10-K/A 1 fy04_form10ka.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 2) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Fiscal year ended February 29, 2004 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ COMMISSION FILE NUMBER: 333-109667-04 EVERGREEN HOLDINGS, INC. (Exact name of registrant as specified in its charter) OREGON 91-1797880 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3850 THREE MILE LANE, McMINNVILLE, OREGON 97128-9496 (Address of principal executive offices) (Zip Code) (503) 472-9361 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 12 preceding months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( ) No (X) Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ( )No (X) Indicate the number of shares of outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of September 28, 2004 Common stock, no par value 10,054,749 shares EXPLANATORY NOTE Evergreen Holdings, Inc. ("Holdings"), the parent company of Evergreen International Aviation, Inc. ("Aviation," "Evergreen," "the Company," "we," "us," or "our") and its subsidiaries, is filing this Amendment No. 2 on Form 10-K/A (this "Amendment" or this "Annual Report on Form 10-K/A") for the sole purpose of amending Holding's Annual Report on Form 10-K for the year ended February 29, 2004 (the "Original Filing"). This Amendment reflects the effects of the following items on the Original Filing: o Correction of an accounting error which resulted in an increase of approximately $3,084,000 to long-term debt with corresponding increases in selling, general, and administrative expenses. o Correction of accounting errors which resulted in an increase of approximately $25,000 in operating expenses, an increase of approximately $735,000 in current assets, a decrease of approximately $458,000 in property and equipment, an increase of approximately $123,000 in deposits, and an increase of approximately $416,000 in current liabilities. The above-listed corrections also resulted in an increase of approximately $1,185,000 in the Company's income tax benefit and an increase of approximately $1,924,000 in the Company's net loss for the fiscal year 2004. By means of an investigation by management into the causes of the above-listed accounting errors, it was determined that, as of February 29, 2004, reconciliations of certain accounts and ledgers were either not being properly performed, not being performed in a timely manner, or not being independently reviewed by management. Consequently, certain journal entries were made at the closing of fiscal year 2004 which resulted in the above-listed accounting errors in the Company's consolidated financial statements. Subsequent to the issuance of the Original Filing, the Company has been implementing enhanced controls and procedures for account reconciliations and management review of journal entries. Please note that this Amendment restates only those items of the Original Filing that were affected by the above-described corrections. Furthermore, the information contained in this Amendment is as of the date of the Original Filing and does not reflect any subsequent information or events occurring after the date of the Original Filing. Therefore, you should read this Amendment together with other documents that we have filed with the United States Securities and Exchange Commission ("SEC") subsequent to the filing of the Original Filing. Information in such reports and documents updates and supersedes certain information contained in this Amendment. 2 TABLE OF CONTENTS PAGE Part II. Item 6. Selected Consolidated Financial Data..........................4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................................43 Item 8. Consolidated Financial Statements and Supplementary Data.....44 Notes to Consolidated Financial Statements...............52 Item 9. Changes In and Disagreements with Accounts and Accounting and Financial Disclosures.................89 Item 9A. Controls and Procedures......................................90 Part IV. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................................93 SIGNATURES...................................................................94 EXHIBIT INDEX................................................................95 3 PART II ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below have been derived from our consolidated financial statements. For comparability of results, this information should be read in conjunction with the consolidated financial statements and related notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K/A. As discussed in Note 14 of "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A, subsequent to the issuance of the Company's fiscal year 2004 consolidated financial statements, as reported in the Original Filing, we determined that such fiscal year 2004 consolidated financial statements contained certain accounting errors. In particular, we determined that the Company's outstanding long-term debt balance as of February 29, 2004 and the total amount of the Company's selling, general and administrative expenses for fiscal year 2004 were both understated by approximately $3,084,000. In addition, after conducting a further review of other year-end transactions for fiscal year 2004, we discovered other accounting errors, the correction of which resulted in an increase of approximately $25,000 in operating expenses, an increase of approximately $735,000 in current assets, a decrease of approximately $458,000 in property and equipment, an increase of approximately $123,000 in deposits, and an increase of approximately $416,000 in current liabilities. As a result, the Company's consolidated financial statements contained in this Annual Report on Form 10-K/A for the fiscal year ended February 29, 2004 have been restated from amounts previously reported in the Original Filing. The correction of these errors increased the Company's fiscal year 2004 net loss by approximately $1,924,000, increased assets by approximately $400,000, and increased liabilities by approximately $2,324,000. As further discussed in Note 14 in Part II, Item 8 of this Annual Report on Form 10-K/A, we restated our consolidated statement of operations for the year ended February 28, 2002 to present a claim of approximately $7,200,000 received under the Air Transportation Safety and System Stabilization Act as a separate component of operating expenses. This amount was previously reported in operating revenues (support services and other). The following tables and management's discussion and analysis of financial condition and results of operations gives effect to both of these restatements. 4 The following presents the Company's results of operations for the 2004, 2003, 2002, 2002, and 2000 fiscal years:
Fiscal Year ------------------------------------------------------------------- 2004 2002 (As restated) 2003 (As restated) 2001 2000 ------------- ------- ------------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: (in thousands) Operating revenues: Flight revenue $ 377,650 $ 400,603 $ 284,293 $ 317,898 $ 362,691 Sales of aircraft, parts and other assets 17,357 12,137 13,270 32,705 10,290 Ground logistics services 99,790 129,724 122,287 104,419 89,834 Support services and other 40,837 31,871 27,857 32,458 29,129 ------- ------- ------- ------- ------- Total operating revenues 535,634 574,335 447,707 487,480 491,944 ------- ------- ------- ------- ------- Operating expenses: Flight costs 73,816 69,808 54,645 49,014 54,831 Fuel 96,769 100,195 69,559 69,112 66,559 Maintenance 73,265 69,740 61,279 77,625 93,246 Aircraft and equipment 49,847 44,139 48,269 47,136 49,160 Cost of sales of aircraft, parts and other property and equipment 13,709 8,888 9,291 26,214 6,370 Cost of ground logistics services 89,150 104,559 104,598 87,444 71,852 Support services and other 38,957 32,636 23,168 29,054 40,444 Selling, general, and administrative 77,065 62,729 52,616 56,086 55,639 Impairment charge on aircraft(1) -- -- 16,000 20,000 -- Unusual credits-net(2) -- -- -- (57,874) -- Claims under the Air Transportation Safety and Systems Stabilization Act -- -- (7,204) -- -- ------- ------- ------- ------- ------- Total operating expenses 512,578 492,694 432,221 403,811 438,101 ------- ------- ------- ------- ------- Operating income 23,056 81,641 15,486 83,669 53,843 ------- ------- ------- ------- ------- Other (expense) income: Interest expense (34,840) (30,576) (34,297) (46,461) (41,444) Other (expense) income, net 4,386 1,508 836 51 (1,113) ------- ------- ------- ------- ------- Other expense, net (30,454) (29,068) (33,461) (46,410) (42,557) ------- ------- ------- ------- ------- (Loss) income before minority interest and income taxes (7,398) 52,573 (17,975) 37,259 11,286 Minority interest(3) (1,116) (962) (879) (814) (694) ------- ------- ------- ------- ------- (Loss) income before income taxes (8,514) 51,611 (18,854) 36,445 10,592 Income tax benefit (expense) 2,020 (19,804) 6,420 (16,374) (8,340) ------- ------- ------- ------- ------- Net (loss) income $ (6,494) $ 31,807 $ (12,434) $ 20,071 $ 2,252 ========= ========= ========= ========= ========= Other Financial Data: Cash capital expenditures $ 61,894 $ 60,826 $ 35,694 $ 68,574 $ 85,744 Consolidated rental expense 39,436 33,150 28,751 12,299 20,070 Cash flows provided by (used in): Operating activities 53,055 100,302 107,528 51,856 121,125 Investing activities (62,281) (52,199) (16,835) (43,351) (91,258) Financing activities 7,659 (51,387) (87,397) (18,906) (19,985)
5 The following presents significant year-end balances from the Company's balance sheets at the end of fiscal years 2004, 2003, 2002, 2001, and 2000:
At the End of Fiscal Year ------------------------- 2004 (as restated) 2003 2002 2001 2000 ------------ ---- ---- ---- ---- (in thousands) BALANCE SHEET DATA: Cash and cash equivalents $ 4,071 $ 5,638 $ 8,922 $ 5,626 $ 16,027 Working capital (deficit)(4) (5,620) (279,135) (317,272) (39,290) (71,141) Total assets 679,135 692,102 690,337 786,056 740,605 Long-term debt 299,937 18,455 26,198 327,853 347,641 Total debt(5) 312,256 303,858 355,245 422,843 416,685 Total stockholders' equity 188,940 195,434 163,627 176,061 155,990
(1) On a periodic basis, we review the carrying value of our aircraft. We recognize an impairment loss when the sum of the expected future and undiscounted net cash flows to be derived from the assets is less than their carrying amount on our balance sheet. In fiscal year 2001, we recognized an impairment charge of $20 million on two of our B747 aircraft as a result of our decision to take these aircraft out of service rather than take corrective action required by an FAA directive. These aircraft will not be returned to service. In fiscal year 2002, we recognized an impairment charge of $16 million on our DC9 fleet as a result of under utilization of the fleet. For a more detailed discussion of impairment charges, see Note 1 of "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. (2) Unusual credits-net consist of: o $58.7 million of net proceeds from a lawsuit settlement recorded in fiscal year 2001. In February 2001, we received $75 million, offset by $16.3 million of related legal costs and vendor settlements, over a dispute regarding structural modification services performed on three of our B747-100 aircraft. o A one-time pre-tax charge of $0.8 million recorded in fiscal year 2001 related to the write-off of net assets associated with a labor classification dispute on one of our EAGLE contracts. (3) Represents the one-third beneficial interest held by Mr. Delford M. Smith, our Chairman, in one B747 aircraft that is owned by the Trust Created February 25, 1986 (the "Trust"). We are the beneficiary of the remaining two-thirds beneficial interest in the B747 aircraft. We are also the beneficiary of the entire beneficial interest in that portion of the Trust's property that consists of three DC9 aircraft. Evergreen International Airlines, Inc. leases all four of these aircraft from the Trust. Lease payments relating to Mr. Smith's minority beneficial interest in the B747 aircraft were approximately $1.9 million, $1.9 million, $1.9 million, $1.9 million, and $1.8 million for fiscal years 2004, 2003, 2002, 2001, and 2000 respectively. (4) Working capital (deficit) represents total current assets less total current liabilities. (5) Total debt is computed as the total current portion of long-term debt, plus the non-current portion of long-term debt, plus the current portion of the note payable to affiliate, and plus, for fiscal year 2000, short-term notes payable and the non-current portion of the note payable to affiliate. 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS About Forward Looking Statements The Company is subject to certain risks and uncertainties that could affect its expected and actual future results. Except for the historical information contained in this Annual Report on Form 10-K/A, this Annual Report on Form 10-K/A contains forward-looking statements that involve risks and uncertainties. See "Statement Regarding Forward-Looking Disclosure" of the Original Filing BUSINESS OVERVIEW Evergreen is a leading integrated provider of worldwide airfreight transportation, aircraft ground handling and logistics, helicopter and small aircraft sales and leasing, and aircraft maintenance and repair services. Mr. Delford M. Smith, our Chairman, founded Evergreen in 1960 with three helicopters. Today we have a fleet of 76 commercial aircraft and helicopters, including ten Boeing 747s and seven DC9s, with the capability of providing aviation services throughout the world. We have provided air services to locations in over 150 countries while maintaining a reputation for safety and reliability. We generally provide our services under U.S. dollar-denominated contracts to a broad base of long-standing customers, including the U.S. Air Force Air Mobility Command ("AMC"), the U.S. Postal Service, freight forwarders, domestic and foreign airlines, industrial manufacturers, and other government agencies. We were the largest commercial provider of B747 air cargo services to the U.S. military for its 2003 fiscal year ending September 30, 2003. Over the past two years, we have redeployed our wide-body fleet to more profitable business by transitioning away from freight forwarders and other commercial customers and toward the U.S. military. Our diverse customer base and our ability to deploy aircraft to match market conditions give us the agility to respond to changes in the demand for our services within different economic sectors. 7 We provide our services through six reporting segments: Evergreen International Airlines, Inc. (EIA), Evergreen Aviation Ground Logistics Enterprises, Inc. (EAGLE), Evergreen Helicopters, Inc. (Helicopters or EHI), Evergreen Air Center, Inc. (Air Center or EAC), Evergreen Aircraft Sales & Leasing Co. (EASL), and Evergreen Agricultural Enterprises, Inc. (OTHER). Operating revenues and income from operations for each of our segments for fiscal years 2004, 2003 and 2002 are set forth in the following table:
Fiscal Years 2004 2002 (as restated) 2003 (as restated) ------------- --------- ------------- Operating revenues: (in millions) EIA $ 350.0 $ 374.5 $ 267.5 EAGLE 100.4 129.7 122.3 EHI 39.3 35.2 28.1 EAC 31.9 23.9 20.1 EASL 7.0 5.3 5.7 OTHER 7.0 5.7 4.0 --------- --------- --------- Total $ 535.6 $ 574.3 $ 447.7 ========= ========= ========= Totals may not add due to rounding.
Fiscal Years 2004 2002 (as restated) 2003 (as restated) ------------- --------- ------------- Income (loss) from operations: (in millions) EIA $ 33.2 $ 61.0 $ 3.8 EAGLE (2.3) 15.9 11.3 EHI (7.9) 0.8 0.1 EAC 5.0 2.9 (0.2) EASL (2.5) 2.3 2.3 OTHER (2.5) (1.3) (1.8) --------- --------- --------- Total $ 23.0 $ 81.6 $ 15.5 ========= ========= ========== Totals may not add due to rounding.
8 OPERATING REVENUES OVERVIEW The following is a summary of the methods by which each of our six business segments generates revenue and contributes to our results of operations. EIA EIA provides international long-range and domestic short-range air cargo services. Revenues in this segment are recorded predominantly as flight revenue. We primarily charge customers based on miles traveled, space utilized ("block space"), hours flown ("block hours"), or trips taken. This contrasts with other integrated freight carriers that generally charge based on the weight of the cargo carried. Accordingly, we generally are not responsible for securing freight for our aircraft, and receive revenues based on routes flown rather than capacity carried. Block hours are measured in sixty minute periods, or fractions of such periods, from the time the aircraft moves from its departure point to the time it comes to rest at its destination. Block space is measured by the number of pallet positions utilized. Flight revenue is primarily recorded as flights are completed and can be measured in block hours regardless of the method of charging customers. Many of our contracts are structured as "all-in" contracts, under which we are responsible for the full range of operating expenses, including fuel costs. Other contracts are "ACMI" or "wet lease" arrangements, under which we provide only the aircraft, crew, maintenance and insurance, and the customer is responsible for all other operating expenses, such as fuel, ground handling, crew accommodations and the cost of obtaining freight. Under ACMI contracts, the customer also bears the additional risk of ensuring that the capacity of the aircraft is fully utilized. As a result, we receive higher revenues per block hour flown with all-in contracts than we do with ACMI contracts. To reduce the impact of fuel price volatility, we include fuel cost adjustment mechanisms in most of our all-in contracts. In many cases, customers, such as AMC, bear the risk of escalation in fuel prices above a specified cost, and we forego the benefit of any decrease in fuel prices below such cost. Our annual AMC contract is an all-in contract. However, it differs from our other all-in contracts because on AMC flights we avoid costs of aircraft handling and landing fees at military airports where the military provides these services at no cost to us. Our agreements with freight forwarders, including our ad hoc arrangements, are typically structured as block space agreements, where the forwarder commits to deliver a certain amount of freight for a specific flight. Under the agreement, the forwarder must pay for the space committed, whether it delivers the freight to us or not. Our express delivery contracts are similar to ACMI contracts in that we provide the aircraft, crew, maintenance and insurance, but we also provide ground handling and logistics services. All other expenses are the responsibility of the customers. Fluctuations in flight revenues are principally dependent upon the quantity of block hours flown, the prevailing market rates, the mix among our contract types, and the composition of our operating fleet. EAGLE Through EAGLE, we provide full-service aviation ground handling and logistics services, including mail handling, aviation hub management, aircraft handling, cargo loading and unloading, container build up and break down, 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. Most revenues in this segment are recorded as ground logistics services revenues. Ground handling and logistics revenues are typically generated under contracts with the U.S. Postal Service, domestic and international passenger and cargo airlines, and express delivery customers. We typically provide services through contracts with a term of one year or more, with scheduled rates for a range of services at one or more locations throughout the United States. Fluctuations in revenues from our EAGLE segment are primarily dependent upon general demand for our services, the degree to which air carriers outsource ground logistics services to specialized providers in lieu of supporting these activities in-house, and the level of our business from the U.S. Postal Service. Revenues in this segment are recorded when services are rendered. 9 EHI We provide helicopter and small fixed-wing aircraft services throughout the world in markets in connection with 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. Revenues in our Helicopters segment are recorded primarily as flight revenue and, to a lesser extent, as support services and other revenue. Services are typically provided under one to five-year contracts. We typically charge customers a monthly availability fee in addition to an hourly charge for missions flown or by hour with a minimum number of hours per day. We often modify our pricing methods to match the characteristics of a mission, which may involve pricing based on cubic meter if the mission relates to logging, by acre if agricultural or by number of pick-ups if construction. Fluctuations in revenues from our Helicopters segment are primarily dependent upon the type of aircraft operated, market rates for aircraft, and the types of missions to which such aircraft are deployed. Revenues in this segment are recorded when services are rendered. EAC Through Air Center, an unlimited Class IV airframe repair station certified by the FAA, we perform aircraft maintenance, repair and overhaul services. Most revenues in this segment are recorded as support services and other revenue. Aircraft maintenance and repair revenues are generally derived from heavy maintenance ("C" checks and "D" checks) on aircraft, aircraft storage and other aircraft and storage services. Fluctuations in aircraft maintenance and repair revenues are primarily a function of air carriers' heavy maintenance needs, and the degree to which air carriers outsource aircraft maintenance and repair services to specialized providers in lieu of supporting these activities in-house. Additionally, fluctuations in aircraft maintenance and repair revenues are dependent upon: labor revenues, which are a function of total billable hours and labor rates; material revenues, which are a function of materials sold and the associated market rates; fueling operations, which are a function of the volume of fuel sold and the associated market rates; and other revenues, primarily resulting from the rental of certain facilities at the Air Center. Revenues in this segment are recorded when services are rendered. EASL EASL is our aircraft trading business through which we selectively buy, sell, lease and broker commercial aircraft, helicopters and spare parts. Revenues in this segment are predominantly derived from sales of aircraft, parts and other assets, including sales on a consignment basis. Revenues generated from the sale of our assets are recorded within the segment from which the assets originated. Revenues from asset sales within EASL relate solely to assets acquired and sold by EASL. Similarly, revenues generated from leasing of aircraft are recorded within the segment that controls those assets. EASL generates revenues in the form of commissions earned on the sale and leasing of assets for third parties and our Evergreen entities. OTHER We operate a nursery and farming enterprise through Evergreen Agricultural Enterprises, Inc. Our agricultural business is compensated based on delivery of nursery and agricultural products to wholesale and retail customers. Revenues from this segment are recorded as support services and other revenues. All of our subsidiaries in this segment are non-guarantor unrestricted subsidiaries for purposes of the indenture relating to the notes. 10 HOLDINGS Evergreen Holdings, Inc., the registrant, owns all of the outstanding common stock of Evergreen International Aviation, Inc. ("EA" or "Aviation") and all of the outstanding common stock of Evergreen Vintage Aircraft, Inc. ("Vintage"). Aviation, as the assignee of Holdings, is the beneficiary of an approximate two-thirds beneficial interest in the Trust Created February 25, 1986 ("the Trust"). Aviation owns all the outstanding common stock of Evergreen International Airlines, Inc., Evergreen Aviation Ground Logistics Enterprises, Inc., Evergreen Helicopters, Inc., Evergreen Air Center, Inc., Evergreen Aircraft Sales & Leasing Co., and Evergreen Agricultural Enterprises, Inc. Vintage owns a collection of vintage aircraft and a 120,000 square foot Evergreen Aviation Museum building on approximately 84.2 acres in McMinnville, Oregon. Vintage leases this building and land to The Captain Michael King Smith Evergreen Aviation Educational Institute, a non-profit corporation. The Trust owns one B747 and three DC9 aircraft. Mr. Delford M. Smith is the beneficiary of a one-third beneficial interest in the portion of the Trust that owns the B747 aircraft. Aviation, as the assignee of Holdings, is the beneficiary of the remaining two-thirds beneficial interest in the portion of the Trust that owns the B747 aircraft. Aviation, as the assignee of Holdings, is also the beneficiary of the entire beneficial interest in that portion of the Trust that owns the three DC9 aircraft. The Trust leases the aircraft to Evergreen International Airlines, Inc. Evergreen Holdings, Inc. is predominantly a holding company and it recognizes any income and expenses in the period incurred. Its primary assets are the shares of Evergreen International Aviation, Inc. and Evergreen Vintage Aircraft, Inc. In addition, it owns rural property with improvements, and incurs maintenance expense in relation to that property. Evergreen Holdings, Inc. also holds approximately $15.8 million in notes receivable from affiliates as of February 29, 2004. OPERATING EXPENSES OVERVIEW Our consolidated operating expenses consist of: flight costs; fuel expenses; maintenance expenses; aircraft and equipment expenses; the cost of sales of aircraft, parts and other property and equipment; cost of ground logistics services; support services and other expenses; selling, general and administrative expenses; impairment charges on aircraft; and unusual credits-net; and for fiscal year 2002, a claim under the Air Transportation Safety and System Stabilization Act. Selling, general and administrative expenses are not related to a single segment, but rather relate to our consolidated operations as a whole. Flight costs consist principally of flight crew costs, international air traffic control fees, and commissions payable to other members of our CRAF team. Fuel expenses are primarily generated by EIA and, to a much lesser extent, Helicopters. Flight crew costs and fuel expenses fluctuate based on changes in both fuel prices and the degree to which increases in such prices are either absorbed by us under all-in contracts or passed through to customers under ACMI contracts. In addition to the cost of maintaining our EIA fleet, including amortization of C checks and D checks and overhauls of engines and major aircraft components, our maintenance expenses reflect the cost of maintaining equipment utilized in all of our aviation services for EIA and EHI. As a result, maintenance expenses increase as block hours flown increase and as our EAGLE segment expands. We expense our light maintenance of aircraft ("A" checks and "B" checks) and capitalize our heavy maintenance of aircraft ("C" checks and "D" checks). Our aircraft and equipment expenses, which consist principally of depreciation, insurance, and engine and aircraft rental, are primarily driven by air freight transportation services provided by EIA, but are also impacted by our overall business mix. The cost of sales of aircraft, parts, and other property and equipment are recorded in the segment that sold the relevant asset. Our cost of ground logistics services includes labor and facility costs for EAGLE. Our support services and other expenses consist primarily of labor and materials costs for Air Center, and landing fees, aircraft and cargo handling and other operational support costs for EIA. 11 MATERIAL TRENDS AND UNCERTAINTIES We pay close attention to, and monitor various trends and uncertainties emerging in the markets we serve. The markets we serve are impacted by government regulations and policies, world wide economic and political changes, and the emergence of new competition in the various markets we serve. Our EIA segment operates in a highly competitive environment, which can be impacted by the emergence of new competitors offering low cost service. We maintain strong customer relations and provide a higher quality of service to combat potential competition. In addition, we are subject to governmental regulations covering where we can operate and how we operate. We track changing regulations to ensure our operating authority is as broad as possible and to ensure that we are eligible to operate in the markets we serve. Maintenance costs related to our aircraft increase as the age of the fleet increases. As younger aircraft under economically favorable financing arrangements enter the market we anticipate shifting the older aircraft into other markets which will extend their useful lives and add more competitive aircraft to maintain our market share. Our EIA segment depends on continued business with the U.S. Air Force Air Mobility Command. If our AMC business declines significantly, it could have a material adverse effect on our operations. We expect that revenues from AMC will continue to be the primary source of our revenue for the foreseeable future. The volume of AMC business is sensitive to changes in national and international political priorities and the U.S. federal budget. During January and February of fiscal year 2004, our flight revenues and income from operations were adversely affected by a decrease in our AMC business. This decrease in AMC business was caused by a decision by the U.S. Air Force Air Mobility Command to shift away from commercial aircraft in favor of organic military transport aircraft for movements of cargo directly into Iraq. U.S. commercial aircraft are currently prohibited from operating in Iraq by the FAA. The impact of this change on our AMC expansion revenues was a decrease in flight revenues of approximately $13.3 million during January and February of fiscal year 2004. This estimate was based on average AMC expansion revenues through the first three quarters of fiscal year 2004 against actual AMC expansion revenue for January and February 2004. This trend continued through March and April, however AMC expansion revenue has returned to previous revenue levels in May 2004. If AMC elects to fly directly into Iraq or use alternative methods of transportation, we may experience a decline in our consolidated operating revenues again, which could have a material adverse impact on our results of operations. Our EAGLE segment tracks U.S. Postal Service and Integrated Carriers volume, their market positions, and their rate structures. Based upon this information we are able to structure our operations in order to provide the type and volume of service that our targeted customers require. We also track traffic and route authority filings for foreign flag carriers. We periodically review our operations in order to consistently provide services at a high level of quality, while maintaining pricing and market share. Our EAC segment provides aircraft maintenance and repair services for a broad range of aircraft types, which provides us with a competitive advantage. Furthermore, we are constantly adjusting our operations to reflect changes in technology. In order to maintain our competitive position, we upgrade our equipment on a continuing basis and provide periodic training to our employees. Recently, we have been facing competition from an increasing number of foreign competitors who are adding capabilities and operating facilities. The increased competition is challenging our ability to maintain our market share and we must continue to upgrade our facilities in order to maintain our market share against the international competition. Our EHI segment is impacted by changes in the oil and gas industry, forest and land management practices, and changing governmental regulations. Because contracts are awarded in part based on safety records and a company's ability to maintain its aircraft, our safety record and maintenance infrastructure makes us competitive in the marketplace. We maintain strong relationships with our customers and have available a diverse fleet of aircraft in order to meet our customer's needs. We also provide services to a wide variety of markets, which enables us to minimize the impact of fluctuations in any individual market. 12 CRITICAL ACCOUNTING POLICIES This section is based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to impairment of property and equipment and goodwill, allowance for bad debts, inventory reserves and valuation for income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies and related judgments and estimates affect the preparation of our consolidated financial statements. Property and Equipment We had approximately $544.9 million and $553.7 million in operating property and equipment, net as of February 29, 2004 and February 28, 2003, respectively. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections made by us, including the estimation of useful lives, residual values and, in fiscal year 2002, impairment charges on aircraft. We record aircraft at acquisition cost upon delivery. Depreciable life is determined by using economic analysis, reviewing existing fleet plans, and comparing estimated lives to other airlines operating similar fleets. Older generation aircraft are assigned lives that are consistent with our experience and other airlines. As aircraft technology has improved, useful life has been extended. Residual values are estimated based on our historical experience with regard to the sale of both aircraft and spare parts, and are established in conjunction with the estimated useful lives of the aircraft. Residual values are based on current dollars when the aircraft are acquired and typically reflect values for assets that have not reached the end of their physical lives. Both depreciable lives and residual values are revised annually to recognize changes in our fleet plans and changes in conditions. The values reflected on our balance sheet do not necessarily reflect the fair market value or appraised value of these assets. See "Risk Factors - Volatility of aircraft values may affect our ability to obtain financing secured by our aircraft." Effective as of September 1, 2003, we changed the estimated useful lives of the aircraft in our EHI segment to more accurately reflect our current estimate of the useful lives of such aircraft. The estimated useful lives of these aircraft were increased from 10 years to 20 years. See Note 3 of "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. We evaluate the recoverability of a long-lived asset or asset group in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, an impairment loss is recognized only if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The recoverability of the carrying amount of long-lived assets is determined by comparing the sum of the expected future, undiscounted net cash flows to be derived from the related assets to the net book value of the assets; an impairment loss is then recognized as the difference between the fair value and the net book value of the long-lived assets. The undiscounted cash flows estimate includes only cash flows that are directly associated with and that is expected to arise as a direct result of the use of the assets and incorporates our own assumptions about the use of the assets. The assumptions incorporate our internal budgets and projections based on historical use, existing contracts currently in place as well as the existing service potential of the assets at the date they are tested. For our fleet of B747s and DC9s aircraft, each aircraft is depreciated until an economic point in time, regardless of when the aircraft was purchased. DC9s are depreciated through 2023 and B747s are depreciated until a point in time that ranges from 2020 until 2028, depending upon the aircraft model. For our fleet of helicopters, each helicopter has an estimated useful life of twenty years. Revenues and expenses which are incorporated in the undiscounted cash flow analysis are estimated based on the existing service potential of the assets, which is consistent with the estimated useful lives. If our projections of future undiscounted cash flows do not support the recoverability of our long-lived assets, an impairment charge is recorded to reduce the carrying value of our fleet to its fair value. The fair market values of our long-lived assets, for purposes of our assessment, are determined based on the amount at which such assets could be bought or sold in a current transaction between willing parties, discounted cash flows, or internal or external appraisals. The estimated magnitude of any such potential impairment charge could have a significant impact on our financial statements. 13 In fiscal year 2002, we recorded an impairment charge of $16 million for our DC9-33 aircraft fleet, resulting from the anticipated decrease in future cash flows in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See Note 1 of "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. For fiscal year 2004 and fiscal year 2003, we evaluated our fleet in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Utilizing our current cash flow projections, and current analysis of aircraft value, management determined that no further impairment charge was necessary. Allowance for Doubtful Accounts We maintain allowances for estimated losses resulting from the inability of our customers to make required payments and from contract disputes. The extension and revision of credit is established by obtaining credit rating reports or financial information of a potential customer. Trade receivable balances are evaluated at least monthly. If it is determined that the customer will be unable to meet its financial obligation to us as a result of a bankruptcy filing, deterioration in the customer's financial position, a contract dispute, or other similar events, a specific allowance is recorded to reduce the related receivable to the expected recovery amount given all information presently available. A general allowance is recorded for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. As of February 29, 2004 and February 28, 2003, the accounts receivable balances of $39.4 million and $55.6 million, respectively, were reported net of allowances for doubtful accounts of $1.9 million and $33.5 million, respectively. If a customer's financial condition were to deteriorate, resulting in its inability to make payments, an additional allowance may need to be recorded, which would result in additional selling, general and administrative expenses being recorded for the period in which such determination was made. During fiscal year 2004, EAGLE reduced the allowance for doubtful accounts by $6.1 million with write-offs related to U.S. Postal Service contracts. We had a freighter service agreement with Asiana Airlines ("Asiana"), which began January 28, 2000 and expired February 28, 2003. The agreement required the Company to provide the aircraft (B747), crew, maintenance and insurance. Asiana was required to pay all other costs incurred in the performance of the contract. The contract provided for minimum payments based on guaranteed block hour utilization as defined in the contract. On August 28, 2001, Asiana paid the Company for block hour utilization for the first week of September and gave notice that no further payments would be made. Asiana did not reimburse the Company for certain costs incurred by the Company during performance under the terms of the contract. The Company completed the mission in progress and returned the aircraft to the United States. On September 19, 2001, the Company instituted proceedings in the United States District Court for the State of Oregon against Asiana Airlines to recover certain amounts owed to the Company pursuant to the freighter service agreement with Asiana. On April 28, 2003, the court entered judgment in our favor in the amount of $16.6 million. In May 2003, Asiana posted a cash bond in the amount US $17.4 million. The court ordered a settlement assessment conference for December 18, 2003 which was recorded and conducted on January 5, 2004 at which time it was determined that further settlement discussions were not likely to be fruitful and that the briefing schedule stood as issued. Briefing on the appeal began on February 23, 2004. We filed our answer brief to affirm the judgment on 14 April 7, 2004. Asiana's reply was filed on May 10, 2004. Matters are still pending with the Ninth Circuit Court of Appeals and the court has not yet scheduled an oral argument. Since the agreement was in force until February 28, 2003 and Asiana ceased making minimum payments without notice, the Company believes it is entitled to the revenue which it would have earned had Asiana continued to meet its contractual obligation. At February 28, 2003, the Company had recorded an account receivable of $27.2 million however, such amount was fully reserved and no income was recorded for this program since Asiana ceased making payments. During fiscal year 2004, the account receivable of $27.2 million was written off against the fully reserved balance resulting in no change to the net receivables and no income effect. See Item 3. "Legal Proceedings" of the Original Filing. Goodwill On March 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for goodwill and other intangible assets, including when and how to perform impairment tests of recorded balances. We have two reporting units, EAGLE and Helicopters that have assigned goodwill of $5.5 million. Quoted stock market prices are not available for these individual reporting units. Accordingly, consistent with SFAS No. 142, our methodology for estimating the fair value of each reporting unit primarily considers discounted future cash flows. In applying this methodology, we make assumptions about each reporting unit's future cash flows based on capacity, expected revenue, operating costs and other relevant factors, and discount those cash flows based on each reporting unit's weighted average cost of capital. Changes in these assumptions may have a material impact on our consolidated financial statements. Income Taxes In conjunction with preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense, and assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheets. We must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent management believes that recovery is not likely, a valuation allowance must be established. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. Due to our acceleration of depreciation on property and equipment, we could have a loss for accounting purposes but would still owe tax. A discussion of the income tax provision and the components of the deferred tax assets and liabilities can be found in Note 6 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. Revenue Recognition Our principal sources of revenue are from air freight transportation services, ground logistics services, aircraft maintenance and repair services, helicopter and small aircraft services, and aviation sales, leasing and other services. Revenues from air freight transportation services are primarily recorded as cargo flights are completed. We enter into fixed-price contracts for flight activity, with some containing clauses for reimbursement of certain direct costs. Revenue from our ground logistic services, aircraft maintenance and repair services, helicopter and small aircraft services, and aviation sales, leasing and other services are recorded when services are rendered or goods are provided. To the extent our contracts contain provisions where customers pay fees for early termination, we record such fees when received. 15 RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities-an Interpretation of ARB No.51 Consolidated Financial Statements," which was subsequently revised in December 2003 with the issuance of FIN 46-R. FIN 46-R addresses how variable interest entities are to be identified and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46-R also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. We are required to adopt FIN 46-R as of the period ending May 31, 2005. While we have not completed our final assessment of the impact of FIN 46-R, based upon our preliminary assessment, management believes we may be the primary beneficiaries of certain related party entities including, but not limited to, Ventures Holdings, Inc. and Ventures Acquisitions Company, LLC. We lease certain assets, consisting primarily of buildings and aircraft, from these entities. The financial statements of these entities may be included in our financial statements in the period of adoption and beyond. Such inclusion is not expected to have a material impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. This standard is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. On November 7, 2003, the FASB issued FASB Staff Position No. FAS 150-3 ("FSP 150-3"), "Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." FSP 150-3 deferred certain aspects of SFAS No. 150. The adoption of SFAS No. 150 and FSP 150-3 did not have a material impact on our results of operations, financial position or cash flows. On December 17, 2003, the staff of the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which supersedes Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" (the "FAQ") issued with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition." Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did have a material impact on our revenue recognition policies, results of operations, financial position or cash flows. RISK FACTORS Our business, operations and financial condition are subject to various risks. Investors and prospective investors should carefully consider the following risk factors in conjunction with other information provided in this Annual Report on Form 10-K/A. We failed to comply with financial and other covenants in our debt instruments in the past. There is uncertainty regarding the Company's ability to comply with certain of the debt covenants which are contained in the Company's various debt instruments. Any failure by the Company to comply with any of these debt covenants, could result in the immediate acceleration of the debt by the Company's creditors. This risk that one or more of the Company's debt instruments could immediately be called due and payable raises substantial doubt about the Company's ability to continue as a going concern. 16 From time to time over the last ten years, we have been in default of the covenants under our debt agreements. At times we have not always had sufficient cash flows from operations and available borrowings to meet our liquidity requirements. As a result of this and other matters, our audited financial statements included audit opinions by our external auditors that included an emphasis of a matter paragraph regarding the Company's ability to continue as a going concern in fiscal years 1994, 1995, 1996, 2002, and 2004. In fiscal year 2002, a going concern emphasis paragraph was issued as a result of the maturity of our existing credit facility within one year of the end of the fiscal year end. Taking into consideration our working capital position, our ability to refinance our existing credit facility or have its maturity extended beyond one year was uncertain. Accordingly, we were required to classify such debt as a current liability. In certain other years we obtained waivers from our lenders and did not receive a going concern comment. In fiscal year 2004, a going concern paragraph was issued because, at February 29, 2004, we were in default of the Fixed Charge Coverage Ratio covenant under our revolving credit facility with PNC Bank. However, we were able to cure the default by obtaining alternative financing and paying off all amounts owed by us to PNC Bank. See Notes 1 and 5 of Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. There are weaknesses with our internal controls, which could affect our ability to provide accurate financial statements and comply with the Sarbanes-Oxley Act. Our auditors have noted "reportable conditions" and "material weaknesses" with respect to our financial statements from time to time. Reportable conditions involve significant deficiencies in the design or operation of a company's internal controls that could adversely affect the company's ability to record, process, summarize and report financial data. Beginning in fiscal year 1994, our accountants noted reportable conditions in fiscal years 1994, 2000, 2001 and 2002. For fiscal year 2004, our auditors noted material weaknesses relating to our failure to ensure that all transactions were recorded properly and all of our accounts were reconciled on a consistent and timely basis. In May 2004, the Company's principal executive officer and principal financial officer analyzed the facts and circumstances surrounding the quantity and magnitude of the adjusting journal entries within certain subsidiaries at year end. After reviewing the adjustments and restatement entries and performing an evaluation of the internal controls within our reporting entities we concluded that, as of the end of such period, the Company's current controls and procedures require further enhancements to ensure that the Company's disclosure controls and procedures are 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. At this time, management has determined that disclosure controls and procedures may not be sufficient to ensure that data errors, control problems or acts of fraud are detected and to confirm that appropriate corrective action, including process improvements, is undertaken. After reviewing the restatement adjustments and performing an evaluation of our controls and disclosure procedures, management concurs with our current registered public accountants that improvements to internal controls are needed relating to: (1) establishment of policies and procedures regarding capitalization and amortization of balances, (2) establishment of policies and procedures for recording and processing transactions, (3) establishment of standards to review journal entries, account balances and financial statements. During fiscal year 2004 and subsequent, we began a project to improve our internal controls. See Item 9, "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure." In particular, we are committed to improving the core competencies of our accounting staff and we are adding new accounting positions in the areas of internal audit, reporting and oversight functions. In addition, as a previously private company with no prior public reporting obligations, we are in the process of instituting changes to our internal procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, when and as such requirements become applicable to us. Implementing these changes may require a significant period of time and specific compliance training of our directors, officers and personnel. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to provide accurate financial statements and comply with the Sarbanes-Oxley Act. We depend on continued business with the U.S. Air Force Air Mobility Command. If our AMC business declines significantly, it could have a material adverse effect on our operations. In fiscal years 2004, 2003 and 2002, 17 AMC was our principal customer, accounting for approximately 57.4% 48.2% and 30.8% respectively of our consolidated operating revenues and 87.8%, 73.9% and 51.5%, respectively of our total EIA segment revenues. During January and February of fiscal year 2004, our flight revenues and income from operations were adversely affected by a decrease in our AMC business. This decrease in AMC business was caused by a decision by the U.S. Air Force Air Mobility Command to shift away from commercial aircraft in favor of organic military transport aircraft for movements of cargo directly into Iraq. U.S. commercial aircraft are currently prohibited from operating in Iraq by the FAA. The impact of this change on our AMC expansion revenues was a decrease in flight revenues of approximately $13.3 million during January and February of fiscal year 2004. This estimate was based on average AMC expansion revenues through the first three quarters of fiscal year 2004 against actual AMC expansion revenue for January and February 2004. This trend continued through March and April but AMC expansion revenue has returned to previous earnings levels in May 2004. If AMC elects to fly directly into Iraq or use alternative methods of transportation, we may experience a decline in our consolidated operating revenues, which could have a material adverse impact on our results of operations. We expect that revenues from AMC will continue to be the primary source of our revenue for the foreseeable future. However, our revenues from AMC are derived from one-year contracts that AMC is not obligated to renew. In addition, AMC can terminate or modify its contract with us for convenience if we fail to perform or if we fail to pass bi-annual inspections. Any such termination could also expose us to liability and hinder our ability to compete for future contracts. If our AMC business declined significantly, it could have a material adverse effect on our results of operations and financial condition. Even if AMC continues to award business to us, we cannot assure you that we will continue to generate the same level of revenues we currently derive from AMC business. The volume of AMC business is sensitive to changes in national and international political priorities and the U.S. federal budget. Our revenues from AMC could decline as a result of the system AMC uses to allocate business to commercial airlines that participate in the Civil Reserve Air Fleet. Each year, AMC grants a certain portion of its business to different airlines based on a point system. The number of points an airline can accrue is determined by the amount and type of aircraft pledged to the Civil Reserve Air Fleet ("CRAF"). We participate in CRAF through a teaming arrangement with other airlines, known as the North American Contractor Team. We are currently the only core B747 wide-body cargo member of our CRAF team, which is the team that has accumulated the most points for the current contract year. The formation of competing teaming arrangements that have larger partners than those in our team, an increase by other air carriers in their commitment of aircraft to the program, or the withdrawal of our team's current partners, could adversely affect the amount of our AMC business in future years. For example, in 2002, Northwest Airlines left our team to join another CRAF team. This resulted in our team's entitlement of AMC business dropping from 65% for the U.S. government's 2002 and 2001 fiscal years to 51% for the U.S. government's 2003 fiscal year. All of the current North American Contractor Team members will participate in the North American Contractor Team for the government fiscal year 2005. Some of our current team members are currently facing financial difficulties. If any of our team members were to cease or restructure their operations, the number of planes pledged to CRAF by our team would be reduced. As a result, the number of points allocated to our team would be reduced and our allocation of AMC business would probably decrease. We also depend on continued business with the U.S. Postal Service. If our business with the U.S. Postal Service declines significantly or if the U.S. Postal Service fails to renew any of our contracts, it could have a material adverse effect on our results of operations and financial condition. In fiscal years 2004, 2003, and 2002, the U.S. Postal Service accounted for approximately 12.5%, 18.3%, and 26.1% respectively of our total operating revenues. The U.S. Postal Service account consists of five separate contracts, which range in original duration from one to five years. Our largest contract comes up for renewal in 2006. Our contracts with the U.S. Postal Service represented approximately 61.2%, 71.3%, and 68.8% of our EAGLE segment revenues for fiscal years 2004, 2003, and 2002 respectively. We cannot assure you that any of these agreements will remain in effect for their scheduled terms or that they will be renewed upon their expiration. Any such termination or non-renewal of any of these agreements by the U.S. Postal Service or any significant decline in our income from our business with the U.S. Postal Service, for any reason, could have a material adverse effect on our results of operations and financial condition. Our operating cash flows may be subject to fluctuations related to our ability to promptly collect accounts receivable, which may limit our ability to borrow against our revolving credit facility. A significant decline in operating cash flows may require us to seek additional financing sources to fund our working capital requirements. 18 Historically, we have experienced fluctuations in our operating cash flows as the result of fluctuations in our collection of accounts receivable. These fluctuations have been due to various issues, including amendments and changes to existing contracts and the commencement of operations under new agreements. If we cannot successfully collect a significant portion of such accounts receivable over 90 days old, we may be required to set aside additional reserves or write off a portion of such receivables in accordance with generally accepted accounting principles. If we are not able to maintain or reduce our aged receivables, our ability to borrow against our revolving credit facility entered into subsequent to fiscal year 2004, on May 13, 2004, may be restricted due to the fact that borrowings are limited to 85% of eligible receivables, as defined, which excludes receivables over ninety days old. If our operating cash flows significantly decline as a result of such fluctuations, we may be required to seek alternative financing sources, in addition to our revolving credit facility, to fund our working capital requirements. Our fleet consists of older aircraft which may have higher maintenance costs than new aircraft and which could require substantial maintenance expenses. Our fleet consists of ten B747s and seven DC9s, manufactured between 1967 and 1975. As of February 29, 2004, the average age of our operating aircraft was approximately 33 years. Because many aircraft components wear out and are required to be replaced after a specified number of flight hours or take-off and landing cycles, and because older aircraft may need to be refitted with new aviation technology, older aircraft tend to have higher maintenance costs than new aircraft. Maintenance and related costs can vary significantly from period to period as a result of government-mandated inspections and maintenance programs and the time needed to complete required maintenance checks. In addition, the age of our aircraft increases the likelihood that we will need significant capital expenditures in the future to replace our older aircraft. The incurrence of substantial additional maintenance expenses for our aircraft, or the incurrence of significant capital expenditures to replace an aircraft, could have a material adverse effect on our results of operations, and our ability to make payments on our debt obligations. Volatility of aircraft values may affect our ability to obtain financing secured by our aircraft. We have historically relied upon the market value of our aircraft as a source of additional capital. The market for used aircraft, however, is volatile, and it can be negatively affected by excess availability due to factors such as the potential bankruptcy of existing airlines. As a result, the value of aircraft reflected on our balance sheet does not necessarily reflect the fair market value or appraised value of these aircraft. Accordingly if we sell our aircraft or obtain financing secured by our aircraft, or are involved in a bankruptcy, liquidation, and reorganization or other winding up, there can be no assurance that our aircraft would receive a favorable valuation at such time. Moreover, if we were to sell our aircraft now, they would probably not generate proceeds equal to their carrying value on our balance sheet. We depend on the availability of our wide-body aircraft for the majority of our flight revenues. In the event that one or more of our B747 aircraft are out of service for an extended period of time, we may have difficulty fulfilling our obligations under one or more of our existing contracts. As a result, we may have to lease or purchase replacement aircraft or, if necessary, convert an aircraft from passenger to freighter configuration. There can be no assurance that suitable replacement aircraft could be located quickly or on acceptable terms. Due to the relatively small size of our B747 fleet, the loss of revenue resulting from any such business interruption or costs to replace aircraft could have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. We do not have insurance against losses arising from any business interruption. If we fail to keep our aircraft in service, we may have to take impairment charges in the future and our results of operations would be adversely affected. The loss of our aircraft or the grounding of our fleet could reduce our capacity utilization and revenues, require significant capital expenditures to replace such aircraft and could have a material adverse affect on us and on our ability to make payments on our debt obligations. Moreover, any aircraft accident could cause a public perception that some of our aircraft are less safe or reliable than other carriers' aircraft, which could have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. The industries in which we operate are highly competitive and our failure to effectively compete would adversely affect our results of operations and financial condition. Our industry is highly competitive and susceptible to price discounting due to excess capacity. Because we offer a broad range of aviation services, our competitors vary by geographic market and type of service. Each of the markets we serve is highly competitive, fragmented and, 19 other than ground handling and logistics, can be capital intensive. Competition in each of these industries depends on safety, price, reliability and the availability and quality of service. In addition, some of our contracts are awarded based on a competitive bidding process. Competition arises primarily from other international and domestic contract carriers, regional and national ground handling and logistic companies, internal maintenance units of major airlines and third party maintenance providers, some of which have substantially greater financial resources and more extensive fleets and facilities than we do. Some of our airline competitors are currently facing financial difficulties and as a result could resort to drastic pricing measures with which we may not be able to compete. In addition, some of these airlines have larger fleets of newer wide-body cargo aircraft. Once these airlines resolve their financial difficulties, they will be able to resume operations with these newer larger fleets and compete with us, both in the commercial market and also in AMC business. Some of our competitors may be able to substantially reduce their costs, particularly interest and lease expense, in bankruptcy. We may also compete with our customers who may establish "in-house" operations and stop using our services, because it moved these services in-house. In addition, traffic rights to many foreign countries are subject to bilateral air services agreements between the United States and the foreign country and are allocated only to a limited number of U.S. carriers and are subject to approval by the applicable foreign regulators. Consequently, our ability to provide air cargo service in some foreign markets depends in part on the willingness of the DOT to allocate limited traffic rights to us rather than to competing U.S. airlines and on the approval of the applicable foreign regulators. If we are unable to compete successfully, we may not be able to generate sufficient revenues and cash flow to meet our debt obligations. Many of our arrangements with customers are not long-term contracts. As a result, we cannot assure you that we will be able to continue to generate similar revenues from these arrangements. We generate a large portion of our revenues from arrangements with customers with terms of one year or less, under ad hoc arrangements and through "call when needed" contracts. Further, we generate a large portion of our revenues from AMC expansion business, which is not fixed by contract and is dependent on AMC requirements that are not predictable. There is a risk that customers may not continue to seek the same level of services from us as they have in the past or that they do not renew these arrangements or terminate them at short notice. In the past, several of our larger contracts have not been renewed due to reasons unrelated to our performance, such as the financial position of our customers or their decision to move the services we provided to them in-house. In addition, some of our contracts have not been signed, although we continue to provide services and receive payments under these arrangements. Accordingly, we cannot assure you that in any given year we will be able to generate similar revenues from our customers as we did in the previous year. The cost of fuel is a major operating expense, and fuel shortages and increases in the price of fuel could adversely affect our operations. The cost of fuel is a major operating expense for all airlines, including ours. Fuel costs are also significant for our EAGLE and EHI operations. For fiscal years 2004, 2003 and 2002, fuel costs were approximately 18.9%, 20.7% and 16.1%, respectively, of our total operating expenses. Also, because of the relative age of our fleet, our aircraft tend to be less fuel-efficient than newer aircraft, and fuel costs tend to be a higher percentage of our operating costs than for other airlines. Both the cost and availability of fuel are subject to many worldwide economic and political factors and events, which are beyond our control, including taxes. The price we pay for fuel varies directly with market conditions, and we have no guaranteed long-term sources of supply. We do not regularly enter into hedging arrangements. If we elect to hedge fuel prices in the future, through the purchase of futures contracts or options or otherwise, there can be no assurance that we will be able to do so successfully. Our ability to pass on increased fuel costs may be limited by economic and competitive conditions. We generally pass fuel costs on to our customers either through price increases or contracts that provide for fuel price adjustment mechanisms. However, if fuel costs increase significantly, our customers may reduce the volume and frequency of cargo shipments or find less costly alternatives for cargo delivery, such as land and sea carriers. Accordingly, an increase in fuel costs could have a material adverse effect on our operating results. Similarly, a reduction in the availability of fuel, resulting from a disruption of oil imports or other events, could have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. Changes in general economic and political conditions may have a material adverse effect on our results of operations and financial performance. The commercial air freight industry is highly sensitive to general economic and political conditions, particularly fluctuations in demand for products from abroad. Any negative change in the economic or political climate or a reduction in demand in the world air freight market could increase our security costs, 20 increase the cost or limit the availability of insurance, or reduce our capacity utilization, all of which could have a material adverse effect on our results of operations or financial performance. We are subject to extensive regulation and our failure to comply with these regulations in the United States and abroad, or the adoption of any new laws, policies or regulations may have an adverse effect on our business. Our operations are subject to complex aviation and transportation laws and regulations, including Title 49 of the United States Code (formerly the Federal Aviation Act of 1958, as amended), under which the United States Department of Transportation ("DOT") and the Federal Aviation Administration ("FAA") exercise regulatory authority over air carriers. In addition, we are subject to regulation by various other federal, state, local and foreign authorities, including the Department of Defense and the Environmental Protection Agency. These laws and regulations may require us to maintain and comply with a wide variety of certificates, permits, licenses, noise abatement standards and other requirements, the failure of which to maintain or comply with could result in substantial fines. The DOT, the FAA and other regulatory agencies have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with provisions of law or applicable regulations, and may impose civil or criminal penalties for violations of applicable rules and regulations. Such actions, if taken, could have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. In addition, the DOT and the FAA may adopt new regulations, directives or orders that could require us to take additional compliance steps or result in the grounding of some of our aircraft, which could increase our costs or result in a loss of revenues, which could have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. We may be subject to extensive future regulation by various government agencies intended to prevent terrorist attacks. In response to the terrorist attacks of September 11, 2001, various government agencies, including the Transportation Security Administration ("TSA"), the Department of Homeland Security and the U.S. Customs Service, have adopted, and may adopt in the future, new rules, policies or regulations or changes in the interpretation or application of existing laws, rules, policies or regulations, compliance with which could increase our costs or result in loss of revenues, which could have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. The TSA may adopt security-related regulations, including new requirements for screening of cargo and our reimbursement to the TSA for the cost of security services. These new regulations could have an adverse impact on our ability to efficiently process cargo or could increase our costs. Our business outside of the United States exposes us to uncertain conditions in overseas markets. A portion of our revenues comes from air freight services to customers outside the United States, which exposes us to the following risks: o Potential adverse changes in the diplomatic relations between foreign countries and the United States. o Risks of insurrections or hostility from local populations directed at U.S. companies. o Government policies against businesses owned by non-nationals. o Expropriations of property by foreign governments. o The instability of foreign governments. o Adverse effects of currency exchange controls. At some foreign airports, we are required by local governmental authorities or market conditions to contract with third parties for ground and cargo handling and other services. The performance by these third parties or boycott of such services is beyond our control, and any operating difficulties experienced by these third parties could adversely affect our reputation or business. 21 Volatility in international currency markets may adversely affect demand for our services. We provide services to numerous industries and customers that experience significant fluctuations in demand based on economic conditions and other factors beyond our control. The demand for our services could be materially adversely affected by downturns in the businesses of our customers. Although we price our services and receive payment for our services almost exclusively in U.S. dollars, many of our customers' revenues are denominated in foreign currencies. Any significant devaluation in such currencies relative to the U.S. dollar could have an adverse effect on such customers' ability to pay us or their demand for our services, which could have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. Conversely, if there is a significant decline in the value of the U.S. dollar against foreign currencies, the demand for some of the products we transport could decline. Such a decline could reduce demand for our services and thereby have a material adverse effect on our results of operations and our ability to make payments on our debt obligations. We operate in dangerous locations and carry hazardous cargo, either of which could result in a loss of, or damage to, our aircraft. Our operations are subject to conditions that could result in losses of, or damage to, our aircraft, or death or injury to our personnel. These conditions include: o Geopolitical instability in areas through which our flight routes pass, including areas where the United States is conducting military activities. o Future terrorist attacks. o Casualties incidental to the services we provide in support of U.S. military activities, particularly in or near Afghanistan, Kuwait and elsewhere in the Middle East. We regularly carry sensitive military cargo including weaponry, ammunition and other volatile materials. The inherently dangerous nature of this cargo increases our risk of aircraft damage or loss. The success of our business depends on the services of certain key personnel. We believe that our success depends to a significant extent upon the services of Mr. Delford M. Smith, our founder and Chairman of our Board of Directors, who is currently 74, and certain other key members of our senior management including those with primary responsibility for each business segment. The loss of the services of Mr. Smith or other key members of our management could have a material adverse effect on us and our ability to make payments on our debt obligations. Our insurance coverage does not cover all risks. Our operations involve inherent risks that subject us to various forms of liability. We carry insurance against those risks for which we believe other participants in our industry commonly insure, however, we can give no assurance that we are adequately insured against all risks. If our liability exceeds the amounts of our coverage, we would be required to pay any such excess amounts, which amounts could be material. For more information on our insurance policies and risk management. See "Business-Insurance and Risk Management." Our insurance coverage has become increasingly expensive and difficult to obtain. Aviation insurance premiums historically have fluctuated based on factors that include the loss history of the industry in general and the insured carrier. Since September 11, 2001, our premiums have increased significantly. Future terrorist attacks involving aircraft, or the threat of such attacks, could result in further increases in insurance costs, and could affect the availability of such coverage. Although we believe our current insurance coverage is adequate and consistent with current industry practice, there can be no assurance that we will be able to maintain our existing coverage on terms favorable to us, that the premiums for such coverage will not increase substantially or that we will not bear substantial losses and lost revenues from accidents. Substantial claims resulting from an accident in excess of related insurance coverage or a significant increase in our current insurance expense could have a material adverse effect on our financial condition and our ability to make payments on our debt obligations. 22 If we ship hazardous or undisclosed illegal cargo, it could damage our aircraft, subject us to fines or penalties or result in our aircraft being impounded. If we fail to discover any undisclosed weapons, explosives, illegal drugs or other hazardous or illegal cargo, or if we mislabel, mishandle or otherwise ship hazardous materials in violation of federal or foreign regulations, we may suffer possible aircraft damage or liability, as well as fines, penalties or flight bans or impoundment of our aircraft, imposed by both the country of origin and the country of destination. Any of these events could have a material adverse effect on our ability to make payments on our debt obligations. As a U.S. government contractor, we are subject to a number of procurement and other rules and regulations. In order to do business with government agencies, we must comply with and are affected by many laws and regulations, including those relating to the formation, administration and performance of U.S. government contracts. These laws and regulations, among other things: o Require, in some cases, certification and disclosure of all cost and pricing data in connection with contract negotiations. o Impose accounting rules that define allowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. government contracts. o Restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data. These laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of these laws and regulations could result in the imposition of fines and penalties or the termination of our contracts. In addition, the violation of certain other generally applicable laws and regulations could result in our suspension or debarment as a government contractor. All of our outstanding shares are controlled by two principal shareholders, whose interests may conflict with those of our bondholders. A trust controlled by Mr. Delford M. Smith, who is the chairman of our board of directors, beneficially owns 75.1% of our outstanding shares. In addition, Mr. Mark Smith, the son of Mr. Delford M. Smith, beneficially owns 24.9% of Evergreen Holdings, Inc.'s outstanding shares. As a result of this ownership, Mr. Delford M. Smith is able to direct the affairs of Evergreen and to approve any matter requiring the approval of our shareholders. Such matters include the election of directors, the adoption of amendments to our certificate of incorporation and approval of mergers or sales of substantially all our assets and certain related party transactions of the nature and type described in "Item 13, Certain Relationships and Related Transactions," of the Original Filing. There can be no assurance that the interests of our principal shareholders will not conflict with the interests of our bondholders. 23 RESULTS OF OPERATIONS This discussion highlights trends and year-to-year changes in results of operations of each of our businesses as they impact our results of operations on a consolidated basis. This discussion should be read in conjunction with the consolidated financial statements of Evergreen Holdings, Inc., including the related notes and the reports of independent accountants. Inter-company revenues and expenses have been eliminated in the discussion of consolidated and segment revenues and expenses. The report of our predecessor independent registered public accounting firm for the year ended February 28, 2002 includes an explanatory paragraph regarding the existence of a substantial doubt of our ability to continue as a going concern. The report of our current independent registered public accounting firm for the year ended February 29, 2004, includes an explanatory paragraph regarding the existence of substantial doubt of our ability to continue as a going concern. The report of our current registered public accounting firm for the year ended February 28, 2003, dated April 25, 2003, included an explanatory paragraph stating that there was substantial doubt about our ability to continue as a going concern because we believed that we may not have been able to make the payments on our debt as it came due. However, as disclosed in Notes 1 and 5 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A, we repaid that debt with proceeds obtained from the sale of the senior second secured notes due 2010 and from proceeds obtained from a revolving line of credit obtained with PNC Bank. Accordingly, upon re-issuance of their report on May 16, 2003 and October 10, 2003, the explanatory paragraph discussing the existence of substantial doubt of our ability to continue as a going concern was removed. Restatements As discussed in Note 14 of "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A, subsequent to the issuance of the Company's fiscal year 2004 consolidated financial statements, as reported in the Original Filing, we determined that such fiscal year 2004 consolidated financial statements contained certain accounting errors. In particular, we determined that the Company's outstanding long-term debt balance as of February 29, 2004, and the total amount of the Company's selling, general and administrative expenses for fiscal year 2004 were both understated by approximately $3,084,000. In addition, after conducting a further review of other year-end transactions for fiscal year 2004, we discovered other accounting errors, the correction of which resulted in an increase of approximately $25,000 in operating expenses, an increase of approximately $735,000 in current assets, a decrease of approximately $458,000 in property and equipment, an increase of approximately $123,000 in deposits, and an increase of approximately $416,000 in current liabilities. As a result, the Company's consolidated financial statements in this Annual Report on Form 10-K/A for the year ended February 29, 2004 have been restated from amounts previously reported in the Original Filing. The correction of these errors increased the Company's fiscal year 2004 net loss by approximately $1,924,000, increased assets by approximately $400,000, and increased liabilities by approximately $2,324,000. As further discussed in Note 14, we restated our consolidated statement of operations for the fiscal year ended February 28, 2002 to present a claim of approximately $7,200,000 received under the Air Transportation Safety and System Stabilization Act as a separate component of operating expenses. This amount was previously reported in operating revenues (support services and other). The following management's discussion and analysis of financial condition and results of operations gives effect to these restatements. 24 RESULTS OF OPERATIONS FOR FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003 The following information relating to fiscal years 2004 and 2003 is derived from the audited consolidated financial statements of Evergreen Holdings, Inc. for fiscal years 2004 and 2003, which are included in this Annual Report on Form 10-K/A.
Fiscal Year --------------------------------- 2004 Total (as restated) 2003 Change ----------- -------- ------- (in millions) Operating revenues: Flight revenue $ 377.7 $ 400.6 $ (22.9) Sales of aircraft, parts, and other assets 17.3 12.1 5.2 Ground logistics services 99.8 129.7 (29.9) Support services and other 40.8 31.9 8.9 -------- -------- -------- Total operating revenues 535.6 574.3 (38.7) Operating Expenses: Flight costs 73.8 69.8 4.0 Fuel 96.8 100.2 (3.4) Maintenance 73.3 69.7 3.6 Aircraft and equipment 49.8 44.1 5.7 Costs of sales of aircraft, parts, and other property and equipment 13.7 8.9 4.8 Cost of ground logistics services 89.1 104.6 (15.5) Support services and other 39.0 32.6 6.4 Selling, general, and administrative 77.1 62.7 14.4 -------- -------- -------- Total operating expenses 512.6 492.7 19.9 -------- -------- -------- Income from operations $ 23.0 $ 81.6 $ (58.6) ======== ======== ======== (Totals may not add due to rounding)
25 OPERATING REVENUES Our consolidated operating revenues decreased $38.7 million, or 6.7%, to $535.6 million for fiscal year 2004 from $574.3 million in fiscal year 2003 as a result of the following: Flight Revenue Flight revenue decreased $22.9 million, or 5.7%, to $377.6 million for fiscal year 2004 from $400.6 million for fiscal year 2003. Flight revenue in our EIA segment decreased $26.4 million, or 7.1%, to $342.9 million from $369.2 million. EIA flight revenue derived by the B747 fleet accounted for $20.4 million of the decrease and EIA flight revenue derived by the DC9 fleet accounted for $5.1 million decrease in EIA flight revenue. This decrease in EIA flight revenue was offset by an increase in our EHI segment of $3.4 million, or 10.9%, to $34.8 million for fiscal year 2004 from $31.4 million for fiscal year 2003 in our EHI segment. These changes in flight revenue resulted from the following: o EIA segment's flight revenue derived from AMC business in the B747 fleet increased $30.5 million, or 11.0%, to $307.3 million for fiscal year 2004 from $276.8 million for fiscal year 2003 driven primarily by the ongoing requirement of the AMC in support of the war on terrorism. o EIA segment's flight revenue derived from Asian charters flown by the B747 fleet decreased $44.2 million to $12.3 million for fiscal year 2004 from $56.5 million for fiscal year 2003. The Asian charter revenue for fiscal year 2003 was generated in large part by the West Coast dock strike. o EIA segment's flight revenue derived from the B747 Finnair contract decreased $5.5 million, or 60.2%, to $3.6 million for fiscal year 2004 from $9.1 million for fiscal year 2003 as a result of the completion of the contract in fiscal year 2004. o EIA segment's flight revenue derived from DC9 contracts decreased $5.1 million, or 31.2%, to $11.4 million for fiscal year 2004 from $16.5 million for fiscal year 2003 as a result of a decrease in U.S. Postal Service contracts primarily providing service to southeastern Alaska. The following table details EIA block hours by aircraft and contract type for fiscal year 2004 and fiscal year 2003. 747 Block Hour Comparison: 2004 2003 Change ------ ------ ------- AMC 26,410 22,967 3,443 Other All-In 1,613 5,426 (3,813) ------ ------ ------- Total All In 28,023 28,393 (370) ------ ------ ------- ACMI 463 583 (120) ------ ------ ------- Total 747 Hours 28,486 28,976 (490) ====== ====== ======= DC9 Block Hour Comparison: 2004 2003 Change ------ ------ ------- ALL-IN 1,169 2,482 (1,313) ACMI 3,302 2,985 317 ------ ------ ------- Total DC 9 Hours 4,471 5,467 (996) ------ ------ ------- Total Block Hours 32,957 34,443 (1,486) ====== ====== ======= EHI flight revenue increased $3.4 million, or 10.9%, to $34.8 million for the fiscal year 2004 from $31.4 million for fiscal year 2003. The increase in EHI flight revenue was due primarily to the following: 26 o New air ambulance service in Alaska accounted for an increase of $1.9 million in flight revenues for fiscal year 2004. o UNOCAL contract revenues related primarily to offshore oil support work support resulted in increased revenues of $1.2 million for fiscal year 2004. o NASA shuttle recovery work accounted for increased flight revenues of $0.7 million for fiscal year 2004. Sales of Aircraft, Parts, and Other Assets Sales of aircraft, parts, and other assets increased $5.3 million, or 43.0%, to $17.4 million for the fiscal year 2004 from $12.1 million for fiscal year 2003 due to the following: o EIA segment had an increase of $2.9 million, or 75.3%, to $6.9 million for fiscal year 2004 from $4.0 million for fiscal year 2003. This increase was generated by the sale of a Gulfstream II aircraft for $3.8 million offset by a lower volume of aircraft parts and material sales. o EAGLE segment had an increase of $0.5 million to $0.5 million for fiscal year 2004 from $0.0 million for fiscal year 2003 due to the sale of two de-icing trucks. o EASL segment had an increase of $1.7 million, or 32.9%, to $7.0 million for fiscal year 2004 from $5.3 million for fiscal year 2003. This increase in sales was driven by higher aircraft part out sales. Major part out sales programs during fiscal year 2004 consisted of $4.5 million from the sale of two B-767 aircraft and $0.9 million from the sale of two A-300 aircraft. Ground Logistics Services Revenues Ground logistics services revenues, which are wholly comprised of revenues generated by our EAGLE segment, decreased $29.9 million, or 23.1%, to $99.8 million for fiscal year 2004 from $129.7 million for fiscal year 2003 due to a decrease in U.S. Postal Service revenue of $31.1 million. This decrease was driven by the elimination of the $14.3 million U.S. Postal Service Christmas Network (or "CNET") operation and a reduction of Shared Network (or "SNET") volume, which caused a decrease of $13.8 million. These decreases were partially offset by an increase in third party revenue of $1.2 million related to the growth in domestic and international markets. Support Services and Other Revenues Support services and other revenues increased $8.9 million, or 28.1%, to $40.8 million for fiscal year 2004 from $31.9 million for fiscal year 2003 due to the following: o EAC segment's support services revenue increased $7.5 million, or 31.8%, to $31.0 million for fiscal year 2004 from $23.5 million for fiscal year 2003. The factors contributing to this increase was a contract for heavy maintenance checks with a major aircraft leasing company and EAC implementation of an aggressive marketing campaign that was targeted at increasing heavy maintenance revenues from airlines and leasing companies in the fiscal year 2004. In addition, EAC had additional support service revenues from aircraft storage as the number of aircraft in storage increased by 61 to 258 at February 29, 2004 from 197 at February 28, 2003. o OTHER segment's support services and other revenue increased $1.3 million, or 22.8%, to $7.0 million for fiscal year 2004 from $5.7 million for fiscal year 2003 as a result of a $0.5 million increase in Christmas tree sales and an increase in other agricultural sales generated by reduced margins on excess inventory. 27 OPERATING EXPENSES Flight Costs Flight costs increased $4.0 million, or 5.8%, to $73.8 million for fiscal year 2004 compared to $69.8 million for fiscal year 2003. o EIA segment's flight costs increased $3.3 million, or 5.2%, to $65.7 million for fiscal year 2004 from $62.4 million for fiscal year 2003, due to a $3.9 million increase in our overflys related directly to the increase in the AMC flying into Europe. o EHI segment's flight costs increased $0.7 million, or 9.4% to $8.1 million for fiscal year 2004 from $7.4 million for fiscal year 2003, related to an associated increase in flight revenue. Fuel Expense Fuel expense decreased $3.4 million, or 3.4%, to $96.8 million for fiscal year 2004 from $100.2 million for fiscal year 2003. o EIA segment's fuel costs decreased $4.0 million, or 4.1%, to $94.4 million for fiscal year 2004 from $98.4 million for fiscal year 2003. $2.4 million of the decrease was primarily the result of actual decreases in gallons purchased and an excise tax credit of $1.6 million received during the fiscal year 2004 drove the increase as well. o EHI segment's fuel costs increased $0.6 million, or 28.7%, to $2.4 million for fiscal year 2004 from $1.8 million for fiscal year 2003, as a result of higher flight activity related to the light and medium helicopters and general increases in our fuel prices. Maintenance Expense Maintenance expense increased $3.6 million, or 5.2%, to $73.3 million for fiscal year 2004 from $69.7 million for fiscal year 2003 as a result of the following: o EIA segment's maintenance expense decreased $1.9 million, or 3.1%, to $59.8 million for fiscal year 2004 from $61.7 million for fiscal year 2003 due to a reduction of engine overhauls amortization of $4.6 million as a result of an increase in engine leases. This was offset by $7.7 million increase in our airframe amortization due to increasing C Check costs offset by a $0.8 million decrease in B Check costs. In addition, DC9 amortization decreased $3.4 million and routine maintenance decreased $0.5 million as a result of fewer hours flown. o EHI segment's maintenance costs increased $5.5 million, or 68.8%, to $13.5 million for fiscal year 2004 from $8.0 million for fiscal year 2003. These changes were due primarily as a result of higher flight hours, an increase in the fleet size, a shift in flight activity to the medium and light helicopters, and higher configuration costs. Medium and light helicopters generate higher maintenance costs compared to the heavy lift helicopters. Expenses associated with aircraft configuration costs are costs that are incurred subsequent to the acquisition of new contracts, but prior to commencement of services under the terms of such contracts. The term configuration, in this case, refers to changes made to a helicopter to make it suitable for services as specified in a given contract. Aircraft and Equipment Expenses Aircraft and equipment expenses increased $5.7 million, or 12.9%, to $49.8 million for fiscal year 2004 from $44.1 million for fiscal year 2003 as a result of the following: 28 o EIA segment's aircraft and equipment costs increased $2.5 million, or 6.8%, to $39.5 million for fiscal year 2004 from $37.0 million for fiscal year 2003. This increase, which resulted from an increase in the number of leased engines being utilized, accounting for a $3.5 million increase in engine rentals. o EHI segment's aircraft and equipment costs increased $3.2 million, or 45.1%, to $10.3 million for fiscal year 2004 from $7.1 million for fiscal year 2003 as a result of additional leased aircraft. Costs of Sales of Aircraft, Parts, and Other Property and Equipment Costs of sales of aircraft, parts, and other property and equipment increased $4.8 million, or 54.2%, to $13.7 million for fiscal year 2004 from $8.9 million for fiscal year 2003 because of the following: o EIA segment's costs of sales of aircraft, parts, and other property and equipment increased $4.6 million, or 246.4%, to $6.5 million for fiscal year 2004 from $1.9 million for fiscal year 2003 primarily from the sale of a Gulfstream II aircraft that carried costs of $4.8 million. o EAC segment's costs of sales of aircraft, parts, and other property and equipment decreased $0.8 million, or 100%, to $0.0 million for fiscal year 2004 from $0.8 million for fiscal year 2003 from reduced sales activity. o EASL segment's costs of sales of aircraft, parts, and other property and equipment increased $1.3 million, or 35.5%, to $5.0 million for fiscal year 2004 from $3.7 million for fiscal year 2003. This was due to increased third party aircraft part out sales. o EHI segment's costs of sales of aircraft, parts, and other property and equipment decreased $0.5 million, or 20.9%, to $1.8 million for fiscal year 2004 from $2.3 million for fiscal year 2003 from reduced third party sales. Cost of Ground Logistics Services Cost of ground logistics services decreased $15.4 million, or 14.7%, to $89.2 million for fiscal year 2004 from $104.6 million for fiscal year 2003 due primarily to reduced revenue activities resulting in decreases in labor expenses, travel expenses, equipment expenses, and outside services expenses of $10.4 million, $0.8 million, $1.9 million and $1.8 million respectively. Support Services and Other Expenses Support services and other expenses increased $6.3 million, or 19.4%, to $38.9 million for fiscal year 2004 from $32.6 million for fiscal year 2003 because of the following: o EIA segment's support services and other expenses decreased $0.4 million, or 3.1%, to $13.1 million for fiscal year 2004 from $13.5 million for fiscal year 2003, primarily due to a lower flight activity and a shift from commercial flights to AMC whose contracts pass through a higher percentage of other expenses such as ground handling expenses. o EAC segment's support services and other expenses increased $4.2 million, or 30.1%, to $18.3 million for fiscal year 2004 from $14.1 million for fiscal year 2003 related to increased operating revenue. o OTHER segment's support services and other expenses increased $2.5 million, or 49.4%, to $7.6 million for fiscal year 2004 from $5.1 million for fiscal year 2003 as a result of higher costs of goods sold related to increased sales activity. 29 Selling, General and Administrative Expenses Selling, general and administrative expenses increased $14.4 million, or 23.0%, to $77.1 million for fiscal year 2004 from $62.7 million for fiscal year 2003 as a result of the following: o EIA segment's selling, general and administrative expenses increased $5.6 million, or 17.3%, to $37.9 million for fiscal year 2004 from $32.3 million for fiscal year 2003 primarily as the result of higher administrative costs associated with a one-time $4.0 million bonus paid to our Chief Executive Officer, Mr. Delford M. Smith. See Note 11 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. The remaining $1.6 million increase is primarily attributed to increased legal and professional fees. o EAGLE segment's selling, general and administrative expenses increased $3.8 million, or 39.8%, to $13.2 million for fiscal year 2004 from $9.4 million for fiscal year 2003, primarily due to a $2.1 million charge for worker's compensation expenses and a $2.0 million charge for bad debt expense related to U.S. Postal Service receivables. o EHI segment's selling, general and administrative expenses increased $2.8 million, or 33.7%, to $11.1 million for fiscal year 2004 from $8.3 million for fiscal year 2003 as the result of increased marketing activities, strengthening management in response to the increase in revenues and the addition of field overhead costs supporting operations in the Gulf of Mexico. o EAC segment's selling, general and administrative expenses increased $1.7 million, or 24.3%, to $8.5 million for fiscal year 2004 from $6.8 million for fiscal year 2003 due primarily to higher sales and administrative expenses associated with increased sales activity. o EASL segment's selling, general and administrative expenses increased $0.7 million, or 17.0%, to $4.5 million for fiscal year 2004 from $3.8 million for fiscal year 2003 due to a $0.3 million increase in travel expenses and a $0.2 million increase in rent expense. INCOME FROM OPERATIONS Consolidated income from operations decreased $58.6 million, or 71.8%, to $23.0 million for fiscal year 2004 from $81.6 million for fiscal year 2003. This decrease resulted primarily from the decrease in income from operations in our EIA and EAGLE segments. EIA's income from operations decreased primarily due to the reduction in Asian charter revenues of $44.2 million from the West Coast dock strike in fiscal year 2003 that yielded premium rates compared to the AMC revenue which replaced it in fiscal year 2004. In addition, we experienced a decrease of 3.4% in the AMC rates with the contract year that began in October 2003 impacting revenues by approximately $3.8 million. EAGLE's income from operations decreased primarily due to reduction of ground logistics services revenue caused by the decrease in U.S. Postal Service volume. OTHER (NON-OPERATING) INCOME AND EXPENSE Interest Expense Interest expense increased $4.2 million, or 13.9%, to $34.8 million for fiscal year 2004 from $30.6 million for fiscal year 2003, primarily as a result of: o An increase in our average borrowing rate that resulted from our refinancing in May 2003 including the issuance of the 12% senior second secured notes due 2010. o $1.1 million in higher interest charges by a former loan syndicate in exchange for a term extension while refinancing arrangements with new loan sources were arranged. 30 Other Income and Expense Income from non-recurring charges 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 due to the following: o Foreign currency exchange gains and losses incurred by EIA as a result of transactions associated with contracts denominated in foreign currencies. We do not have significant foreign currency transactions. Losses on foreign currency contracts increased $0.2 million to $0.2 million during fiscal year 2004 from $0.0 during fiscal year 2003. o EIA Segment's income classified as non-recurring charge/aircraft and other increased $4.5 million to $4.5 million for fiscal year 2004 from $0.0 in fiscal year 2003 due primarily to a non-recurring $4.1 million gain on an insurance settlement to repair a damaged aircraft and other infrequent charges related to obsolete inventory write-offs. o Our OTHER segment's income classified as non-recurring charge/aircraft and other decreased $1.5 million to $0.0 for fiscal year 2004 from $1.5 million in fiscal year 2003 due to the absence of land sales during fiscal year 2004 but which had occurred during fiscal year 2003. INCOME TAX EXPENSE We had an income tax benefit of $2.0 million for fiscal year 2004 on a loss before income taxes of $8.5 million. We had income tax expense of $19.8 million in fiscal year 2003 on income before taxes of $51.6 million. The benefit in fiscal year 2004 and the expense in fiscal year 2003 were computed at the statutory rates of 34.0% for Federal tax and a blended rate of approximately 4.1% for state taxes in fiscal years 2004 and 2003, respectively (net of the Federal tax benefit of the State tax deduction). In addition there were other adjustments. The following table illustrates the calculation of our income tax benefit (expense) in fiscal years 2004 and 2003:
Fiscal Year ------------------------- 2004 (as restated) 2003 ------------- -------- (in thousands) Income (loss) before income taxes $ (8,514) $ 51,611 Combined federal and state tax rates 38.1% 38.0% --------- --------- "Expected" income tax benefit (expense) before other adjustments $ 3,246 $(19,612) Other adjustments (1) (1,226) (192) --------- --------- Income tax benefit (expense) $ 2,020 $(19,804) ========= ========= (1) Other is comprised of permanent differences, predominately meals, entertainment, fines and other penalties.
NET LOSS Our net income decreased $38.3 million, or 120.4%, to a net loss of $6.5 million for fiscal year 2004 from net income of $31.8 million for fiscal year 2003 as a result of the factors discussed above. 31 RESULTS OF OPERATIONS FOR FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002 The following information relating to fiscal years 2003 and 2002 is derived from the audited consolidated financial statements of Evergreen Holdings, Inc. for fiscal year 2003 and 2002, which are including in this Annual Report on Form 10-K/A. (Totals may not add due to rounding)
Fiscal Year ----------------------------------- Total 2003 2002 Change -------- -------- -------- (in millions) Operating revenues: Flight revenue $ 400.6 $ 284.3 $ 116.3 Sales of aircraft, parts, and other assets 12.1 13.3 (1.2) Ground logistics services 129.7 122.3 7.4 Support services and other 31.9 27.8 4.0 -------- -------- ------- Total operating revenues 574.3 447.7 126.5 Operating expenses: Flight costs 69.8 54.6 15.2 Fuel 100.2 69.6 30.6 Maintenance 69.8 61.3 8.4 Aircraft and equipment 44.1 48.3 (4.2) Costs of sales of aircraft, parts, and other property and equipment 8.9 9.3 (0.4) Cost of ground logistics services 104.6 104.5 0.1 Support services and other 32.6 23.2 9.4 Selling, general, and administrative 62.7 52.6 10.1 Impairment charge on aircraft -- 16.0 (16.0) Claim under the Air Transportation Safety and System Stabilization Act -- (7.2) 7.2 -------- -------- ------- Total operating expenses 492.7 432.2 60.5 -------- -------- ------- Income from operations $ 81.6 $ 15.5 $ 66.1 ======== ======== ======= (Totals may not add due to rounding)
32 OPERATING REVENUES Our consolidated operating revenues increased $126.6 million, or 28.8%, to $574.3 million for fiscal year 2003 from $447.7 million for fiscal year 2002. The majority of this increase resulted from an increase in flight revenue of $116.3 million, or 40.9%. Flight Revenues Flight revenues are derived principally from the operations of our EIA segment and, to a lesser extent, our EHI segment. Flight revenue increased $116.3 million, or 40.9%, to $400.6 million for fiscal year 2003 from $284.3 million for the fiscal year ended February 28, 2002. The increase in flight revenue generated by our EIA segment was due to the following factors: o AMC business increased $139 million as a result of the redeployment of our wide-body fleet to U.S. military business and the U.S. military buildup in the Middle East in the lead up to Operation Iraqi Freedom, and activities of the U.S. military in connection with the ongoing global war on terrorism following September 11, 2001. o Flight revenue from Asian points of origin increased $21.3 million due to a stronger Christmas peak season in fiscal year 2003, and additional air freight demand arising from the West Coast dock workers' strike in September 2002. o Revenues under our Finnair contract increased $3.5 million as a result of a full year of operations for this contract in fiscal year 2003. The increase in revenues was offset by reductions in business from ACMI contracts, the U.S. Postal Service and Qantas of $10.1 million, $22.5 million and $20.5 million, respectively, reflecting the expiration of ACMI and U.S. Postal Service contracts with EIA and our shift in operations away from commercial customers in favor of AMC. The following table details EIA block hours by aircraft and contract type for fiscal year 2003 and 2002: 747 Block Hour Comparison: 2003 2002 Change ------- ------- -------- AMC 22,967 11,510 11,457 Other All-In 5,426 8,270 (2,844) ------- ------- -------- Total All In 28,393 19,780 8,613 ------- ------- -------- ACMI 583 5,227 (4,644) ------- ------- -------- Total 747 Hours 28,976 25,007 3,969 ======= ======= ======== DC9 Block Hour Comparison: 2003 2002 Change ------- ------- -------- ALL-IN 2,482 3,069 (587) ACMI 2,985 1,504 1,481 ------- ------- -------- Total DC 9 Hours 5,467 4,573 894 ------- ------- -------- Total Block Hours 34,443 29,580 4,863 ======= ======= ======== 33 Flight revenue from our EHI segment increased $5.6 million, or 21.7%, to $31.4 million for fiscal year 2003 from $25.8 million for fiscal year 2002. This increase was principally the result of the following factors: o Our Sikorsky S-64E Skycrane helicopter was available for the full year in fiscal year 2003, which resulted in an increase in flight revenue of $3.7 million, compared to fiscal year 2002, in which this helicopter was not available for the first three months of the fire season as a result of the delay in certification of an external tank for use in fire fighting activities; and o The addition to our fleet of two Eurocopter AS 350B helicopters, which together generated an additional $1.4 million in flight revenue, predominantly from fire fighting activities, and a Bell 206L-3 helicopter which generated an additional $0.4 million in flight revenue from petroleum support missions. Revenues from Sales of Aircraft, Parts and Other Assets Revenues from sales of aircraft, parts and other assets, which are primarily comprised of sales of aircraft parts, decreased $1.2 million, or 9.0%, to $12.1 million for fiscal year 2003 from $13.3 million for fiscal year 2002. Ground Logistics Services Revenues Ground logistics services, which are wholly comprised of revenues generated by our EAGLE segment, increased $7.4 million, or 6.0%, to $129.7 million for fiscal year 2003 from $122.3 million for fiscal year 2002. This increase was primarily a result of the expansion of our U.S. Postal Service business, including the opening of two new bases in fiscal year 2003, and the full year of revenue for fiscal year 2003 generated by 15 bases opened during fiscal year 2002. Support Services and Other Revenues Support services and other revenues, which are primarily comprised of revenues generated by our Air Center segment, increased $4.0 million, or 14.3%, to $31.9 million for fiscal year 2003 from $27.9 million for fiscal year 2002. This increase was primarily the result of an increase in revenue generated by our Air Center segment of $3.8 million, or 18.9%, to $23.9 million for fiscal year 2003 from $20.1 million for fiscal year 2002, due to marketing efforts expanding third party revenues. OPERATING EXPENSES Operating expenses increased $60.4 million, or 14.0%, to $492.7 million for fiscal year 2003 from $432.2 million for fiscal year 2002. Flight Costs Flight costs are generated by EIA and, to a much lesser extent, EHI. Flight costs increased $15.2 million, or 27.8%, to $69.8 million for fiscal year 2003 from $54.6 million for fiscal year 2002, primarily due to increased flight activity and a $5.8 million increase in commissions payable to other members of our CRAF team due to the increase in our AMC revenues. Fuel Expenses Fuel costs are attributable principally to the operations of our EIA segment and, to a lesser extent, our Eagle and EHI segments. Fuel costs were $100.2 million in fiscal year 2003 as compared with $69.6 million in fiscal year 2002, $30.6 million of the increase was due to an increase in all-in hours, primarily with AMC, and $6.1 million of the increase was due to an increase in the average price paid for fuel. 34 Maintenance Expenses Maintenance expense is attributable principally to the operations of our EIA segment and, to a lesser extent, our EAGLE and EHI segments. Maintenance expense increased $8.5 million, or 13.8 %, to $69.7 million for fiscal year 2003 from $61.3 million for fiscal year 2002 as a result of increases in flight activity in our EIA and EHI segments. Aircraft and Equipment Expenses Aircraft and equipment expense decreased $4.2 million, or 8.7%, to $44.1 million for fiscal year 2003 from $48.3 million for fiscal year 2002. This was predominantly due to the following factors: o We had a decrease of $3.4 million in aircraft rental cost, which related primarily to the discontinuation of a lease of a B747 that we operated in fiscal year 2002. o We had a decrease in depreciation of $3.4 million, which reflects the write-off of the remaining cost basis of six B-727 aircraft in fiscal year 2002. o EIA and EHI segment's had an increase in insurance costs of $1.8 million. Cost of Sales of Aircraft, Parts and Other Property and Equipment Cost of sales of aircraft, parts and other property and equipment decreased $0.4 million, or 4.3%, to $8.9 million for fiscal year 2003 from $9.3 million for fiscal year 2002, which reflects the lower cost of assets sold in fiscal year 2003. Cost of Ground Logistics Services Cost of ground logistics services remained relatively unchanged at $104.6 million in both fiscal year 2002 and fiscal year 2003. This is despite the corresponding decrease in ground logistics services revenue for fiscal year 2002 due to a more profitable business mix driven by the first full year of U.S. Postal Service Shared Network (SNET) revenues that were recorded in fiscal year 2002. Support Services and Other Expenses Support services and other expenses increased $9.4 million, or 40.9%, to $32.6 million for fiscal year 2003 from $23.2 million for fiscal year 2002 as a result of a number of factors, including: o EIA segment's support services and other expenses increased $6.9 million due to an increase in operating revenues in connection with our shift in operations away from commercial customers in favor of AMC, and increased related ground handling and other support costs; o Eagle segment's support services and other expenses increased $1.0 million due to the overall increase in Eagle's support services revenue; and o All of our other support services and other expenses for EHI, EASL and our OTHER segment decreased by $3.7 million from fiscal year 2003 to fiscal year 2002. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $10.2 million, or 19.4%, to $62.8 million for fiscal year 2003 from $52.6 million for fiscal year 2002. This increase was the result of a number of factors, which included: 35 o EIA segment's selling, general and administrative expense increased $4.4 million due to an increase in bank, legal and professional fees incurred in connection with our analysis of refinancing alternatives, debt restructuring and obtaining certain waivers and amendments under our old credit facility, and other increases relating to additional personnel and other support in connection with increased flight activity; o EAGLE segment's selling, general and administrative expense increased $2.7 million primarily due to an increase in a reserve for anticipated settlement adjustments related to a receivables dispute with the U.S. Postal Service; o EHI segment's selling, general and administrative expense increased $0.9 million as a result of increased marketing costs and additional administrative costs arising from increased flight activity; and o Selling, general and administrative expense in our OTHER segment increased $1.3 million, representing an increase in marketing costs associated with our expansion into products such as wine, grape juice and hazelnut products, and commencement of direct sales of some of our agricultural products. There were no impairment charges on aircraft or unusual charges or credits for fiscal year 2003. In fiscal year 2002, we took an impairment charge of $16.0 million relating to under-utilization of our DC9 fleet. In fiscal year 2002, we received $7.2 million for our claim for losses pursuant to the Air Transportation Safety and System Stabilization Act. Since payment of claims under the Air Transportation Safety and System Stabilization Act are subject to a DOT audit, the DOT may seek to recover all or a portion of this amount. INCOME FROM OPERATIONS Consolidated income from operations increased $66.1 million to $81.6 million for fiscal year 2003 from $15.5 million for fiscal year 2002. This increase resulted primarily from the increase in EIA flight revenues which were primarily due to increased AMC business which resulted from the redeployment of our wide-body fleet to U.S. military business, flight revenue from Asian points of origin due to a stronger Christmas peak season in fiscal year 2003, and additional air freight demand arising from the West Coast dock workers' strike in September 2002. NON-OPERATING INCOME AND EXPENSES Interest Expense Interest expense decreased $3.7 million, or 10.8%, to $30.6 million for fiscal year 2003 from $34.3 million for fiscal year 2002. This was predominantly the result of a reduction in interest expense of $3.7 million in fiscal year 2003, of which $4.9 million was due to a reduction in outstanding borrowings, offset by $1.2 million related to an increase in average interest rates. Other Income and Expense In fiscal year 2003, we sold a parcel of land resulting in net gain on sale of $1.5 million. As this transaction was outside our normal operations, the gain has been presented as other non-operating income. 36 Income Tax Expense In fiscal year 2003, we recorded a tax expense of $19.8 million. In fiscal year 2002, we recorded a tax benefit of $6.4 million because of our loss in that year. These benefits and expenses were computed at the statutory rates of 34.0% for Federal tax and an approximately 4.0%, blended rate for state taxes for fiscal year 2003 and 2002, respectively (net of the Federal tax benefit of the state tax deduction). In addition, there were other adjustments. The following table illustrates the calculation of our income tax benefit (expense) for fiscal year 2003 and 2002:
Fiscal Year ------------------------- 2003 2002 -------- -------- (in thousands) Income (loss) before income taxes $ 51,611 $(18,854) Combined federal and state tax rates 38.0% 38.0% --------- --------- "Expected" income tax (expense) benefit before other adjustments (19,612) 7,172 Other adjustments (1) (192) (752) --------- --------- Income tax (expense) benefit $(19,804) $ 6,420 ========= ========= (1) Other is comprised of permanent differences, predominately meals, entertainment, fines and other penalties.
NET INCOME Our net income (loss) increased $44.2 million to net income of $31.8 million for fiscal year 2003 from a net loss of $12.4 million for fiscal year 2002, as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES Capital Requirements Our capital requirements relate mostly to the maintenance of our aircraft and other equipment, and working capital requirements. Our working capital requirements typically peak at the end of our fiscal third quarter and during our fiscal fourth quarter, which coincide with our peak revenue generation season. Historically, we have funded our cash requirements through our cash flows from operations, borrowings and the sale of assets. Major Customers Our largest customer, the AMC, had reduced expansion mission requests for the months of January and February 2004 due to the AMC's operation of missions with military transport aircraft in place of using commercial aircraft. This was occurring in order to move cargo by airlift into Iraq because of the FAA's continued prohibition of U.S. carriers operating into Iraq. The Company has and will take actions to minimize the impact to liquidity by reducing operating costs, fixed costs and capital expenditures. The impact of this change on our AMC expansion revenues was a decrease in flight revenues of approximately $13.3 million during January and February of fiscal year 2004. This estimate was based on average AMC expansion revenues through the first three quarters of fiscal year 2004 against actual AMC expansion revenue for January and February 2004. This trend continued through March and April but AMC expansion revenue has returned to previous earnings levels in May 2004. If AMC elects to fly directly into Iraq or use alternative methods of transportation, we may experience a decline in our consolidated operating revenues, which could have a material adverse impact on our results of operations. 37 Seasonality While flight revenue generated by our AMC contract is not affected by seasonal fluctuations, other aspects of our business are seasonal in nature. Flight revenue generated by our contracts with the U.S. Postal Service, commercial airlines and freight forwarders has historically been higher from September through December of each year as the levels of flight activity increase with the build-up of inventories by retailers in anticipation of the holiday season. Revenues in our EAGLE segment also reflect similar seasonal fluctuations with a peak over the same months. The seasonality for our EAGLE segment is predominantly the result of increased volumes of mail and packages being processed by the U.S. Postal Service and United Parcel Service in the lead up to the holiday season. The months of higher revenue for our Helicopters segment typically occur in June and July as a result of increased forest fire fighting activities during these months. Capital Resources On May 16, 2003, the Company issued $215 million in aggregate principal amount of 12% senior second secured notes (the "Notes") that will mature in 2010. The Notes were sold for 100% of their face amount. The Notes have interest payments of $12.9 million to be paid on May 15 and November 15 of each year. Concurrent with the issuance of the Notes, Aviation entered into a $100 million revolving credit facility (the "PNC Credit Facility"). The PNC Credit Facility had an interest rate of the lesser of LIBOR plus 3% or the prime rate plus 2% and was due in 2006. The Company initially borrowed $72.1 million under the PNC Credit Facility on May 16, 2003. The proceeds from the refinancing were used to repay $264.7 million outstanding under a previous credit facility. In securing the refinancing, $19.0 million in loan acquisition costs were incurred. These costs are being amortized over the lives of the two loans using the effective interest method. For further discussion see Note 5 of "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. The PNC Credit Facility and the indenture governing the Notes impose certain restrictions on Aviation, including restrictions that limit its restricted subsidiaries' ability to, among other things: (i) incur additional debt; (ii) pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments; (iii) place limitations on distributions from restricted subsidiaries; (iv) issue or sell capital stock of restricted subsidiaries; (v) issue guarantees; (vi) sell or exchange assets; (vii) enter into transactions with shareholders and affiliates; (viii) make capital expenditures; (ix) create liens; and (x) effect mergers and other changes of control. Additionally, capital expenditures are limited to $75.0 million per year. The PNC Credit Facility also contained financial covenants requiring the Company to meet various financial ratios, such as a minimum tangible net worth ratio, maximum capital expenditures, and a minimum fixed charge coverage ratio. The Company was further required to maintain: i) $5 million of excess availability, which could only be reduced with the consent of each of the lenders under the PNC Credit Facility; ii) a minimum consolidated tangible net worth of $150.0 million through February 29, 2004, and increasing tangible net worth based on net income in subsequent periods; iii) a fixed charge coverage ratio of 1.5 to 1; and iv) an interest coverage ratio of 2.5 to 1. As of February 29, 2004, Aviation had approximately $73.6 million in outstanding borrowings from the PNC Credit Facility and $12.4 million available upon application of borrowing base limitations as such borrowing base was available on March 1, 2004 and subject to applicable covenants. At February 29, 2004, the Company was in default of the Fixed Charge Coverage Ratio covenant of the PNC Credit Facility. The Company decided to cure the default by paying off all obligations owed by the Company under the PNC Credit Facility. The source of the payoff was funds obtained on May 13, 2004, when Evergreen International Aviation, Inc., and certain of its subsidiaries entered into a new financing arrangement with Wells Fargo Foothill, part of Wells Fargo & Company (NYSE: WFC), and Ableco Finance LLC (collectively, "the Wells Fargo Lenders"). 38 The new financing arrangement is a three-year senior secured credit facility (the "New Credit Facility") that consists of a $50 million revolving loan, which is subject to a borrowing limitation based on eligible receivables and eligible inventory, and a $50 million term loan. The New Credit Facility is collateralized by substantially all of the assets of the Company and its domestic subsidiaries, other than those subsidiaries that operate the Company's agricultural business. Approximately $83 million was funded at closing in order to prepay and terminate the Company's obligations to PNC Bank under the PNC Credit Facility and to pay certain transaction costs related to the closing of the New Credit Facility. The New Credit Facility has interest rates of LIBOR plus 5.5% or the prime rate plus 3.0% on the term debt and interest rates of LIBOR plus 3.0% or the prime rate plus 0.5% on the revolving credit facility and is due in 2007. Going Concern Qualifications; Debt Compliance Substantially all of the assets of the Company are pledged as collateral under the Company's various debt agreements. If the Company or its restricted subsidiaries violates any of the covenants in the Company's debt agreements and are unable to obtain waivers from the lenders or noteholders, the debt could be immediately accelerated and called due by the Company's creditors, which would raise substantial doubt about the Company's ability to continue as a going concern. Furthermore, cross default provisions exist in the indenture governing the Notes whereby a default on the Notes would occur if an event of default under issues of indebtedness of Aviation, any subsidiary guarantor or other significant subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such persons and such default causes the holder to declare the indebtedness due and payable prior to its stated maturity and such indebtedness is not discharged in full or such acceleration is not rescinded or annulled within 30 days. In the past, we have not always had sufficient cash flows from operations and available borrowings to meet our liquidity requirements, including debt service payments. We have also failed at various times to comply with several of our covenants in our debt agreements. These covenant violations include failure to maintain a minimum Fixed Charge Coverage Ratio, failure to maintain a minimum Debt to EBITDA Ratio, failure to timely provide financial statement reports, purchasing a new aircraft through our revolving credit facility instead of with proceeds from a special tranche of term loans, failure to comply with the transactions with affiliates covenant and the loan covenant, failure to comply with the covenant that limited our capital expenditures, and merging a subsidiary with another subsidiary when an event of default or default had occurred and was continuing. For a more detailed discussion of defaults on our debt agreements, see "Risk Factors - We failed to comply with financial and other covenants in our debt instruments in the past." The audit report for fiscal year 2004 contains an explanatory paragraph that states that, due to the historical difficulty we have had in meeting our debt covenants, there is substantial doubt as to our ability to continue a going concern. Our ability to continue as a going concern is dependent on future financial results and, in the event we are in breach of any of the covenants on our debt, our ability to restructure or otherwise amend the terms of that debt. The financial statements do not include any adjustments to reflect the possible future effects on either the recoverability and classification of assets or the amounts and classifications of liabilities that might result from the outcome of this uncertainty. Under the New Credit Facility, the Company is required to deliver to the Wells Fargo Lenders a copy of the Company's consolidated financial statements for each fiscal year which ends during the term of the New Credit Facility. The consolidated financial statements must be accompanied by an audit report that does not contain any qualification, including any explanatory comments regarding the Company's ability to continue as a going concern (the "unqualified audit covenant"). Because the audit report for the fiscal year ended February 29, 2004 contained an explanatory paragraph regarding the Company's ability to continue as a going concern, the Wells Fargo Lenders notified the Company that the Wells Fargo Lenders believed that the Company was in default of the unqualified audit covenant. However, the Company maintained that such audit report and consolidated financial statements for the fiscal year ended February 29, 2004 were not subject to the unqualified audit covenant because the audit report and consolidated financial statements for the fiscal year ended February 29, 2004 relate to a period prior to the May 13, 2004 closing date of the New Credit Facility. In resolution of the matter, on August 9, 2004, the Wells Fargo Lenders issued a Conditional Waiver letter in which the Wells Fargo Lenders waived any default or event of default that may have occurred solely as a result of the failure of the Company to have complied with the requirements of the unqualified audit covenant for the fiscal year ended February 29, 2004. 39 In fiscal years 2003 and 2002, our audited financial statements were subject to "going concern" comments. The going concern comments were issued because our old credit facility was scheduled to mature within twelve months of the end of such fiscal years and, given our working capital position, there was uncertainty as to our ability to refinance the existing credit facility or have its maturity extended beyond twelve months. Accordingly, we were required to classify such debt as a current liability. Subsequently, the "going concern" comments were removed from the report of independent registered public accounting firm on our fiscal year 2003 audited financial statements because, in May 2003, we repaid our outstanding debt as it came due with proceeds that we obtained from the sale of bonds and funds that were available to us under our revolving credit facility In addition, from time to time, due to a lack of liquidity and the existence of restrictive covenants in our existing credit agreements, we have not been able to acquire the helicopters required to meet our customers' demand for our services. On a number of these occasions, we have been able to obtain leases of the required helicopters from Mr. Delford M. Smith and his affiliates, as described in "Item 13. Certain Relationships and Related Transactions" of the Original Filing. Cash and Cash Equivalents Cash and cash equivalents decreased $1.5 million to $4.1 million at February 29, 2004 compared to cash and cash equivalents of $5.6 million at February 28, 2003. Although there can be no assurances, we believe that our cash flow from operations and availability under our revolving credit facility will provide us with sufficient liquidity and capital resources to operate our business and pay our contractual obligations, including the obligations under the notes and our revolving credit facility. In addition, we may conduct sales of equity in the future. In the event that we do not have adequate liquidity under the revolving credit facility, we believe we would have access to additional liquidity through additional borrowings and asset sales. We cannot assure you, however, that these sources will generate sufficient cash flows or that future borrowings will be available in an amount sufficient to enable us to make principal and interest payments on our debt, including the notes, or to fund our other liquidity needs, or that we will able to comply with the financial covenants in the New Credit Facility. Cash Provided by Operating Activities Cash flows from operating activities have historically been driven by net income (loss) combined with fluctuations in accounts receivable and accounts payable balances. We generated cash in operating activities of $53.1 million, $100.3 million and $107.5 million during the fiscal years ended February 29, 2004, and February 28, 2003 and 2002 respectively. Cash provided by operations decreased $47.0 million from fiscal year 2003 to fiscal year 2004. The decrease in cash provided by operations was primarily the result of a net loss of $6.5 million adjusted primarily for non-cash charges such as depreciation and amortization, and a $16.2 million decrease in accounts receivable. The decrease in accounts receivable was primarily associated with the settlement agreement we entered into with the U.S. Postal Service for $17.6 million that was subject to certain terms and conditions of which we collected $15.6 million during the year and wrote off $2.0 million. Other adjustments to reconcile net income to net cash provided by operating activities included a $12.1 million decrease in accounts payable and accrued liabilities related mostly to our new financing arrangements, a $3.2 million decrease in income taxes payable, a $2.8 million increase in prepaid expenses and other assets, and a $4.1 million net gain from an insurance settlement. Cash Used in Investing Activities Cash flows used in investing activities includes purchases of property, equipment, and overhauls; proceeds from the sale of property and equipment; notes receivable from affiliates; and changes to other assets. Capital expenditures on purchases of property and equipment, and engine overhauls primarily comprise purchases of additional parts, aircraft, investments in airframes, engine overhauls and enhancements to aircraft. To a lesser extent, net cash used in investing activities includes purchases of equipment purchases associated with our EAGLE locations and expansion at existing EAGLE locations. 40 We used cash in investing activities of $62.3 million, $52.2 million and $16.8 million during the fiscal years ended February 29, 2004, and February 28, 2003 and 2002 respectively. Cash used by investing activities decreased $10.5 million from fiscal year 2003 to fiscal year 2004. During the twelve months ended February 29, 2004, proceeds from asset sales were $9.5 million. We also received proceeds of $8.2 million from an insurance settlement to repair a damaged aircraft, and $4.1 million of these proceeds were used to buyout related leases. Prepaid expenses and other assets increased $13.8 million due partially to a $1.9 million deposit related to the purchase of a Gulfstream IV aircraft, and $0.5 million for a standby letter of credit in connection with a contract for our Helicopters segment. Cash capital expenditures for fiscal years 2004, 2003 and 2002 were $61.9 million, $60.8 million and $35.7 million respectively. In fiscal year 2002, our lower capital expenditures were largely the result of lower levels of flight activity. In fiscal 2004, our capital expenditures included approximately $19.3 million in heavy maintenance of our aircraft ("C" checks and "D" checks) and approximately $10.4 million in engine overhauls. Increasing aircraft utilization and escalating maintenance costs related to engine and airframe overhauls has resulted in increasing capital expenditures since fiscal year 2002. Capital expenditures for the twelve months ended February 29, 2004 consisted of $44.0 million of expenditures by the EIA segment primarily for normal airframe overhauls and system upgrades on our fleet of B747s and DC9s, rotables repairs, equipment acquisitions and engine acquisitions. Capital expenditures for the twelve months ended February 29, 2004 by the EHI segment were $12.0 million and consisted primarily of aircraft purchases and deferred overhauls and configuration costs during the twelve months ended February 29, 2004. Cash Provided by Financing Activities Cash flows used in financing activities primarily represent payments on borrowings under our bank term loans, revolving credit facilities, financed engine overhauls, and interest payments and fees associated with the May 2003 refinancing. The refinancing was composed of Aviation's issuance of $215 million senior second secured notes that mature in 2010 and a $100 million collateralized revolving credit facility with $73.6 million outstanding as of February 29, 2004. Cash provided by financing activities in fiscal year 2004 was $7.7 million. Cash used in financing activities for fiscal years 2003 and 2002 was $51.4 million and $87.4 million respectively. From fiscal year 2003 to fiscal year 2004, we realized a net increase in cash provided by financing activities of $59.1 million due primarily to a refinancing of the Company's long-term debt. Proceeds from the refinancing on May 16, 2003 resulted in $215 million from the issuance of senior secured notes that mature in 2010 and $72.1 million from a collateralized revolving credit facility. The proceeds from the refinancing were used to repay $264.7 million outstanding debt under a previous credit facility. In securing the refinancing, $19.0 million in loan acquisition costs were incurred. These costs are being amortized over the lives of the two loans using the effective interest method. The Company made its first two semi-annual $12.9 million interest payments on November 15, 2003 and May 15, 2004 respectively. For further discussion see Note 5 of "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. 41 Commitments The following table summarizes our contractual cash obligations as of February 29, 2004, but does not consider the effect of the May 13, 2004 refinancing as described in Note 5 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A:
Long-Term Operating Debt Short-Term Lease Other Total Fiscal (as restated) Debt Obligations Obligations (as restated) ------ ------------- ------- ----------- ------------ ------------ (in millions) 2005 $ 0.0 $ 11.6 $ 20.5 $ 3.0 $ 35.1 2006 6.5 0.0 11.8 3.0 21.3 2007 75.8 0.0 7.5 3.0 86.3 2008 1.7 0.0 4.7 3.0 9.4 2009 0.8 0.0 3.7 3.0 7.5 Thereafter $ 215.1 $ 0.0 $ 6.6 $ 3.0 $ 224.7
Other obligations consist exclusively of contractual obligations payable pursuant to an employment agreement we entered into in May 2003 with our Chief Executive Officer and Chairman, Mr. Smith. The employment agreement provides for compensation at the rate of $3.0 million per year and a one-time bonus in the amount of $4.0 million, which was paid after completion of the refinancing of our old credit facility in May 2003. During July 2003, we entered into arrangements with two of our major engine repair vendors to finance over 12 month and 15 month periods, respectively, payables incurred for certain engine overhauls. It is anticipated that the total cost of the overhauls will approximate $2.5 million. We cannot assure you that the engine purchases and overhaul financing arrangements will continue as expected. In addition, we are required to perform certain scheduled maintenance inspections and structural modifications. The FAA has mandated the installation of traffic collision avoidance systems ("TCAS") on all aircraft over 33,000 pounds by January 1, 2005. We have installed TCAS on all our B747 aircraft. However, the FAA mandate also applies to our DC9 aircraft. We estimate the total cost of installation of TCAS for our DC9 fleet will be approximately $1.1 million. The FAA has also mandated that a terrain awareness and warning system ("TAWS") be installed on all turbine-powered aircraft by March 29, 2005. All of our B747 and DC9 aircraft will require TAWS installation and we estimate the total cost of installation will be $1.8 million. 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 our claims for losses pursuant to the Air Transportation Safety and System Stabilization Act. As of February 29, 2004, we have received no further correspondence and have not participated in any further negotiations regarding this matter and we do not anticipate that we will be required to pay any additional amounts. To the extent we need to actually pay these amounts, we believe cash on hand and amounts expected to be available under our revolving credit facility will be sufficient. 42 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK With respect to interest rate risks at February 29, 2004, we had fixed rate debt of $227.3 million, and variable rate debt of $84.2 million. Based on the outstanding balances at February 29, 2004, each 1% change in interest recalculated on our variable rate debt would have increased or decreased our annual interest cost by approximately $0.8 million, and a 1% increase in interest rates would decrease the fair market value of our fixed rate debt by approximately $2.2 million. We have not entered into any obligations for trading purposes. The table below presents principal amounts and related weighted average interest rates by year for our cash and cash equivalents and debt obligations. The following summarizes our contractual cash obligations as of February 29, 2004, but does not consider the effect of the refinancing May 13, 2004 as described in Note 5 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on 10-K/A.
Expected Maturity Dates ---------------------------------- (as restated) ---------------------------------------------------------------------------------- There- Fair 2005 2006 2007 2008 2009 after Total Value (in millions) ---------------------------------------------------------------------------------- Debt obligations: Long-term debt Senior Secured Debt $ -- $ -- $ -- $ -- $ -- $ 215.0 $ 215.0 $ 148.4 Average Interest Rate 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Other Fixed Rate Debt $ 7.5 $ 4.2 $ 0.5 $ 0.1 $ -- $ -- $ 12.3 $ 10.7 Average Interest Rate 9.5% 9.6% 8.5% 6.7% 6.7% 7.3% 6.0% Variable Rate Debt $ 4.1 $ 2.3 $ 75.3 $ 1.6 $ 0.8 $ 0.1 $ 84.2 $ 84.2 Average Interest Rate 6.4% 6.0% 6.0% 7.0% 6.9% 3.9% 5.3%
With respect to foreign currency exchange rate risks, although some of our revenues are derived from foreign customers, substantially all revenues and substantially all expenses are denominated in U.S. dollars. We maintain minimal balances in foreign bank accounts to facilitate payment of expenses. We are not exposed to commodity price risks except 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, our contracts with customers limit our exposure to increases in fuel prices. We purchase no fuel under long-term contracts nor do we enter into futures or swap contracts at this time. 43 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Evergreen Holdings, Inc. and Subsidiaries Index to Consolidated Financial Statements The following financial statements are the consolidated financial statements of Evergreen Holdings, Inc., the parent company of Evergreen International Aviation, Inc. and its subsidiaries. Evergreen International Aviation, Inc. is the issuer of certain 12% Senior Second Secured Notes due 2010 (the "Notes") (see Note 5 of Notes to Consolidated Financial Statements). The Notes are fully and unconditionally guaranteed on a joint and several, senior basis by Evergreen Holdings, Inc., the Trust Created February 28, 1986, and substantially all of the subsidiaries of Evergreen International Aviation, Inc. Condensed consolidating financial statements which separately present the financial information for Evergreen Holdings, Inc., Evergreen International Aviation, Inc., 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 15 of Notes to Consolidated Financial Statements. Consolidated Financial Statements of Evergreen Holdings, Inc. and its Subsidiaries: PAGE Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm..................................................45 Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm..................................................46 Consolidated Balance Sheets as of February 29, 2004 (as restated) and February 28, 2003...................................................47 Consolidated Statements of Operations for the Years Ended February 29, 2004 (as restated), February 28, 2003 and 2002 (as restated).................48 Consolidated Statement of Stockholders' Equity for the Years Ended February 29, 2004 (as restated), February 28, 2003 and 2002.............49 Consolidated Statements of Cash Flows for the Years Ended February 29, 2004 (as restated), February 28, 2003 and 2002.............50 Notes to Consolidated Financial Statements...................................52 Schedule II - Valuation and Qualifying Accounts..............................88 44 REPORT OF 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 February 28, 2003, 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 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 1 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 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 14 to the financial statements, the Company has restated its consolidated financial statements for the fiscal year ended February 29, 2004. PricewaterhouseCoopers LLP Portland, OR June 11, 2004, except as to the Fiscal Year 2004 caption under Note 14 to the consolidated financial statements, which is as of September 28, 2004 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Evergreen Holdings, Inc. McMinnville, Oregon We have audited the consolidated statements of operations, stockholders' equity, and cash flows of Evergreen Holdings, Inc. and subsidiaries (the "Company") for the year ended February 28, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with 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, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Evergreen Holdings, Inc. and subsidiaries for the year ended February 28, 2002, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements for the year ended February 28, 2002 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's difficulties in meeting its loan agreement covenants and its negative working capital position raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 14, the accompanying consolidated statement of operations for the year ended February 28, 2002 has been restated. Deloitte & Touche LLP Portland, Oregon July 16, 2002 (April 25, 2003 as to Note 12, October 10, 2003 as to Note 15, and November 20, 2003 as to Note 14) 46
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS FEBRUARY 29, 2004 (AS RESTATED) AND FEBRUARY 28, 2003 (In thousands) 2004 (as restated -) see Note 14) 2003 -------------- -------- ASSETS Current assets: Cash $ 4,071 $ 5,638 Accounts receivable, less allowance of $2,029 and $32,848 for doubtful accounts Trade 37,143 51,907 Other 2,229 3,667 Receivable and notes from affiliates, net 2,199 112 Inventories 14,719 17,786 Prepaid expenses and other assets 6,965 3,746 Income taxes receivable 583 -- Deferred tax asset 11,964 10,444 -------- -------- Total current assets 79,873 93,300 Assets held for sale 6,760 6,968 Notes receivable from affiliates 15,563 18,038 Property and equipment, net 544,939 553,736 Capitalized loan acquisition costs 15,531 5,707 Other assets 10,975 8,859 Goodwill 5,494 5,494 -------- -------- Total assets $679,135 $692,102 ======== ======== LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Current portion of long-term debt $ 11,580 $285,403 Accounts payable 43,204 63,699 Accrued liabilities 20,597 18,759 Accrued interest 7,735 1,857 Affiliate trade and notes payable 2,377 348 Income taxes payable -- 2,257 -------- -------- Total current liabilities 85,493 371,318 Long-term debt 299,937 18,455 Deferred income and other 101 495 Deferred tax liabilities 104,664 105,395 -------- -------- Total liabilities 490,195 496,668 -------- -------- Commitments and contingencies (Notes 8 and 9) STOCKHOLDERS' EQUITY Stockholders' equity: Common stock, no par value; 20,000,000 shares 7,568 7,568 authorized, 10,054,749 issued and outstanding Retained earnings 181,372 187,866 -------- -------- Total stockholders' equity 188,940 195,434 -------- -------- Total liabilities and stockholders' equity $679,135 $692,102 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
47
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED FEBRUARY 29, 2004 (AS RESTATED), AND FEBRUARY 28, 2003 AND 2002 (AS RESTATED) (In thousands) 2004 2002 (as restated - (as restated - see Note 14) 2003 see Note 14) --------------- --------- ------------ Operating revenue: Flight revenue $ 377,650 $ 400,603 $ 284,293 Sales of aircraft, parts, and other assets 17,357 12,137 13,270 Ground logistics services 99,790 129,724 122,287 Support services and other 40,837 31,871 27,857 ---------- ---------- ---------- Total operating revenues 535,634 574,335 447,707 ---------- ---------- ---------- Operating expenses: Flight costs 73,816 69,808 54,645 Fuel 96,769 100,195 69,559 Maintenance 73,265 69,740 61,279 Aircraft and equipment 49,847 44,139 48,269 Costs of sales of aircraft, parts, and other property and equipment 13,709 8,888 9,291 Cost of ground logistics services 89,150 104,559 104,598 Support services and other 38,957 32,636 23,168 Selling, general, and administrative 77,065 62,729 52,616 Impairment charge on aircraft -- -- 16,000 Claim under the Air Transportation Safety and System Stabilization Act -- -- (7,204) ---------- ---------- ---------- Total operating expenses 512,578 492,694 432,221 ---------- ---------- ---------- Income from operations 23,056 81,641 15,486 ---------- ---------- ---------- Other (expense) income: Interest expense (34,840) (30,576) (34,297) Other income, net 4,386 1,508 836 ---------- ---------- ---------- Other expense, net (30,454) (29,068) (33,461) ---------- ---------- ---------- (Loss) income before minority interest and income taxes (7,398) 52,573 (17,975) Minority interest (1,116) (962) (879) ---------- ---------- ---------- (Loss) income before income taxes (8,514) 51,611 (18,854) Income tax benefit (expense) 2,020 (19,804) 6,420 ---------- ---------- ---------- Net (loss) income $ (6,494) $ 31,807 $ (12,434) ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements.
48
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED FEBRUARY 29, 2004 (AS RESTATED), AND FEBRUARY 28, 2003 AND 2002 (In thousands, except share data) Retained Common Stock Earnings Total Shares Amount (as restated) (as restated) ---------- ---------- ---------- ---------- Balance, February 28, 2001 10,054,749 $ 7,568 $ 168,493 $ 176,061 Net loss -- -- (12,434) (12,434) ---------- ---------- ----------- ----------- Balance, February 28, 2002 10,054,749 7,568 156,059 163,627 Net income -- -- 31,807 31,807 ---------- ---------- ----------- ----------- Balance, February 28, 2003 10,054,749 7,568 187,866 195,434 Net loss -- -- (6,494) (6,494) ---------- ---------- ----------- ----------- Balance, February 29, 2004 10,054,749 $ 7,568 $ 181,372 $ 188,940 ========== ========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
49
EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 29, 2004 (AS RESTATED), AND FEBRUARY 28, 2003 AND 2002 (In thousands) 2004 (as restated - see Note 14) 2003 2002 ----------- --------- --------- Cash Flows from operating activities: Net (loss) income $ (6,494) $ 31,807 $ (12,434) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation 24,303 25,676 28,626 Amortization 42,352 43,453 38,078 Deferred income taxes (2,251) 22,417 (11,414) Gain on sale of property and equipment (741) (4,904) (947) Gain on insurance settlement (4,093) -- -- Impairment charges on aircraft -- -- 16,000 Deferred (income) loss and other (394) 69 -- Foreign currency exchange loss (gain) 207 (16) (48) Minority interest income 1,116 962 879 Changes in operating assets and liabilities: Accounts receivable 16,203 (3,358) 60,132 Receivables from affiliates (2,087) -- (896) Inventories 3,067 (2,299) (4,669) Prepaid expenses and other assets (3,219) (10,107) 2,133 Accounts payable and accrued liabilities (12,074) 2,318 (11,530) Income taxes payable (2,840) (5,716) 3,618 ---------- ---------- ---------- Net cash provided by operating activities 53,055 100,302 107,528 ---------- ---------- ---------- Cash flows from investing activities: Purchases of property, equipment, and overhauls (61,894) (60,826) (35,694) Proceeds from disposal of property and equipment 9,464 7,480 10,899 Early payment of operating leases with insurance settlements (4,090) -- -- Proceeds from insurance settlements 8,183 -- -- Repayments on notes receivable from affiliates (112) 3,435 2,529 Advances on notes receivable from affiliates -- (2,574) (6,522) Other assets (13,832) 286 11,953 ---------- ---------- ---------- Net cash used in investing activities (62,281) (52,199) (16,835) ---------- ---------- ---------- Net cash provided by financing activities: Proceeds from long term debt 284,491 367 2,330 Payments on long term debt (122,378) (6,304) (85,127) Proceeds from operating loans and short term debt (1,500) 6,987 20,200 Payments on operating loans and short term debt (152,954) (52,396) (23,000) Payments on notes payable to affiliates -- (41) (1,800) ---------- ---------- ---------- Net provided by (used in) financing activities 7,659 (51,387) (87,397) ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents (1,567) (3,284) 3,296 Cash and cash equivalents, beginning of period 5,638 8,922 5,626 ---------- ---------- ---------- Cash and cash equivalents, end of period $ 4,071 $ 5,638 $ 8,922 ========== ========== ========== Supplemental cash flow information: Interest $ 25,225 $ 28,329 $ 36,494 Income taxes $ 3,635 $ 1,059 $ 1,394
50 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 29, 2004 (AS RESTATED), AND FEBRUARY 28, 2003 AND 2002 - CONTINUED (In thousands) Supplemental schedule of non-cash investing and financing activities: Fiscal year 2004: None Fiscal year 2003: The Company converted $14,974 of receivables from affiliates to notes receivable from affiliates. Fiscal year 2002: The Company exchanged an aircraft with a net book value of $25,570 and incurred a liability of $8,800 to acquire another aircraft. The Company purchased $9,590 of engine and aircraft overhauls through long-term financing. The Company purchased $1,250 of property and equipment through long-term financing. The accompanying notes are an integral part of the consolidated financial statements. 51 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Evergreen Holdings, Inc. (Holdings), (dba Evergreen International Aviation Group) (the "Company") and its wholly-owned subsidiaries Evergreen International Aviation, Inc. (EA), Evergreen International Airlines, Inc. (EIA), Evergreen Aviation Ground Logistics Enterprise, Inc. (EAGLE), Evergreen Helicopters Inc. (EHI), Evergreen Air Center, Inc. (Air Center), Evergreen Aircraft Sales and Leasing Co. (EASL), Evergreen Agricultural Enterprises, Inc. (EAE), Evergreen Vintage Aircraft, Inc. (Vintage), and Evergreen Aviation Services, Inc. (the foreign subsidiary), provide highly diversified aviation services through the following operating segments: o EIA engages primarily in domestic short-range and international long-range cargo operations, as well as air freight brokerage services. o EAGLE primarily provides mail handling, hub management, aircraft handling, cargo loading and unloading, and terminal services. o EHI provides flight services throughout the world in markets including international peacekeeping and health operations, agriculture, oil exploration and development, and forest control and provides aircraft maintenance and repair services. o EAC performs required Federal Aviation Administration (FAA) inspections, scheduled and unscheduled maintenance and repairs, light engine maintenance, stripping and painting, aircraft storage and complete airframe overhauls of commercial aircraft at an unlimited airframe maintenance and repair station. o EASL includes aircraft and parts brokerage operations. o OTHER services include farming and nursery production and vintage aircraft restoration operations. Pursuant to Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has determined that its core business activities are comprised of six distinct operations, which are EIA, EAGLE, EHI, EAC, EASL, and OTHER. The Company's EIA segment consists of Holdings, EA, and EIA. The Company's OTHER segment consists of EAE and Vintage. LIQUIDITY The Company's consolidated financial statements as of February 29, 2004 and for the year ended have been prepared on a going concern basis, which contemplates the realization of assets and settlements of liabilities and commitments in the normal course of business. However, in the past, the Company has not always had sufficient cash flows from operations and available borrowings to meet its liquidity requirements, including debt service payments. The Company has also failed at various times to comply with one or more of its covenants in its debt agreements. These covenant failures include failure to maintain a minimum Fixed Charge Coverage Ratio, failure to maintain a minimum Debt to EBITDA Ratio, failure to timely provide financial statement reports, purchasing a new aircraft through the revolving credit facility instead of with proceeds from a special tranche of term loans, failure to comply with the transactions with affiliates covenant and the loan covenant, failure to comply with the covenant that limited its capital] expenditures, and merging a subsidiary with another subsidiary when an event of default or default had occurred and was continuing. In addition, from time to time, due to a lack of liquidity and the existence of restrictive covenants in the Company's existing credit agreements, the Company has not been able to acquire the helicopters required to meet the demand for the Company's services. On a number of these occasions, the Company has been able to obtain leases of the required helicopters from Mr. Delford M. Smith and his affiliates, as described in "Item 13. Certain Relationships and Related Transactions" of the Original Filing. 52 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Going Concern Qualifications - Fiscal Years 2003 and 2002 In fiscal years 2003 and 2002, the Company's audited financial statements were subject to "going concern" comments due to the maturity of the Company's old credit facility within twelve months of the end of such fiscal years and, given the Company's working capital position, uncertainty as to the Company's ability to refinance the existing credit facility or have its maturity extended beyond twelve months. Accordingly, the Company was required to classify such debt as a current liability. Subsequently, comments regarding "going concern" were removed from the report of independent registered public accounting firm on the fiscal year 2003 audited financial statements because the Company repaid outstanding debt as it came due with proceeds obtained from the sale of bonds and funds available under the revolving credit facility in May 2003. At February 29, 2004, the Company was in default of the Fixed Charge Coverage Ratio covenant under its $100,000 revolving credit facility with PNC Bank. The Company decided to cure the default by paying off all obligations owed by the Company to PNC Bank under the revolving credit facility. The source of the payoff was funds obtained on May 13, 2004, when Evergreen International Aviation, Inc., and certain of its subsidiaries entered into a financing arrangement with Wells Fargo Foothill, part of Wells Fargo & Company (NYSE: WFC), and Ableco Finance LLC (collectively, "the Wells Fargo Lenders"). The new credit facility (the "New Credit Facility") consists of a $50,000 revolving loan, which is subject to a borrowing limitation based on eligible receivables and eligible inventory, and a $50,000 term loan. The $50,000 revolving loan has interest rates of LIBOR plus 3.0% or the prime rate plus 0.5%, and the $50,000 term loan has interest rates of LIBOR plus 5.5% or the prime rate plus 3.0%. The New Credit Facility matures in 2007, and is secured by substantially all of the assets of the Company and its domestic subsidiaries, other than those subsidiaries that operate the Company's agricultural business. For a further discussion of both the revolving credit facility with PNC Bank and the New Credit Facility, see Note 5, "Debt Obligations." At February 29, 2004, the Company was also in default of covenants associated with its line of credit with Merrill Lynch Business Financial Securities, Inc. The line of credit was amended whereby the covenants were modified such that the Company was in compliance at February 29, 2004. Fiscal Year 2004 Going Concern Qualification The Company's ability to remain in compliance with its debt covenants continues to be uncertain. If the Company or its restricted subsidiaries violates any of the covenants in its debt agreements and are unable to obtain waivers from the lenders or noteholders, the debt could be immediately accelerated and called due by the Company's creditors. As a result, the audit report for fiscal year 2004 contains an explanatory paragraph which states that, due to the Company's historical difficulty in meeting its debt covenants, there is substantial doubt as to the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent on the Company's future financial results and, in the event that the Company is in breach of its debt covenants, whether or not the Company will be able to restructure or otherwise amend the terms of its debt. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that might result from the outcome of this uncertainty. Under the New Credit Facility, the Company is required to deliver to the Wells Fargo Lenders a copy of the Company's consolidated financial statements for each fiscal year which ends during the term of the New Credit Facility. The consolidated financial statements must be accompanied by an audit report that does not contain any qualification, including any explanatory comments regarding the Company's ability to continue as a going concern (the "unqualified audit covenant"). Because the audit report for the fiscal year ended February 29, 2004 contained an explanatory paragraph regarding the Company's ability to continue as a going concern, the Wells Fargo Lenders notified the Company that the Wells Fargo Lenders believed that the Company was in default of the unqualified audit covenant. However, the Company maintained 53 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) that such audit report and consolidated financial statements for the fiscal year ended February 29, 2004 were not subject to the unqualified audit covenant because the audit report and consolidated financial statements for the fiscal year ended February 29, 2004 relate to a period prior to the May 13, 2004 closing date of the New Credit Facility. In resolution of the matter, on August 9, 2004, the Wells Fargo Lenders issued a Conditional Waiver letter in which the Wells Fargo Lenders waived any default or event of default that may have occurred solely as a result of the failure of the Company to have complied with the requirements of the unqualified audit covenant for the fiscal year ended February 29, 2004. Management Response As described above, the Company refinanced its existing PNC Credit Facility with a three year senior secured credit facility with Wells Fargo Foothill, a part of Wells Fargo & Company, and Ableco Financial LLC that includes covenants that the Company believes will be achieved. If the Company were to be in default of its covenants in the future, it would, as it has in the past, seek to obtain amendments to the debt or waivers of the covenants so that the Company was no longer in violation. The Company has instituted various cost controls to reduce operating expenses including the timely monitoring of labor, aircraft maintenance and selling, general and administrative costs. These include: o The reduction of labor costs as a percentage of revenue in certain subsidiaries by approximately five percent or $5,400. o The renegotiation of insurance costs to reduce the transport expenses on fixed winged aircraft by approximately nineteen percent or $700. o Overall reduction of professional services costs as the Company begins to take some of these functions in-house. o Consolidation of certain accounting functions within the various subsidiaries. o Focus on reducing non-essential maintenance costs. Additionally, the Company continues to enhance its system of internal controls such that timely financial reporting will assist in the frequent monitoring of these costs. The Company's consolidated financial statements as of February 28, 2002 and for the year then ended were prepared on a going concern basis, which contemplated the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company was in default of one of its covenants, a fixed charge coverage ratio, under its term loans and its revolving credit agreement as of February 28, 2002. This difficulty in meeting loan agreement covenants, along with its negative working capital position, raised substantial doubt about the Company's ability to continue as a going concern. The Company obtained waivers of certain of these covenant violations until August 15, 2002. As a result of obtaining only a temporary waiver of certain of the covenant violations, the Company classified term loans of $263,000 and the borrowings under the revolving credit agreement of $38,000 as current on the Company's balance sheet as of February 28, 2002. The Company was in default of several of its covenants under its revolving credit facility at February 28, 2003. On May 16, 2003, the Company completed a $215,000 debt offering and borrowed $72,100 under a new revolving credit facility (see Note 5). 54 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The operations of the Company's active foreign subsidiary 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 management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances at that time. On an ongoing basis the Company evaluates and updates its estimates as appropriate. Actual results could differ from those estimates under different assumptions or conditions. CASH AND CASH EQUIVALENTS Cash and cash equivalents include all cash balances and other short-term, highly liquid, income-producing investments. Investments with maturities of three months or less on their acquisition date are classified as cash equivalents. These balances are located at high credit quality financial institutions. At times, such balances may be in excess of Federal Deposit Insurance Corporation limits. At February 29, 2004 and February 28, 2003, the Company had no cash equivalents. INVENTORIES Inventories consist primarily of (i) expendable parts and supplies for aircraft maintenance and for sale to third parties, which are carried at the lower of average cost or net realizable value, and (ii) agricultural crops and nursery products, which are carried at the lower of first-in, first-out cost or net realizable value. Maintenance inventories are charged to operations as issued for use and agricultural and all other inventories are charged to operations when sold. The nature of these inventories generally results in their utilization over an operating cycle in excess of one year. The Company periodically reviews inventories for potential obsolescence and records adjustments, as necessary, to reflect the lower of cost or net realizable value. The Company had no material adjustments related to obsolete inventory during fiscal year 2004 or fiscal year 2003. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. All costs of major renewals, modifications and overhauls, such as "C" and "D" checks, are capitalized. The cost and accumulated depreciation related to assets sold or retired are removed from the accounts and charged to income in the period the asset is sold or retired. Depreciable assets are depreciated down to their estimated residual values utilizing the straight-line method over the estimated useful lives of the assets. Aircraft, aircraft engines and rotable assets are depreciated from 8 to 38 years, machinery and equipment from 3 to 10 years, and buildings and improvements from 10 to 40 years. Effective as of September 1, 2003, the Company changed the estimated useful lives of the aircraft in its EHI segment to more accurately reflect the Company's current estimate of the useful lives of such aircraft. (See Note 3). 55 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Overhauls of aircraft and rotable assets are accounted for as follows: o Large fixed-wing aircraft overhauls: Upon acquisition, the cost of major aircraft overhaul components included in the purchase price is segregated from the cost of equipment. Overhaul component costs and subsequent capitalized major overhauls are amortized to expense over the period until the next scheduled overhaul, generally a period of ten years or less. o Helicopters, medium and light fixed-wing aircraft overhauls: Major overhaul components purchased with the aircraft are depreciated as part of the cost of equipment. Subsequent major overhauls are capitalized and amortized over operating hours to the succeeding overhaul, generally a period of two years or less. o Rotable asset overhauls: The cost of rotable asset overhauls for large fixed-wing aircraft and helicopters is capitalized and amortized over estimated useful lives, generally a period of five years or less. The cost of repairing rotable assets is expensed as incurred. Management evaluates the recoverability of the carrying value of property and equipment at each balance sheet date or when events or changes in circumstances indicate that a carrying amount may not be recoverable. An impairment loss is recognized when the sum of the expected future undiscounted net cash flows to be derived from the related assets is less than the carrying amount of the assets. The amount of the impairment loss is based on the difference between the related assets' carrying value and the expected future discounted net cash flows. The factors considered by management in performing this assessment includes current operating results, trends and prospects as well as the effects of obsolescence, demand, competition and other economic factors. Based on management's reviews, an adjustment related to impairment associated with the carrying value of capitalized assets was not required in fiscal year 2004 and 2003. In fiscal year 2002, an impairment loss of $16,000 was recognized on the Company's DC9-33 fleet, which was determined based on a forecast of the net present value of expected future cash flows to be earned by the aircraft. LEASED AIRCRAFT OVERHAULS We capitalize the costs of required major maintenance and inspection of engines and airframes for our leased aircraft. Such capitalized costs are then amortized to expense over the number of years until the next scheduled overhaul, generally a period of ten years or less, or, if sooner, until the termination of the lease. ASSETS HELD FOR SALE Aircraft parts and other assets held for sale are recorded at the lower of cost or net realizable value. Cost of aircraft held for sale includes the amount of related unamortized overhauls. CAPITALIZED LOAN ACQUISITION COSTS On May 16, 2003, the Company completed a refinancing program which included costs associated with the issuance of the 12% senior secured notes due 2010 and a $100,000 revolving credit facility (see Note 5). The costs associated with the refinancing were capitalized and are being amortized over the lives of the loans using the effective interest method in accordance with APB. No. 21, "Interest on Receivables and Payables." Amortization of capitalized loan acquisition costs for fiscal year 2004 was $3,500. CAPITALIZED INTEREST Interest on funds used to finance the acquisition and structural conversion of aircraft and the construction of certain facilities to the date the asset is placed in service is capitalized. The Company did not capitalize any interest charges in fiscal years 2004, 2003 or 2002. 56 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) INTANGIBLE ASSETS - GOODWILL Goodwill represents the excess of cost over the fair value of net assets acquired. The Company has two reporting units, EAGLE and EHI, with assigned goodwill of $5,500. Quoted stock market prices are not available for these individual reporting units. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets." SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16 and eliminates pooling of interests accounting. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment approach. Under SFAS No. 142, goodwill and non-amortizing intangible assets shall be adjusted whenever events or circumstances occur indicating that goodwill has been impaired. Accordingly, consistent with SFAS No. 142, management's methodology for estimating the fair value of each reporting unit primarily considers the discounted future cash flows. In applying this methodology, management makes assumptions about each reporting unit's future cash flows based on capacity, expected revenue, operating costs and other relevant factors. The estimated future cash flows are then discounted based on each reporting unit's weighted average cost of capital. The Company has completed its impairment testing of the valuation of its goodwill as of February 29, 2004 and has determined that there is no impairment for the fiscal year ended February 29, 2004. We adopted SFAS No. 142 on March 1, 2002, at the beginning of fiscal year 2003. When we adopted SFAS No. 142, we discontinued the amortization of goodwill. Previously, we had been amortizing goodwill over 15 years. If SFAS No. 142 would have been effective as of March 1, 2001, the decrease in amortization expense would have resulted in a $474 decrease in our net loss for the fiscal year ended February 28, 2002. The following table summarizes the impact SFAS No. 142 would have had on our net loss if SFAS No. 142 been in effect for fiscal year 2002: Fiscal Year Ended Feb. 28, 2002 ------------- Net loss $(12,434) Amortization of goodwill, net of tax of $300 474 ---------- Net loss as adjusted $(11,960) ========== ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains allowances for estimated losses resulting from the inability of customers to make required payments and from disputed balances. The Company periodically reviews past due balances to identify the reasons for non-payment, and adjusts the allowance for doubtful accounts as appropriate. In September 2001, we instituted proceedings in the United States District Court for the State of Oregon against Asiana Airlines ("Asiana") to recover certain amounts owed to us pursuant to a freighter service agreement with Asiana. On February 28, 2003, a jury returned a verdict in our favor against Asiana. At February 28, 2003, the Company had recorded an account receivable of $27,169 and an allowance against the receivable in the same amount. No income had been recorded for this program since Asiana ceased making payments. During fiscal year 2004, the account receivable of $27,169 was written off against the fully reserved balance resulting in no change to net receivables and having no effect on income. During fiscal year 2004, EAGLE reduced its allowance for doubtful accounts by $6,100 with write-offs related to U.S. Postal Service contracts. 57 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) We believe the allowances for doubtful accounts as of February 29, 2004 are adequate. If, in future periods, our customers' financial conditions deteriorate, resulting in their inability to make payments, we may determine that we will need to record additional allowances, which would then result in additional expenses being recorded for the periods in which such determinations are made. REVENUE RECOGNITION The following describes the revenue recognition policy by segment: EIA Revenue Recognition Revenues in this segment are recorded predominantly as flight revenue. The Company primarily charges customers based on miles traveled, space utilized ("block space"), hours flown ("block hours"), or trips taken. The Company generally is not responsible for obtaining freight for its aircraft and receives revenues based on routes flown rather than capacity carried. Block hours are measured in 60 minute periods, or fractions of such periods, from the time the aircraft moves from its departure point to the time it comes to rest at its destination. The number of pallet position utilized measures Block space. Flight revenue is primarily recorded as flights are completed. Many of the contracts are structured as "all-in" contracts, under which the Company is responsible for the full range of operating expenses, including fuel costs. Other contracts are Aircraft Crew Maintenance and Insurance, "ACMI" or "wet lease" arrangements, under which the Company provides only the aircraft, crew, maintenance and insurance, and the customer is responsible for all other operating expenses, such as fuel, ground handling, crew accommodations and the cost of obtaining freight. The agreements with freight forwarders are typically structured as block space agreements, where the forwarder commits to deliver a certain amount of freight for a specific flight. Under the agreement, the forwarder must pay for the space committed, whether or not it delivers the freight to the Company. EAGLE Revenue Recognition All revenues in this segment are recorded as ground logistics services. Ground handling and logistics revenues are typically generated under contracts with the U.S. Postal Service, domestic and international passenger and cargo airlines, and express delivery customers. The Company typically provides services through contracts with a term of one year or more, with scheduled rates for a range of services at one or more locations throughout the United States. Revenues in this segment are recorded when services are rendered. EHI Revenue Recognition Services are typically provided under one to five year contracts. The Company typically charges customers a monthly availability fee in addition to an hourly charge for missions flown or by hour with a minimum number of hours per day. The Company often modifies its pricing methods to match the characteristics of a mission, which may involve pricing based on weight if the mission is transport-related, by acre if agricultural or by number of pick-ups if construction. Revenues in this segment are recorded when services are rendered. EAC Revenue Recognition All revenues in this segment are recorded as support services. Aircraft maintenance and repair revenues are generally derived from heavy maintenance (C checks and D checks) on aircraft, aircraft storage and other aircraft and storage services. Revenues in this segment are recorded when services are rendered. 58 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) EASL Revenue Recognition All revenues in this segment are predominantly derived from sales of aircraft, parts and other assets, typically on a consignment basis. Revenues generated from the sale of the Company's assets are recorded within the segment from which the assets originated. Revenues from asset sales within EASL relate solely to assets acquired and sold by EASL. Similarly, revenues generated from leasing of aircraft are recorded within the segment that controls those assets. EASL generates revenues in the form of commissions earned on the sale and leasing of assets owned by third parties and the Company's other operating segments. OTHER Segment Revenue Recognition Revenues from this segment are recorded as support services. MAJOR CUSTOMERS Revenues generated under various contracts with numerous agencies of the U.S. Government accounted for approximately 73%, 68%, and 61% of our total revenues for fiscal years 2004, 2003, and 2002 respectively. Amounts receivable from these agencies were $25,033 and $39,870 at February 29, 2004 and February 28, 2003 respectively. INCOME TAXES Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income tax liabilities and assets are determined based on the difference between the financial reporting amounts and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based upon enacted tax laws and rates in effect for the years in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. CONCENTRATION OF CREDIT RISKS The Company grants credit to customers throughout the world. The Company's primary customer base consists of various agencies of the U.S. 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. The Company evaluates each customer's credit worthiness on a case-by-case basis. 59 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, the revolving credit facility, and accrued liabilities approximate fair market value because of the short-term maturity of these items. The carrying amounts of the Company's variable-rate long-term debt approximate fair market value due to variable interest rates correlating to changes in market conditions. The Company's fixed-rate debt balances as of February 29, 2004 and February 28, 2003 were $227,300 and $20,208, respectively. The fair market values of such debt as of February 29, 2004 and February 28, 2003 were $159,000 and $17,059, respectively. (See Note 5). RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities-an Interpretation of ARB No.51 Consolidated Financial Statements," which was subsequently revised in December 2003 with the issuance of FIN 46-R. FIN 46-R addresses how variable interest entities are to be identified and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. FIN 46-R also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the 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. While management has not completed their final assessment of the impact of FIN 46-R, based upon their preliminary assessment, management believes that the Company may be the primary beneficiary of certain related party entities including, but not limited to, Ventures Holding, Inc. and Ventures Acquisitions Company, LLC. The Company leases certain assets, consisting primarily of buildings and aircraft, from these entities. The financial statements of these entities may be included in its 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. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. On November 7, 2003, the FASB issued FASB staff Position No. FAS 150-3 ("FSP 150-3") "Effective Date, Disclosure, and Transition for Mandatorily Redeemable Financial Instruments of Certain Non-public Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." FSP 150-3 deferred certain aspects of SFAS No. 150. FSP 150-3 requires issuers to classify financial instruments within its scope as liabilities (or an asset in some cases). Prior to SFAS No. 150, many of these instruments may have been classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. This standard is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance of SFAS No. 150. The adoption of SFAS No. 150 and FSP 150-3 did not have a material effect on the Company's ongoing results of operations, financial position or cash flows. On December 17, 2003, the staff of the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which supersedes Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers" (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, "Revenue Recognition." Selected portions of the FAQ have been incorporated into SAB 104. Although the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company's revenue recognition policies, results of operations, financial position or cash flows. RECLASSIFICATIONS Certain amounts in the prior years' financial statements and notes have been reclassified to conform to the current year presentation. Previously reported net income (loss) or cash flows were not affected by these reclassifications. 60 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) 2. PROPERTY AND EQUIPMENT Property and equipment at February 29, 2004 and February 28, 2003 consisted of the following: 2004 (as restated) 2003 ------------ --------- Flight equipment Aircraft $ 704,322 $ 711,664 Overhauls, net 91,698 89,121 Construction in progress 11,297 11,069 --------- --------- 807,317 811,854 --------- --------- Other property and equipment Machinery and equipment 102,787 84,501 Buildings and improvements 42,956 42,194 Land and improvements 15,646 15,444 Construction in progress 0 1,499 --------- --------- 161,389 143,638 --------- --------- Property and equipment, at cost 968,706 955,492 Accumulated depreciation (423,767) (401,756) --------- --------- Total $ 544,939 $ 553,736 ========= ========= The Company owns an aviation museum facility, which is not being depreciated and which had a net book value of $16,072 at February 29, 2004 and at February 28, 2003. This facility is currently being leased to a not-for-profit entity at no charge and is included in the table above. Depreciation expense for fiscal years 2004, 2003 and 2002 was $24,303, $25,676 and $28,626 respectively. 3. CHANGE IN ACCOUNTING ESTIMATES Effective as of September 1, 2003, the Company changed the estimated useful lives of the aircraft in its EHI segment to more accurately reflect its 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 $400 for fiscal year 2004. 4. OTHER ASSETS Other assets at February 29, 2004 and February 28, 2003 consisted of the following: Feb. 29, 2004 (as restated) Feb. 28, 2003 ------------ ------------ Deposits $ 4,007 $ 5,010 Noncurrent agricultural products 5,703 3,078 Other 1,265 771 -------- ------- Total $ 10,975 $ 8,859 ======== ======= 61 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) 5. DEBT OBLIGATIONS On May 16, 2003, the Company issued $215,000 in aggregate principal amount of 12% Senior Second Secured Notes (the "Notes") that will mature in 2010. The Notes were sold for 100% of their face amount. The Notes are unconditionally guaranteed, jointly and severally, by Holdings and all of Aviation's subsidiaries (except Evergreen Agricultural Enterprises, Inc. and its subsidiaries), and by Aviation's foreign subsidiaries. The Notes are secured by a second priority lien, subject to permitted liens, on substantially all of the assets that secure obligations under the new revolving credit facility. The Notes (i) have interest payment dates of May 15 and November 15 of each year; (ii) are senior second secured obligations, rank equally with all of Aviation's existing and future senior, or unsubordinated, debt and are senior to any of Aviation's future senior subordinated or unsubordinated debt; and (iii) are redeemable after the dates and at the prices (expressed in percentages of principal amount on the redemption date) as set forth below: Redemption If Redeemed during the 12-month period commencing Price ------------------------------------------------- ---------- May 15, 2007 106% May 15, 2008 103% May 15, 2009 and thereafter 100% Concurrent with the issuance of the Notes, Aviation entered into a $100,000 revolving credit facility (the "PNC Credit Facility"), for which PNC Capital Markets, Inc. acted as arranger, and PNC Bank, National Association acted as the agent. The PNC Credit Facility had an interest rate of the lesser of LIBOR plus 3% or prime plus 2% and was scheduled to mature in 2006. The obligations under the PNC Credit Facility were guaranteed by all of the guarantors under the Notes. Borrowings under the PNC Credit Facility were secured by a first priority security interest granted by the Company to PNC Bank in substantially all of the Company's existing and after-acquired personal property, including all of the capital stock or membership interests of all of the Company's subsidiaries that were guarantors under the PNC Credit Facility. The security interest was subject to certain exceptions and permitted liens, including existing liens on two B747 aircraft and three DC9 aircraft. The Company initially borrowed $72,100 under the PNC Credit Facility on May 16, 2003. The Proceeds from the refinancing were used to repay $264,700 outstanding under a previous credit facility. In securing the refinancing, $19,000 in loan acquisition costs were incurred. These costs are being amortized over the lives of the two loans using the effective interest method. The PNC Credit Facility and the indenture governing the Notes imposed certain restrictions on Aviation, including restrictions that limited its restricted subsidiaries' ability to, among other things: (i) incur additional debt; (ii) pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments; (iii) place limitations on distributions from restricted subsidiaries; (iv) issue or sell capital stock of restricted subsidiaries; (v) issue guarantees; (vi) sell or exchange assets; (vii) enter into transactions with shareholders and affiliates; (viii) make capital expenditures; (ix) create liens; and (x) effect mergers and other changes of control. In addition, the PNC Credit Facility contained financial covenants requiring the Company to meet various financial ratios, such as a minimum tangible net worth ratio, a $75,000 per year limitation on capital expenditures, and a minimum fixed charge coverage ratio. These covenants included requirements to, at all times, maintain undrawn availability of not less than $5,000 on the revolving loan component of the PNC Credit Facility, a minimum consolidated tangible net worth of $150,000 through February 29, 2004 and increasing tangible net worth based on net income in subsequent periods, and a fixed charge coverage ratio of 1.5 to 1. 62 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) At February 29, 2004, Aviation had approximately $73,600 in outstanding borrowings under the PNC Credit Facility and approximately $12,400 available upon application of borrowing base limitations as such borrowing base was available on March 1, 2004 and subject to applicable covenants. Aviation was required to maintain $5,000 of excess availability under the PNC Credit Facility, which could only be reduced with the consent of each of the lenders under the PNC Credit Facility. At February 29, 2004, substantially all of the assets of the Company were pledged as collateral under the various debt agreements. Long-term debt consisted of the following at February 29, 2004 and February 28, 2003:
2004 (as restated) 2003 ------------ --------- 12% Senior Second Secured Notes due 2010 $ 215,000 -- Revolving credit facility, variable rate interest at LIBOR plus 6% plus 2% principal in kind (9.38% at February 29, 2003) (starting March 1, 2003 interest becomes LIBOR plus 10%), due in May 2003, total borrowings available of $40,000 as of February 28, 2003 -- 28,000 Revolving credit facility, variable rate interest at PNC's prime rate plus 1% 73,614 -- or PNC's eurodollar rate plus 3.5%, due in May 2006 Term loans, variable rate interest at LIBOR plus 6% plus 2% principal in kind (9.38% at February 28, 2003) (starting March 1, 2003 interest becomes LIBOR plus 10%),quarterly payments of principal and interest through May 2003 -- 239,607 Notes payable, LIBOR plus 6% plus 2% principal in kind (9.38% at February 28, 2003) (starting March 1, 2003 interest becomes LIBOR plus 10%), monthly payments of principal and interest through August 2006 -- 4,033 Term loan, interest at 10.44%, monthly payments of principal and interest through March 29, 2007 7,955 14,289 Long-term vendor financing, variable rate interest at LIBOR plus 6% plus 2% principal in kind (9.38% at February 29, 2004) (starting March 1, 2003 interest becomes LIBOR plus 10%) 1,332 3,614 Other term loans 9,039 9,787 Capital leases 4,577 4,528 ---------- ---------- 311,517 303,858 Current maturities of long-term obligations (11,580) (285,403) ---------- ---------- Total long-term obligations $ 299,937 $ 18,455 ========== ==========
63 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) At February 29, 2004, scheduled maturities of long-term debt were as follows: (as restated) Debt obligations: ------------ 2005 $ 9,125 2006 5,155 2007 75,307 2008 1,600 2009 753 Thereafter 215,000 --------- $ 306,940 ========= Capital leases (net of interest): 2005 $ 2,455 2006 1,315 2007 543 2008 85 2009 79 Thereafter 100 ------- $ 4,577 ======= At February 29, 2004, the Company was in default of the Fixed Charge Coverage Ratio covenant under the PNC Credit Facility agreement. The Company decided to cure the default by paying off all obligations owed by the Company under the PNC Credit Facility. The source of the payoff was funds obtained on May 13, 2004, when Evergreen International Aviation, Inc., and certain of its subsidiaries entered into the New Credit Facility with the Wells Fargo Lenders. The New Credit Facility is a three-year senior secured credit facility that consists of a $50,000 revolving loan, subject to a borrowing base based on eligible receivables and eligible inventory, and a $50,000 term loan. The New Credit Facility is collateralized by substantially all of the assets of the Company and its domestic subsidiaries, other than those subsidiaries that operate the Company's agricultural business. Approximately $83,000 of the New Credit Facility was funded at closing. The Company used those initial funds to repay in full and terminate the Company's obligations to PNC Bank under the PNC Credit Facility and to pay certain transaction costs related to the closing of the New Credit Facility. 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 the Company is not in default under the New Credit Facility, the Company 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. The Company is 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 New Credit Facility. Then, unless paid in full earlier, all outstanding principal and accrued but unpaid interest of both the term loan and the revolving loan will be due and payable in full when the New Credit Facility terminates in May 2007. 64 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) The following table sets forth a comparison of the future annual debt service obligations of the Company, both prior to and after the Company fully repaid the PNC Credit Facility and entered into the New Credit Facility. Before After Total debt obligations: May 13,2004 May 13,2004 ------------ ----------- 2005 $ 10,799 $ 15,674 2006 8,609 11,909 2007 79,656 8,564 2008 1,684 66,809 2009 561 561 Thereafter 215,087 215,087 --------- --------- $ 316,396 $ 318,604 ========= ========= The Company is subject to various covenants under both the Notes and the New Credit Facility. These covenants include a requirement at all times to maintain undrawn availability of not less than $5,000 on the revolving line, a minimum threshold measuring consolidated EBITDA, a ratio requiring a minimum fixed charge coverage and a limit on capital expenditures of $75,000 provided $10,000 is funded by indebtedness other than revolving credit advances. If Aviation or its restricted subsidiaries violates these covenants and are unable to obtain waivers from the lenders or noteholders, the Company would be in default under the debt agreements and the debt could be accelerated by the lenders or noteholders. Cross default provisions exist in the indenture governing the Notes whereby a default on the Notes would occur if an event of default under issues of indebtedness of Aviation, any subsidiary guarantor or other significant subsidiary having an outstanding principal amount of $10,000 or more in the aggregate for all such issues of all such persons and such default causes the holder to declare the indebtedness due and payable prior to its stated maturity and such indebtedness is not discharged in full or such acceleration is not rescinded or annulled within 30 days. Under the New Credit Facility, the Company is required to deliver to the Wells Fargo Lenders a copy of the Company's consolidated financial statements for each fiscal year which ends during the term of the New Credit Facility. The consolidated financial statements must be accompanied by an audit report that does not contain any qualification, including any explanatory comments regarding the Company's ability to continue as a going concern (the "unqualified audit covenant"). Because the audit report for the fiscal year ended February 29, 2004 contained an explanatory paragraph regarding the Company's ability to continue as a going concern, the Wells Fargo Lenders notified the Company that the Wells Fargo Lenders believed that the Company was in default of the unqualified audit covenant. However, the Company maintained that such audit report and consolidated financial statements for the fiscal year ended February 29, 2004 were not subject to the unqualified audit covenant because the audit report and consolidated financial statements for the fiscal year ended February 29, 2004 relate to a period prior to the May 13, 2004 closing date of the New Credit Facility. In resolution of the matter, on August 9, 2004, the Wells Fargo Lenders issued a Conditional Waiver letter in which the Wells Fargo Lenders waived any default or event of default that may have occurred solely as a result of the failure of the Company to have complied with the requirements of the unqualified audit covenant for the fiscal year ended February 29, 2004. In connection with the Company's execution of the New Credit Facility agreement, Evergreen Aircraft Sales & Leasing Co. amended its existing WCMA Loan Agreement with Merrill Lynch Business Financial Services, Inc. The amendment conforms the financial covenants in the WCMA Loan Agreement to the financial covenants in the New Credit Facility. 65 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) In addition on May 13, 2004, when Evergreen International Aviation, Inc. and certain of its subsidiaries entered into a new financing arrangement with Wells Fargo Foothill and refinanced its existing PNC Revolver, the remaining unamortized balance of deferred financing costs relating to the PNC Revolver of $3,464 was written off and charged to expense. 6. INCOME TAXES The components of the Company's income tax benefit (expense) for the years ended February 29, 2004 and February 28, 2003 and 2002 are as follows: 2004 (as restated) 2003 2002 ------------- ------------- ------------- Current: Federal $ -- $ (2,339) $ 4,226 State 231 (274) 768 --------- --------- --------- 231 (2,613) 4,994 --------- --------- --------- Deferred: Federal (1,802) 20,057 (9,594) State (449) 2,360 (1,820) --------- --------- --------- (2,251) 22,417 (11,414) --------- --------- --------- Total $ (2,020) $ 19,804 $ (6,420) ========= ========= ========= The tax effects of the temporary differences that give rise to deferred tax assets and deferred tax liabilities at February 29, 2004 and February 28, 2003 are presented below: 2004 (as restated) 2003 ------------ ---------- Deferred tax assets, current: Accounts receivable $ 4,736 $ 4,103 Other 7,228 6,341 --------- ---------- Total deferred tax assets, current 11,964 10,444 --------- ---------- Deferred tax liabilities, noncurrent Net operating loss carryforwards 32,682 17,901 Alternative minimum tax credit carryforwards 10,528 12,983 Property and equipment (146,339) (136,279) Other (1,535) -- ---------- ---------- Total deferred tax liabilities, noncurrent $(104,664) $(105,395) ========== ========== The Company's effective tax rate for the years ended February 29, 2004 and February 28, 2003 and 2002 differs from the federal statutory tax due primarily to the following: 2004 (as restated) 2003 2002 -------- --------- --------- Tax (benefit) expense computed at statutory rate $(2,895) $ 17,548 $ (6,410) State income taxes, net of federal effect (351) 2,064 (762) Other (1) 1,226 192 752 ------- -------- --------- Income tax (benefit) expense $(2,020) $ 19,804 $ (6,420) ======= ======== ========= (1) Other is comprised of permanent differences, predominately meals, entertainment, fines and other penalties. 66 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Business tax credits and the related valuation allowance of approximately $1,100 were netted at February 28, 2002 because such credits are not expected to be realized. At February 29, 2004 and February 28, 2003, the Company had federal income tax net operating loss carryforwards of $88,788 and $71,827 respectively. At February 29, 2004 and February 28, 2003, the Company had state income tax net operating loss carryforwards of $34,549 and $25,033 respectively. These net operating loss carryforwards expire in the years 2007 through 2024. During the year ended February 29, 2004 and February 28, 2003, the Company reduced its taxes currently payable by $0 and $16,179 respectively from the utilization of net operating loss carryforwards. The Company has an alternative minimum tax (AMT) credit available of $10,528 at February 29, 2004 and February 28, 2003 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. 7. EMPLOYEE BENEFIT PLANS Effective March 1, 2002, we amended our Cash or Deferred Savings Plan and established the Evergreen Savings and Retirement Plan (the "Plan"). We transferred the assets of the Evergreen Pension Plan and The Evergreen Profit Sharing Plan effective March 15, 2002 into the Plan, whereby the Evergreen Savings and Retirement Plan was the sole surviving 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 age 21 or older, are not covered by a collective bargaining agreement, and are not a temporary employee. Under the Plan, we match 50% of the first 8% of base compensation that a participant contributes to the Plan. We also 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. We may make additional discretionary contributions at the option of the Board of Directors. We made matching contributions of $3,981, $3,815 and $3,400 for the years ended February 29, 2004, February 28, 2003 and 2002, respectively. We made no discretionary contributions to the Plan for the years ended February 29, 2004, February 28, 2003 and 2002. Plan participants direct the investment of both their contributions and the Company's contributions into various investments 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. 8. COMMITMENTS The Company leases aircraft, land, buildings, and equipment under various cancelable and non-cancelable agreements with both third parties and affiliates of the Company. Nine of the Company's helicopters and turbo-prop aircraft are leased under aircraft operating leases which have lease terms ranging from six to ten years. Eight of these leases include options to purchase the aircraft on lease anniversary dates that range from three to five years. In the event the Company prematurely terminates any of the leases, the Company would be liable for a lease commitment buyout for such leases. As of February 29, 2004, the aggregate amount of the guaranteed future lease commitment buyouts for the helicopter and turbo-prop aircraft leases was approximately $8,376. The Company also leases a Gulfstream G-IV under an operating lease which includes an option to purchase the aircraft on the fifth anniversary of the lease for an amount equal to the fair market value of the aircraft at that time. In the event the Company prematurely terminates the lease, the Company would be liable for a lease commitment buyout. As of February 29, 2004, the amount of the future lease commitment buyout for the Gulfstream G-IV aircraft lease was approximately $9,182. 67 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Four of the Company's aircraft engines are leased under operating leases that include termination guarantees of approximately $5,638 as of February 29, 2004. Rental commitments under non-cancelable operating leases having an original term of one year or more at February 29, 2004 are as follows: Fiscal Related Other Total Party ------ ------------- -------------- ------------- 2005 $5,831 $14,709 $20,540 2006 2,040 9,733 11,773 2007 565 6,887 7,452 2008 0 4,676 4,676 2009 0 3,732 3,732 Thereafter 0 6,595 6,595 ---------- ----------- ---------- $8,436 $46,332 $54,768 ========== =========== ========== In addition, the Company leases aircraft and engines under short-term agreements on an as-needed basis. Total rental expense for the years ended February 29, 2004, and February 28, 2003 and 2002 was $39,436, $33,150 and $28,751 respectively, including related party rentals (see Note 11). 9. CONTINGENCIES On September 19, 2001, we instituted proceedings in the United States District Court for the District of Oregon against Asiana Airlines ("Asiana") to recover certain amounts owed to us pursuant to a freighter service agreement with Asiana, which began January 28, 2000 and expired February 28, 2003. The agreement required us to provide the aircraft (B747), crew, maintenance and insurance. Asiana was required to pay all other costs incurred in the performance of the contract. The contract provided for minimum payments based on guaranteed block hour utilization as defined in the agreement. On August 28, 2001, Asiana paid us block hour utilization for the first week of September and gave notice that no further payments would be made. Asiana did not reimburse us for certain costs that we incurred during performance under the terms of the contract. We completed the mission in progress and returned the aircraft to the United States. Since the agreement was in force until February 28, 2003 and Asiana ceased minimum payments without notice, we sought damages to compensate us for the revenue that would have been earned had Asiana continued to meet its contractual obligations. On February 28, 2003, a jury returned a verdict of US $16,600 in our favor against Asiana. On April 22, 2003, the court denied our motion for prejudgment interest. On April 28, 2003, the court entered judgment in our favor in the amount of US $16,600. On May 2, 2003, Asiana moved to stay the execution of the judgment pending hearing on post-judgment motions. On May 5, 2003, the court granted the stay of execution, as of the date Asiana posts sufficient bond. In May 2003, Asiana posted a cash bond in the amount US $17,000. An order denying Asiana's post-judgment motions and awarding us $38,053 in costs was entered on September 26, 2003. On October 24, 2003 Asiana filed a notice of appeal. The court ordered a settlement assessment conference for December 18, 2003 which was recorded and conducted on January 5, 2004 at which time it was determined that further settlement discussions were not likely to be fruitful and that the briefing schedule stood as issued. Briefing on the appeal began on February 23, 2004. We filed our answer brief to affirm the judgment on April 7, 2004. Asiana's reply was filed on May 10, 2004. The Ninth Circuit Court of Appeals has not yet scheduled an oral argument. 68 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Since the agreement was in force until February 28, 2003 and Asiana ceased making minimum payments without notice, the Company believes it is entitled to the revenue, which it would have earned had Asiana continued to meet its contractual obligation. At February 28, 2003, the Company had recorded an account receivable of $27,169. This amount was fully reserved and no income was recorded for this program since Asiana ceased making payments. During fiscal year 2004, the account receivable of $27,169 was written off against the fully reserved balance resulting in no change to the net receivables and no income effect. On February 11, 2003, Tridair Repair and Manufacturing, Inc. filed a complaint against us alleging, among other things, fraud and breach of contract (California Action) related to an aircraft salvage contract. After Tridair transferred its litigation rights to an entity named Diversified Aero Asset Management, Inc. (which also sued Evergreen Air Center in the same court for similar claims), Diversified amended its complaint to include Tridair. Diversified seeks $10,600 plus the fair market value of the parts. We filed a motion to dismiss, or in the alternative, to transfer the case to court in Arizona. The California Action was dismissed, and the parties filed competing claims on the same matters in Arizona court. The Arizona court actions are in the initial pleading stages. Discovery is continuing and trial is scheduled for November 30, 2004. We believe we have meritorious defenses to the allegations in the complaint and intend to defend the case vigorously. On or around May 22, 2003, Bank of America Securities LLC filed suit for the State of North Carolina against Evergreen International Aviation and certain of its subsidiaries. The complaint alleges claims for breach of contract and quantum meruit, arising out of the agreements with the plaintiff to act as our financial agent and payment of related fees. The damages were unspecified and we retained local counsel. On March 29, 2004 we filed our Opening Brief. Oral arguments are expected to be set for mid to late June 2004. We believe we have meritorious defenses to the allegations in the complaint and intend to defend the case vigorously. The Company is a party to certain legal proceedings and claims that arise in the ordinary course of business. While the results of these matters cannot be predicted with certainty, management believes, based on its examination of such matters, experience to date and discussion with legal counsel, that the final outcome of such matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 10. EFFECT OF THE TERRORIST ATTACKS OF SEPTEMBER 11, 2001 Immediately following the terrorist attacks on September 11, 2001 the FAA closed the United States airspace. The Company resumed operations on September 14, 2001 after the FAA order was rescinded. During the period in which the flight operations were suspended, the Company experienced contract revenue losses and incurred incremental expenses associated with crew and aircraft repositioning and added security measures. In September 2001 the Company filed a claim for $22,100 under the Air Transportation Safety and System Stabilization Act, which provides direct compensation to the U.S. airlines for direct and incremental losses that resulted from the terrorist attacks for the period September 11, 2001 through December 31, 2001. In May 2002 an amended claim for $15,100 was filed. In September 2001, the federal government paid the Company $7,200 as an initial payment of the claim under the Air Transportation Safety and System Stabilization Act. No further payments have been received. Payment of the balance of the claim is dependent upon finalization of the Department of Transportation (DOT) rules and guidelines related to the audit of the claims that have been filed by the airlines. Since payment of claims under the Act are subject to a DOT audit, there can be no assurances that the balance will be paid by the DOT or, that upon the audit of the claim, the DOT will not seek to recover amounts already paid to the Company. Accordingly, the Company has not recorded a receivable in its fiscal year 2004 financial statements. 69 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) 11. RELATED PARTY TRANSACTIONS TRANSACTIONS UNDER MR. DELFORD M. SMITH'S EMPLOYMENT AGREEMENT On May 16, 2003, the Company completed a $215,000 debt offering and borrowed $72,100 under a new revolving credit facility (see Note 5). In conjunction with the completion of the new financing arrangement, the Company paid its Chief Executive Officer, Mr. Delford M. Smith ("Mr. Smith"), a one-time bonus in the amount of $4,000. This expense was recognized in selling, general and administrative expenses. Also on May 16, 2003, the Company entered into an employment agreement (the "agreement") with Mr. Smith. Pursuant to this agreement, Mr. Smith will serve as the Company's Chief Executive Officer and Chairman of the Board. The agreement provides for compensation at the rate of $3,000 per year. The term of Mr. Smith's agreement is five years from the completion of the refinancing (May 16, 2003) and is automatically extended each day so that the remaining term is always five years. Upon Mr. Smith's termination under certain circumstances as defined in the agreement, Mr. Smith will be paid 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. Such payment will only be made upon approval of two-thirds of the directors then in office, other than Mr. Smith. Pursuant to the agreement, the board may, in its discretion, grant Mr. Smith annual bonuses, provided, however, that the amount of such bonuses shall be used solely (i) to satisfy any of Mr. Smith's or his affiliates obligations to Holdings or its subsidiaries or (ii) to satisfy any taxes payable by Mr. Smith as a result of the receipt of such bonus or the satisfaction of such obligations. The agreement was entered into concurrent with Mr. Smith's execution of certain promissory notes to us to provide for repayment of existing indebtedness. See Note 13, "Subsequent Events." INDEBTEDNESS OF MR. DELFORD M. SMITH AND AFFILIATED ENTITIES As of February 29, 2004 and February 28, 2003, entities owned or controlled by Mr. Smith owed the Company approximately $15,200 and $18,150, respectively, (including $600 owed to the Trust Created February 25, 1986). The majority of this debt is evidenced by several promissory notes which bear interest at the rate of 4% per annum. Annual installments of principal and interest total approximately $2,000. Each note is due and payable on March 31, 2013. Each note is secured by a pledge of Mr. Smith's interest in the trust that owns approximately 2.7 million shares of common stock of Evergreen Holdings, Inc. The receivable of $15,200 owed by these affiliated entities to the Company at February 29, 2004 is net of accounts payable of $1,638 not evidenced by promissory notes, and a note payable of $739 evidenced by a signed promissory note bearing interest at 6%. LEASE TRANSACTIONS The Company rents aircraft and buildings under operating leases from entities owned or controlled by Mr. Smith. Rent expense for these leases amounted to $7,298, $5,426, and $6,214 for the years ended February 29, 2004, and February 28, 2003, and 2002, respectively. PURCHASE TRANSACTIONS Our agricultural business segment sells bulk hazelnuts to wholesalers and distributors, produces hazelnut products, sell pinot noir grape juice and wine, and sells bulk pinot noir grapes to wineries. During fiscal 2004, the Company purchased $197 in pinot noir grapes from our Chairman, Mr. Delford M. Smith. During fiscal year 2003, the Company purchased hazelnuts and pinot noir grapes grown on and produced on Mr. Smith's properties totaling approximately $600 and $1,000, respectively. During fiscal year 2002, the Company purchased hazelnuts grown on Mr. Smith's properties totaling $1,600. 70 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) OTHER RELATED PARTY TRANSACTIONS During fiscal years 2004, 2003 and 2002, the Company had sales of $11, $99 and $19 with various related-party affiliates. OWNERSHIP INTEREST IN AIRCRAFT In addition, Mr. Smith has a one-third ownership interest in a certain B747 aircraft of which the Company has the remaining two-thirds interest. His share of the income for the one-third ownership interest being leased to the Company was $1,116, $962 and $879, respectively for the fiscal years ended February 29, 2004, and February 28, 2003 and 2002. NOTES RECEIVABLE FROM AFFILIATES AND NOTES PAYABLE TO AFFILIATES Notes receivable from affiliates and Notes payable to affiliates at February 29, 2004 and February 28, 2003 consisted of the following:
2004 2003 ------------- ------------ Notes receivable from Ventures Holdings, Inc. (an entity controlled by the Company's majority shareholder) due in annual installments totaling $1,134 beginning March 31, 2004 including interest of 4% $10,673 $10,365 Notes receivable from Ventures Acquisitions Company LLC (an entity controlled by the Company's majority shareholder) due in annual installments totaling $146 beginning March 31, 2004 including interest of 4% 1,233 1,198 Notes receivable from the controlling shareholder due in ten annual installments totaling $802 beginning March 31, 2004 including interest of 4% 5,094 4,948 Notes receivable from the controlling shareholder due in annual installments equal to the earnings distributed on aircraft N471, including interest of 8% 602 1,639 Note payable to Ventures Acquisitions Company LLC (an entity controlled by the Company's majority shareholder) due in monthly installments of $108 including interest of 6% (739) -- ------------- ------------- $16,863 $18,150 ============= =============
71 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Evergreen Aviation Museum The Company owns a collection of vintage aircraft and a 120,000 square foot Evergreen Aviation Museum building on approximately 84.2 acres in McMinnville, Oregon. The Company leases this building and land to The Captain Michael King Smith Evergreen Aviation Educational Institute, a non-profit corporation. The initial lease term is for 25 years, with a nominal rental payment obligation of one dollar per year. Over the past four years to cover start-up, payroll and operational expenses, the Company made a series of loans to the Evergreen Aviation Museum, and on February 28, 2003, the Company forgave these loans in the amount of $716. 12. BUSINESS SEGMENTS The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires disclosure of financial information about the Company's reportable operating segments. The operating segments reported below are based on the nature of the services and products sold by the Company and are the segments of the Company for which separate financial information is available and for which operating results are regularly evaluated by executive management to make decisions about resources to be allocated to the segment and assess its performance. Management evaluates segment performance based on segment gross profit. There were transfers between segments in the periods presented. The following are distinct operating segments of the Company: o EIA engages primarily in international long-range and domestic short range cargo operations, as well as air freight brokerage services. o EAGLE provides mail handling, hub management, aircraft handling, cargo loading and unloading, and terminal services. o EAC performs required Federal Aviation Administration (FAA) inspections, scheduled and unscheduled maintenance and repairs, light engine maintenance, stripping and painting, aircraft storage and complete airframe overhauls of commercial aircraft at an Unlimited Repair Station. o EHI provides flight services throughout the world in markets including international peacekeeping and health operations, agriculture, oil exploration and development, and forest control and provides aircraft maintenance and repair services. o EASL includes aircraft and parts brokerage operations. o Other includes farming and nursery production and vintage aircraft restoration and one active foreign subsidiary. 72 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Based on the location of the consumer, the Company revenues are derived from the United States and throughout the world. As of February 29, 2004, all material long-lived assets are located in the United States. Fiscal Year --------------- 2004 2002 (as restated) 2003 (as restated) ------------ --------- ----------- Operating Revenues: EIA $ 350,016 $ 374,486 $ 267,446 EAGLE 100,407 129,724 122,287 EHI 39,343 35,163 28,064 EAC 31,864 23,938 20,134 EASL 7,010 5,274 5,733 OTHER 6,994 5,750 4,043 --------- --------- --------- Total $ 535,634 $ 574,335 $ 447,707 ========= ========= ========= Inter-company revenues: * EIA $ 9,036 $ 4,605 $ 7,756 EAGLE 1,936 3,079 4,437 EHI 1,813 1,164 1,895 EAC 26,238 26,827 14,125 EASL 4,448 5,171 4,849 OTHER 306 67 71 --------- --------- --------- Total $ 43,777 $ 40,913 $ 33,133 ========= ========= ========= Income from operations: EIA $ 33,204 $ 61,028 $ 3,765 EAGLE (2,332) 15,943 11,353 EHI (7,853) 759 116 EAC 5,022 2,920 (177) EASL (2,444) 2,300 2,267 OTHER (2,541) (1,309) (1,838) --------- --------- --------- Total $ 23,056 $ 81,641 $ 15,486 ========= ========= ========= Interest expense, net: EIA $ 34,498 $ 29,875 $ 33,363 EAGLE 339 520 616 EHI (16) 28 40 EAC (5) (23) 67 EASL -- 118 138 OTHER 24 58 73 --------- --------- --------- Total $ 34,840 $ 30,576 $ 34,297 ========= ========= ========= * Amounts are eliminated in consolidation. 73 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Fiscal Year --------------- 2004 2002 (as restated) 2003 (as restated) ------------ --------- ----------- Depreciation and amortization of property and equipment: EIA $ 52,926 $ 55,474 $ 54,253 EAGLE 2,483 2,677 2,302 EHI 4,892 5,262 3,320 EAC 1,057 1,048 1,199 EASL 155 165 707 OTHER 456 416 419 -------- -------- -------- Total $ 61,969 $ 65,042 $ 62,200 ======== ======== ======== Capital expenditures: EIA $ 45,827 $ 46,280 $ 43,394 EAGLE 1,485 2,865 1,440 EHI 12,019 10,029 9,316 EAC 2,148 1,129 549 EASL -- 6 7 OTHER 415 517 628 -------- -------- -------- Total $ 61,894 $ 60,826 $ 55,334 ======== ======== ======== Total assets: EIA $513,690 $521,367 $539,863 EAGLE 48,588 64,040 55,296 EHI 64,125 53,579 47,341 EAC 16,503 17,250 15,555 EASL 7,676 7,315 5,495 OTHER 28,553 28,551 26,787 -------- -------- -------- Total $679,135 $692,102 $690,337 ======== ======== ======== Operating revenues by geographic area: United States of America $473,258 $510,640 $361,296 Foreign 62,376 63,695 86,411 -------- -------- -------- Total $535,634 $574,335 $447,707 ======== ======== ======== 74 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) 13. SUBSEQUENT EVENTS On March 26, 2004, Mr. Smith was granted a $2,900 bonus by the board of directors in accordance with his employment agreement (see Note 11), from which $2,100 was used to satisfy $1,400 in principal and $700 in interest on his affiliated obligations to Holdings and its subsidiaries and $800 was used to satisfy the taxes payable by Mr. Smith which resulted from the granting of the bonus. This bonus was recorded to selling, general and administrative expense in the first quarter of fiscal year 2005. On May 13, 2004, EA completed a refinancing of its revolving credit facility. The new credit facility consists of a $50,000 revolving loan, subject to a borrowing base based on eligible receivables and eligible inventory, and a $50,000 term loan. See Note 5, "Debt Obligations." 14. RESTATEMENTS Fiscal Year 2004 Subsequent to the issuance of the Company's fiscal year 2004 consolidated financial statements, as reported in the Original Filing, the Company's management determined that such fiscal year 2004 consolidated financial statements contained certain accounting errors. Based upon an investigation by management, the Company's principal executive officer and principal financial officer have concluded that the accounting errors resulted from material weaknesses in the Company's disclosure controls and procedures as of February 29, 2004, particularly in the areas of account reconciliations and management review of journal entries. The investigation revealed that as of February 29, 2004, the following disclosure controls and procedures were either not in place, not being properly performed, not being performed in a timely manner, or not being independently reviewed by management: o reconciliation of significant accounting cycles; o reconciliation of bank accounts; o reconciliation of subsidiary account activity to general ledger; o reconciliation of fixed asset ledgers; and o reconciliation of intercompany account activity. As a result of these weaknesses in the Company's disclosure controls and procedures, certain journal entries were made at the closing of fiscal year 2004 which resulted in accounting errors in the Company's consolidated financial statements. As a result of the investigation, the Company's management determined that the Company's outstanding long-term debt balance as of February 29, 2004 and the Company's total amount of selling, general, and administrative expenses for fiscal year 2004 were both understated by $3,084. In addition, after conducting a further review of other year-end transactions for fiscal year 2004, the Company's management discovered other accounting errors, the correction of which resulted in an increase of approximately $25 in operating losses. Management determined that the other accounting errors occurred due to an under-accrual of payroll costs, an inaccurate recording of excise tax refund receivables, and a misclassification of deposits on aircraft purchases. 75 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) The following tables show the impact of the above-described restatements for the fiscal year 2004 on the Company's consolidated statement of operations and consolidated balance sheet: Statement of Operations Fiscal Year 2004 (in thousands) Previously Reported Adjustments As Restated ------------ ----------- ----------- Total operating revenues $ 535,634 $ - $ 535,634 Operating expenses: Flight costs 73,756 60 73,816 Fuel 97,159 (390) 96,769 Maintenance 73,205 60 73,265 Aircraft and equipment 49,612 235 49,847 Costs of sales of aircraft, parts and 13,709 - 13,709 other property and equipment Cost of ground logistics services 89,150 - 89,150 Support services and other 38,957 - 38,957 Selling, general, and administrative 73,921 3,144 77,065 ------------ ---------- ---------- Total operating expenses 509,469 3,109 512,578 ------------ ---------- ---------- Income from operations 26,165 3,109 23,056 ------------ ---------- ---------- Other expense, net (30,454) - (30,454) ------------ ---------- ---------- Loss before minority interest (4,289) (3,109) (7,398) and income taxes Minority interest (1,116) - (1,116) ------------ ---------- ---------- Loss before income taxes (5,405) (3,109) (8,514) Income tax benefit 835 1,185 2,020 ------------ ---------- ---------- Net loss $ (4,570) $ (1,924) $ (6,494) ============ ========== ========== 76 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Balance Sheet Fiscal Year 2004 (in thousands) Previously Reported Adjustments As Restated ------------ ------------ ----------- ASSETS Current assets: Cash $ 4,071 $ - $ 4,071 Accounts receivable, less allowance of $2,029 and $32,848 for doubtful accounts Trade 37,143 - 37,143 Other 1,878 726 2,229 Receivable and notes from affiliates, net 2,199 - 2,199 Inventories 14,719 - 14,719 Prepaid expenses and other assets 6,590 - 6,965 Income taxes receivable 583 - 583 Deferred tax asset 11,955 9 11,964 ----------- ----------- ---------- Total current assets 79,138 735 79,873 Assets held for sale 6,760 - 6,760 Notes receivable from affiliates 15,563 - 15,563 Property and equipment, net 545,397 (458) 544,939 Capitalized loan acquisition costs 15,531 - 15,531 Other assets 10,852 123 10,975 Goodwill 5,494 - 5,494 ----------- ----------- --------- Total assets $ 678,735 $ 400 $ 679,135 =========== =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 11,580 $ - $ 11,580 Accounts payable 43,204 - 43,204 Accrued liabilities 20,081 516 20,597 Accrued interest 7,735 - 7,735 Affiliate trade and notes payable 2,477 (100) 2,377 ----------- ----------- --------- Total current liabilities 85,077 416 85,493 Long-term debt 296,853 3,084 299,937 Deferred income and other 101 - 101 Deferred tax liabilities 105,840 (1,176) 104,664 ----------- ----------- --------- Total liabilities 487,871 2,324 490,195 ----------- ----------- --------- Stockholders' Equity: Common stock, no par value; 7,568 - 7,568 20,000,000 shares authorized; 10,054,749 issued and outstanding Retained earnings 183,296 (1,924) 181,372 ----------- ----------- ---------- Total stockholders' equity 190,864 (1,924) 188,940 ----------- ----------- ---------- Total liabilities and $ 678,735 $ 400 $ 679,135 stockholders' equity =========== =========== ========== 77 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Fiscal Year 2002 The Company received $7,200 as an initial payment of its claim under the Air Transportation Safety and System Stabilization Act. Subsequent to the issuance of the Company's fiscal year 2002 consolidated financial statements, the Company's management determined that the $7,200 initial payment of the claim received under the Air Transportation Safety and Stabilization Act should have been recorded as a separate line item in operating expenses within its consolidated statement of operations for the year ended February 28, 2002. As previously reported, this amount was included in support services and other, a component of operating revenues. As a result, the accompanying consolidated statement of operations for the year ended February 28, 2002 has been restated from amounts previously reported. The correction of this error reduced operating revenues and operating expenses by $7,200; however, it had no effect on net loss for the year ended February 28, 2002 as previously reported. 15. GUARANTOR SUBSIDIARIES AND NON-GUARANTOR SUBSIDIARIES The Company's payment obligations under the 12% Senior Subordinated Notes due 2010 are fully and unconditionally guaranteed on a joint and several, senior subordinated basis by substantially all of the Company's consolidated subsidiaries (collectively, and excluding Non-Guarantor Subsidiaries (as defined below), the "Guarantor Subsidiaries") except for Evergreen Agricultural Enterprises, Inc., Evergreen Vintage Aircraft Inc. and Foreign Subsidiaries (together, the "Non-Guarantor Subsidiaries"). Subsidiary financial information for the Non-Guarantor subsidiaries is presented in the column titled "Other Subsidiaries". Balance sheet data is presented as of February 29, 2004 and February 28, 2003. Statement of operations and statement of cash flows data are presented for the years ended February 29, 2004 and February 28, 2003 and 2002. Investments in subsidiaries are accounted for by Evergreen Holdings, Inc. ("Parent Company"), and Guarantor Subsidiaries using the equity method of accounting. Net income of Guarantor and Non-Guarantor Subsidiaries is, therefore, reflected in the Parent Company's and Guarantor Subsidiaries' investments in and advances to (from) subsidiaries. Net income of the Guarantor and Non-Guarantor Subsidiaries is reflected in Guarantor Subsidiaries and Parent Company as equity in consolidated subsidiaries. The elimination entries eliminate investments in Other Subsidiaries and inter-company balances and transactions for consolidated reporting purposes. Presented on the next eight pages is the consolidated condensed financial information of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. Financial information for the Trust Created February 25, 1986 is presented separately as the Company owns less than 100% of this Guarantor. 78 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Statement of Operations
Fiscal Year 2004 (as restated) ------------------------------------ Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total --------------------------------------------------------------------------------------- Operating revenues .................... $ -- $ 12,786 $ 551,829 $ 7,496 $ 7,300 $ (43,777) $ 535,634 Operating expenses .................... -- 4,786 457,005 373 7,890 (34,541) 435,513 Selling, general and administrative ... 26 23,716 60,499 -- 1,860 (9,036) 77,065 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations ......... (26) (15,716) 34,325 7,123 (2,450) (200) 23,056 Interest income (expense).............. 609 (1,186) (33,129) (1,110) (24) -- (34,840) Other income (expense), net ........... -- -- 4,286 -- 100 -- 4,386 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before minority interest, 583 (136,902) 5,482 6,013 (2,374) (200) (7,398) income taxes and equity in earnings Equity in earnings of subsidiaries .... (7,077) 6,827 -- -- -- 250 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income before minority interest (6,494) (10,075) 5,482 6,013 (2,374) 50 (7,398) and income taxes Minority interest ..................... -- (1,116) -- -- -- -- (1,116) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes ..... (6,494) (11,191) 5,482 6,013 (2,374) 50 (8,514) Income tax benefit (expense) .......... -- 6,088 (5,076) -- 933 75 2,020 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income ..................... $ (6,494) $ (5,103) $ 406 $ 6,013 $ (1,441) $ 125 $ (6,494) ========== ========== ========== ========== ========== ========== ==========
79 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Statement of Operations
Fiscal Year 2003 -------------------- Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total --------------------------------------------------------------------------------------- Operating revenues .................... $ -- $ 4,306 $ 596,839 $ 7,987 $ 7,136 $ (41,933) $ 574,335 Operating expenses .................... -- -- 459,589 330 5,184 (35,138) 429,965 Selling, general and administrative ... 575 10,248 54,837 -- 2,648 (5,579) 62,729 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations ......... (575) (5,942) 82,413 7,657 (696) (1,216) 81,641 Interest expense ...................... -- (253) (28,559) (1,706) (58) -- (30,576) Other income (expense), net ........... -- -- 46 -- 1,462 -- 1,508 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before minority interest, (575) (6,195) 53,900 5,951 708 (1,216) 52,573 income taxes and equity in earnings Equity in earnings of subsidiaries .... 28,646 38,326 -- -- -- (66,972) -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before minority interest 28,071 32,131 53,900 5,951 708 (68,188) 52,573 and income taxes Minority interest ..................... -- (962) -- -- -- -- (962) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes ..... 28,071 31,169 53,900 5,951 708 (68,188) 51,611 Income tax (expense) benefit .......... 3,736 -- (22,774) -- -- (766) (19,804) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) ..................... $ 31,807 $ 31,169 $ 31,126 $ 5,951 $ 708 $ (68,954) $ 31,807 ========== ========== ========== ========== ========== ========== ==========
80 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Statement of Operations
Fiscal Year 2002 --------------------- Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total --------------------------------------------------------------------------------------- Operating revenues $ 1,827 $ 4,461 $ 460,475 $ 8,040 $ 6,036 $ (33,132) $ 447,707 Operating expenses -- -- 396,796 611 5,396 (31,994) 370,809 Selling, general and administrative 83 6,061 45,465 -- 1,007 -- 52,616 Impairments and unusual charges - net -- -- 6,982 9,018 -- -- 16,000 Claim under Air Transportation Safety and System Stabilization Act -- -- (7,204) -- -- -- (7,204) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations 1,744 (1,600) 18,436 (1,589) (367) (1,138) 15,486 Interest expense (733) (510) (30,879) (2,102) (73) -- (34,297) Other income (expense), net -- -- 836 -- -- -- 836 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before minority interest 1,011 (2,110) (11,607) (3,691) (440) (1,138) (17,975) income taxes and equity in earnings Equity in earnings of subsidiaries (13,445) (11,729) -- -- -- 25,174 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before minority interest (12,434) (13,839) (11,607) (3,691) (440) 24,036 (17,975) and income taxes Minority interest -- (879) -- (0) -- -- (879) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes (12,434) (14,718) (11,607) (3,691) (440) 24,036 (18,854) Income tax benefit (expense) -- 811 5,093 -- 715 (199) 6,420 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (12,434) $ (13,907) $ (6,514) $ (3,691) $ 275 $ 23,837 $ (12,434) ========== ========== ========== ========== ========== ========== ==========
81 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Balance Sheet
At the End of Fiscal Year 2004 (as restated) ----------------------------------------------- Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total --------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents ............. $ -- $ 1,001 $ 2,723 $ -- $ 347 $ -- $ 4,071 Accounts and assets receivable, net ... -- 14 38,210 -- 1,148 -- 39,372 Other current assets .................. 836 10,290 18,522 -- 7,103 (321) 36,430 --------- --------- --------- --------- --------- ---------- --------- Total current assets .............. 836 11,305 59,455 -- 8,598 (321) 79,873 Properties, net ....................... 1,753 3,744 492,345 12,105 37,078 (2,086) 544,939 Notes receivable ...................... -- -- 378 -- 68 -- 446 Investment in subsidiaries ............ 205,172 233,716 -- -- -- (438,888) -- Other assets including goodwill ....... 13,893 17,628 14,513 1,241 6,602 -- 53,877 --------- --------- --------- --------- --------- ---------- --------- Total assets ............................. $ 221,654 $ 266,393 $ 566,691 $ 13,346 $ 52,346 $(441,295) $ 679,135 ========= ========= ========= ========= ========= ========== ========= Liabilities and stockholders' equity Current liabilities: Accounts payable ...................... $ -- $ 6,682 $ 35,734 $ -- $ 788 $ -- $ 43,204 Current portion long-term debt ........ -- 66 5,652 5,059 803 -- 11,580 Accrued liabilities ................... -- 5,366 15,137 -- 94 -- 20,597 Accrued Interest ...................... -- 7,727 (1) -- 9 -- 7,735 Income taxes payable .................. -- 64 2,218 -- 95 -- 2,377 --------- --------- --------- --------- --------- --------- --------- Total current liabilities ......... -- 19,905 58,740 5,059 1,789 -- 85,493 Long-term debt and capital leases ..... 74,076 64,422 132,946 2,898 25,595 -- 299,937 Deferred income taxes ................. (41,362) 1,760 142,554 -- 1,712 -- 104,664 Other liabilities ..................... -- -- (4,698) 4,799 -- -- 101 Stockholders' equity .................... 188,940 180,306 237,149 590 23,250 (441,295) 188,940 --------- --------- --------- --------- --------- ---------- --------- Total liabilities and stockholders' equity $ 221,654 $ 266,393 $ 566,691 $ 13,346 $ 52,346 $(441,295) $ 679,135 ========= ========= ========= ========= ========= ========== =========
82 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Balance Sheet
At the End of Fiscal Year 2003 ---------------------------------- Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total --------------------------------------------------------------------------------------- Cash and cash equivalents ................ $ -- $ 854 $ 4,714 $ -- $ 70 $ -- $ 5,638 Accounts and assets receivable, net .... -- -- 55,022 -- 552 -- 55,574 Other current assets ................... -- 4,890 16,514 -- 10,572 -- 31,976 --------- --------- --------- --------- --------- ---------- --------- Total current assets ................ -- 5,744 76,250 -- 11,194 -- 93,188 Properties, net ........................ 1,777 8,349 496,998 12,479 36,019 (1,886) 553,736 Notes receivable ....................... 14,290 1,034 300 1,639 887 -- 18,150 Investment in subsidiaries ............. 212,404 208,153 -- -- -- (420,557) -- Other assets including goodwill ........ -- 3,205 26,130 -- 3,128 (5,435) 27,028 --------- --------- --------- --------- --------- ---------- --------- Total assets.............................. $ 228,471 $ 226,485 $ 599,678 $ 14,118 $ 51,228 $(427,878) $ 692,102 ========= ========= ========= ========= ========= ========== ========= Liabilities and stockholders' equity Accounts payable ....................... $ -- $ 4,375 $ 58,920 $ -- $ 752 $ -- $ 64,047 Current portion long-term debt ......... -- 145,008 135,600 4,702 93 -- 285,403 Accrued liabilities .................... -- 5,624 12,768 124 243 -- 18,759 Accrued Interest ....................... -- 201 1,647 -- 9 -- 1,857 Income taxes payable ................... 1,204 2,983 1,416 -- 617 (4,968) 1,252 --------- --------- --------- --------- --------- ---------- --------- Total current liabilities .......... 1,204 158,191 210,351 4,826 1,714 (4,968) 371,318 Long-term debt and capital leases ...... 73,195 (108,209) 27,201 7,829 18,439 -- 18,455 Deferred income taxes .................. (41,362) 5,475 135,880 -- 1,046 5,361 106,400 Other liabilities ...................... -- -- (3,408) 3,903 5,435 (5,435) 495 Stockholders' equity ..................... 195,434 171,028 229,654 (2,440) 24,594 (422,836) 195,434 --------- --------- --------- --------- --------- ---------- --------- Total liabilities and stockholders' equity $ 228,471 $ 226,485 $ 599,678 $ 14,118 $ 51,228 $(427,878) $ 692,102 ========= ========= ========= ========= ========= ========== =========
83 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Statement of Cash Flows
Fiscal Year 2004 (as restated) --------------------------------- Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total ----------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities ................. $ -- $ (5,708) $ 53,135 $ 8,038 $ (4,074) $ 1,664 $ 53,055 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchases of property, equipment, and overhauls ...................... -- (1,731) (59,687) -- (476) -- (61,894) Proceeds from sale of property & equipment ........................... -- 3,750 5,714 -- -- -- 9,464 Notes receivable & other assets ..... (880) (16,924) 11,237 1,035 (2,655) (1,664) (9,851) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities ................. (880) (14,905) (42,736) 1,035 (3,131) (1,664) (62,281) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from long term debt ........ -- 282,065 1,983 -- 443 -- 284,491 Payments on long term debt .......... -- (113,908) (2,139) (6,331) -- -- (122,378) Other financing sources ............. 880 (147,397) (12,234) (2,742) 7,039 -- (154,454) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities ................. 880 20,760 (12,390) (9,073) 7,482 -- 7,659 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in cash ....... -- 147 (1,991) -- 277 -- (1,567) Cash, beginning of period .............. -- 854 4,714 -- 70 -- 5,638 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash, end of period ................... $ -- $ 1,001 $ 2,723 $ -- $ 347 $ -- $ 4,071 ========== ========== ========== ========== ========== ========== ==========
84 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Statement of Cash Flows
Fiscal Year 2003 ------------------- Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total ----------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities ............... $ (17,371) $ (7,926) $ 154,391 $ 3,834 $ 581 $ (33,207) $ 100,302 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchases of property, equipment, and overhauls ..................... -- (744) (59,363) -- (719) -- (60,826) Proceeds from sale of property & equipment .......................... -- -- 5,722 -- 1,758 -- 7,480 Notes receivable & other assets ..... 17,371 (27,515) (2,103) 1,795 (690) 12,289 1,147 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities ............... 17,371 (28,259) (55,744) 1,795 349 12,289 (52,199) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from long term debt ....... -- -- 367 -- -- -- 367 Payments on long term debt ......... -- -- (2,759) (3,608) 63 -- (6,304) Other financing sources ............ -- 35,476 (98,827) (2,021) (997) 20,919 (45,450) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities ............... -- 35,476 (101,219) (5,629) (934) 20,919 (51,387) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in cash ..... -- (709) (2,572) -- (4) -- (3,284) Cash, beginning of period ........... -- 1,563 7,285 -- 74 -- 8,922 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash, end of period ................. $ -- $ 854 $ 4,713 $ -- $ 70 $ -- $ 5,638 ========== ========== ========== ========== ========== ========== ==========
85 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) Supplemental Consolidating Statement of Cash Flows
Fiscal Year 2002 ------------------- Non Wholly 100% Owned Owned Holdings Evergreen Guarantor Guarantor Non Consolidated (Parent) (Issuer) Subsidiaries Subsidiaries Guarantors Eliminations Total ----------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities ............... $ (12,240) $ (14,360) $ 107,236 $ 2,873 $ (3,991) $ 28,010 $ 107,528 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchases of property, equipment, and overhauls ..................... -- (19) (41,965) -- (2,728) 9,018 (35,694) Proceeds from sale of property & equipment ......................... -- -- 10,899 -- -- -- 10,899 Notes receivable & other assets .... 12,240 11,273 10,223 2,529 2,107 (30,412) 7,960 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities ............... 12,240 11,254 (20,843) 2,529 (621) (21,394) (16,835) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Proceeds from long term debt ....... -- -- 2,330 -- -- -- 2,330 Payments on long term debt ......... -- (39,850) (41,646) (3,558) (73) -- (85,127) Other financing sources ............ -- 43,310 (44,139) (1,844) 4,689 (6,616) (4,600) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities ............... -- 3,460 (83,455) (5,402) 4,616 (6,616) (87,397) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in cash ..... -- 354 2,938 -- 4 1 3,296 Cash, beginning of period ........... -- 1,209 4,347 -- 70 -- 5,626 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Cash, end of period ................. $ -- $ 1,563 $ 7,285 $ -- $ 74 $ 1 $ 8,922 ========== ========== ========== ========== ========== ========== ==========
86 EVERGREEN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands) SUPPLEMENTARY FINANCIAL DATA The following table summarizes the Company's unaudited consolidated quarterly results of operations for 2004 and 2003. 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. Fiscal 2004 Three Months Ended (in thousands) Feb. 29 (1)(2) May 31 Aug. 31 Nov. 30 (as restated) --------- --------- --------- ------------ Operating revenues $137,586 $147,555 $134,161 $116,332 Income (loss) from operations 10,700 16,990 10,049 (14,683) Net income (loss) 435 7,464 453 (14,846) Fiscal Year 2003 Three Months Ended (in thousands) May 31 Aug. 31 Nov. 30 Feb. 28 -------- --------- --------- ----------- Operating revenues $125,006 $142,821 $161,213 $145,295 Income from operations 14,799 20,535 25,457 20,850 Net income 4,335 8,631 10,745 8,096 (1) In fiscal year 2004, we had AMC 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, AMC 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. While we are actively negotiating alternative means of transporting the cargo into the region and working towards obtaining waivers from the FAA, we may not be able to achieve a satisfactory alternative that will allow us to continue to provide this service at previous levels. If AMC elects to continue to fly directly into Iraq or use alternative methods of transportation, we may experience a continued decline in our consolidated operating revenues, which could have a material adverse effect on our operations. (2) The following table shows the impact of the restatements on the Company's results of operations for the three months ended February 29, 2004: Previously Percentage Reported As Restated Change -------------- -------------- ------------ Operating revenues $ 116,332 $ 116,332 - Income (loss) from operations (11,574) (14,683) (26.9)% Net loss (12,922) (14,846) (14.9)% 87 EVERGREEN HOLDINGS, INC. AND ITS SUBSIDIARIES Schedule II - Valuation and Qualifying Accounts The following represents the additions and deletions to the Company's inventory and equipment reserves during fiscal years 2004, 2003, and 2002:
- - - - - - - (In Thousands) - - - - - - Additions Balance at (reductions) Reclasses Balance Beginning of to Costs and from Other at End of Period Expenses Write-offs Accounts Period -------------------------------------------------------------------------------------------- Allowance for doubtful accounts: Year ended February 28, 2002 $ 1,664 $ 9,253 (1) $ (556) $ - $ 10,361 Year ended February 28, 2003 10,361 23,368 (2),(3) (881) - 32,848 Year ended February 29, 2004 32,848 2,327 (4) (34,408)(5),(6) 1,262 (7) 2,029 Allowance for doubtful notes receivable Year ended February 28, 2002 $ - $ - $ - $ - $ - Year ended February 28, 2003 - - - - - Year ended February 29, 2004 - - - - - Allowance for obsolete inventory Year ended February 28, 2002 $ - $ - $ - $ - $ - Year ended February 28, 2003 - - - - - Year ended February 29, 2004 - (160) 160 - -
(1) During FY 2002, EIA increased Asiana reserve by $8,534. (2) During FY 2003, EIA increased Asiana reserve by $18,736. (3) During FY 2003, EAGLE expensed an additional $4,220 for USPS SNET contract. (4) During FY 2004, EAGLE expensed an additional $2,712 for USPS SNET contract. (5) During FY 2004, EIA wrote off Asiana accounts receivable of $27,889. (6) During FY 2004, $6,119 was written off from the settlement for the prior year USPS SNET contract for EAGLE. (7) During FY 2004, $1,262 was reclassed from a liability account to the reserve account. 88 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURES On March 12, 2003, Evergreen Holdings, Inc. dismissed Deloitte & Touche LLP ("Deloitte & Touche") and engaged PricewaterhouseCoopers LLP ("PwC") as its independent registered public accounting firm for the 2003 fiscal year. The consolidated financial statements of Evergreen Holdings, Inc. and subsidiaries for the year ended February 28, 2002, included in this Annual Report on Form 10-K/A have been audited by Deloitte & Touche LLP, independent registered public accounting firm, as stated in their audit report appearing herein. The audit report expresses an unqualified opinion and includes explanatory paragraphs, relating to the Company's ability to continue as a going concern and to the restatement for fiscal year 2002 described in Note 14 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. As discussed in Note 1 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A, the Company's difficulties in meeting its loan agreement covenants and its negative working capital position raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 14 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K/A, the accompanying consolidated financial statements for the fiscal year ended February 29, 2004 have been restated. In addition, as further discussed in Note 14, the accompanying consolidated statement of operations for the fiscal year ended February 28, 2002 has been restated. There have been no disagreements with our independent registered public accounting firm on our accounting or financial reporting or auditing scope of procedure that would require our independent registered public accounting firm to make reference to such disagreements in their report on our consolidated financial statements or otherwise require disclosure in this Annual Report on Form 10-K/A. 89 ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES During the fiscal period covered by this report, the Company's management, with the participation of the Company's principal executive officer and principal financial officer, 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 February 29, 2004. This evaluation included various steps that management undertook in an effort to ensure that information required to be disclosed in the Company's Exchange Act filings is recorded, processed, summarized, and reported within the required time frame. This evaluation also included considerations of the Company's internal controls and procedures for the preparation of the Company's financial statements. Based on such evaluation, the Company's principal executive officer and principal financial officer have concluded that, as of the end of the Company's fiscal year 2004, the Company's disclosure controls and procedures required further enhancements to ensure that such disclosure controls and procedures are 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. In addition, the Company's principal executive officer and principal financial officer have determined that the Company's disclosure controls and procedures that are currently in place require further enhancements, and may not be sufficient to ensure that data errors, control problems or acts of fraud are detected, and to confirm that appropriate corrective action, including process improvements, is undertaken. Deficiencies in the Company's Controls and Procedures In connection with the audit of the Company's financial statements for the year ended February 29, 2004, PwC delivered to the Company's disclosure committee a letter identifying deficiencies that existed in the design and operation of the Company's internal controls that PwC considers to be material weaknesses in the effectiveness of the Company's internal controls pursuant to standards established by the American Institute of Certified Public Accountants. A "material weakness" is a reportable condition in which the design or operation of one or more of the specific internal control components has a defect or defects that could have a material adverse effect on the Company's ability to record, process, summarize and report financial data in the financial statements in a timely manner. The material weaknesses identified by the independent registered accounting firm include the following weaknesses in certain divisions of the Company: o Failure to reconcile certain general ledger accounts on a timely and regular basis and lack of management review of certain reconciliations. o Inconsistent application of accounting policies, including capitalization policies and procedures for determining unrecorded liabilities. o Failure of financial management in certain operating segments to properly supervise personnel, enforce and follow policies and procedures, and perform their assigned duties. o Lack of adequately staffed accounting departments. In response, the Company's principal executive officer and principal financial officer analyzed the facts and circumstances surrounding the quantity and magnitude of the adjusting journal entries within certain subsidiaries at fiscal year end. After reviewing the adjusting entries and performing an evaluation of the internal controls within certain subsidiaries, the Company's principal executive officer and principal financial officer concluded that, as of the Company's fiscal year 2004, the Company's disclosure controls and procedures required enhancements to ensure that such disclosure controls and procedures were 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. 90 Subsequent to the issuance of the Company's fiscal year 2004 consolidated financial statements, the Company's management determined that certain accounting errors had occurred during the Company's year-end closing process, the correction of which necessitated a restatement of the Company's consolidated financial statements for the fiscal year ending February 29, 2004. Based upon the results of management's investigation of the accounting errors, the Company's principal executive officer and principal financial officer have concluded that the accounting errors resulted from material weaknesses in the Company's disclosure controls and procedures as of February 29, 2004, particularly in the areas of account reconciliations and management review of journal entries. Detailed validation work was then performed by the Company's internal personnel in order to substantiate the financial information contained in the Company's consolidated financial statements and related disclosures that are contained in this Annual Report on Form 10-K/A. Analyses were also performed in order to compare the reasonableness of current year amounts to prior year amounts. Enhancements to the Company's Controls and Procedures Management has determined that in order to ensure that the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting information to be disclosed by the Company, the Company's policies and procedures need to be improved in the following areas: o Capitalization and amortization of asset balances - regular detailed analyses of fixed assets and accumulated depreciation accounts should be performed by preparing detailed account reconciliations, and significant transactions should be independently reviewed in a timely manner; o Recording and processing transactions - all transactions must be supported by appropriate documentation and sign-off review by management; o Reconciliation of accounts - detailed reconciliations of subsidiary accounts to the general ledger should be performed on a regular basis, and quarterly accounting review procedures should be enhanced by requiring an independent review of material general ledger accounts and reserves; o Management review of journal entries, account balances and financial statements - all non-recurring journal entries must be reviewed by an independent member of management; o Internal audit function - an internal audit function should conduct audit procedures and test internal controls in order to ensure that the Company's policies and procedures for transactional recording, transactional review, segregation of duties, and review of significant transactions at the appropriate levels of management are both effective and being followed; and o Competent personnel - staffing should be enhanced to provide sufficient resources to accomplish the foregoing objectives. 91 In order to ensure that all material information about the Company is accurately disclosed in this report, management has taken certain incremental steps toward enhancing the Company's disclosure controls and procedures. In particular, management has: o Made, and is in the process of making, appropriate personnel changes; o Enhanced policies and procedures for capitalization of certain costs into deferred overhauls and construction in progress; o Instituted an additional level of approval for capitalized items; and o Strengthened monitoring of controls by adding an additional level of review authorization and review of significant transactions. These proposed enhancements represent significant improvements to the Company's disclosure controls and procedures. The Company believes that once fully implemented, such enhancements will address the identified disclosure control deficiencies. The Company will continue to evaluate the effectiveness of both its disclosure controls and procedures and its internal controls and procedures on an ongoing basis, and will take further action as appropriate. 92 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) Consolidated financial statements of the Company included in Item 8 "Financial Statements and Supplementary Data" a. Reports of Independent Registered Public Accounting Firms b. Consolidated Balance Sheets as of February 29, 2004 (as restated) and February 28, 2003 c. Consolidated Statement of Operations for the Years Ended February 29, 2004 (as restated) and February 28, 2003 and 2002 (as restated) d. Consolidated Statements of Stockholders' Equity for the Years Ended February 29, 2004 (as restated) and February 28, 2003 and 2002 e. Consolidated Statements of Cash Flows for the Years Ended February 29, 2004 (as restated) and February 28, 2003 and 2002 f. Notes to Consolidated Financial Statements (2) Financial statement schedule included Item 8 "Financial Statements and Supplementary Data" a. Schedule II - Valuation and Qualifying Accounts (3) A list of exhibits that are filed as part of, or incorporated by reference into this Annual Report on Form 10-K/A is set forth in the Exhibit Index, which is on page 95 hereof. (b) Reports on Form 8-K. On May 24, 2004, the Company furnished a Current Report on Form 8-K dated May 24, 2004. The Form 8-K reported at Item 12 that the Company issued a press release announcing that it completed a refinancing of its credit facility. 93 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K/A (Amendment No. 2) to be signed on its behalf by the undersigned thereunto duly authorized. EVERGREEN HOLDINGS, INC. Date: September 29, 2004 /s/ Delford M. Smith --------------------- Delford M. Smith Chairman of the Board of Directors Date: September 29, 2004 /s/ Timothy G. Wahlberg ----------------------- Timothy G. Wahlberg President Date: September 29, 2004 /s/ John A. Irwin ------------------ John A. Irwin Chief Financial Officer 94 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF DOCUMENT ----------- ----------------------- 3.1+ Articles of Incorporation of Evergreen International Aviation, Inc. 3.2+ Articles of Amendment to the Articles of Incorporation of Evergreen International Aviation, Inc., filed December 15, 1980. 3.3+ Articles of Amendment to the Articles of Incorporation of Evergreen International Aviation, Inc., filed September 24, 1992. 3.4+ Articles of Amendment to the Articles of Incorporation of Evergreen International Aviation, Inc., filed February 25, 1993. 3.5+ Amended and Restated By-Laws of Evergreen International Aviation, Inc. 3.6+ Articles of Incorporation of Evergreen Air Center, Inc., filed January 24, 1979. 3.7+ Amended and Restated Bylaws of Evergreen Air Center, Inc. 3.8+ Articles of Incorporation of Evergreen Aircraft Sales and Leasing Co., filed October 11, 1984. 3.9+ Amendment of Articles of Incorporation of Evergreen Aircraft Sales and Leasing Co., filed November 13, 1984. 3.10+ Amended and Restated By-Laws of Evergreen Aircraft Sales and Leasing Co. 3.11+ Certificate of Incorporation of Evergreen Aviation Ground Logistics Enterprise, Inc., filed December 6, 1984. 3.12+ Certificate of Amendment of Certificate of Incorporation of Evergreen Aviation Ground Logistics Enterprise, Inc., filed July 11, 1986. 3.13+ Amended and Restated By-Laws of Evergreen Aviation Ground Logistics Enterprise, Inc. 3.14+ Articles of Incorporation of Evergreen Equity, Inc., filed on February 20, 1984. 3.15+ Amended and Restated Bylaws of Evergreen Equity, Inc. 3.16+ Restated Certificate of Incorporation of Evergreen Helicopters of Alaska, Inc., filed March 31, 1976. 3.17+ Amended and Restated Bylaws of Evergreen Helicopters of Alaska, Inc. 3.18+ Restated Articles of Incorporation of Evergreen Helicopters, Inc., filed October 22, 1975. 3.19+ Amended and Restated Bylaws of Evergreen Helicopters, Inc. 3.20+ Articles of Incorporation of Evergreen Helicopters International, Inc., filed November 17, 1989. 3.21+ Amended and Restated Bylaws of Evergreen Helicopters International, Inc. 3.22+ Articles of Incorporation of Evergreen Holdings, Inc., filed on April 15, 1997. 3.23+ Articles of Amendment to the Articles of Incorporation of Evergreen Holdings, Inc., filed on August 31, 1998. 95 3.24+ Amended and Restated By-Laws of Evergreen Holdings, Inc. 3.25+ Articles of Incorporation of Evergreen International Airlines, Inc., filed April 16, 1974. 3.26+ Articles of Amendment to the Articles of Incorporation of Evergreen International Airlines, Inc., filed October 16, 1975. 3.27+ Articles of Amendment to the Articles of Incorporation of Evergreen International Airlines, Inc., filed February 25, 1993. 3.28+ Articles of Amendment to the Articles of Incorporation of Evergreen International Airlines, Inc., filed May 14, 2003. 3.29+ Amended and Restated Bylaws of Evergreen International Airlines, Inc. 3.30+ Certificate of Incorporation of Sys-tems LogistiX, filed June 1, 2001. 3.31+ Certificate of Amendment of Certificate of Incorporation of Sys-tems LogistiX, filed June 6, 2003. 3.32+ Amended and Restated By-Laws of Sys-tems LogistiX, Inc. 3.33+ Second Amended and Restated Trust Agreement, dated as of September 29, 1995, among Wilmington Trust Company, as owner trustee, 747 Inc., Delford M. Smith, and King, Christian Inc. 3.34+ Amendment to the Second Amended and Restated Trust Agreement, dated as of May 8, 2003, among Wilmington Trust Company, as owner trustee, Delford M. Smith and Evergreen International Aviation, Inc. 3.35+ Second Amendment to the Second Amended and Restated Trust Agreement, dated as of January 14, 2004, among the Wilmington Trust Company, Evergreen International Aviation, Inc. and Delford M. Smith. 4.1+ Indenture, dated as of May 16, 2003, by and among Evergreen International Aviation, Inc., Evergreen Holdings, Inc., the initial subsidiary guarantors named therein and Bank One, N.A., as trustee. 4.2+ Registration Rights Agreement, dated as of May 16, 2003, by and among Evergreen International Aviation, Inc., the guarantors named therein, Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and PNC Capital Markets, Inc. 4.3+ Form of Evergreen International Airlines, Inc. 12% Senior Second Secured Note due 2010 (included in Exhibit 4.1). 10.1+ Credit, Guaranty and Security Agreement, dated as of May 16, 2003, by and among Evergreen International Aviation, Inc., the guarantors named therein, PNC Bank, National Association and GE Capital Public Finance, Inc. 10.2+ Security Agreement, dated as of May 16, 2003, by and among Evergreen International Aviation, Inc., the guarantors named therein and Bank One, N.A., as trustee 10.3+ Intercreditor Agreement, dated as of May 16, 2003, by and between PNC Bank, National Association and Bank One, N.A. 10.4+ AMC Award/Contract No. F11626-03-D-0024, effective as of October 1, 2003, issued by HQ MC/DOYAI to North American Airlines Contractor Team. 10.5+ Employment Agreement, dated as of April 30, 2003, by and between Evergreen International Aviation, Inc. and Delford M. Smith. 96 10.6+ Amended Lease, dated as of June 12, 1992, by and between Pinal County and Evergreen Air Center, Inc. 10.7+ Amendment of Correction to Amended Lease, dated July 1, 1998, by and between Pinal County and Evergreen Air Center, Inc. 10.8+ Second Amendment to Amended Lease, dated August 16, 2000, by and between Pinal County and Evergreen Air Center, Inc. Amended Lease, entered into on June 12, 1992, by and between Pinal County and Evergreen Air Center, Inc. 10.9+ United States Postal Service Solicitation for Air Terminal Handling Services, Solicitation No. HQ 2001-12, Shared Network-SNET for Contract Term August 27, 2001 - August 26, 2006. 10.10+ Amendment 1 to United States Postal Service Solicitation for Air Terminal Handling Services, Solicitation HQ-2001-12, dated April 27, 2001. 10.11+ Amendment 2 to United States Postal Service Solicitation for Air Terminal Handling Services, Solicitation HQ-2001-12, dated May 4, 2001. 10.12+ Amendment 3 to United States Postal Service Solicitation for Air Terminal Handling Services, Solicitation HQ-2001-12, dated May 11, 2001. 10.13+ Amendment 4 to United States Postal Service Solicitation for Air Terminal Handling Services, Solicitation HQ-2001-12, dated May 17, 2001. 10.14+ Amendment 5 to United States Postal Service Solicitation for Air Terminal Handling Services, Solicitation HQ-2001-12, dated May 21, 2001. 10.15+ Amendment 1 to Transportation Services Contract (Contract No. SNET-01-GLR) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Great Lakes/Midwest region). 10.16+ Amendment 2 to Transportation Services Contract (Contract No. SNET-01-GLR) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Great Lakes/Midwest region). 10.17+ Amendment 3 to Transportation Services Contract (Contract No. SNET-01-GLR) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Great Lakes/Midwest region). 10.18+ Amendment 1 to Transportation Services Contract (Contract No. SNET-01-PR) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Pacific region). 10.19+ Amendment 2 to Transportation Services Contract (Contract No. SNET-01-PR) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Pacific region). 10.20+ Amendment 3 to Transportation Services Contract (Contract No. SNET-01-PR) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Pacific region). 10.21+ Amendment 1 to Transportation Services Contract (Contract No. SNET-01-SER) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Southeast region). 97 10.22+ Amendment 2 to Transportation Services Contract (Contract No. SNET-01-SER) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Southeast region). 10.23+ Amendment 3 to Transportation Services Contract (Contract No. SNET-01-SER) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 8/27/01 - 8/26/06 (Southeast region). 10.24+ Amendment No. 58 to Transportation Services Contract (Contract No. TNET-93-01) by and between the United States Postal Service and Evergreen Aviation Ground Logistics Enterprise, Inc. for Contract Term 9/7/02 - 9/10/04 (Indianapolis). 10.25+ Secured Loan Agreement, dated as of May 7, 1997, among Finova Capital Corporation as Lender, Wilmington Trust Company, in its capacity as Owner Trustee, as Borrower, and 747 Inc., Delford M. Smith and King, Christian Inc. as Owner Participants. 10.26+ Amendment Agreement, dated as of May 9, 2003, among Finova Capital Corporation, Wilmington Trust Company, 747 Inc., Delford M. Smith and King Christian, Inc. 10.27+ Second Amended and Restated Lease Agreement, dated as of September 29, 1995 between Wilmington Trust Company and Evergreen International Airlines, Inc. 10.28+ Third Amendment to Lease Agreement, dated as of May 7, 1997, between Wilmington Trust Company and Evergreen International Airlines, Inc. 10.29+ Guaranty and Subordination Agreement, dated as of May 7, 1997, for the benefit of Wilmington Trust Company by Evergreen International Aviation, Inc. 10.30+ First Priority Chattel Mortgage and Security Agreement, dated May 7, 1997, between Wilmington Trust Company and Finova Capital Corporation. 10.31+ Loan Agreement, dated as of August 22, 1997, by and between Evergreen International Airlines, Inc. and UT Finance Corporation 10.32+ Security Agreement, dated as of December 10, 1997, by and between Evergreen Aviation Ground Logistics Enterprise, Inc. and Heller Financial, Inc. 10.33+ WCMA Reducing Revolver Loan Agreement No .54F-07164, dated as of August 12, 2003, by and between Merrill Lynch Business Financial Services, Inc. and Evergreen Aircraft Sales and Leasing Co. 10.34+ WCMA Reducing Revolver Loan Agreement No. 54F-07230, dated as of April 25, 2001 between Evergreen International Airlines, Inc., and Merrill Lynch Business Financial Services, Inc. 10.35+ Amendment to WCMA Reducing Revolver Loan Agreement No. 54F-07230, April 23, 2003, by and between Merrill Lynch Business Financial Services Inc. and Evergreen International Airlines, Inc., Evergreen Aircraft Sales and Leasing, Co. and Evergreen International Aviation, Inc. 10.36+ First Amendment to Credit, Guaranty and Security Agreement, dated as of August 14, 2003, by and among Evergreen International Aviation, Inc., the subsidiaries listed on the signature page thereto, Evergreen Holdings, Inc., 1986 Trust, Evergreen Aircraft Trust, PNC Bank, National Association and GE Capital Public Finance, Inc. 10.37+ Second Amendment to Credit, Guaranty and Security Agreement, dated as of August 15, 2003, by and among Evergreen International Aviation, Inc., the subsidiaries listed on the signature page thereto, Evergreen Holdings, Inc.,1986 Trust, Evergreen Aircraft Trust, PNC Bank, National Association and GE Capital Public Finance, Inc. 98 10.38+ Amendment 6 to United States Postal Service Solicitation for Air Terminal Handling Services, Solicitation HQ-2001-12, dated June 28, 2001. 10.39+ Amendment to Letter Agreement, effective as of April 30, 2003, by and between Delford M. Smith and Evergreen International Aviation, Inc. 10.40+ Third Amendment to Credit, Guaranty and Security Agreement, dated as of October 14, 2003, by and among Evergreen International Aviation, Inc., the subsidiaries listed on the signature page thereto, Evergreen Holdings, Inc., 1986 Trust, Evergreen Aircraft Trust, PNC Bank, National Association and GE Capital Public Finance, Inc. 10.41+ Amendment to Loan Agreement, dated as of December 1, 2003, by and between Evergreen International Airlines, and UT Finance Corporation. 10.42+ First Amendment to Security Agreement, dated as of February 25, 2004, by and among Evergreen International Aviation, Inc., Evergreen Holdings, Inc., the subsidiary guarantors party thereto and J.P. Morgan Trust Company, National Association. 10.43+ Fourth Amendment to Credit, Guaranty and Security Agreement, dated as of February 24, 2004, by and among Evergreen International Aviation, Inc., Evergreen Holdings, Inc., the subsidiaries listed on the signature pages thereto, the 1986 Trust, PNC Bank, National Association, as administrative agent, and GE Capital Public Finance, Inc. as documentation agent. 10.44+ Loan and Security Agreement by and among Evergreen International Aviation, Inc. and Each of Its Subsidiaries that are Signatories Hereto, as Borrowers, the Lenders that are Signatories Hereto, as the Lenders, and Wells Fargo Foothill, Inc., as the Arranger and Administrative Agent, dated as of May 13, 2004. 10.45+ Letter Agreement by and between Merrill Lynch Business Financial Services, Inc. and Evergreen Aircraft Sales and Leasing Co., dated as of May 12, 2004. 10.46+ Intercreditor Agreement, dated as of May 13, 2004, by and between JP Morgan Trust Company, National Association, as successor to Bank One, National Association, a national banking association, and Wells Fargo Foothill, Inc., a California corporation. 12.1+ Statement regarding the computation of ratio of earnings to fixed charges for Evergreen Holdings, Inc. 21.1+ Subsidiaries of Evergreen Holdings, Inc. 31.1* Certification of President pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. + Previously filed. 99