Registration of Securities Issued in a Business-Combination Transaction — Form S-4 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-4 Standard Aero Holdings, Inc. S-4 HTML 1.54M
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, HTML 312K
Liquidation or Succession
3: EX-2.2 Plan of Acquisition, Reorganization, Arrangement, HTML 119K
Liquidation or Succession
4: EX-2.3 Plan of Acquisition, Reorganization, Arrangement, HTML 235K
Liquidation or Succession
5: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 27K
14: EX-3.10 Articles of Incorporation/Organization or By-Laws HTML 26K
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31: EX-3.27 Articles of Incorporation/Organization or By-Laws HTML 133K
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7: EX-3.3 Articles of Incorporation/Organization or By-Laws HTML 23K
34: EX-3.30 Articles of Incorporation/Organization or By-Laws HTML 58K
35: EX-3.31 Articles of Incorporation/Organization or By-Laws HTML 86K
8: EX-3.4 Articles of Incorporation/Organization or By-Laws HTML 25K
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12: EX-3.8 Articles of Incorporation/Organization or By-Laws HTML 25K
13: EX-3.9 Articles of Incorporation/Organization or By-Laws HTML 23K
36: EX-4.1 Instrument Defining the Rights of Security Holders HTML 554K
37: EX-4.2 Ex-4.1 HTML 49K
38: EX-4.3 Instrument Defining the Rights of Security Holders HTML 56K
39: EX-4.4 Instrument Defining the Rights of Security Holders HTML 50K
40: EX-4.5 Instrument Defining the Rights of Security Holders HTML 44K
41: EX-4.7 Instrument Defining the Rights of Security Holders HTML 97K
42: EX-4.8 Instrument Defining the Rights of Security Holders HTML 200K
43: EX-10.1 Material Contract HTML 470K
51: EX-10.10 Material Contract HTML 31K
52: EX-10.11 Material Contract HTML 34K
53: EX-10.12 Material Contract HTML 30K
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55: EX-10.14 Material Contract HTML 30K
56: EX-10.15 Material Contract HTML 81K
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44: EX-10.2 Material Contract HTML 147K
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50: EX-10.9 Material Contract HTML 34K
62: EX-12.1 Statement re: Computation of Ratios HTML 30K
63: EX-21.1 Subsidiaries of the Registrant HTML 24K
64: EX-23.7 Consent of Experts or Counsel HTML 23K
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check
the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum
Amount of
Title of Each Class of
Amount to be
Offering Price
Aggregate
Registration
Securities to be Registered
Registered
per Note(1)
Offering Price
Fee
81/4% Senior
Subordinated Notes Due 2014(2)
$200,000,000
100.0%
$200,000,000
$23,540.00
Guarantees of the
81/4% Senior
Subordinated Notes due 2014(3)
N/A
N/A
N/A
N/A
(1)
Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(f) of the Securities Act.
(2)
The
81/4% Senior
Subordinated Notes due 2014 will be the obligations of Standard
Aero Holdings, Inc.
(3)
Each of Standard Aero (US), Inc.; Standard Aero (US) Legal,
Inc; Standard Aero, Inc.; Standard Aero Materials, Inc.;
Standard Aero (San Antonio) Inc.; Standard Aero (Alliance)
Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company;
3091782 Nova Scotia Company; 3091783 Nova Scotia Company;
Standard Aero Limited; Not FM Canada Inc. and Standard Aero
Redesign Services Inc. will guarantee on an unconditional basis
the obligations of Standard Aero Holdings, Inc. under the
81/4% Senior
Subordinated Notes due 2014. Pursuant to Rule 457(n), no
additional registration fee is being paid in respect of the
guarantees. The guarantees are not traded separately.
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are
not soliciting an offer to buy these securities in any state
where the offer or sale is not
permitted.
$200,000,000 principal amount of its
81/4% Senior
Subordinated
Notes due 2014, which have been registered under the
Securities Act, for any and all of its outstanding
81/4% Senior
Subordinated Notes due 2014
We are offering to exchange all of our outstanding
81/4% senior
subordinated notes due 2014, which we refer to as the old notes,
for new
81/4% senior
subordinated notes due 2014, in an exchange transaction that is
being registered hereby. We refer to these new notes as the
exchange notes, and together with the old notes, the notes. The
terms of the exchange notes are identical to the terms of the
old notes except that the transaction in which you may elect to
receive the exchange notes has been registered under the
Securities Act of 1933 and, therefore, the exchange notes are
freely transferable. We will pay interest on the notes on
March 1 and September 1 of each year. The first
interest payment was made on March 1, 2005. The notes will
mature on September 1, 2014.
Before September 1, 2009, we may redeem some or all of the
notes, subject to payment of a make-whole premium. On or after
September 1, 2009, we may redeem some or all of the notes
at the redemption prices set forth under “Description of
the Exchange Notes — Optional Redemption.” In
addition, at any time prior to September 1, 2007, we may
also redeem up to 35% of the original principal amount of the
notes using the proceeds of certain equity offerings at 108.25%
of the principal amount of notes redeemed, plus accrued and
unpaid interest and any additional interest as described in
“Description of the Exchange Notes — Optional
Redemption.” If we sell certain of our assets or experience
specific kinds of changes in control, we must offer to purchase
the notes.
The principal features of the exchange offer are as follows:
•
The exchange offer expires at 5:00 p.m., New York City
time,
on ,
2005, unless extended.
•
All old notes that are validly tendered and not validly
withdrawn prior to the expiration
of the
exchange offer will be exchanged for exchange notes.
•
You may withdraw tendered old notes at any time prior to the
expiration of the exchange offer.
•
The exchange of old notes for exchange notes pursuant to the
exchange offer will not be a taxable event for U.S. federal
income tax purposes.
•
We will not receive any proceeds from the exchange offer.
•
We do not intend to apply for listing of the exchange notes on
any securities exchange or automated quotation system.
Broker-dealers receiving exchange notes in exchange for old
notes acquired for their own account through market-making or
other trading activities must deliver a prospectus in any resale
of the exchange notes.
Investing in the notes involves risks. See “Risk
Factors” beginning on page 13.
Neither the U.S. Securities and Exchange Commission nor
any other federal or state agency has approved or disapproved of
these securities to be distributed in the exchange offer, nor
have any of these organizations determined that this prospectus
is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus
is ,
2005.
Each broker-dealer that receives the exchange notes for its own
account pursuant to the exchange offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
exchange notes. The letter of transmittal delivered with this
prospectus states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it
is an “underwriter” within the meaning of the
Securities Act of 1933. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired by
such broker-dealer as a result of market-making activities or
other trading activities. We have agreed that, for a period of
not less than 180 days following the effective date of the
registration statement, of which this prospectus is a part, we
will make this prospectus available to any broker-dealer for use
in connection with any such resale. See “Plan of
Distribution.”
We have not authorized any dealer, salesman or other person
to give any information or to make any representation other than
those contained or incorporated by reference in this prospectus.
You must not rely upon any information or representation not
contained or incorporated by reference in this prospectus as if
we had authorized it. This prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any
securities other than the registered securities to which it
relates, nor does this prospectus constitute an offer to sell or
a solicitation of an offer to buy securities in any jurisdiction
to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
This summary highlights important information contained
elsewhere in this prospectus. Because this is only a summary, it
does not contain all of the information that may be important to
you. This prospectus includes specific terms of the exchange
offer, as well as information regarding our business and
detailed financial data. Please review this prospectus in its
entirety, including the information set forth under the heading
“Risk Factors,” the financial statements and related
notes and other financial data included herein, before making an
investment decision. Unless otherwise noted, the terms
“we,”“us,”“our” and “our
company” refer to Standard Aero Holdings, Inc. and its
subsidiaries.
On August 24, 2004, we acquired the maintenance, repair
and overhaul, or MRO, business of Dunlop Standard Aerospace
Group Limited (which we refer to as Dunlop Standard or
Predecessor). We refer to that transaction as the
“Acquisition.” For more information relating to the
Acquisition, see “The Acquisition.” We are a wholly
owned subsidiary of Standard Aero Acquisition Holdings, Inc.,
which like us, is a corporation formed at the direction of The
Carlyle Group.
Prior to the Acquisition, the MRO business of Dunlop Standard
was not operated as a stand-alone business, but as part of
Dunlop Standard’s broader operations. Due to the
Acquisition, and the resultant application of purchase
accounting, Dunlop Standard’s pre-Acquisition combined
financial statements and our post-Acquisition consolidated
financial statements have been prepared on different bases of
accounting and therefore are not necessarily comparable. In the
presentation of our results of operations and the discussion of
our business in this prospectus, the period from January 1,2004 through August 24, 2004 is referred to as the 2004
Predecessor Period and the period from August 25, 2004
through December 31, 2004 is referred to as the 2004
Post-Acquisition Period. Financial results for the 2004
Predecessor Period and the 2004 Post-Acquisition Period have
sometimes been combined in this Prospectus for convenience of
discussion and are together referred to as “combined
2004.”
Our Company
We are a leading independent provider of aftermarket MRO
services for gas turbine engines used primarily for military,
regional and business aircraft. We repair and overhaul a wide
range of aircraft and industrial engines and provide our
customers with comprehensive, value-added maintenance and
redesign solutions. For the year ended December 31, 2004,
we generated combined 2004 revenues of $793.5 million. For
the 2004 Predecessor period our income from operations was
$54.0 million and for the 2004 Post-Acquisition period our
income from operations was $7.4 million. From
January 1, 2001 through December 31, 2004, our
revenues increased at a compound annual growth rate of 22.0%.
We believe we are differentiated from our competitors and well
positioned for growth as a result of our long-term customer
relationships, our advanced engine maintenance expertise, our
parts repair technology, our rapid service turnaround times, the
substantial investments we have made in our facilities, the
service authorizations that we have obtained from original
equipment manufacturers, or OEMs, and the large and growing
installed base of engines that we service. We generated
approximately 89.8% of our combined 2004 revenues from servicing
engine platforms for which we believe we had the largest or
second-largest worldwide market share among all service
providers. Additionally, 51.8% of our combined 2004 revenues
were generated from customers under long-term contracts.
Generally, manufacturer specifications, government regulations
and military maintenance regimens require that aircraft engines
undergo MRO servicing at regular intervals or upon the
occurrence of certain events. As a result, we believe that the
market for MRO services is less cyclical than other sectors of
the aerospace industry related to the manufacture of new
aircraft.
Our comprehensive MRO services include scheduled and unscheduled
engine MRO and accessory shop visits, on-wing and field service
support, engine and accessory reliability management tools,
spare engine and component support, proprietary repair
processes, custom build specifications and fleet management.
Our Aviation MRO services generated combined 2004 revenues of
$758.0 million, which represented 95.5% of our combined
2004 revenues. Revenues generated by our Aviation MRO services
have increased significantly over the last four years, from
$416.6 million in 2001 to combined 2004 revenues of
$758.0 million. Several contracts and relationships have
driven this growth.
CF34 and AE3007 authorizations. We are the only OEM
authorized MRO service provider for both of the leading regional
jet engines, the Rolls-Royce AE3007, used primarily on Embraer
regional and business jets, and the General Electric CF34, used
primarily on Bombardier regional and business jets. We believe
that the AE3007 and CF34 engines represent significant growth
opportunities for our company. In 2001, we obtained an
authorization from General Electric to be the first authorized
independent MRO service provider for the CF34 engine.
Kelly Air Force Base contract. We service T56 and AE2100
engines for the U.S. Air Force under a contract with Kelly
Aviation Center LP, a partnership between Lockheed Martin and
General Electric. This contract, which we refer to as the Kelly
Air Force Base contract, was awarded in 1999 and we have been
granted extensions to February 2007. In October 2003, the scope
of our Kelly Air Force Base contract was expanded to include
parts and materials used in the MRO process.
U.S. Navy T56 contract. In December 2003, we secured
the engine MRO contract for the U.S. Navy fleet of
T56-powered aircraft, establishing us as the sole depot-level
provider of T56 support for the U.S. Navy. Our Navy T56
contract began generating revenues in the second quarter of 2004
and contributed approximately $30.3 million to our combined 2004
revenues. We expect this contract to be renewed annually for the
next four years and to generate approximately
$180.0 million in revenues over its life.
U.S. Army T703 contract. In July 2004, we were
awarded a contract with the U.S. Army for the repair and
overhaul of Rolls-Royce T703 engines (a military variant of the
Model 250), which power U.S. Army helicopters. This
contract was awarded for a five-year term, and we expect this
contract to generate approximately $40 million in total revenues
during the remainder of its term.
We believe that opportunities to provide MRO services on engines
used in military aircraft and regional jets will continue to
drive our growth for several reasons. In recent years, the
U.S. military and other militaries around the world have
increasingly outsourced engine MRO services to private
enterprises. This trend has grown as the U.S. and other
militaries seek the operating efficiencies of commercial MRO
practices. Engine MRO services provided to U.S. military
customers are generally performed at large, dedicated
facilities, or depots. In its 2004 fiscal year, the
U.S. Department of Defense spent approximately
$24 billion on depot-level maintenance, which refers to
major repairs or overhauls, of which nearly 50% was outsourced
to the private sector. Moreover, the average age of
U.S. military aircraft is approximately 20 years and
increasing, driven by the low replacement rate and reduced new
aircraft procurement spending during the 1990s. We believe the
aging of the U.S. military aircraft fleet will continue to
result in an increased need for MRO services.
We also believe that the AE3007 and CF34 engines represent
significant growth opportunities for us. These engines were
placed on approximately 98% of new regional jets delivered in
2003. We have been a Rolls-Royce authorized service provider for
the AE3007 since 1992 and we estimate that we achieved
approximately 50% share of the worldwide MRO market for this
engine in 2004. In 2001, we obtained a 10-year authorization
from General Electric to be the first authorized independent MRO
service provider for the CF34 engine. In 2002, after substantial
investment, our CF34 MRO facility became operational. We
anticipate that MRO service requirements for both of these
engines will increase significantly over the next several years
as the hours of operation across the installed base of these
engines increase and as these engines, particularly the CF34,
reach their first major maintenance intervals. During the fourth
quarter of 2004, we signed an exclusive contract with SkyWest
Airlines to service their fleet of CF34-8 engines that power
their new CRJ-700 regional jets. We expect that this contract
will start to generate revenues in 2007 and will generate
approximately $300 million of revenues during its 16-year
term.
We expect that demand for MRO services in the regional jet
market will continue to increase and that we are well positioned
to benefit from this growth. The regional jet market has grown
dramatically since the introduction of regional jets in 1992.
Regional jets are a significant, and the fastest growing,
portion of the market for commercial aircraft. Regional airlines
revenue passenger miles increased from 1.9 billion in 1992
to 55.5 billion in 2004, representing a 12-year compound
annual growth rate of 32.7%. The regional jet fleet is projected
to grow at an annual rate of 7% through 2014. This growth is
being driven by the economic benefits that airlines can realize
from regional jets, including replacing larger aircraft with
regional aircraft in order to more closely match seating
capacity with specific route demand and offering greater flight
frequency throughout the airlines’ route structures.
Embraer and Bombardier together lead the market for new regional
jets, with an estimated 99% combined share of new jet deliveries
in 2004. Because we are the only OEM authorized MRO service
provider for both the AE3007 and the CF34, the engines that
currently power all new Embraer and Bombardier regional jets, we
believe we are well positioned to capitalize on growth in
regional jets.
We also provide MRO services on engine platforms used in
non-aviation applications as well as comprehensive maintenance
service solutions, control systems upgrades and retrofits, and
engineering solutions to the power generation, mechanical drive,
and cogeneration markets. Additionally, following our successful
experience in redesigning the former Kelly Air Force Base we
started our Affordable Readiness Transformation, or ART,
business in order to respond to requirements of the military for
redesign of certain maintenance facilities and practices. Since
that time, we have broadened the reach of our ART business to
include services relating to the design and implementation of
operational redesigns to non-military MRO operations as well.
The following table provides summary information regarding the
primary engine platforms we service:
Estimated
Product
Combined 2004
Life-Cycle
Engine
Revenues
Stage
Primary Aircraft Applications
(In millions)
Aviation
Rolls-Royce T56
$
342.6
Declining
Military aircraft including C-130 A-H Hercules; P-3 Orion; E-2C
Hawkeye
Rolls-Royce AE3007
$
151.3
Growth
Embraer RJ135/140/145 regional jets; Cessna Citation X business
jets
Rolls-Royce Model 250
$
49.4
Mature
Wide range of commercial and military helicopters, including the
Bell Jet Ranger and OH-58 Kiowa
Rolls-Royce AE2100
$
22.1
Growth
Military and regional aircraft including C-130J Hercules, C-27
Spartan, Saab 2000
General Electric CF34
$
36.0
Growth
Bombardier regional and business jets; Embraer ERJ170/190
regional jets
Pratt & Whitney Canada PT6A
$
65.7
Mature
Various business aviation turboprops including the Beechcraft
King Air series; T-6A Texan II military trainers
Pratt & Whitney Canada PW100
$
67.2
Mature
ATR, Embraer and Dash 8 series regional turboprops
Non Aviation
Rolls-Royce 501k
$
17.5
Mature
Developed from T56 for use in marine and industrial
applications, generally power generation.
We believe that our customer mix and the size of the installed
base of engines we service reduce our exposure to any single
market trend or development. We also believe that the following
strengths provide our business with a solid foundation for
future growth:
Industry leading service provider. We believe our MRO
services are among the best in the industry in terms of quality
of work, turnaround times, reliability after overhaul, technical
support and overall customer satisfaction. We also provide our
customers with a broad range of service offerings, including
advanced engine diagnosis and monitoring, fleet MRO maintenance
programs and spare engines so that customers can continue to
operate their aircraft during the MRO service.
Leading market positions. We rank in the top three in the
worldwide MRO market for each of the principal engine platforms
that we service and are the only OEM authorized provider to
service both the Rolls-Royce AE3007 and the General Electric
CF34 regional jet engines. We believe that our leading market
positions, extensive experience, existing OEM authorizations,
technology and expertise differentiate us from many of our
competitors in the eyes of our customers and play a key role in
securing additional long-term contracts and OEM authorizations.
High barriers to entry. The dynamics of the MRO industry
make it difficult for new competitors to enter the market. New
entrants to the industry must obtain extensive approvals and
certifications from both customers and government regulators and
demonstrate conformity with complex and sophisticated materials
tracking capabilities, quality system and production process
controls and other operational system requirements. Obtaining
these certifications, approvals and authorizations requires
sophisticated technological capabilities, experience-based
industry knowledge and substantial capital investment.
Long-term contracts and regulated maintenance requirements
provide strong cash flows. A substantial portion of our
revenues are generated under government-regulated maintenance
programs based on engine usage and operating cycles. We expect
that the large and growing installed base of many of the engines
we service and increasing hours used will combine to provide our
company with a base of recurring revenues. Furthermore, we are
the depot level provider to the U.S. military under
long-term contracts for the T56 and AE2100 engines, which power
the C-130 Hercules tactical transport aircraft. There is no
anticipated replacement in the foreseeable future for the C-130,
which is an important element of the U.S. military’s
tactical airlift capability. We believe that, due to the
C-130’s increasing age and important military function, MRO
services on the engines that power the C-130 will continue to be
a significant source of revenues for our company.
Well-positioned to benefit from favorable industry
trends. We believe that we are well positioned to benefit
from current industry trends. We believe that our success in
transforming the former Kelly Air Force Base facility positions
us to compete effectively for future military outsourcing and
MRO facility redesign contracts. Additionally, as the only
OEM-authorized provider of MRO services for both the Rolls-Royce
AE3007 and the General Electric CF34 engines, our investment in
advanced facilities to handle current and future MRO demand for
these engines positions us to benefit from anticipated growth in
the regional jet sector. Finally, we believe that we are
well-positioned to adapt our MRO capabilities and facilities for
additional applications without incurring significant additional
fixed costs
Experienced management team with proven track record. Our
operations are led by an executive management team that has been
working together for approximately 16 years and whose
members have an average of over 19 years of industry
experience. Our management team has a proven record in winning
new business, reducing costs, improving working capital
management and implementing other initiatives to increase
operating efficiencies.
Our principal objective is to continue to increase our revenues
and cash flows by building on our position as a leading provider
of MRO services for military, regional and business aircraft and
related redesign and non-aviation MRO. In pursuing this
objective, we intend to continue to target engine platforms with
large installed bases and blend high quality and efficient MRO
operations with innovative value-added services including
redesign services. Specifically, we intend to pursue the
following strategies:
Win new business. We will continue to focus on expanding
our market share in our existing engine programs and will
selectively seek to enter new MRO programs. We currently are
pursuing several engine MRO programs, including aircraft powered
by the Pratt & Whitney Canada PT6 and the Rolls-Royce
Model 250 engine that are used by the U.S. military. We are
also working to expand our ART business by actively seeking
opportunities to redesign military and commercial MRO
facilities. Additionally, we are seeking to take advantage of
our authorizations and our advanced MRO facilities by bidding on
numerous new contracts with regional aircraft operators and
pursuing new business with OEMs. We continue to leverage our
military, business aviation and regional airline customer
relationships to grow our core auxiliary power unit, or APU,
business and expand into new engine models. We believe that our
achievements under our military contracts, our relationships
with OEMs and our reputation for excellent quality and service
place us in a favorable position to obtain business servicing
additional engine platforms. We intend to capitalize on our
existing engine MRO competency to pursue additional growth
opportunities related to non-aviation engines used in the energy
sector.
Capitalize on our advanced facilities to increase cash
flow. We intend to capitalize on the significant investments
that we have made in our MRO facilities, including our new CF34
facility, our expanded AE3007 facility and our facilities at the
former Kelly Air Force Base. We believe that the capacity
available at these facilities positions us to handle increased
MRO volume without substantial additional investment. We also
intend to further distinguish ourselves from our competitors by
reducing our turnaround times and improving our parts inventory
and working capital management.
Pursue selected acquisition opportunities. We intend to
evaluate and pursue selected opportunities to acquire aerospace
and defense services businesses or energy service businesses.
Our objective is to identify acquisition opportunities that will
benefit our existing operations by enhancing economies of scale
and our technological strengths and by adding new customers,
services and product lines.
Market and Industry Data
This prospectus includes estimates of market share and industry
data and forecasts that we obtained from industry publications
and surveys and internal company surveys. Industry publications
and surveys generally state that the information contained
therein has been obtained from sources believed to be reliable,
but there can be no assurance as to the accuracy or completeness
of the information. We believe that information obtained from
these sources was accurate at the time of publication and is
accurate as of the date of this prospectus, however, we have not
independently verified any of the data from third-party sources
nor have we ascertained the underlying economic assumptions
relied upon therein. While we are not aware of any misstatements
regarding our market share or industry data and forecasts
presented herein, our estimates of this information involve
risks and uncertainties and are subject to change based on
various factors, including those discussed under the heading
“Risk Factors” in this prospectus.
On August 24, 2004, we completed an offering of
$200.0 million in aggregate principal amount of
81/4% senior
subordinated notes due 2014, which was exempt from registration
under the Securities Act of 1933, or the Securities Act.
Old Notes
Standard Aero Holdings, Inc. sold the old notes to
J.P. Morgan Securities Inc., Lehman Brothers, Inc. and
Credit Suisse First Boston LLC, the initial purchasers, on
August 20, 2004. The initial purchasers subsequently resold
the old notes to qualified institutional buyers pursuant to
Rule 144A under the Securities Act, to
non-U.S. persons outside the United States in reliance on
Regulation S under the Securities Act.
Registration Rights Agreement
In connection with the sale of the old notes, Standard Aero
Holdings, Inc. and the subsidiary guarantors, which together we
refer to as the guarantors, entered into a registration rights
agreement with the initial purchasers. Under the terms of that
agreement, we agreed to:
• use our reasonable best efforts to file a
registration statement for the exchange offer and the exchange
notes and have such registration statement remain effective
until the earlier of (i) 180 days after the closing of
the exchange offer or (ii) a date when all the old notes
have been sold pursuant to the registration statement;
• commence the exchange offer promptly after the
exchange offer registration statement is declared effective by
the Securities and Exchange Commission, or the SEC, and use our
reasonable efforts to complete the exchange offer within
360 days after the date on which the old notes were
purchased by the initial purchasers;
• use our reasonable best efforts to complete the
exchange offer not later than 30 business days after the
registration statement is declared effective by the SEC; and
• file a shelf registration statement for the resale
of the old notes, if necessary and use our reasonable best
efforts to cause such shelf registration statement to be
declared effective by the SEC.
If neither the exchange offer nor the shelf registration
statement are declared effective prior to August 15, 2005,
the annual interest rate on the notes will be increased by 1.0%
and shall remain at that increased rate until the exchange offer
is completed or the shelf registration statement, if required,
is declared effective by the SEC or the notes become freely
tradable under the Securities Act. The exchange offer is being
made pursuant to the registration rights agreement and is
intended to satisfy the rights granted under the registration
rights agreement, which rights terminate upon completion of the
exchange offer.
The following is a summary of the exchange offer. For a more
complete description of the terms of the exchange offer, see the
section entitled “The Exchange Offer” located
elsewhere in this prospectus.
Exchange Offer
$1,000 principal amount of exchange notes will be issued in
exchange for each $1,000 principal amount of old notes validly
tendered.
Resale
Based upon interpretations by the staff of the SEC set forth in
no-action letters issued to unrelated third parties, we believe
that the exchange notes may be offered for resale, resold or
otherwise transferred to you without compliance with the
registration and prospectus delivery requirements of the
Securities Act of 1933, unless you:
• are an “affiliate” of ours within the
meaning of Rule 405 under the Securities Act;
• are a broker-dealer who purchased the old notes
directly from us for resale under Rule 144A or any other
available exemption under the Securities Act of 1933;
• acquired the exchange notes other than in the
ordinary course of your business; or
• have an arrangement with any person to engage in the
distribution of exchange notes.
However, we have not submitted a no-action letter and there can
be no assurance that the SEC will make a similar determination
with respect to the exchange offer. Furthermore, in order to
participate in the exchange offer, you must make the
representations set forth in the letter of transmittal that we
are sending you with this prospectus.
Expiration Date
The exchange offer will expire at 5:00 p.m., New York City
time,
on ,
2005, which we refer to as the expiration date, unless we, in
our sole discretion, extend it.
Conditions to the Exchange Offer
The exchange offer is subject to certain customary conditions,
some of which may be waived by us. See “The Exchange
Offer — Conditions to the Exchange Offer.”
Procedure for Tendering Old Notes
If you wish to accept the exchange offer, you must complete,
sign and date the letter of transmittal, or a copy of the letter
of transmittal, in accordance with the instructions contained in
this prospectus and in the letter of transmittal, and mail or
otherwise deliver the letter of transmittal, or the copy,
together with the old notes and any other required
documentation, to the exchange agent at the address set forth in
this prospectus and in the letter of transmittal.
We will accept for exchange any and all old notes that are
properly tendered in the exchange offer prior to the expiration
date. The exchange notes issued in the exchange offer will be
delivered promptly following the expiration date. See “The
Exchange Offer — Terms of the Exchange Offer.”
If you are the beneficial owner of old notes registered in the
name of a broker, dealer, commercial bank, trust company or
other nominee and wish to tender in the exchange offer, you
should contact the person in whose name your notes are
registered and promptly instruct the person to tender on your
behalf. See “The Exchange Offer — Procedures for
Tendering.”
Guaranteed Delivery Procedures
If you wish to tender your old notes and time will not permit
your required documents to reach the exchange agent by the
expiration date, or the procedure for book-entry transfer cannot
be completed on time, you may tender your notes according to the
guaranteed delivery procedures. For additional information, you
should read the discussion under “The Exchange
Offer — Guaranteed Delivery Procedures.”
Withdrawal Rights
The tender of the old notes pursuant to the exchange offer may
be withdrawn at any time prior to 5:00 pm, New York City time,
on the expiration date.
Acceptance of Old Notes and Delivery of Exchange Notes
Subject to customary conditions, we will accept old notes which
are properly tendered in the exchange offer and not withdrawn
prior to the expiration date. The exchange notes will be
delivered promptly following the expiration date.
Effect of Not Tendering
Any old notes that are not tendered or that are tendered but not
accepted will remain subject to the restrictions on transfer.
Since the old notes have not been registered under the federal
securities laws, they bear a legend restricting their transfer
absent registration or the availability of a specific exemption
from registration. Upon completion of the exchange offer, we
will have no further obligations, except under limited
circumstances, to provide for registration of the old notes
under the federal securities laws. See “The Exchange
Offer — Consequences of Failure to Exchange.”
Interest on the Exchange Notes and the Old Notes
The exchange notes will bear interest from the most recent
interest payment date to which interest has been paid on the
notes. Interest on the old notes accepted for exchange will
cease to accrue upon the issuance of the exchange notes.
Certain U.S. Federal Income Tax Considerations
The exchange of old notes for exchange notes by tendering
holders will not be a taxable exchange for federal income tax
purposes. See “Certain United States Federal Income Tax
Consequences.”
Exchange Agent
Wells Fargo Bank Minnesota, National Association, the trustee
under the indenture, is serving as exchange agent in connection
with the exchange offer.
Use of Proceeds
We will not receive any proceeds from the issuance of exchange
notes pursuant to the exchange offer.
The notes will be redeemable at our option, in whole or in part,
at any time on or after September 1, 2009, at the
redemption prices set forth in this prospectus, together with
accrued and unpaid interest, if any, to the date of redemption.
Additionally, we may redeem some or all of the notes at any time
prior to September 1, 2009 at a price equal to 100% of the
principal amount of the notes plus a “make-whole”
premium set forth under “Description of Notes —
Optional Redemption.”
Optional Redemption After Equity Offerings
At any time prior to September 1, 2007, we may redeem up to
35% of the original principal amount of the notes with the
proceeds of one or more equity offerings of our common shares or
a capital contribution, at a redemption price of 108.250% of the
principal amount of the notes, together with accrued and unpaid
interest, if any, to the date of redemption.
Change of Control
Upon the occurrence of a change of control, we will be required
to offer to purchase all or a portion of the notes at a price
equal to 101% of their principal amount, together with accrued
and unpaid interest, if any, to the date of purchase.
Guarantees
The notes are unconditionally guaranteed, jointly and severally,
by certain of our current and future subsidiaries.
Ranking
The notes:
• will be our general unsecured obligations;
• will be subordinated in right of payment to all of
our existing and future senior indebtedness, including our
obligations under our senior credit facilities;
• will be pari passu in right of payment with all of
our future senior subordinated indebtedness; and
• will be structurally subordinated to all of the
existing and future liabilities (including trade payables) of
each of our subsidiaries that do not guarantee the notes.
Covenants
The indenture contains covenants that limit what we and our
restricted subsidiaries (as defined under the heading
“Description of the Exchange Notes”) may do. The
indenture contains covenants that limit our ability to:
• incur or guarantee additional indebtedness;
• issue redeemable stock and preferred stock;
• repurchase capital stock or make other restricted
payments;
• redeem debt that is junior in right of payment to
the notes;
• create liens;
• sell or otherwise dispose of assets, including
capital stock of subsidiaries;
• enter into agreements that restrict dividends from
subsidiaries;
• enter into mergers or consolidations;
• enter into transactions with affiliates;
• incur debt senior to the notes but junior to other
indebtedness;
• enter into new lines of business; and
• repurchase capital stock or make other restricted
payments.
These restrictions and prohibitions are subject to a number of
important qualifications and exceptions. See “Description
of the Exchange Notes — Certain Covenants.”
Risk Factors
Investment in the exchange notes involves risks. You should
carefully consider the information under the section entitled
“Risk Factors” and all other information included in
this prospectus before investing in the notes.
Additional Information
Standard Aero Holdings, Inc. is a Delaware corporation. Our
principal executive offices are currently located at 500-1780
Wellington Avenue, Winnipeg, Manitoba, Canada. Our telephone
number at that address is 204-987-8860 and our website is
located at www.standardaero.com.
The following table sets forth certain summary historical and
pro forma financial data including consolidated financial data
for the 2004 Post-Acquisition period (which are referred to in
the table below under the heading Successor) and the combined
financial data of the MRO division of Dunlop Standard (which are
referred to in the table under the heading Predecessor). The
financial data as of December 31, 2004 and for the 2004
Post-Acquisition Period have been derived from the audited
consolidated financial statements of Standard Aero Holdings,
Inc. included elsewhere in this prospectus as of such date and
for such period. The financial data for the 2004 Predecessor
period and the years ended December 31, 2003 and 2002 have
been derived from the audited combined financial statements of
the MRO division of Dunlop Standard included elsewhere in this
prospectus as of such date and for such periods. The financial
data as of December 31, 2002 have been derived from the
audited combined financial statements of the MRO division of
Dunlop Standard as of such date, which are not included
elsewhere in this prospectus. The unaudited pro forma data give
effect to the Acquisition as if it had occurred as of
January 1, 2004. The pro forma data do not purport to
represent what our results of operations would have been, or
will be for any future date or period, had the Acquisition
actually occurred on such date. You should read these data in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,”“Unaudited Pro Forma Combined Financial Data” and the
financial statements, including the related notes, appearing
elsewhere in this prospectus.
Year Ended December 31,
Pro Forma
Year Ended
August 25 -
January 1 -
December 31,
December 31,
August 24
2004
2004
2004
2003
2002
Successor
Predecessor
(In thousands, except ratios)
Statements of operations data:
Revenues
$
793,501
$
284,116
$
509,385
$
545,029
$
461,173
Operating expenses
Cost of revenues
(675,300
)
(251,099
)
(423,867
)
(456,058
)
(382,484
)
Selling, general and administrative expenses
(53,046
)
(22,400
)
(29,646
)
(39,783
)
(36,319
)
Amortization of intangible assets
(9,784
)
(3,262
)
(1,835
)
(2,752
)
(2,752
)
Total operating expenses
738,130
)
(276,761
)
(455,348
)
(498,593
)
(421,555
)
Income from operations
55,371
7,355
54,037
46,436
39,618
Interest expense
(34,762
)
(13,706
)
(4,835
)
(8,118
)
(11,689
)
(Loss) income before income taxes
20,609
(6,351
)
49,202
38,318
27,929
Benefit (provision) for income taxes
(5,066
)
3,143
(15,994
)
(13,322
)
(10,259
)
Net (loss) income
$
15,543
$
(3,208
)
$
33,208
$
24,996
$
17,670
Other financial data:
Capital expenditures, net(1)
$
6,385
$
11,710
$
16,417
$
29,194
Depreciation and amortization
9,124
14,229
19,685
18,928
Net cash provided by operating activities
19,819
36,441
64,299
1,878
Net cash used in investing activities
(670,396
)
(11,598
)
(16,320
)
(28,895
)
Net cash provided by (used in) financing activities
Capital expenditures, net includes acquisition of
intangibles — licenses, acquisition of property, plant
and equipment, acquisition of rental assets and spare engines
less proceeds from disposal of rental assets and spare engines.
(2)
Ratio of earnings to fixed charges is calculated by dividing
income before income taxes plus fixed charges by fixed charges.
Fixed charges consist of interest expense and amortization of
deferred finance costs and an estimate of interest within rental
expense. Our earnings were inadequate to cover fixed charges for
the period from August 25, 2004 to December 31, 2004
by approximately $6.4 million.
(3)
Divisional equity includes the owner’s investment in the
division, accumulated earnings and certain inter-company
advances that represented investing and financing activities
related to the division.
You should carefully consider the risks described below as
well as the other information contained in this prospectus
before making a decision to participate in the exchange offer.
The risks described below are not the only risks facing us.
Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial may also materially
adversely affect our business, financial condition or results of
operations. Any of the following risks could materially
adversely affect our business, financial condition or results of
operations. In such case, you may lose all or part of your
original investment.
Risks Related to the Notes
Our substantial indebtedness could adversely affect our
ability to raise additional capital to fund our operations,
limit our ability to react to changes in the economy or our
industry and prevent us from fulfilling our obligations under
the notes.
We have a significant amount of indebtedness. As of
December 31, 2004, excluding $50 million of unused
commitments under our revolving credit facility, our total
indebtedness was $489.2 million (of which
$200.0 million consisted of the notes and the balance of
which consisted of debt senior to the notes).
Our high degree of leverage could have important consequences
for you. For example, it could:
•
make it more difficult for us to satisfy our obligations with
respect to the notes;
•
increase our vulnerability to a downturn in general economic and
industry conditions or in our business;
•
require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures, research and development efforts,
future business opportunities and other general corporate
purposes;
•
limit our flexibility in planning for, or reacting to market
conditions, including changes in our business and the industry
in which we operate and place us at a competitive disadvantage
compared to other providers of MRO services that have less debt;
•
restrict us from making strategic acquisitions or exploiting
business opportunities;
•
limit our ability to make capital expenditures that are
important to our growth and to our ability to maintain our
facilities in good working order and repair; and
•
limit, among other things, our ability to borrow additional
funds or dispose of assets.
The indenture governing the notes and our senior credit
facilities contains financial and other restrictive covenants
that limit our ability to engage in activities that may be in
our long term best interests. Our failure to comply with these
covenants could result in an event of default which, if not
cured or waived, could result in the acceleration of our debts.
If we default on our obligations to pay our indebtedness
we may not be able to make payments on the notes.
Any default under the agreements governing our indebtedness,
including a default under our senior credit facilities that is
not waived by the required lenders, and the remedies sought by
the holders of such indebtedness, could render us unable to pay
principal, premium, if any, and interest on the notes and result
in a substantial decrease in the market value of the notes. If
we are unable to generate sufficient cash flow and are otherwise
unable to obtain funds necessary to meet required payments of
principal, premium, if any, and interest on our indebtedness, or
if we otherwise fail to comply with the various covenants,
including financial and operating covenants, in the instruments
governing our indebtedness (including covenants in our indenture
and our senior credit facilities), we could be in default under
the terms of the
agreements governing such indebtedness, including our indenture
and our senior credit facilities. In the event of such a
default, the holders of such indebtedness could elect to declare
all the funds borrowed thereunder to be due and payable,
together with accrued and unpaid interest, the lenders under our
senior credit facilities could elect to terminate their
commitments thereunder, cease making further loans and institute
foreclosure proceedings against our assets, and we could be
forced into bankruptcy or liquidation. See “Description of
Senior Credit Facilities” and “Description of the
Exchange Notes.”
To service our indebtedness, we require a significant
amount of cash. Our ability to generate cash depends on many
factors beyond our control.
Our ability to make payments on and to refinance our
indebtedness, including the notes, and to fund our operations
depends on our ability to generate cash in the future. This, to
a certain extent, is subject to general economic, industry,
financial, competitive, legislative, regulatory and other
factors that are beyond our control.
Based on our current and anticipated levels of operations, we
believe our cash flow from operations, available cash and
available borrowings under our senior credit facilities will be
adequate to meet our future liquidity needs for at least the
foreseeable future.
We cannot assure you, however, that our business will generate
sufficient cash flow from operations or that future borrowings
will be available to us under our senior credit facilities in an
amount sufficient to enable us to pay our indebtedness,
including the notes, or to fund our other liquidity needs. We
may need to refinance all or a portion of our indebtedness,
including the notes on or before maturity. We cannot assure you
that we will be able to refinance any of our indebtedness,
including our senior credit facilities and the notes, on
commercially reasonable terms or at all.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to delay capital
expenditures, sell assets, seek additional capital or
restructure or refinance our indebtedness, including the notes.
These alternative measures may not be successful and may not
permit us to meet our scheduled debt service obligations. In the
absence of such operating results and resources, we could face
substantial liquidity problems and might be required to dispose
of material assets or operations to meet our debt service and
other obligations. Our senior credit facilities and the
indenture restrict our ability to dispose of assets and use the
proceeds from asset dispositions. We may not be able to
consummate those dispositions or to obtain the proceeds which we
could realize from them and these proceeds may not be adequate
to meet any debt service obligations then due. See
“Description of Senior Credit Facilities” and
“Description of the Exchange Notes.”
Despite current indebtedness levels, we and our
subsidiaries will be able to incur substantially more debt,
which would further exacerbate the risks associated with our
substantial leverage.
We and our subsidiaries will be able to incur substantial
additional indebtedness in the future because the terms of the
indenture governing the notes do not fully prohibit us or our
subsidiaries from doing so. If new indebtedness is added to our
and our subsidiaries’ current indebtedness levels, the
related risks that we and they face would be magnified. In
addition, the indenture governing the notes does not prevent us
from incurring obligations that do not constitute indebtedness,
but that could nevertheless further exacerbate the risks
associated with our substantial leverage.
Your right to receive payments on the notes and the
guarantees is subordinated to the borrowings under our senior
credit facilities and possibly all our future borrowings.
The notes and the related subsidiary guarantees rank behind all
of our and our subsidiary guarantors’ existing and future
senior indebtedness, including borrowings under our senior
credit facilities. As a result, upon any distribution to our
creditors or the creditors of the subsidiary guarantors in a
bankruptcy, liquidation or reorganization or similar proceeding
relating to us or the subsidiary guarantors or our or their
property, the holders of senior indebtedness of our company and
the subsidiary guarantors will be entitled
to be paid in full in cash before any payment may be made with
respect to the notes or the related subsidiary guarantees.
All payments on the notes and the subsidiary guarantees will be
blocked in the event of a payment default on our senior
indebtedness and may be blocked for up to 179 consecutive days
in the event of certain nonpayment defaults on certain of our
senior indebtedness.
In the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding relating to us or the
subsidiary guarantors, holders of the notes will participate
with trade creditors and all other holders of our and the
subsidiary guarantors’ senior subordinated indebtedness in
the assets remaining after we and the subsidiary guarantors have
paid all of our and their senior indebtedness. However, because
the indenture requires that amounts otherwise payable to holders
of the notes in a bankruptcy or similar proceeding be paid to
holders of senior indebtedness instead, holders of the notes may
receive less, ratably, than holders of trade payables in any
bankruptcy or similar proceeding. In any of these cases, we and
the subsidiary guarantors may not have sufficient funds to pay
all of our creditors, and holders of the notes may receive less,
ratably, than the holders of senior indebtedness.
As of December 31, 2004, the notes and the subsidiary
guarantees are subordinated to $289.2 million of senior
indebtedness and an additional $50.0 million would have
been available for borrowing as additional senior indebtedness
under the revolving credit portion of our senior credit
facilities, subject to certain conditions. We will be permitted
to borrow substantial additional indebtedness, including senior
indebtedness, in the future under the terms of the indenture.
Your ability to receive payments on these notes is junior
to those lenders who have a security interest in our
assets.
Our obligations under the notes and the related guarantees will
be unsecured, but our obligations under our senior credit
facilities are secured by an interest in substantially all of
our assets. If we are declared bankrupt or insolvent, or if we
default under our senior credit facilities, the lenders could
declare all of the funds borrowed thereunder, together with
accrued interest, immediately due and payable. If we are unable
to repay such indebtedness, the lenders could foreclose on the
pledged assets to the exclusion of holders of the notes and the
guarantees, even if an event of default exists under the
indenture at such time. Furthermore, if the lenders foreclose
and sell the equity interests in any subsidiary guarantor under
the notes, then that guarantor will be released from its
guarantee of the notes automatically and immediately upon such
sale. In any such event, because the notes will not be secured
by any of our assets, it is possible that there would be no
assets remaining from which claims of the holders of notes could
be satisfied or, if any assets remained, they might be
insufficient to satisfy such claims fully. See “Description
of Senior Credit Facilities.”
Restrictive covenants in our senior credit facilities and
the indenture governing the notes may restrict our ability to
pursue our business strategies.
The indenture governing the notes and our senior credit
facilities contain various covenants that limit our ability to
pursue our business strategies or to otherwise engage in
activities that may be in our long-term best interests
including, among other things, to:
•
incur, assume or guarantee additional indebtedness or contingent
obligations;
•
make restricted payments, including, without limitation, pay
dividends or make distributions to our stockholders, make loans
and redeem debt that is junior in right of payment to the notes;
enter into agreements that restrict dividends from subsidiaries;
•
change our business;
•
sell assets; and
•
acquire the assets of, or merge or consolidate with, other
companies or sell or otherwise dispose of substantially all of
our assets.
In addition, our senior credit facilities contain restrictive
covenants and require us to maintain specified financial ratios
and satisfy other financial tests. A failure by us to comply
with any of the covenants in the indenture, our senior credit
facilities or any other indebtedness could result in an event of
default under that indebtedness and could result in
cross-defaults under our other indebtedness, including the notes
and our senior credit facilities, which could permit the holders
to declare such indebtedness to be immediately due and payable.
If we are unable to repay those amounts, the lenders under our
senior credit facilities and our other secured indebtedness
could proceed against the collateral granted to them. Moreover,
as a result of the subordination provisions of the indenture,
holders of our senior indebtedness would be entitled to receive
payment in full before the holders of the notes would be
entitled to any payments. In any such case, we might not have
sufficient assets to repay our senior credit facilities and our
other indebtedness, including the notes. See “Description
of Senior Credit Facilities.”
Certain subsidiaries are not included as subsidiary
guarantors.
The guarantors of the notes will include only our restricted
U.S. and Canadian subsidiaries. However, the historical
consolidated and combined financial statements and the pro forma
combined financial data included in this prospectus include all
of our domestic and foreign subsidiaries. Our non-guarantor
subsidiaries generated approximately 9.7% of our combined 2004
revenues, and as of December 31, 2004 our non-guarantor
subsidiaries held approximately 8.7% of our total assets. In
addition, we will have the ability to designate certain of our
subsidiaries as unrestricted subsidiaries pursuant to the terms
of the indenture, and any subsidiary so designated will not be a
subsidiary guarantor of the notes.
Our non-guarantor subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the notes, or to make any funds
available therefor, whether by dividends, loans, distributions
or other payments. Any right that we or the subsidiary
guarantors have to receive any assets of any of the
non-guarantor subsidiaries upon the liquidation or
reorganization of those subsidiaries, and the consequent rights
of holders of notes to realize proceeds from the sale of any of
those subsidiaries’ assets, will be effectively
subordinated to the claims of that subsidiary’s creditors,
including trade creditors and holders of debt of that subsidiary.
We may not have the ability to raise the funds necessary
to finance any change of control offer required by the indenture
governing the notes.
Upon the occurrence of certain specific kinds of change of
control events, we will be required to offer to repurchase all
outstanding notes at 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase. However,
it is possible that we will not have sufficient funds at the
time of the change of control to make the required repurchase of
notes or that restrictions in our senior credit facilities will
not allow such repurchases. Accordingly, we may not be able to
satisfy our obligations to purchase your notes unless we are
able to refinance or obtain waivers under our senior credit
facilities. Our failure to repurchase the notes upon a change of
control would cause a default under the indenture and a
cross-default under the senior credit facilities. Our senior
credit facilities also provide that a change of control will be
a default that permits the lenders to accelerate the maturity of
borrowings thereunder. Any of our future debt agreements may
contain similar provisions. In addition, certain important
corporate events, such as leveraged recapitalizations, that
would increase the level of our indebtedness may not
constitute a “Change of Control” under the indenture
governing the notes. Therefore, if an event occurs that does not
constitute a “Change of Control,” we will not be
required to make an offer to repurchase the notes and you may be
required to continue to hold your notes despite the event. See
“Description of the Exchange Notes — Repurchase
at the Option of Holders — Change of Control.”
Our variable rate indebtedness subjects us to interest
rate risk, which could cause our debt service obligations to
increase significantly.
Certain of our borrowings, primarily borrowings under our senior
credit facilities, bear interest at variable rates and expose us
to interest rate risk. If interest rates increase, our debt
service obligations on the variable rate indebtedness would
increase even though the amount borrowed remained the same, and
our net income and cash flows would decrease. While we may enter
into agreements limiting our exposure, such agreements may not
offer complete protection from this risk.
Federal and state fraudulent transfer laws permit a court
to void the notes and the guarantees, and, if that occurs, you
may not receive any payments on the notes.
The issuance of the notes and the guarantees may be subject to
review under federal and state fraudulent transfer and
conveyance statues. While the relevant laws may vary from state
to state, under such laws the payment consideration will be a
fraudulent conveyance if (1) we paid the consideration with
the intent of hindering, delaying or defrauding creditors or
(2) we or any of our guarantors, as applicable, received
less than reasonably equivalent value or fair consideration in
return for issuing either the notes or a guarantee, and, in the
case of (2) only, one of the following is also true:
•
we or any of our guarantors were or was insolvent or rendered
insolvent by reason of the incurrence of the
indebtedness; or
•
payment of the consideration left us or any of our guarantors
with an unreasonably small amount of capital to carry on the
business; or
•
we or any of our guarantors intended to, or believed that we or
it would, incur debts beyond our or its ability to pay as they
mature.
If a court were to find that the issuance of the notes or a
guarantee was a fraudulent conveyance, the court could void the
payment obligations under the notes or such guarantee or further
subordinate the notes or such guarantee to presently existing
and future indebtedness of ours or such guarantor, or require
the holders of the notes to repay any amounts received with
respect to the notes or such guarantee. In the event of a
finding that a fraudulent conveyance occurred, you may not
receive any repayment on the notes. Further, the voidance of the
notes could result in an event of default with respect to our
other debt and that of our subsidiaries that could result in
acceleration of such debt.
Generally, an entity would be considered insolvent if, at the
time it incurred indebtedness:
•
the sum of its debts, including contingent liabilities, was
greater than the fair market value of all its assets; or
•
the present fair market value of its assets was less than the
amount that would be required to pay its probable liability on
its existing debts and liabilities, including contingent
liabilities, as they become absolute and mature; or
•
it could not pay its debts as they become due.
We cannot be certain as to the standards a court would use to
determine whether or not we or the guarantors were solvent at
the relevant time, or regardless of the standard that a court
uses, that the issuance of the notes and the guarantees would
not be subordinated to our or any guarantor’s other debt.
If the guarantees were legally challenged, any guarantee could
also be subject to the claim that, since the guarantee was
incurred for our benefit, and only indirectly for the benefit of
the guarantor, the obligations of the applicable guarantor were
incurred for less than fair consideration. A court could thus
void the obligations under the guarantees, subordinate them to
the applicable guarantor’s other debt or take other action
detrimental to the holders of the notes.
Your ability to transfer the exchange notes may be limited
by the absence of an active trading market, and we cannot assure
you that an active trading market for the exchange notes will
develop.
There is no established trading market for the exchange notes.
Although the initial purchasers have informed us that they
currently intend to make a market in the exchange notes, they
have no obligation to do so and may discontinue making a market
at any time without notice. Therefore, we cannot guarantee that
an active market for the exchange notes will develop or, if
developed, that it will continue.
We intend to apply for the exchange notes to be designated as
eligible for trading on PORTAL. However, we do not intend to
apply for listing of the exchange notes on any securities
exchange or for quotation through Nasdaq.
The liquidity of any market for the exchange notes will depend
upon the number of holders of the exchange notes, our
performance, the market for similar securities, the interest of
securities dealers in making a market in the exchange notes and
other factors. A liquid trading market may not develop for the
notes. If a market develops, the notes could trade at prices
that may be lower than the initial offering price of the notes.
The market price for the notes may be volatile.
Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility
in the prices of securities similar to the notes offered hereby.
The market for the exchange notes, if any, may be subject to
similar disruptions. Any such disruptions may adversely affect
the value of your exchange notes.
We are a holding company and may not have access to
sufficient cash to make payments on the notes.
We are a holding company with no direct operations. Our
principal assets are the equity interests we hold in our
operating subsidiaries. As a result, we are dependent upon
dividends and other payments from our subsidiaries to generate
the funds necessary to meet our outstanding debt service and
other obligations. Our subsidiaries may not generate sufficient
cash from operations to enable us to make principal and interest
payments on our indebtedness, including the notes. In addition,
any payments on dividends, distributions, loans or advances to
us by our subsidiaries could be subject to restrictions on
dividends or repatriation of earnings under applicable local law
and monetary transfer restrictions in the jurisdictions in which
our subsidiaries operate. In addition, payments to us by our
subsidiaries will be contingent upon our subsidiaries’
earnings. Our subsidiaries are permitted under the terms of our
indebtedness, including the indenture governing the notes, to
incur additional indebtedness that may restrict payments from
those subsidiaries to us. We cannot assure you that agreements
governing the current and future indebtedness of our
subsidiaries will permit those subsidiaries to provide us with
sufficient cash to fund payments on the notes when due.
Our subsidiaries are separate and distinct legal entities and,
except for our existing and future subsidiaries that will be the
guarantors of the notes, they will have no obligation,
contingent or otherwise, to pay amounts due under the notes or
to make any funds available to pay those amounts, whether by
dividend, distribution, loan or other payment. In addition, any
guarantee of the notes will be subordinated to any senior
indebtedness of a subsidiary guarantor to the same extent that
the notes are subordinated to the senior indebtedness.
If you do not properly tender your old notes, your ability
to transfer your old notes will be adversely affected.
We will only issue exchange notes in exchange for old notes that
are timely received by the exchange agent, together with all
required documents, including a properly completed and signed
letter of
transmittal. Therefore, you should allow sufficient time to
ensure timely delivery of the old notes and you should carefully
follow the instructions on how to tender your old notes. Neither
we nor the exchange agent are required to tell you of any
defects or irregularities with respect to your tender of the old
notes. If you do not tender your old notes or if we do not
accept your old notes because you did not tender your old notes
properly, then, after we consummate the exchange offer, you may
continue to hold old notes that are subject to the existing
transfer restrictions. In addition, if you tender your old notes
for the purpose of participating in a distribution of the
exchange notes, you will be required to comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the exchange
notes. If you are a broker-dealer that receives exchange notes
for your own account in exchange for old notes that you acquired
as a result of market-making activities or any other trading
activities, you will be required to acknowledge that you will
deliver a prospectus in connection with any resale of such
exchange notes. After the exchange offer is consummated, if you
continue to hold any old notes, you may have difficulty selling
them because there will be fewer old notes outstanding. In
addition, if a large amount of old notes are not tendered or are
tendered improperly, the limited amount of exchange notes that
would be issued and outstanding after we consummate the exchange
offer could lower the market price of such exchange notes.
Risks Related to Our Business
A significant portion of our revenues are derived from
long-term contracts, directly or indirectly, with the
U.S. military that are subject to U.S. Government
subcontracting rules and regulations.
Approximately 51.8% of our combined 2004 revenues were generated
under long-term contracts, primarily related to services
provided to military end-users, including the U.S. Air
Force, through our contract to provide MRO services at the
former Kelly Air Force Base. These revenues depend on the
U.S. Government’s continued commitment to, and funding
of, the programs under contract with us or the customers for
whom we act as a sub-contractor for such programs. The terms of
defense contracts with the U.S. Government or the prime
contractor generally permit the government or the prime
contractor to terminate or modify contracts partially or
completely, with or without cause, at any time. An unexpected
termination of a significant government contract by the
Government or the prime contractor, including for
non-performance, a change in the government’s or prime
contractor’s procurement priorities, in connection with a
transfer of control or assignment of a contract, or for any
other reason, a reduction in the volume of contracts or
sub-contracts awarded to us, or substantial cost overruns, could
adversely affect our results of operations. We also face the
risk that the U.S. Government may unilaterally suspend our
customers or us from new contracts in the event of any alleged
violations of procurement laws or regulations. In addition, we
may be required to renegotiate terms of our military contracts
if the U.S. Government threatens to terminate the contract
of a primary contractor through whom we provide services. If we
fail to renegotiate with the primary contractor, we and the
primary contractor may lose all our business related to such
contract.
Under the terms of its contracts with us, the
U.S. Government or the prime contractor, provides a
majority of the facilities and equipment we use in providing MRO
services to the U.S. military. If we were unable to use
these government-furnished factories and equipment, we could be
required to incur significant capital investment to fulfill our
obligations under such contracts and our financial condition,
results of operations and cash flows could be materially
adversely affected.
A decline in the operational tempo of the
U.S. military would affect the frequency with which the
engines used in military aircraft reach scheduled intervals for
maintenance events, which would adversely affect our results of
operations.
A decline in the operational tempo of the U.S. military
could reduce aircraft engine maintenance cycles, which could
adversely affect our results of operations. The frequency of
maintenance cycles is largely dependent on levels of engine
utilization and correlates to the frequency of aircraft
deployment. For example, our results of operations in recent
periods have been impacted significantly by the increased
operational tempo of the U.S. military, which has resulted
in increased MRO events for T56 and other
engines. We do not anticipate the operational tempo of the U.S.
military to remain at such increased levels indefinitely, and
expect that the operational tempo of the U.S. military will be
lower in 2005 than it was in 2004. Such a reduction in
operational tempo in 2005 or in future periods may reduce the
demand for our services, which could adversely impact our
results of operations.
Decreases in spending or outsourcing by our military
end-users could materially reduce our revenues and adversely
affect our financial condition.
Services to our military end-users accounted for 47.3% of our
combined 2004 revenues. The U.S. military and the Canadian
Air Force are our two largest military end-users, representing
approximately 40.6% and 2.5% of our combined 2004 revenues,
respectively. Defense spending by U.S., Canadian and European
governments has fluctuated in recent years, at times resulting
in reduced demand for our services. Growth in sales to our
military customers depends on continued outsourcing by the
U.S. military of certain MRO functions. This outsourcing
may cease or decrease in the future. U.S. federal law
currently prevents the U.S. military from outsourcing more
than 50% of depot-level maintenance without a waiver from the
Secretary of Defense, and we believe that the military is
approaching this threshold. Additionally, the retirement of
mature aircraft from the U.S. military may decrease the
need for our MRO services.
If military spending declines in the future or is refocused away
from markets in which we operate or aircraft in which our
services are used, or if military outsourcing decreases or
ceases, our business, results of operations and financial
condition would be materially adversely affected. Additionally,
unlike civil aviation, military organizations have discretion
over their own maintenance regimens. Military end-users may
elect to reduce MRO spending by lengthening the time between
required overhaul for certain engines, which could adversely
affect our results of operations.
A significant portion of our revenues is generated from
engine platforms that are mature or declining. If we are unable
to offset the resulting declines in revenues as engines are
retired, our results of operations will be adversely
affected.
The long-term prospects of our business depend in part on the
size of the installed base across the engine platforms we
service. A significant portion of our revenues is generated from
engine platforms that are mature and for which the installed
base is flat or is declining, including the T56, Model 250, PT6
and PW100 engine platforms. We expect the installed base of T56
engines currently in service in the U.S. and Canadian militaries
to decline by approximately 700 engines by 2010 due largely to
P-3 Orion retirements and C-130A-H replacements by C130Js, and
cannot assure you that the installed base for these engines will
not decline more rapidly than we expect. Although aircraft
currently powered by T56 engines are being replaced with
aircraft powered by the AE2100, for which we also provide MRO
services, we do not expect the loss in revenues due to the
retirement of T56-powered aircraft to be fully offset by
revenues from AE2100-powered aircraft due to the time lag
between the deployment of AE2100-powered aircraft and their
first scheduled maintenance events and the types and frequency
of MRO services that we may be called upon to provide for these
engines. If we are unable to offset the declining installed base
with price increases, market share gains, or services for new or
additional platforms, or if such new or additional platforms are
not used as widely or at as high a rate as the engines that we
currently service, our results of operations will be adversely
affected.
Our profitability will be adversely affected if we are
unable to reduce costs or increase prices in response to
fluctuations in demand for our services.
Our business is capital intensive, requiring us to maintain a
large fixed cost base. Therefore, our profitability is
dependent, in part, on our ability to spread our fixed costs
over increasing sales of our services and to reduce costs if
demand for our services decreases. If we are unable to generate
increasing demand for our services, or are unable to reduce
costs to offset price reductions or any reduction in demand for
our services, our profitability will be adversely affected.
We have incurred significant costs to obtain
authorizations for new engine platforms, including the CF34 and
AE3007, and to establish facilities for servicing such
platforms. We may not realize all of the revenues or profit
margins expected from these new engine platforms now or in the
future or recover the significant capital we have
expended.
We have incurred significant up-front costs to obtain our OEM
authorizations and to establish facilities for our new regional
jet platforms: the CF34 and the AE3007. Our investments in these
platforms may not yield the returns that we anticipate. The
realization of additional revenues from these new engine
platforms is subject to a number of important risks and
uncertainties, including the following:
•
The CF34 is a new engine and the current market is primarily
based on unscheduled maintenance events and General
Electric-sponsored upgrade campaigns. We do not anticipate
significant MRO activity on this platform until 2007 when the
first significant volume of expected scheduled maintenance
events come due.
•
Because customers of CF34 MRO services are limited in number and
because the contracts for these services could be long term in
nature, to the extent that these customers enter into contracts
with other MRO providers, we could effectively be precluded from
competing for this business for a significant period of time.
•
The CF34 engine has proven to be significantly more reliable
than most other small turbofan engines, with the first major
required MRO event for CF34 engines occurring between 9,000 and
18,000 cycles, depending on the model, as compared to
4,000-6,000 hours for other turbofan engines. As a result,
our service volumes for the CF34 engine may be lower than for
other engines with higher scheduled maintenance frequencies.
•
We are currently the only independent authorized MRO provider
for the CF34 in North America. Our ability to win new business
for this platform could be adversely affected by increased
competitive pressure if General Electric authorizes additional
independent service providers in our market or if General
Electric expands its existing in-house MRO capabilities.
•
We depend on Rolls-Royce for a significant portion of our AE3007
business as we provide services for Rolls-Royce on certain
engines for which they have “power-by-the-hour”
contracts with the end-user. Rolls-Royce maintains its own MRO
facility and may elect to service a greater proportion of AE3007
engines in-house.
•
We have based our business plan, in part, on the assumption that
the worldwide regional jet fleet will continue to grow. Over
time our anticipated returns from our regional jet business
could be adversely affected if new production demand or
passenger traffic results in lower than anticipated engine
production in this market.
Any future new engine programs will also require significant
investments to obtain authorizations, build facilities, procure
tools and parts and train employees and may be subject to
similar uncertainties. Such new programs may fail to generate
sufficient returns to allow us to recover the investments we
make in such platforms.
Competition in our business is intense and concentrated
given the small market in which we participate and the narrow
range of services that we provide within that market.
Our primary competitors are OEMs, other independent MRO service
providers, and the in-house maintenance services of the
commercial airlines. Certain characteristics of these
competitors are as follows:
Service divisions of OEMs. We estimate that the service
divisions of OEMs, including Rolls-Royce, General Electric,
Pratt & Whitney Canada and Honeywell, comprise
approximately one-half of the market for MRO services. Service
divisions of OEMs compete on the basis of their affiliations
with OEMs, which may give them design authority brand
recognition, strong and long-term customer relationships
beginning with the original sale of the engines, the ability to
adapt more quickly to customer requirements involving technical
specification changes, a diverse product and service base,
significant financial resources, control
over certification and control over sources of approved parts.
OEMs are attempting, or may in the future attempt, to perform a
greater portion of the repair and overhaul services related to
the engines they manufacture themselves.
Other independent MRO service providers. Most of the
independent MRO service providers that compete with us also
operate under authorizations from OEMs. Certain of these
competitors may have certain stronger and longer-term customer
relationships and greater financial resources.
In-house maintenance services of the commercial airlines.
While recently there has been an increasing trend among
commercial carriers to outsource engine MRO, some of the large
commercial airlines maintain in-house MRO service divisions.
These service divisions often provide MRO services externally
but do not have the benefit of holding OEM authorizations to
provide MRO services to third parties. In-house maintenance
services have several competitive advantages over us, including
captive engine fleets and may have greater financial resources.
We believe that providers of MRO services have traditionally
competed on the basis of price, quality and the ability to
perform repairs and overhauls rapidly. Developing and
maintaining a competitive advantage will require continued
investments in technology, engineering, operations, customer
service and sales and marketing. We may not have sufficient
resources to make the necessary investments and we may not be
able to compete effectively. Furthermore, our business, results
of operations and financial condition may be materially
adversely affected by changes in the competitive environment,
including any intensification of competition, which could lead
to a loss of business and a decline in our margins.
If we fail to obtain or maintain engine service
authorizations from OEMs, our revenues, cash flows and
profitability may be materially adversely affected.
We depend on authorizations granted by OEMs to service the
engines manufactured by them. These authorizations can provide
important competitive advantages, such as discounts on parts and
services purchased from the OEMs and access to OEM technical
information and upgrade campaigns. If an OEM fails to renew or
extend an existing service authorization or if authorization
fees increase significantly, our results of operations may be
materially adversely affected. Additionally, there is generally
no restriction on the ability of OEMs to grant licenses to other
competitors and there can be no assurance that other service
providers will not be authorized on platforms on which we are
the primary or sole independent provider. For example, we are
currently the only independent authorized MRO provider for the
CF34 in North America and our ability to win new business in
this market could be affected if General Electric authorizes
additional independent service providers.
A number of factors could cause us to lose existing
authorizations, including:
•
our failure to comply with applicable specifications provided to
us by OEMs;
•
a material breach by us under our OEM authorizations or
termination or expiration of those authorizations;
•
a change of control of our company without consent or approval
from OEMs where required;
•
our failure to obtain or comply with applicable governmental
regulatory approvals; and
•
a significant service failure for which we are found to be
responsible.
A majority of our parts are procured from OEMs and their
affiliates. If we are unable to purchase component parts or raw
materials from these or other of our key suppliers, our business
and results of operations may be materially adversely
affected.
We depend on certain component parts and material suppliers for
our MRO operations. Our authorizations from OEMs often require
that we purchase component parts from the OEMs or their
designated distributors. We made 32.8% of our combined 2004
parts purchases from Rolls-Royce and 13.3% of our combined 2004
parts purchases from Pratt & Whitney Canada. We made an
additional
35.7% of our combined 2004 parts purchases from the Defense
Logistics Agency and Aviall, Inc., a parts distributor that is
the exclusive distributor for certain Rolls-Royce engines. The
loss of any of these key suppliers could have a material adverse
effect on our business and results of operation. We have at
times experienced delays in receiving component parts and raw
materials from our key suppliers, and any significant future
delays could have a material adverse effect on our business and
results of operations. If we had to develop alternative sources
of supply, our ability to supply parts to our customers when
needed could be impaired, business could be lost and margins
could be reduced.
Our continued supply of materials may also be affected by:
•
destruction of our suppliers’ facilities or their
distribution infrastructure or the failure of essential
equipment at their facilities;
•
a work stoppage or strike by our suppliers’ employees;
•
failure of our suppliers to provide materials of requisite
quality;
•
a failure or shortage of supply of raw materials to our
suppliers; and
•
contractual amendments and disputes with respect to pricing and
other terms with our suppliers.
In addition, some of our non-OEM supplier contracts are
short-term or renewable contracts. If we are unable to continue
to purchase these products at competitive prices, or at all, or
if we are unable to find alternative sources for these products,
our business could be adversely impacted.
The prices that we charge under our fixed-price contracts
are predetermined and we bear the risk that our costs may exceed
our estimates.
We have entered into multi-year, fixed-price contracts
(including fixed-price arrangements based on engine utilization)
with some of our customers, in which we have agreed to service
engines for a price determined based on then-existing engine
maintenance and usage data. Several factors may cause the costs
we incur in fulfilling these contracts to vary substantially
from our original estimates, including the actual condition of
the customer’s engine fleet and our ability to inspect the
condition of the customers’ aircraft prior to bidding. We
bear the risk that increased or unexpected costs may reduce our
profit or cause us to sustain losses on the contract. In a
fixed-price contract, we must fully absorb cost overruns,
notwithstanding the difficulty of estimating all of the costs we
will incur in performing these contracts. In the case of one
contract that we have with a foreign government, we have
experienced losses for work scopes that have exceeded our
original estimates, partly because we did not have the
opportunity to inspect engines prior to bidding the contract and
we may experience additional losses during the remaining term of
this contract. In such cases, we may be unable to estimate the
existence or the magnitude of losses until engines are delivered
to us, despite any prior experience under the contract.
Consequently, our recorded reserves only reflect estimated
losses on engines delivered to us and actual losses may be
higher than such reserves. Our ability to terminate fixed-price
contracts is generally limited and we may be subject to
liquidated damages in the event we elect early termination.
A significant portion of our revenues from regional and
business aviation customers derive from services we provide on
behalf of OEMs as a subcontractor for services they provide to
their customers. As a result, we could be adversely affected by
changes in demand by them or their customers.
Aircraft engine manufacturers, including Rolls-Royce and General
Electric, in addition to providing authorizations to service the
engines they manufacture, are also significant customers as a
result of subcontracting MRO services to us for contracts they
have with their end customers. MRO services subcontracted to us
by Rolls-Royce accounted for approximately 19.1% of our combined
2004 revenues. Our results of operations could be adversely
affected if these OEMs reduce the volume of engines
subcontracted to us, either because of decreased demand by their
end users or because of an increase in the volume of MRO
services provided directly by the OEMs.
The regional and business aviation industry may experience
additional disruptions as a result of terrorist threats or
attacks and other exogenous factors beyond our control that
could materially adversely affect our results of operations and
financial condition in future periods.
In the aftermath of the September 11, 2001 terrorist
attacks, passenger traffic on commercial flights was
significantly lower than prior to the attacks. Most commercial
airlines reduced their operating schedules, lowered fares and
implemented cost reduction initiatives. The impact of the war on
terror, the outbreak of the Severe Acute Respiratory Syndrome
(SARS) virus in 2003 as well as increases in fuel costs and
a weak U.S. economy resulted in a decrease in revenue
passenger miles and large and continuing losses in the airline
industry. Many carriers around the world have filed for
bankruptcy and others are considering filing for bankruptcy
protection. Bankruptcies of our customers could materially
impact our revenues, result in account losses or could lead to
litigation against us for preference payments or other claims.
For example, certain of our bankrupt customers have filed claims
against us to recover amounts that we retained upon their
default under our agreements with them. Although we are
vigorously contesting these claims, their outcomes are uncertain.
Additionally, subsequent world developments, such as acts of
terrorism, may lead to additional hostilities, as well as
economic and political instability — which could
adversely affect the number of new regional jet deliveries and
the utilization of regional and business aviation engines that
we service. As available seat miles decrease, the frequency with
which engines reach scheduled intervals for major maintenance
events also decreases, adversely affecting our revenues.
The following additional factors may also have a negative impact
on our regional and business jet aviation revenues:
•
Downturns in commercial air travel may contribute to excess
capacity in the MRO market and increased competition for MRO
work. We may not have sufficient resources to compete
effectively and our profit margins may be negatively impacted;
•
Changes in passenger travel patterns may require commercial
airlines to retire some of the aircraft that use engine
platforms that we service; and
•
Increases in fuel prices may result in the retirement of older
engines that we service in favor of newer, more fuel-efficient
models.
The foregoing factors, many of which are beyond our control, may
have a material adverse effect on our business, financial
condition or results of operation.
We will not be able to operate our business if we fail to
comply with or obtain and maintain the necessary regulatory
approvals.
We operate in a highly regulated industry and need a number of
regulatory approvals to provide our services. In addition, most
of our authorizations with OEMs terminate at the option of the
OEM if we fail to obtain or maintain necessary approvals or fail
to comply with applicable regulations. Failure to obtain,
maintain or comply with regulatory approvals, or the costs
associated with obtaining, maintaining or complying with any
such regulatory approvals, could have a material adverse effect
on our business, results of operations and financial condition.
Regulatory authorities monitoring our performance and products
include the U.S. Federal Aviation Administration, or the
FAA, a consortium of European regulatory authorities called the
Joint Aviation Authorities, the U.K. Civil Aviation Authority,
Transport Canada and others. Certain of these regulatory
authorities require, among other things, that we:
•
periodically undergo extensive inspections and audits of our
facilities and practices;
•
obtain and maintain certifications from regulatory authorities
to provide service for commercially operated aircraft
engines; and
•
obtain and maintain recognized quality approvals, such as
ISO-9000 and ISO-9001.
The U.S. Department of Defense, the Canadian military and
most other military organizations to which we provide services
similarly require us to comply with all applicable government
regulations when servicing their equipment and may conduct
reviews similar to those conducted by civil regulatory
authorities. We are also subject to U.S. Commerce, Treasury
and State Department regulations and other governmental trade
regulations including regulations that govern citizenship and
nationality that can increase costs and add to the complexity of
doing business with aerospace and defense products. In addition,
we may become subject to new governmental regulations if we
expand our business into new countries or sell new products or
services. The imposition of new, different or more stringent
regulations could also materially adversely affect us because we
might be unable to comply with them or compliance may require
significant additional expenditures.
Our operations depend on our facilities, which are subject
to physical and other risks that could disrupt our
business.
The facilities at which we provide our services could be damaged
or disrupted by a natural disaster, war or terrorist activity.
Although we have obtained property damage and business
interruption insurance, a major catastrophe, such as an
earthquake, hurricane, flood, tornado or other natural disaster
at any of our sites, or war or terrorist activities in any of
the areas where we conduct operations could result in prolonged
interruption of our business. Any disruption resulting from
these events could cause significant delays in service and
shipments of engines and the loss of sales and customers, and we
may not have insurance to adequately compensate us for any of
these events.
Changes in foreign exchange rates could have adverse
effects on our results of operations and financial
condition.
While our functional currency is the U.S. dollar, our
revenues, costs, assets and liabilities are denominated in a
variety of currencies, particularly the U.S. dollar, the
Euro and the Canadian dollar. As a result, our results of
operations and financial condition will be affected by
fluctuations in exchange rates. Our most significant foreign
currency exposure has historically been our Canadian dollar
operating expenses. The recent strengthening of the Canadian
dollar contributed to an increase in our operating expenses,
largely payroll.
We may enter into derivative instruments to protect against
currency transaction risk. However, we may not, in all cases, be
able to successfully manage our currency transaction risks
through the derivative instruments.
Our international operations are exposed to various risks
which could have a material adverse effect on our results of
operations and financial condition.
Our business is subject to certain risks associated with doing
business internationally. Most of our operations are in the
United States and Canada, but we also have operations in other
markets and may, in the future, expand organically or through
acquisition into additional markets. We have a presence in six
different countries with facilities in five of those countries.
The revenues of our foreign subsidiaries represented 35.8% of
our total combined 2004 revenues. International operations are
subject to many additional risks, including:
•
the burden of complying with multiple and possibly conflicting
laws and any unexpected changes in regulatory requirements;
•
exchange controls, import and export restrictions and tariffs
and other trade protection measures;
•
political risks, including risks of loss due to civil
disturbances, acts of terrorism, acts of war, guerilla
activities and insurrection;
•
unstable economic, financial and market conditions and increased
expenses as a result of inflation, or higher interest rates;
potentially adverse tax consequences from changes in tax laws,
requirements relating to withholding taxes on remittances and
other payments by subsidiaries and restrictions on our ability
to repatriate dividends from our subsidiaries; and
•
exposure to liabilities under the U.S. Foreign Corrupt
Practices Act.
Any one of these factors could materially adversely affect our
sales of products or services to international customers, which
could materially adversely affect our business, results of
operations and financial condition.
We may face large liability claims.
A failure or malfunction of an engine for which we provided MRO
services could result in claims for personal injury, death or
property damage. In addition, many factors beyond our control
could lead to liability claims, including:
•
the failure of an aircraft on which an engine for which we
provided MRO services has been installed;
•
the reliability and skills of the operators of our
customers’ aircraft; and
•
the type and amount of maintenance on aircraft and component
systems performed by our customers.
We have obtained insurance coverage with respect to these types
of liabilities. However, any liability not covered by insurance
or for which third-party indemnification is not available could
require us to dedicate a substantial portion of our cash flows
to make payments on these liabilities. Some of our service
contracts with OEMs do not limit our liability or provide for
indemnification by the OEMs against losses arising from parts or
work provided to us by the OEMs. Furthermore, we may incur
significant expenses in the course of defending against claims.
In addition, adequate insurance may not be available in the
future or may be available only on unacceptable terms.
Additionally, we are also subject to warranty claims for which
our reserves may prove to be inadequate.
Our operations may prove harmful to the environment, which
could expose us to fines and damages and could require expensive
remediation.
Our operations are subject to various laws and regulations,
including those relating to:
•
the generation, storage, handling, use and transportation of
hazardous materials;
•
emissions and discharges to air, soil and water;
•
the health and safety of our employees; and
•
other environmental matters.
We are required to obtain environmental permits from
governmental authorities. These authorities can modify or revoke
such permits and can enforce compliance with laws, regulations
and permits by issuing orders and assessing fines. We incur
capital and operating costs to comply with laws, regulations and
permits. We cannot assure you that regulators will not
successfully challenge our compliance or require us to expend
significant amounts to comply with applicable environmental laws.
Historical contamination is known or suspected to exist at or
about certain of our facilities located on land that has been
used for industrial purposes for a long time or in facilities
that contain or have contained asbestos. Under some
circumstances, we could be held responsible for cleaning up
contamination at our facilities, including facilities that we
have sold or transferred to other companies, or at waste
disposal sites we use. We could also be held liable for any
damages from exposure to such contamination. For these reasons,
we do not know the ultimate environmental liabilities and other
costs that we face or costs from our workforce’s exposure
to harmful agents in the engines we service. It is possible that
such
environmental liabilities and other costs could materially
adversely affect our business, results of operations and
financial condition.
Any expansion by acquisition may prove risky for
us.
We intend to pursue acquisitions or business combinations that
we believe may present opportunities to enhance our market
position and extend our technological capabilities, realize
significant synergies, operating expense reductions or overhead
cost savings. This strategy will depend in part on whether any
suitable businesses are available at acceptable valuations and
our ability to finance the purchase price of any acquisitions.
Any acquisition that we make could present a variety of risks,
including:
•
the incurrence of any debt or contingent liabilities and an
increase in interest expense, amortization expense related to
intangible assets, and possible goodwill impairment charges;
•
our failure to discover liabilities of the acquired company for
which we may be responsible as a successor owner or operator
despite any investigation we make before the acquisition;
•
our inability to integrate the operations, technology and
personnel of the acquired company;
•
the diversion of management’s attention from our core
operations as they attend to any business integration issues
that may arise;
•
our loss of key personnel of the acquired company; and
•
our becoming subject to material liabilities as a result of
failure to negotiate adequate indemnification rights.
As a result of these factors, if an acquisition were to occur,
our business, financial condition or results of operation could
be materially adversely affected.
The indenture governing the notes restricts our ability to
engage in certain mergers or other similar transactions. In
addition, upon the occurrence of certain change of control
events, we will be required to offer to repurchase the notes.
However, the indenture will not prohibit us from engaging in all
transactions, including certain acquisitions and other business
combinations that could have the effect of substantially
increasing our level of indebtedness or otherwise result in
significant changes to our capital structure.
Failure to retain certain of our executive officers or
attract and retain the services of certain qualified employees
may materially adversely affect our business and results of
operations.
Our continued success depends on the services of certain of our
executive officers and on our ability to attract and retain
qualified managerial and technical personnel experienced in the
various operations of our businesses. Loss of the services of
these employees could materially adversely affect our operations.
Competition for qualified technical personnel is intense, and we
have, at times, found it difficult to attract and retain skilled
personnel for our operations. Failure to attract or retain
highly qualified personnel could have a material adverse effect
on our business, results of operations and financial condition.
We may not be able to quickly and effectively design and
implement internal controls and procedures necessary to comply
with the reporting obligations applicable to us by the terms of
the indenture.
While our management is in the process of enhancing our
accounting and financial reporting capabilities, including the
establishment of an internal audit function and the design and
implementation of internal control policies and procedures
consistent with the requirements of the U.S. Sarbanes-Oxley
Act of 2002 and other regulatory guidelines, we cannot assure
you that they will be successful in doing so. This process will
include adding certain staff and systems necessary for annual
and quarterly external financial reporting, and qualified
individuals may not be readily available. Failure to quickly
establish the necessary controls and procedures would make it
difficult to comply with SEC rules and regulations with respect
to internal control over financial reporting.
We rely on intellectual property in our business and our
business could be adversely affected if we lose our intellectual
property rights.
Our operations involve the use of non-patented know-how, trade
secrets, processes and other proprietary information. While we
employ various methods to protect our proprietary information,
our proprietary information may become known to, or be
independently developed by, competitors, or our proprietary
rights in intellectual property may be challenged, any of which
could have a material adverse effect on our business, financial
condition and results of operations.
We are controlled by Carlyle, whose interests in our
business may be different than yours.
As result of the Acquisition, certain affiliates of Carlyle own
all of our equity and are able to control our affairs. As a
result, Carlyle controls the appointment of our management, the
entering into of mergers, and all other matters requiring the
consent of our stockholders. We may also pursue potential
business combinations with other Carlyle affiliates in the
future. The interests of Carlyle and its affiliates could
conflict with yours. For example, if we encounter financial
difficulties or are unable to pay our indebtedness as it
matures, the interests of Carlyle as an equity holder might
conflict with your interests as a note holder. In addition,
Carlyle or its affiliates may in the future own businesses that
directly compete with ours.
This prospectus and the information incorporated by reference
herein include statements that are, or may be deemed to be,
“forward-looking statements” within the meaning of
Section 27A of the Securities Act and Section 21E of
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). These forward-looking statements can
be identified by the use of forward-looking terminology,
including the terms “believes,”“estimates,”“anticipates,”“expects,”“intends,”“may,”“will” or
“should” or, in each case, their negative or other
variations or comparable terminology. These forward-looking
statements include all matters that are not historical facts.
They appear in a number of places throughout this prospectus and
include statements regarding our intentions, beliefs or current
expectations concerning, among other things, our results of
operations, financial condition, liquidity, prospects, growth
and strategies and the industry in which we operate.
By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. We
caution you that forward-looking statements are not guarantees
of future performance and that our actual results of operations,
financial condition and liquidity, and the development of the
industry in which we operate may differ materially from those
made in or suggested by the forward-looking statements contained
in this prospectus. In addition, even if our results of
operations, financial condition and liquidity, and the
development of the industry in which we operate are consistent
with the forward-looking statements contained in this
prospectus, those results or developments may not be indicative
of results or developments in subsequent periods.
The following listing represents some, but not necessarily all,
of the factors that may cause actual results to differ from
those anticipated or predicted:
•
the impact of general economic or industry conditions on our
customers;
•
general conditions in the military, regional or business
aviation industry;
•
military spending and outsourcing trends;
•
decreases in the operational tempo of the U.S. military;
•
the size and age of the installed base of engines that we
service;
•
inflation, interest rates, exchange rates, market and monetary
fluctuations and other risks related to our international
operations;
•
the effect of, and changes in, regulation and government policy;
•
the effects of competition in the geographic and business areas
in which we conduct operations;
•
our ability to increase market share and control expenses;
•
our ability to keep pace with technological changes;
•
our ability to obtain new contracts and authorizations to
service existing and new engines;
•
returns on our investment in new engine programs; and
•
our success at managing the risks of the foregoing.
You should also carefully read the factors described in the
“Risk Factors” section of this prospectus and the
information incorporated by reference herein to better
understand the risks and uncertainties inherent in our business
and underlying any forward-looking statements.
Any forward-looking statements that we make in this prospectus
speak only as of the date of such statement, and we undertake no
obligation to update such statements. Comparisons of results for
current and any prior periods are not intended to express any
future trends or indications of future performance, unless
expressed as such, and should only be viewed as historical data.
Concurrently with the sale of the old notes on August 20,2004, we entered into a registration rights agreement with the
initial purchasers of the old notes, which requires us to file
the registration statement under the Securities Act with respect
to the exchange notes and, upon the effectiveness of the
registration statement, offer to the holders of the old notes
the opportunity to exchange their old notes for a like principal
amount of exchange notes. The exchange notes will be issued
without a restrictive legend and may generally be reoffered and
resold without registration under the Securities Act. The
registration rights agreement further provides that we must use
our reasonable best efforts to complete the exchange offer
within 360 days of the issue date of the old notes and
consummate the exchange offer within 30 business days after the
effective date of our registration statement.
Except as described below, upon the completion of the exchange
offer, our obligations with respect to the registration of the
old notes and the exchange notes will terminate. A copy of the
registration rights agreement has been filed as an exhibit to
the registration statement of which this prospectus is a part,
and this summary of the material provisions of the registration
rights agreement does not purport to be complete and is
qualified in its entirety by reference to the complete
registration rights agreement. Assuming the timely effectiveness
of the registration statement of which this prospectus is a
part, we will not have to pay additional interest on the old
notes provided in the registration rights agreement. Following
the completion of the exchange offer, holders of old notes not
tendered will not have any further registration rights other
than as set forth in the paragraphs below, and the old notes
will continue to be subject to certain restrictions on transfer.
Additionally, the liquidity of the market for the old notes
could be adversely affected upon consummation of the exchange
offer. See “Risk Factors — If you do not properly
tender your old notes, your ability to transfer your old notes
will be adversely affected.”
Under certain circumstances specified in the registration rights
agreement, we may be required to file a “shelf”
registration statement for a continuous offer in connection with
the old notes pursuant to Rule 415 under the Securities Act.
Based on an interpretation by the SEC’s staff set forth in
no-action letters issued to third parties unrelated to us, we
believe that, with the exceptions set forth below, exchange
notes issued in the exchange offer may be offered for resale,
resold and otherwise transferred by the holder of exchange notes
without compliance with the registration and prospectus delivery
requirements of the Securities Act, unless the holder:
•
is an “affiliate” of Standard Aero Holdings, Inc. or
any guarantor within the meaning of Rule 405 under the
Securities Act;
•
is a broker-dealer who purchased old notes directly from us for
resale under Rule 144A or Regulation S or any other
available exemption under the Securities Act;
•
acquired the exchange notes other than in the ordinary course of
the holder’s business; or
•
has an arrangement with any person to engage in the distribution
of the exchange notes.
Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the exchange notes cannot
rely on this interpretation by the SEC’s staff and must
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that receives
exchange notes for its own account in exchange for old notes,
where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See “Plan of
Distribution.” Broker-dealers who acquired old notes
directly from us and not as a result of market-making activities
or other trading activities may not rely on the staff’s
interpretations discussed above or participate in the exchange
offer, and must comply with the prospectus delivery requirements
of the Securities Act in order to sell the old notes.
Upon the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal, we will accept any
and all old notes validly tendered and not withdrawn prior to
5:00 p.m., New York City time,
on ,
2005, or such date and time to which we extend the offer. We
will issue $1,000 in principal amount of exchange notes in
exchange for each $1,000 principal amount of old notes accepted
in the exchange offer. Holders may tender some or all of their
old notes pursuant to the exchange offer. However, old notes may
be tendered only in integral multiples of $1,000 in principal
amount.
The exchange notes will evidence the same debt as the old notes
and will be issued under the terms of, and entitled to the
benefits of, the indenture relating to the old notes.
As of the date of this prospectus, $200.0 million in
aggregate principal amount of senior subordinated notes were
outstanding, and there was one registered holder, a nominee of
the Depository Trust Company. This prospectus, together with the
letter of transmittal, is being sent to the registered holder
and to others believed to have beneficial interests in the old
notes. We intend to conduct the exchange offer in accordance
with the applicable requirements of the Exchange Act and the
rules and regulations of the SEC promulgated under the Exchange
Act.
We will be deemed to have accepted validly tendered old notes
when, as and if we have given oral or written notice thereof to
Wells Fargo Bank Minnesota, National Association, the exchange
agent. The exchange agent will act as agent for the tendering
holders for the purpose of receiving the exchange notes from us.
If any tendered old notes are not accepted for exchange because
of an invalid tender, the occurrence of certain other events set
forth under the heading “— Conditions to the
Exchange Offer” or otherwise, certificates for any such
unaccepted old notes will be returned, without expense, to the
tendering holder of those old notes promptly after the
expiration date unless the exchange offer is extended.
Holders who tender old notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the
instructions in the letter of transmittal, transfer taxes with
respect to the exchange of old notes in the exchange offer. We
will pay all charges and expenses applicable to the exchange
offer, other than certain applicable taxes, underwriting
discounts, if any, and commissions and transfer taxes, if any,
which shall be borne by the holder. See “— Fees
and Expenses.”
Expiration Date; Extensions; Amendments
The expiration date shall be 5:00 p.m., New York City time,
on ,
2005, unless we, in our sole discretion, extend the exchange
offer, in which case the expiration date shall be the latest
date and time to which the exchange offer is extended. In order
to extend the exchange offer, we will notify the exchange agent
and each registered holder of any extension by oral or written
notice prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. We
reserve the right, in our sole discretion:
•
to delay accepting any old notes until confirmation that they
have been properly tendered, to extend the exchange offer or, if
any of the conditions set forth under
“— Conditions to the Exchange Offer” shall
not have been satisfied, to terminate the exchange offer, by
giving oral or written notice of that delay, extension or
termination to the exchange agent, or
•
to amend the terms of the exchange offer in any manner.
In the event that we make a fundamental change to the terms of
the exchange offer, we will file a post-effective amendment to
the registration statement of which this prospectus is a part.
Procedures for Tendering
Only a holder of old notes may tender the old notes in the
exchange offer. Except as set forth under
“— Book-Entry Transfer,” to tender in the
exchange offer a holder must complete, sign and date the letter
of transmittal, or a copy of the letter of transmittal, have the
signatures on the letter of transmittal
guaranteed if required by the letter of transmittal and mail or
otherwise deliver the letter of transmittal or copy to the
exchange agent prior to the expiration date. In addition:
•
certificates for the old notes must be received by the exchange
agent along with the letter of transmittal prior to the
expiration date, or
•
a timely confirmation of a book-entry transfer, or a book-entry
confirmation, of the old notes, if that procedure is available,
into the exchange agent’s account at The Depository Trust
Company, which we refer to as the book-entry transfer facility,
following the procedure for book-entry transfer described below,
must be received by the exchange agent prior to the expiration
date, or you must comply with the guaranteed delivery procedures
described below.
To be tendered effectively, the letter of transmittal and other
required documents must be received by the exchange agent at the
address set forth under “— Exchange Agent”
prior to the expiration date.
Your tender, if not withdrawn prior to 5:00 p.m., New York
City time, on the expiration date, will constitute an agreement
between you and us in accordance with the terms and subject to
the conditions set forth herein and in the letter of transmittal.
The method of delivery of old notes and the letter of
transmittal and all other required documents to the exchange
agent is at your election and risk. Instead of delivery by mail,
it is recommended that you use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to
assure delivery to the exchange agent before the expiration
date. No letter of transmittal or old notes should be sent to
us. You may request your broker, dealer, commercial bank, trust
company or nominee to effect these transactions for you.
Any beneficial owner whose old notes are registered in the name
of a broker, dealer, commercial bank, trust company, or other
nominee and who wishes to tender should contact the registered
holder promptly and instruct the registered holder to tender on
the beneficial owner’s behalf. If the beneficial owner
wishes to tender on its own behalf, the beneficial owner must,
prior to completing and executing the letter of transmittal and
delivering the owner’s old notes, either make appropriate
arrangements to register ownership of the old notes in the
beneficial owner’s name or obtain a properly completed bond
power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal,
as the case may be, must be guaranteed by an “eligible
guarantor institution” within the meaning of
Rule 17Ad-15 under the Exchange Act unless old notes
tendered pursuant thereto are tendered:
•
by a registered holder who has not completed the box entitled
“Special Registration Instruction” or “Special
Delivery Instructions” on the letter of transmittal, or
•
for the account of an eligible guarantor institution.
If signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed,
the guarantee must be by any eligible guarantor institution that
is a member of or participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion
Signature Program or an eligible guarantor institution.
If the letter of transmittal is signed by a person other than
the registered holder of any old notes listed in the letter of
transmittal, the old notes must be endorsed or accompanied by a
properly completed bond power, signed by the registered holder
as that registered holder’s name appears on the old notes.
If the letter of transmittal or any old notes or bond powers are
signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in
a fiduciary or representative capacity, such persons should so
indicate when signing, and evidence satisfactory to us of their
authority to so act must be submitted with the letter of
transmittal unless waived by us.
All questions as to the validity, form, eligibility, including
time of receipt, acceptance, and withdrawal of tendered old
notes will be determined by us in our sole discretion, which
determination will be final and
binding. We reserve the absolute right to reject any and all old
notes not properly tendered or any old notes our acceptance of
which would, in the opinion of our counsel, be unlawful. We also
reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange
offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of old
notes must be cured within such time as we shall determine.
Although we intend to notify holders of defects or
irregularities with respect to tenders of old notes, neither we,
the exchange agent, nor any other person shall incur any
liability for failure to give that notification. Tenders of old
notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any old notes received
by the exchange agent that are not properly tendered and as to
which the defects or irregularities have not been cured or
waived will be returned by the exchange agent to the tendering
holders, unless otherwise provided in the letter of transmittal,
as soon as practicable following the expiration date, unless the
exchange offer is extended.
In addition, we reserve the right in our sole discretion to
purchase or make offers for any old notes that remain
outstanding after the expiration date or, as set forth under
“— Conditions to the Exchange Offer,” to
terminate the exchange offer and, to the extent permitted by
applicable law, purchase old notes in the open market, in
privately negotiated transactions, or otherwise. The terms of
any such purchases or offers could differ from the terms of the
exchange offer.
By tendering, you will be representing to us that, among other
things:
•
the exchange notes acquired in the exchange offer are being
obtained in the ordinary course of business of the person
receiving such exchange notes, whether or not such person is the
registered holder;
•
you are not engaging in and do not intend to engage in a
distribution of the exchange notes;
•
if you are a broker-dealer that will receive exchange notes for
your own account in exchange for old notes that were acquired as
a result of market-making or other trading activities, then you
will deliver a prospectus in connection with any resale of such
exchange notes;
•
you do not have an arrangement or understanding with any person
to participate in the distribution of such exchange
notes; and
•
you are not an “affiliate,” as defined under
Rule 405 of the Securities Act, of Standard Aero Holdings,
Inc.
In all cases, issuance of exchange notes for old notes that are
accepted for exchange in the exchange offer will be made only
after timely receipt by the exchange agent of certificates for
such old notes or a timely book-entry confirmation of such old
notes into the exchange agent’s account at the book-entry
transfer facility, a properly completed and duly executed letter
of transmittal or, with respect to The Depository Trust Company
and its participants, electronic instructions in which the
tendering holder acknowledges its receipt of and agreement to be
bound by the letter of transmittal, and all other required
documents. If any tendered old notes are not accepted for any
reason set forth in the terms and conditions of the exchange
offer or if old notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or
non-exchanged old notes will be returned without expense to the
tendering holder or, in the case of old notes tendered by
book-entry transfer into the exchange agent’s account at
the book-entry transfer facility according to the book-entry
transfer procedures described below, those non-exchanged old
notes will be credited to an account maintained with that
book-entry transfer facility, in each case, as promptly as
practicable after the expiration or termination of the exchange
offer.
Each broker-dealer that receives exchange notes for its own
account in exchange for old notes, where those old notes were
acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of those
exchange notes. See “Plan of Distribution.”
The exchange agent will make a request to establish an account
with respect to the old notes at the book-entry transfer
facility for purposes of the exchange offer within two business
days after the date of this prospectus, and any financial
institution that is a participant in the book-entry transfer
facility’s systems may make book-entry delivery of old
notes being tendered by causing the book-entry transfer facility
to transfer such old notes into the exchange agent’s
account at the book-entry transfer facility in accordance with
that book-entry transfer facility’s procedures for
transfer. However, although delivery of old notes may be
effected through book-entry transfer at the book-entry transfer
facility, the letter of transmittal or copy of the letter of
transmittal, with any required signature guarantees and any
other required documents, must, in any case other than as set
forth in the following paragraph, be transmitted to and received
by the exchange agent at the address set forth under
“— Exchange Agent” on or prior to the
expiration date or the guaranteed delivery procedures described
below must be complied with.
The Depository Trust Company’s Automated Tender Offer
Program, or ATOP, is the only method of processing exchange
offers through The Depository Trust Company. To accept the
exchange offer through ATOP, participants in The Depository
Trust Company must send electronic instructions to The
Depository Trust Company through The Depository Trust
Company’s communication system instead of sending a signed,
hard copy letter of transmittal. The Depository Trust Company is
obligated to communicate those electronic instructions to the
exchange agent. To tender old notes through ATOP, the electronic
instructions sent to The Depository Trust Company and
transmitted by The Depository Trust Company to the exchange
agent must contain the character by which the participant
acknowledges its receipt of and agrees to be bound by the letter
of transmittal.
Guaranteed Delivery Procedures
If a registered holder of the old notes desires to tender old
notes and the old notes are not immediately available, or time
will not permit that holder’s old notes or other required
documents to reach the exchange agent prior to 5:00 p.m.,
New York City time, on the expiration date, or the procedure for
book-entry transfer cannot be completed on a timely basis, a
tender may be effected if:
•
the tender is made through an eligible guarantor institution;
•
prior to 5:00 p.m., New York City time, on the expiration
date, the exchange agent receives from that eligible guarantor
institution a properly completed and duly executed letter of
transmittal or a facsimile of a duly executed letter of
transmittal and notice of guaranteed delivery, substantially in
the form provided by us, by telegram, telex, fax transmission,
mail or hand delivery, setting forth the name and address of the
holder of old notes and the amount of the old notes tendered and
stating that the tender is being made by guaranteed delivery and
guaranteeing that within three New York Stock Exchange, Inc., or
NYSE, trading days after the date of execution of the notice of
guaranteed delivery, the certificates for all physically
tendered old notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, will be deposited by the
eligible guarantor institution with the exchange agent; and
•
the certificates for all physically tendered old notes, in
proper form for transfer, or a book-entry confirmation, as the
case may be, are received by the exchange agent within three
NYSE trading days after the date of execution of the notice of
guaranteed delivery.
Withdrawal Rights
Tenders of old notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the expiration date.
For a withdrawal of a tender of old notes to be effective, a
written or, for The Depository Trust Company participants,
electronic ATOP transmission, notice of withdrawal, must be
received by the
exchange agent at its address set forth under
“— Exchange Agent” prior to 5:00 p.m.,
New York City time, on the expiration date. Any such notice of
withdrawal must:
•
specify the name of the person having deposited the old notes to
be withdrawn, whom we refer to as the depositor;
•
identify the old notes to be withdrawn, including the
certificate number or numbers and principal amount of such old
notes;
•
be signed by the holder in the same manner as the original
signature on the letter of transmittal by which such old notes
were tendered, including any required signature guarantees, or
be accompanied by documents of transfer sufficient to have the
trustee register the transfer of such old notes into the name of
the person withdrawing the tender; and
•
specify the name in which any such old notes are to be
registered, if different from that of the depositor.
All questions as to the validity, form, eligibility and time of
receipt of such notices will be determined by us, whose
determination shall be final and binding on all parties. Any old
notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the exchange offer. Any
old notes which have been tendered for exchange, but which are
not exchanged for any reason, will be returned to the holder of
those old notes without cost to that holder as soon as
practicable after withdrawal, rejection of tender, or
termination of the exchange offer. Properly withdrawn old notes
may be retendered by following one of the procedures under
“— Procedures for Tendering” at any time on
or prior to the expiration date.
Conditions to the Exchange Offer
Notwithstanding any other provision of the exchange offer, we
will not be required to accept for exchange, or to issue
exchange notes in exchange for, any old notes and may terminate
or amend the exchange offer if at any time before the acceptance
of those old notes for exchange or the exchange of the exchange
notes for those old notes, we determine that the exchange offer
violates applicable law, any applicable interpretation of the
staff of the SEC or any order of any governmental agency or
court of competent jurisdiction.
The foregoing conditions are for our sole benefit and may be
asserted by us regardless of the circumstances giving rise to
any such condition or may be waived by us in whole or in part at
any time and from time to time in our sole discretion. The
failure by us at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any of those rights and
each of those rights shall be deemed an ongoing right which may
be asserted at any time and from time to time.
In addition, we will not accept for exchange any old notes
tendered, and no exchange notes will be issued in exchange for
those old notes, if at such time any stop order shall be
threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or the
qualification of the indenture under the Trust Indenture Act of
1939. In any of those events we are required to use every
reasonable effort to obtain the withdrawal of any stop order at
the earliest possible time.
Exchange Agent
All executed letters of transmittal should be directed to the
exchange agent. Wells Fargo Bank Minnesota, National Association
has been appointed as exchange agent for the exchange offer.
Questions,
requests for assistance and requests for additional copies of
this prospectus or of the letter of transmittal should be
directed to the exchange agent addressed as follows:
Originals of all documents sent by facsimile should be sent
promptly by registered or certified mail, by hand or by
overnight delivery service.
Fees And Expenses
We will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. The principal
solicitation is being made by mail; however, additional
solicitations may be made in person or by telephone by our
officers and employees. The estimated cash expenses to be
incurred in connection with the exchange offer will be paid by
us and will include fees and expenses of the exchange agent,
accounting, legal, printing and related fees and expenses.
Transfer Taxes
Holders who tender their old notes for exchange will not be
obligated to pay any transfer taxes in connection with that
tender or exchange, except that holders who instruct us to
register exchange notes in the name of, or request that old
notes not tendered or not accepted in the exchange offer be
returned to, a person other than the registered tendering holder
will be responsible for the payment of any applicable transfer
tax on those old notes.
This exchange offer is intended to satisfy our obligations under
the registration rights agreement, dated August 20, 2004 by
and among us, the guarantors party thereto, and the initial
purchasers of the old notes. We will not receive any proceeds
from the issuance of the exchange notes in the exchange offer.
We will receive in exchange old notes in like principal amount.
We will retire or cancel all of the old notes tendered in the
exchange offer.
On August 20, 2004, we issued and sold the old notes. We
used the proceeds from the offering of the old notes, together
with borrowings under the senior credit facilities and equity
contributions from certain affiliates of Carlyle, to fund
payment of the consideration for the Acquisition and to pay
related fees and expenses. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operation — Liquidity and Capital Resources” and
“The Acquisition.”
The following table sets forth our capitalization as of
December 31, 2004. This table should be read in conjunction
with the information contained in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
the notes thereto included elsewhere in this prospectus.
The revolving credit portion of our senior credit facilities
provide for up to $50.0 million of revolving credit
borrowings, none of which is outstanding as of the date hereof.
See “Description of Senior Credit Facilities.”
(2)
A payment was made on February 28, 2005 for
$15.0 million against the term loan facility reducing this
amount to $270.0 million.
The following table sets forth certain of our selected
historical financial data including consolidated financial data
for the 2004 Post-Acquisition period (which are referred to in
the table below under the heading Successor) and the combined
financial data of the MRO division of Dunlop Standard (which are
referred to in the table under the heading Predecessor). The
financial data as of December 31, 2004, and for the 2004
Post-Acquisition Period, have been derived from the audited
consolidated financial statements of Standard Aero Holdings,
Inc. included elsewhere in this prospectus as of such date and
for such period. The financial data as of December 31, 2003
and for the 2004 Predecessor period and for the years ended
December 31, 2003 and 2002 have been derived from the
audited combined financial statements of the MRO division of
Dunlop Standard included elsewhere in this prospectus as of such
date and for such periods. The financial data as of
December 31, 2002 and for the year ended December 31,2001 have been derived from the audited combined financial
statements of the MRO division of Dunlop Standard as of such
date and for such period, which are not included elsewhere in
this prospectus. The financial data as of December 31, 2001
and 2000 and for the year ended December 31, 2000, have
been derived from the unaudited accounting records of the MRO
division of Dunlop Standard as of such dates and for such
period, which are not included elsewhere in this prospectus. You
should read these data in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial
statements, including the related notes, appearing elsewhere in
this prospectus.
August 25 -
January 1 -
Year Ended December 31,
December 31,
August 24
2004
2004
2003
2002
2001
2000
Successor
Predecessor
(In thousands, except ratios)
Statements of operations data:
Revenues
$
284,116
$
509,385
$
545,029
$
461,173
$
436,830
$
340,776
Operating expenses
Cost of revenues
(251,099
)
(423,867
)
(456,058
)
(382,484
)
(370,420
)
(290,029
)
Selling, general and administrative expenses
(22,400
)
(29,646
)
(39,783
)
(36,319
)
(36,816
)
(24,611
)
Amortization of intangible assets
(3,262
)
(1,835
)
(2,752
)
(2,752
)
(3,895
)
(3,893
)
Amortization of goodwill(1)
—
—
—
—
(2,033
)
(2,041
)
Total operating expenses
(276,761
)
(455,348
)
(498,593
)
(421,555
)
(413,164
)
(320,574
)
Income from operations
7,355
54,037
46,436
39,618
23,666
20,202
Interest expense
(13,706
)
(4,835
)
(8,118
)
(11,689
)
(14,618
)
(15,240
)
(Loss) income before income taxes
(6,351
)
49,202
38,318
27,929
9,048
4,962
Benefit (provision) for income taxes
3,143
(15,994
)
(13,322
)
(10,259
)
(3,820
)
(1,630
)
Net (loss) income
$
(3,208
)
$
33,208
$
24,996
$
17,670
$
5,228
$
3,332
Other financial data:
Capital expenditures, net (2)
$
6,385
$
11,710
$
16,417
$
29,194
$
43,881
$
19,326
Depreciation and amortization
9,124
14,229
19,685
18,928
17,778
16,170
Net cash provided by (used in) operating activities
19,819
36,441
64,299
1,878
31,085
(5,954
)
Net cash used in investing activities
(670,396
)
(11,598
)
(16,320
)
(28,895
)
(43,796
)
(19,284
)
Net cash provided by (used in) financing activities
Effective January 1, 2002, goodwill was no longer amortized
in accordance with Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 142,
Goodwill and Other Intangible Assets. The following table
presents reported net income and income adjusted to exclude
goodwill amortization for the years ended December 31, 2001
and 2000:
Capital expenditures, net includes acquisition of
intangibles — licenses, acquisition of property, plant
and equipment, acquisition of rental assets and spare engines
less proceeds from disposal of rental assets and spare engines.
(3)
Ratio of earnings to fixed charges is calculated by dividing
income before income taxes plus fixed charges by fixed charges.
Fixed charges consist of interest expense and amortization of
deferred finance costs and an estimate of interest within rental
expense. Our earnings were inadequate to cover fixed charges for
the period from August 25, 2004 to December 31, 2004
by approximately $6.4 million.
(4)
Divisional equity includes the owner’s investment in the
division, accumulated earnings and certain inter-company
advances that represented investing and financing activities
related to the division.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION
Overview
Set forth below is certain unaudited pro forma combined
financial data for the year ended December 31, 2004. The
unaudited pro forma combined statement of operations data for
the year ended December 31, 2004, have been derived from
the audited combined financial statements of the MRO division of
Dunlop Standard for the 2004 Predecessor period and from the
audited consolidated financial statements of Standard Aero
Holdings, Inc. for the 2004 Post-Acquisition period, and give
effect to the Acquisition, including the related financing
transactions, as if it had occurred as of January 1, 2004.
The unaudited pro forma financial data do not purport to
represent what our results of operations would have been if the
Acquisition had occurred on such date, or what our results of
operations will be for any future period.
The Acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141,
Business Combinations, pursuant to which the total
purchase price of the Acquisition, including related fees and
expenses, was allocated to our net assets based upon these
estimated fair value. The final allocation of the total purchase
price to our net assets was made after the closing of the
Acquisition based on a formal valuation analysis of the fair
value of our assets and the resolution of any post-closing
purchase price adjustments pursuant to the purchase agreement
relating to the Acquisition.
The Acquisition purchase price, including direct costs of the
Acquisition of $28.0 million, was $699.7 million. The
Acquisition was financed with $325.0 million of
indebtedness borrowed under the term-loan portion of our senior
credit facilities, the issuance of $200.0 million of the
notes, and $215.0 million of equity contributed by Carlyle.
We allocated the purchase price based on the fair values of the
assets acquired and liabilities assumed at the acquisition date,
as follows:
The unaudited pro forma combined financial data should be read
together with “Selected Historical Financial Data,”
“Management’s Discussion and Analysis of Financial
Condition and Results of
(1) Cost of revenues for the Successor include
$21.4 million of inventory costs which resulted from the
adjustments to fair value at the date of Acquisition.
(2) Reflects the incremental amortization of OEM
authorizations and licenses and the incremental depreciation of
property, plant and equipment resulting from the adjustments to
fair value as follows:
Eliminate Predecessor amortization of OEM authorizations and
licenses
$
(1,909
)
Record pro forma amortization of OEM authorizations and licenses
(Note A)
2,018
Incremental amortization
109
Record depreciation on adjustment to fair value of property,
plant and equipment, net
225
Incremental amortization and depreciation
$
334
Note A
The OEM authorizations and licenses are amortized over the
estimated useful lives or terms of licenses using the
straight-line method over a period of 4 to 17 years. The
fair value of the OEM authorizations and licenses at the date of
Acquisition was $38,350.
(3) Reflects the Carlyle Management Fee for the period
January 1 to August 24, 2004 based on the annual fee of
$1,500.
(4) Reflects the incremental amortization of intangible
assets, other than OEM authorizations and licenses, resulting
from the adjustments to fair value for the period January 1
to August 24, 2004. The customer relationships are
amortized over the estimated useful lives using the
straight-line method over a period of 1 to 20 years. The
fair value of the customer relationships at the date of
Acquisition was $98,000. The technology and other intangibles
are amortized over the estimated useful lives using the
straight-line method over a period of 5 years. The fair
value of the technology and other intangibles at the date of
Acquisition was $7,900. Indefinite lived intangible assets not
subject to amortization are trademarks. The fair value of the
trademarks at the date of Acquisition was $97,300. Goodwill is
not subject to amortization. The resulting goodwill at the date
of Acquisition which is not subject to amortization was $249,481.
(5) Reflects the elimination of Predecessor interest
expense and amortization of deferred financing costs related to
the Predecessor’s bank debt.
(6) Reflects the recording of interest expense, including
the amortization of deferred financing costs, related to the
senior credit facilities and the notes. Interest expense related
to the notes has been calculated using the stated interest rate
of the notes of
81/4%.
The interest expense related to the senior credit facilities has
been calculated using the historical monthly LIBOR rate plus
2.5% for the period from January 1, 2004 to August 24,2004, which resulted in a weighted average rate of 3.76%. Each
0.125% change in the assumed interest rate of the senior credit
facilities would result in a change in annual interest expense
of $406, based on principal of $325,000. Pro forma interest
expense reflects the following:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read together with
“Selected Historical Financial Data,”“Unaudited
Pro Forma Condensed Combined Financial Information” and our
consolidated and combined financial statements and the related
notes included elsewhere in this prospectus. This discussion
contains forward-looking statements about our business,
operations, and the markets for our products. Our future results
and financial condition may differ materially from those we
currently anticipate as a result of the factors we describe
under “Forward-Looking Statements,”“Risk
Factors” and elsewhere in this prospectus.
Basis of Presentation
On August 24, 2004, we acquired the maintenance, repair and
overhaul, or MRO, business of Dunlop Standard Aerospace Group
Limited (which we refer to as Dunlop Standard or Predecessor).
We refer to that transaction as the “Acquisition.” For
more information relating to the Acquisition, see “The
Acquisition.” We are a wholly owned subsidiary of Standard
Aero Acquisition Holdings, Inc., which like us, is a corporation
formed at the direction of The Carlyle Group.
Prior to the Acquisition, the MRO business of Dunlop Standard
was not operated as a stand-alone business, but as part of
Dunlop Standard’s broader operations. Due to the
Acquisition, and the resultant application of purchase
accounting, Dunlop Standard’s pre-Acquisition combined
financial statements and our post-Acquisition consolidated
financial statements have been prepared on different bases of
accounting and therefore are not necessarily comparable. In the
presentation of our results of operations and the discussion of
our business in this prospectus, the period from January 1,2004 through August 24, 2004 is referred to as the 2004
Predecessor period and the period from August 25, 2004
through December 31, 2004 is referred to as the 2004
Post-Acquisition period. Financial results for the 2004
Predecessor period and the 2004 Post-Acquisition period have
sometimes been combined in this Prospectus for convenience of
discussion and are together referred to as “combined
2004.”
Overview
We are a leading independent provider of aftermarket MRO
services for gas turbine engines used primarily for military,
regional and business aircraft. We also supply repair and
overhaul services of gas turbine engines used in co-generation
and energy supply as well as consultancy and redesign services
related to the MRO process and facilities.
Our Aviation MRO segment is our only reportable segment. Our
Redesign Services and Energy Services operating segments are not
reportable and have been combined and disclosed in “Other
Services” as they do not meet any of the quantitative
thresholds under SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. Our
Aviation MRO segment involves the comprehensive MRO services
that we provide on a wide range of aircraft engines, modules and
accessories for military, regional and business aircraft. Our
Other Services include the MRO services, control systems and
engineering services that we provide to the power generation,
mechanical drive and cogeneration markets. Our Other Services
also include our ART business through which we provide
consulting services to transform and optimize efficiencies in
the MRO process and facilities of certain of our customers.
Generally, manufacturer specifications, government regulations
and military maintenance regimens require that engines undergo
MRO servicing at regular intervals or upon the occurrence of
certain events during the serviceable life of each engine. As a
result, the aggregate volume of MRO services required for any
particular engine platform is a function of three factors:
•
the number of engines in operation (which we refer to as the
installed base);
Because we provide MRO services with respect to specific engine
platforms, the services we provide, and thus our revenues, are
influenced to a significant degree by the size, age and
utilization rate of the installed base of those engine platforms.
Trends Affecting Our Business
We believe that during 2005 our relationships with our military
and regional airline customers, which were the primary drivers
of our improved combined 2004 revenues, will continue to provide
areas of opportunity for us.
The utilization rate of aircraft engines for the
U.S. military has been significantly affected during the
past several years by the increased operational tempo of the
U.S. military related to the war on terror. This increased
tempo has led to an increase in required aircraft engine MRO
services. While our combined 2004 revenues benefited from this
trend, we do not expect that the operating tempo of the
U.S. military will continue to be as high during 2005 as it
was during 2004. We have also benefited from an increasing
reliance by the U.S. military on outsourcing maintenance
and repair services, including aircraft engine MRO services and
MRO redesign services and we expect that this trend will
continue. Our contracts with military aviation end-users
contributed significantly to our revenues in recent periods. The
growth in this portion of our combined 2004 revenue base was
largely due to the expansion of the scope of services provided
under our Kelly Air Force Base contract. While we expect that
the Kelly Air Force Base contract will continue to contribute
significantly to our revenues during 2005, we anticipate that
2005 revenues under this contract will be lower than they were
during 2004.
The principal military engine that we service for military
customers is the Rolls-Royce T56, which powers the C-130
Hercules, P-3 Orion, and E2C Hawkeye aircraft. We provide T56
MRO services under long-term contracts to the U.S. Air Force and
Navy, the Canadian Air Force and to other militaries throughout
the world. We believe that there are over 3,800 T56 engines
installed in the U.S. military fleet. The T56 installed
base is expected to gradually decline as P-3 Orions and C-130
models A through H are retired and replaced with the C-130J,
which is powered by the AE2100 engine. However, we expect that
revenues lost due to the decreased size of the T56 installed
base will be partially offset by revenues generated by providing
MRO services for AE2100 engines.
We believe that we have the opportunity to continue to grow our
revenues from our regional airline customers. Since their
introduction in the 1990s, regional jets have been replacing
older turboprop-powered aircraft. As a result of this trend, our
revenues generated by our MRO services of turboprop engines have
been relatively flat in recent years and will likely decline in
the future. We anticipate, however, that increasing revenues
generated by providing MRO services to the growing fleet of
regional jet aircraft using the CF34 and AE3007 engines should
more than offset expected declines in MRO services for turboprop
engines. We have invested significant capital in obtaining the
OEM authorizations and licenses for the AE3007 and CF34 engines
and in the advanced facilities in which we provide MRO services
for them. In 1999 we started to realize significant revenues
from the AE3007 platform, which was introduced in 1995, and
anticipate that the age and utilization rates of this engine
will necessitate scheduled maintenance. We do not expect to
fully realize the benefit of our investment in the CF34 platform
until 2007, when we expect the first significant volumes of CF34
overhauls, and until such time our gross profit margins will be
impacted by the fixed costs of this program.
We typically provide MRO services to our regional and business
aviation customers under “time-and-materials”
arrangements pursuant to which we charge our customer a price
based on the specific work to be performed on each engine. In
some cases, this price is based on negotiated hourly rates for
labor and for replacement parts. We also provide MRO services to
our regional customers under fixed price contracts, similar to
the fixed price contracts that we enter into with our military
aviation customers, or under fixed price per engine utilization
arrangements, a variation of a fixed-price arrangement pursuant
to which customers pay us a negotiated price per hour or cycle
that each engine is operated and we assume responsibility for
MRO services for that engine.
As a result of the Acquisition, our assets and liabilities were
adjusted to their fair market values as of the closing date. The
inventory valuations caused an increase in our cost of revenues
due to increased carrying value of our inventory and work in
process. This resulted in a $21.4 million reduction in our
income from operations that we would otherwise have recorded in
the 2004 Post-Acquisition period. Additionally, the excess of
total purchase price over the fair value of our assets and
liabilities at closing was allocated to goodwill and other
intangible assets. Goodwill and other intangible assets with
indefinite lives are subject to periodic impairment review.
Intangible assets with definite lives are amortized and charged
as an expense against operating income.
As set forth in greater detail in the table below, as a result
of the application of purchase accounting, our intangible assets
with definite lives were fair valued from a gross carrying
amount of $114.3 million prior to the consummation of the
Acquisition to $144.3 million after the consummation of the
Acquisition, and were assigned new amortization periods.
Weighted
Gross
Average
Carrying
Amortization
Value
Period
(In millions)
Customer relationships
$
98.0
17.4 years
OEM authorizations
38.4
14.2 years
Technology
2.0
5 years
Databases
5.9
5 years
In addition, goodwill and trademarks increased from an aggregate
of $74.8 million and $42.0 million, respectively,
prior to the consummation of the Acquisition to
$249.5 million and $97.3 million, respectively, after
the consummation of the Acquisition. These intangible assets are
subject to annual impairment testing.
We incurred transaction fees of approximately
$54.1 million, including deferred financing fees, fees paid
to Carlyle and other fees and expenses as a result of the
Acquisition. Those fees related to the Acquisition were
capitalized as part of the purchase price and allocated to our
net assets in accordance with purchase accounting, and those
fees associated with financing the Acquisition were capitalized
as deferred financing expense and are amortized over the
applicable term of the related financings. Transaction fees and
expenses that were not capitalized as part of the purchase price
or deferred financing were expensed.
As discussed below in “— Liquidity and Capital
Resources,” we incurred significant indebtedness in
connection with the consummation of the Acquisition, and our
total indebtedness and related interest expenses is
significantly higher than prior to the Acquisition.
Financial Statement Presentation
The following discussion provides a brief description of certain
items that appear in our consolidated financial statements and
the combined financial statements of Dunlop Standard and general
factors that impact these items.
Revenues. Revenues represents gross sales principally
resulting from the MRO services and parts that we provide.
Revenues related to our Other Services are based on services
provided to the end customer pursuant to the contractual terms
and conditions of the service agreements.
Cost of revenues. Cost of revenues includes all direct
costs required to provide our MRO services. These costs include
the cost of parts, labor for engine disassembly, assembly and
repair, spare engines, and overhead costs directly related to
the performance of MRO services. Overhead costs also include the
cost of our MRO facilities, engineering, quality and production
management, commercial credit insurance, depreciation of
equipment and facilities and amortization of the cost to acquire
OEM authorizations. Cost
of revenues related to our ART business include the cost of
labor, subcontracted services and overhead costs directly
related to the performance of MRO redesign services.
Selling, general and administrative expense. Selling,
general and administrative, or SG&A, expense includes the
cost of selling our services to our customers and maintaining a
global sales support network, including salaries of our direct
sales force. General costs to support the administrative
requirements of the business such as finance, accounting, human
resources and general management are also included.
Critical Accounting Policies
The accounting policies discussed below are important to the
presentation of our results of operations and financial
condition and require the application of judgment by our
management in determining the appropriate assumptions and
estimates. These assumptions and estimates are based on our
previous experience, trends in the industry, the terms of
existing contracts and information available from other outside
sources and factors. Adjustments to our financial statements are
recorded when our actual experience differs from the expected
experience underlying these assumptions. These adjustments could
be material if our experience is significantly different from
our assumptions and estimates. Below are those policies applied
in preparing our financial statements that management believes
are the most dependent on the application of estimates and
assumptions.
Revenue recognition. We generally recognize revenues
generated by our services or parts sales when the services are
completed or repaired parts are shipped to the customer. Amounts
that are received in advance from our customers are recorded as
unearned revenue. Lease income associated with the rental of
engines or engine modules to customers is recorded based on
engine usage as reported by the customer. In connection with
fixed price per engine utilization services that we provide, we
receive payments from customers in advance of completion of
services or shipment of repaired parts to the customer, which
are recorded as deferred revenue. These payments are based on
contractual terms and conditions pursuant to which customers pay
for services or products based on aircraft usage.
Reserves for losses on fixed-price work orders. Losses on
work orders generally result from fixed-price agreements that we
have with customers and result when the costs of providing MRO
services under a particular work order exceed the agreed-upon
price for the parts and services under the underlying agreement.
We provide a reserve for losses on work orders in the event that
a loss on a particular work order becomes probable and
estimable. We are unable to estimate the existence or size of
losses until engines are delivered to us, despite our prior
experience under a particular contract. This is due to the fact
that the number of engines that will be delivered under the
contract is unknown and the condition of each engine and the
required MRO services vary from engine to engine. As a result,
loss reserves only reflect our estimate of losses we expect to
incur on engines already delivered to and inspected by us. The
reserve is provided by increasing our cost of revenues by a
reasonable estimate of the probable loss.
Reserve for warranty costs. We provide reserves to
account for costs associated with warranty claims. Warranty
claims arise when an engine we service fails to perform to
required specifications during the relevant warranty period. The
warranty reserve is provided for by increasing our cost of
revenues by an amount based on our current and historical
warranty claims and associated repair costs.
Reserve for doubtful accounts receivable. We provide a
reserve for doubtful accounts receivable that accounts for
estimated losses that result from our customers’ inability
to pay for our MRO services. This reserve is based on a
combination of our analyses of history, aging receivables,
financial condition of a particular customer and political risk.
Our estimates are net of credit insurance coverage that we
maintain for most of our commercial customers. The provision for
uncollectible accounts receivable is charged against operating
income in the period when such accounts are determined to be
uncollectible, and has historically been immaterial in amount.
Nevertheless, we believe that ongoing analysis of this reserve
is important due to the high concentration of revenues within
our customer base.
Goodwill and intangible assets. Goodwill and other
intangible assets with indefinite lives are not amortized, but
are subject to impairment testing both annually and when there
is an indication that
an impairment has occurred, such as an operating loss or a
significant adverse change in our business. Impairment testing
includes use of future cash flow and operating projections,
which, by their nature, are subjective. If we were to determine
through such testing that an impairment has occurred, we would
record the impairment as a charge against our income. We
amortize intangible assets that we have determined to have
definite lives, such as OEM authorizations, technology and
databases, over their estimated useful lives. We amortize
intangible assets that have definite lives over periods ranging
from one to 20 years with a weighted average of
12.6 years. Our specific OEM licenses and authorizations
are amortized over four to 17 years. The Predecessor,
amortized its intangibles that have definite lives over a period
ranging from three to 40 years with a weighted average of
31.5 years, and specific OEM licenses and authorizations
were amortized over three to 10 years. All of our
trademarks are classified as having indefinite lives.
Impairment of long-lived assets. We review long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets
may not be recoverable in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Recoverability of assets to
be held and used is measured by a comparison of the carrying
amount of an asset to undiscounted estimated future net cash
flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets and charged against
our income.
Inventory. We value our inventory on an ongoing basis
using the first-in first-out, or FIFO, method, and state our
inventories at the lower of cost or net realizable value. In
making such determinations, cost represents the actual cost of
raw materials, direct labor and an allocation of overhead in the
case of work in progress and finished goods. We write down our
inventory for estimated obsolescence or unmarketable inventory
on a part-by-part basis using aging profiles. Aging profiles are
determined based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are
less favorable than those projected, inventory adjustments may
be required.
Income taxes. We account for income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are estimated using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. We do not
provide taxes on undistributed earnings of foreign subsidiaries
that are considered to be permanently reinvested. If
undistributed earnings were remitted, foreign tax credits would
substantially offset any resulting U.S. tax liability.
The following table sets forth certain financial data for the
2004 Post-Acquisition period under the heading
“Successor,” and for the 2004 Predecessor period and
the years ended December 31, 2003 and 2002 under the
heading “Predecessor.”
August 25 -
January 1 -
Year Ended December 31,
December 31,
August 24
2004
2004
2003
2002
Successor
Predecessor
(In millions)
Revenues
$
284.1
$
509.4
$
545.0
$
461.2
Cost of revenues
251.1
423.9
456.1
382.5
Gross profit
33.0
85.5
89.0
78.7
Selling, general and administrative expense
22.4
29.6
39.8
36.3
Amortization of intangible assets and goodwill
3.3
1.8
2.8
2.8
Income from operations
7.4
54.0
46.4
39.6
Interest expense
13.7
4.8
8.1
11.7
(Loss) income before income taxes
(6.4
)
49.2
38.3
28.0
Benefit (provision) for income taxes
3.1
(16.0
)
(13.3
)
(10.3
)
Net (loss) income
$
(3.2
)
$
33.2
$
25.0
$
17.7
2004 Post-Acquisition period and 2004 Predecessor period
compared to the Year Ended December 31, 2003 for the
Predecessor.
Revenues. Revenues during the 2004 Post-Acquisition
period were $284.1 million and were $509.4 million
during the 2004 Predecessor period. Revenues for the year ended
December 31, 2003 were $545.0 million. Combined 2004
revenues increased by $248.5 million, to
$793.4 million, or 45.6% compared to the year ended
December 31, 2003. This increase primarily resulted from
additional combined 2004 revenues of $140.3 million
generated from providing parts to the U.S. Air Force under
the expanded scope of our Kelly Air Force Base contract,
additional combined 2004 revenues of $30.3 million
generated under our new T56 contract with the U.S. Navy and
an increase in combined 2004 revenues from regional airline
customers of $50.8 million primarily due to an increase in
regional jet engine maintenance requirements.
Revenues under long term contracts were approximately 51.8% of
combined 2004 revenues and 38.2% in 2003. Revenues from military
end-users accounted for approximately 47.3% and 33.3% of our
combined 2004 revenues and total revenues in 2003, respectively.
Gross profit. Gross profit during the 2004
Post-Acquisition period was $33.0 million and was
$85.5 million during the 2004 Predecessor period. For the
year ended December 31, 2003, gross profit was
$89.0 million. Gross profit during the 2004
Post-Acquisition period was affected by $21.4 million of
fair value inventory and work in process adjustments related to
the application of purchase accounting in connection with the
Acquisition. Gross profit as a percentage of revenues was 11.6%
for the 2004 Post-Acquisition period and was 16.8% for the 2004
Predecessor period. During the year ended December 31,2003, gross profit as a percentage of revenues was 16.3%. The
decrease in the gross profit as a percentage of revenues during
the 2004 Post-Acquisition period was primarily attributable to a
$21.4 million increase in the cost basis for inventory and
work in process that was recorded at fair value on
August 25, 2004 and sold during the period. This decrease
was partially offset by operational efficiencies, gains from
training and protocols, and improved overhead absorption of
approximately $7.0 million.
Selling, general and administration expense. SG&A
expense during the 2004 Post-Acquisition period was
$22.4 million and was $29.6 million during the 2004
Predecessor period. For the year ended
December 31, 2003, SG&A expense was $39.8 million.
Combined 2004 SG&A expense, which includes management fees
of $0.5 million, increased $12.3 million during 2004
to $52.0 million, or 30.8% compared to combined SG&A for the
year ended December 31, 2003. SG&A expense as a
percentage of revenues was 7.9% for the 2004 Post-Acquisition
period and was 5.8% for the 2004 Predecessor period. During the
year ended December 31, 2003, the SG&A expense as a
percentage of revenues was 7.3%. The increase in combined 2004
SG&A expense was primarily due to expenses associated with
supporting increased MRO volumes in our Aviation MRO services
segment as well as $2.8 million in additional SG&A
expenses associated with supporting our Energy Services
business, additional audit and professional fees and insurance
expense and $4.7 million in non-recurring expenses
associated with the Acquisition.
Income from operations. Income from operations during the
2004 Post-Acquisition period was $7.4 million and was
$54.0 million during the 2004 Predecessor period. For the
year ended December 31, 2003, income from operations was
$46.4 million. Income from operation for the 2004
Post-Acquisition period was impacted by the transaction-related
expenses discussed above and increased amortization on
intangible assets that were revalued as part of the Acquisition.
Revenues. Total revenues increased by $83.9 million,
or 18.2%, to $545.0 million for the year ended
December 31, 2003 from $461.2 million for the year
ended December 31, 2002. This increase primarily resulted
from the expanded scope of our Kelly Air Force Base contract
beginning in October 2003, which resulted in increased revenues
of $27.6 million, and $44.3 million increase in
revenues from regional airline customers for our AE3007, CF34
and APU MRO services.
Revenues under long term contracts were approximately 38.2% of
revenues in 2003 and 37.3% in 2002. Revenues from military end
users were approximately 33.3% and 37.3% in 2003 and 2002,
respectively.
Gross profit. Gross profit increased $10.3 million,
or 13.1%, to $89.0 million, or 16.3% of total revenues, for
the year ended December 31, 2003 from $78.7 million,
or 17.1% of total revenues, for the year ended December 31,2002. This increase was largely driven by the increase in
revenues during 2003, as discussed above. The increase was
partially offset by losses of $4.4 million on CF34 services
in 2003 resulting from the startup of our CF34 program.
Selling, general and administrative expense. SG&A
expense increased $3.5 million, or 9.5%, to
$39.8 million, or 7.3% of total revenues, for the year
ended December 31, 2003 from $36.3 million, or 7.9% of
total revenues, for the year ended December 31, 2002. This
increase reflects an increase in insurance costs of
$0.6 million in 2003 resulting from increased revenues. In
addition, during 2003 we expanded our sales, marketing and
business development capabilities, primarily for the CF34, ART
and Energy Services businesses. This resulted in an additional
$1.0 million of SG&A expense during 2003.
Income from operations. For the reasons discussed above,
income from operations increased $6.8 million, or 17.2%, to
$46.4 million, or 8.5% of total revenues for the year ended
December 31, 2003 from $39.6 million, or 8.6% of total
revenues, for the year ended December 31, 2002.
The Company has one reportable segment, Aviation MRO. The
Redesign Services and Energy Services operating segments are not
reportable and have been combined and disclosed in “Other
Services” as they do not meet any of the quantitative
thresholds under SFAS No. 131. The following table
reconciles segment revenue and income from operations to total
revenue and net income:
August 25 -
January 1 -
Year Ended December 31,
December 31,
August 24
2004
2004
2003
2002
Successor
Predecessor
(In millions)
Revenues:
Aviation MRO
$
266.8
$
491.2
$
520.1
$
438.0
Other Services
17.3
18.2
24.9
23.2
Total revenue
$
284.1
$
509.4
$
545.0
$
461.2
Segment Income (Loss) From Operations:
Aviation MRO
$
35.5
$
63.5
$
51.1
$
40.0
Other services
(0.8
)
(4.2
)
(1.2
)
3.3
Segment income from operations
34.6
59.3
49.9
43.3
Corporate expenses
(27.3
)
(5.3
)
(3.5
)
(3.7
)
Income from operations
7.4
54.0
46.4
39.6
Interest expense, net
(13.7
)
(4.8
)
(8.1
)
(11.7
)
(Loss) income before income taxes
(6.4
)
49.2
38.3
27.9
Benefit (provision) for income taxes
3.1
(16.0
)
(13.3
)
(10.3
)
Net (loss) income
$
(3.2
)
$
33.2
$
25.0
$
17.7
Aviation MRO
2004 Post-Acquisition period and 2004 Predecessor period
compared to the Year Ended December 31, 2003 for the
Predecessor.
Revenues. Revenues for our Aviation MRO segment during
the 2004 Post-Acquisition period were $266.8 million and
were $491.2 million during the 2004 Predecessor period. For
the year ended December 31, 2003 revenues for the segment
were $520.1 million. The $237.9 million, or 45.7%,
increase in combined 2004 revenues to $758.0 million was
primarily attributable to an increase in revenues generated by
our new contracts including $140.3 million in additional
combined 2004 revenues generated by providing parts to the
U.S. Air Force under the expanded scope of our Kelly Air
Force Base MRO services contract and $30.3 million of
combined 2004 revenues generated under our new contract to
provide T56 MRO services to the U.S. Navy. We also
experienced a general increase in T56 and AE2100 volume due to
the increased operational tempo of the U.S. and foreign
militaries. In addition, $50.8 million of increased
combined 2004 revenues in this segment was attributable to an
increase in MRO volumes for the AE3007 and CF34 engines
resulting from an increase in the installed base, utilization
and work scopes for these regional jet engine platforms.
Income from operations. Aviation MRO segment income from
operations during the 2004 Post-Acquisition period was
$35.5 million and was $63.5 million during the 2004
Predecessor period. Income from operations during the two
periods reflects the increases in volume changes described
above. For the year ended December 31, 2003, Aviation MRO
segment income from operations was $51.1 million. Aviation
MRO segment income from operations as a percentage of revenues
was 13.3% for the 2004 Post-Acquisition period and was 12.9% for
the 2004 Predecessor period. During the year ended
December 31, 2003, Aviation MRO segment income from
operations was 9.8%. The increase in segment income from
operations as a percentage of revenues during the 2004
Post-Acquisition period was primarily attributable
to increases in operational efficiency resulting from training
and protocols, improved overhead absorption and labor
efficiencies on our CF34 and turboprop programs. This increase
was partially offset by losses incurred on a contract with a
foreign military and increased warranty costs.
Revenues. Aviation MRO segment revenues increased by
$82.1 million, or 18.8%, to $520.1 million for the
year ended December 31, 2003 from $438.0 million for
the year ended December 31, 2002. This increase was
primarily due to increased MRO services on regional jet engines
including a $23.0 million increase in revenues generated in
2003 by our CF34 MRO operations, compared to $1.0 million
in revenues generated by these operations in 2002, growth in
demand for AE3007 MRO services, and to an increase in APU
revenues resulting from new contracts with regional jet
operators. Revenues generated by providing services for
turboprop engine platforms were flat during the periods.
Aviation MRO revenue increases were also driven by
$27.6 million of revenues generated during the 2003 period
by providing parts to the U.S. Air Force under the expanded
scope of our Kelly Air Force Base contract and a general
increase in T56 and AE2100 volume due to the increased
operational tempo of the U.S. military. This increase was
partially offset by a reduction in revenues from the Canadian
Air Force, which increased its T56 times-between-overhaul and
reduced utilization in 2003.
Income from operations. Aviation MRO segment income from
operations increased by $11.2 million, or 27.9%, to
$51.1 million for the year ended December 31, 2003
from $40.0 million for the year ended December 31,2002. The increase in income from operations came as a result of
higher volumes of military contracts and regional jet engine MRO
and operational efficiencies that we realized due to improved
training and protocols. The increase was partially offset by a
reduction in our turboprop MRO pricing resulting from increased
competition and losses of $4.4 million on CF34 services in
2003 resulting from the startup of our CF34 engine program.
Other Services
2004 Post-Acquisition period and 2004 Predecessor period
compared to the Year Ended December 31, 2003 for the
Predecessor.
Revenues. Revenues generated by our Other Services during
the 2004 Post-Acquisition period were $17.3 million and
were $18.2 million during the 2004 Predecessor period. For
the year ended December 31, 2003, Revenues generated by our
Other Services were $24.9 million. Combined 2004 revenues
generated by our Other Services increased $10.6 million or
42.5% to $35.5 million. This increase was primarily due to
increased engine MRO for pipeline operators and new customers
operating cogeneration units in the chemical processing industry
and our ART contracts at Oklahoma Air Logistics Center and Ogden
Air Logistics Center.
Loss from operations. Loss from operations generated by
our Other Services during the 2004 Post-Acquisition period was
$0.8 million compared to a loss of $4.2 million during
the 2004 Predecessor period. For the year ended
December 31, 2003, loss from operations generated by our
Other Services was $1.2 million. We have made a significant
investment in developing our ART business during 2004 in an
effort to capitalize on the trend towards outsourcing. Our
expenditures and related losses in developing our ART business
are primarily associated with hiring and training personnel to
manage and provide our redesign related services and developing
bids to win redesign contracts.
Revenues. Revenues generated by our Other Services
increased by $1.7 million or 7.4% to $24.9 million for
the year ended December 31, 2003 from $23.2 million
for the year ended December 31, 2002. This increase was
primarily due to services contracts related to our redesign
services.
Income (loss) from operations. Income from operations
generated by our Other Services decreased to a loss of
$1.2 million during the year ended December 31, 2003
from an income of $3.3 million for the
year ended December 31, 2002. This decrease is a result of
additional costs associated with the establishment of the Energy
Services and ART businesses.
Liquidity and Capital Resources
Liquidity Requirements
Our principal cash requirements are for working capital, to fund
capital expenditures, and to service our indebtedness. We expect
to satisfy our cash requirements with cash on hand, cash flows
from operations and borrowings under the revolving credit
portion of our senior credit facilities.
We incurred substantial indebtedness in connection with the
Acquisition. Our indebtedness at April 15, 2005 consisted
of:
•
our senior credit facilities, consisting of an eight-year term
loan facility, under which we had outstanding indebtedness of
$270.0 million and a $50.0 million six-year revolving
credit facility, under which we had no outstanding indebtedness;
•
$3.9 million in capital lease obligations; and
•
$200.0 million in aggregate principal amount of
81/4% Senior
Subordinated Notes due 2014.
Borrowings under our senior credit facilities bear interest at
either a floating base rate or a LIBOR rate plus, in each case,
an applicable margin. As of April 15, 2005, our borrowings
under our senior credit facilities bore interest based on LIBOR.
In addition, we pay a commitment fee in respect of unused
revolving commitments at a rate equal to 0.5% per annum.
Subject to certain exceptions, our senior credit facilities
require mandatory prepayments of the loans with 50% of our
annual excess cash flow (as defined in the senior credit
facilities) and with the net cash proceeds of certain assets
sales or other asset dispositions and issuances of debt
securities. The obligations under our senior credit facilities
are guaranteed by all of our existing and future wholly owned
U.S. and Canadian subsidiaries (except for unrestricted
subsidiaries) and by our parent, and are secured by a security
interest in substantially all of our assets and the assets of
our direct and indirect restricted U.S. subsidiaries that
are guarantors, including a pledge of all of our capital stock,
the capital stock of each of our restricted
U.S. subsidiaries and 65% of the capital stock of certain
of our non-U.S. subsidiaries that are directly owned by us
or one of our unrestricted U.S. subsidiaries.
We made optional prepayments under the term loan portion of our
senior credit facilities of $10.0 million on
October 27, 2004, $30.0 million on December 29,2004 and of $15.0 million on February 28, 2005. These
prepayments have been applied against our future scheduled
prepayments and we will not have a scheduled prepayment until
December 2011.
Pursuant to the terms of our senior credit facilities we have
entered into interest rate hedging arrangements for the purpose
of reducing our exposure to adverse fluctuations in interest
rates. On October 12, 2004 we entered into a series of
sequential collar transactions. The following table summarizes
the collar transactions:
The notes have an interest rate of 8.25% and mature on
September 1, 2014. We are required to make interest
payments on these notes each year on March 1 and
September 1 commencing March 1, 2005. Prior to
September 1, 2007 we may redeem up to 35% of the original
principal amount of the notes at a premium with the proceeds of
certain equity issuances. Additionally, at any time on or after
September 1, 2009, we may redeem all or a portion of the
notes at pre-determined premiums. The notes are guaranteed
on a senior subordinated basis by all of our subsidiaries that
provide guarantees under our senior credit facilities. For
additional information regarding the exchange notes, see
“Description of the Exchange Notes.”
We made combined 2004 net capital expenditures of
$18.0 million, which were comprised of $6.4 million
during the 2004 Post-Acquisition period and $11.6 million
during the 2004 Predecessor period. During 2004, these capital
expenditures were, and we expect will continue to be, divided
between general maintenance requirements, rental engine pool
investments and continuing investments in our CF34 program. We
expect to make approximately $18.2 million in capital
expenditures, including net rental engine pool expenditures,
during 2005.
Based on our current operations, we believe that cash on hand,
together with cash flows from operations and borrowings under
the revolving credit portion of our senior credit facilities,
will be adequate to meet our working capital, capital
expenditure, debt service and other cash requirements for the
foreseeable future. However, our ability to make scheduled
payments of principal of, to pay interest on, and to refinance,
our indebtedness to comply with the financial covenants under
our debt agreements, and to fund our other liquidity
requirements will depend on our ability to generate cash in the
future, which is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are
beyond our control. We cannot assure you that our business will
generate cash flows from operations or that future borrowings
will be available under our senior credit facilities in an
amount sufficient to enable us to service our indebtedness or to
fund our other liquidity needs. Any future acquisitions, joint
ventures or other similar transactions will likely require
additional capital and there can be no assurance that any such
capital will be available to us on acceptable terms, if at all.
In connection with the Acquisition, we also entered into a
management agreement with TC Group Management, L.L.C., an
affiliate of The Carlyle Group. Pursuant to this agreement, and
subject to certain conditions, we pay TC Group Management an
annual management fee of $1.5 million. We also have
employee benefit obligations, which will require us to make
future payments.
Covenant Compliance
Our senior credit facilities contain various restrictive
operating and financial covenants, including covenants that are
based on Adjusted EBITDA as defined in our senior credit
facilities. These covenants include a consolidated leverage
ratio covenant that measures the ratio of our outstanding debt
net of cash to our Adjusted EBITDA. This consolidated leverage
ratio covenant required us to have a ratio of outstanding debt
net of cash to Adjusted EBITDA of no more than 6.50 to 1 at
December 31, 2004. Our actual consolidated leverage ratio
at December 31, 2004 was 4.14 to 1.
These covenants also include a minimum consolidated net interest
coverage ratio covenant that measures the ratio of our Adjusted
EBITDA for any period of four consecutive quarters to our
interest expense during the same four quarters. The minimum
interest coverage ratio covenant required us to have a ratio of
Adjusted EBITDA to interest expense ratio of at least 2.00 to 1
at December 31, 2004. Our actual interest coverage ratio
was 3.64 to 1 at December 31, 2004.
We are currently, and for at least the next twelve months,
expect to remain, in compliance in all material respects with
the covenants in the senior credit facilities and the indenture
governing our
81/4% Senior
Subordinated Notes due 2014. For additional information
regarding our senior credit facilities including the other
covenants applicable to us, see “Description of Senior
Credit Facilities.”
We have included information concerning Adjusted EBITDA because
we use this measure to evaluate our compliance with covenants
governing our indebtedness. Under our senior credit facilities,
Adjusted EBITDA represents net income before provision for
income taxes, interest expense, net, and depreciation and
amortization and also adds or deducts, among other things,
unusual or non-recurring items, restructuring, transaction fees,
expenses and management fees pursuant to our management
agreement with Carlyle. Adjusted EBITDA is not a recognized term
under GAAP. Adjusted EBITDA should not be considered in
isolation or as an alternative to net income, net cash provided
by operating activities or other
measures prepared in accordance with GAAP. Additionally,
Adjusted EBITDA is not intended to be a measure of free cash
flow available for management’s discretionary use, as such
measure does not consider certain cash requirements such as
capital expenditures, tax payments and debt service
requirements. Adjusted EBITDA, as included herein, is not
necessarily comparable to similarly titled measures reported by
other companies.
The following table presents a reconciliation of Adjusted
EBITDA, as defined in the senior credit facilities to net income:
August 25 -
January 1 -
Year Ended December 31,
December 31,
August 24
2004
2004
2004
2003
2002
Successor
Predecessor
Combined(4)
Predecessor
(In millions)
Net income
$
(3.2
)
$
33.2
$
25.0
$
17.7
Add:
Depreciation and amortization
9.1
14.2
19.7
18.9
Interest expense, net
13.7
4.8
8.1
11.7
Provision for income taxes
(3.1
)
16.0
13.3
10.3
Expenses associated with the disposal of Dunlop Standard(1)
—
2.3
Expenses associated with Acquisition(2)
2.4
—
—
—
Effect of write-up of inventory and work in progress(3)
21.4
—
—
—
Management fee
0.5
—
—
—
Adjusted EBITDA
$
40.8
$
70.6
$
111.4
$
66.1
$
58.5
(1)
The Predecessor incurred approximately $2.3 million in
compensation expenses associated with the disposal of Dunlop
Standard.
(2)
We incurred approximately $2.4 million in fees and other
expenses associated with negotiating, financing and consummating
the Acquisition that were not capitalized as part of the
purchase price or as deferred financing charges.
(3)
As a result of the Acquisition and the requirements of purchase
accounting, our assets and liabilities, including the amounts
recorded for inventory and work in process, were adjusted to
their fair market values as of the closing date.
(4)
Successor and Predecessor results combined to give twelve months
results as required under the senior credit facilities.
Cash Flows
The following table sets forth our cash flows for the periods
indicated:
August 25 -
January 1 -
Year Ended December 31,
December 31,
August 24
2004
2004
2003
2002
Successor
Predecessor
(In millions)
Net cash provided by operating activities
$
19.8
$
36.4
$
64.3
$
1.9
Net cash used in investing activities
(670.4
)
(11.6
)
(16.3
)
(28.9
)
Net cash provided from (used in) financing activities
678.5
(11.8
)
(45.1
)
13.0
Net increase (decrease) in cash and cash equivalents
Net cash provided by operating activities during the 2004
Post-Acquisition period was $19.8 million and was
$36.4 million during the 2004 Predecessor period. For the
year ended December 31, 2003 net cash provided by
operating activities was $64.3 million. Net cash provided
by operating activities during the 2004 Post-Acquisition period
was primarily attributable to a $39.8 million reduction in
inventory levels. This was partially offset by an increase in
accounts receivable associated with volume increases and
increased cash taxes. Net cash provided by operating activities
for the 2004 Predecessor period was impacted by an increase in
accounts payable. Under the expanded Kelly Air Force Base
contract we have used U.S. government-owned inventory and
recorded a payable for such usage. This has resulted in an
accounts payable of approximately $37.0 million, which will
be discharged during 2005. This increase in cash has been offset
by an increase in accounts receivable and inventories associated
with increased volumes.
Net cash provided by our operating activities for the year ended
December 31, 2003 was $64.3 million compared to
$1.9 million for the year ended December 31, 2002. The
$62.4 million increase in net cash provided by operating
activities in 2003 compared to 2002 was primarily attributable
to improved income from operations and increased accounts
payable.
Net Cash Used in Investing Activities
Net cash used for investing activities was $670.4 million
during the 2004 Post-Acquisition Period and $11.6 million
during the 2004 Predecessor Period. Net cash used for investing
activities for the 2004 Post-Acquisition period included
$699.7 million for the Acquisition, less $35.7 million
of cash acquired and $6.4 million for net capital
expenditures. Net cash used for investing activities for the
2004 Predecessor period was $11.7 million for capital
expenditures. Our capital expenditure requirements during the
2004 Predecessor period and the 2004 Post-Acquisition period
were primarily due to capital expenditures related to our CF34
program and net increases in our rental engine pool.
Historically, cash used in investing activities has been for
capital expenditures on property, plant, and equipment plus net
change in our rental engine pool less disposals of property,
plant, and equipment. Net capital expenditures for the year
ended December 31, 2003 were $16.4 million and reflect
expenditures on our CF34 program and net rental engine
additions. Net capital expenditures for the year ended
December 31, 2002 was $29.2 million and reflect
expenditures on the start-up of our CF34 program, plant
expansions and redesigns in San Antonio, Knoxville and
Tilburg and net rental engine additions.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by (used in) financing activities was
comprised of $678.5 million during the 2004
Post-Acquisition Period and ($11.8) million during the 2004
Predecessor Period. Net cash provided by financing activities of
$678.5 million during the 2004 Post-Acquisition period
included: (1) $525.0 million from the incurrence of
long-term debt in connection with the Acquisition, comprised of
$325.0 million from borrowings under the senior credit
facilities and $200.0 million from the issuance of our
81/4% Senior
Subordinated Notes; (2) a capital contribution of
$215.0 million in connection with the Acquisition;
(3) payment of financing fees of $23.7 million related
to the Acquisition; (4) further contribution from our
parent of $2.8 million in connection with the Acquisition
and (5) repayments of long-term debt totaling
$40.6 million.
During the 2004 Predecessor period and the years ended
December 31, 2003 and 2002, cash provided by or used in
financing activities represented payments to or funding from our
former parent company, Dunlop Standard and changes in Dunlop
Standard’s external indebtedness. Prior to the Acquisition,
we funded our cash flow requirements with our cash flow from
operating activities, borrowings under our previous credit
agreement, and borrowings from Dunlop Standard, or its other
subsidiaries. During the 2004 Predecessor Period and the year
ended December 31, 2003, net cash used by financing
activities related primarily to repayment of related company
indebtedness. During the period ended December 31, 2002,
net cash provided by financing activities was provided primarily
by drawings under Dunlop
Standard’s revolving credit facility and term loan
facility, offset by payments that were received from related
entities.
Commitments
The following table presents our obligations and commitments to
make future payments under contracts and commitments.
Payments Due by Period
Less Than
More Than
Total
1 Year
1-3 Years
3-5 Years
5 Years
(In millions)
Term loan(1)
$
389.9
$
14.3
$
28.4
$
28.4
$
318.8
Capital lease obligations
4.6
2.2
2.4
—
—
Senior subordinated notes(2)
365.0
16.5
33.0
33.0
282.5
Capital commitments
3.1
3.1
—
—
—
Operating lease obligations
22.6
11.3
9.0
1.2
1.1
Total contractual obligations
$
785.2
$
47.4
$
72.8
$
62.6
$
602.4
(1)
Includes required interest payments based on an interest rate at
December 31, 2004 of 4.99%. Scheduled payments have been
included in the interest payment calculation.
(2)
Includes required interest payments at 8.25%.
Inflation
Historically, inflation has not had a material effect on our
results of operations.
Seasonality
Although we have secured several long-term agreements, we record
revenues under these agreements as we actually deliver a
completed service. The work orders that we receive, the number
of repairs or overhauls that we perform and the number of parts
that we deliver in particular periods may vary significantly,
causing our quarterly revenues and results of operations to
fluctuate. We are often unable to predict the precise timing of
the actual receipt of such orders.
Recent Accounting Pronouncements
In December 2004, FASB released SFAS 123R,
Share-Based Payments, that is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. SFAS 123R requires
companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the
grant-date fair value of those instruments, except in certain
circumstances. The standard is applicable to us as of the
beginning of the first interim or annual reporting period
beginning after December 15, 2005. We intend to adopt the
standard on a prospective basis as of January 1, 2006 and
do not expect the adoption of SFAS 123R to have an impact
on our financial condition or results of operations.
In November 2004, the FASB released SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 adopts the view
related to inventories that abnormal amounts of idle capacity
and spoilage costs should be excluded from the cost of inventory
and expensed when incurred. The provisions of
SFAS No. 151 are applicable to inventory costs
incurred during fiscal years beginning after June 15, 2005.
We intend to adopt the standard as of January 1, 2006, and
do not expect the adoption of the standard to have an impact on
our financial condition or results of operation.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential economic loss that may result from
adverse changes in the fair value of financial instruments. Our
results could be impacted by changes in interest rates or
foreign currency exchange rates. We use financial instruments to
hedge our exposure to fluctuations in interest rates and foreign
currency exchange rates. We do not hold financial instruments
for trading purposes. Our policies are reviewed on a regular
basis.
Interest rate risks. We are subject to interest rate risk
in connection with borrowings under our senior credit
facilities. As of April 15, 2005, we had
$285.0 million outstanding under the term-loan portion of
our senior credit facilities, bearing interest at variable
rates. Each change of 0.125% in interest rates would result in a
$0.4 million change in our annual interest expense on
term-loan borrowings. In addition, any borrowings under the
revolving credit portion of our senior credit facilities will
bear interest at variable rates. Assuming that our revolving
credit facility is fully drawn, each 0.125% change in interest
rates would result in a $0.1 million change in annual
interest expense on our revolving loan facility. Any debt we
incur in the future may also bear interest at floating rates.
Pursuant to the terms of our credit agreement we have entered
into interest rate hedging arrangements for the purpose of
reducing our exposure to adverse fluctuations in interest rates.
The credit agreement requires that 50% of our total debt is
fixed or covered under interest rate protection arrangements
described in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
Derivatives used to hedge the variable cash flows associated
with $75.0 million of existing variable-rate debt with
interest rate collars are as follows:
Maximum and minimum interest rates exclude the effect of our
credit spread on the variable rate debt.
Currency risks. Our assets and liabilities in foreign
currencies are translated at the period-end rate. Exchange
differences arising from this translation are recorded in our
statement of operations. Currency exposures can arise from
revenues and purchase transactions denominated in foreign
currencies. Generally, transactional currency exposures are
naturally hedged; that is, revenues and expenses are
approximately matched, but where appropriate, are covered using
forward exchange contracts. We expect to continue to enter into
financial hedges, primarily forward contracts, to reduce foreign
exchange volatility. We are exposed to credit losses in the
event of non-performance by the other party to the derivative
financial instruments. We mitigate this risk by entering into
agreements directly with a number of major financial
institutions that meet our credit standards and that we expect
to fully satisfy their contractual obligations. We view
derivative financial instruments purely as a risk management
tool and, therefore, do not use them for speculative trading
purposes. At December 31, 2004, we did not have any
outstanding foreign currency exchange contracts.
We are a leading independent provider of aftermarket MRO
services for gas turbine engines used primarily for military,
regional and business aircraft. We repair and overhaul a wide
range of aircraft and industrial engines and provide our
customers with comprehensive, value-added maintenance and
redesign solutions. For the year ended December 31, 2004,
we generated combined 2004 revenues of $793.5 million. For
the 2004 Predecessor period our income from operations was
$54.0 million and for the 2004 Post-Acquisition period our
income from operations was $7.4 million. From
January 1, 2001 through December 31, 2004, our
revenues increased at a compound annual growth rate of 22.0%.
We believe we are differentiated from our competitors and well
positioned for growth as a result of our long-term customer
relationships, our advanced engine maintenance expertise, our
parts repair technology, our rapid service turnaround times, the
substantial investments we have made in our facilities, the
service authorizations that we have obtained from OEMs and the
large and growing installed base of engines that we service. For
the year ended December 31, 2004, we generated
approximately 89.8% of our combined 2004 revenues from servicing
engine platforms for which we believe we had the largest or
second-largest worldwide market share among all service
providers. Additionally, 51.8% of our combined 2004 revenues
were generated from customers under long-term contracts.
Generally, manufacturer specifications, government regulations
and military maintenance regimens require that aircraft engines
undergo MRO servicing at regular intervals or upon the
occurrence of certain events. As a result, we believe that the
market for MRO services is less cyclical than other sectors of
the aerospace industry related to the manufacture of new
aircraft.
We were incorporated in June 2004 in connection with the
Acquisition. We have a presence in six countries and have
facilities in five of those countries, with our largest
facilities located in the United States and Canada.
Business Segments
We have one reportable segment, Aviation MRO. Our Redesign
Services and Energy Services operating segments are not
reportable and have been combined as they do not meet any of the
quantitative thresholds under SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information.
These services are referred to in this prospectus as our Other
Services.
Aviation MRO Segment
Our Aviation MRO segment consists of the comprehensive MRO
services that we provide on a wide range of gas turbine engines
utilized on regional, military and business aircraft. Our
comprehensive MRO services include scheduled and unscheduled
engine MRO and accessory shop visits, on-wing and field service
support, engine and accessory reliability management tools,
spare engine and component support, proprietary repair
processes, custom build specifications and fleet management. The
engine lines for which we provide MRO services include the
Rolls-Royce T56/501D, AE2100, AE3007, Gem42 and Model 250,
General Electric CF34, Pratt & Whitney Canada PT6A and
PW100 and Honeywell GTCP APU Series 36 &
Series 85 and RE220. Our Aviation MRO segment generated
combined 2004 revenues of $758.0 million, which represented
95.5% of our combined 2004 revenues.
Other Services
Our Other Services include the MRO services that we provide on
General Electric LM1600 and Rolls-Royce 501K engine platforms
used in non-aviation applications as well as the comprehensive
maintenance service solutions, control systems upgrades and
retrofits, and engineering solutions for the power generation,
mechanical drive, and cogeneration markets. Our Other Services
also include our Affordable Readiness Transformation, or
ART, business under which we provide our redesign services.
We commenced our ART business in 2002 following our successful
experience in redesigning the former Kelly
Air Force Base in order to respond to requirements of the
military for redesign of certain maintenance facilities and
practices. Since that time, we have broadened the reach of our
ART business to include services relating to the design and
implementation of operational redesigns to non-military MRO
operations as well. Our Other Services generated combined 2004
revenues of $35.5 million, which represented 4.5% of our
total combined 2004 revenues for the year.
Our Services
Engine MRO services are generally required at scheduled
intervals prescribed by OEMs, government regulations, military
maintenance or upon the occurrence of certain events or
conditions such as engine damage or sub-standard engine
performance. The cost of servicing an engine and the time
required to complete servicing varies with the age, size and
model of engine, the extent of the repairs being performed and
the type and number of parts that need to be remanufactured or
replaced.
An overhaul of an engine can involve thousands of parts and
numerous separate work orders. Each work order represents a
specific step or process that must be completed during the
course of the overhaul. For example, an overhaul of a
Rolls-Royce T56 engine typically involves the inspection,
replacement or refurbishment of 5,500 or more parts and
approximately 170 separate work orders. We typically average
between 25 and 60 days for a full overhaul on the majority
of our engine programs. In order to overhaul engines quickly, we
must perform and integrate numerous parallel processes and
integrate numerous components just before final assembly.
Engine platforms serviced. The following table provides
summary information regarding the primary engine platforms we
service:
Combined 2004
Date Introduced/ Date
Estimated Product
Engine
Revenues
First Serviced by Us
Life-Cycle Stage
Primary Aircraft Applications
(In millions)
Aviation
Rolls-Royce T56
$
342.6
1954/1960
Declining
Military aircraft including C-130 A-H Hercules; P-3 Orion; E-2C
Hawkeye
Rolls-Royce AE3007
$
151.3
1996/1997
Growth
Embraer RJ135/140/145 regional jets; Cessna Citation X business
jets
Rolls-Royce Model 250
$
49.4
1967/1967
Mature
Wide range of commercial and military helicopters, including the
Bell Jet Ranger and OH-58 Kiowa
Rolls-Royce AE2100
$
22.1
1991/1993
Growth
Military and regional aircraft including C-130J Hercules, C-27
Spartan, Saab 2000
General Electric CF34
$
36.0
1995/2002
Growth
Bombardier regional and business jets; Embraer ERJ170/190
regional jets
Pratt & Whitney Canada
PT6A
$
65.7
1964/1986
Mature
Various business aviation turboprops including the Beechcraft
King Air series business turboprops; T-6A Texan II military
trainers
Pratt & Whitney Canada
PW100
$
67.2
1984/1993
Mature
ATR, Embraer and Dash 8 series regional turboprops
Non Aviation
Rolls-Royce 501k
$
17.5
1963/1969
Mature
Developed from T56 for use in marine and industrial
applications, generally power generation.
General Electric LM1600
$
11.0
1991 (as aircraft engine)/1994
Mature
Used in marine and industrial applications.
Repair and overhaul process. The stages of the engine
overhaul process include the following:
•
Disassembly, cleaning, and parts inspection. After we
receive an engine for repair and overhaul, our technicians
disassemble the unit into its parts, a process that requires
special tooling and expertise. Each part is identified to ensure
traceability throughout the MRO process. The parts are then
cleaned and inspected in accordance with specifications for
serviceable material condition, structural integrity, and
dimensional tolerances. Our technicians record the condition of
the parts, prepare work orders for repairable parts, and order
replacement parts as required. The information
we gather during inspection of the engine parts enables us to
prepare a detailed cost estimate for each MRO event.
•
Parts re-manufacturing and replacement. The next phase of
the MRO process involves the re-manufacturing of repairable
parts, issue of replacement parts from our inventory, and
procurement of any parts we do not routinely stock. We seek to
remanufacture parts or offer used serviceable replacement parts
to our customers as an alternative to new parts. Our parts
re-manufacturing capabilities include extensive machining,
welding, brazing, metalizing, heat treatment, metal reshaping,
surface refinishing, and coating processes. Parts repairs are
performed in accordance with OEM and government-approved
specifications, and may involve more than fifty discrete process
steps to complete. Although we subcontract a small number of
processes to third parties, the majority of the re-manufacturing
work is done in our own facilities. Re-manufacturing parts in
lieu of new parts generally lowers customer costs and increases
our margins when compared to an engine overhaul that consists
exclusively of new parts. In addition, these re-manufacturing
and service capabilities are integral to our competitive
position because they enable us to maintain or increase the
quality of work we perform and significantly reduce costs and
turn around times. An on-line master schedule and visual
scheduling boards are used to coordinate the production
activities required to meet our turn around time commitments.
On-line business systems are also used by technicians to record
the completion of all production tasks in accordance with our
quality system requirements, to collect labor costs, and to
track the location of parts and assemblies throughout the MRO
process.
•
Re-assembly, engine testing, and outbound logistics. The
engine is then reassembled, with technicians recording the
completion of all tasks documenting the results of inspections
that impact engine performance. The engine is then installed in
a test fixture and tested in accordance with OEM and government
approved specifications to check for leakages, fuel efficiency,
operating temperature range, and power output. An engine which
has gone through a complete overhaul must meet the OEM’s
original performance and safety specifications. It is then
classified as a zero time engine, meaning that it can operate
for the same number of hours before the next major maintenance
event as a new engine. Upon successfully completing all
performance tests and final inspection criteria, the engine is
packaged for outbound shipment to the customer. Engines are
generally shipped via third party ground transportation carriers.
Engine leasing program. When a customer transfers an
engine to us for repair and overhaul work, we may lease or rent
an engine of the same type to the customer so that the customer
can continue to operate their aircraft. We keep an inventory of
flight-ready engines for most of the engine platforms that we
service. The net book value of our engines and modules inventory
was $28.4 million at December 31, 2004.
Repair and overhaul facilities. Our repair and overhaul
facilities are located primarily in the United States and
Canada, as well as the Netherlands. In the United States, our
largest operations facilities are located in San Antonio,
Texas and Maryville, Tennessee, and we have numerous sales
facilities throughout the country. In Canada, we have six
primary operations facilities in Winnipeg and service facilities
in Vancouver and Montreal. We also have service facilities in
Singapore and Australia. Each repair and overhaul facility
generally focuses on multiple engine platforms. We believe that
the equipment in use in our various facilities is of high
quality, in part a result of capital expenditures made during
the past several years and the redesign of our facilities.
OEM Authorizations and Licenses
We believe that establishing and maintaining relationships with
the OEMs is an important factor in achieving sustainable success
as an independent service provider. OEMs grant participants in
the MRO services market authorizations or licenses to perform
repair and overhaul services on the engines they manufacture.
MRO service providers that have received OEM authorizations and
licenses gain a competitive advantage because they typically
receive discounts on parts, technical information, OEM
warranty support and use of the OEM name in marketing. Obtaining
OEM authorizations requires sophisticated technological
capabilities, experience-based industry knowledge and
substantial capital investment. Additionally, the OEMs maintain
a tight control on, and in certain cases, grant very few
authorizations or licenses. For example, we are currently one of
only two independent service providers in the world authorized
to service the Rolls-Royce AE2100, the only independent service
provider in North America authorized to service the Rolls-Royce
AE3007 and the only independent service provider in North
America authorized to service the General Electric CF34.
We currently have OEM authorization or licenses to service all
the engine platforms that we service other than Honeywell APUs.
Each of the authorizations or licenses that we have with OEMs is
in the form of a contractual arrangement. These contracts
typically require us to pay an authorization fee to the relevant
OEM and, in some cases, also require us to pay annual
authorization fees and royalties, or to fulfill other conditions
set by the OEM. None of our material authorizations or licenses
expires prior to November 1, 2008. In the past, our OEM
authorizations or licenses have generally been renewed or
extended at their expiration, however, we cannot assure you that
any or all of these authorizations or licenses will be extended
or renewed in the future.
Customers and Significant Contracts
We service approximately 1,300 customers. Our two largest
customers, Kelly Aviation Center, L.P. and Rolls-Royce
Corporation, accounted for approximately 35.7% and 19.1% of our
combined 2004 revenues, respectively. Revenues from Kelly
Aviation Center, L.P. are those subcontracted under the Kelly
Air Force Base contract and revenues from Rolls-Royce are
generally provided on a subcontract basis to regional airlines
that have entered into “power by the hour” contracts
with Rolls-Royce.
We have entered into several long-term agreements that we expect
will result in future revenues. The pricing terms under these
contracts vary depending on the type of contract and its
specific terms. Generally the types of contracts that we enter
into are as follows:
•
time and material contracts, where we charge our customer a
price based on the specific work to be performed;
•
fixed price per maintenance or service event contracts, where
pre-negotiated fixed prices are charged for specific MRO or
redesign services; and
•
fixed price per engine hour/cycle contracts, where a flat rate
based on engine-hours/cycles used is charged for any and all MRO
service requirements during the term of the contract.
Several of our significant customer contracts are set forth
below:
Kelly Air Force Base T56 contract: In February 1999, a
team comprised of Oklahoma City Air Logistics Center (OC-ALC)
and Kelly Aviation Center, L.P. won a contract pursuant to which
the U.S. Air Force outsourced its engine MRO operations at
the former Kelly Air Force Base in San Antonio, Texas.
OC-ALC as the prime contractor subcontracts all Rolls-Royce T56
engine MRO services at the facility to Kelly Aviation Center,
L.P., which then subcontracts such services solely to us. The
original contract, awarded in 1999, was for MRO labor services
only. In October 2003, the scope of the contract was expanded to
include the supply of materials. The contract’s original
term ran through 2006 and we have been awarded one extension to
February 2007.
U.S. Navy T56 contract: In December 2003, the
U.S. Navy awarded us a one-year contract with four optional
renewal years to provide MRO services for its fleet of T56
engines. These services are performed at our San Antonio
and Winnipeg facilities. This contract features a fixed price
per maintenance event. We estimate that revenues from this
contract will exceed $180 million, assuming all renewal
options are exercised.
U.S. Army T703 contract: In July 2004, we won a
five-year contract with the U.S. Army to provide MRO
services for the T703 (a military variant of the Model 250)
engines that power its fleet of Kiowa Warrior helicopters. This
contract features a fixed price per maintenance event. The
contract is expected to contribute approximately
$40 million in revenues over its term.
Canadian Air Force T56 contract: Since 1960 we have been
the exclusive provider of MRO services to the Canadian Air Force
for its T56 engine fleet and are currently operating under an
exclusive time and materials contract that runs through the
first quarter of 2006. The work is performed at our Winnipeg
facilities. We contract directly with the Canadian Department of
National Defense.
Air Canada Jazz PW100 contract: In January 2004, Air
Canada Jazz awarded us a five-year contract (with five renewal
year options) to provide MRO services for its fleet of PW100
engines. This contract features a fixed price per engine flying
hour rate.
SkyWest CF34 contract: During the quarter ended
December 31, 2004, the Company signed an exclusive contract
with SkyWest Airlines of St. George, Utah to service their fleet
of CF34-8 engines powering their new CRJ-700 Regional Jets. We
expect that this contract will generate approximately
$300 million of revenues during its 16-year term, with
scheduled maintenance events expected to commence in 2007.
Competitive Strengths
We believe that our customer mix and the size of the installed
base of engines we service reduce our exposure to any single
market trend or development. We also believe that the following
strengths provide our business with a solid foundation for
future growth:
Industry leading service provider. We believe our MRO
services are among the best in the industry in terms of quality
of work, turnaround times, reliability after overhaul, technical
support and overall customer satisfaction. We provide our
customers with in-house part repair and overhaul services, which
frequently avoids delays associated with outsourcing part
repairs and provides a lower cost alternative to sourcing new
replacement parts from OEMs. Additionally, our short turnaround
times help our customers reduce downtime and enhance their fleet
utilization. We also provide our customers with a broad range of
service offerings, including advanced engine diagnosis and
monitoring, fleet MRO maintenance programs and spare engines so
that customers can continue to operate their aircraft during the
MRO service.
Leading market positions. We rank in the top three in the
worldwide MRO market for each of the principal engine platforms
that we service in our Aviation MRO and Other Services segments
and are the only OEM authorized provider to service both the
Rolls-Royce AE3007 and the General Electric CF34 regional jet
engines. Our market share allows us to develop a depth of
experience and capabilities that improve our operations, reduce
turnaround times and lower costs. We also believe that our
leading market positions, extensive experience, existing OEM
authorizations, technology and expertise differentiate us from
many of our competitors in the eyes of our customers and play a
key role in securing additional long-term contracts and OEM
authorizations.
High barriers to entry. The dynamics of the MRO industry
make it difficult for new competitors to enter the market. New
entrants to the industry must obtain extensive approvals and
certifications from both customers and government regulators and
demonstrate conformity with complex and sophisticated materials
tracking capabilities, quality system and production process
controls and other operational system requirements. In addition,
OEM service authorizations, which enable MRO providers to
receive discounts on parts, technical information, OEM warranty
support and use of the OEM name in marketing, are difficult to
obtain. Obtaining these certifications, approvals and
authorizations requires sophisticated technological
capabilities, experience-based industry knowledge and
substantial capital investment.
Long-term contracts and regulated maintenance requirements
provide strong cash flows. A substantial portion of our
revenues are generated under government-regulated maintenance
programs based on engine usage and operating cycles. We expect
that the large and growing installed base of many of the engines
we service and increasing hours used will combine to provide our
company with a base of
recurring revenues. Furthermore, we are the depot level provider
to the U.S. military under long-term contracts for the T56
and AE2100 engines, which power the C-130 Hercules tactical
transport aircraft. There is no anticipated replacement in the
foreseeable future for the C-130, which is an important element
of the U.S. military’s tactical airlift capability. We
believe that, due to the C-130’s increasing age and
important military function, MRO services on the engines that
power the C-130 will continue to be a significant source of
revenues for our company.
Well-positioned to benefit from favorable industry
trends. We believe that we are well positioned to benefit
from current industry trends. We believe that our success in
transforming the former Kelly Air Force Base facility and
delivering substantially improved war-readiness rates and
reduced costs to the U.S. military position us to compete
effectively for future military outsourcing and MRO facility
redesign contracts. Additionally, as the only OEM-authorized
provider of MRO services for both of the Rolls-Royce AE3007 and
the General Electric CF34 engines, our investment in advanced
facilities to handle current and future MRO demand for these
engines positions us to benefit from anticipated growth in the
regional jet sector. Finally, because many military, regional
and business aircraft share related engine platforms, such as
GE’s CF34 (for deployment on commercial aircraft) and TF34
(for deployment on military aircraft), we believe that we are
well-positioned to adapt our MRO capabilities and facilities for
additional applications without incurring significant additional
fixed costs. For example, we were recently awarded a contract by
the U.S. Army to service the Rolls-Royce T703 engines that
power its OH-58 Kiowa Warrior helicopters, building on our
experience with that engine in commercial applications.
Experienced management team with proven track record. Our
operations are led by an executive management team that has been
working together for approximately 16 years and whose
members have an average of over 19 years of industry
experience. Our management team has a proven record in winning
new business, reducing costs, improving working capital
management and implementing other initiatives to increase
operating efficiencies.
Business Strategy
Our principal objective is to continue to increase our revenues
and cash flows by building on our position as a leading provider
of MRO services for military, regional and business aircraft and
related redesign and non-aviation MRO. In pursuing this
objective, we intend to continue to target engine platforms with
large installed bases and blend high quality and efficient MRO
operations with innovative value-added services including
redesign services. Specifically, we intend to pursue the
following strategies:
Win new business. We will continue to focus on expanding
our market share in our existing engine programs and will
selectively seek to enter new MRO programs. We currently are
pursuing several engine MRO programs, including aircraft powered
by the Pratt & Whitney Canada PT6 and the Rolls-Royce
Model 250 engine that are used by the U.S. military. We are
also working to expand our Redesign Services business in order
to leverage our successful experience at the former Kelly Air
Force Base and are actively seeking opportunities to redesign
military and commercial MRO facilities. We are also seeking to
take advantage of our authorizations and our advanced MRO
facilities by bidding on numerous new contracts with regional
aircraft operators and pursuing new business with OEMs. We
recently secured a long term contract with SkyWest Airlines to
provide CF34 MRO services. We continue to leverage our military,
business aviation and regional airline customer relationships to
grow our core APU business and expand into new engine models. We
believe that our achievements under our military contracts, our
relationships with OEMs and our reputation for excellent quality
and service place us in a favorable position to obtain business
servicing additional engine platforms. We intend to capitalize
on our existing engine MRO competency to pursue additional
growth opportunities related to non-aviation engines used in the
energy sector.
Capitalize on our advanced facilities to increase cash
flow. We intend to capitalize on the significant investments
that we have made in our MRO facilities, including our new CF34
facility, our expanded AE3007 facility and at the former Kelly
Air Force Base. We believe that the resulting capacity available
at these facilities positions us to handle increased MRO volume
without substantial additional investment.
We also intend to further distinguish ourselves from our
competitors by increasing our operational efficiency at all of
our facilities by further reducing our turnaround times and
improving our parts inventory and working capital management.
Pursue selected acquisition opportunities. We intend to
evaluate and pursue selected opportunities to acquire aerospace
and defense services businesses or energy service businesses.
Our objective is to identify acquisition opportunities that will
benefit our existing operations by enhancing economies of scale
and our technological strengths and by adding new customers,
services and product lines.
Competitive Environment
We believe that the market for the aviation and energy MRO and
redesign services that we provide is highly competitive and
concentrated, and that competition in the market is based on
price, quality, and the ability to perform repairs and overhauls
rapidly. Our primary competitors in our Aviation MRO segment are
the service divisions of OEMs, other independent MRO service
providers and, in certain cases, the in-house maintenance
services of the commercial airlines. Our primary MRO competitors
for our non-aviation MRO services are other independent MRO
service providers and the service divisions of OEMs. Our primary
competitors for our ART business include independent management
consulting businesses. Certain characteristics of these
competitors are as follows:
•
Service divisions of OEMs. We estimate that the service
divisions of OEMs, including Rolls-Royce, General Electric,
Pratt & Whitney Canada and Honeywell, comprise
approximately one-half of the market for all MRO services.
Service divisions of OEMs compete on the basis of their
affiliations with OEMs, which may give them design authority,
brand recognition, strong and long-term customer relationships
beginning with the original sale of the engines, the ability to
adapt quickly to customer requirements involving technical
specification changes, a diverse product and service base,
significant financial resources, control over product
certification and control over sources of approved parts.
•
Other independent MRO service providers. Most of the
independent MRO service providers that compete with us also
operate under authorizations from OEMs, and include, Vector
Aerospace Corporation, BBA Group plc, Rolls Wood Group and
others. These competitors may have strong and long-term customer
relationships and greater financial resources than we do.
•
In-house maintenance services. While recently there has
been an increasing trend among commercial airlines to outsource
their engine MRO needs, some of the large commercial airlines
maintain in-house MRO service divisions. These service divisions
often provide MRO services externally but do not have the
benefit of holding OEM authorizations to provide MRO services to
third parties. These competitors include Delta Tech Ops, and the
MRO division of Lufthansa. In-house maintenance services have
several competitive advantages, including captive engine fleets
and may have greater financial resources.
Sales and Marketing
We market and sell our MRO services to more than 1,300
customers, including: OEMs; civilian, military, government and
industrial end-users; commercial, regional, commuter and charter
airlines; corporate fleets; helicopter operators; and
third-party overhaul shops.
Sales of our MRO services are made through a combination of
direct marketing, sales personnel and agents or independent
representatives. Actual sales methods vary depending on the
particular service we are offering, the customer or the market
for that service. Sales methods include competitive bids and
direct and indirect sales.
Employees
As of December 31, 2004, we had approximately 2,600
employees worldwide. Of our employees, approximately 41.5% work
in the United States, 49.5% work in Canada, 7.4% in the
Netherlands and 1.6%
in other offices around the world, including Singapore,
Australia, the United Kingdom and France. Our employees in the
Netherlands are included under a government bargaining unit. We
believe that our relations with employees are strong and we have
not experienced a material work stoppage or strike.
Raw Materials
We depend on certain component parts and material suppliers for
our MRO operations. Our authorizations from OEMs often require
that we purchase component parts we need from the OEMs or their
designated distributors. We made 32.8% of our combined 2004 part
purchases from Rolls-Royce and 13.3% of our combined parts
purchases from Pratt & Whitney Canada. We made an additional
35.7% of our combined 2004 parts purchases from the Defense
Logistics Agency and Aviall, Inc., a parts distributor that is
the exclusive distributor for certain Rolls-Royce engines. The
loss of any of these key suppliers could have a material adverse
effect on our business. We have at times experienced delays in
receiving component parts and raw materials from our key
suppliers, and any significant future delays could have a
material adverse effect on our business and results of
operations. If we had to develop alternative sources of supply,
our ability to supply parts to our customers when needed could
be impaired, business could be lost and margins could be reduced.
We select our non-OEM suppliers primarily based on their ability
to ensure that their parts are serviceable and traceable to
OEM-approved sources, their delivery performance and their
ability to help us reduce our total cost of procuring those
parts. For quality control, cost and efficiency reasons, we
generally purchase supplies only from vendors with whom we have
ongoing relationships or who our customers have previously
approved. We have qualified second sources or have identified
alternate sources for many of our parts supply needs.
Research and Development, Patents, Trademarks and Licenses
Our research and development focuses on new and innovative
component repairs for the engines that we service and on
improvements in engine performance. In particular, we have
invested significant resources in developing internal
remanufacturing technologies that can deliver more extensive
component repair capabilities at lower costs and higher quality.
We have established dedicated repair cells with specialized
equipment and highly-trained engineers and technicians to
achieve these objectives. An important element of this
capability is our designation as a Design Approval Organization
as authorized by Transport Canada. This approval, which is
recognized by the FAA under bilateral agreements, simplifies the
approvals of our component repairs in the North American market
and with several other allied nations. We work closely with
engine OEMs on selected component repairs to gain their formal
approvals, commercial support and wider market access. The
primary objectives of our component repair development are to
provide market differentiation, by means of lower cost part
replacement options, and to increase the value-added content of
our aviation and non-aviation MRO projects. Our ability to
remanufacture components has also enabled us to minimize the use
of subcontractors, which we believe has helped us to enhance our
turn times, quality control and revenues.
We are active in protecting our intellectual property through
patents, trademarks, licensing and retention of our know-how.
Where we do not own the intellectual property for the
applications we develop, we may seek to license the technology.
Governmental Regulation of the Aerospace and Defense
Industry
The aerospace and defense industry is highly regulated and the
MRO services that we provide are required to meet stringent
standards. These regulations are imposed by governmental and
intergovernmental agencies worldwide, such as the FAA and
equivalent government agencies in other countries, and by both
aircraft and engine manufacturers’ guidelines. All
aircraft, engines and associated components are subject to
stipulated maintenance, repair, overhaul and replacement
criteria based on certain numbers of flight hours and/or
takeoffs and landings. Inspection, maintenance and repair
procedures for the various
types of aircraft engines and components are prescribed by
regulatory authorities and can be performed only by certified
repair facilities and/or certified technicians.
We believe that we have all material licenses and certifications
that are required in the jurisdictions in which we operate and
that we are in material compliance with the governmental
regulations affecting the aerospace and defense industry.
Environmental Matters
We are regulated under various international, national and local
environmental, occupational health and safety and other similar
governmental laws and regulations. Our operations are subject to
comprehensive and frequently changing laws and regulations
relating to the generation, storage, handling, use and
transportation of hazardous materials, to the emission and
discharge of such materials into the environment, to the health
and safety of our employees and to other environmental matters.
Under environmental laws, permits are required for some of our
operations, and the issuing authorities could modify, refuse to
renew or revoke our permits. Although the Predecessor has, from
time to time, been required to pay fines in connection with
violations of certain environmental requirements, we believe
that we are currently in substantial compliance with
environmental laws. We incur capital and operating costs
relating to environmental compliance on an ongoing basis. We do
not, however, believe that we will be required under existing
environmental laws to expend amounts that would have a material
adverse effect on our financial condition or results of
operations as a whole.
Historical contamination is known or suspected to exist at or
about certain of our facilities located on land that has been
used for industrial purposes or in facilities that contain or
have contained asbestos. Under some circumstances, we could be
held responsible for cleaning up contamination at our
facilities, including facilities that we have sold or
transferred to other companies, or at waste disposal sites that
we use regardless of whether we know of or were responsible for
such contamination. We could also be held liable for any
personal injury or property damage resulting from such
contamination or, more generally, from any releases of hazardous
materials resulting from our activities. We do not, however,
believe that we will be required under existing environmental
laws to expend amounts that would have a material adverse effect
on our financial condition or results of operations as a whole.
Legal Proceedings
We are, from time to time, involved in certain legal proceedings
arising in the normal course of our business. These proceedings
primarily involve commercial claims, product liability claims,
personal injury claims and worker’s compensation claims. We
cannot predict the outcome of these lawsuits, legal proceedings
and claims with certainty. Nevertheless, we do not believe that
the outcome of any currently existing proceedings, either
individually or in the aggregate, is likely to have a material
adverse effect on our business or our consolidated financial
position.
Our corporate headquarters are in Winnipeg, Canada. We have
additional facilities in Canada, the United States, Europe, Asia
and Australia. The following table sets forth certain
information with respect to our material facilities.
Approximate Area
Type of Property
Location
(Square Feet)
Interest Held
Use
Winnipeg, Canada
540,000
Owned/Leased
Repair and overhaul
San Antonio, TX
370,000
Leased
Repair and overhaul
Maryville, TN
120,000
Owned
Repair and overhaul
Tilburg, the Netherlands
77,000
Owned
Repair and overhaul
Sydney, Australia
32,000
Leased
Repair and overhaul
Singapore
23,000
Leased
Repair and overhaul
Southlake, TX
5,500
Leased
Sales, repair and field service
Concord, NC
7,000
Leased
Sales, repair and field service
Vancouver, Canada
7,000
Leased
Sales, repair and field service
Montreal, Canada
4,000
Leased
Sales, repair and field service
Oklahoma City, OK
2,500
Leased
Redesign Services
Godstone, UK
1,800
Leased
Sales
Calgary, Canada
1,200
Leased
Sales and field service
Ogden, UT
1,000
Leased
Redesign Services
Seattle, WA
1,000
Leased
Sales and field service
Van Nuys, CA
700
Leased
Sales and field service
Allentown, PA
300
Leased
Sales and field service
Salisbury, NC
300
Leased
Sales, repair and field service
Lafayette, LA
300
Leased
Sales
We have multiple facilities in certain of these locations and,
generally, our facilities provide services for all our business
segments.
Our executive officers and directors are briefly described below:
David Shawjoined Standard Aero Limited in 1989 as
Director of Engineering and Quality Assurance. After a series of
promotions, he became the President of Standard Aero Limited in
1994. In March 2001, Mr. Shaw was appointed Chief Operating
Officer of Dunlop Standard, and in December 2001, Mr. Shaw
became our Chief Executive Officer. Before joining Standard
Aero, Mr. Shaw worked with Pratt & Whitney Canada
and Garrett Canada, now part of Honeywell International Inc.
Mr. Shaw is a professional engineer with a Bachelor of
Science degree in Engineering and a Diploma in Management.
Bradley Bertouillebegan with Standard Aero Limited in
October 1985. Mr. Bertouille was promoted to Assistant
Controller in 1988 and Corporate Controller in 1990, in 1995, he
was appointed Executive Vice-President, Finance and
Administration of Standard Aero Limited and became Senior
Vice-President, Finance and Administration for Dunlop Standard
in 2001, and in September 2004 became our Chief Financial
Officer. Prior to joining us, Mr. Bertouille worked in
retail accounting. He is a professional accountant with a
Certified Management Accountant designation and a diploma in
Business Administration.
Edward S. Richmond commenced employment with Standard
Aero Limited in January 1993 as Director of the PT-6 Business
Unit. He was subsequently promoted to Executive Vice President
of the PT-6 Business Unit in 1997 and was also assigned
responsibility to lead the Standard Aero Alliance Business Unit.
In March 2001, he was promoted to the role of Senior Vice
President of Strategy and Business Development for Dunlop
Standard and in 2005 he has also assumed responsibility of
President of Redesign Services. Prior to joining us,
Mr. Richmond held management positions with UTL, European
Helicopters and GE Aerospace. He is a graduate of the Royal
Military College of Canada with a Bachelor of engineering
degree. He is also a graduate of the General Electric Management
Institute (Crotonville) and the Wharton Advanced Management
Program.
Paul Soubry, Jr. joined Standard Aero Limited in
1985 as manager of Publications. In 1989 Mr. Soubry was
appointed Vice-President Sales and Marketing of Standard Aero
Limited. Mr. Soubry became President, Standard Aero
Canadian Operations in March 2001 and was appointed President,
Standard Aero Regional and Business Aviation Services in January
2004. Effective December 2004, he was appointed President of our
Aviation MRO Services division. He has a Bachelor of Commerce
(Honors) degree from the University of Manitoba and has attended
the Executive program at Harvard School of Business.
Rene M. van Doorn joined Standard Aero vof based in
Tilburg, the Netherlands in 1997 as Executive Director of PW100
Operations. He became President, Standard Aero International
Operations in March 2001 and became President of our Energy
Services division in January 2004. Mr. van Doorn has a
Bachelor degree in Electronic and Electrical Engineering and a
Master of Business Administration degree from Brunel University
in the United Kingdom. He has worked in the aerospace industry
for over 20 years, including tenures with Fokker Aircraft
and United Technologies (Hamilton Standard, Pratt &
Whitney) from 1983 to 1997.
Peter J. Clarejoined the board of directors in June,
2004. He currently serves as a Partner and Managing Director of
The Carlyle Group. From 1997 to 1999, Mr. Clare served as a
Principal of The Carlyle Group, and from 1995 to 1997 as a Vice
President of The Carlyle Group. Mr. Clare was previously
with First City Capital, a private investment group, and also
worked at Prudential-Bache. Mr. Clare is a director of
Aviall, Inc., United Defense Industries, Inc. and several
privately-held companies.
Allan Holtwas elected as one of our directors in
connection with the Acquisition. He currently serves as a
Partner and Managing Director of The Carlyle Group, which he
joined in 1991. Prior to joining Carlyle, Mr. Holt spent
three and a half years with Avenir Group, Inc., a private
investment and advisory group. From 1984 to 1987, Mr. Holt
was Director of Planning and Budgets at MCI Communications
Corporation. Mr. Holt is the Chairman of the Board of
Directors of The Relizon Company. He also serves on the Boards
of Directors of Aviall, Inc. and several privately-held
companies.
Adam Palmerwas elected as one of our directors in
connection with the Acquisition. He is currently a Managing
Director of Carlyle. Prior to joining Carlyle in 1996,
Mr. Palmer was with Lehman Brothers focusing on mergers,
acquisitions and financings for defense electronics and
information services companies. Mr. Palmer also serves on
the Boards of Directors of Avio, S.p.A., Vought Aircraft
Industries, Piedmont Holdings, Inc., Grand Vehicle Works, LLC
and US Investigations Services, Inc.
Andrew Shinnwas elected as one of our directors in
connection with the Acquisition. He is currently a Principal
with The Carlyle Group, focused on U.S. buyout investments
in the aerospace, defense and financial services sectors.
Mr. Shinn is a founding member of Carlyle Asia and was
based in Hong Kong and Seoul for several years. Prior to joining
Carlyle, Mr. Shinn was an Associate at Generation Partners
and an Analyst at UBS Capital, the private equity investment
unit of Union Bank of Switzerland.
The following persons have been nominated, but not yet elected
to our board of directors:
Thomas Corcoran was nominated to be a director on
April 12, 2005. Mr. Corcoran was President and CEO of
Gemini Air Cargo, Inc., which is owned by Carlyle, from 2001 to
2004. He is currently a director of Gemini Air Cargo. He is also
President of Corcoran Enterprises, LLC, a management-consulting
firm and in this capacity, has a relationship with Carlyle where
he is a Senior Advisor. Previously, he was President and CEO of
Allegheny Teledyne and prior to that he was President and COO of
Lockheed Martin’s Electronics Sector from 1995 to 1999. He
is a member of the Board of Trustees of Stevens Institute of
Technology and has also been a trustee at Worcester Polytechnic
Institute. Mr. Corcoran also is a member of the Boards of
Directors of L-3 Communications Holdings, Inc., United
Industrial Corporation, Vought Aircraft Industries and REMEC,
Inc. He was selected in 1998, 1999 and 2000 for Irish America
Magazine’s “Business 100.”
General Ralph E. Eberhart, USAF (Ret.) was nominated to
be a director on April 12, 2005. A graduate of the
U.S. Air Force Academy, General Eberhart’s active-duty
military career spans 36 years with his last assignment as
Commander, U.S. Northern Command and Commander, North
American Aerospace Defense Command, Peterson Air Force Base,
Colorado. General Eberhart has been President of the Armed
Force’s Benefit Association (AFBA) since December 2004. As
President of the AFBA, General Eberhart also serves as Chairman
of 5Star Bank, 5Star Life Insurance Company, AFBA 5Star
Investment Management Company and AFBA 5Star Fund, Inc.
David Squier was nominated to be a director on
April 12, 2005. Mr. Squier has been a consultant and
advisor to Carlyle since 2000. He retired from Howmet
Corporation in October 2000 where he served as
President and Chief Executive Officer since 1992. As Chief
Executive Officer, he was responsible for the operations of an
organization with more than $1.5 billion in annual sales
and some 29 manufacturing facilities in five nations. He is
the Chairman of the Board of Directors of United Components,
Inc. and Firth Rixson plc, and a Director of Avio SpA and Vought
Aircraft Industries. Mr. Squier had been a member of the
Board of Directors of Howmet Corporation since 1987, until his
retirement.
Committees of our Board of Directors
Our board of directors directs the management of our business
and affairs, as provided by Delaware law, and conducts its
business through meetings of the board of directors and three
standing committees: the audit committee, which is currently
comprised of Messrs. Palmer and Shinn; the compensation
committee, which is currently comprised of Messrs. Clare
and Shinn and the governance committee, which is currently
comprised of Messrs. Clare and Shaw. In addition, from time
to time, special committees may be established under the
direction of the board of directors when necessary to address
specific issues. We have no nominating committee or similar
committee.
Executive Compensation
The following table sets forth the cash and non-cash
compensation paid or incurred on our behalf to our Chief
Executive Officer and each of the four other most highly
compensated executive officers, or the named executive officers,
for the 2004 Post-Acquisition period. Compensation for previous
periods has not been included as the named executive officers
were compensated by the former parent, Dunlop Standard.
Includes base salary and vacation payments for the 2004
Post-Acquisition period. Amounts shown are not necessarily
indicative of salaries to be paid on a going-forward basis. For
a more comprehensive discussion of the named executive
officers’ salaries, see “— Employment
Agreements.”
(2)
Messrs. Shaw, Bertouille, Richmond and Soubry are compensated in
Canadian dollars, which have been converted to U.S. dollars at
period average exchange rates for presentation in the table. Mr.
van Doorn’s compensation is in Euros, which have been
converted to U.S. dollars at period average exchange rates for
presentation in the table.
(3)
The value of perquisites and other personal benefits paid does
not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for the named executive officer.
(4)
Relates to amounts paid under the Dunlop Standard management
incentive compensation plan.
The following table shows options granted by our parent company,
Standard Aero Acquisition Holdings, Inc. to the named executive
officers during the 2004 Post-Acquisition period. None of these
options were exercised during this period by any of the named
executive officers.
The following tables show information regarding options to
purchase our common stock that were awarded to the named
executive officers during the 2004 Post-Acquisition period. Also
included is the value and number of unexercised options held as
of December 31, 2004 by such named executive officers.
“Exercise” means an employee’s acquisition of
shares of common stock which have already vested,
“exercisable” means options to purchase shares of
common stock which are subject to exercise and
“unexercisable” means all other options to purchase
shares of common stock.
Consists of options to purchase shares that were exercisable as
of, or within 60 days of, December 31, 2004.
(2)
The value of the options as at December 31, 2004 has not
been presented as it cannot be ascertained whether the subject
options are “in the money” as the value of the
underlying stock cannot accurately be determined because there
is no trading market in such stock.
Pension Plan
Our executive officers in the United States and Canada
participate in tax-advantaged defined contribution plans in
which we contribute up to 5% of the executive’s salary
through a matching formula paid into individual accounts subject
to government mandated limits on employee contributions. In the
Netherlands, the executive participates in the multi-employer
Metals Industry Pension Plan and is eligible to participate in a
supplementary defined contribution early retirement plan where
the company matches employee contribution to collectively
negotiated limits.
As of the date of this prospectus, our directors are employed
either by Carlyle or us and are not separately compensated for
their service as directors. Outside directors will be added and
will be eligible for cash or equity, or a combination, in
compensation for their service as a director.
Stock Option Plan
In December, 2004 our parent, Standard Aero Acquisition
Holdings, Inc. adopted the Stock Option and Purchase Plan of
Standard Aero Acquisition Holdings, Inc., or the Plan, which
provides for the grant to our employees, consultants and
independent directors of options to purchase the common stock of
Standard Aero Acquisition Holdings, and provides for the sale of
Standard Aero Acquisition Holdings’ common shares to our
employees and consultants. Up to 425,000 of Standard Aero
Acquisition Holdings’ common shares may be issued under the
Plan (whether directly or pursuant to the grant of options),
which amount may be adjusted to reflect changes in Standard Aero
Acquisition Holdings’ capitalization or certain corporate
events, which are described more fully in the Plan, but includes
stock splits, recapitalizations, reclassifications,
reorganizations, mergers and consolidations. Options may be
incentive stock options which qualify under Section 422 of
the Internal Revenue Code of 1986, as amended or nonqualified
options. The option price will not be less than 100% of the fair
market value of the shares subject to the option on the date the
option is granted. Options granted under the Plan may not be
exercised more than ten years after the date of grant. Shares
sold under the Plan will not be sold for less than the fair
market value on the date any such offer is accepted. Shares
acquired by any individuals will be subject to the terms and
conditions of a stockholders agreement. The Plan may be amended,
suspended or terminated at any time or from time to time by the
Board of Directors or the Compensation Committee, however,
certain amendments are subject to approval by our stockholders.
In 2004, our employees were granted options under the Plan to
purchase 206,071 shares of Standard Aero Acquisition
Holdings’ common stock at an exercise price of $100 per
share. Our employees also purchased an aggregate of 28,175 of
common stock under the Plan for cash consideration of
$100 per share. Each option granted under the Plan will
generally become vested and exercisable as follows:
•
Approximately 31% of the options are time vesting options that
will vest on or prior to December 31, 2008.
•
Approximately 47% of the options are performance vesting options
that will vest on the day immediately preceding the seventh
anniversary of the date of grant, provided the option holder
remains continuously employed with us. However, all or a portion
of such performance vesting options may vest over a five-year
period, starting with 2004, if certain performance targets
relating to earnings and debt repayment are met.
•
Approximately 22% of the options are performance vesting options
that will vest between December 31, 2006 and
December 31, 2008 if certain performance targets relating
to earnings are met.
Executive Bonus Plan
In connection with the Acquisition, we adopted our Executive
Bonus Plan to provide our management with an incentive to
achieve key business objectives. The plan allows our key
executives to achieve performance-based compensation in addition
to their annual base salary. Each participating executive is
eligible to receive a performance bonus for each bonus period
based on a stated percentage of the executive’s base pay if
our financial performance is equal to or greater than 90% of
certain stated financial targets, as described in the plan.
Sixty percent of the performance-based compensation will be paid
in accordance with the percentage of EBITDA targets achieved, as
defined under the plan, and 40% of the performance-based
compensation will be paid in accordance with the achievement of
cash flow performance targets. Solely at our discretion,
additional performance-based compensation may be paid to
executives. With limited exception, an executive who leaves us
prior to the end of a bonus period will not be eligible for a
bonus payment.
Management — Employment Agreements
All members of the executive group are covered by formal
employment agreements that were assumed following the
Acquisition.
Each of our named executive officers employment agreement has an
initial three-year term commencing on March 10, 2004, after
which the agreement will remain effective until we give, or are
provided by the named executive, 18 months’ notice of
termination or pay in lieu of notice. Each named executive is
entitled to a base salary to be reviewed at least annually by
the Board of Directors. Additionally, each named executive is
entitled to: participate in our Executive Bonus Plan;
participate in our employee benefit and pension plans; the use
of a company motor vehicle; corporate memberships; and is
entitled to reimbursement for all reasonable travel and other
expenses incurred during performance of the executive’s
duties in accordance with our expense reimbursement policy.
Each named executive employment agreement provides that if we
terminate their employment within the initial three-year period
of employment for any reason, except for cause, we will be
required to pay named executive a severance payment equal to
three times the sum of (i) base salary, and (ii) the
value of benefits.
Each named executives employment agreement contains a
non-competition provision that prevents them from working for
our competitors, and a non-solicit provision that prevents them
from soliciting our employees or clients, for at least one year
after a voluntary termination of employment.
The employment agreements also place restrictions on the
dissemination by each named executive of proprietary or
confidential information and establishes our exclusive property
right in intellectual property made or discovered by named
executive (either alone or with others) during their employment
in connection with or in any way affecting or relating to our
business or capable of being used or adapted for use therein.
In their current capacities, the named executive officers are
entitled to the following annual base salaries: Mr. Shaw,
$612,000 (Canadian); Mr. Bertouille, $259,980 (Canadian);
Mr. Richmond $386,688 (Canadian); Mr. Soubry, $283,308
(Canadian); and Mr. van Doorn,
€153,751.
The executives also are entitled to participate in the stock
option plan of Standard Aero Acquisition Holdings, Inc. and have
been granted options to purchase shares of Standard Aero
Acquisition Holdings, stock through the grant of stock options
pursuant to the terms of the stock option plan and the
respective executive’s stock option agreement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL AND SELLING STOCKHOLDERS
All of the issued and outstanding common stock of Standard Aero
Holdings, Inc is owned by our parent, Standard Aero Acquisition
Holdings, Inc. The following table provides summary information
regarding the beneficial ownership of the outstanding Standard
Aero Acquisition Holdings, Inc common stock as of March 31,2005, for:
•
each person or group known to beneficially own more than 5% of
the common stock;
•
each of the executive officers named in the Summary Compensation
Table;
•
each of our directors;
•
all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of
the Securities and Exchange Commission and generally includes
any shares over which a person exercises sole or shared voting
or investment power. Except as indicated by footnote, and
subject to applicable community property laws, each person
identified in the table possesses sole voting and investment
power with respect to all shares of common stock held by them.
Shares of common stock subject to options currently exercisable
or exercisable within 60 days of March 31, 2005 and
not subject to repurchase as of that date are deemed outstanding
for calculating the percentage of outstanding shares of the
person holding these options, but are not deemed outstanding for
calculating the percentage of any other person. Unless otherwise
noted, the address for each director and executive officer is
c/o Standard Aero Holdings, Inc. 500-1780 Wellington
Avenue, Winnipeg, Manitoba, Canada.
All Directors and Named Executive Officers as a Group
22,076
1.0
%
*
Denotes less than 1% beneficial ownership
(1)
TC Group III, L.P. is the sole general partner of Carlyle
Partners III, L.P. and CP III Coinvestment, L.P. the
record holders of 2,024,452 and 125,548 share of our common
stock, respectively. TC Group III, L.L.C. is the sole
general partner of TC Group III, L.P. TC Group, L.L.C. is
the sole managing member of TC Group III, L.L.C. TCG
Holdings, L.L.C. is the sole managing member of TC Group, L.L.C.
Accordingly, (i) TC Group III, L.P. and TC
Group III, L.L.C. each may be deemed to be a beneficial
owner of shares of common stock owned of record by each of
Carlyle Partners III, L.P. and CP III Coinvestment,
L.P; and (ii) TC Group, L.L.C. and TCG Holdings, L.L.C.
each may be deemed to be a beneficial owner of shares of common
stock owned of record by each of Carlyle Partners III, L.
P., and CP III Coinvestment, L.P. William E.
Conway, Jr., Daniel A. D’Aniello and David M.
Rubenstein are managing members of TCG Holdings, L.L.C. and, in
such capacity, may be deemed to share beneficial ownership of
shares of common stock beneficially owned by TCG Holdings,
L.L.C. Such individuals expressly disclaim any such beneficial
ownership. The
principal address and principal offices of TCG Holdings, L.L.C.
and certain affiliates is c/o The Carlyle Group, 1001
Pennsylvania Avenue, N.W., Suite 220 South,
Washington, D.C.20004-2505.
(2)
Messrs. Clare, Holt, Palmer and Shinn as employees of The
Carlyle Group, do not directly or indirectly have or share
voting or investment power or have or share the ability to
influence voting or investment power over the shares shown as
beneficially owned by TCG Holdings, L.L.C.
(3)
Includes shares vested under the Stock Option Plan, of Standard
Aero Holdings, Inc. as of March 31, 2005 of
4,080 shares for Mr. Shaw; 1,224 shares each for
Messrs. Richmond, Bertouille, Soubry, and van Doorn and
8,976 shares for all executive officers and directors as a
group.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Carlyle Management Agreement
In connection with the Acquisition, we entered into a management
agreement with TC Group, L.L.C., an affiliate of Carlyle, for
management and financial advisory services and oversight to be
provided to us and our subsidiaries. Pursuant to this agreement,
subject to certain conditions, we pay an annual management fee
to Carlyle of $1.5 million, reimburse its out-of-pocket
expenses and we may pay Carlyle additional fees associated with
financial advisory and other future transactions. Carlyle also
received a one-time transaction fees and expenses of
$11.8 million upon the consummation of the Acquisition.
Supply Agreement with Aviall, Inc.
We maintain a supply agreement with Aviall, Inc. for the
purchase of certain Rolls-Royce parts that Aviall has contracted
with Rolls-Royce to distribute. In 2004, we purchased
$62.0 million of Rolls-Royce parts from Aviall. These
purchases accounted for approximately 14.2% of our combined 2004
material purchased. As of March 31, 2005, affiliates of
Carlyle owned approximately 14.0% of Aviall’s common
equity. Mr. Holt and Mr. Clare are members of the
Board of Directors of Aviall, Inc.
Employment Agreements
We have entered into employment agreements with certain of our
executive officers as described in “Management —
Employment Agreements.”
Stockholders Agreements
In connection with their participation in the Stock Option and
Purchase Plan of Standard Aero Acquisition Holdings, Inc., our
named executive officers and certain of our other employees
entered into stockholder agreements with Standard Aero
Acquisition Holdings that:
•
impose restrictions on their transfer of Standard Aero
Acquisition Holdings’ shares;
•
require them to take certain actions upon the sale of Standard
Aero Acquisition Holdings; and
•
grant Carlyle the right to require other stockholders to
participate pro rata in connection with a sale of shares by
Carlyle.
On July 5, 2004, we entered into a series of agreements
with Dunlop Standard, certain stockholders and affiliates of
Dunlop Standard, including Doughty Hanson & Co., the
U.K.-based private equity firm that controlled Dunlop Standard,
and Meggitt Acquisition Limited, pursuant to which, among other
things, we acquired the MRO business of Dunlop Standard. These
acquisition agreements also provided for the purchase by an
affiliate of Meggitt plc of the aerospace design and
manufacturing business of Dunlop Standard simultaneously with
our acquisition of the MRO business. The separate businesses
acquired by us and Meggitt plc together constitute the entire
business of Dunlop Standard. We effected the acquisition by
acquiring all of the issued and outstanding capital stock of the
subsidiaries of Dunlop Standard that are engaged in the MRO
business.
In connection with the Acquisition, we and an affiliate of
Meggitt plc entered into a separation agreement that addresses
certain matters related to the separation of the MRO business
purchased by us and the design and manufacturing business
purchased by Meggitt. The separation agreement provides, among
other things, that we will indemnify Meggitt and its
subsidiaries for liabilities relating to the MRO business and
that Meggitt Acquisition Limited will indemnify us for
liabilities arising out of the aerospace design and
manufacturing business purchased by Meggitt. The separation
agreement also requires that we indemnify Meggitt and its
subsidiaries for 50% of the liabilities of Dunlop Standard and
its subsidiaries assumed by Meggitt in connection with the
acquisition that relate to any former business or activity of
Dunlop Standard other than the MRO business or the aerospace
design and manufacturing business.
The acquisition agreements contain customary provisions
regarding representations and warranties and covenants with
respect to the conduct of the business.
The purchase price for the Acquisition including fees and
expenses was $699.7 million. In connection with the
Acquisition and the payment of the cash purchase price, the
sellers retained all cash on hand, repaid all outstanding
indebtedness other than approximately $4.9 million of
capital leases, and settled all intercompany indebtedness with
Dunlop Standard and its other subsidiaries.
The purchase price was financed through:
•
the purchase by affiliates of Carlyle of stock of Standard Aero
Acquisition Holdings, Inc. for approximately $215.0 million
in cash, which was contributed to us as common equity;
•
our borrowing of $325.0 million under the term-loan portion
of our senior credit facilities; and
•
the offering by us of $200.0 million of the old notes.
We summarize below the principal terms of the agreements that
govern our senior credit facilities. This summary is not a
complete description of all of the terms of the agreements.
General
In connection with the Acquisition, we entered into our senior
credit facilities with a syndicate of financial institutions and
institutional lenders. Set forth below is a summary of the terms
of our senior credit facilities.
Our senior credit facilities provide for senior secured
financing of up to $375.0 million. Our senior credit
facilities consist of a $325.0 million term loan facility
drawn in full on the closing date with a maturity of eight years
and a $50.0 million revolving credit facility that will
terminate six years from the closing date. The revolving credit
was not used to finance a portion of the Acquisition, and as of
April 15, 2005, no amounts were outstanding under the
revolving credit facility. The revolving credit facility is
available to finance permitted acquisitions and for other
general corporate purposes, and for the issuance of letters of
credit for our account. All borrowings are subject to the
satisfaction of customary conditions, including absence of a
default and accuracy in all material respects of representations
and warranties.
Interest and Fees
The interest rates per annum applicable to loans under our
senior credit facilities are, at our option, the Base Rate or
Eurodollar Rate plus, in each case, an applicable margin. The
Base Rate is a fluctuating interest rate equal to the higher of
(a) the prime rate of interest per annum publicly announced
from time to time by JPMorgan Chase Bank as its prime rate in
effect at its principal office in New York City, and
(b) the federal funds effective rate plus one-half of one
percent (0.50%). In addition, we are required to pay to the
lenders under the revolving credit facility a commitment fee in
respect of the unused commitments thereunder at a per annum rate
of one-half of one percent (0.50%). The applicable margins and
commitment fees for the revolving credit facility are subject to
adjustments based on certain performance ratios.
Prepayments
The term loans will be required to be prepaid with, subject to
certain exceptions, 100% of the net proceeds of certain asset
sales or dispositions, 100% of the net proceeds of certain
indebtedness, 100% of the net proceeds from insurance recovery
and condemnation events and, commencing with the fiscal year
ending December 31, 2005, a percentage of excess cash flow.
Voluntary prepayments of loans under our senior credit
facilities are permitted in whole or in part, in minimum amounts
and subject to certain other limitations as set forth in the
credit agreement. As of April 15, 2005, we had prepaid an
aggregate of $55.0 million of the term loan facility.
Amortization of Principal
The term loan amortizes in equal quarterly installments of 0.25%
of the initial aggregate amount of the term loan until the date
that is seven years after the closing date, and thereafter, in
equal quarterly installments of the remaining principal balance
of the term loans until the date that is eight years after the
closing date.
Collateral and Guarantees
Standard Aero’s wholly owned U.S. and Canadian subsidiaries
guarantee our obligations under our senior credit facilities.
Substantially all of the domestic guarantors’ tangible and
intangible assets (including, without limitation, intellectual
property, material owned real property and all of the capital
stock of each of our direct and indirect domestic subsidiaries
and 65% of the capital stock of certain of our
first-tier foreign subsidiaries) secure the domestic guarantees
and our obligations under our senior credit facilities.
Covenants and Other Matters
Our senior credit facilities contain various restrictive
operating and financial covenants, including covenants that are
based on Adjusted EBITDA as defined in our senior credit
facilities. For more information regarding the calculation of
Adjusted EBITDA as well as a reconciliation of Adjusted EBITDA
to net income, see “Management’s Discussion and
Analysis of Results of Operations and Financial
Condition — Liquidity and Capital
Resources — Covenant Compliance.” These covenants
include a consolidated leverage ratio covenant that measures the
ratio of our outstanding debt net of cash to our Adjusted
EBITDA. This consolidated leverage ratio covenant required us to
have a ratio of outstanding debt net of cash to Adjusted EBITDA
of no more than 6.50 to 1 at December 31, 2004. Our actual
consolidated leverage ratio at December 31, 2004 was 4.14
to 1.
These covenants also include a minimum consolidated net interest
coverage ratio covenant that measures the ratio of our Adjusted
EBITDA for any period of four consecutive quarters to our net
interest expense during the same four quarters. The minimum net
interest coverage ratio covenant required us to have a ratio of
Adjusted EBITDA to net interest expense ratio of at least 2.00
to 1 at December 31, 2004. Our actual net interest coverage
ratio was 3.64 to 1 at December 31, 2004.
We are permitted to make capital expenditures under the senior
credit facilities in any fiscal year up to $25.0 million,
plus any unused carryover of up to 100% from the prior year.
Our credit facilities include certain negative covenants
restricting or limiting our ability to, among other things
prepay, redeem or purchase certain debt; guarantee or incur
additional debt; grant liens on our properties or restrict our
ability to grant liens on our properties; engage in mergers,
acquisitions or other business combinations; sell assets;
declare dividends or redeem or repurchase capital stock;
restrict our subsidiaries’ ability to pay dividends or make
other shareholder distributions; make capital expenditures; make
loans or investments; amend or otherwise alter terms of certain
debt; enter into transactions with affiliates; engage in sale
leaseback transactions; change our fiscal reporting periods;
alter the business we conduct; enter into hedging transactions;
and change our name or jurisdiction of incorporation.
Our credit facilities also contain certain customary
representations and warranties, affirmative covenants and events
of default, including payment defaults, breach of
representations and warranties, covenant defaults, certain
events of bankruptcy, actual or asserted failure of any guaranty
or security document supporting the obligations under our senior
credit facilities to be in full force and effect, change of
control, cross-defaults to other material debt and material
judgments. If such an event of default occurs, the lenders under
our credit facilities are entitled to take various actions,
including the acceleration of amounts due under our credit
facilities and all actions permitted to be taken by a secured
creditor.
Standard Aero Holdings, Inc. issued the old notes and will issue
the exchange notes (collectively, the “Notes”) under
an Indenture (the “Indenture”) between itself and
Wells Fargo Bank Minnesota, National Association, as Trustee.
The form and terms of the exchange notes are identical to those
of the old notes in all material respects, except the exchange
notes will have been registered under the Securities Act. See
“The Exchange Offer — Purpose and Effect.”
The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust
Indenture Act. Certain terms used in this description are
defined under the subheading “— Certain
Definitions.” In this description, the word
“Company” refers only to Standard Aero Holdings, Inc.
and not to any of its subsidiaries.
The following description is only a summary of the material
provisions of the Indenture and the Registration Rights
Agreement. We urge you to read the Indenture and the
Registration Rights Agreement because they, not this
description, define your rights as holders of these Notes. We
have filed copies of the Indenture and the Registration Rights
Agreement as exhibits to the registration statement, which
includes this prospectus. You may also request copies of these
agreements at our address set forth under the heading
“Where You Can Find More Information.”
The registered holder of a note will be treated as its owner for
all purposes. Only registered holders will have rights under the
indenture.
Brief Description of the Notes and the Guarantees
The Notes:
•
are general unsecured obligations of the Company;
•
are subordinated in right of payment to all existing and future
Senior Debt of the Company;
•
are pari passu in right of payment with any future senior
subordinated Indebtedness of the Company; and
•
are unconditionally guaranteed by the Guarantors on a senior
subordinated basis.
The Guarantees:
The Notes will be guaranteed by our existing and future
subsidiaries that guarantee any Indebtedness of the Company or
of other Guarantors of the Notes. Each guarantee of the Notes:
•
is a general unsecured obligation of the Guarantor;
•
is subordinated in right of payment to all existing and future
Guarantor Senior Debt of that Guarantor; and
•
is pari passu in right of payment with any future senior
subordinated Indebtedness of that Guarantor.
As of December 31, 2004, the Company (excluding its
subsidiaries) had:
•
total Senior Debt of $289.2 million; and
•
no subordinated or senior subordinated Indebtedness other than
the Notes.
An additional $50.0 million available for revolving credit
borrowings under the Credit Agreement, all of which would
constitute Senior Debt.
total Guarantor Senior Debt of $289.2 million,
$285.0 million of which consists of their guarantees of the
Company’s obligations under the Credit Agreement; and
•
no subordinated or senior subordinated Indebtedness other than
the guarantees of the Notes.
As indicated above and as discussed in detail below under the
caption “— Subordination,” payments on the
Notes will be subordinated to the payment of Senior Debt and
payments under the Subsidiary Guarantees will be subordinated to
the payment of Guarantor Senior Debt. The Indenture will permit
us and the Guarantors to incur additional debt, including Senior
Debt and Guarantor Senior Debt, as the case may be, in the
future.
Not all of our subsidiaries will guarantee the Notes. The Notes
will be effectively subordinated in right of payment to all
Indebtedness and other liabilities and commitments (including
trade payables, lease obligations and intercompany indebtedness
that will be pledged to the lenders under the Credit Agreement)
of the Non-Guarantor Subsidiaries. As of December 31, 2004,
the Non-Guarantor Subsidiaries have no indebtedness other than
capital leases and total assets of approximately
$83.2 million or 8.7% of our total assets. The
Non-Guarantor Subsidiaries generated 9.7% of our combined 2004
revenues.
As of the date of the Indenture, all of our subsidiaries will be
“Restricted Subsidiaries.” However, under the
circumstances described below under the subheading
“— Certain Covenants — Designation of
Restricted and Unrestricted Subsidiaries,” we will be
permitted to designate certain of our subsidiaries as
“Unrestricted Subsidiaries.” Our Unrestricted
Subsidiaries will not be subject to many of the restrictive
covenants in the Indenture. Unrestricted Subsidiaries will not
guarantee the Notes.
Principal, Maturity and Interest
The Company will issue the Notes with an initial maximum
aggregate principal amount of $200.0 million. The Company
may issue additional notes (“Additional Notes”) under
the Indenture from time to time after the date of this exchange
offer. Any issuance of Additional Notes is subject to the
covenants described below under the caption “Certain
Covenants,” as applicable, including
“— Incurrence of Indebtedness and Issuance of
Preferred Stock”. The Notes and any Additional Notes
subsequently issued under the Indenture will be treated as a
single class for all purposes under the Indenture, including,
without limitation, waivers, amendments, redemptions and offers
to purchase. The Company will issue the Notes in denominations
of $1,000 and integral multiples of $1,000. The Notes will
mature on September 1, 2014.
Interest on the Notes will accrue at the rate of
81/4% per
annum and will be payable semi-annually in arrears on
September 1 and March 1 of each year, commencing on
March 1, 2005. The Company will make each interest payment
to the Holders of record on the immediately preceding August 15
and February 15.
Interest on the Notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it
was most recently paid. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
Methods of Receiving Payments on the Notes
If a Holder of the Notes has given wire transfer instructions to
the Company, the Company will pay all principal, interest and
premium and Additional Interest, if any, on that Holder’s
Notes in accordance with those instructions. All other payments
on the Notes will be made at the office or agency of the paying
agent and registrar unless the Company elects to make interest
payments by check mailed to the Holders at their respective
addresses set forth in the register of Holders.
Paying Agent and Registrar for the Notes
The Trustee will initially act as paying agent and registrar.
The Company may change the paying agent or registrar without
prior notice to the Holders of the Notes, and the Company or any
of its Restricted Subsidiaries may act as paying agent or
registrar.
A Holder may transfer or exchange notes in accordance with the
Indenture. The registrar and the Trustee may require a Holder to
furnish appropriate endorsements and transfer documents in
connection with a transfer of Notes. Holders will be required to
pay all taxes due on transfer. The Company is not required to
transfer or exchange any Note selected for redemption. Also, the
Company is not required to transfer or exchange any Note for a
period of 15 days before a selection of the Notes to be
redeemed.
Subsidiary Guarantees
The Notes will be guaranteed by each of the Guarantors. The
Subsidiary Guarantees will be joint and several obligations of
the Guarantors. Each Subsidiary Guarantee will be subordinated
to the prior payment in full of all Guarantor Senior Debt of
that Guarantor. The obligations of each Guarantor under its
Subsidiary Guarantee are intended to be limited as necessary to
prevent that Subsidiary Guarantee from constituting a fraudulent
conveyance under applicable law. See “Risk
Factors — Risks relating to the Notes —
Federal and state fraudulent transfer laws permit a court to
void the notes and the guarantees, and, if that occurs, you may
not receive any payments on the notes.”
A Guarantor may not sell or otherwise dispose of all or
substantially all of its assets to, or consolidate with or merge
with or into (whether or not such Guarantor is the surviving
Person), another Person, other than the Company or another
Guarantor, unless:
(1) immediately after giving effect to such transaction, no
Default or Event of Default exists; and
(2) either:
(a) the Person acquiring the property in any such sale or
disposition or the Person formed by or surviving any such
consolidation or merger assumes all the obligations of that
Guarantor, pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, under the
Indenture and its Subsidiary Guarantee on terms set forth
therein; or
(b) the Net Proceeds of such sale or other disposition are
applied in accordance with the “Asset Sale” provisions
of the Indenture.
The Subsidiary Guarantee of a Guarantor will be released:
(1)(a) in connection with any sale or other disposition of
all or substantially all of the assets of that Guarantor
(including by way of merger or consolidation) to a Person that
is not (either before or after giving effect to such
transaction) a Subsidiary of the Company, if the sale or other
disposition does not violate the “Asset Sale”
provisions of the Indenture; or
(b) in connection with any sale or other disposition of all
of the Capital Stock of a Guarantor to a Person that is not
(either before or after giving effect to such transaction) a
Subsidiary of the Company, if the sale complies with the
“Asset Sale” provisions of the Indenture; or
(c) in connection with any Legal Defeasance of the Notes in
accordance with the terms of the Indenture; or
(d) if the Company designates any Restricted Subsidiary
that is a Guarantor as an Unrestricted Subsidiary in accordance
with the applicable provisions of the Indenture; and
(2) in the case of clauses 1(a) and (b) above,
such Guarantor is released from its guarantee, if any, of and
all pledges and security, if any, granted in connection with the
Credit Agreement and any other Indebtedness of the Company or
any Restricted Subsidiary.
See “— Repurchase at the Option of
Holders — Asset Sales.”
The payment of principal of, premium and Additional Interest, if
any, and interest on the Notes is subordinated in right of
payment, as set forth in the Indenture, to the prior payment in
full in cash of all Senior Debt, whether outstanding on the
Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company:
(1) in a liquidation or dissolution of the Company;
(2) in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or
its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of the Company’s assets and
liabilities,
the holders of Senior Debt will be entitled to receive payment
in full in cash of all Obligations due in respect of such Senior
Debt (including interest after the commencement of any
bankruptcy proceeding at the rate specified in the applicable
Senior Debt, whether or not an allowable claim in any such
proceeding) before the Holders of Notes will be entitled to
receive any payment with respect to the Notes, and until all
Obligations with respect to such Senior Debt are paid in full in
cash, any distribution to which the Holders of Notes would be
entitled shall be made to the holders of Senior Debt (except, in
each case, that Holders of Notes may receive and retain
Permitted Junior Securities and payments made from any trust
described under “— Legal defeasance and covenant
defeasance”).
The Company also may not make any payment or distribution with
respect to the Notes (other than Permitted Junior Securities or
from any trust described under “— Legal
defeasance and covenant defeasance”) if:
(1) a default in the payment of the principal of, premium,
if any, or interest on any Designated Senior Debt occurs and is
continuing beyond any applicable grace period; or
(2) any other default occurs and is continuing with respect
to any Designated Senior Debt that permits holders of the
Designated Senior Debt as to which such default relates to
accelerate its maturity (or that would permit such holders to
accelerate with the giving of notice or the passage of time or
both) and the Trustee receives a notice of such default (a
“Payment Blockage Notice”) from the Company or the
holders of such Designated Senior Debt.
Payments on the Notes may and will be resumed:
(1) in the case of a payment default, upon the date on
which such default is cured or waived; and
(2) in the case of a nonpayment default, upon the earlier
of the date on which such nonpayment default is cured or waived
or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated;
if the Indenture otherwise permits the payment at the time of
such payment.
No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the delivery of the
immediately prior Payment Blockage Notice; and
(2) all scheduled payments of principal of, premium and
Additional Interest, if any, and interest on the Notes that have
come due have been paid in full in cash.
No nonpayment default that existed or was continuing on the date
of delivery of any Payment Blockage Notice to the Trustee will
be, or be made, the basis for a subsequent Payment Blockage
Notice, whether or not within a period of 360 consecutive days,
unless such default has been cured or waived for a period of not
less than 90 days.
In the event that the Trustee or any Holder receives any payment
of any Obligations with respect to the Notes (other than
Permitted Junior Securities or from the trust described under
“— Legal defeasance and covenant
defeasance”) at a time when the Trustee or such Holder, as
applicable, has actual knowledge that such payment is prohibited
by these subordination provisions, such payment shall be held by
the Trustee or such Holder, in trust for the benefit of, and
will be paid over and delivered, upon written request, to the
holders of Senior Debt or their proper representative.
The Indenture further requires the Company promptly notify
holders of Senior Debt if payment of the Notes is accelerated
because of an Event of Default.
As a result of the subordination provisions described above, in
the event of a bankruptcy, liquidation or reorganization or
similar proceeding of the Company, Holders of Notes may recover
less ratably than creditors of the Company who are holders of
Senior Debt. See “Risk Factors — Risks Related to
the Notes — Your right to receive payments on the
notes and the guarantees will be subordinated to the borrowings
under our new senior credit facilities and possibly all our
future borrowings”.
Optional Redemption
At any time prior to September 1, 2007, the Company may on
any one or more occasions redeem up to 35% of the aggregate
principal amount of Notes issued under the Indenture (calculated
after giving effect to the issuance of Additional Notes) at a
redemption price of 108.25% of the principal amount, plus
accrued and unpaid interest and Additional Interest, if any, to
the redemption date, with the net cash proceeds of one or more
Equity Offerings by the Company or from the cash contribution of
equity capital (other than Disqualified Stock) to the Company,
provided that:
(1) at least 65% of the aggregate principal amount of Notes
(including Additional Notes, if any) issued under the Indenture
remains outstanding immediately after the occurrence of such
redemption (excluding Notes held by the Company and its
Subsidiaries); and
(2) the redemption occurs within 90 days of the date
of the closing of such Equity Offering.
At any time prior to September 1, 2009, the Company may
also redeem all or a part of the notes, upon not less than 30
nor more than 60 days’ prior notice, at a redemption
price equal to 100% of the principal amount of notes redeemed
plus the Applicable Premium as of, and accrued and unpaid
interest and Additional Interest, if any, to the applicable
redemption date.
On and after September 1, 2009, the Company may redeem all
or a part of the Notes upon not less than 30 nor more than
60 days’ notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued
and unpaid interest and Additional Interest, if any, on the
Notes redeemed, to the applicable redemption date, if redeemed
during the twelve-month period beginning on September 1 of
the years indicated below:
Year
Percentage
2009
104.125
%
2010
102.750
%
2011
101.375
%
2012 and thereafter
100.000
%
Selection and Notice
If less than all of the Notes are to be redeemed at any time,
the Trustee will select Notes for redemption as follows:
(1) if the Notes are listed on any national securities
exchange, in compliance with the requirements of the principal
national securities exchange on which the Notes are
listed; or
(2) if the Notes are not listed on any national securities
exchange, on a pro rata basis.
Notes of $1,000 or less can be redeemed in part. Notices of
redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each
Holder of Notes to be redeemed at its registered address, except
that redemption notices may be mailed more than 60 days
prior to a redemption date if the notice is issued in connection
with a defeasance of the Notes or a satisfaction and discharge
of the Indenture. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of
redemption that relates to that note will state the portion of
the principal amount of that Note that is to be redeemed. A new
Note in principal amount equal to the unredeemed portion of the
original Note will be issued in the name of the Holder of Notes
upon cancellation of the original Note. Notes called for
redemption become due on the date fixed for redemption. On and
after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
Mandatory Redemption
We are not required to make any mandatory redemption or sinking
fund payments with respect to the Notes. However, under certain
circumstances, we may be required to offer to purchase Notes as
described under the captions “— Repurchase at the
Option of Holders — Asset Sales,” and
“— Change of Control.” We may at any time
and from time to time purchase Notes in the open market or
otherwise.
Repurchase at the Option of Holders
Change of Control
If a Change of Control occurs, each Holder of Notes will have
the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple of $1,000) of that
Holder’s Notes pursuant to a Change of Control Offer on the
terms set forth in the Indenture. In the Change of Control
Offer, the Company will offer a Change of Control Payment in
cash equal to 101% of the aggregate principal amount of Notes
repurchased plus accrued and unpaid interest and Additional
Interest, if any, on the Notes repurchased, to the date of
purchase. Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of
Control and offering to repurchase Notes on the Change of
Control Payment Date specified in the notice, which date will be
no earlier than 30 days and no later than 60 days from
the date such notice is mailed, pursuant to the procedures
required by the Indenture and described in such notice.
The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder to the extent those laws and regulations
are applicable in connection with the repurchase of the Notes as
a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with
the Change of Control provisions of the Indenture, the Company
will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under
the Change of Control provisions of the Indenture by virtue of
such compliance.
On the Change of Control Payment Date, the Company will, to the
extent lawful:
(1) accept for payment all Notes or portions of Notes
properly tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the
Change of Control Payment in respect of all Notes or portions of
Notes properly tendered; and
(3) deliver or cause to be delivered to the Trustee the
Notes properly accepted together with an Officers’
Certificate stating the aggregate principal amount of Notes or
portions of Notes being purchased by the Company.
The paying agent will promptly mail to each Holder of Notes
properly tendered the Change of Control Payment for such Notes,
and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each Holder a new note equal in
principal amount to any unpurchased
portion of the Notes surrendered, if any; provided that
each new note will be in a principal amount of $1,000 or an
integral multiple of $1,000.
Prior to complying with any of the provisions of this
“Change of Control” covenant, but in any event within
90 days following a Change of Control, the Company will
either repay all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding
Senior Debt to permit the repurchase of Notes required by this
covenant. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
The provisions described above that require the Company to make
a Change of Control Offer following a Change of Control will be
applicable whether or not any other provisions of the Indenture
are applicable. Except as described above with respect to a
Change of Control, the Indenture does not contain provisions
that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Company will not be required to make a Change of Control
Offer upon a Change of Control if (1) a third party makes
the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes properly tendered and not
withdrawn under the Change of Control Offer or (2) a notice
of redemption is outstanding pursuant to the Indenture as
described above under the caption “— Optional
Redemption,” unless and until there is a default in payment
of the applicable redemption price.
The definition of Change of Control includes a phrase relating
to the direct or indirect sale, lease, transfer, conveyance or
other disposition of “all or substantially all” of the
properties or assets of the Company and its Subsidiaries taken
as a whole. Although there is a limited body of case law
interpreting the phrase “substantially all,” there is
no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase its Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than
all of the assets of the Company and its Subsidiaries, taken as
a whole, to another Person or group may be uncertain.
Asset Sales
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case
may be) receives consideration at the time of the Asset Sale at
least equal to the fair market value of the assets or Equity
Interests issued or sold or otherwise disposed of; and
(2) In the case of Asset Sales involving consideration in
excess of $5.0 million, the fair market value is determined
by the Company’s Board of Directors and evidenced by a
resolution of the Board of Directors set forth in an
Officers’ Certificate delivered to the Trustee; and
(3) at least 75% of the consideration received in the Asset
Sale by the Company or such Restricted Subsidiary is in the form
of cash or Cash Equivalents. For purposes of this provision,
each of the following will be deemed to be cash:
(a) any liabilities, as shown on the Company’s or such
Restricted Subsidiary’s most recent balance sheet, of the
Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated
to the Notes or any Subsidiary Guarantee) that are assumed by
the transferee of any such assets and from which the Company and
all Restricted Subsidiaries have been validly released by all
relevant creditors in writing;
(b) any securities, notes or other obligations received by
the Company or any such Restricted Subsidiary from such
transferee that are contemporaneously, subject to ordinary
settlement periods, converted by the Company or such Restricted
Subsidiary into cash or Cash Equivalents to the extent of the
cash or Cash Equivalents received in that conversion; and
(c) any stock or other assets of the kind referred to in
clause (II) or (IV) of the next succeeding paragraph,
or any Designated Noncash Consideration received by the Company
or any of its Restricted Subsidiaries in such Asset Sale having
an aggregate fair market value, taken together with all other
Designated Noncash Consideration received pursuant to this
clause (c) that is at that time outstanding, not to exceed
the greater of (x) $20.0 million and (y) 2% of
Total Assets at the time of the receipt of such Designated
Noncash Consideration (with the fair market value of each item
of Designated Noncash Consideration being measured at the time
received without giving effect to subsequent changes in value).
Within 360 days after the receipt of any Net Proceeds from
an Asset Sale, the Company (or the applicable Restricted
Subsidiary, as the case may be) may apply those Net Proceeds at
its option:
(I) to repay Senior Debt or Guarantor Senior Debt (other
than Indebtedness owed to the Company or any Subsidiary), and if
the Senior Debt or Guarantor Senior Debt repaid is revolving
credit Indebtedness, to correspondingly reduce commitments with
respect thereto;
(II) to acquire (or enter into a binding agreement to
acquire; provided that such commitment will be subject
only to customary conditions (other than financing) and such
acquisition will be consummated within 90 days after the
end of such 360-day period) all or substantially all of the
assets of, or a majority of the Voting Stock of, another
Permitted Business;
(III) to make a capital expenditure; or
(IV) to acquire (or enter into a binding agreement to
acquire; provided that such commitment will be subject
only to customary conditions (other than financing) and such
acquisition will be consummated within 90 days after the
end of such 360-day period) other long-term assets that are used
or useful in a Permitted Business.
Pending the final application of any Net Proceeds, the Company
may temporarily reduce revolving credit borrowings or otherwise
invest the Net Proceeds in any manner that is not prohibited by
the Indenture.
Any Net Proceeds from Asset Sales that are not applied or
invested as provided in the preceding paragraph will constitute
“Excess Proceeds.” When the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company will make an
Asset Sale Offer to all Holders of Notes and all holders of
other Indebtedness that is pari passu with the Notes
containing provisions similar to those set forth in the
Indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets to purchase the maximum principal
amount of Notes and such other pari passu Indebtedness
that may be purchased out of the Excess Proceeds. The offer
price in any Asset Sale Offer will be equal to 100% of principal
amount plus accrued and unpaid interest and Additional Interest,
if any, to the date of purchase, and will be payable in cash. If
any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use those Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. If the aggregate
principal amount of Notes and other pari passu
Indebtedness tendered into such Asset Sale Offer exceeds the
amount of Excess Proceeds, the Trustee will select the Notes and
such other pari passu Indebtedness to be purchased on a
pro rata basis. Upon completion of each Asset Sale Offer, the
amount of Excess Proceeds will be reset at zero.
The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and
regulations thereunder to the extent those laws and regulations
are applicable in connection with each repurchase of Notes
pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with
the Asset Sale provisions of the Indenture, the Company will
comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the
Asset Sale provisions of the Indenture by virtue of such
compliance.
The agreement governing the Company’s Credit Agreement
prohibits the Company from purchasing any Notes, and also
provides that certain change of control or asset sale events
with respect to the Company would constitute a default or
require repayment of the Senior Debt under that agreement. Any
future credit agreements or other agreements relating to Senior
Debt to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control or
Asset Sale occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its
senior lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings,
the Company will remain prohibited from purchasing Notes. In
such case, the Company’s failure to purchase tendered Notes
would constitute an Event of Default under the Indenture which
would, in turn, constitute a default under such Senior Debt. In
such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes.
Certain Covenants
Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment
or distribution on account of the Company’s or any of its
Restricted Subsidiaries’ Equity Interests (including,
without limitation, any payment in connection with any merger or
consolidation involving the Company or any of its Restricted
Subsidiaries) or to the direct or indirect holders of the
Company’s or any of its Restricted Subsidiaries’
Equity Interests in their capacity as such (other than dividends
or distributions payable (A) in Equity Interests (other
than Disqualified Stock) of the Company or (B) by a
Restricted Subsidiary to the Company or another Restricted
Subsidiary of the Company);
(2) purchase, redeem or otherwise acquire or retire for
value (including, without limitation, in connection with any
merger or consolidation involving the Company) any Equity
Interests of the Company or any direct or indirect parent of the
Company;
(3) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any
Indebtedness of the Company or any Guarantor that is expressly
subordinated or junior in right of payment to the Notes or the
Subsidiary Guarantees, except a payment of interest or principal
at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and
other actions set forth in these clauses (1) through
(4) above being collectively referred to as
“Restricted Payments”),
unless, at the time of and after giving effect to such
Restricted Payment:
(1) no Default or Event of Default has occurred and is
continuing or would occur as a consequence of such Restricted
Payment;
(2) the Company would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the
applicable four quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption
“— Incurrence of Indebtedness and Issuance of
Preferred Stock;” and
(3) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the Company and
its Restricted Subsidiaries after the Issue Date (excluding
Restricted Payments permitted by clauses (2) through
(4) and (6) through (10) of the next succeeding
paragraph), is less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the Issue Date to
the end of the Company’s most recently ended fiscal quarter
for which internal financial statements are available at the
time of such Restricted Payment (or, if Consolidated Net Income
for such period is a deficit, less 100% of such deficit),
plus
(b) 100% of the aggregate net cash proceeds and the fair
market value of the property received by the Company since the
Issue Date as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other
than Disqualified Stock) or from the issue or sale of
convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the Company that have been
converted into or exchanged for Equity Interests (other than
Disqualified Stock) of the Company (in each case, other than
Equity Interests (or Disqualified Stock or debt securities) sold
to a Subsidiary of the Company), provided that such
property is limited to assets that are used or useful in a
Permitted Business or Capital Stock of a Person engaged in a
Permitted Business, plus
(c) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise
liquidated or repaid, purchased or redeemed for cash, the cash
return of capital with respect to such Restricted Investment
(less the cost of disposition, if any), plus
(d) to the extent that any Unrestricted Subsidiary of the
Company is redesignated as a Restricted Subsidiary after the
Issue Date, the lesser of (i) the fair market value of the
Company’s Investment in such Subsidiary as of the date of
such redesignation and (ii) such fair market value as of
the date on which such Subsidiary was originally designated as
an Unrestricted Subsidiary (other than an Unrestricted
Subsidiary to the extent the investment in such Unrestricted
Subsidiary constituted a Permitted Investment), plus
(e) 100% of any dividend received by the Company or a
Restricted Subsidiary that is a Guarantor after the Issue Date
from an Unrestricted Subsidiary, to the extent such dividends
were not otherwise included in Consolidated Net Income of the
Company for such period.
The preceding provisions will not prohibit:
(1) the payment of any dividend or the consummation of any
irrevocable redemption within 60 days after the date of
declaration of the dividend or giving of the redemption notice,
as the case may be, if at such date of declaration or notice,
the dividend or redemption payment would have complied with the
provisions of the Indenture;
(2) the making of any Restricted Payment in exchange for,
or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, Equity
Interests of the Company (other than Disqualified Stock) or from
the substantially concurrent cash contribution to the common
equity capital to the Company; provided that the amount
of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other
acquisition will be excluded from clause (3)(b) of the
preceding paragraph;
(3) the defeasance, redemption, repurchase or other
acquisition or retirement for value of subordinated Indebtedness
of the Company or any Guarantor with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of dividends or distributions by a
Restricted Subsidiary of the Company to the holders of its
Equity Interests on a pro rata basis;
(5) so long as no Default or Event of Default has occurred
and is continuing, the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of
the Company or Holdings held by any current or former director,
officer or employee of the Company or Holdings (or any of its
Restricted Subsidiaries) pursuant to any equity subscription
agreement, stock option agreement, shareholders’ agreement
or similar agreement; provided that the aggregate price
paid for all such repurchased, redeemed, acquired or retired
Equity Interests may not in any calendar year exceed the lesser
of (A) the sum of (x) $2.5 million and
(y) the aggregate amount of Restricted Payments permitted
(but not made) pursuant to this clause (5) in prior
calendar years and (B) $7.5 million;
(6) the repurchase of Equity Interests deemed to occur upon
the exercise of stock options or warrants to the extent such
Equity Interests represent a portion of the exercise price of
those stock options or warrants;
(7) the declaration and payment of dividends to holders of
any class or series of Disqualified Stock of the Company or any
Restricted Subsidiary of the Company issued on or after the
Issue Date in accordance with the Fixed Charge Coverage test
described below under the caption “— Incurrence
of Indebtedness and Issuance of Preferred Stock” to the
extent such dividends are included in the definition of
“Fixed Charges”; provided that no Default or
Event of Default shall have occurred and be continuing
immediately after making such Restricted Payment;
(8) so long as no Default or Event of Default has occurred
and is continuing, the purchase by the Company of fractional
shares arising out of stock dividends, splits or combinations or
business combinations;
(9) dividends, distributions or advances to Holdings to pay
the fees required to maintain its corporate existence and to pay
for general corporate and overhead expenses (including salaries
and other compensation of employees who perform services for
both Holdings and the Company) incurred by Holdings in the
ordinary course of its business not to exceed $1.0 million
in any twelve-month period;
(10) dividends, distributions or advances to pay federal,
state and local income taxes to the extent such income taxes are
attributable to the income of the Company and its Restricted
Subsidiaries and, to the extent of the amount actually received
from the Unrestricted Subsidiaries, in amounts required to pay
such taxes to the extent attributable to the income of the
Unrestricted Subsidiaries; and
(11) so long as no Default or Event of Default has occurred
and is continuing, other Restricted Payments in an aggregate
amount since the Issue Date not to exceed $15.0 million.
The amount of all Restricted Payments (other than cash) will be
the fair market value on the date of the Restricted Payment of
the asset(s) or securities proposed to be transferred or issued
by the Company or such Restricted Subsidiary, as the case may
be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors, whose
good faith determination will be conclusive and will be
delivered to the Trustee. The Board of Directors’
determination must be based upon an opinion or appraisal issued
by an accounting, appraisal or investment banking firm of
national standing if the fair market value exceeds
$15.0 million.
Incurrence of Indebtedness and Issuance of Preferred
Stock
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to
(collectively, “incur”) any Indebtedness (including
Acquired Debt), and the Company will not permit any of its
Restricted Subsidiaries to issue any shares of Preferred Stock;
provided, however, that the Company and any Restricted
Subsidiary that is a Guarantor may incur Indebtedness (including
Acquired Debt), or any Restricted Subsidiary that is a Guarantor
may issue Preferred Stock, if the Fixed Charge Coverage Ratio
for the Company’s most recently ended four full fiscal
quarters for which internal financial statements are available
immediately preceding the date on which such additional
Indebtedness is incurred or such Preferred Stock is issued, as
the case may be, would have been at least 2.0 to 1.0, determined
on a pro forma basis (including a pro forma application of the
net proceeds therefrom), as if the additional Indebtedness had
been incurred or Preferred Stock had been issued, as the case
may be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness
(collectively, “Permitted Debt”):
(1) the incurrence by the Company and/or any Restricted
Subsidiary of Indebtedness and letters of credit under the
Credit Agreement in an aggregate principal amount at any one
time outstanding under this clause (1) (with letters of
credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Restricted
Subsidiaries thereunder) not to exceed $465.0 million, less
the sum of all permanent principal payments (with respect to
revolving borrowings and letters of credit, only to the extent
revolving commitments are correspondingly reduced) with respect
to such Indebtedness pursuant to clause (I) of the
covenant described under “— Repurchase at the
Option of Holders — Asset Sales;”
(2) the incurrence by the Company and its Restricted
Subsidiaries of the Existing Indebtedness;
(3) the incurrence by the Company and the Guarantors of
Indebtedness represented by the Notes issued and sold on the
Issue Date and the related Subsidiary Guarantees to be issued on
the Issue Date and the Exchange Notes and the related Subsidiary
Guarantees to be issued pursuant to the Registration Rights
Agreement which relate to the Notes (and the related Subsidiary
Guarantees) issued on the Issue Date;
(4) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease
Obligations, mortgage financings or purchase money obligations,
in each case, incurred for the purpose of financing all or any
part of the purchase price or cost of design, construction,
installation, lease or improvement of property, plant or
equipment used in the business of the Company or such Restricted
Subsidiary, in an aggregate principal amount, including all
Permitted Refinancing Indebtedness incurred pursuant to
clause (5) to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (4), not to exceed
$10.0 million at any time outstanding;
(5) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange
for, or the net proceeds of which are used to refund, refinance
or replace Indebtedness (other than intercompany Indebtedness)
that was permitted by the Indenture to be incurred under the
first paragraph of this covenant or clause (2), (3),
(4) or (5) of this paragraph;
(6) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries; provided,
however, that:
(a) if the Company or any Guarantor is the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated
to the prior payment in full in cash of all Obligations then due
with respect to the Notes, in the case of the Company, or the
Subsidiary Guarantee, in the case of a Guarantor; and
(b)(i) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a
Person other than the Company or a Restricted Subsidiary of the
Company and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary of the Company, will be deemed, in each
case, to constitute an incurrence of such Indebtedness by the
Company or such Restricted Subsidiary, as the case may be, that
was not permitted by this clause (6);
(7) the issuance by any of the Company’s Restricted
Subsidiaries to the Company or any of its Restricted
Subsidiaries of shares of Preferred Stock, provided that:
(a) any subsequent issuance or transfer of Equity Interests
that results in any such Preferred Stock being held by a Person
other than the Company or a Restricted Subsidiary of the
Company and
(b) any sale or other transfer of any such Preferred Stock
to a Person that is not either the Company or a Restricted
Subsidiary of the Company,
will be deemed, in each case, to constitute an issuance of
Preferred Stock by the Company or such Restricted Subsidiary, as
the case may be, that was not permitted by this clause (7);
(8) the incurrence by the Company or any of its
Subsidiaries of Hedging Obligations;
(9) the guarantee by the Company or any of the Guarantors
of Indebtedness of the Company or any Guarantor that was
permitted to be incurred by another provision of this covenant;
provided that if such Indebtedness is by its express
terms subordinated in right of payment to the Notes or the
Subsidiary Guarantee of such Restricted Subsidiary, as
applicable, any such guarantee of the Notes shall be
subordinated in right of payment to such Guarantor’s
Subsidiary Guarantee with respect to the Notes substantially to
the same extent as such Indebtedness is subordinated to the
Notes or the Subsidiary Guarantee of such Restricted Subsidiary,
as applicable;
(10) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness in respect of workers’
compensation claims, self-insurance obligations, bankers’
acceptances, performance and surety bonds, completion guarantees
or similar arrangements in the ordinary course of business;
(11) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness arising from the honoring by a bank
or other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds, so
long as such Indebtedness is covered within five business days;
(12) Indebtedness arising from agreements of the Company or
a Restricted Subsidiary providing for indemnification,
adjustment of purchase price, earn out or other similar
obligations, in each case, incurred or assumed in connection
with the acquisition or disposition of any business, assets or a
Subsidiary, other than guarantees of Indebtedness incurred by
any Person acquiring all or any portion of such business, assets
or Subsidiary for the purpose of financing such acquisition;
provided, however, that (A) such Indebtedness is not
reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance
sheet will not be deemed to be reflected on such balance sheet
for purposes of this clause (A)) and (B) the maximum
assumable liability in respect of all such Indebtedness shall at
no time exceed the gross proceeds including noncash proceeds
(the fair market value of such noncash proceeds being measured
at the time received and without giving effect to any subsequent
changes in value) actually received by the Company and any
Restricted Subsidiaries in connection with such disposition;
(13) the incurrence by Foreign Subsidiaries (other than
Guarantors) of Indebtedness in an aggregate principal amount (or
accreted value, as applicable) at any time outstanding,
including all Permitted Refinancing Indebtedness incurred to
refund, defease, renew, extend, refinance or replace any
Indebtedness incurred pursuant to this clause (13), not to
exceed $10.0 million; and
(14) the incurrence by the Company or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate
principal amount (or accreted value, as applicable) at any time
outstanding, including all Permitted Refinancing Indebtedness
incurred to refund, defease, renew, extend, refinance or replace
any Indebtedness incurred pursuant to this clause (14), not
to exceed $25.0 million at any one time outstanding;
For purposes of determining compliance with this
“Incurrence of Indebtedness and Issuance of Preferred
Stock” covenant, in the event that an item of Indebtedness
(including Acquired Debt) meets the criteria of more than one of
the categories of Permitted Debt described in clauses (1)
through (14) above, or is entitled to be incurred pursuant
to the first paragraph of this covenant, the Company will be
permitted to divide and classify (or later classify or
reclassify) in whole or in part in its sole discretion such item
of Indebtedness in any manner that complies with this covenant.
Indebtedness under the Credit Agreement outstanding on the Issue
Date will initially be deemed to have been incurred pursuant to
clause (1) above and the Company shall not be permitted to
divide or reclassify all or any portion of such Indebtedness.
The accrual of interest, the accretion or amortization of
original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the
same terms, the reclassification of preferred stock as
Indebtedness due to a change in accounting principles, and the
payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will
not be deemed to be an incurrence of Indebtedness or an issuance
of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the amount of any such
accrual, accretion or payment is included in Fixed Charges of
the Company as accrued. Notwithstanding any other provision of
this covenant, the maximum amount of Indebtedness that the
Company or any Restricted Subsidiary may incur pursuant to this
covenant shall not be deemed to be exceeded solely as a result
of fluctuations in exchange rates or currency values.
The amount of any Indebtedness outstanding as of any date will
be:
(1) the accreted value of the Indebtedness, in the case of
any Indebtedness issued with original issue discount;
(2) the principal amount of the Indebtedness, in the case
of any other Indebtedness, or the liquidation preference in the
case of Disqualified Stock or Preferred Stock; and
(3) in respect of Indebtedness of another Person secured by
a Lien on the assets of the specified Person, the lesser of:
(a) the fair market value of such assets at the date of
determination; and
(b) the amount of the Indebtedness of the other Person.
Indebtedness will not include the obligations of any Person
(A) resulting from the endorsement of negotiable
instruments for collection in the ordinary course of business,
(B) under stand-by letters of credit to the extent
collateralized by cash or Cash Equivalents and
(C) resulting exclusively from representations, warranties,
covenants and indemnities given by such Person that are
reasonably customary for sellers or transferors in an accounts
receivable securitization transaction.
Limitation on Layering
The Company will not incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate
or junior in right of payment to any Senior Debt of the Company
and senior in any respect in right of payment to the Notes. No
Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate
or junior in right of payment to the Senior Debt of such
Guarantor and senior in any respect in right of payment to such
Guarantor’s Subsidiary Guarantee. No such Indebtedness will
be considered to be senior by virtue of being secured on a first
or junior priority basis.
Liens
The Company will not, and will not permit any Restricted
Subsidiary that is a Guarantor to, directly or indirectly,
create, incur, assume or suffer to exist any Lien (other than
Permitted Liens) that secures obligations under any Indebtedness
ranking pari passu with or subordinated to the Notes or
any Subsidiary Guarantee on any asset or property of the Company
or any such Restricted Subsidiary, or any income or profits
therefrom, or assign or convey any right to receive income
therefrom, unless:
(1) in the case of Liens securing Indebtedness subordinated
to the Notes or any Subsidiary Guarantees, the Notes or the
Subsidiary Guarantee, as the case may be, is secured by a Lien
on such property, assets or proceeds that is senior in priority
to such Liens; or
(2) in all other cases, the Notes or the Subsidiary
Guarantee, as the case may be, is equally and ratably secured,
except that the foregoing shall not apply to:
(i) Liens existing on the Issue Date to the extent and in
the manner such Liens are in effect on the Issue Date;
(ii) Liens securing the Notes and the Subsidiary Guarantees
and the Exchange Notes (including Exchange Notes issued in
exchange for Additional Notes (if any) issued in accordance with
the terms of the Indenture) and the Subsidiary Guarantees of the
Exchange Notes;
(iii) Liens securing Senior Debt or Guarantor Senior Debt
and the related guarantees of such Senior Debt or Guarantor
Senior Debt; and
(iv) Permitted Liens.
Dividend and Other Payment Restrictions Affecting
Subsidiaries
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to
exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its
Capital Stock to the Company or any of its Restricted
Subsidiaries, or with respect to any other interest or
participation in, or measured by, its profits, or pay any
indebtedness owed to the Company or any of its Restricted
Subsidiaries;
(2) make loans or advances to the Company or any of its
Restricted Subsidiaries; or
(3) sell, lease or transfer any of its properties or assets
to the Company or any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to
encumbrances or restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and the
Credit Agreement as in effect on the Issue Date and any
amendments, modifications, restatements, renewals, increases,
supplements, refundings, restructurings, replacements or
refinancings of those agreements; provided that the
amendments, modifications, restatements, renewals, increases,
supplements, refundings, restructurings, replacement or
refinancings are, in the good faith judgment of the
Company’s Board of Directors, no more restrictive, taken as
a whole, with respect to such dividend and other payment
restrictions than those contained in those agreements on the
Issue Date;
(2) the Indenture, the Notes and the Subsidiary Guarantees
(including any Exchange Notes and related Subsidiary Guarantees);
(3) applicable law, rule, regulation or order;
(4) any instrument governing Indebtedness or Capital Stock
of a Person acquired by the Company or any of its Restricted
Subsidiaries as in effect at the time of such acquisition or
assumed by the Company or any of its Restricted Subsidiaries in
connection with an acquisition of all or substantially all of
the assets of a Person (except to the extent such Indebtedness
was incurred or assumed or such Capital Stock was issued in
connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be
incurred;
(5) customary non-assignment provisions in leases, licenses
or similar contracts entered into in the ordinary course of
business and consistent with past practices;
(6) purchase money obligations or other obligations
described in clause (4) of the second paragraph of
“— Incurrence of Indebtedness and Issuance of
Preferred Stock” for property acquired in the ordinary
course of business and Capital Lease Obligations permitted under
the Indenture that impose restrictions of the nature described
in clause (3) of the preceding paragraph on the property
purchased or leased;
(7) Permitted Refinancing Indebtedness, provided
that the restrictions contained in the agreements governing
such Permitted Refinancing Indebtedness are, in the good faith
judgment of the Company’s Board of Directors, no more
restrictive, taken as a whole, than those contained in the
agreements governing the Indebtedness being refinanced;
(8) Liens securing Indebtedness otherwise permitted to be
incurred under the provisions of the covenants described above
under the captions “— Incurrence of Indebtedness
and Issuance of Preferred Stock” and
“— Liens” that limit the right of the debtor
to dispose of the assets subject to such Liens;
(9) customary provisions with respect to the disposition or
distribution of assets or property in joint venture agreements,
asset sale agreements, sale-leaseback agreements, stock sale
agreements and other similar agreements entered into in the
ordinary course of business;
(10) any such encumbrance or restriction with respect to a
Foreign Subsidiary pursuant to an agreement governing
Indebtedness incurred by such Foreign Subsidiary that was
permitted by the terms of the Indenture to be incurred; and
(11) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the
ordinary course of business.
Merger, Consolidation or Sale of Assets
The Company may not, directly or indirectly:
(1) consolidate or merge with or into another Person
(whether or not the Company is the surviving corporation); or
(2) sell, assign, transfer, convey or otherwise dispose of
all or substantially all of the properties or assets of the
Company and its Restricted Subsidiaries taken as a whole, in one
or more related transactions, to another Person; unless:
(1) either: (a) the Company is the surviving
corporation; or (b) the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, conveyance or other
disposition has been made is a corporation organized or existing
under the laws of the United States, any state of the United
States or the District of Columbia (the Company or such Person,
as the case may be, being herein called the “Successor
Company”);
(2) the Successor Company (if other than the Company)
assumes all the obligations of the Company under the Notes, the
Indenture and the Registration Rights Agreement pursuant to
agreements reasonably satisfactory to the Trustee;
(3) immediately after such transaction no Default or Event
of Default exists;
(4) the Successor Company will, on the date of such
transaction after giving pro forma effect thereto and any
related financing transactions as if the same had occurred at
the beginning of the applicable four-quarter period, (i) be
permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in
the first paragraph of the covenant described above under the
caption “— Incurrence of Indebtedness and
Issuance of Preferred Stock” or (ii) would have a
Fixed Charge Coverage Ratio greater than the Fixed Charge
Coverage Ratio existing immediately prior to that
transaction; and
(5) each Guarantor, unless it is the other party to the
transactions described above or is released from its obligations
under its Subsidiary Guarantee in accordance with the Indenture,
shall have by
supplemental indenture confirmed that its Guarantee shall apply
to such Person’s obligations under the Indenture and the
Notes.
In addition, the Company may not, directly or indirectly, lease
all or substantially all of its properties or assets, in one or
more related transactions, to any other Person.
Notwithstanding the foregoing clauses (3) and (4):
(A) the Company may merge with an Affiliate incorporated
solely for the purpose of reincorporating the Company in another
state of the United States to realize tax benefits so long as
the amount of Indebtedness of the Company and its Restricted
Subsidiaries is not increased thereby; and
(B) any Restricted Subsidiary of the Company may
consolidate with, merge into or transfer all or part of its
properties and assets to the Company or to a Restricted
Subsidiary that is a Guarantor.
The Indenture will also provide for similar provisions relating
to any consolidation, merger or sale, assignment, transfer,
conveyance or disposal of all or substantially all of the
properties or assets of a Guarantor, excluding clause (4)
above. See “— Subsidiary Guarantees.”
For purposes of this covenant, the sale, lease, conveyance,
assignment, transfer or other disposition of all or
substantially all of the properties and assets of one or more
Subsidiaries of the Company, which properties and assets, if
held by the Company instead of such Subsidiaries, would
constitute all or substantially all of the properties and assets
of the Company on a consolidated basis, shall be deemed to be
the transfer of all or substantially all of the properties and
assets of the Company.
The predecessor company will be released from its obligations
under the Indenture and the Successor Company will succeed to,
and be substituted for, and may exercise every right and power
of, the Company under the Indenture, but, in the case of a lease
of all or substantially all its assets, the predecessor will not
be released from the obligation to pay the principal of and
interest on the Notes.
Although there is a limited body of case law interpreting the
phrase “substantially all,” there is no precise
established definition of the phrase under applicable law.
Accordingly, in certain circumstances there may be a degree of
uncertainty as to whether a particular transaction would involve
“all or substantially all” of the property or assets
of a Person.
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate
(each, an “Affiliate Transaction”), unless:
(1) the Affiliate Transaction is on terms that are no less
favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an
unrelated Person; and
(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $5.0 million, a resolution of the Board of
Directors set forth in an Officers’ Certificate certifying
that such Affiliate Transaction complies with this covenant and
that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $15.0 million, a written opinion from an
independent investment banking, accounting or appraisal firm of
nationally recognized standing to the effect that such Affiliate
Transaction is fair, from a financial standpoint, to the Company
and
its Restricted Subsidiaries or not materially less favorable to
the Company and its Restricted Subsidiaries than could
reasonably be expected to be obtained at the time in an
arm’s-length transaction with a Person who was not an
Affiliate.
The following items will not be deemed to be Affiliate
Transactions and, therefore, will not be subject to the
provisions of the prior paragraph:
(1) any employment agreements or arrangements, employee
benefit plan or arrangements, officer and director
indemnification agreements or arrangements or other similar
agreements or arrangements entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business;
(2) transactions between or among the Company and/or its
Restricted Subsidiaries;
(3) the payment by the Company or any Restricted Subsidiary
to the TC Group L.L.C. and any of their Affiliates for any
financial advisory, financing, underwriting or placement
services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions
or divestitures, which payments are approved by a majority of
the members of the Board of Directors or a majority of the
disinterested members of the Board of Directors of the Company,
in each case in good faith;
(4) transactions in the ordinary course of the business of
the Company and its Restricted Subsidiaries, provided
that such transactions are on terms that are no less
favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an
unrelated person;
(5) payment of reasonable directors fees and indemnity
provided on behalf of officers, directors or employees of the
Company or any of its Restricted Subsidiaries;
(6) any issuance or sale of Equity Interests (other than
Disqualified Stock) to Affiliates of the Company;
(7) Restricted Payments or Permitted Investments (other
than pursuant to clauses (3) and (16) of the
definition thereof) that, in each case, do not violate the
provisions of the Indenture described above under the caption
“— Restricted Payments;” and
(8)(a) payments of $11.0 million to be made to TC
Group, L.L.C. upon consummation of the Acquisition and
(b) amounts payable to TC Group, L.L.C. pursuant to the
management agreement, as in effect on the closing date of the
Acquisition and on the terms described in this prospectus,
between the Company and TC Group, L.L.C. or pursuant to any
amendment, restatement or replacement thereof to the extent that
the terms of any such amendment, restatement or replacement are
not, taken as a whole, disadvantageous to the holders of the
Notes in any material respect, provided that any payments
pursuant to this clause (b) in excess of $2.5 million
per year, plus reasonable out-of-pocket expenses incurred by TC
Group, L.L.C. in connection with its performance of management
or other services under such management agreement, shall be
subject to the first paragraph of this covenant.
Designation of Restricted and Unrestricted
Subsidiaries
The Board of Directors may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if that designation would not
cause a Default. If a Restricted Subsidiary is designated as an
Unrestricted Subsidiary, the aggregate fair market value of all
outstanding Investments owned by the Company and its Restricted
Subsidiaries in the Subsidiary properly designated will be
deemed to be an Investment made as of the time of the
designation in an amount determined as set forth in the second
paragraph of the definition of Investments and will reduce the
amount available for Restricted Payments under the covenant
described above under the caption “— Restricted
Payments” or under one or more clauses of the definition of
Permitted Investments, as determined by the Company. That
designation will only be permitted if a Restricted Payment or a
Permitted Investment in such amount would be permitted at that
time and if the Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary. The Board of Directors
may redesignate any Unrestricted Subsidiary to be a Restricted
Subsidiary if the redesignation would not cause a Default;
provided that the conditions set forth in the definition
of “Unrestricted Subsidiary” for such designation as a
Restricted Subsidiary are satisfied.
Additional Subsidiary Guarantees
The Company will cause each Restricted Subsidiary that
Guarantees, on the Issue Date or any time thereafter, any
Indebtedness of the Company or any Guarantor to execute and
deliver to the Trustee a Guarantee pursuant to which such
Restricted Subsidiary will unconditionally Guarantee, on a joint
and several basis, the full and prompt payment of the principal
of, premium, if any, and interest (including Additional
Interest, if any) on the Notes on a senior subordinated basis
and all other obligations under the Indenture. Notwithstanding
the foregoing, in the event any Guarantor is released and
discharged in full from all of its obligations under its
Guarantees of (1) the Credit Agreement and (2) all
other Indebtedness of the Company and its Restricted
Subsidiaries, then the Subsidiary Guarantee of such Guarantor
shall be automatically and unconditionally released or
discharged; provided that such Restricted Subsidiary has
not incurred any Indebtedness or issued any Preferred Stock in
reliance on its status as a Guarantor under the covenant
“— Incurrence of Indebtedness and Issuance of
Preferred Stock” unless such Guarantor’s obligations
under such Indebtedness or Preferred Stock, as the case may be,
are satisfied in full and discharged or are otherwise permitted
under the second paragraph of “— Incurrence of
Indebtedness and Issuance of Preferred Stock.”
Each Guarantee will be limited to an amount not to exceed the
maximum amount that can be guaranteed by that Restricted
Subsidiary without rendering the Guarantee, as it relates to
such Restricted Subsidiary, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
Each Guarantee shall be released in accordance with the
provisions of the Indenture described under
“— Subsidiary Guarantees.”
Business Activities
The Company will not, and will not permit any Restricted
Subsidiary to, engage in any business other than Permitted
Businesses, except to such extent as would not be material to
the Company and its Subsidiaries taken as a whole.
Payments for Consent
The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, pay or cause to be paid
any consideration to or for the benefit of any Holder of Notes
for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Notes
unless such consideration is offered to be paid and is paid to
all Holders of the Notes that consent, waive or agree to amend
in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
Reports
Whether or not required by the Commission, so long as any Notes
are outstanding, the Company will furnish to the Trustee for
mailing to the Holders of Notes, within the time periods
specified in the Commission’s rules and regulations:
(1) all quarterly and annual financial information that
would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were
required to file such Forms, including a “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and, with respect to the annual information
only, a report on the annual financial statements by the
Company’s certified independent accountants; and
(2) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were
required to file such reports.
If the Company has designated any of its Subsidiaries as
Unrestricted Subsidiaries, then the quarterly and annual
financial information required by the preceding paragraph will
include a reasonably detailed presentation, either on the face
of the financial statements or in the footnotes thereto, and in
the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” of the financial
condition and results of operations of the Company and its
Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of
the Company.
In addition, following the consummation of the Exchange Offer
contemplated by the Registration Rights Agreement, whether or
not required by the Commission, the Company will file a copy of
all of the information and reports referred to in
clauses (1) and (2) above with the Commission for
public availability within the time periods specified in the
Commission’s rules and regulations (unless the Commission
will not accept such a filing) and make such information
available to prospective investors upon request. For purposes of
this covenant, the Company and the Guarantors will be deemed to
have furnished the reports to the Trustee and the Holders of
Notes as required by this covenant if it has filed such reports
with the Commission via the EDGAR filing system and such reports
are publicly available.
Notwithstanding the foregoing, such requirements for the
applicable period shall be deemed satisfied prior to the
commencement of the Exchange Offer or the effectiveness of the
Shelf Registration Statement by the filing with the Commission
of the Exchange Offer registration statement and/or Shelf
Registration Statement, and any amendments thereto, with such
financial information that satisfies Regulation S-X of the
Securities Act.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of
interest on, or Additional Interest, if any, with respect to,
the Notes, whether or not prohibited by the subordination
provisions of the Indenture;
(2) default in payment when due of the principal of, or
premium, if any, on the Notes, whether or not prohibited by the
subordination provisions of the Indenture;
(3) failure by the Company or any of its Restricted
Subsidiaries for 30 days after notice to comply with the
provisions described under the captions
“— Certain Covenants — Merger,
Consolidation or Sale of Assets,”“— Repurchase at the Option of
Holders — Asset Sales,”“— Repurchase at the Option of
Holders — Change of Control,”“Certain
Covenants — Restricted Payments” or
“— Certain Covenants — Incurrence of
Indebtedness and Issuance of Preferred Stock;”
(4) default in the performance of or the failure by the
Company or any of its Restricted Subsidiaries for 60 days
after notice to comply with any of the other agreements (other
than a default or failure which is described in
clauses (1), (2) or (3) above) in the Indenture;
(5) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company
or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by the Company or any of its Restricted
Subsidiaries), whether such Indebtedness or guarantee now
exists, or is created after the Issue Date, if that default:
(a) is caused by a failure to pay principal of, or interest
or premium, if any, on such Indebtedness at its Stated Maturity
prior to the expiration of the grace period provided in
such Indebtedness on the date of such default (a “Payment
Default”); or
(b) results in the acceleration of such Indebtedness prior
to its Stated Maturity,
and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default
or the maturity of which has been so accelerated, aggregates
$25.0 million or more;
(6) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of
$25.0 million, which judgments are not paid, discharged or
stayed for a period of 60 days;
(7) except as permitted by the Indenture, any Subsidiary
Guarantee is held in any judicial proceeding to be unenforceable
or invalid or ceases for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any
Guarantor, denies or disaffirms its obligations under its
Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency described in
the Indenture with respect to the Company or any of its
Significant Subsidiaries or any group of Restricted Subsidiaries
that, taken as a whole, would constitute a Significant
Subsidiary.
In the case of an Event of Default arising from certain events
of bankruptcy or insolvency, with respect to the Company, any
Restricted Subsidiary that is a Significant Subsidiary or any
group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will
become due and payable immediately without further action or
notice. If any other Event of Default occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount
of the then outstanding Notes may declare all the Notes to be
due and payable immediately.
However, a Default under clause (3) or (4) above will
not constitute an Event of Default until the Trustee or the
Holders of 25% in principal amount of the outstanding Notes
notify the Company of the Default and the Company does not cure
such Default within the time specified after receipt of such
notice.
Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default if it
determines that withholding notice is in their interest, except
with respect to a Default or Event of Default relating to the
payment of principal of, or interest or premium or Additional
Interest, if any, on, the Notes.
The Holders of a majority in aggregate principal amount of the
Notes then outstanding by notice to the Trustee may, on behalf
of the Holders of all of the Notes, waive any existing Default
or Event of Default and its consequences under the Indenture,
except a continuing Default or Event of Default in the payment
of principal of, or interest or premium or Additional Interest,
if any, on the Notes.
The Indenture will provide that, at any time after a declaration
of acceleration with respect to the Notes, the Holders of a
majority in principal amount of the Notes may rescind and cancel
such declaration and its consequences:
(1) if the rescission would not conflict with any judgment
or decree;
(2) if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has
become due solely because of acceleration; and
(3) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such
declaration of acceleration, has been paid.
No such rescission shall affect any subsequent Default or impair
any right consequence thereto.
In the event of any Event of Default specified in
clause (5) of the first paragraph above, such Event of
Default and all consequences thereof (excluding, however, any
resulting payment default) will be annulled, waived and
rescinded, automatically and without any action by the Trustee
or the holders of the
Notes, if within 20 days after such Event of Default arose
the Company delivers an Officers’ Certificate to the
Trustee stating that (x) the Indebtedness or guarantee that
is the basis for such Event of Default has been discharged or
(y) the holders thereof have rescinded or waived the
acceleration, notice or action (as the case may be) giving rise
to such Event of Default or (z) the default that is the
basis for the Event of Default has been cured.
Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture and under the Trust
Indenture Act of 1939, as amended. Subject to the provisions of
the Indenture relating to the duties of the Trustee, the Trustee
is under no obligation to exercise any of its rights or powers
under the Indenture at the request, order or direction of any of
the Holders of the Notes, unless such Holders have offered to
the Trustee reasonable indemnity. Subject to all provisions of
the Indenture and applicable law, the holders of a majority in
aggregate principal amount of the then outstanding Notes issued
under such Indenture have the right to direct the time, method
and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the
Trustee.
The Company is required to deliver to the Trustee annually a
statement regarding compliance with the Indenture. Upon becoming
aware of any Default or Event of Default, the Company is
required to deliver to the Trustee a statement specifying such
Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and
Stockholders
No past, present or future director, officer, employee,
incorporator or stockholder of the Company or any Guarantor, as
such, will have any liability for any obligations of the Company
or the Guarantors under the Notes, the Indenture or the
Subsidiary Guarantees, or for any claim based on, in respect of,
or by reason of, such obligations or their creation. Each Holder
of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration
for issuance of the Notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have
all of its obligations discharged with respect to the
outstanding Notes and all obligations of the Guarantors
discharged with respect to their Subsidiary Guarantees
(“Legal Defeasance”) except for:
(1) (the rights of Holders of outstanding Notes to receive
payments in respect of the principal of, or interest or premium
and Additional Interest, if any, on such Notes when such
payments are due from the trust referred to below;
(2) the Company’s obligations with respect to the
Notes concerning issuing temporary notes, registration of Notes,
replacing mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for
security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of
the Trustee, and the Company’s and the Guarantors’
obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company and the Guarantors
released with respect to certain covenants (including the
obligation to make Change of Control Offers and Asset Sale
Offers) that are described in the Indenture (“Covenant
Defeasance”) and thereafter any omission to comply with
those covenants will not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events)
described under “— Events of Default and
Remedies” will no longer constitute an Event of Default
with respect to the Notes.
If the Company exercises its Legal Defeasance option, each
Guarantor will be released from all of its obligations with
respect to the Subsidiary Guarantees.
In order to exercise either Legal Defeasance or Covenant
Defeasance:
(1) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Notes, cash in
U.S. dollars, non-callable Government Securities or a
combination of cash in U.S. dollars and non-callable
Government Securities, in amounts as will be sufficient, in the
opinion of a nationally recognized investment bank or firm of
independent public accountants, to pay the principal of, or
interest and premium and Additional Interest, if any, on the
outstanding Notes on the Stated Maturity or on the applicable
redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, the Company has
delivered to the Trustee an opinion of counsel reasonably
acceptable to the Trustee confirming that:
(a) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling; or
(b) since the Issue Date, there has been a change in the
applicable federal income tax law;
in either case to the effect that, and based thereon such
opinion of counsel will confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company has
delivered to the Trustee an opinion of counsel reasonably
acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is
continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be
applied to such deposit and the grant of any Lien securing such
borrowings);
(5) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default
under, any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is
bound;
(6) the Company must deliver to the Trustee an opinion of
counsel to the effect that, assuming, among other things, no
intervening bankruptcy of the Company between the date of
deposit and the 91st day following the deposit and assuming
that no Holder is an “insider” of the Company under
applicable bankruptcy law, after the 91st day following the
deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization of similar
laws affecting creditors’ rights generally;
(7) the Company must deliver to the Trustee an
officers’ certificate stating that the deposit was not made
by the Company with the intent of preferring the Holders of
Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(8) the Company must deliver to the Trustee an
Officers’ Certificate and an opinion of counsel, each
stating that all conditions precedent relating to Legal
Defeasance or Covenant Defeasance have been complied with.
Except as provided in the next three succeeding paragraphs, the
Indenture or the Notes or the Subsidiary Guarantees may be
amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then
outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer
for, Notes), and any existing default or compliance with any
provision of the Indenture or the Notes or the Subsidiary
Guarantees may be waived (except a default in respect of the
principal or interest on the Notes) with the consent of the
Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or
exchange offer for, Notes). Without the consent of each Holder
affected, an amendment or waiver of the Indenture, the Notes or
the Subsidiary Guarantees may not (with respect to any Notes
held by a non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of
any note or alter the provisions with respect to the redemption
of the Notes (other than provisions relating to the covenants
described above under the caption “— Repurchase
at the Option of Holders”);
(3) reduce the rate of or change the time for payment of
interest on any Note;
(4) waive a Default or Event of Default in the payment of
principal of, or interest or premium or Additional Interest, if
any, on the Notes (except a rescission of acceleration of the
Notes by the Holders of at least a majority in aggregate
principal amount of the Notes with respect to a nonpayment
default and a waiver of the payment default that resulted from
such acceleration);
(5) make any note payable in currency other than that
stated in the Notes;
(6) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of, or interest or
premium or Additional Interest, if any, on the Notes;
(7) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described
above under the caption “— Repurchase at the
Option of Holders”);
(8) release any Guarantor from any of its obligations under
its Subsidiary Guarantee or the Indenture, except in accordance
with the terms of the Indenture;
(9) modify the Subsidiary Guarantees in any manner adverse
to the holders of the Notes; or
(10) make any change in the preceding amendment and waiver
provisions.
In addition, any amendment to, or waiver of, the provisions of
the Indenture relating to subordination that adversely affects
the rights of the Holders of the Notes will require the consent
of the Holders of at least 75% in aggregate principal amount of
Notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder
of Notes, the Company, the Guarantors and the Trustee may amend
or supplement the Indenture or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or
in place of certificated Notes;
(3) to provide for the assumption of the Company’s
obligations to Holders of Notes in the case of a merger or
consolidation or sale of all or substantially all of the
Company’s assets;
(4) to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not
adversely affect the legal rights under the Indenture of any
such Holder;
(5) to comply with the rules of any applicable securities
depository;
(6) to comply with requirements of the Commission in order
to effect or maintain the qualification of the Indenture under
the Trust Indenture Act;
(7) to comply with the covenant relating to mergers,
consolidations and sales of assets;
(8) to add Guarantees with respect to the Notes or to
secure the Notes;
(9) to add to the covenants of the Company or any Guarantor
for the benefit of the Holders of the Notes or surrender any
right or power conferred upon the Company or any Guarantor;
(10) to release a Guarantor from its Subsidiary Guarantee
in accordance with the applicable provisions of the
Indenture; or
(11) to evidence and provide for the acceptance and
appointment under the Indenture of a successor Trustee pursuant
to the requirements thereof.
The consent of the Holders is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the
proposed amendment.
After an amendment under the Indenture becomes effective, the
Company is to mail to Holders of the Notes a notice briefly
describing such amendment. However, the failure to give such
notice to all Holders of the Notes, or any defect therein, will
not impair or affect the validity of the amendment.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further
effect as to all Notes issued thereunder, when:
(1) either:
(a) all Notes that have been authenticated, except lost,
stolen or destroyed Notes that have been replaced or paid and
Notes for whose payment money has been deposited in trust and
thereafter repaid to the Company, have been delivered to the
Trustee for cancellation; or
(b) all Notes that have not been delivered to the Trustee
for cancellation have become due and payable by the reason of
the mailing of a notice of redemption or otherwise will become
due and payable within one year by reason of the mailing of a
notice of redemption or otherwise and the Company or any
Guarantor has irrevocably deposited or caused to be deposited
with the Trustee as funds in trust solely for the benefit of the
Holders, cash in U.S. dollars, non-callable Government
Securities or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be
sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire Indebtedness on the
Notes not delivered to the Trustee for cancellation of
principal, premium and Additional Interest, if any, and accrued
interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is
continuing on the date of the deposit or will occur as a result
of the deposit (other than a Default resulting from the
borrowing of funds to be applied to such deposit and the grant
of any Lien securing such borrowing) and the deposit will not
result in a breach or violation of, or constitute a default
under, any other instrument to which the Company or any
Guarantor is a party or by which the Company or any Guarantor is
bound;
(3) the Company or any Guarantor has paid or caused to be
paid all sums payable by it under the Indenture; and
(4) the Company has delivered irrevocable instructions to
the Trustee under the Indenture to apply the deposited money
toward the payment of the Notes at maturity or the redemption
date, as the case may be.
In addition, the Company must deliver an Officers’
Certificate and an opinion of counsel to the Trustee stating
that all conditions precedent to satisfaction and discharge have
been satisfied.
If the Trustee becomes a creditor of the Company or any
Guarantor, the Indenture limits its right to obtain payment of
claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise.
The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the
Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then
outstanding Notes will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. The
Indenture provides that in case an Event of Default occurs and
is continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any
Holder of Notes, unless such Holder has offered to the Trustee
security and indemnity satisfactory to it against any loss,
liability or expense.
Registered Exchange Offer; Registration Rights
We have filed a registration statement to comply with our
obligations under the registration rights agreement to register
to the issuance of the Exchange Notes. See “The Exchange
Offer.”
Certain Definitions
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein
for which no definition is provided.
“Acquired Debt”means, with respect to any
specified Person:
(1) Indebtedness of any other Person existing at the time
such other Person is merged with or into or became a Restricted
Subsidiary of such specified Person, whether or not such
Indebtedness is incurred in connection with, or in contemplation
of, such other Person merging with or into, or becoming a
Restricted Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
“Additional Interest”means amounts payable
under the Registration Rights Agreement as described under
“Registration Rights.”
“Affiliate”of any specified Person means any
other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with such specified
Person. For purposes of this definition, “control,” as
used with respect to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of
the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise;
provided that with respect to “— Certain
Covenants — Transactions with Affiliates” only,
beneficial ownership of 10% or more of the Voting Stock of a
Person will be deemed to be control. For purposes of this
definition, the terms “controlling,”“controlled
by” and “under common control with” have
correlative meanings.
“Applicable Premium”means, with respect to any
note on any redemption date, the greater of:
(1) 1.0% of the then outstanding principal amount of the
note; and
(2) the excess of:
(a) the present value at such redemption date of
(i) the redemption price of the note at September 1,2009 (such redemption price being set forth in the table
appearing above under the caption “— Optional
Redemption”) plus (ii) all required interest payments
due on the note through September 1, 2009 (excluding
accrued but unpaid interest to the redemption date),
computed using a discount rate equal to the Treasury Rate as of
such redemption date plus 50 basis points; over
(b) the then outstanding principal amount of the note.
“Asset Sale”means:
(1) the sale, lease, conveyance or other disposition of any
property, assets or rights (including by way of sale and
leaseback); provided that the sale, conveyance or other
disposition of all or substantially all of the assets of the
Company and its Restricted Subsidiaries taken as a whole will be
governed by the provisions of the Indenture described above
under the caption “— Repurchase at the Option of
Holders — Change of Control” and/or the
provisions described above under the caption
“— Certain Covenants — Merger,
Consolidation or Sale of Assets” and not by the provisions
of the Asset Sale covenant; and
(2) the issuance or sale of Equity Interests (other than
directors’ qualifying shares) in any of the Company’s
Restricted Subsidiaries.
Notwithstanding the preceding, the following items will not be
deemed to be Asset Sales:
(1) any single transaction or series of related
transactions that involves assets having an aggregate fair
market value of less than $2.0 million;
(2) a transfer of assets between or among the Company and
its Restricted Subsidiaries,
(3) an issuance of Equity Interests by a Restricted
Subsidiary to the Company or to another Restricted Subsidiary;
(4) the sale or lease of products, services, equipment,
inventory or other assets in the ordinary course of business or
other disposition of damaged, worn-out or obsolete assets in the
ordinary course of business;
(5) the sale or other disposition of cash or Cash
Equivalents;
(6) the license of patents, trademarks, copyrights and
know-how to third Persons in the ordinary course of business;
(7) the creation of Liens;
(8) disposition of an account receivable in connection with
the collection or compromise thereof;
(9) for purposes of “— Repurchase of the
Option of Holders — Asset Sales” only, a
Restricted Payment that does not violate, or Permitted
Investment (other than a Permitted Investment to the extent such
transaction results in the receipt of cash or Cash Equivalents
by the Company or its Restricted Subsidiaries) that is permitted
by, the covenant described above under the caption
“— Certain Covenants — Restricted
Payments”; and
(10) dispositions of engine pool assets in the ordinary
course of business.
“Beneficial Owner”has the meaning assigned to
such term in Rule 13d-3 and Rule 13d-5 under the
Exchange Act, except that in calculating the beneficial
ownership of any particular “person” (as that term is
used in Section 13(d)(3) of the Exchange Act), such
“person” will be deemed to have beneficial ownership
of all securities that such “person” has the right to
acquire by conversion or exercise of other securities, whether
such right is currently exercisable or is exercisable only upon
the occurrence of a subsequent condition. The terms
“Beneficially Owns” and “Beneficially Owned”
have correlative meanings.
“Board of Directors”means:
(1) with respect to a corporation, the board of directors
of the corporation;
(2) with respect to a partnership, the Board of Directors
of the general partner of the partnership; and
(3) with respect to any other Person, the board or
committee of such Person serving a similar function.
“Business Day”means each day that is not a
Saturday, Sunday or other day on which banking institutions in
New York, New York are authorized or required by law to close.
“Capital Lease Obligation”means, at the time
any determination is to be made, the amount of the liability in
respect of a capital lease that would at that time be required
to be capitalized on a balance sheet in accordance with GAAP.
“Capital Stock”means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any
and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or
limited); and
(4) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses
of, or distributions of assets of, the issuing Person.
“Cash Equivalents”means:
(1) United States dollars or, in the case of any Foreign
Subsidiary, such local currencies held by it from time to time
in the ordinary course of business;
(2) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or
instrumentality of the United States government (provided
that the full faith and credit of the United States is
pledged in support of those securities) having maturities of not
more than one year from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits
with maturities of one year or less from the date of
acquisition, bankers’ acceptances with maturities not
exceeding six months and overnight bank deposits, in each case,
with any lender party to the Credit Agreement or with any
domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thomson Bank Watch Rating of
“B” or better;
(4) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in
clauses (2) and (3) above entered into with any
financial institution meeting the qualifications specified in
clause (3) above;
(5) commercial paper having one of the two highest rating
obtainable from Moody’s Investors Service, Inc. or
Standard & Poor’s Rating Services and in each case
maturing within one year after the date of acquisition; and
(6) money market funds at least 95% of the assets of which
constitute Cash Equivalents of the kinds described in
clauses (1) through (5) of this definition.
“Change of Control”means the occurrence of any
of the following:
(1) prior to the occurrence of the first public offering of
common stock of the Company or Holdings, the Permitted Holders
cease to be the Beneficial Owners, directly or indirectly, of a
majority of the Voting Stock of the Company or Holdings,
measured by voting power rather than number of shares, whether
as a result of the issuance of securities of the Company or
Holdings, any merger, consolidation, liquidation or dissolution
of the Company or Holdings, or any direct or indirect transfer
of securities by the Permitted Holders or otherwise;
(2) the direct or indirect sale, transfer, conveyance or
other disposition (other than by way of merger or
consolidation), in one or a series of related transactions, of
all or substantially all of the
properties or assets of Holdings or the Company and its
Restricted Subsidiaries taken as a whole to any
“person” or “group” (as those terms are used
in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act or any successor provision) other than a Permitted
Holder;
(3) the adoption of a plan relating to the liquidation or
dissolution of Holdings or the Company;
(4) after the first public offering of common stock of the
Company or Holdings, the consummation of any transaction
(including, without limitation, any merger or consolidation) the
result of which is that any “person” or
“group” (as these terms are used in
Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act or any successor provision), other than the Permitted
Holders, becomes the Beneficial Owner, directly or indirectly,
of more than 35% of the Voting Stock of the Company or Holdings
after such first public offering, measured by voting power
rather than number of shares; or
(5) the first day on which a majority of the members of the
Board of Directors of the Company or Holdings are not Continuing
Directors.
“Commission”means the Securities and Exchange
Commission.
“Consolidated Cash Flow”means, with respect to
any specified Person for any period, the Consolidated Net Income
of such Person for such period, plus
(1) provision for taxes based on income or profits of such
Person and its Restricted Subsidiaries for such period to the
extent such taxes were deducted in computing such Consolidated
Net Income; plus
(2) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of
letter of credit or bankers’ acceptance financings), fees
or interest paid to purchasers or lenders providing financing in
connection with a factoring agreement or other similar agreement
and net of the effect of all payments made or received pursuant
to Hedging Obligations to the extent such expense was deducted
in computing such Consolidated Net Income; plus
(3) depreciation, amortization (including amortization of
intangibles but excluding amortization of prepaid cash expenses
that were paid in a prior period) and other non-cash expenses
(excluding any such non-cash expense to the extent that it
represents an accrual of or reserve for cash expenses in any
future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for
such period to the extent such expenses were deducted in
computing such Consolidated Net Income; plus
(4) unrealized non-cash losses resulting from foreign
currency balance sheet adjustments required by GAAP to the
extent such losses were deducted in computing such Consolidated
Net Income; plus
(5) any non-recurring fees, charges or other expenses
(including bonus and retention payments and severance expenses,
restructuring costs and acquisition integration costs and fees)
made or incurred in connection with the Acquisition within one
year of the Issue Date; plus
(6) all other unusual or non-recurring items of loss or
expense, net after-tax; minus
(7) all other unusual or non-recurring gains or revenue,
net after-tax; minus
(8) non-cash items increasing such Consolidated Net Income
for such period, other than the accrual of revenue in the
ordinary course of business, in each case, on a consolidated
basis and determined in accordance with GAAP.
“Consolidated Net Income”means, with respect
to any specified Person for any period, the aggregate of the Net
Income of such Person and its Restricted Subsidiaries for such
period, on a consolidated basis, determined in accordance with
GAAP; provided that:
(1) the Net Income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting will be included only to the extent of the amount of
dividends or distributions paid in cash (or the extent converted
into cash) to the specified Person or a Restricted Subsidiary of
the Person or, if such Net Income is a loss, only to the extent
such loss has been funded with cash from the Company or a
Restricted Subsidiary;
(2) the Net Income (if positive) of any Restricted
Subsidiary that is not a Guarantor will be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income
is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly
or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary
or its stockholders;
(3) the cumulative effect of a change in accounting
principles will be excluded; and
(4) any impairment loss of such Person or its Restricted
Subsidiaries relating to goodwill or other nonamortizing
intangible asset will be excluded.
Notwithstanding the foregoing, for the purpose of the covenant
contained under the caption “— Certain
Covenants — Restricted Payments” only, there
shall be excluded from Consolidated Net Income any income
arising from any sale or other disposition of Restricted
Investments made by the Company and its Restricted Subsidiaries,
any repurchases and redemptions of Restricted Investments made
by the Company and its Restricted Subsidiaries, any repayments
of loans and advances which constitute Restricted Investments
made by the Company and any Restricted Subsidiary, or any
distribution or dividend from an Unrestricted Subsidiary, but in
each case only to the extent such income otherwise increases the
amount of Restricted Payments permitted under
clauses (3)(c) and (e) of the first paragraph of the
covenant contained under the caption “— Certain
Covenants — Restricted Payments.”
“Continuing Directors”means, as of any date of
determination, any member of the Board of Directors of the
Company or Holdings, as the case may be, who:
(1) was a member of such Board of Directors on the Issue
Date; or
(2) was nominated for election or elected to such Board of
Directors with the approval of a majority of the Continuing
Directors who were members of the relevant Board at the time of
such nomination or election.
“Credit Agreement”means that certain Credit
Agreement, dated as of the closing date of the Acquisition,
among the Company, the lenders party thereto, J.P. Morgan
Securities Inc. and Lehman Brothers Inc., as joint lead
arrangers, JPMorgan Chase Bank, as administrative agent, and
Lehman Commercial Paper Inc. and Credit Suisse First Boston, as
co-syndication agent, providing for up to $375.0 million of
borrowings, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection
therewith, and in each case as amended, restated, modified,
renewed, increased, refunded, replaced (whether upon or after
termination or otherwise) or refinanced (including by means of
sales of debt securities to institutional investors) from time
to time.
“Default”means any event that is, or with the
passage of time or the giving of notice or both would be, an
Event of Default.
“Designated Noncash Consideration”means the
fair market value of noncash consideration received by the
Company or one of its Restricted Subsidiaries in connection with
an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers’ Certificate setting
forth the basis of such valuation, less the amount of cash or
Cash Equivalents received in connection with a subsequent sale,
redemption or payment of, on or with respect to such Designated
Noncash Consideration.
(1) any Indebtedness outstanding under the Credit
Agreement; and
(2) any other Senior Debt permitted under the Indenture the
principal amount of which is $25.0 million or more and that
has been designated by the Company as “Designated Senior
Debt.”
“Disqualified Stock”means, with respect to any
Person, any Capital Stock of such Person that, by its terms (or
by the terms of any security into which it is convertible, or
for which it is exchangeable, in each case at the option of the
holder of the Capital Stock), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the
option of the holder of the Capital Stock, in whole or in part,
or is convertible or exchangeable for Indebtedness or
Disqualified Stock (excluding Capital Stock which is
exchangeable or convertible solely at the option of the Company
or any Restricted Subsidiary) on or prior to the date that is
91 days after the earlier of the date on which the Notes
mature or the date the Notes are no longer outstanding.
Notwithstanding the preceding sentence, any Capital Stock that
would constitute Disqualified Stock solely because the holders
of the Capital Stock have the right to require the Company to
repurchase such Capital Stock upon the occurrence of a Change of
Control or an Asset Sale will not constitute Disqualified Stock
if the terms of such Capital Stock provide that the Company may
not repurchase or redeem any such Capital Stock (and all
securities into which it is convertible or exchangeable)
pursuant to such provisions prior to compliance by the Company
with the provision of the Indenture described under the caption
“Repurchase at the Option of Holders” and such
repurchase or redemption complies with the covenant described
above under the caption “— Certain
Covenants — Restricted Payments.”
“Domestic Subsidiary”means any Restricted
Subsidiary of the Company that was formed under the laws of the
United States or any state of the United States or the District
of Columbia or that guarantees or otherwise provides direct
credit support for any Indebtedness of the Company.
“Equity Interests”means Capital Stock and all
warrants, options or other rights to acquire Capital Stock (but
excluding any debt security that is convertible into, or
exchangeable for, Capital Stock).
“Equity Offering”means any public or private
sale of Capital Stock (other than Disqualified Stock) made for
cash on a primary basis by the Company after the Issue Date,
other than (i) public offerings registered on Form S-4
or S-8 or (ii) any issuance to any Subsidiary.
“Exchange Notes”means the notes issued in the
Exchange Offer pursuant to the Indenture.
“Exchange Offer”has the meaning set forth in
the Registration Right Agreement.
“Existing Indebtedness”means Indebtedness of
the Company and its Restricted Subsidiaries (other than
Indebtedness under the Credit Agreement and the Notes) in
existence on the Issue Date until such amounts are repaid.
“Fixed Charge Coverage Ratio”means, with
respect to any specified Person for any period consisting of
such Person’s most recently ended four fiscal quarters for
which internal financial statements are available (the
“four quarter reference period”), the ratio of the
Consolidated Cash Flow of such Person for such period to the
Fixed Charges of such Person for such period. In the event that
the specified Person or any of its Restricted Subsidiaries
incurs, assumes, Guarantees, repays, repurchases or redeems any
Indebtedness (other than ordinary working capital borrowings) or
issues, repurchases or redeems Preferred Stock subsequent to the
commencement of the applicable period for which the Fixed Charge
Coverage Ratio is being calculated and on or prior to the date
on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the “Calculation Date”), then
the Fixed Charge Coverage Ratio will be calculated giving pro
forma effect to such incurrence, assumption, Guarantee,
repayment, repurchase or redemption of Indebtedness, or such
issuance, repurchase or redemption of Preferred Stock, and the
use of the proceeds therefrom, as if the same had occurred at
the beginning of the applicable four-quarter period.
In addition, for purposes of calculating the Fixed Charge
Coverage Ratio:
(1) acquisitions that have been made by the specified
Person or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing
transactions, subsequent to the commencement of the applicable
four-quarter reference period and on or prior to the Calculation
Date will be given pro forma effect as if they had occurred on
the first day of such period, including any Consolidated Cash
Flow and any pro forma expense and cost reductions that have
occurred or are reasonably expected to occur, in the reasonable
judgment of the chief financial officer of the specified Person
(regardless of whether those expense and cost reductions could
then be reflected in pro forma financial statements in
accordance with Regulation S-X promulgated under the
Securities Act or any other regulation or policy of the
Commission related thereto);
(2) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation
Date, will be excluded;
(3) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation
Date, will be excluded, but only to the extent that the
obligations giving rise to such Fixed Charges will not be
obligations of the specified Person or any of its Restricted
Subsidiaries following the Calculation Date;
(4) any Person that is a Restricted Subsidiary on the
Calculation Date will be deemed to have been a Restricted
Subsidiary at all times during the applicable four-quarter
reference period;
(5) any Person that is not a Restricted Subsidiary on such
Calculation Date will be deemed not to have been a Restricted
Subsidiary at any time during the applicable four-quarter
reference period; and
(6) if any Indebtedness bears a floating rate of interest,
the interest expense on such Indebtedness will be calculated as
if the rate in effect on the Calculation Date had been the
applicable rate for the entire applicable four-quarter reference
period (taking into account any Hedging Obligation applicable to
such Indebtedness if such Hedging Obligation has a remaining
term as at the Calculation Date in excess of 12 months).
“Fixed Charges”means, with respect to any
specified Person for any period, the sum, without duplication,
of:
(1) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment
obligations, the interest component of all payments associated
with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or
bankers’ acceptance financings), fees or interest paid to
purchasers or lenders providing financing in connection with a
factoring agreement or other similar agreement, and net of the
effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its
Restricted Subsidiaries that was capitalized during such period;
plus
(3) any interest expense on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries, whether or not such
Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or
accrued and whether or not in cash, on any series of preferred
stock or Disqualified Stock of such Person or any of its
Restricted Subsidiaries, other than dividends on Equity
Interests payable solely in Equity Interests of the Company
(other than Disqualified Stock) or to the Company or a
Restricted Subsidiary of the Company, times (b) a
fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal.
“Foreign Cash Equivalents”means:
(1) certificates of deposit or bankers acceptances of, and
bank deposits with, any bank organized under the laws of any
country that is a member of the European Economic Community,
whose short-term commercial paper rating from
Standard & Poor’s Rating Services is at least A-1
or the equivalent thereof or from Moody’s Investors
Service, Inc. is at least P-1 or the equivalent thereof, in each
case with maturities of not more than six months from the date
of acquisition;
(2) commercial paper maturing not more than one year from
the date of creation thereof and, at the time of acquisition,
having the highest rating obtainable from either
Standard & Poor’s Rating Services or Moody’s
Investors Service, Inc.; or
(3) shares of any money market mutual fund that has its
assets invested continuously in the types of investments
referred to in clauses (1) and (2) above.
“Foreign Subsidiary”means any Restricted
Subsidiary of the Company that was not formed under the laws of
the United States or any state of the United States or the
District of Columbia.
“GAAP”means generally accepted accounting
principles set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements
of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a
significant segment of the accounting profession, which are in
effect on the Issue Date.
“Guarantee”means a guarantee, other than by
endorsement of negotiable instruments for collection in the
ordinary course of business, direct or indirect, in any manner
including, without limitation, by way of a pledge of assets or
through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
“Guarantors”means each Subsidiary that incurs
a Guarantee of the Notes, including its successors and assigns;
provided that upon the release and discharge of such
Person from its Guarantee in accordance with the Indenture, such
Person shall cease to be a Guarantor.
“Guarantor Senior Debt”means
(1) all Indebtedness of any Guarantor outstanding under the
Credit Agreement and all Hedging Obligations with respect
thereto;
(2) any other Indebtedness of any Guarantor permitted to be
incurred under the terms of the Indenture, including premiums
and accrued and unpaid interest (including interest accruing on
or after the filing of any petition in bankruptcy or for
reorganization relating to the Guarantor at the rate specified
in the documentation with respect thereto whether or not a claim
for post-filing interest is allowed in such proceeding), unless
the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated
in right of payment to any Subsidiary Guarantee; and
(3) all Obligations with respect to the items listed in the
preceding clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding
sentence, Guarantor Senior Debt will not include:
(a) any liability for federal, state, local or other taxes
owed or owing by such Guarantor;
(b) any intercompany Indebtedness of such Guarantor or any
of its Subsidiaries to the Company or any other Subsidiary of
the Company;
(c) any accounts payable or other liability to trade
creditors arising in the ordinary course of business;
(d) the portion of any Indebtedness that is incurred in
violation of the Indenture; or
(e) Capital Stock.
“Hedging Obligations”means, with respect to
any specified Person, the obligations of such Person incurred in
the normal course of business and consistent with past practices
and not for speculative purposes under:
(1) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements entered into with
one of more financial institutions and designed to protect the
Person or entity entering into the agreement against
fluctuations in interest rates with respect to Indebtedness
incurred and not for purposes of speculation;
(2) foreign exchange contracts and currency protection
agreements entered into with one of more financial institutions
and designed to protect the Person or entity entering into the
agreement against fluctuations in currency exchanges rates with
respect to Indebtedness incurred and not for purposes of
speculation;
(3) any commodity futures contract, commodity option or
other similar agreement or arrangement designed to protect
against fluctuations in the price of commodities used by such
Person at the time; or
(4) other agreements or arrangements designed to protect
such Person against fluctuations in interest rates, currency
exchange rates or commodity prices.
“Holdings”means Standard Aero Acquisition
Holdings, Inc., a Delaware corporation, or its successor.
“Indebtedness”means, with respect to any
specified Person, any indebtedness of such Person (excluding
accrued expenses and trade payables), whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or, without double counting,
reimbursement agreements in respect thereof);
(3) in respect of banker’s acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the
purchase price of any property due more than six months after
such property is acquired; or
(6) representing the loss value of any Hedging Obligations,
if and to the extent any of the preceding items (other than
letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of the specified Person prepared
in accordance with GAAP. In addition, the term
“Indebtedness” includes (a) Disqualified Stock,
(b) all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness
is assumed by the specified Person) and, (c) to the extent
not otherwise included, the Guarantee by the specified Person of
any Indebtedness of any other Person.
“Investments”means, with respect to any
Person, all direct or indirect investments by such Person in
other Persons (including Affiliates) in the forms of loans
(including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances
to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities issued by any
other Person, together with all items that are or would be
classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Restricted Subsidiary
of the Company such that, after giving effect to any such sale
or disposition, such Person is no longer a Subsidiary of the
Company, the Company will be deemed to have made an Investment
on the date of any such sale or disposition in an amount equal
to the fair
market value of the Equity Interests of such Restricted
Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described
above under the caption “— Certain
Covenants — Restricted Payments.” The acquisition
by the Company or any Restricted Subsidiary of the Company of a
Person that holds an Investment in a third Person will be deemed
to be an Investment made by the Company or such Restricted
Subsidiary in such third Person in an amount equal to the fair
market value of the Investment held by the acquired Person in
such third Person on the date of any such acquisition in an
amount determined as provided in the final paragraph of the
covenant described above under the caption
“— Certain Covenants — Restricted
Payments.”
For purposes of the definition of “Unrestricted
Subsidiary” and the covenant described above under the
caption “— Certain Covenants —
Restricted Payments,” (i) “Investments”
shall include the portion (proportionate to the Company’s
equity interest in such Subsidiary) of the fair market value of
the net assets of a Subsidiary of the Company at the time that
such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be
deemed to continue to have a permanent “Investment” in
an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company’s “Investment” in such
Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company’s equity interest in
such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; and
(ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time
of such transfer, in each case as determined in good faith by
the Company.
“Lien”means, with respect to any asset, any
mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset, whether or not filed,
recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or
agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
“Net Income”means, with respect to any
specified Person, the net income (loss) of such Person,
determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision
for taxes on such gain (but not loss), realized in connection
with: (a) any Asset Sale; or (b) the disposition of
any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (or loss), together with any
related provision for taxes on such extraordinary gain (or loss).
“Net Proceeds”means the aggregate cash
proceeds received by the Company or any of its Restricted
Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition
of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale, including,
without limitation, legal, accounting and investment banking
fees, and sales commissions, recording fees, title transfer
fees, appraiser fees, costs of preparation of assets for sale
and any relocation expenses incurred as a result of the Asset
Sale, taxes paid or payable as a result of the Asset Sale, in
each case, after taking into account any available tax credits
or deductions and any tax sharing arrangements, and amounts
required to be applied to the repayment of Indebtedness, other
than Senior Debt, secured by a Lien on the asset or assets that
were the subject of such Asset Sale, and any reserve for
adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
“Non-Guarantor Subsidiary”means any Subsidiary
that is not a Subsidiary Guarantor.
(1) as to which neither the Company nor any of its
Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or (c) is
the lender;
(2) no default with respect to which (including any rights
that the holders of the Indebtedness may have to take
enforcement action against an Unrestricted Subsidiary) would
permit upon notice, lapse of time or both any holder of any
other Indebtedness (other than the Notes) of the Company or any
of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment of the Indebtedness to
be accelerated or payable prior to its Stated Maturity; and
(3) as to which the lenders have been notified in writing
that they will not have any recourse to the stock (other than
stock of an Unrestricted Subsidiary pledged by the Company or
any of its Restricted Subsidiaries) or assets of the Company or
any of its Restricted Subsidiaries.
“Obligations”means any principal, premium and
Additional Interest, if any, interest (including interest
accruing on or after the filing of any petition in bankruptcy or
for reorganization, whether or not a claim for post-filing
interest is allowed in such proceeding), penalties, fees,
charges, expenses, indemnifications, reimbursement obligations
(including, without limitation, reimbursement obligations with
respect to letters of credit), damages, guarantees, and other
liabilities or amounts payable under the documentation governing
any Indebtedness or in respect thereto.
“Officers’ Certificate”means a
certificate signed on behalf of the Company by two Officers of
the Company one of whom is the principal executive officer, the
principal financial officer, the treasurer or the principal
accounting officer of the Company, that meets the requirements
set forth in the Indenture.
“Permitted Business”means the lines of
business conducted by the Company and its Restricted
Subsidiaries on the Issue Date and any business incidental or
reasonably related thereto or which is a reasonable extension
thereof as determined in good faith by our Board of Directors of
the Company.
“Permitted Holders”means (1) TC Group
L.L.C. (which operates under the trade name “The Carlyle
Group”), a Delaware limited liability company and its
Related Parties and (2) Carlyle Partners III, L.P. and
its Related Parties or any other investment fund controlled by
TC Group L.L.C. For purposes of this definition,
“control” shall have the meaning given such term in
the definition of the term “Affiliate.”
“Permitted Investments”means:
(1) any Investment in the Company or in a Restricted
Subsidiary of the Company;
(2) any Investment in Cash Equivalents or Foreign Cash
Equivalents;
(3) any Investment by the Company or any Restricted
Subsidiary of the Company in a Person, if as a result of such
Investment:
(a) such Person becomes a Restricted Subsidiary of the
Company; or
(b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets
to, or is liquidated into, the Company or a Restricted
Subsidiary of the Company;
(4) any Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the
caption “Repurchase at the Option of Holders —
Asset Sales;”
(5) any Investment solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company
or made with the proceeds of a substantially concurrent sale of
such Equity Interests (other than Disqualified Stock);
(6) any Investments received in compromise or resolution of
obligations of litigation, arbitration or other disputes;
(7) Hedging Obligations permitted to be incurred under the
“Incurrence of Indebtedness and Issuance of Preferred
Stock” covenant;
(8) loans and advances to officers, directors and employees
in an aggregate amount not to exceed $500,000 extended during
any one fiscal year or $2.0 million outstanding at any time;
(9) Investments of any Person (other than Indebtedness of
such Person) in existence at the time such Person becomes a
Subsidiary of the Company; provided such Investment was
not made in connection with or anticipation of such Person
becoming a Subsidiary of the Company;
(10) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and
workers’ compensation, performance and other similar
deposits;
(11) any Investment consisting of a guarantee permitted
under “Certain Covenants — Incurrence of
Indebtedness and Issuance of Preferred Stock” above;
(12) Investments consisting of non-cash consideration
received in the form of securities, notes or similar obligations
in connection with dispositions of obsolete or worn out assets
permitted pursuant to the Indenture;
(13) advances, loans or extensions of credit to suppliers
in the ordinary course of business by the Company or any of its
Restricted Subsidiaries;
(14) Investments in any Person to the extent such
Investment existed on the Issue Date and any Investment that
replaces, refinances or refunds such an Investment,
provided, that the new Investment is in an amount that
does not exceed that amount replaced, refinanced or refunded and
is made in the same Person as the Investment replaced,
refinanced or refunded;
(15) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of suppliers
and customers and in settlement of delinquent obligations of,
and other disputes with, customers and suppliers arising in the
ordinary course of business; and
(16) other Investments in any Person having an aggregate
fair market value (measured on the date each such Investment was
made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to
this clause (16) since the Issue Date that remain
outstanding, not to exceed $25.0 million.
“Permitted Junior Securities”means:
(1) Equity Interests in the Company or any direct or
indirect parent of the Company issued pursuant to a plan of
reorganization or adjustment; or
(2) unsecured debt securities that are subordinated to all
Senior Debt and any debt securities issued in exchange for
Senior Debt to substantially the same extent as, or to a greater
extent than, the Notes are subordinated to Senior Debt pursuant
to the Indenture.
“Permitted Liens”means:
(1) Liens in favor of the Company or the Guarantors;
(2) Liens on property of a Person existing at the time such
Person is merged with or into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided
that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with
the Company or the Restricted Subsidiary;
(3) Liens on property existing at the time of acquisition
of the property by the Company or any Restricted Subsidiary of
the Company, provided that such Liens were in existence
prior to the
contemplation of such acquisition and do not extend to any other
assets of the Company or its Restricted Subsidiaries;
(4) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of
business;
(5) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (4) of the second
paragraph of the covenant entitled “— Certain
Covenants — Incurrence of Indebtedness and Issuance of
Preferred Stock” covering only the assets acquired with or
financed by such Indebtedness;
(6) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested
in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other
appropriate provision as is required in conformity with GAAP has
been made therefor;
(7) Liens on assets of Unrestricted Subsidiaries that
secure Non-Recourse Debt of Unrestricted Subsidiaries;
(8) Liens imposed by law, such as carriers’,
warehousemen’s, landlord’s and mechanics’ Liens,
in each case, incurred in the ordinary course of business;
(9) survey exceptions, easements or reservations of, or
rights of others for, licenses, rights-of-way, sewers, electric
lines, telegraph and telephone lines and other similar purposes,
or zoning or other restrictions as to the use of real property
that were not incurred in connection with Indebtedness and that
do not in the aggregate materially adversely affect the value of
said properties or materially impair their use in the operation
of the business of such Person;
(10) Liens arising from Uniform Commercial Code financing
statement filings by lessors regarding operating leases entered
into by such lessors and the Company and its Restricted
Subsidiaries in the ordinary course of business;
(11) Liens incurred in the ordinary course of business of
the Company or any Restricted Subsidiary of the Company with
respect to obligations that do not exceed $2.0 million at
any one time outstanding; and
(12) Liens securing the obligations under the Escrow
Agreement.
“Permitted Refinancing Indebtedness”means any
Indebtedness of the Company or any of its Restricted
Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its
Restricted Subsidiaries (other than intercompany Indebtedness);
provided that:
(1) the principal amount (or accreted value, if applicable)
of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the
Indebtedness extended, refinanced, renewed, replaced, defeased
or refunded (plus all accrued interest on the Indebtedness and
the amount of all expenses and premiums incurred in connection
therewith);
(2) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right
of payment to the Notes or the Subsidiary Guarantee, as the case
may be, such Permitted Refinancing Indebtedness is subordinated
in right of payment to the Notes or the Subsidiary Guarantee, as
the case may be, on terms at least as favorable to the Holders
of Notes and Subsidiary Guarantee as those contained in the
documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or
by the Restricted Subsidiary that is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
“Person”means any individual, corporation,
partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, limited liability company or
government or other entity.
“Preferred Stock”means any Equity Interest
with preferential rights of payment of dividends upon
liquidation, dissolution or winding up.
“Registration Rights Agreement”means the
registration rights agreement dated as of the Issue Date among
the Company, the Guarantors and the initial purchasers set forth
therein and, with respect to Additional Notes, one or more
substantially similar registration rights agreements among the
Company, the Guarantors and the other parties thereto, as such
agreement may be amended from time to time.
“Related Party”means:
(1) any controlling stockholder, 80% (or more) owned
Subsidiary, or immediate family member (in the case of an
individual) of any Permitted Holder; or
(2) any trust, corporation, partnership or other entity,
the beneficiaries, stockholders, partners, owners or Persons
beneficially holding an 80% or more controlling interest of
which consist of any one or more Permitted Holders and/or such
other Persons referred to in the immediately preceding
clause (1).
“Restricted Investment”means an Investment
other than a Permitted Investment.
“Restricted Subsidiary”of a Person means any
Subsidiary of the referent Person that is not an Unrestricted
Subsidiary.
“Senior Debt”means
(1) all Indebtedness of the Company outstanding under the
Credit Agreement and all Hedging Obligations with respect
thereto;
(2) any other Indebtedness of the Company permitted to be
incurred under the terms of the Indenture, including premiums
and accrued and unpaid interest (including interest accruing on
or after the filing of any petition in bankruptcy or for
reorganization relating to the Company at the rate specified in
the documentation with respect thereto whether or not a claim
for post-filing interest is allowed in such proceeding), unless
the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated
in right of payment to the Notes; and
(3) all Obligations with respect to the items listed in the
preceding clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding
sentence, Senior Debt will not include:
(a) any liability for federal, state, local or other taxes
owed or owing by the Company;
(b) any intercompany Indebtedness of the Company to any of
its Subsidiaries;
(c) any accounts payable or other liability to trade
creditors arising in the ordinary course of business;
(d) the portion of any Indebtedness that is incurred in
violation of the Indenture; or
(e) Capital Stock.
“Shelf Registration Statement”has the meaning
set forth in the Registration Rights Agreement.
“Significant Subsidiary”means any Subsidiary
that would be a “significant subsidiary” as defined in
Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date hereof.
“Stated Maturity”means, with respect to any
installment of interest or principal on any series of
Indebtedness, the date on which the payment of interest or
principal was scheduled to be paid in the original documentation
governing such Indebtedness, and will not include any contingent
obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment
thereof.
“Subsidiary”means, with respect to any
specified Person:
(1) any corporation, association or other business entity
of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or
trustees of the corporation, association or other business
entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and
(2) any partnership, joint venture, limited liability
company or similar entity of which (x) more than 50% of the
capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as
applicable, are owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that
Person or a combination thereof whether in the form of
membership, general, special or limited partnership or otherwise
and (y) such Person or any Wholly Owned Restricted
Subsidiary of such Person is a controlling general partner or
otherwise controls such entity.
“Subsidiary Guarantee”means any Guarantee by a
Subsidiary of the Company’s payment Obligations under the
Indenture and the Notes, executed pursuant to the provisions of
the Indenture.
“Total Assets”means, with respect to any
Person, the total assets of such Person and its Restricted
Subsidiaries determined in accordance with GAAP, as shown on its
most recent balance sheet.
“Transactions”means the transactions
contemplated by (i) the Acquisition Agreement,
(ii) the Credit Agreement and (iii) and this offering
of Notes.
“Treasury Rate”means, as of the applicable
redemption date, the yield to maturity as of such redemption
date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal
Reserve Statistical Release H.15 (519) that has become
publicly available at least two business days prior to the
redemption date (or, if such Statistical Release is no longer
published, any publicly available source of similar market
data)) most nearly equal to the period from the redemption date
to September 1, 2009; provided, however, that if the
period from the redemption date to September 1, 2009 is
less than one year, the weekly average yield on actually traded
United States Treasury securities adjusted to a constant
maturity of one year will be used.
“Unrestricted Subsidiary”means any Subsidiary
of the Company (other than the Subsidiaries of the Company on
the Issue Date or any successor to any of them) that is
designated by the Board of Directors as an Unrestricted
Subsidiary (and any Subsidiary of an Unrestricted Subsidiary)
pursuant to a resolution of the Board of Directors, but only to
the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the
Company or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the
Company;
(3) is a Person with respect to which neither the Company
nor any of its Restricted Subsidiaries has any direct or
indirect obligation (a) to subscribe for additional Equity
Interests or (b) to maintain or preserve such Person’s
financial condition or to cause such Person to achieve any
specified levels of operating results; and
(4) does not own any Equity Interests or Indebtedness of,
or own or hold any Lien on, any property of, the Company or any
Subsidiary of the Company (other than any Subsidiary of the
Subsidiary to be so designated) and has not guaranteed or
otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of the Company as an
Unrestricted Subsidiary will be evidenced to the Trustee by
filing with the Trustee a certified copy of the resolution of
the Board of Directors giving effect to such designation and an
Officers’ Certificate certifying that such designation
complied with the preceding conditions and was permitted by the
covenant described above under the captions
“— Certain Covenants — Restricted
Payments” and “— Designation of Restricted
and Unrestricted Subsidiaries.” If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding
requirements as an Unrestricted Subsidiary, it will thereafter
cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness and Preferred Stock of such
Subsidiary will be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date and, if such
Indebtedness or Preferred Stock is not permitted to be incurred
as of such date under the covenant described under the caption
“Certain Covenants — Incurrence of Indebtedness
and Issuance of Preferred Stock,” the Company will be in
default of such covenant. The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation
will be deemed to be an incurrence of Indebtedness or Preferred
Stock by a Restricted Subsidiary of the Company of any
outstanding Indebtedness or Preferred Stock, as the case may be,
of such Unrestricted Subsidiary and such designation will only
be permitted if (1) such Indebtedness and Preferred Stock
is permitted under the covenant described under the caption
“— Certain Covenants — Incurrence of
Indebtedness and Issuance of Preferred Stock,” calculated
on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no
Default or Event of Default would be in existence following such
designation.
“Voting Stock”of any Person as of any date
means the Capital Stock of such Person that is at the time
entitled to vote in the election of the Board of Directors of
such Person.
“Weighted Average Life to Maturity”means, when
applied to any Indebtedness at any date, the number of years
obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking
fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect of the
Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the
making of such payment; by
(2) the then outstanding principal amount of such
Indebtedness.
“Wholly Owned Restricted Subsidiary”is any
Wholly Owned Subsidiary that is a Restricted Subsidiary.
“Wholly Owned Subsidiary”of any Person means a
Subsidiary of such Person, 100% of the outstanding Capital Stock
or other ownership interests of which (other than
directors’ qualifying shares and shares issued to foreign
nationals under applicable law) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such
Person or by such Person and one or more Wholly Owned
Subsidiaries of such Person.
The exchange notes will be issued in the form of one or more
fully registered notes in global form (“Global
Notes”). Ownership of beneficial interests in a Global Note
will be limited to persons who have accounts with the Depository
Trust Company (“participants”) or persons who hold
interests through participants. Ownership of beneficial
interests in a Global Note will be shown on, and the transfer of
that ownership will be effected only through, records maintained
by the Depository Trust Company its nominee (with respect to
interests of participants) and the records of participants (with
respect to interests of persons other than participants).
So long as the Depository Trust Company, or its nominee, is the
registered owner or holder of a Global Note, the Depository
Trust Company or such nominee, as the case may be, will be
considered the sole owner or holder of the notes represented by
such Global Note for all purposes under the indenture and the
exchange notes. No beneficial owner of an interest in a Global
Note will be able to transfer that interest except in accordance
with the Depository Trust Company’s applicable procedures,
in addition to those provided for under the indenture.
Payments of the principal of, and interest on, a Global Note
will be made to the Depository Trust Company or its nominee, as
the case may be, as the registered owner thereof. None of
Standard Aero Holdings, Inc., the Trustee or any Paying Agent
will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial
ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial
ownership interests.
We expect that the Depository Trust Company or its nominee, upon
receipt of any payment of principal or interest in respect of a
Global Note, will credit participants’ accounts with
payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown
on the records of the Depository Trust Company or its nominee.
We also expect that payments by participants to owners of
beneficial interests in such Global Note held through such
participants will be governed by standing instructions and
customary practices, as is now the case with securities held for
the accounts of customers registered in the names of nominees
for such customers. Such payments will be the responsibility of
such participants.
Transfers between participants in the Depository Trust Company
will be effected in the ordinary way in accordance with the
Depository Trust Company rules and will be settled in same-day
funds.
We expect that the Depository Trust Company will take any action
permitted to be taken by a holder of exchange notes (including
the presentation of exchange notes for exchange as described
below) only at the direction of one or more participants to
whose account the Depository Trust Company interests in a Global
Note is credited and only in respect of such portion of the
aggregate principal amount of exchange notes as to which such
participant or participants has or have given such direction.
However, if there is an Event of Default under the notes, the
Depository Trust Company will exchange the applicable Global
Note for Certificated Notes, which it will distribute to its
participants.
We understand that: the Depository Trust Company is a limited
purpose trust company organized under the laws of the State of
New York, a “banking organization” within the meaning
of New York Banking Law, a member of the Federal Reserve System,
a “clearing corporation” within the meaning of the
Uniform Commercial Code and a “Clearing Agency”
registered pursuant to the provisions of Section 17A of the
Exchange Act. The Depository Trust Company was created to hold
securities for its participants and facilitate the clearance and
settlement of securities transactions between participants
through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement
of certificates. Indirect access to the Depository Trust Company
system is available to others such as banks, brokers, dealers
and trust companies and certain other organizations that clear
through or maintain a custodial relationship with a participant,
either directly or indirectly (“indirect
participants”).
Although the Depository Trust Company is expected to follow the
foregoing procedures in order to facilitate transfers of
interests in a Global Note among participants of the Depository
Trust Company, it is
under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time.
Neither Standard Aero Holdings, Inc. nor the Trustee will have
any responsibility for the performance by the Depository Trust
Company or its respective participants or indirect participants
of their respective obligations under the rules and procedures
governing their operations.
If the Depository Trust Company is at any time unwilling or
unable to continue as a depositary for the Global Notes and a
successor depositary is not appointed by us within 90 days,
we will issue Certificated Notes in exchange for the Global
Notes. Holders of an interest in a Global Note may receive
Certificated Notes in accordance with the Depository Trust
Company’s rules and procedures in addition to those
provided for under the indenture.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material U.S. federal income
tax consequences relating to the exchange of the old notes for
exchange notes in the exchange offer, but does not purport to be
a complete analysis of all the potential tax considerations
relating thereto. This summary is based upon the Internal
Revenue Code of 1986, as amended, Treasury Regulations, Internal
Revenue Service (“IRS”) rulings and pronouncements,
and judicial decisions now in effect, all of which are subject
to change at any time by legislative, administrative, or
judicial action, possibly with retroactive effect. We have not
sought and will not seek any rulings from the IRS with respect
to the statements made and the conclusions reached in the
following summary, and accordingly, there can be no assurance
that the IRS will not successfully challenge the tax
consequences described below. This summary only applies to you
if you exchange your old notes for exchange notes in the
exchange offer. This summary also does not discuss the effect of
any applicable U.S. state and local or non-U.S. tax laws or U.S.
tax laws other than U.S. federal income tax law. In addition,
this summary does not discuss every aspect of U.S. federal
income taxation that may be relevant to you in light of your
personal circumstances or if you are otherwise subject to
special tax treatment, including, without limitation, if you are:
•
a bank;
•
a financial institution;
•
a holder subject to the alternative minimum tax;
•
a broker or dealer in securities or currencies;
•
an insurance company;
•
a person whose functional currency is not the U.S. dollar;
•
a tax-exempt organization;
•
an investor in a pass-through entity holding the notes;
•
a partnership or other entity treated as a partnership for tax
purposes;
•
a U.S. expatriate;
•
a person holding notes as a part of a hedging or conversion
transaction or a straddle for tax purposes; or
•
a foreign person or entity.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE
APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR
PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE
LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION
OR UNDER ANY APPLICABLE TAX TREATY.
The exchange of the old notes for the exchange notes in the
exchange offer should not be treated as an “exchange”
for U.S. federal income tax purposes, because the exchange notes
should not be considered to differ materially in kind or extent
from the old notes. Accordingly, the exchange of old notes for
exchange notes should not be a taxable event to holders for U.S.
federal income tax purposes. Moreover, the exchange notes should
have the same tax attributes as the old notes and the same tax
consequences to holders as the old notes have to holders,
including without limitation, the same issue price, adjusted
issue price, adjusted tax basis and holding period.
Each broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired as a
result of market-making activities or other trading activities.
We have agreed that, for a period of not less than 180 days
after the expiration date, we will make this prospectus, as
amended or supplemented, available to any broker-dealer which
requests it in the letter of transmittal, for use in any such
resale.
We will not receive any proceeds from any sale of exchange notes
by broker-dealers. Exchange notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the
writing of options on the exchange notes or a combination of
such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such exchange notes.
Any broker-dealer that resells exchange notes that were received
by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such
exchange notes may be deemed to be an “underwriter”
within the meaning of the Securities Act and any profit on any
such resale of exchange notes and any commission or concessions
received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver, and by
delivering, a prospectus, a broker-dealer will not be deemed to
admit that it is an “underwriter” within the meaning
of the Securities Act.
We have agreed to pay all expenses incident to the exchange
offer other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the old notes
(including any broker-dealers) against certain types of
liabilities, including liabilities under the Securities Act.
The validity of the securities offered hereby is being passed
upon for us by Latham & Watkins LLP, New York, New York
and certain matters of local law relating to the validity of the
guarantees under New York law are being passed upon for us by
Aikins MacAulay & Thorvaldson LLP and Stewart McKelvey
Stirling Scales as set forth in and limited by their respective
opinions filed as exhibits to the registration statement of
which this prospectus is a part.
EXPERTS
The audited consolidated financial statements of the Company as
of December 31, 2004 and for the period from
August 25, 2004 to December 31, 2004 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent registered public
accounting firm, given on authority of said firm as experts in
auditing and accounting.
The audited combined financial statements of the MRO division of
Dunlop Standard Aerospace Group Limited at December 31,2003, and for the period from January 1, 2004 to
August 24, 2004 and for each of the two years in the period
ended December 31, 2003, included in this prospectus have
been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent registered public
accounting firm, given on authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange
Commission a registration statement on Form S-4 with
respect to the securities we are offering. This prospectus does
not contain all the information contained in the registration
statement, including its exhibits and schedules. You should
refer to the registration statement, including the exhibits and
schedules, for further information about us and the securities
we are offering. Statements we make in this prospectus about
certain contracts or other documents are not necessarily
complete. When we make such statements, we refer you to the
copies of the contracts or documents that are filed as exhibits
to the registration statement because those statements are
qualified in all respects by reference to those exhibits. The
registration statement, including exhibits and schedules, is on
file at the offices of the SEC and may be inspected without
charge.
Under the terms of the indenture governing the notes, we have
agreed that, whether or not required by the rules and
regulations of the SEC, so long as any notes are outstanding, we
will furnish to the trustee and the holders of notes
(i) all quarterly and annual financial information that
would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K, if we were required to file such
Forms, including a “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
that describes our financial condition and results of operations
and our consolidated subsidiaries and, with respect to the
annual statements only, a report thereon by our independent
auditor and (ii) all current reports that would be required
to be filed with the SEC on Form 8-K if we were required to
file such reports, except with respect to item (i) above,
certain disclosures required for filings with the SEC on
Form 10-Q and 10-K have been excluded from our quarterly
and annual financial information required by Rule 3-10 of
Regulation S-X. In addition, whether or not required by the
rules and regulations of the SEC, we will file a copy of all
such information and reports with the SEC for public
availability (unless the SEC will not accept such a filing) and
make such information available to securities analysts and
prospective investors upon request. In addition, we have agreed
that, for so long as any notes remain outstanding, we will
furnish to the holders and to prospective investors, upon their
request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act so long as the
notes are not freely transferable under the Securities Act.
Upon effectiveness of the registration statement of which this
prospectus is a part, we will become subject to the periodic
reporting and to the informational requirements of the Exchange
Act and will file information with the SEC, including annual,
quarterly and special reports. You may read and copy any
document we file with the SEC, including the registration
statement of which this prospectus is a part, at the SEC’s
public reference room at the following address:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
Please call the SEC at 1-800-SEC-0330 for further information on
the operations of the public reference rooms. Our SEC filings,
including the registration statement of which this prospectus is
a part, are also available at the SEC’s web site at
http://www.sec.gov.
You can obtain a copy of any of our filings, at no cost, by
writing to or telephoning us at the following address:
To ensure timely delivery, please make your request as soon as
practicable and, in any event, no later than five business days
prior to the expiration of the exchange offer.
Report of Independent Registered Public Accounting Firm
To the Stockholder of
Standard Aero Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statement of operations,
stockholder’s equity and cash flows present fairly, in all
material respects, the financial position of Standard Aero
Holdings, Inc. (a wholly-owned subsidiary of Standard Aero
Acquisition Holdings, Inc.) and its subsidiaries (Successor) at
December 31, 2004 and the results of their operations and
their cash flows for the period from August 25, 2004 to
December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
standards of the Public 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 audit provides a reasonable
basis for our opinion.
Report of Independent Registered Public Accounting Firm
To the Stockholder of
Standard Aero Holdings, Inc.
In our opinion, the accompanying combined balance sheet and the
related combined statements of operations, divisional equity and
cash flows present fairly, in all material respects, the
financial position of the MRO Division of Dunlop Standard
Aerospace Group Limited (Predecessor), as described in
note 1 to the accompanying combined financial statements,
at December 31, 2003 and the results of its operations and
its cash flows for the period from January 1, 2004 to
August 24, 2004 and for each of the two years in the period
ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
standards of the Public 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.
Standard Aero Holdings, Inc. was incorporated on June 20,2004 in the State of Delaware to acquire the MRO business (as
described below). Standard Aero Holdings, Inc. and its
subsidiaries (the “Company” or the
“Successor”) commenced operations on August 25,2004.
The Company is an independent provider of aftermarket
maintenance repair and overhaul (“MRO”) services for
gas turbine engines used primarily for military, regional and
business aircraft. The Company repairs and overhauls a wide
range of aircraft engines and provides its customers with
comprehensive, value-added maintenance solutions.
The Acquisition
On August 24, 2004, pursuant to a purchase agreement with
Meggitt plc, the Company acquired from Meggitt the MRO Division
of Dunlop Standard Aerospace Group Limited (the
“Predecessor”) for cash consideration of
$699.7 million, including estimated direct costs of the
Acquisition of $28.0 million. This transaction is referred
to as the Acquisition. The Company is a wholly-owned subsidiary
of Standard Aero Acquisition Holdings, Inc., which is a
corporation formed at the direction of The Carlyle Group.
Immediately after the Acquisition, affiliates of The Carlyle
Group own 100% of Standard Aero Acquisition Holdings, Inc.
common stock. The purchase price was financed by a
$215.0 million equity investment from the Company’s
parent company, Standard Aero Acquisition Holdings, Inc.,
$325.0 million of term loans and $200.0 million of
senior subordinated notes.
The Acquisition forms part of The Carlyle Group’s aerospace
and defense portfolio and expands The Carlyle Group’s
presence and expertise in a wide range of global aerospace
markets.
The accompanying financial statements include the consolidated
accounts of the Company and its subsidiaries subsequent to the
Acquisition and also include the combined accounts of the
Predecessor prior to the Acquisition. All significant
intercompany accounts and transactions, including profit and
loss as a result of those transactions, have been eliminated in
the consolidation. The financial statements of the Predecessor
are presented for comparative purposes and include the combined
historical financial statements of the MRO Division of Dunlop
Standard Aerospace Group Limited. As a result of the
Acquisition, the combined financial statements of the
Predecessor Company are not fully comparable to the consolidated
financial statements of the Successor Company due to the
different basis of accounting and change in capital structures.
The Company accounted for the Acquisition using the purchase
method of accounting in accordance with SFAS No. 141,
Business Combinations and, accordingly, the Acquisition resulted
in a new basis of
accounting for the Company. The Company allocated the purchase
price based on the fair values of the assets acquired and
liabilities assumed at the acquisition date, as follows:
The excess of the cost of the Company’s acquisition of the
MRO Division of Dunlop Standard Aerospace Group Limited over the
fair values of the net tangible and intangible assets acquired
of $249.5 million has been allocated to goodwill. All of
the goodwill has been allocated to the Aviation Maintenance,
Repair and Overhaul reporting segment of the Company. As at
December 31, 2004, the goodwill had not yet been assigned
to reporting units. In accordance with SFAS No. 142,
this goodwill will not be amortized but will be reviewed
annually for impairment. The majority of the goodwill will not
be deductible for income tax purposes. Of the
$241.6 million of acquired intangible assets,
$97.3 million was assigned to trademarks that have
indefinite lives, $98.0 million was assigned to customer
relationships that have an estimated weighted average useful
life of 17.4 years, $38.4 million was assigned to OEM
authorizations and licenses that have an estimated weighted
average useful life of 14.2 years, and $7.9 million
was assigned to technology and other that have an estimated
average useful life of 5 years.
The following reflects the pro forma impact of the purchase of
the Predecessor on Standard Aero Holdings, Inc.’s results
of operations giving effect to the transaction as if it had
taken place on January 1 of each year:
The financial statements of the Predecessor reflect the combined
financial position, combined results of operations and combined
cash flows of the Predecessor business which includes the
accounts of Standard Aero (US) Inc. (formerly Dunlop
Standard Aerospace (US) Inc.), related to the MRO business
and the accounts of the following entities:
Name
Country of Incorporation
Standard Aero, Inc.
USA
Standard Aero (San Antonio) Inc.
USA
Standard Aero (Alliance) Inc.
USA
Standard Aero Limited
Canada
Standard Aero de Mexico de C.V.
Mexico
Standard Aero (Australia) Pty Limited
Australia
Standard Aero International Pty Limited
Australia
Standard Aero BV
Netherlands
Standard Aero (Asia) Pte Limited
Singapore
Standard Aero (Netherlands) BV (formerly Dunlop Standard
Aerospace (Nederland) BV)
Netherlands
Standard Aero (US) Legal Inc. (formerly Dunlop Standard
Aerospace (US) Legal Inc.)
USA
Standard Aero Materials Inc. (formerly Dunlop Aerospace Parts
Inc.)
USA
Not FM Canada Inc.
Canada
Standard Aerospace BV
Netherlands
Standard Aero vof
Netherlands
Standard Aero (US) Inc.’s (formerly Dunlop Standard
Aerospace (US) Inc.) accounts include investments in two
wholly-owned subsidiaries which carry on business not related to
the MRO Division and, therefore, have been excluded from the
Predecessor’s financial statements. All material
intra-group balances and transactions have been eliminated in
the combination. The combined financial statements reflect a
divisional equity account which represents the parent
company’s initial investments, accumulated earnings less
distributions and advances to and from the parent company.
Divisional equity also includes advances to or from related
companies made at the discretion of the parent company that are
considered investing and financing activities in these financial
statements.
Certain administration, management and other services were
provided by Dunlop Standard Aerospace Group Limited including,
but not limited to, executive and strategic management,
accounting and financial reporting, treasury, cash management,
employee benefit administration, training and redesign services.
The Predecessor was charged an allocation for these services by
Dunlop Standard Aerospace Group Limited (see note 9). All
allocations and estimates are based on assumptions that
management believes are reasonable. However, the combined
financial position as at December 31, 2003, combined
results of operations, and combined cash flows of the
Predecessor for the period from January 1, 2004 to
August 24, 2004 and for each of the three years ended
December 31, 2003, may not necessarily reflect those that
would have occurred had the Predecessor operated autonomously as
an entity independent of Dunlop Standard Aerospace Group Limited.
The consolidated and combined financial statements of the
Company and the Predecessor, respectively, have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“US GAAP”) and are reported
in U.S. dollars.
a) Translation of foreign
currencies
The functional currency of the Company and the Predecessor is
the U.S. dollar. Transactions in foreign currencies are
recorded at the exchange rate prevailing on the date of the
transaction. Monetary assets and liabilities denominated in
foreign currencies are remeasured in the functional currency at
the exchange rates in effect as of the balance sheet date. All
gains and losses resulting from foreign currency transactions
are included in the statements of operations.
b) Use of accounting
estimates
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated/combined financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are
used when accounting for allowance for doubtful accounts, slow
moving or obsolete inventory, depreciation, amortization,
impairment of long-lived assets and goodwill, employee benefit
plans, taxes, losses on contracts and other contingencies. The
Company evaluates and updates its assumptions and estimates on
an ongoing basis.
c) Revenue recognition
The Company’s revenues related to engine maintenance,
repair and overhaul services includes the provision of services
and parts which are accounted for as a single accounting unit.
These revenues and related cost of revenues are recognized when
the services are completed or repaired parts are shipped to the
customer. The Company’s standard terms and conditions
provide that title and risk of loss passes to the customer when
the customer owned material is shipped to the customer. Amounts
received in advance from customers are recorded as unearned
revenue.
Certain of the Company’s arrangements may include multiple
elements consisting both of engine repair and overhaul services
and engine rentals. In these arrangements, the service and
rental elements are divided into separate units of accounting
based on the relative fair values of each unit and each unit is
accounted for in accordance with the policies noted above.
Lease income associated with the rental of engines or engine
modules to customers is recorded based on time incurred (i.e.,
on the number of hours flown) as reported to the Company by the
customer. Provisions for estimated loss on work orders in
progress are provided in the period the loss is probable and can
be reasonably estimated.
d) Cash and cash
equivalents
Cash and cash equivalents consist of highly liquid investments
such as certificates of deposit, time deposits and money market
instruments, having maturities of three months or less at the
time of purchase.
Accounts receivable are stated net of an allowance for doubtful
accounts. The Company establishes an allowance for doubtful
accounts based on factors affecting the credit risk of specific
customers, as well as historical trends and other information.
f) Inventories
The Company values its inventory using the first-in, first-out
(“FIFO”) method. Inventories are stated at the lower
of cost or net realizable value. Cost consists of the actual
cost of raw materials, direct labour, and an appropriate
proportion of overhead in the case of work in progress and
finished goods.
g) Property, plant and
equipment
Property, plant and equipment are recorded at original cost less
accumulated depreciation, and include costs for significant
improvements as well as those that increase the useful lives of
existing assets. The cost of routine maintenance, repairs and
minor renewals is expensed as incurred. When property, plant and
equipment are retired or sold, the net carrying amount is
eliminated and any gain or loss on disposition is recognized in
the statement of operations for the respective period.
Depreciation is provided over the lesser of the estimated useful
lives of the assets or terms of the lease, using the
straight-line method, as summarized below:
•
Buildings — 20 to 40 years;
•
Computer hardware and software — 3 to 5 years;
•
Machinery and equipment — 4 to 13 years;
•
Leasehold improvements — the unexpired term of the
lease — 3 to 10 years; and
•
Rental engines — based on hours flown
The Company uses in its operations certain equipment owned and
provided by the U.S. government at no cost, to provide
services to the U.S. government under a subcontract with
Lockheed Martin.
h) Impairment of long-lived
assets
The Company reviews its long-lived assets for possible
impairment when events or circumstances indicate that the
carrying value of the assets may not be recoverable. Assumptions
and estimates used in the evaluation of impairment may affect
the carrying value of long-lived assets, which could result in
impairment charges in future periods. If the total of the
undiscounted future cash flows is less than the carrying amount
of the asset or asset group, an impairment loss, if any, is
recognized as the difference between the estimated fair value
and the carrying value of the asset or asset group.
Intangibles with definite lives of the Successor are being
amortized over 1 to 20 years with a weighted average of
12.6 years. Intangibles with definite lives of the
Predecessor were being amortized over 3 to 40 years with a
weighted average of 31.5 years. The goodwill and intangible
assets determined to have indefinite lives are tested for
impairment annually or earlier if the situation indicates that
the asset might be impaired.
Intangible assets having definite lives are recorded at cost and
amortized over their estimated useful lives or terms of
licenses, using the straight-line method, as summarized below:
Successor
Predecessor
Customer relationships
1 to 20 years
13 to 40 years
OEM authorizations and licenses
4 to 17 years
3 to 10 years
Technology and other
5 years
—
j) Income taxes
The Company recognizes deferred tax assets and liabilities using
the liability method. Under this method, deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance to record the deferred tax
assets at an amount expected more likely than not to be
recoverable. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
Investment tax credits are accounted as a reduction in the cost
of the asset or as a reduction in associated operating costs
when it is likely that such credits will be realized. These
investment tax credits are used to reduce current and future
taxes payable.
k) Leases
Assets which qualify as capital leases in accordance with
SFAS No. 13, “Accounting for Leases,” are
capitalized and included within property, plant and equipment
and depreciated over the economic life of the asset. Interest is
charged to the statement of operations over the period of the
lease using a constant interest rate. Operating lease rentals
are charged on a straight-line basis to the statement of
operations as incurred.
l) Pension, post-retirement
and post-employment benefits
The Company contributes to a number of defined contribution
pension plans and a defined benefit plan in Canada.
The Company’s contributions to defined contribution plans
are charged in the statement of operations as incurred. Pension
expense on the defined benefit plan is based on
management’s assumptions and consists of: the actuarially
computed costs of pension benefits in respect of the current
year’s service; imputed interest on plan assets and pension
obligations; and straight-line amortization of experience gains
and losses, assumption changes and plan amendments over the
expected average remaining service life of the employee group.
The Company provides product warranties and accrues for
estimated future warranty costs in the period in which the
revenue is recognized.
n) Share-based
compensation
The Company does not have a share-based compensation plan.
However, certain employees of the Company participate in the
parent company’s plan. Options granted by Standard Aero
Acquisition Holdings, Inc. had an exercise price equal to market
value of the underlying stock on the date of the grant. The
parent company accounts for stock-based employee compensation
using the intrinsic value method under Accounting Principles
Board Opinion No. 25, “Accounting to Stock Issued to
Employees”.
The following table illustrates the effect on net income of the
Successor if Standard Aero Acquisition Holdings, Inc. had
applied the fair value recognition provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation”:
Deduct: Stock-based compensation expense calculated in
accordance with SFAS No. 123
(16
)
Pro forma net loss
$
(3,224
)
o) Derivative financial
instruments
The Company accounts for derivatives pursuant to
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,”
(“SFAS 133”) as amended. This standard requires
that all derivatives be recognized in the financial statements
and measured at fair value regardless of the purpose or intent
for holding them. Gains and losses resulting from changes in
fair value are accounted for depending on the intended use of
the derivative and whether it is designated and qualifies for
hedge accounting.
Derivatives were used by the Predecessor to hedge certain
anticipated foreign currency transactions. Not all of the
criteria for hedge accounting under SFAS 133 were met and,
therefore, all outstanding hedges were marked-to-market through
earnings. The Predecessor had no effective hedges for the period
from January 1, 2004 to August 24, 2004 and for each
of the two years ended December 31, 2003.
p) Deferred finance
charges
The Company accounts for deferred finance charges in connection
with the issuance of bank and bond debt. The costs associated
with the debt are amortized using the effective yield method
over the life of the debt. If the debt is repaid before the end
of the debt agreement, the deferred finance charges related to
that debt are amortized fully in the year of repayment.
q) New accounting
standards
In December 2004, the Financial Accounting Standards Board
(“FASB”) released Statement 123R,
“Share-Based Payments”, that is a revision of FASB
Statement No. 123, “Accounting for Stock-Based
Compensation”. This Statement supersedes APB Opinion
No. 25, “Accounting for Stock Issued to
Employees”, and its related implementation guidance.
Statement 123R requires companies to measure the
cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of those
instruments, except in certain circumstances. The standard is
applicable to the Company as of the beginning of the first
interim or annual reporting period beginning after
December 15, 2005. The Company intends to adopt the
standard on a prospective basis as of January 1, 2006 and
does not expect the adoption of the standard to have an impact
on its financial position or results of operations.
In November 2004, the FASB released Statement No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4”. The standard adopts the view related to
inventories that abnormal amounts of idle capacity and spoilage
costs should be excluded from the cost of inventory and expensed
when incurred. The provisions of the statement are applicable to
inventory costs incurred during fiscal years beginning after
June 15, 2005. The Company intends to adopt the standard as
of January 1, 2006 and does not expect the adoption of the
standard to have an impact on its financial position or results
of operations.
The Successor’s depreciation expense was $4,854 for the
period from August 25, 2004 to December 31, 2004. The
Predecessor’s depreciation expense was $10,485 for the
period from January 1, 2004 to August 24, 2004 and was
$14,078 and $13,323 for the years ended December 31, 2003
and 2002, respectively. Rental engines at December 31, 2004
included assets held under capital leases with historical costs
of $6,420 (Successor) (2003 — $6,300 (Predecessor))
and accumulated depreciation of $720 (Successor)
(2003 — $57 (Predecessor)).
The net carrying value of rental engines was $28,369 (Successor)
and $29,393 (Predecessor) for the years ended December 31,2004 and 2003, respectively.
Definite lived intangible assets subject to amortization:
Customer relationships
$
49,381
$
7,212
$
42,169
OEM authorizations and licenses
54,924
12,761
42,163
Technology and other
10,000
1,462
8,538
114,305
21,435
92,870
Indefinite lived intangible assets not subject to amortization:
Trademarks
41,986
—
41,986
Total intangible assets
$
156,291
$
21,435
$
134,856
The Successor’s amortization expense for the period from
August 25, 2004 to December 31, 2004 was $4,270. The
estimated amortization expense for each five succeeding years of
the Successor will be approximately $11,611.
The Predecessor’s amortization expense for the period from
January 1, 2004 to August 24, 2004 was $3,744, and was
$5,607 in 2003 and $5,605 in 2002.
Amortization of OEM authorizations and licenses is included
within cost of revenues.
As a result of the acquisition of the MRO Division of Dunlop
Standard Aerospace Group Limited, the Company entered into a
credit agreement on August 24, 2004.
The Company had outstanding bank term loans of $285 million
at December 31, 2004. The Company has provided as
collateral for the loan substantially all of its assets. The
term of the loans is eight years repayable by instalments of
$58.3 million in 2011 and $226.7 million in 2012. At
the option of the Company, borrowing under the term loans will
bear interest at 1.50% plus the Base Prime Rate or 2.50% plus
the Eurodollar rate. The bank term loans of $285 million at
December 31, 2004 were denominated and are repayable in US
dollars, and bear interest at 4.99% at December 31, 2004.
The credit agreement also provides Standard Aero Holdings, Inc.
with a $50.0 million revolving credit facility. At the
option of the Company, borrowing under the revolving credit
facility will bear interest at 1.50% plus the Base Prime Rate or
2.50% plus the Eurodollar rate. The related commitment fee is
equal to 0.5% of the undrawn credit facility. There were no
borrowings outstanding under the revolving credit facility at
December 31, 2004.
In addition, subordinated unsecured senior notes of
$200.0 million were issued with an interest rate of 8.25%,
maturing on September 1, 2014. Prior to September 1,2007, the Company may redeem up to 35% of the original principal
amount of the notes at a premium. Further, at any time on or
after September 1, 2009, the Company may redeem any portion
of the bond at pre-determined premiums.
In connection with the Acquisition and the payment of the cash
purchase price, Dunlop Standard Aerospace Group Limited repaid
the senior debt facilities outstanding at August 24, 2004
which totalled $168,201. Accordingly, the Company did not assume
such liabilities of the Predecessor in the Acquisition.
At December 31, 2004, the amounts of long-term debt payable
for the years ending on December 31, are as follows:
Capital Leases
Debt
Total
2005
$
1,985
$
—
$
1,985
2006
2,261
—
2,261
2007
—
—
—
2008
—
—
—
2009
—
—
—
Thereafter
—
485,000
485,000
Total long-term debt
$
4,246
$
485,000
$
489,246
Certain of these facilities contain covenants that restrict the
Company’s ability to raise additional financings and pay
dividends in the future. The financial covenants are based on
long-term solvency ratios calculated from the Company’s
consolidated financial statements prepared in accordance with
generally accepted accounting principles in the United States.
The Successor’s weighted average interest rate of
borrowings under the credit agreement was 4.4% at
December 31, 2004. The Predecessor’s weighted average
interest rate of borrowings under the credit agreement was 4.0%
and 4.2% at December 31, 2003 and 2002, respectively.
The undrawn committed amount available under the credit
agreement at December 31, 2004 was $50,000 (Successor)
(2003 — $45,020 (£25,292) (Predecessor)).
7
Commitments and contingencies
Commitments
The Company leases facilities, office equipment, machinery,
computer, and rental engines under non-cancellable operating
leases having initial terms of more than one year.
The future minimum payments under operating leases and
contractual commitments for the years ending December 31,
consisted of:
2005
$
11,339
2006
7,511
2007
1,515
2008
673
2009
557
Thereafter
1,054
Total future minimum payments
$
22,649
The Successor’s rental expense on operating leases for the
period from August 25, 2004 to December 31, 2004
amounted to $2,735. The Predecessor’s rental expense on
operating leases for the period from January 1, 2004 to
August 24, 2004 amounted to $5,343, and for the years ended
December 31, 2003 and 2002 amounted to $7,884 and $7,416,
respectively. As of December 31, 2004, the Company has
contracted $3,108 (Successor) (2003 — $237
(Predecessor)) relating to future capital commitments.
The Company is involved, from time to time, in legal actions and
claims arising in the ordinary course of business. While the
ultimate result of these claims cannot presently be determined,
management does not expect that these matters will have a
material adverse effect on the financial condition, statement of
operations or cash flows of the Company.
The Company has facilities that are located on land that has
been used for industrial purposes for an extended period of
time. The Company has not been named as a defendant to any
environmental suit. Although the Predecessor has, from time to
time, been required to pay fines in connection with violations
of certain environmental requirements, management believes that
the Company is currently in substantial compliance with
environmental laws. The Company incurs capital and operating
costs relating to environmental compliance on an ongoing basis.
Management does not, however, believe that the Company will be
required under existing environmental laws to expend amounts
that would have a material adverse effect to its financial
condition or results of operations as a whole.
8
Income taxes
The components of the income tax provision are as follows:
Unrealized foreign exchange gains and losses arising from the
remeasurement of income tax balance from the foreign currency
amounts to the US dollar functional currency is included in
selling, general and administrative expenses.
Deferred tax liabilities consist of the following:
Inventories
—
(177
)
Income not included for tax purposes
—
(1,411
)
Property, plant and equipment
(15,226
)
(14,290
)
Intangibles
(76,063
)
(43,476
)
Deferred charges and development costs
—
(1,311
)
Deferred financing costs
—
(596
)
Foreign exchange on financing
—
(4,931
)
Other
(832
)
—
Deferred tax liabilities
(92,121
)
(66,192
)
Net deferred tax liability
$
(84,065
)
$
(58,930
)
The Company incurred cumulative net operating losses in
Australia in the amount of $3,594 which may be carried forward
indefinitely. These losses are available to offset future income
for tax purposes. SFAS No. 109, “Accounting for
Income Taxes,” requires that a “more likely than
not” criterion be applied when evaluating the realizability
of a deferred tax asset. A valuation allowance of $1,078
(Successor) (2003 — $858 (Predecessor)) has been
recorded against the taxes recoverable from these tax losses
because the Company has not determined that it is more likely
than not that the amount of the deferred tax asset will be
realized.
The Division also has Canadian investment tax credits that can
be applied against future years’ income taxes payable. As
of December 31, 2004, these items expire as follows:
2007
$
104
2008
405
Total
$
509
The value of goodwill will be reduced as these investment tax
credits are realized.
At December 31, 2004, the Company has an outstanding
payable of $2,808 to its parent for cash advanced by Standard
Aero Acquisition Holdings, Inc. The payable is non-interest
bearing and has no repayment terms.
The Carlyle Group charges the Company a monthly management fee
of $125. For the period August 25, 2004 to
December 31, 2004 a management fee of $875 was paid to The
Carlyle Group, of which $375 has been recorded as prepaid
expenses. In addition, the Company paid The Carlyle Group
$11,800 for fees associated with the Acquisition. Of this
amount, $4.7 million has been recorded as deferred finance
charges, $5.9 million has been recorded as costs of the
Acquisition, and $1.2 million was expensed during the
period.
Predecessor transactions
The Predecessor’s parent, Dunlop Standard Aerospace Group
Limited provided certain services, such as general and strategic
management, cash and treasury management, training and redesign
services to the Predecessor. The combined financial statements
include an allocation of expenses relating to such services.
These expenses were allocated based on actual usage and
allocations. There are no material operating transactions
between the MRO Division and other businesses within Dunlop
Standard Aerospace Group Limited.
The transactions with the ultimate parent company reflected in
the combined statement of operations are as follows:
The Predecessor was charged interest on certain amounts advanced
from other Dunlop Standard Aerospace Limited entities. The
weighted average balance at December 31, 2003 was $5,673,
and the weighted average interest rate was 6%. In addition, the
Predecessor earned interest income on certain amounts related to
advances made to Dunlop Standard Aerospace Group Limited. The
weighted average balance at December 31, 2003 was $1,806
and the weighted average interest rate was 6%. Amounts due to
and from other Dunlop Standard Aerospace Group Limited entities
are included in divisional equity as follows:
Amounts due from and to affiliates included within divisional
equity represent amounts the Predecessor received from or
advanced to affiliates as directed by Dunlop Standard Aerospace
Group Limited.
The Company provides defined contribution pension plans to
substantially all of its employees. Employer contributions paid
into the U.S. plans by the Successor for the period from
August 25, 2004 to December 31, 2004 amounted to
$1,017. Employer contributions paid into the U.S. plans by
the Predecessor for the period from January 1, 2004 to
August 24, 2004 amounted to $1,183, and for the years ended
December 31, 2003 and 2002 amounted to $1,910 and $1,760,
respectively. Employer contributions paid into the Canadian
plans by the Successor for the period from August 25, 2004
to December 31, 2004 amounted to $795. Employer
contributions paid into the Canadian plans by the Predecessor
for the period from January 1, 2004 to August 24, 2004
amounted to $1,252, and for the years ended December 31,2003 and 2002 amounted to $2,228 and $1,572, respectively.
The Company also provides a defined benefit pension plan to a
limited number of long-term and retired employees in Canada. The
Company does not provide any other post-retirement benefits or
supplemental retirement plans.
A measurement date of December 31 is used in accounting for
the retirement plans.
Net periodic benefit costs for the defined benefit retirement
plan included the following components:
The net periodic benefit cost and the actuarial present value of
projected benefit obligations are based on actuarial assumptions
that are reviewed on a periodic basis. Management revises these
assumptions based on an evaluation of long-term trends, as well
as market conditions, that may have an impact on the cost of
providing retirement benefits and in accordance with the
requirements of SFAS No. 87, “Employers’
Accounting for Pensions”.
The expected rate of return represents management’s
long-term assessment of return expectations which will only
change based on significant shifts in economic and financial
market conditions. Management’s long-term outlook is
influenced by a combination of return expectations by individual
asset class, actual historical experience and assumed inflation.
The historical returns are used to provide context for the
development of the return expectations.
The following details both the funded status of the defined
benefit plan and the associated amounts recognized in the
accompanying consolidated balance sheets as of:
December 31,
Defined Benefit Plan
2004
2003
(Successor)
(Predecessor)
Change in benefit obligation
Benefit obligation — beginning of period
$
2,132
$
1,202
Service costs
85
243
Interest cost
42
97
Actuarial gain
12
139
Benefits paid
(43
)
(53
)
Foreign currency adjustment
57
199
Benefit obligation — end of period
2,285
1,827
Change in plan assets
Fair value of plan assets — beginning of period
2,033
1,038
Actual return on plan assets
45
173
Employer contributions
106
351
Benefits paid
(43
)
(53
)
Foreign currency adjustment
63
182
Fair value of plan assets — end of period
2,204
1,691
Funded status of the plan
(81
)
(136
)
Unrecognized net actuarial (gain) loss
(11
)
449
(Accrued pension liability) prepaid benefit cost
$
(92
)
$
313
The accumulated benefit obligation for the defined benefit plan
was $1,830 and $1,342 at December 31, 2004 and 2003,
respectively.
The plan asset allocations by asset category are as follows:
December 31,
Target
2004
2003
Allocation
(Successor)
(Predecessor)
Asset category
Equities
57
%
59
%
58
%
Bonds
37
%
35
%
37
%
Other
6
%
6
%
5
%
100
%
100
%
100
%
The Company’s investment goals are to maximize returns
subject to tolerance to investment risk. The Company addresses
diversification by the use of mutual fund investments whose
underlying investments reflect the Company’s tolerance to
investment risk.
The Company expects to contribute $321 to its defined benefit
plan in 2005.
The benefits expected to be in paid in future are as follows:
Pension Plan
2005
$
31
2006
43
2007
66
2008
86
2009
108
2010-2014
1,042
Certain employees in the Netherlands participated in a
collectively-bargained multi-employer plan. In addition to the
collectively-bargained plan, employees in the Netherlands also
participated in a defined contribution plan. Employer
contributions to these plans by the Successor for the period
from August 25, 2004 to December 31, 2004 amounted to
nil. Employer contributions by the Predecessor for the period
from January 1, 2004 to August 24, 2004 amounted to
$851, and for the years ended December 31, 2003 and 2002
amounted to $392 and $486, respectively.
In Australia, employees participate in an arrangement which is a
hybrid defined contribution and defined benefit plan. Employer
contributions by the Successor for the period from
August 25, 2004 to December 31, 2004 amounted to $26.
Employer contributions by the Predecessor for the period from
January 1, 2004 to August 24, 2004 amounted to $49 and
for the years ended December 31, 2003 and 2002 amounted to
$99 and $53, respectively.
In Singapore, a national defined contribution plan is operated.
Employer contributions by the Successor for the period from
August 25, 2004 to December 31, 2004 amounted to nil.
Employer contributions by the Predecessor for the period from
January 1, 2004 to August 24, 2004 amounted to nil,
and for the years ended December 31, 2003 and 2002 amounted
to $7 and nil, respectively.
11
Stock options
Successor
Certain employees of the Company are eligible to participate in
Standard Aero Acquisition Holdings, Inc.’s Stock Option and
Purchase Plan (the “Plan”) which was approved by the
Company’s Board of Directors in December 2004. A total of
425,000 stock options have been approved for issuance under this
Plan. As of December 31, 2004, the Company has 206,071
stock options outstanding, each of which may be used to purchase
one share of the Company’s common stock. The options have a
ten year life and an exercise price of one hundred dollars per
share, which was equivalent to the exercise price at that date.
Approximately 31% of the options are time vesting options that
will vest on or prior to December 31, 2008. Approximately
47% of the options are performance vesting options that will
vest on the day immediately preceding the seventh anniversary of
the date of grant, provided the option holder remains
continuously employed with the Company. However, all or a
portion of such performance vesting options may vest and become
exercisable over a five-year period, starting with 2004, if
certain performance targets relating to earnings and debt
repayment are met. Approximately 22% of the options are
performance vesting options that will vest between
December 31, 2006 and December 31, 2008 if certain
performance targets relating to earnings are met. In addition,
these options vest upon the occurrence of certain stated
liquidity events, as defined in the Plan.
The Company has elected to apply the provisions of APB
No. 25. For the period from August 25, 2004 to
December 31, 2004, no stock option compensation expense was
recognized in the determination of net income in the
accompanying statement of operations. The weighted average fair
value on the measurement date for the options granted in 2004
was $3,855 and the weighted average fair value per share was
nineteen dollars per share. Had stock option compensation
expense been determined pursuant to the methodology of
SFAS No. 123, the Company would have recorded an
after-tax compensation charge of approximately $16 in the year
ended December 31, 2004.
The fair value of the options was estimated at the measurement
date using the minimum value method, and assumed no dividends or
volatility, a risk-free interest rate of 4.13% and an expected
option life of 6 years.
Predecessor
At December 31, 2003, 327,846 share options had been
granted by Dunlop Standard Aerospace Group Limited to certain
employees of the MRO Division. All of the options were granted
in October 1998 and had vested prior to January 1, 2001.
The market value of the options at the date of grant was
£1, which was equivalent to the exercise price at that
date. There was consequently no cost to the MRO Division arising
from the issue of the share options. On August 24, 2004,
all 327,846 options were exercised.
12
Financial instruments and hedging activities
Risk management
The Company holds and issues financial instruments in order to
finance its operations and to manage foreign currency risks
arising from its operations. The Company does not hold financial
instruments for trading purposes. The Company’s major
financial risks relate to movements in exchange rates and
interest rates. The Company’s policies are reviewed on a
regular basis.
The Company uses derivative financial instruments primarily to
reduce its exposure to adverse fluctuations in interest rates.
When entered into, the Company formally designates and documents
the financial instrument as a hedge of a specific underlying
exposure, as well as the risk management objectives and
strategies for undertaking the hedge transactions. The Company
formally assesses, both at the inception and at least quarterly
thereafter, whether the financial instruments that are used in
hedging transactions are effective at offsetting changes in
either the fair value or cash flows of the related underlying
exposure. Because of the high degree of effectiveness between
the hedging instrument and the underlying exposure being hedged,
fluctuations in the value of the derivative instrument are
generally offset by changes in the fair value or cash flows of
the underlying exposures being hedged. Any ineffective portion
of a financial instrument’s change in fair value is
immediately recognized in earnings.
The Company adopted SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138. No. 133
was further amended by SFAS No. 149.
SFAS No. 149 became effective beginning July 1,2003. These statements require the Company to recognize all
derivative instruments as either assets or liabilities in the
balance sheets at fair value. The accounting for changes in the
fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship
and, further, on the type of hedging relationship. At the
inception of the hedging relationship, the Company must
designate the derivative instrument as a fair value hedge, cash
flow hedge or a hedge of a net investment in a foreign
operation. This designation is based upon the exposure being
hedged.
The Company’s objective in using derivatives is to add
stability to interest expense and to manage its exposure to
interest rate movements. To accomplish this objective, the
Company primarily uses interest rate collars as part of its cash
flow hedging strategy. The interest rate collars are designated
as cash flow hedges and are used by the Company to limit its
exposure to changes in interest rates on its existing variable
rate debt.
The Company has established strict counterparty credit
guidelines and enters into transactions only with financial
institutions of investment grade or better. The Company monitors
counterparty exposures daily and reviews any downgrade in credit
immediately.
Interest rate risk
The mix of fixed rate and variable rate debt are subject to
interest rate risk. The Company will fix interest rates either
through entering into fixed rate investments and debt or through
the use of derivative financial instruments. During 2004, such
derivatives were used to hedge the variable cash flows
associated with $75 million of existing variable-rate debt.
Under the interest rate collars, the Company has limited its
exposure to changes in interest rates on its variable rate debt
as follows:
Maximum and minimum interest rates exclude the effect of the
Company’s credit spread on the variable rate debt.
As of December 31, 2004, derivatives with a fair value of
$52 were included in other assets on the Company’s balance
sheet. The change in net unrealized gains of $52 in 2004 for
derivatives designated as cash flow hedges is separately
disclosed in the statement of changes in shareholders’
equity and comprehensive income. No hedge ineffectiveness was
recognized during 2004.
Amounts reported in accumulated other comprehensive income
related to derivatives will be reclassified to interest expense
as interest payments are made on the Company’s
variable-rate debt. No amounts were reclassified out of other
comprehensive income into interest expense during 2004 or 2003,
and the Company does not anticipate that any amounts will be
reclassified in 2005.
Foreign currency risk
The Company has significant operations in Canada, as well as
other countries outside of North America and consequently the
balance sheet can be affected by movements in exchange rates. In
addition,
currency exposures can arise from revenues and purchase
transactions denominated in foreign currencies. Generally,
transactional currency exposures are naturally hedged, but where
appropriate, are covered using forward exchange contracts. There
were no foreign exchange contracts outstanding at
December 31, 2004.
Net currency transaction and translation gains and losses
included in selling, general and administrative expense of the
Successor was a gain/(loss) of $(1,367) for the period from
August 25, 2004 to December 2004. Net currency transaction
and translation gains and losses included in selling, general
and administrative expense of the Predecessor was a gain/(loss)
of $(525) for the period from January 1, 2004 to
August 24, 2004, and was a gain/(loss) of $(2,356) and
$1,383 for the years ended December 31, 2003 and 2002,
respectively.
Fair value
The estimated fair values of financial instruments approximate
the amounts at which they could be exchanged in a current
transaction between willing parties. The fair values are based
on estimates using present value and other valuation techniques
that are significantly affected by the assumptions used
concerning the amount and timing of estimated future cash flows
and discount rates that reflect varying degrees of risk.
For cash and cash equivalents, the fair value approximates the
carrying value due to the short maturity periods of these
financial instruments. For medium and long-term borrowings, the
fair value is based on market values or, where not available, on
the quoted market prices of comparable debt issued by other
companies. The Successor’s long-term debt outstanding as at
December 31, 2004 has a fair value of $510,891. The
Predecessor’s long-term debt outstanding as at
December 31, 2003 was at floating rates of interest and had
relatively short terms of maturity. Accordingly, the fair value
approximated the carrying value at that date.
Credit risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable and cash and cash equivalents. Management has
assessed the credit risk and believes that the concentration of
credit risk associated with accounts receivable is minimal
because it has significant revenues from well established
customers and the Company carries credit insurance to mitigate
its credit exposure. Cash and cash equivalents are invested in
bank deposit accounts callable on no more than three months
notice. The risk associated with the Company’s cash and
cash equivalents is mitigated by the fact that these amounts are
placed with commercial financial institutions.
The counterparty to the Company’s derivatives is a major
financial institution. The Company could be exposed to loss in
the event of non-performance by the counterparty. However,
credit ratings and concentration of risk of the financial
institution is monitored on a continuing basis.
13
Guarantees
The Company issues letters of credit, performance bonds, bid
bonds or guarantees in the ordinary course of its business.
These instruments are generally issued in conjunction with
contracts or other business requirements. The total of these
instruments outstanding at December 31, 2004 was
approximately $4,147 (Successor) (2003 — $3,360
(Predecessor)).
In connection with the Acquisition, the Company and an affiliate
of Meggitt plc entered into a separation agreement. The
separation agreement provides, among other things, that the
Company will indemnify Meggitt and its subsidiaries for
liabilities relating to the MRO business and that Meggitt
Acquisition Limited will indemnify the Company for liabilities
arising out of the aerospace design and
manufacturing business purchased by Meggitt. The separation
agreement also requires that the Company indemnify Meggitt and
its subsidiaries for 50% of the liabilities of Dunlop Standard
Aerospace Group Limited and its subsidiaries assumed by Meggitt
in connection with the Acquisition that relate to any former
business or activity of Dunlop Standard Aerospace Group Limited
other than the MRO business or the aerospace design and
manufacturing business. As at December 31, 2004, there are
no indemnification claims known to the Company and accordingly,
no amount has been accrued in the consolidated financial
statements.
Warranty guarantee
Reserves are recorded to reflect the Company’s contractual
liabilities relating to warranty commitments to customers.
Warranty coverage of various lengths and terms is provided to
customers depending on standard offerings and negotiated
contractual agreements.
Changes in the carrying amount of accrued warranty costs are
summarized as follows:
The Company has three principal operating segments, which are
the Aviation Maintenance Repair and Overhaul, Energy Services
and Redesign Services. The Aviation Maintenance Repair and
Overhaul segment provides gas turbine engine maintenance repair
and overhaul services primarily for the aviation market. The
Energy Services segment provides services for engines and other
components that have a non-aviation application. The Redesign
Services segment provides services related to the design and
implementation of lean manufacturing operational redesigns.
These operating segments were determined based on the nature of
the products and services offered. Operating segments are
defined as components of an enterprise about which separate
financial information is available that is evaluated regularly
by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. The
Company’s chief executive officer has been identified as
the chief operating decision-maker. The Company’s chief
operating decision-maker directs the allocation of resources to
operating segments based on profitability and cash flows of each
respective segment. These segments were adopted on
December 20, 2004 by the Company. The Predecessor’s
results have been restated to reflect the current segment
structure.
The Company has determined that it has one reportable segment:
Aviation Maintenance Repair and Overhaul. The Other Services
segment comprises the Redesign Services and Energy Services;
these operating segments were not separately reported as they do
not meet any of the quantitative thresholds under Financial
Accounting Standards Board Statement No. 131 (Disclosures
about Segments of an Enterprise and Related Information).
Certain administrative and management services are shared by the
segments and are allocated based on direct usage, revenue and
employee levels. Corporate management expenses are not allocated
to the segments. The Successor’s corporate management
expenses include $20,432 for the inventory step-up to fair value
at August 25, 2004. Unallocated corporate assets of the
Successor relate primarily to cash, deferred finance charges and
deferred income taxes. Unallocated assets of the Predecessor
relate to cash, deferred finance charges, deferred income taxes,
indefinite lived intangibles and goodwill.
These sales were concentrated in the Aviation Maintenance Repair
and Overhaul segment.
15
Subsequent event
On February 28, 2005, the Company made an optional
prepayment of $15 million against the term loans which has
been applied against future scheduled payments.
The following schedules present the condensed consolidating
financial information as at December 31, 2004 and for the
period from August 25, 2004 to December 31, 2004
(Successor) and the condensed combining financial information as
at December 31, 2003 and for the period from
January 1, 2004 to August 24, 2004 and for each of the
two years in the period ended December 31, 2003
(Predecessor). The Successor’s schedules are comprised of
the following columns: (a) Standard Aero Holdings, Inc.
(Parent); (b) on a combined basis, the wholly-owned
subsidiaries, either directly or indirectly, who guarantee the
senior subordinated notes (the “Notes”) (Guarantors);
(c) on a combined basis, the wholly-owned subsidiaries,
either directly or indirectly, which do not guarantee the Notes
(Non-Guarantors); and (d) elimination entries to
consolidate the parent with the Guarantors and Non-Guarantors
that principally consist of entries that eliminate investments
in consolidated subsidiaries and intercompany balances and
transactions. The parent company and the Guarantors account for
their investments in their wholly-owned subsidiaries using the
equity method. The Predecessor’s schedules are comprised of
the following columns: (a) on a combined basis, the MRO
subsidiaries who guarantee the Notes in the Successor Company
(MRO Guarantors); (b) on a combined basis, the MRO
subsidiaries which do not guarantee the Notes in the Successor
Company (MRO Non-Guarantors); and (c) elimination entries
to combine the MRO Guarantors and the MRO Non-Guarantors that
principally consist of entries that eliminate intercompany
balances and transactions. Under the Predecessor structure, the
MRO Guarantors did not have any investments in MRO
Non-Guarantors. In addition, the accounts of Standard Aero
(U.S.) Inc., an MRO Guarantor, do not include two wholly-owned
subsidiaries which were not related to the MRO Division.
Separate financial statements of the Guarantor subsidiaries are
not presented because their guarantees of the Notes are full and
unconditional and joint and several, and the Company believes
separate financial statements and other disclosure regarding the
Guarantor Subsidiaries are not material to investors. The
Guarantor Subsidiaries guarantee the senior subordinated notes
issued in connection with the Acquisition.
Condensed Consolidating Statement of Operations
(Successor)
Article Eight of Standard Aero Holdings, Inc.’s
Certificate of Incorporation and Standard Aero Canada,
Inc.’s Certificate of Incorporation and Article Nine
of Standard Aero (US), Inc.’s Certificate of Incorporation,
Standard Aero Materials, Inc.’s Certificate of
Incorporation, Standard Aero (San Antonio) Inc.’s
Certificate of Incorporation, Standard Aero (Alliance)
Inc.’s Certificate of Incorporation and Standard Aero
Redesign Services Inc.’s Certificate of Incorporation
eliminate the liability of directors to the respective company
or its stockholders, except for liabilities related to breach of
duty of loyalty, actions or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law,
under Section 174 of the Delaware General Corporation Law
(“DGCL”) or for any transaction from which the
director derived an improper personal benefit.
Section 102(b)(7) of the General Corporation Law of the
State of Delaware (the “DGCL”), provides that a
corporation may eliminate or limit the personal liability of a
director (or certain persons who, pursuant to the provisions of
the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director:
•
for any breach of the director’s duty of loyalty to the
corporation or its stockholders;
•
for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
•
under Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock
purchases or redemptions); or
•
for any transaction from which the director derived an improper
personal benefit.
Article Eight of Standard Aero (US) Legal, Inc.’s
Certificate of Incorporation, Standard Aero Materials,
Inc.’s Certificate of Incorporation, Standard Aero (San
Antonio) Inc.’s Certificate of Incorporation, Standard Aero
(Alliance) Inc.’s Certificate of Incorporation and Standard
Aero Redesign Services Inc.’s Certificate of Incorporation
and the Bylaws of Standard Aero Holdings, Inc., Standard Aero
(US) Legal, Inc., Standard Aero, Inc., Standard Aero
Materials, Inc., Standard Aero (San Antonio) Inc., Standard Aero
(Alliance) Inc., Standard Aero Canada, Inc. and Standard Aero
Redesign Services Inc. provide for the indemnification of their
directors, officers, employees and agents to the fullest extent
permitted by applicable law.
Article Seven of Standard Aero (US) Inc.’s
Certificate of Incorporation provides for the indemnification of
all persons whom it may indemnify to the fullest extent
permitted by section 145 of the DGCL. Section 145 of
the DGCL provides that a Delaware corporation has the power,
under specified circumstances, to indemnify its directors,
officers, employees and agents in connection with actions, suits
or proceedings brought against them by a third party or in the
right of the corporation against expenses incurred in any such
action, suit or proceeding. The DGCL also provides that Delaware
corporations may purchase insurance on behalf of any such
director, officer, employee or agent.
The Bylaws of Standard Aero, Inc. eliminates the liability of
directors and officers to Standard Aero, Inc. for any actions
taken in good faith, if such person (i) exercised or used
the same degree of diligence, care and skill as an ordinary
prudent man would have exercised or used under the circumstances
in the conduct of his own affairs or (ii) took, or omitted
to take, such action in reliance on advice of counsel for
Standard Aero, Inc., or upon statements made or information
furnished by employees of Standard Aero, Inc. which the director
or officer had reasonable grounds to believe to be true, or upon
a financial statement provided by a person in charge of Standard
Aero, Inc’s accounts or certified by a public accountant or
a firm or public accountants.
Under the Canada Business Corporations Act (CBCA), a corporation
may indemnify a director or officer of the corporation, a former
director or officer of the corporation or another individual who
acts or acted at the corporation’s request as a director or
officer or an individual acting in a similar capacity, of
another entity, and his or her heirs and legal representatives
(an “indemnifiable person”), against all costs,
charges and expenses, including an amount paid to settle an
action or satisfy a judgment, reasonably incurred by him or her
in respect of any civil, criminal, administrative, investigative
or other proceeding in which he or she is involved by reason of
being or having been a director or officer of such corporation
or such other entity, if: (i) he or she acted honestly and
in good faith with a view to the best interests of such
corporation or such other entity, as the case may be; and
(ii) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had
reasonable grounds for believing that his or her conduct was
lawful. An indemnifiable person is entitled under the CBCA to
such indemnity from the corporation if he or she was not judged
by the court or other competent authority to have committed any
fault or omitted to do anything that the individual ought to
have done and fulfilled the conditions set out in (i) and
(ii) above. A corporation may, with the approval of a
court, also indemnify an indemnifiable person in respect of an
action by or on behalf of the corporation or other entity to
procure a judgment in its favor, to which such person is made a
party by reason of being or having been a director or an officer
of the corporation or other entity, if he or she fulfills the
conditions set out in (i) and (ii), above.
Not FM Canada Inc.’s and Standard Aero Limited’s
bylaws provide for indemnification of directors and officers to
the fullest extent authorized by the CBCA.
Not FM Canada Inc.’s and Standard Aero Limited’s
bylaws eliminate liability for directors and officers for
(i) the acts, omissions, receipts, failures, neglects or
defaults of any other director, officer or employee;
(ii) joining in any receipt or other act for conformity;
(iii) any loss, damage or expense happening through the
insufficiency or deficiency of title to any property acquired
for or on behalf of the respective company; (iv) the
insufficiency or deficiency of any security in or upon which any
corporate funds shall be invested; (v) any loss or damage
arising from the bankruptcy, insolvency or tortuous acts of any
person with whom any corporate funds, securities or effects
shall be deposited; or (vi) any loss occasioned by any
error of judgment or oversight on the director or officer’s
part, or for any other loss, damage or misfortune whatever which
shall happen in the execution of his duties of his office or in
relation to his office.
Under applicable Nova Scotia law, a corporation is permitted to
indemnify its officers and directors on terms acceptable to its
shareholders subject only to the general common law restrictions
based on public policy and restrictions residing under specific
legislation of relevant jurisdictions. The Articles of
Association of 3091781 Nova Scotia Company, 3091782 Nova Scotia
Company and 3091783 Nova Scotia Company indemnify directors and
officers for all liabilities, in the absence of any dishonesty
on the part of the person, arising by reason of such
person’s position at the respective company. Additionally,
no director, officer or person who acts at the respective
company’s request, in the absence of any dishonesty of such
person’s part, shall be liable for the acts, receipts
neglects or defaults of another other director, officer or
person, or for joining in any receipt or other act for
conformity, or for any loss, damage or expense through
insufficiency or deficiency of title to any property acquired
for or on behalf of the respective company, or through the
insufficiency or deficiency of any security in or upon which any
of the funds of the respective company are invested, or for any
loss or damage arising from the bankruptcy, insolvency or
tortuous acts of any person with whom any funds, securities or
effects are deposited, or for any loss occasioned by error of
judgment or oversight on the part of such person, or for any
other loss, damage or misfortune whatsoever which happens in the
execution of the duties of such person or in relation thereto.
Agreement Relating to the Sale And Purchase of the Entire Issued
Share Capital of Dunlop Standard Aerospace Group Limited, dated
July 5, 2004, by and between Meggitt Acquisition Limited
Meggitt plc, Standard Aero Holdings Inc., and the other parties
thereto. Schedules and similar attachments to this agreement
will be furnished supplementally to the U.S. Securities and
Exchange Commission upon request.
2
.2
Agreement Relating to the Sale And Purchase of the Entire Issued
and Outstanding Capital Stock of Dunlop Standard Aerospace
(U.S.), Inc., dated July 5, 2004, by and between Standard
Aero Limited, Standard Aero (Asia) Pte Limited, Standard Aero
(Australia) Pty Limited And Dunlop Standard Aerospace
(Nederland) BV. Schedules and similar attachments to this
agreement will be furnished supplementally to the U.S.
Securities and Exchange Commission upon request.
2
.3
Separation Agreement Relating to the Design And Manufacturing
Division and the Engine Repair and Overhaul Division of the
Dunlop Standard Aerospace Group, dated as of July 1, 2004,
by and among Meggitt Acquisition Limited, Meggitt Plc And
Standard Aero Holdings, Inc. Schedules and similar
attachments to this agreement will be furnished supplementally
to the U.S. Securities and Exchange Commission upon request.
3
.1
Certificate of Incorporation of Standard Aero Holdings, Inc.,
3
.2
Certificate of Incorporation of Standard Aero (US), Inc.
3
.3
Certificate of Amendment to Certificate of Incorporation of
Standard Aero (US), Inc.
3
.4
Certificate of Incorporation of Standard Aero (US) Legal,
Inc.
3
.5
Certificate of Amendment to Certificate of Incorporation of
Standard Aero (US) Legal, Inc.
3
.6
Certificate of Incorporation of Standard Aero, Inc.
3
.7
Certificate of Amendment to Certificate of Incorporation of
Standard Aero, Inc.
3
.8
Certificate of Incorporation of Standard Aero Materials, Inc.
3
.9
Certificate of Amendment to Certificate of Incorporation of
Standard Aero Materials, Inc.
3
.10
Certificate of Incorporation of Standard Aero (San Antonio)
Inc.
3
.11
Certificate of Incorporation of Standard Aero (Alliance) Inc.
3
.12
Certificate of Incorporation of Standard Aero Canada, Inc.
3
.13
Certificate of Incorporation of Standard Aero Redesign Services
Inc.
3
.14
Memorandum of Association of 3091781 Nova Scotia Company.
3
.15
Memorandum of Association of 3091782 Nova Scotia Company.
3
.16
Memorandum of Association of 3091783 Nova Scotia Company.
3
.17
Bylaws of Standard Aero Holdings, Inc.
3
.18
Bylaws of Standard Aero, Inc.
3
.19
Bylaws of Standard Aero (US), Inc.
3
.20
Bylaws of Standard Aero (US) Legal, Inc.
3
.21
Bylaws of Standard Aero, Inc.
3
.22
Bylaws of Standard Aero Materials, Inc.
3
.23
Bylaws of Standard Aero (San Antonio) Inc.
3
.24
Bylaws of Standard Aero (Alliance) Inc.
3
.25
Bylaws of Standard Aero Canada, Inc.
3
.26
Bylaws of Standard Aero Redesign Services Inc.
3
.27
Articles of Association of 3091781 Nova Scotia Company.
3
.28
Articles of Association of 3091782 Nova Scotia Company.
3
.29
Articles of Association of 3091783 Nova Scotia Company.
Senior Subordinated Note Indenture with respect to the
81/4% Senior
Subordinated Notes due 2014, between Standard Aero Holdings,
Inc., Wells Fargo Bank Minnesota, National Association, as
trustee, and the Guarantors listed on the signature pages
thereto, dated as of August 20, 2004.
4
.2
Supplemental Indenture, dated as of August 24, 2004, among
Dunlop Standard Aerospace (Nederland) BV and Standard Aero BV,
Standard Aero Holdings, Inc. and Wells Fargo Bank, National
Association, as trustee.
4
.3
Supplemental Indenture, dated as of August 24, 2004, among
Dunlop Standard Aerospace (US) Inc., Dunlop Standard Aerospace
(US) Legal Inc., Standard Aero, Inc., Dunlop Aerospace Parts,
Inc., Standard Aero (San Antonio) Inc., Standard Aero
(Alliance) Inc., Standard Aero Canada, Inc., 3091781 Nova Scotia
Company, 3091782 Nova Scotia Company, 3091783 Nova Scotia
Company, Standard Aero Limited, Not FM Canada Inc.,
Standard Aero Holdings, Inc. and Wells Fargo Bank, National
Association, as trustee.
4
.4
Supplemental Indenture, dated as of March 3, 2005, among
Standard Aero (US), Inc. (f/k/a Dunlop Standard Aerospace
(U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop
Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.;
Standard Aero Materials, Inc. (f/k/a Dunlop Aerospace Parts
Inc.); Standard Aero (San Antonio) Inc.; Standard Aero
(Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia
Company; 3091782 Nova Scotia Company; 3091783 Nova Scotia
Company; Standard Aero Limited; Not FM Canada Inc.; Standard
Aero (Netherlands) B.V. (f/k/a Dunlop Standard Aerospace
(Nederland) BV) and Standard Aero BV, Standard Aero Holdings,
Inc. and Wells Fargo Bank, National Association, as trustee.
4
.5
Supplemental Indenture, dated as of March 31, 2005, among
Standard Aero (US), Inc. (f/k/a Dunlop Standard Aerospace (U.S.)
Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop
Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.;
Standard Aero Materials, Inc. (f/k/a Dunlop Aerospace Parts
Inc.); Standard Aero (San Antonio) Inc.; Standard Aero
(Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia
Company; 3091782 Nova Scotia Company; 3091783 Nova Scotia
Company; Standard Aero Limited; Not FM Canada Inc. and
Standard Aero Redesign Services Inc., Standard Aero Holdings,
Inc. and Wells Fargo Bank, National Association, as trustee.
4
.6
Form of
81/4% Senior
Subordinated Notes due 2014 (included in exhibit 4.1).
4
.7
Registration Rights Agreement among Standard Aero Holdings,
Inc., each of the Subsidiary Guarantors listed on Schedule A
thereto, J.P. Morgan Securities Inc., Lehman Brothers Inc.
and Credit Suisse First Boston LLC, dated as of August 20,2004.
4
.8
Purchase Agreement between Standard Aero Holdings, Inc. and the
initial purchasers named in Schedule I thereto, dated
August 17, 2004.
5
.1*
Opinion of Latham & Watkins LLP regarding the validity
of the exchange notes.
5
.2*
Opinion of Aikins MacAulay & Thorvaldson LLP.
5
.3*
Opinion of Stewart McKelvey Stirling Scales.
10
.1
Credit Agreement, dated as of August 20, 2004, by and among
Standard Aero Holdings, Inc., the lenders party thereto,
J.P. Morgan Securities Inc. and Lehman Brothers Inc., as
joint lead arrangers, JPMorgan Chase Bank, as administrative
agent, and Lehman Commercial Paper Inc. and Credit Suisse First
Boston, as co-syndication agent.
10
.2
Guarantee and Collateral Agreement, dated as of August 24,2004, made by Standard Aero Acquisition Holdings, Inc., Standard
Aero Holdings, Inc. and certain of its subsidiaries in favor of
JPMorgan Chase Bank, as administrative agent.
10
.3
CDN Guarantee and Collateral Agreement, dated as of
August 24, 2004, made by Standard Aero Limited, Not FM
Canada, 3091781 Nova Scotia Company, 3091782 Nova Scotia
Company, 3091783 Nova Scotia Company and 6269044 Canada Inc. in
favor of JPMorgan Chase Bank, as administrative agent.
10
.4*
Management Agreement among Standard Aero Holdings, Inc. and TC
Group, L.L.C. dated August 20, 2004
10
.5
Service Agreement between Standard Aero Limited and David W.
Shaw, dated as of October 1, 1998.
Stock Option and Purchase Plan of Standard Aero Acquisition
Holdings, Inc.
10
.16
Stockholders Agreement, dated as of December 22, 2004, by
and between Standard Aero Acquisition Holdings, Inc., Carlyle
Partners III, L.P. and David Shaw.
10
.17
Stockholders Agreement, dated as of December 22, 2004, by
and between Standard Aero Acquisition Holdings, Inc., Carlyle
Partners III, L.P. and Paul Soubry.
10
.18
Stockholders Agreement, dated as of December 22, 2004, by
and between Standard Aero Acquisition Holdings, Inc., Carlyle
Partners III, L.P. and Rene van Doorn.
10
.19
Stockholders Agreement, dated as of December 22, 2004, by
and between Standard Aero Acquisition Holdings, Inc., Carlyle
Partners III, L.P. and Bradley Bertouille.
10
.20
Stockholders Agreement, dated as of December 22, 2004, by
and between Standard Aero Acquisition Holdings, Inc., Carlyle
Partners III, L.P. and Edward Richmond.
10
.21*
Heavy Maintenance Center Agreement between Allison Gas Turbine
Division, General Motors Corporation (now known as Rolls-Royce
Corp.) and Standard Aero Limited, dated January 21, 1993.
10
.22*
T56 Engine and Accessories Support Subcontract
No. LMKAC-98-0001 between Standard Aero (San Antonio) Inc.
and Lockheed Martin Kelly Aircraft Center, dated
September 23, 1998.
10
.23*
Amendment No. 24 to Subcontract No. LMKAC-98-0001
between Standard Aero and Lockheed, dated as of May 2, 2002.
10
.24*
Amendment No. 36 to Subcontract No. LMKAC-98-0001
between Standard Aero and Lockheed dated as of November 24,2003.
12
.1
Statement of Computation of Ratio of Earnings to Fixed Charges.
21
.1
List of Subsidiaries.
23
.1
Consent of Latham & Watkins LLP (included in
Exhibit 5.1).
23
.2
Consent of Stikeman Elliott LLP (included in Exhibit 5.2).
23
.7
Consent of PricewaterhouseCoopers LLP.
24
.1
Powers of Attorney (included in the signature pages to this
registration statement).
25
.1*
Statement of Eligibility of Trustee with respect to the Senior
Subordinated Notes Indenture.
99
.1*
Form of Letter of Transmittal, with respect to the Exchange
Offer.
99
.2*
Form of Notice of Guaranteed Delivery, with respect to the old
notes and exchange notes.
99
.3*
Form of Letter to DTC Participants Regarding the Exchange Offer.
99
.4*
Form of Letter to Beneficial Holders Regarding the Exchange
Offer.
Schedules to the financial statements and the notes and other
materials related thereto have been included on page S-2.
Item 22.
Undertakings.
The undersigned registrants hereby undertake:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement
(notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a
prospectus filed with the SEC pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table
in the effective registration statement); and (iii) to
include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned registrants hereby undertake as follows: that
prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other Items of the applicable form.
The undersigned registrants hereby undertake that every
prospectus (1) that is filed pursuant to the immediately
preceding paragraph or (2) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrants pursuant to the
foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrants in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrants will, unless in the
opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by final adjudication of such issue.
The undersigned registrants hereby undertake to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Items 4, 10(b), 11, or 13
of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the
request.
The undersigned registrants hereby undertake to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of San Antonio, State of Texas, on
April 27, 2005.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David Shaw and Bradley
Bertouille, jointly and severally, each in his own capacity, his
true and lawful attorneys-in-fact, with full power of
substitution, for him and his name, place and stead, in any and
all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and
to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto such said attorneys-in-fact and agents
with full power and authority to do so and perform each and
every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all
that said attorneys in fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and as of the dates indicated.
Report of Independent Registered Public Accounting Firm
To the Stockholder of
Standard Aero Holdings, Inc.
Our audit of the consolidated financial statements of Standard
Aero Holdings, Inc. (Successor) as of December 31, 2004 and
for the period from August 25, 2004 to December 31,2004 referred to in our report dated March 31, 2005 except
for Note 16 which is as of April 26, 2005, and our
audits of the combined financial statements of the MRO Division
of Dunlop Standard Aerospace Group Limited (Predecessor) as of
December 31, 2003 and for the period from January 1,2004 to August 24, 2004 and the years ended
December 31, 2003 and December 31, 2002 referred to in
our report dated March 31, 2005, except for note 16,
which is at April 26, 2005, appearing elsewhere in this
Registration Statement also included an audit of the financial
statement schedule listed in Item 21(b) of the Registration
Statement on Form S-4. In our opinion, this financial
statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related financial statements.
