 4% per annum and require installments of principal and interest of approximately $2.0 million per year. Each promissory note matures and is due and payable on March 31, 2013. The notes are further secured by a pledge of approximately 2.5 million shares of Holdings common stock owned by the Delford M. Smith Revocable Trust.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the fees billed to the Company by our current independent registered public accounting firm, GHP Horwath, and our former independent registered public accounting firm, PricewaterhouseCoopers, for professional services rendered during fiscal years 2005 and 2004:
Audit Fees - Audit Fees for the fiscal years 2005 and 2004 were for professional services rendered for the audits of the financial statements of the Company, quarterly reviews of the financial statements included in the Company's Quarterly Reports on Form 10-Q, and other services related to SEC matters.
Audit-Related Fees - Audit-Related Fees for the fiscal years 2005 and 2004 were for assurance and related services associated with employee benefit plan audits, advisory services, and agreed-upon procedure engagements.
Pre-Approval Policy
Our board of directors has adopted an Audit and Non-Audit Services Pre-Approval Policy to provide procedures for i) the pre-approval of audit and non-audit services and ii) procedures for the engagement of the independent registered public accounting firm each year.
The policy provides that the board of directors shall pre-approve i) the annual audit services and certain audit-related and tax compliance services to be provided by the Company's independent registered public accountant, and ii) all anticipated fees for such services. The board of directors also must pre-approve i) any engagement of the independent registered public accountant for services outside the scope of the annual general pre-approval and ii) any engagement of the independent registered public accountant if the anticipated fee for such engagement is expected to exceed certain pre-established thresholds. The policy also allows the board of directors to delegate to one or more of its members pre-approval authority with respect to permitted services.
In accordance with the policy, the board of directors has ratified and approved all audit and audit-related services performed by the Company's current independent registered public accounting firm, GHP Horwath, and the Company's former independent registered public accounting firm, PricewaterhouseCoopers during fiscal year 2005. The board of directors have concluded that the provision of the audit and audit-related services by these firms during fiscal year 2005 was compatible with the maintenance of such firms' independence in the conduct of their auditing functions. The board of directors has approved the engagement of GHP Horwath as its independent registered public accounting firm for fiscal year 2006.
Management is required to provide the board of directors with periodic and annual reconciliations of actual fees paid to the independent registered public accounting firm as compared to the fees that were pre-approved.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. The Consolidated Financial Statements of Holdings, as reported in Item 8 of this Annual Report:
Page
2. Financial Statement Schedules, as reported in Item 8 of this Annual Report:
Supplementary Quarterly Financial Data
Schedule II - Valuation and Qualifying Accounts
3. List of Exhibits. A list of exhibits that are filed as part of, or incorporated by reference into this Annual Report on Form 10-K are set forth below.
Exhibit No.
Description of Document
Exhibit No.
Description of Document
SIGNATURES
Pursuant to the requirements of 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.
EVERGREEN HOLDINGS, INC.
(Registrant)
Date: June 14, 2005 /s/ Timothy G. Wahlberg
Timothy G. Wahlberg
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
Exhibit No.
Description of Document
Exhibit No.
Description of Document
Exhibit No.
Description of Document
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plans
The Company does not have any equity compensation plans.
Principal Shareholders of Holdings
The table below sets forth the beneficial ownership interests of all outstanding shares of Holdings common stock as of February 28, 2005. Except as otherwise noted, Mr. Delford M. Smith has sole voting power and sole investment power with respect to the shares set forth below.
(1) Includes:
• 2,500,000 shares of Holdings common stock held by Mr. Delford M. Smith, as trustee of the Delford M. Smith Revocable Trust (Mr. Delford M. Smith is the sole trustee and sole beneficiary of the Delford M. Smith Revocable Trust); and
• 5,053,038 shares of Holdings common stock that are owned by Ventures Holdings, Inc. All outstanding shares of the common stock of Ventures Holdings, Inc. is held by Mr. Delford M. Smith, as trustee of the Delford M. Smith Revocable Trust.
(2) Includes:
• 1,000,000 shares of Holdings common stock held by Mr. Delford M. Smith, as trustee under Declaration of Trust dated March 5, 1976, for the benefit of Mr. Mark C. Smith;
• 1,200,000 shares of Holdings common stock held by Wells Fargo Bank, N.A., as trustee under Declaration of Trust dated December 23, 1976, for the benefit of Mr. Mark C. Smith;
• 1,711 shares of Holdings common stock held by Mr. Delford M. Smith, as trustee under Declaration of Trust dated June 1, 1984, for the benefit of Mr. Mark C. Smith; and
• 300,000 shares of Holdings common stock held by Mr. Mark C. Smith.
Mr. Smith also holds a one-third beneficial ownership interest in that portion of the Trust that owns the Boeing 747 aircraft. Aviation holds the remaining two-thirds beneficial interest in that portion of the Trust that owns the Boeing 747 and all of that portion of the Trust that owns the three DC-9 aircraft.
Principal Shareholders of Aviation and Vintage
Holdings owns all of the outstanding shares of Vintage and Aviation. Through its ownership of Aviation, Holdings also indirectly holds i) an ownership interest in all of Aviation's wholly-owned subsidiaries and ii) an approximate two-thirds beneficial interest in the Trust.
Changes in Control
Pledges of Securities under the Secured Credit Facility - In connection with the execution of the Secured Credit Facility, the following beneficial interests and securities, among others, were pledged to Wells Fargo Foothills for the benefit of the Wells Fargo Lenders:
•
Holdings pledged its ownership interest in all of the outstanding common shares of Aviation; and
•
Aviation pledged all of its beneficial interest in the Trust.
In the event of a default under the Secured Credit Facility that is not cured or waived, Wells Fargo Foothills, on behalf of the Wells Fargo Lenders, may exercise its right to take ownership of or sell any of the pledged securities or beneficial interests. An exercise of such right by Wells Fargo Foothills with respect to Holding's ownership interest in Aviation would result in a change in control for Aviation. An exercise of such right with respect to Aviation's beneficial interest in the Trust would result in a change of control in the Trust.
Pledge of Securities under the Indenture Notes - In connection with the issuance of the Indenture Nutes, Holdings pledged its ownership interest in all of the outstanding common stock of Aviation for the benefit of the secured parties under the Indenture Notes. The pledge of Aviation's common stock under the Indenture Notes is subordinated to the pledge of the same shares of common stock under the Secured Credit Facility.
In the event of a default under the Indenture Notes that is not cured or waived, the collateral agent under the Indenture Notes, on behalf of the secured parties, may exercise the right to take ownership of or sell any of the pledged securities. An exercise of such right by the collateral agent under the Indenture Notes with respect to Holding's ownership interest in Aviation would result in a change in control for Aviation.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease Transactions
From time to time, we have entered into leases with Mr. Smith and entities owned by, or controlled by, him. Each lease generally has a term of one to three years and provides for monthly payments. The table below summarizes the assets leased, and related monthly lease payments, as of February 28, 2005.
M-T-M: month-to-month lease.
(1) In addition to the monthly lease payment, we also pay an hourly use charge of $100 per hour, with a minimum of 200 hours per month.
(2) A three-fourths beneficial interest in this helicopter is held by Mr. Delford M. Smith, and the remaining one-fourth beneficial interest is held by Mr. Mark C. Smith. We make lease payments of $22,500 and $7,500, per month, to Mr. Delford M. Smith and Mr. Mark C. Smith, respectively.
Each of our airplane and helicopter leases is terminable by mutual consent between the lessor and us. Our real property leases are terminable at the landlord's option in the event of a default under the leases.
Sales Transaction
During fiscal year 2005, we had sales of approximately $7.7 million to various entities owned by, or controlled by, Mr. Smith, as follows:.
During fiscal year 2004, we had sales of approximately $11.0 million to various entities owned by, or controlled by, Mr. Smith.
Purchases of Agricultural Products
During fiscal year 2003, Agriculture purchased approximately $600,000 of hazelnuts and approximately $1.0 million of pinot noir grapes from Mr. Smith or entities owned by, or controlled by, Mr. Smith. During fiscal year 2004, Agriculture purchased approximately $197,000 of pinot noir grapes from Mr. Smith or entities owned by, or controlled by, Mr. Smith. During fiscal year 2005, Agriculture did not purchase any products from Mr. Smith or any entities owned by, or controlled by, Mr. Smith.
Expiration of Aircraft Lease
During fiscal year 2005, Airlines and Ventures Acquisition Company negotiated a settlement for lease return condition costs in connection with the scheduled expiration of two DC-9 aircraft leases. See "Note 7 - Expiration of Aircraft Leases" in Item 8 of this Annual Report.
Trust Created February 25, 1986
Aviation and Mr. Smith are co-beneficiaries of the Trust, which owns one Boeing 747 aircraft and three DC-9 aircraft. Mr. Smith holds a one-third beneficial interest in that portion of the Trust that owns the Boeing 747 aircraft. Aviation holds the remaining two-thirds beneficial interest in that portion of the Trust that owns the Boeing 747 and all of that portion of the Trust that owns the three DC-9 aircraft. Airlines leases all of the planes from the Trust at a cost of approximately $700,000 per month. The portion of the rental payments allocable to Mr. Smith's one-third beneficial interest in the Boeing 747 aircraft is approximately $200,000 per month. Based upon our beneficial interest in the Trust, the operations of the Trust are included in our consolidated financial statements. Mr. Smith's beneficial interest in the Trust is reported in our consolidated financial statements as a minority interest.
During each of fiscal years 2005, 2004, and 2003, Airlines incurred aircraft lease expenese on the Boeing 747 aircraft in the amount of $7.5 million. Of these amounts in each fiscal year period, $2.4 million was attributable to Mr. Smith's one-third beneficial interest in the aircraft.
At the beginning of fiscal year 2005, the Trust held a note receivable from Mr. Smith with an outstanding balance of $604,000. The note receivable bore interest at an annual rate of 4% and was secured by a pledge of approximately 2.5 million shares of Holdings common stock owned by the Delford M. Smith Revocable Trust. During fiscal year 2005, $604,000 of Mr. Smith's share of the Trust's net income was applied against the note receivable and, as of the end of fiscal year 2005, the note receivable was repaid in full. In fiscal years 2004 and 2003, net income of the Trust that was applied in reduction of the note receivable was $1.1 million and $1.0 million, respectively.
Promissory Notes from Mr. Smith and Affiliates
As of February 28, 2005, Mr. Smith and entities owned by, or controlled by, Mr. Smith were indebted to the Company and its subsidiaries by approximately $15.6 million. See "Notes Receivable from Affiliates and Notes Payable to Affiliates" in "Note 17 - Related Party Transactions" in Item 8 of this Annual Report.
During fiscal year 2005, the largest outstanding amount owed by Mr. Smith and entities owned by, or controlled by, Mr. Smith was $17.6 million. The indebtedness is evidenced by several promissory notes, which were executed on February 28, 2003. The promissory notes bear interest at the rate of 4% per annum and require installments of principal and interest of approximately $2.0 million per year. Each promissory note matures and is due and payable on March 31, 2013. The notes are further secured by a pledge of approximately 2.5 million shares of Holdings common stock owned by the Delford M. Smith Revocable Trust.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the fees billed to the Company by our current independent registered public accounting firm, GHP Horwath, and our former independent registered public accounting firm, PricewaterhouseCoopers, for professional services rendered during fiscal years 2005 and 2004:
Audit Fees - Audit Fees for the fiscal years 2005 and 2004 were for professional services rendered for the audits of the financial statements of the Company, quarterly reviews of the financial statements included in the Company's Quarterly Reports on Form 10-Q, and other services related to SEC matters.
Audit-Related Fees - Audit-Related Fees for the fiscal years 2005 and 2004 were for assurance and related services associated with employee benefit plan audits, advisory services, and agreed-upon procedure engagements.
Pre-Approval Policy
Our board of directors has adopted an Audit and Non-Audit Services Pre-Approval Policy to provide procedures for i) the pre-approval of audit and non-audit services and ii) procedures for the engagement of the independent registered public accounting firm each year.
The policy provides that the board of directors shall pre-approve i) the annual audit services and certain audit-related and tax compliance services to be provided by the Company's independent registered public accountant, and ii) all anticipated fees for such services. The board of directors also must pre-approve i) any engagement of the independent registered public accountant for services outside the scope of the annual general pre-approval and ii) any engagement of the independent registered public accountant if the anticipated fee for such engagement is expected to exceed certain pre-established thresholds. The policy also allows the board of directors to delegate to one or more of its members pre-approval authority with respect to permitted services.
In accordance with the policy, the board of directors has ratified and approved all audit and audit-related services performed by the Company's current independent registered public accounting firm, GHP Horwath, and the Company's former independent registered public accounting firm, PricewaterhouseCoopers during fiscal year 2005. The board of directors have concluded that the provision of the audit and audit-related services by these firms during fiscal year 2005 was compatible with the maintenance of such firms' independence in the conduct of their auditing functions. The board of directors has approved the engagement of GHP Horwath as its independent registered public accounting firm for fiscal year 2006.
Management is required to provide the board of directors with periodic and annual reconciliations of actual fees paid to the independent registered public accounting firm as compared to the fees that were pre-approved.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. The Consolidated Financial Statements of Holdings, as reported in Item 8 of this Annual Report:
Page
2. Financial Statement Schedules, as reported in Item 8 of this Annual Report:
Supplementary Quarterly Financial Data
Schedule II - Valuation and Qualifying Accounts
3. List of Exhibits. A list of exhibits that are filed as part of, or incorporated by reference into this Annual Report on Form 10-K are set forth below.
Exhibit No.
Description of Document
Exhibit No.
Description of Document
SIGNATURES
Pursuant to the requirements of 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.
EVERGREEN HOLDINGS, INC.
(Registrant)
Date: June 14, 2005 /s/ Timothy G. Wahlberg
Timothy G. Wahlberg
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
Exhibit No.
Description of Document
Exhibit No.
Description of Document
Exhibit No.
Description of Document