-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B6BAcD3OTheA59w06i1yLYJlKvpBINAFWY4CDKu7MsATBoiK4RvGjfR7LU7qkY3/ OkMU21+M6jXSDRRJqpM2+Q== 0000912057-97-010846.txt : 19970329 0000912057-97-010846.hdr.sgml : 19970329 ACCESSION NUMBER: 0000912057-97-010846 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULFSTREAM AEROSPACE CORP CENTRAL INDEX KEY: 0000715355 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT [3721] IRS NUMBER: 133554834 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08461 FILM NUMBER: 97567998 BUSINESS ADDRESS: STREET 1: P O BOX 2206 STREET 2: 500 GULFSTREAM RD - TRAVIS FIELD CITY: SAVANNAH STATE: GA ZIP: 31402-2206 BUSINESS PHONE: 9129643000 MAIL ADDRESS: STREET 1: 500 GULFSTREAM RD STREET 2: TRAVIS FIELD CITY: SAVANNAH STATE: GA ZIP: 31402-2206 10-K405 1 10-K405 ________________________________________________________________________________ ________________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /x/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1996 OR / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 1-8461 GULFSTREAM AEROSPACE CORPORATION Delaware 13-3554834) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. Box 2206 500 Gulfstream Road Savannah, Georgia 31402-2206 (912) 965-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------- ----------------------- Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X _ The aggregate market value of the shares of common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the New York Stock Exchange on March 26, 1997) was approximately $956,702,295. For purposes of this computation, shares held by affiliates and by directors of the registrant have been excluded. Such exclusion of shares held by directors is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant. As of March 26, 1997, there were outstanding 74,035,328 shares of the registrant's common stock, par value $.01, which is the only class of common stock of the registrant. Documents Incorporated by Reference Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996, (the "1996 Annual Report") are incorporated by reference in Parts II and IV of this Form 10-K. Portions of the Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 14, 1997, (the "1997 Proxy Statement") are incorporated by reference in Part III of this Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K, neither the Annual Report nor the Proxy Statement is deemed to be filed as a part hereof. ________________________________________________________________________________ ________________________________________________________________________________ PART I ITEM 1. BUSINESS GENERAL Gulfstream Aerospace Corporation (the "Company") is recognized worldwide as a leading designer, developer, manufacturer and marketer of the most technologically advanced intercontinental business jet aircraft. Since 1966, when the Company created the large cabin business jet category with the introduction of the Gulfstream II, the Company has dominated this market segment, capturing a cumulative market share of over 60%. The Company has manufactured and sold over 960 large business aircraft since the introduction of the Gulfstream product line in 1958. The Company has developed a broad range of aircraft products to meet the aviation needs of its targeted customers (which include national and multinational corporations, governments and governmental agencies, heads of state and wealthy individuals). The Company's current principal aircraft products are the Gulfstream IV-SP, the Gulfstream V, Gulfstream Shares-TM-(fractional ownership interests in Gulfstream IV-SPs) and pre-owned Gulfstream aircraft. As an integral part of its aircraft product offerings, the Company offers aircraft completion (exterior painting of the aircraft and installation of customer selected interiors and optional avionics) and worldwide aircraft maintenance services and technical support for all Gulfstream aircraft. In addition, the Company's financial services subsidiary, Gulfstream Financial Services Corporation, through its private label relationship with a third-party aircraft financing provider, offers customized products to finance the worldwide sale of Gulfstream aircraft. The Company is the ultimate successor to a business (the "Predecessor Business") established by Grumman Aerospace in 1956. In 1978, the Predecessor Business was acquired by a group of investors headed by Allen E. Paulson, the then Chairman of the Predecessor Business. Chrysler Corporation ("Chrysler") acquired the Predecessor Business in 1985. In March 1990, the Gulfstream business was acquired from Chrysler by certain partnerships (the "Forstmann Little Partnerships") formed by Forstmann Little & Co. ("Forstmann Little"). On October 16, 1996, the Company sold 4,559,100 shares of the Company's Common Stock, and the Forstmann Little Partnerships and certain option holders of the Company's Common Stock sold 37,940,900 shares of the Company's Common Stock in an initial public offering at a price of $24.00 per share. As of March 26, 1997, the Forstmann Little Partnerships owned approximately 42.4% of the outstanding shares of the Company's Common Stock. PRINCIPAL PRODUCTS The business jet aircraft market is generally divided into four segments--light, medium, large and ultra-long range. These segments are defined on the basis of range, cabin volume and gross operating weight. GULFSTREAM V The Company's newest aircraft product is the Gulfstream V, which serves the ultra-long range market. The Company believes the Gulfstream V provides the longest range, fastest cruising speed and most technologically advanced avionics of any ultra-long range business jet aircraft currently in operation. The Gulfstream V received provisional type certification from the Federal Aviation Administration ("FAA") on December 13, 1996 and the Company expects to receive final type certification in early 1997. The first Gulfstream V deliveries began in the fourth quarter of 1996. The Gulfstream V has a maximum operating speed of Mach .885. It can accommodate up to 19 passengers and has a range of up to 6,500 nautical miles and a cruising speed of up to Mach .87. These capabilities will permit routine intercontinental travel at cruising speeds comparable to commercial airline cruising speeds, while operating efficiently at altitudes as high as 51,000 feet, flying above most commercial airline traffic and adverse weather. The Gulfstream V is versatile enough to fly long-range missions, such as New York to Tokyo in approximately 14 hours, as well as high-speed missions, such as New York to London, in approximately six hours. 2 The Gulfstream V design process combined modern technology with the conservative design philosophy of all Gulfstream aircraft. The Gulfstream V aircraft development was launched in September 1992 and significantly enhanced in 1993 in response to extensive market research. Aerodynamic profiles were developed and verified using computational fluid dynamics (CFD) and scale model wind tunnel testing. Following systems definition, detailed designs were prepared on both two dimensional (CADAM) and three dimensional (CATIA) digital computer models, thereby eliminating the need to construct a physical prototype of the new aircraft. The Company estimates that Gulfstream, its revenue share partners and key suppliers will have invested over $800 million, in the aggregate, in developing the Gulfstream V. The Gulfstream V is equipped with two 14,750-pound-thrust BR710 engines built by BMW Rolls-Royce GmbH, which were specifically designed for use on the Gulfstream V and for which Gulfstream was the launch customer. The sound levels of the Gulfstream V's engines are well below FAA Stage 3 and ICAO/Chapter 3 regulatory requirements (the FAA's and ICAO's most stringent noise abatement regulations). These engines, like the Rolls-Royce Tay engines on the Gulfstream IV-SP (which are considered an industry benchmark), are designed to operate 7,000 flight hours between major overhauls and, due to fuel efficiency, are expected to operate at a lower cost than the engines of the Gulfstream IV-SP. The BR710 engine has been certified by the Joint Aviation Authorities and the FAA. The aircraft utilizes dual cabin pressurization systems to minimize cabin altitude. At a maximum altitude of 51,000 feet, the Gulfstream V cabin altitude is designed to be pressurized to 6,000 feet, the lowest cabin altitude pressurization of any business jet aircraft. This low cabin altitude, together with a 100% fresh air ventilation system (instead of a recirculating air system) is expected to significantly reduce passenger fatigue. The advanced flight systems on the Gulfstream V include automatic throttle systems, an integrated performance computer system, an engine information crew advisory system, a dual global positioning system and independent inertial reference systems. These systems provide accurate flight planning, as well as automatic control, throughout the planned flight profile. For maximum safety, a Traffic Collision Avoidance System, turbulence and wind shear-detecting radar and an enhanced Ground Proximity Warning System are also standard. An additional safety feature of the Gulfstream V is an optional head-up display ("HUD"). The HUD optimizes pilot performance and improves flight safety, especially in low visibility conditions, by reducing the pilot's dependence on the instrument panel, thus allowing the pilot to direct his vision outside the cockpit. In order to reduce the business risk associated with the design and manufacture of the Gulfstream V, the Company entered into revenue sharing agreements with Northrop Grumman Corporation for the wing and Fokker Aviation B.V. (a subsidiary of Stork B.V.) for the empennage. Under these agreements, the revenue share partner is responsible for the detailed design, tooling and manufacture of the systems in exchange for a fixed percentage of revenues of each Gulfstream V sold (which the Company records as a cost of goods sold upon an aircraft delivery). Thus, in addition to financing the development, manufacture and delivery of its components, each manufacturer shares in the risk of fluctuations in demand and market price of the Gulfstream V. The list price for a completed Gulfstream V is currently approximately $37,750,000 (depending on escalation and selected options). The Company provides a purchaser of a Gulfstream V with a 20 year or 20,000 flight hour warranty (whichever comes first) on the airframe structure and a six-year warranty on components (other than the engines). BMW Rolls-Royce GmbH provides a direct five-year or 2,500 flight hour warranty (whichever comes first) on the engines to purchasers of a Gulfstream V. GULFSTREAM IV-SP The Company's other principal aircraft product is the Gulfstream IV-SP, serving the large cabin business jet market. The Company believes that the Gulfstream IV-SP offers the best combination of large cabin size, long range, fast cruising speed and technologically advanced avionics of any large business jet aircraft in its market segment. The Gulfstream IV-SP is an enhanced version of the Gulfstream IV. (See "--Past Aircraft Product Offerings" page 11). The Company manufactured and sold 92 Gulfstream IV-SPs from 1993 to 1996 and 213 Gulfstream IVs from 1985 to 1992. The Company intends to continue to manufacture the Gulfstream IV-SP along with the Gulfstream V. 3 The Gulfstream IV-SP can accommodate up to 19 passengers, has a range of up to 4,220 nautical miles and a cruising speed of up to approximately Mach .85. These capabilities permit routine intercontinental travel at cruising speeds comparable to commercial airline cruising speeds, while operating efficiently at altitudes as high as 45,000 feet, flying above most commercial airline traffic and adverse weather. The Gulfstream IV/IV-SP is the holder of 79 distance, altitude and speed records for aircraft of its class including east-bound and west-bound around-the-world speed records (36 hours and 8 minutes (east-bound) and 45 hours and 25 minutes (west-bound)). The Company developed the SP (Special Performance) version of the Gulfstream IV with enhanced avionics, increased interior cabin width and height, and increased allowable landing weight, providing improved mission flexibility and allowing the Gulfstream IV-SP to fly multiple-leg trips without refueling. The Gulfstream IV-SP is equipped with two Rolls-Royce Tay fan jet engines which have commercial airline-proven reliability and performance. The Tay engines can operate 7,000 flight hours between major overhauls, producing aircraft operating costs for the Gulfstream IV-SP that the Company believes are comparable to those of its competitors. Additionally, the Gulfstream IV-SP, together with the Gulfstream IV and the Gulfstream V, are the only business jet aircraft combining an electronic "all glass cockpit" and an advanced avionics suite consisting of a fully integrated computerized flight management system, including a performance computer and automatic throttle systems. The list price for a completed Gulfstream IV-SP is currently approximately $28,200,000 (depending upon selected options). The Company provides a purchaser of a Gulfstream IV-SP with a 15 year or 15,000 flight hour warranty (whichever comes first) on the airframe structure and a 30 month warranty on most other parts (other than the engines). Rolls-Royce provides a direct 5 year or 2,500 flight hour warranty (whichever comes first) on the engines to purchasers of a new Gulfstream IV-SP. Since the first delivery of a Gulfstream IV in 1985, warranty claims on the Gulfstream IV and Gulfstream IV-SP have aggregated less than 1% of aggregate net revenues from the sales of Gulfstream IVs and Gulfstream IV-SPs. GULFSTREAM IV-MPA The Company has designed and manufactured the Gulfstream IV-MPA, a multi-purpose derivative of the Gulfstream IV (designated C20-G) procured by and in service for the United States Navy. The Gulfstream IV-MPA may be equipped with a six-foot wide cargo door and/or high density seating (up to 26 passengers). These aircraft have the capability to convert from a cargo configuration to a 26 passenger configuration in less than four hours. Depending upon the specific configuration, the Gulfstream IV-MPA's list price ranges from $28,000,000 to $32,000,000. There are currently 7 Gulfstream IV-MPAs in service. The Company believes that the Gulfstream IV-MPA and other special mission modifications of the Gulfstream IV-SP aircraft will be important products for meeting the needs of government operators, military organizations, civil authorities and intelligence gathering agencies. GULFSTREAM SHARES(Trademark) The Company offers customers fractional ownership in Gulfstream IV-SP aircraft through a program established by the Company in 1995 in conjunction with EJI's NetJets-Registered Trademark- program. This program is designed to provide customers with the benefits of Gulfstream IV-SP aircraft ownership at a substantially lower cost than the purchase of an entire aircraft. The program significantly expands the market for Gulfstream IV-SP aircraft to include those customers whose aircraft usage patterns or financial resources do not justify or permit the direct purchase of a Gulfstream aircraft. The Gulfstream Shares(Trademark) program, by teaming Gulfstream and EJI, has brought the Gulfstream name, quality, reputation and marketing infrastructure together with the operational experience and reputation of the founder and leader in the business jet aircraft fractional ownership market. 4 The Gulfstream Shares(Trademark) program is marketed by the Company. EJI purchases Gulfstream IV-SPs from the Company and then sells fractional ownership interests in such aircraft generally in one-eighth or one-quarter increments for which the customer receives 100 or 200 hours of flying time per year, respectively, with a guaranteed response time for pick-up of 10 hours or 6 hours, respectively. Under the terms of the agreements between the Company and EJI, the program consists of EJI's purchase or option to purchase over 20 Gulfstream IV-SPs and 2 Gulfstream Vs. As of December 31, 1996, the Company had contracted to deliver to EJI 16 Gulfstream IV-SPs and 2 Gulfstream Vs in connection with the Gulfstream Shares(Trademark) program, 9 of which had been delivered and 9 of which will be delivered through 1999. In addition, EJI had a remaining option to purchase 5 additional Gulfstream IV-SPs in 1998. The customers enter into management and operating contracts with EJI which provide guaranteed services and operating costs. EJI's agreement with its customers provides for a term of 5 years with certain termination and renewal rights. There is no recourse to the Company under the provisions of these agreements or under the Company's contractual agreement with EJI. The Gulfstream IV-SP aircraft are maintained by the Company under a maintenance agreement with EJI. Further, under a lease arrangement, the Company provides EJI up to 4 pre-owned Gulfstream IV aircraft (which are included in the Company's pre-owned aircraft inventory) which make up EJI's core fleet and are used to facilitate EJI's meeting its response time and service guarantees. The Company has a proprietary agreement with EJI relating to the marketing activities and provision of the core fleet, pursuant to which the Company is reimbursed for certain marketing expenses and earns royalty fees on certain EJI revenues. The Company's marketing services agreement for Gulfstream Shares(Trademark) has a term of three years which can be extended by mutual agreement of the parties. In addition to providing the Company with an incremental source of revenues, the Company believes the Gulfstream Shares(Trademark) program represents an important marketing tool. Fractional ownership provides the Company with a lower priced product that allows it to broaden its potential market and to create an entry level product for new Gulfstream customers. Fractional ownership also allows the Company to offer an interim solution for customers who have an immediate need for aircraft transportation and desire to purchase a whole aircraft, but must wait for delivery due to the order backlog. The Company is currently pursuing opportunities for international Gulfstream Shares(Trademark) programs. Such programs could expand the Company's presence in international markets and assist the Company in selling new as well as pre-owned Gulfstream IV and Gulfstream IV-SP aircraft acquired by the Company from trade-ins on Gulfstream V deliveries. AIRCRAFT COMPLETION When the Company sells a new Gulfstream V or Gulfstream IV-SP, it generally contracts with its customer to deliver a green aircraft and a completed interior. The Company's completion services include painting and installing customer selected interiors and optional avionics. The Company believes that its completion services improve customer satisfaction while enhancing the Company's profitability. The Company has proprietary control over the specifications required to complete a Gulfstream V. Although other companies offer completion services for the Gulfstream IV-SP, the Company believes it has an advantage over other suppliers due to Gulfstream's understanding of its own aircraft and the interface requirements necessary for installation of custom-designed interiors and optional avionics systems. The Company believes that it also provides superior craftsmanship in designing and building customized interiors. Gulfstream has increased its completion order rate on new aircraft as a percentage of green aircraft orders from 70% in 1990 to almost 100% in 1996. In an effort to simplify the selling process and to capture completion business, the Company currently markets its aircraft to customers on a completed basis. As part of this effort, the Company has developed an aircraft completion program that offers customers a customized interior using core standardized design elements. The use of these standardized elements allows the Company to more accurately predict and reduce costs, cut cycle times and increase consistency of production. This, together with its integrated marketing strategy, has allowed the Company to perform substantially all of the completion services for its green aircraft since 1993. 5 The Company's completion centers, located in Savannah, Georgia; Brunswick, Georgia; and Long Beach, California, offer full completion and refurbishing services. The Company's completion centers can accommodate an aggregate of up to 20 aircraft at one time. PREMIUM PRE-OWNED GULFSTREAM AIRCRAFT AND OTHER PRE-OWNED AIRCRAFT Pre-owned aircraft are routinely accepted in trade to facilitate the sale of new Gulfstream IV-SPs and Gulfstream Vs. The Company uses pre-owned Gulfstream aircraft as a significant tool in expanding the Company's potential market and competing with lower priced, new aircraft products. The Company has assembled a new, experienced management team and has introduced a number of initiatives which have enhanced the marketability of its pre-owned aircraft. The Company refurbishes pre-owned Gulfstream aircraft and markets these aircraft as a branded product of the Company. Pursuant to this program, the Company backs pre-owned Gulfstream aircraft with a 5 year warranty on the airframe structure and a 12 month warranty on virtually all other parts, including the engines under a separate warranty from Rolls-Royce Commercial Aero Engines Limited. Trade-in values for pre-owned aircraft are based on estimated fair market value ("FMV") at the time the trade-in will actually occur. If the trade-in time is greater than twelve months into the future, the Company's current practice is to reserve the right to determine FMV not more than six months prior to delivery of the green aircraft. Trade-in aircraft are always entered into inventory at the lower of cost or estimated realizable value. Any excess value offered to a customer above estimated realizable value is recognized as a reduction in the revenue received in the new aircraft sale transaction. Through its trade-in agreements, the Company reserves the right to pre-market the trade-in aircraft prior to acceptance of title from the customer. Over the past several years, the Company has generally been successful in entering sales agreements on trade-in aircraft prior to acceptance of title. If market conditions change, however, no assurances can be made that the Company can continue this practice. The Company has provided a portion of its Gulfstream V customers whose contracts are currently in backlog with an option to trade in a Gulfstream aircraft at the time of their Gulfstream V aircraft delivery. These options may be at a specified dollar amount or at FMV "to be determined six months prior to green delivery" of the Gulfstream V. The Company continues to assess those options which are at a fixed dollar amount in light of market conditions and has determined such fixed dollar options are no higher than the FMV estimated for the time of Gulfstream V aircraft delivery. Although no assurance can be given that the fixed dollar trade-in aircraft values will remain at or below FMV at the time of trade, any adjustments required for values in excess of FMV will be appropriately reflected in the new aircraft sales transaction and the pre-owned inventory will be stated on the Company's books at the lower of cost or estimated realizable value. The Company, in 1996, obtained certification of Gulfstream IIIs, Gulfstream IVs and Gulfstream IV-SPs for use in the Commonwealth of Independent States (the former Soviet Union) as a part of the Company's efforts to develop select international markets through the introduction of lower priced, pre-owned Gulfstreams. AIRCRAFT SERVICES, PARTS AND TECHNICAL SUPPORT The Company is committed to supporting, servicing and expanding the Gulfstream aircraft fleet as part of its customer-oriented strategy. The Company provides worldwide service and support by integrating a network of Company-owned service centers, three levels of authorized third party service providers, worldwide parts depots, worldwide service representatives and 24 hour-a-day technical/AOG (aircraft on the ground) support. The Company believes that the service business offers potential for future expansion and growth as the Gulfstream fleet grows and that the high level of service the Company provides results in significant repeat business. SERVICE CENTERS. The Company operates service centers in Savannah and Brunswick, Georgia and Long Beach, California for aircraft maintenance functions, including modifications and major repairs. In 1996, the Company opened a new 200,000 square foot, state-of-the-art, service facility in Savannah, Georgia, with capacity for 12 to 20 Gulfstream Vs and Gulfstream IVs. Training, level of service and business practices have been significantly improved and standardized across the Company's service centers since 1994. 6 Additionally, the Company has license agreements with Marshalls of Cambridge (Cambridge, England), Chrysler's Pentastar Aviation subsidiary (Ypsilanti, Michigan) and Jet Aviation (Singapore) to provide service, maintenance and repairs for Gulfstream aircraft. The licensees provide additional geographic service locations for the expanding Gulfstream fleet. Royalty fees are paid to the Company by the licensees based on labor hours expended. In addition, Associated Airlines (Melbourne, Australia) and Jet Aviation Business Jets (Geneva and Basel, Switzerland) serve as authorized warranty centers. PARTS. Parts are provided to aircraft owners through a network of five Company parts depots. Proprietary initiatives (including cancellation of discounts to third party outlets, a gradual adjustment of parts pricing for high use items, and a gradual elimination of international price premiums) have been undertaken in the last 24 months to develop, improve and sustain the Company's competitive advantage in the fragmented parts market and to improve customer service levels. TECHNICAL INFORMATION. The Company markets aircraft support publications and technical documents to its customers and to third party service facilities. Additionally, a proprietary computerized maintenance program (CMP) is offered as a subscription service to customers for the management and tracking of the maintenance status of their aircraft. Approximately 90% of the Company's customers utilize this service. Recently, the Company instituted a policy requiring third party maintenance facilities to purchase factory technical support for scheduled maintenance performed on customer aircraft. This is expected to offset the cost of providing this technical support and further strengthen the competitive position of the Company's own service centers. The Company is in the process of establishing its ServiceCare-SM- program, the first comprehensive airframe, engine and avionics maintenance program to be offered in the business aircraft market, which will provide customers of new Gulfstream IV-SPs with scheduled and unscheduled maintenance at guaranteed costs. Coverage will be provided on a world-wide basis, with all work to be accomplished at Gulfstream or Gulfstream authorized service centers. The program is expected to be implemented during the second quarter of 1997. AIRCRAFT MAINTENANCE SERVICES. The Company has assembled a new, experienced management team for its maintenance services operations. Under this new team, the Company has developed a proactive marketing and sales effort and made investments in training and facilities, which have supported the increase in market share to approximately 55% in 1996. In 1995, the Company's estimated market share (based on service center visits) of the maintenance services market for the Gulfstream fleet was approximately 40%. TRAINING AND FACILITIES. The Company provides pilot and maintenance training services to its customers as an integral component of the sale of new Gulfstream IV-SP, Gulfstream V and pre-owned Gulfstream aircraft. The Company has long-term agreements with FlightSafety International ("FSI") for the provision of this high quality training service. FSI maintains and operates training facilities co-located with the Company's Savannah and Long Beach operations and has begun construction of a new 64,000 square foot training facility adjacent to the Gulfstream Service Center in Savannah. This training center, scheduled to open in the third quarter 1997, will be fully funded by FSI and will house classrooms and simulators supporting the entire Gulfstream product line (Gulfstream I through Gulfstream V). Gulfstream, in conjunction with FSI, facilitates the operation of a Customer Training Advisory Board which provides direct customer and original equipment manufacturer input to FSI's training curriculums and course content. Additionally, pilot and maintenance training services are provided to Gulfstream customers by SimuFlight Training International ("SimuFlight") located at Dallas-Fort Worth International Airport, Texas. SimuFlight provides training services for Gulfstream II, Gulfstream III and Gulfstream IV aircraft. Gulfstream, in conjunction with SimuFlight, facilitates the operation of an additional Customer Training Advisory Board which provides direct customer and original equipment manufacturer input to SimuFlight training curriculums and course content. 7 AIRCRAFT FINANCING ARRANGEMENTS The Company, through its subsidiary Gulfstream Financial Services Corporation ("GFSC"), provides customers with access to customized financial products to support the worldwide sale of Gulfstream new and pre-owned aircraft. GFSC representatives typically consult with potential customers to develop the most effective means of financing the purchase of a Gulfstream jet for each such customer's specialized needs. The financial products (including capital and operating leases, loans, tax advantaged leases, like-kind exchange options, and Export-Import Bank support) are provided on a competitive basis through a proprietary, private label relationship with a prominent provider of aircraft financing (the "Financing Provider"), that has full credit review and approval rights and assumes all credit risk with no recourse to the Company. Additionally, the Company and the Financing Provider have entered into a re-marketing arrangement which enables the Company to manage the resale of any Gulfstream aircraft whose lease financing period has ended. This private label agreement has a term of five years with a minimum lending commitment of $250 million annually, and can be extended by mutual agreement of the parties. In 1996, $270 million of aircraft were financed through this program. The Company believes that the access provided by GFSC to financing sources for customers throughout the world serves to expedite and increase sales of new and pre-owned aircraft and also enables the Company to effectively manage the residual values of the Gulfstream fleet. BACKLOG AND NEW ORDERS At December 31, 1996, the Company had a firm contract backlog of approximately $3.1 billion, representing a total of 67 contracts for Gulfstream Vs and 27 contracts for Gulfstream IV-SPs compared with $1.9 billion at the end of 1995, representing a total of 50 contracts for Gulfstream Vs and 7 contracts for Gulfstream IV-SPs. The Company includes an order in backlog only if the Company has entered into a purchase contract (with no contingencies) with the customer and has received a significant (generally non-refundable) deposit from the customer. Typically, the Company begins taking orders and building backlog two to three years prior to beginning production of a new aircraft model such as the Gulfstream V, and receives a significant number of orders prior to delivering its initial aircraft in a program. In total, approximately 55% of the Company's contractual backlog is scheduled for delivery beyond 1997. Generally, at the signing of a Gulfstream IV-SP or Gulfstream V contract, a customer makes a non-refundable deposit with the Company. Subsequently, the customer makes a series of significant progress payments, with the balance of the purchase price due at delivery of the green aircraft. The Company monitors the condition of its backlog and believes, based on the nature of its customers and its historical experience, that there will not be a significant number of cancellations. However, to the extent that there is a lengthy period of time between a customer's aircraft order and its expected delivery date, there may be increased uncertainty as to changes in business and economic conditions which may affect customer cancellations. New orders for the Gulfstream V and the Gulfstream IV-SP totaled 21 and 44, respectively in 1996, 12 and 30, respectively, in 1995, and 16 and 25, respectively in 1994. Orders tend to vary from year to year reflecting a number of factors, including competitive circumstances, worldwide economic and geopolitical conditions and the timing of customer decisions in placing new orders due to budget planning and specific transportation needs. CUSTOMERS AND MARKETING The majority of the Company's aircraft are sold to national and multinational corporations and governments. Gulfstream's aircraft are operated by customers in a wide spectrum of industries and customer groups, including: pharmaceuticals, consumer goods, high technology, energy, industrial manufacturing, finance, insurance, real estate, mining, transportation, communications, public utilities, retail trade, the United States government, other sovereign entities, and individuals. Seventy-eight percent of the Gulfstream fleet is based in North America and 22% of the fleet is based in 45 countries worldwide. Current owners of Gulfstream aircraft include 25 of the Fortune 50 companies and 115 of the Fortune 500 companies. In addition, the United States government, including all branches of the United States military, and 39 foreign governments operate Gulfstream aircraft. Gulfstream aircraft provide air transportation for the President, Vice President and other senior members of the 8 United States government. Over 48 Gulfstream aircraft are currently in operation with various United States government agencies, including the FAA. The diverse Gulfstream customer base combined with wide geographic distribution requires an integrated marketing, communications and sales approach. The Company's marketing and communications program is designed to create general awareness of the Company, its products and services, while the sales approach is highly personalized and focused on the key decision makers, as well as flight departments and other managers within the customer's organization. In 1994, Gulfstream established an International Advisory Board of 16 prominent international business executives and senior statesmen to advise the Company on international activities in support of the Company's strategic initiatives to further penetrate the international markets. In early 1995, to strengthen its overall position in the market and effectively focus the resources of the Company on its customers, the Company created Gulfstream Aircraft Incorporated ("GAI") as a wholly owned subsidiary of the Company. GAI is responsible for all functions directly related to customers including: marketing, sales, completions, service and product support. The Company's marketing and communications program is a carefully integrated combination of business and trade advertising, direct mail, press coverage, trade shows and special events. These activities are specifically developed to create personal selling opportunities for the sales team and senior management with assistance from the Board of Directors and International Advisory Board. The Company has 22 sales executives located in: New York; New Jersey; Washington, D.C.; Atlanta, Georgia; Dallas, Texas; Los Angeles, California; Chicago, Illinois; Columbus, Ohio; Miami, Florida; Savannah, Georgia; London; Cairo; Singapore; Monaco; and Hong Kong. In the case of international operations, these executives are responsible for the Company's relationships with 31 international agents who facilitate business transactions in selected local markets. The Company's sales executives are compensated through a commission program which compliments the Company's overall strategic objectives of maintaining the current customer base and expanding market share. The program is based on annual orders and provides an additional incentive for capturing orders from new customers, as well as a reduction in potential compensation for orders lost to competitors. The Company pursues government and special mission business opportunities worldwide with a two person sales team located in Washington, D.C. These sales executives are specifically suited by their background and experience to deal with military and government customers. The Company's government relations function also involves two people with experience in regulatory, legislative and appropriations processes essential to the conduct of the Company's business with the United States government. The Company's export sales by geographical area and sales to major customers, are included on page 36 of Gulfstream's 1996 Annual Report, which information is incorporated herein by reference. COMPETITION The business aircraft market generally is divided into four segments (light, medium, large and ultra-long range) of aircraft either designed or converted for business use. The Gulfstream IV-SP competes in the large cabin business jet aircraft market segment, principally with Dassault Aviation S.A. (which recently announced that it will merge with Aerospatiale SA) and Bombardier. The Gulfstream V competes in the ultra-long range business jet aircraft market segment, primarily with the Global Express, which is being marketed by Canadair, a subsidiary of Bombardier, and which is scheduled for certification in the second quarter 1998. In addition, in July 1996, Boeing, in partnership with General Electric Co., publicly announced that it intends to begin to market a version of the Boeing 737 into the ultra-long range business jet aircraft market segment. Boeing has indicated that it expects that this aircraft could be available for delivery in late 1998 or 1999. The Company's competitors may have access to greater resources (including, in certain cases, governmental subsidies) than are available to the Company. The Company believes, however, that it competes favorably with its competitors on the basis of the performance characteristics of its aircraft, the quality, 9 range and timeliness of the service it provides and its innovative marketing techniques, and that it has the leading market share in both the large cabin and ultra-long range business jet aircraft market segments. The Company believes its aircraft's operating costs are comparable to or lower than those of its competitors and that its products are competitively priced. RESEARCH AND DEVELOPMENT The Company conducts an internally funded research and development program primarily for the enhancement of the existing Gulfstream aircraft fleet and for the development of new aircraft. The Company's research and development expenditures are cyclical and tend to be relatively high several years prior to the introduction of a new aircraft model and to decrease significantly as that product cycle matures. All amounts expended on research and development are expensed as incurred. The Company's research and development program is based on product and process improvement to satisfy changing customer needs and changing regulatory requirements. The Company's research and development efforts have focused on improving operating efficiencies, performance, safety and reliability, reducing pilot workloads, realizing environmental benefits, reducing weight and improving ease of manufacture. The Company believes that its emphasis on technology and product improvements for aircraft in the Gulfstream fleet has provided and will continue to provide added value for the Gulfstream customer. For aircraft already produced and in service, aircraft changes, which incorporate product improvements, are generally made available for purchase by existing owners of Gulfstream aircraft. Information regarding the Company's research and development expenditures is contained on pages 21 and 22 of Gulfstream's 1996 Annual Report, which information is incorporated herein by reference. MATERIALS AND COMPONENTS Approximately 70% of the production costs of both the Gulfstream IV-SP and the Gulfstream V consist of purchased materials and equipment. Many materials and items of equipment used in the production of the Company's aircraft, such as the engines, wings, landing gear and avionics systems, are purchased from other manufacturers, generally pursuant to long-term purchase orders. For the Gulfstream V, the Company has entered into revenue sharing agreements for the wing and empennage. Under these agreements, the revenue share partner is responsible for the detailed design, tooling and manufacture of the systems in exchange for a fixed percentage of revenues of each Gulfstream V sold. As is typical among general aviation aircraft manufacturers, the Company relies on single source suppliers for complex aircraft components and systems. These single sources are selected based on overall aircraft systems requirements, quality and certification requirements and competitiveness in the market. The Company's major suppliers include Rolls-Royce Commercial Aero Engines Limited (Gulfstream IV-SP engines), BMW Rolls-Royce GmbH (Gulfstream V engines), Honeywell Incorporated (Gulfstream IV-SP and Gulfstream V flight management systems/avionics), The Aerostructures Corporation (Gulfstream IV-SP wing), Northrop Grumman Corporation (Gulfstream V wing revenue share partner and Gulfstream IV-SP nacelle supplier), Fokker Aviation B.V., a subsidiary of Stork B.V., (Gulfstream V empennage revenue share partner), The B.F. Goodrich Co. (Gulfstream IV-SP and Gulfstream V landing gears and air speed sensors), Sundstrand Corp. (Gulfstream V electrical system and actuators) and AlliedSignal, Inc. (Gulfstream IV-SP and Gulfstream V auxiliary power unit and environmental control systems and Gulfstream IV-SP electrical systems). Suppliers are selected on the basis of their ability to produce high quality systems and components at competitive prices on a timely basis. The Company has had continuing relationships with most of its major suppliers since the inception of the Gulfstream II program in 1966. Ongoing supplier relationships are dependent on cooperation, performance and the maintenance of competitive pricing. From time to time suppliers have been replaced as the quality of such suppliers' products declined or the costs associated therewith failed to remain competitive. While the Company's production activities have not been materially affected by the inability to obtain essential components, and while it maintains business interruption insurance in the event that such a disruption should occur, the failure of certain suppliers or subcontractors to meet the Company's performance specifications, quality standards or delivery schedules could adversely impact the Company's operations. In addition, the Company's ability to significantly increase its production rate could be limited by the ability of its key suppliers to 10 increase their delivery rates; however, in the past, the Company's ability to maintain or increase production has not been significantly limited by suppliers' performance. In addition, under many of its supply contracts, the Company is permitted to increase or decrease the quantity of components or systems being ordered at no cost on six months notice. The Company has negotiated multi-year agreements with its major Gulfstream IV-SP and Gulfstream V suppliers. All of the agreements with the exception of the revenue share agreements, allow schedule flexibility and have no cost termination clauses at the Company's option, subject to certain conditions and prior notification periods. In general, the terms of these agreements provide for what is anticipated to be slightly deflationary pricing through 1999. The terms of the revenue share agreements with Northrop Grumman Corporation for the wing and Fokker Aviation B.V. for the empennage continue so long as the Company is manufacturing the Gulfstream V and prices are determined as a function of the sale price of the Gulfstream aircraft. PAST AIRCRAFT PRODUCT OFFERINGS GULFSTREAM IV The Gulfstream IV, launched in 1983, has a range of 4,220 nautical miles and was the first truly intercontinental business jet aircraft. The Gulfstream IV was designed and built to incorporate the most current technologies in aerodynamics, propulsion, digital electronics and automated flight management systems and represented a significant technological advancement over the Gulfstream III and every other business jet aircraft available at the time. Like the Gulfstream IV-SP, the Gulfstream IV is equipped with twin Rolls-Royce Tay engines and an advanced avionics suite. The Gulfstream IV meets current FAA Stage 3 and ICAO Chapter 3 noise limits. The Company produced 213 Gulfstream IVs from 1985 through 1992, 99% of which remain in service today. GULFSTREAM III In December 1979, the Company introduced the Gulfstream III, a twin-engine fan-jet aircraft powered by two Rolls-Royce Spey engines with a cabin accommodating up to 19 passengers, a range of 3,600 nautical miles and a cruising speed of Mach .80. The Gulfstream III incorporated an advanced design utilizing NASA developed winglet technology to provide greater range and fuel efficiency than the Gulfstream II. When production ended in January 1987, 202 Gulfstream IIIs had been built, 99% of which remain in service today. GULFSTREAM II AND IIB In 1966, the Company introduced the Gulfstream II, which was the first business jet aircraft capable of carrying business passengers non-stop, coast-to-coast. The Gulfstream II is a twin-engine fan-jet aircraft powered by two Rolls-Royce Spey engines with a range of 2,400 nautical miles and a cruising speed of Mach .80. Beginning in 1981, the Company modified 43 Gulfstream IIs to Gulfstream IIBs by retrofitting customers' Gulfstream II aircraft with the Gulfstream III's advanced design wing which enhanced the range capability of the aircraft to 3,400 nautical miles at Mach .80. When production of the Gulfstream II ended in December 1979, 256 units had been produced, 95% of which remain in service. Several specially modified Gulfstream IIs are still used regularly to train NASA's space shuttle astronauts. GULFSTREAM I The Company's product line originated in 1958 with the introduction of the Gulfstream I, a large twin-engine turboprop powered aircraft built by Grumman which was the first aircraft of its size and type designed specifically for business use. The Gulfstream I is powered by Rolls-Royce Dart engines and has a range of more than 1,700 miles. When production of the Gulfstream I ended in 1966, 200 Gulfstream Is had been built, 72% of which remain in service today. REGULATION In order for an aircraft model to be manufactured for sale, the FAA must issue a Type Certificate and a Production Certificate for the aircraft model and, in order for an individual aircraft to be operated, an Airworthiness Certificate. Type Certificates are issued by the FAA when an aircraft model is determined to meet certain performance, environmental, safety and other technical criteria. The Production Certificate ensures that the aircraft is built to specifications approved under the Type Certificate. An Airworthiness Certificate is issued for a 11 particular aircraft when it is certified to have been built in accordance with specifications approved under the Type Certificate for that particular model aircraft. Gulfstream has never had a Type Certificate or a Production Certificate suspended, nor had any jet aircraft grounded as the result of regulatory action. All of the Company's aircraft models comply with all currently applicable federal laws and regulations pertaining to aircraft noise and engine emissions. Due to their weight (under 75,000 pounds), all Gulfstream II, III, IV and IV-SP aircraft are currently exempt from the FAA Stage 3 noise requirements. Notwithstanding federal requirements, foreign and local jurisdictions and airport authorities may establish more stringent restrictions pertaining to aircraft noise. Such local and foreign regulations in several locations currently restrict the operation of certain jet aircraft, including the Gulfstream II, IIB and III and certain of their competitors from landing or taking off during late evening and early morning hours. Each of the Gulfstream IV, IV-SP and V aircraft produce noise levels below the FAA's Stage 3 and ICAO's Chapter 3 noise ceilings. EMPLOYEES At March 1, 1997, the Company employed approximately 5,200 persons, of whom approximately 3,750 were employed at the Company's Savannah, Georgia facility, 80 were employed at the Brunswick, Georgia facility, 630 were employed at the Bethany, Oklahoma facility, 420 were employed at the Long Beach, California facility and 320 were employed at the Mexicali, Mexico facility. None of the workers at the Savannah, Brunswick, Long Beach, or Mexicali facilities are unionized. On August 12, 1996, the Company entered into a new 5-year contract with the International Union of United Automobile, Aerospace & Agricultural Implement Workers of America, which represents certain of the Company's employees at its Bethany, Oklahoma plant. The Company considers its overall employee relations to be good. ENVIRONMENTAL The Company's operations, in common with those of the industry generally, are subject to various laws and regulations governing, among other things, the handling and disposal of solid and hazardous materials, wastewater discharges and the remediation of contamination associated with the use and disposal of hazardous substances. Because of the nature of its business, the Company has incurred, and will continue to incur, costs relating to compliance with such environmental laws. Although the Company believes that it is in substantial compliance with such environmental requirements, and has not in the past been required to incur material costs in connection therewith, there can be no assurance that the Company's costs to comply with such requirements will not increase in the future. Although the Company is unable to predict what legislation or regulations may be adopted in the future with respect to environmental protection and waste disposal, compliance with existing legislation and regulations has not had, and is not expected to have, a material adverse effect on its capital expenditures, results of operations, or competitive position. The Company's expenses for remedial environmental matters and capital outlays for environmental compliance was less than $1.0 million in 1996. The Company received in 1992, at its Long Beach facility, two inquiries from the U. S. Environmental Protection Agency (the "EPA") regarding (i) documentation errors subject to the Resource Conservation and Recovery Act, and (ii) possible shipments of hazardous wastes to two storage facilities whose operators are under EPA investigation pursuant to the Comprehensive Environmental Response, Compensation and Liability Act. The Company estimates that potential fines regarding these inquires, and a 1991 soil contamination inquiry at the Oklahoma facility, will not have a material adverse effect on the Company's results of operations. The Company has been named as a Potentially Responsible Party with respect to two cleanup sites, one operated by the Mountaineer Refinery and the other operated by Omega Chemical Company. Based on the Company's limited involvement with such sites, the Company believes that it will not incur material costs in respect of such cleanup sites. The Company is currently engaged in the monitoring and cleanup of certain groundwater at its Savannah facility under the oversight of the Georgia Department of Natural Resources. The principal expenses for the cleanup have been incurred. The Company believes other aspects of the Savannah facility, as well as other 12 Gulfstream properties, are being carefully monitored and are in substantial compliance with current federal, state and local environmental regulations. The Savannah facility has been in existence for 30 years. Like the Savannah facility, certain of the Company's other facilities have been in operation for a number of years and, over such time, these facilities have used substances or generated and disposed of wastes which are or may be considered hazardous. As a result, it is possible that the Company could become subject to additional environmental liabilities in the future in connection with these sites. ITEM 2. PROPERTIES The Company's production and service facilities are located in Savannah and Brunswick, Georgia; Bethany, Oklahoma; Long Beach, California; and Mexicali, Mexico. The Savannah facility occupies approximately 1,450,000 square feet, including a new 200,000 square foot service center, and is the location of the Company's executive offices. Functions performed at the Savannah complex include Gulfstream IV-SP and Gulfstream V manufacturing, assembly and completion, product support, service, repair and overhaul of customer-owned Gulfstream aircraft and new product design, engineering and development. The Savannah completion center, occupying approximately 120,000 square feet, is adjacent to the aircraft production line and simultaneously accommodates completion of up to 10 Gulfstream IV-SP or 6 Gulfstream V aircraft. All of the land and buildings constituting the Savannah facility are owned by the Company. Any prolonged disruption in the use of the Savannah facility due to the destruction of or material damage to such facility, or other reasons, could have an adverse effect on the Company's operations. The Company maintains property and business interruption insurance to protect against any such disruption, but there can be no assurance that the proceeds of such insurance would be adequate to repair or rebuild its facilities in such event or to compensate the Company for losses incurred during the period of any such disruption. The Company leases approximately 51,500 square feet of hangar and adjacent office space in Brunswick, Georgia. The Brunswick facility is both a service center facility and completion facility and has the capacity for four aircraft. The lease term, which is renewable annually at Gulfstream's option, extends to May 1998. The Bethany facility occupies approximately 500,000 square feet, all of which are in buildings leased under leases expiring in 2007. At the Bethany facility, the Company manufactures over 17,000 different detail parts for the Gulfstream IV-SP and over 13,000 for the Gulfstream V. The 250,000 square foot Long Beach facility consists of a completion facility, which has capacity for 8 aircraft and a service center facility which has capacity for 10 aircraft. The Long Beach facility also has facilities for design and administrative functions. The Company owns the buildings and leases the land at the Long Beach facility; the lease expires in 2014. In 1996, the Company expanded its completion capacity at the Long Beach facility through the lease of an additional 22,000 square feet at an adjacent facility. In February 1997, the Company announced plans to expand further its Long Beach operations by constructing a 64,000 square foot, $8.5 million, state-of-the-art aircraft paint facility, expected to become operational in the fourth quarter 1997. This expansion is part of the Company's overall plan to double the 1996 annual production levels to approximately 60 Gulfstream V and Gulfstream IV-SP aircraft by 1999. See "--Liquidity and Capital Resources" included on page 22 of Gulfstream's 1996 Annual Report. The Company's Mexicali, Mexico plant occupies approximately 50,000 square feet of leased space under leases expiring in December 1998 and assembles electrical products, including wire harnesses, used in Gulfstream production, and performs repair and service operations, as well as other electrical subcontracting. During the last five fiscal years, the Company has invested approximately $76.5 million in capital improvements at its facilities. Such capital improvements are expected to enhance the Company's ability to build and service its aircraft. 13 ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit instituted on December 12, 1992 and pending in Oklahoma styled KMC Leasing, Inc. et al. v. Gulfstream Aerospace Corporation et al. (District Court, State of Oklahoma, Oklahoma County, Case No. CJ 92 10313). This action, which may be certified as a class action on behalf of twin-engine Commander aircraft owners, arises from claims relating to potential damage from corrosion and fatigue fractures on wing spars and requirements to inspect and possibly replace wing spars in those aircraft. While there are currently more than 2,500 twin engine Commander aircraft owners, the Company does not believe all of these owners would qualify as members of any such class. This product line was discontinued in 1985 and sold during 1989. This lawsuit is not an insured claim. Other than an allegation that the plaintiffs' damages exceed jurisdictional requirements, the plaintiffs have not specified a dollar value of the extent of their damages. The Company believes it has meritorious defenses to all these claims based upon the facts that underlie them. The Company does not expect the results in this action to have a material adverse effect on its financial condition or results of operations. Although there are other lawsuits pending involving the Company's discontinued light aircraft product lines, those claims are (i) covered by the General Aviation Revitalization Act of 1994, which is a federal statute of repose, (ii) the responsibility of the purchasers of those light aircraft product lines, or (iii) covered by the Company's product liability insurance. There are no accident or incident claims pending with respect to any Gulfstream jet aircraft. The Company maintains product liability insurance coverage of $250 million per occurrence and in the aggregate per year, subject to $10 million of self-insurance retention. Management believes this coverage is adequate. The Company has paid less than $100,000, other than claim expenses and insurance premiums, with respect to product liability occurrences taking place since January 1, 1991. The Company is involved in a tax audit by the Internal Revenue Service covering the years ended December 31, 1990 and 1991. The revenue agent's report includes several proposed adjustments involving the deductibility of certain compensation expense and items relating to the initial capitalization of the Company as well as the allocation of the purchase price in connection with the acquisition by the Company of the Gulfstream business, including the treatment of advance payments with respect to and the cost of aircraft that were in backlog at the time of the acquisition and the amortization of amounts allocated to intangible assets. The Company believes that the ultimate resolution of these issues will not have a material adverse effect on its financial statements because the financial statements already reflect what the Company currently believes is the expected loss of benefit arising from the resolution of these issues. However, because the revenue agent's report is proposing adjustments in amounts materially in excess of what the Company has reflected in its financial statements and because it may take several years to resolve the disputed matters, the ultimate extent of the Company's expected loss of benefit and liability with respect to these matters cannot be predicted with certainty and no assurance can be given that the Company's financial position or results of operations will not be adversely affected. The Company is also involved in other litigation, including product and general liability matters, and governmental proceedings arising in the ordinary course of its business, the ultimate disposition of which in the opinion of the Company's management, will not have a material adverse effect on the financial position or results of operations of the Company. See also--Item 1. Business "Environmental". FORWARD-LOOKING INFORMATION IS SUBJECT TO RISKS AND UNCERTAINTY Certain statements contained in this Form 10-K contain "forward-looking" information that involves risk and uncertainty, including, but not limited to, statements regarding expected future deliveries and expenditures. Actual future results and trends may differ materially depending on a variety of factors. For discussion of these factors, see Exhibit 99, Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, included as part of the Company's Form 10-Q filed for the quarterly period ended September 30, 1996. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the last quarter of the year ended December 31, 1996. ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the executive officers of each of the Company, its GAI subsidiary, and GFSC subsidiary as of the date hereof. The Company does not have a Chief Executive Officer, but operates principally through a five-member management committee (the "Management Committee") chaired by Theodore J. Forstmann and comprised of four other key executives who share responsibility for strategic decisions, management and oversight of the Company's operations. Each Management Committee member is also individually responsible for leadership of specific organizations within the Company, such as engineering and manufacturing, finance and information technology, sales and marketing and service. Officers serve at the discretion of the Board of Directors.
NAME AGE POSITION (S) WITH THE COMPANY - ----------------------------------------------------- --- ----------------------------------------------------- Theodore J. Forstmann................................ 57 Chairman of the Board and Director of the Company; Chairman of the Management Committee Fred A. Breidenbach.................................. 50 President, Chief Operating Officer, and Director of the Company; Management Committee member Bryan T. Moss........................................ 57 Vice Chairman of the Board and Director of the Company; Vice Chairman and Chief Executive Officer of GAI; Management Committee member W.W. Boisture, Jr.................................... 52 Executive Vice President and Director of the Company; President and Chief Operating Officer of GAI; Management Committee member Chris A. Davis....................................... 46 Executive Vice President, Chief Financial Officer, Director and Secretary of the Company; Executive Vice President and Chief Financial Officer of GAI; President and Chief Operating Officer of GFSC; Management Committee member
Theodore J. Forstmann has served as Chairman of the Board of the Company since November 1993. Mr. Forstmann has been a general partner of FLC Partnership, L.P. since he co-founded Forstmann Little in 1978. He is also a director of General Instrument Corporation ("General Instrument"). Fred A. Breidenbach has served as President, Chief Operating Officer and a director of the Company since April 1993. Prior to joining the Company, he was Vice President and General Manager of General Electric Co.'s Electronics Systems Division from 1991 to 1993. He is the Chairman of the General Aviation Manufacturing Association , and also a director of the Aerospace Industries Association of America, Inc. Bryan T. Moss has served as Vice Chairman of the Company and Chief Executive Officer of GAI since March 1995. Prior to joining the Company, he was President of Bombardier Business Aircraft Division where he was responsible for the Challenger and Global Express business jet programs from 1989 to March 1995. W.W. Boisture, Jr. has served as Executive Vice President since February 1994 and as a director of the Company since February 1995. He is also President and Chief Operating Officer of GAI. Prior to joining the Company, he was President and Chief Executive Officer of British Aerospace Corporate Jets from October 1992 through 1993 where he was responsible for the "Hawker" business jet product line and its worldwide marketing, sales and support organization. From early 1990 to 1992, Mr. Boisture was Chairman, President and Chief Executive Officer of Butler Aviation, a nationwide aviation services company. 15 Chris A. Davis has served as Executive Vice President and Chief Financial Officer of the Company since July 1993, Secretary of the Company since August 1996 and as a director of the Company since March 1997. She is also President and Chief Operating Officer of GFSC. Prior to joining the Company, she was Chief Financial Officer for General Electric Co.'s Electronic Systems Division from 1990 to 1993. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK Gulfstream Aerospace Corporation's common stock is traded principally on the New York Stock Exchange under the symbol GAC. The following table reflects the range of high and low selling prices of Gulfstream Aerospace Corporation's common stock since October 10, 1996, the first day the stock began trading. This information is based on selling prices as reported by the New York Stock Exchange. HIGH LOW ----- --------- Fourth Quarter--1996..................... $ 26 $ 20 3/4 HOLDERS At March 26, 1997, there were approximately 114 holders of record of its common stock and 74,035,328 shares outstanding. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. The Company presently intends to retain all cash for use in the operation and expansion of the Company's business and does not anticipate paying any cash dividends in the near future. In addition, the Company's existing bank credit agreement restricts the declaration or payment of cash dividends on its common stock. 17 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial data for each of the five years in the period ended December 31, 1996. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto, incorporated herein by reference.
Year Ended December 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------ ------------ ---------- ----------- ------- (In Thousands, except per share data) Statement of Operations Data: Net revenues.................................... $ 1,063,713 $ 1,041,514 $ 901,638 $ 887,113 $ 900,419 ------------ ------------ ---------- ----------- ---------- Costs and expenses: Cost of sales............................... 839,254 835,547 710,554 737,361 724,554 Selling and administrative expenses......... 99,452 93,239 82,180 97,011 98,187 Stock option and compensation expense....... 7,186 Research and development expense............ 58,118 63,098 57,438 47,990 36,295 Amortization of intangibles and deferred charges................................... 9,434 7,540 7,583 27,613 31,855 Restructuring charge (1).................... 203,911 ------------ ------------ ---------- ----------- ---------- Total costs and expenses........................ 1,013,444 999,424 857,755 1,113,886 890,891 ------------ ------------ ---------- ----------- ---------- ------------ ------------ ---------- ----------- ---------- Income (loss) from operations................... 50,269 42,090 43,883 (226,773) 9,528 Interest income............................. 14,605 5,508 367 486 2,135 Interest expense............................ (17,909) (18,704) (20,686) (48,940) (61,235) ------------ ------------ ---------- ----------- ---------- Net income (loss)........................... $ 46,965 $ 28,894 $ 23,564 $ (275,227) $ (49,572) ------------ ------------ ---------- ----------- ---------- ------------ ------------ ---------- ----------- ---------- Earnings Per Share: Net income per share (2).................... $ .60 $ .37 ------------ ------------ ------------ ------------ Weighted average common and common equivalent shares outstanding (2)........................ 78,535 78,535 ------------ ------------ ------------ ------------
- ------------------------ (1) The Company recorded a charge for a restructuring plan based upon the Company's reassessment of its business plan and its products from which it has realized improved operating efficiencies, reduced costs, and increased overall profitability. (2) Net income per share is based on historical unadjusted net income divided by pro forma weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of the Company's stock issuable upon exercise of common stock options determined using the treasury stock method. All common stock options granted by the Company prior to the Company's Offering and the shares issued in the Company's Offering have been included in the calculation of pro forma common and common equivalent shares outstanding as if they were outstanding for all periods presented. 18
Year Ended December 31, ---------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ---------- ---------- ---------- ---------- (In Thousands, except operating data) Balance Sheet Data (at end of period):................ Working capital................................... $ 138,091 $ 356,976 $ 301,913 $ 302,369 $ 268,881 Total assets...................................... 1,313,215 981,253 745,761 799,470 945,433 Total debt........................................ 400,000 (1) 146,331 178,145 206,145(2) 670,258 Total stockholders' equity (deficit).............. (188,811) (1) 217,540 188,950 164,395 (26,700) Operating Data: Depreciation and amortization..................... $ 26,910 $ 23,094 $ 24,151 $ 47,866 $ 52,374 Operating Data: Units delivered during period: Gulfstream IV/IV-SP........................... 24 26 22 26 25 Gulfstream V.................................. 3 0 0 0 0 ----------- ---------- ---------- ---------- ---------- Total deliveries.............................. 27 26 22 26 25 Units ordered during period: Gulfstream IV/IV-SP........................... 44 30 25 26 26 Gulfstream V.................................. 21 12 16 17 8 ----------- ---------- ---------- ---------- ---------- Total orders.................................. 65 42 41 43 34 Units in backlog at end of period: Gulfstream IV/IV-SP (3)....................... 27 7 3 3 3 Gulfstream V (4).............................. 67 50 40 24 8 ----------- ---------- ---------- ---------- ---------- Total backlog (5)............................. 94 57 43 27 11 Estimated backlog (in billions)(4).................... $ 3.1 $ 1.9 $ 1.5 $ 0.9 $ 0.4
- ------------------------ (1) Total stockholders' equity and total debt at December 31, 1996 gives effect to the Recapitalization and Offering which occurred during the fourth quarter 1996. See "--Liquidity and Capital Resources" on page 22 of the 1996 Annual Report. (2) During November 1993, the Company converted $469 million of subordinated debentures (including accrued interest) to 7% Cumulative Preferred Stock in connection with the 1993 recapitalization. (3) Net of 3 cancellations in each of 1994 and 1992, which generally relate to orders placed in prior years. (4) Net of cancellations of 1, 2 and 1 in 1996, 1995, and 1993, respectively, which generally relate to orders placed in prior years. (5) See "--Contractual Backlog" on page 24 of the 1996 Annual Report. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this Item is included in Management's Discussion and Analysis on pages 20 to 25 of Gulfstream's 1996 Annual Report, incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this Item is included in the consolidated financial statements of the Company for the years ended December 31, 1996, 1995, and 1994, the notes to the consolidated financial statements, and the report of independent auditors thereon on pages 26 to 37 of the 1996 Annual Report, and in the Company's unaudited quarterly financial data for the years ended December 31, 1996, 1995, and 1994 on page 25 of Gulfstream's 1996 Annual Report, incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None in 1996. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item concerning directors of the Company is included in the 1997 Proxy Statement in the section captioned "Election of Directors," and such information is incorporated herein by reference. Information required by this Item concerning the executive officers of the Company is included in Part I, pages 15 through 16 of this Annual Report on Form 10-K as permitted by General Instruction G(3) to Form 10-K. Information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is included in the 1997 Proxy Statement in the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance," and such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is included in the 1997 Proxy Statement in the section captioned "Further Information Concerning the Board of the Directors and Committees--Compensation Committee Interlocks and Insider Participation" and "--Director Compensation" and in the section captioned "Compensation of Executive Officers" (other than the subsection thereof captioned "Committee Reports on Executive Compensation" and "Performance Graph"), and such information (other than the subsections thereof captioned "Committee Reports on Executive Compensation" and "Performance Graph") is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is included in the 1997 Proxy Statement in the section captioned "Security Ownership of Certain Beneficial Owners and Management," and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is included in the 1997 Proxy Statement in the section captioned "Certain Transactions," and such information is incorporated herein by reference. See also, Note 11 to the consolidated financial statements on page 36 of Gulfstream's 1996 Annual Report. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1996 Form 10-K Annual Report (Page) (Page) ----------- --------------- (a) Financial Statements Consolidated Balance Sheets at December 31, 1996 and December 31, 1995....................................................... 26 For the years ended December 31, 1996, 1995, and 1994: Consolidated Statements of Income............................................. 27 Consolidated Statements of Stockholders' Equity............................... 28 Consolidated Statements of Cash Flows......................................... 29 Notes to Consolidated Financial Statements.................................... 30-36 Independent Auditors' Report for the years ended December 31, 1996, 1995, and 1994 37 Financial Statement Schedules Independent Auditors' Report........................................... 23 I. Condensed financial information........................................ 24-25 II. Valuation and qualifying accounts...................................... 26
All other schedules have been omitted because they are not applicable, not required or the information required is included in the consolidated financial statements or notes thereof. Exhibits The exhibits are listed in the accompanying Index to Exhibits on pages 30 to 32. (b) Reports on Form 8-K None. 22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Gulfstream Aerospace Corporation: We have audited the consolidated balance sheets of Gulfstream Aerospace Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity, and cash flows for the three years in the period ended December 31, 1996, and have issued our report thereon dated January 31, 1997; such financial statements and report are included in the Company's 1996 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedules of the Company, listed in Item 14 of Form 10-K. These consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Atlanta, Georgia January 31, 1997 23 GULFSTREAM AEROSPACE CORPORATION (PARENT COMPANY ONLY) SCHEDULE I--CONDENSED FINANCIAL INFORMATION BALANCE SHEETS As of December 31, 1996 and 1995 (In thousands, except for share amounts) ASSETS
1996 1995 ---------- ---------- Investment in subsidiary $ (87,393) $ 219,234) ---------- ---------- Total Assets (87,393) 219,234 ---------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995 ----------- ---------- Payable to subsidiary $ 1,418 $ 1,694 Note Payable to subsidiary 100,000 -- --------- ---------- Total liabilities 101,418 1,694 --------- ---------- Stockholders' equity: Preferred stock; Series A, 7% Cumulative; $.01 par value; 20,000,000 shares authorized; no shares outstanding in 1996 and 100 shares issued in 1995 -- 468,938 Common stock; $.01 par value; 859 523 300,000,000 shares authorized; 85,890,212 shares issued in 1996 and 77,362,516 shares issued in 1995 Additional paid-in capital 333,686 210,631 Accumulated deficit (468,971) (410,613) Minimum pension liability (1,464) (1,450) Unamortized stock plan expense (2,432) 0 Less: Treasury stock: 11,978,439 shares in 1996 and 1995 (50,489) (50,489) --------- --------- Total stockholders' equity (188,811) 217,540 --------- --------- Total Liabilities and Stockholders' Equity $(87,393) $219,234 --------- --------- --------- ---------
- ------------------------ Notes: (1) The Company accounts for its investment in its subsidiary using the equity method of accounting. (2) The Company received cash dividends of approximately $355.0 million from its subsidiary in satisfaction of intercompany balances. See notes to consolidated financial statements included in the 1996 Annual Report, incorporated herein by reference. 24 GULFSTREAM AEROSPACE CORPORATION (PARENT COMPANY ONLY) SCHEDULE I--CONDENSED FINANCIAL INFORMATION STATEMENTS OF INCOME (In thousands) Year Ended December 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Interest expense $ (1,418) $ -- $ -- Net income of subsidiary 48,383 28,894 23,564 --------- --------- --------- Net income $ 46,965 $ 28,894 $ 23,564 --------- --------- --------- --------- --------- --------- Statements of cash flows are not presented since the Company had no cash flows from operations. See notes to consolidated financial statements included in the 1996 Annual Report, incorporated herein by reference. 25 GULFSTREAM AEROSPACE CORPORATION SCHEDULE II--CONDENSED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 (In thousands)
Balance at Charged to Balance beginning costs and at end of Description of period expenses Deductions (1) Period - --------------------------------------------------------------- ----------- ------------- --------------- ----------- Allowance for Doubtful Accounts: Year ended December 31, 1994................................... $ 1,152 $ 286 $ 126 $ 1,312 Year ended December 31, 1995................................... 1,312 2,506 381 3,437 Year ended December 31, 1996................................... $ 3,437 $ 344 $ 538 $ 3,243
- ------------------------ (1) Deductions from the allowance for doubtful accounts represent the write-off of uncollectible accounts. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GULFSTREAM AEROSPACE CORPORATION BY: /s/ Chris A. Davis ----------------------------------------- Chris A. Davis Executive Vice President, Chief Financial Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - ------------------------------ --------------------------- ------------------- /s/ Theodore J. Forstmann Chairman of the Board; - ------------------------------ Director March 28, 1997 Theodore J. Forstmann /s/ Fred A. Breidenbach President and Chief - ------------------------------ Operating Officer; March 28, 1997 Fred A. Breidenbach Director Executive Vice President, Chief Financial Officer /s/ Chris A. Davis and Secretary; Director - ------------------------------ (Principal Financial March 28, 1997 Chris A. Davis Officer and Principal Accounting Officer) /s/ William R. Acquavella - ------------------------------ Director March 28, 1997 William R. Acquavella /s/ Robert Anderson - ------------------------------ Director March 28, 1997 Robert Anderson /s/ Charlotte L. Beers - ------------------------------ Director March 28, 1997 Charlotte L. Beers 27 Signature Title Date - ------------------------------ ----------------------- ----------------- /s/ Thomas D. Bell, Jr. - ------------------------------ Director March 28, 1997 Thomas D. Bell, Jr. /s/ W. W. Boisture, Jr. Executive Vice President; - ------------------------------ Director March 28, 1997 W. W. Boisture, Jr. /s/ Lynn Forester - ------------------------------ Director March 28, 1997 Lynn Forester /s/ Nicholas C. Forstmann - ------------------------------ Director March 28, 1997 Nicholas C. Forstmann /s/ Sandra J. Horbach - ------------------------------ Director March 28, 1997 Sandra J. Horbach /s/ Drew Lewis - ------------------------------ Director March 28, 1997 Drew Lewis /s/ Bryan T. Moss Vice Chairman of the Board; - ------------------------------ Director March 28, 1997 Bryan T. Moss - ------------------------------ Director Michael S. Ovitz /s/ Allen E. Paulson - ------------------------------ Director March 28, 1997 Allen E. Paulson /s/ Roger S. Penske - ------------------------------ Director March 28, 1997 Roger S. Penske /s/ Colin L. Powell - ------------------------------ Director March 28, 1997 Colin L. Powell /s/ Gerard R. Roche - ------------------------------ Director March 28, 1997 Gerard R. Roche 28 Signature Title Date - ------------------------------ ------------------------- ------------------ /s/ Donald H. Rumsfeld - ------------------------------ Director March 28, 1997 Donald H. Rumsfeld /s/ George P. Shultz - ------------------------------ Director March 28, 1997 George P. Shultz /s/ Robert S. Strauss - ------------------------------ Director March 28, 1997 Robert S. Strauss 29 GULFSTREAM AEROSPACE CORPORATION INDEX TO EXHIBITS --------------------------------
Exhibit Description - ----------- --------------------------------------------------------------------------------------------------------- 2.1 Stock Purchase Agreement, dated as of February 12, 1990, between Electrospace Holdings, Inc. and GA Acquisition Corp. (Incorporated herein by reference to Exhibit 2.1 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 3.1 Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 3.2 Restated By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 4.1 Specimen Form of Company's Common Stock Certificate. (Incorporated herein by reference to Exhibit 4.1 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.1 Gulfstream Aerospace Corporation Pension Plan, amended and restated January 1, 1989, as amended ("GAC Pension Plan"). (Incorporated herein by reference to Exhibit 10.1 of Registrant's Registration Statement on Form S-1, No. 333-09897.)A 10.2 First Amendment to GAC Pension Plan, dated December 10, 1996.A* 10.3 Gulfstream Aerospace Corporation Supplemental Executive Retirement Plan, effective as of April 1, 1991. (Incorporated herein by reference to Exhibit 10.2 of Registrant's Registration Statement on Form S-1, No. 333-09897.)A 10.4 Gulfstream Aerospace Corporation November 1, 1991 Supplemental Executive Retirement Plan. (Incorporated herein by reference to Exhibit 10.3 of Registrant's Registration Statement on Form S-1, No. 333-09897.)A 10.5 Form of Indemnification Agreement between the Company and its directors and executive officers. (Incorporated herein by reference to Exhibit 10.4 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.6 Form of Outside Director Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.5 of Registrant's Registration Statement on Form S-1, No. 333-09897.)A 10.7 Form of Outside Director Stockholder's Agreement. (Incorporated herein by reference to Exhibit 10.6 of Registrant's Registration Statement on Form S-1, No. 333-09897.)A 10.8 Gulfstream Aerospace Corporation Stock Option Plan. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Registration Statement on Form S-1, No. 333-09897.)A 10.9 Form of Employee Stock Option Agreement. A* 10.10 Form of Employee Stockholder's Agreement. A* 10.11 Lease Agreement, dated as of January 1, 1988, between Oklahoma City Airport Trust and Gulfstream Aerospace Corporation. (Incorporated herein by reference to Exhibit 10.11 of Registrant's Registration Statement on Form S-1, No. 333-09897.)
30
Exhibit Description - ----------- --------------------------------------------------------------------------------------------------------- 10.12 Lease Agreement, dated as of March 14, 1989, between City of Long Beach and 7701 Woodley Avenue Corporation d/b/a Gulfstream Aerospace. (Incorporated herein by reference to Exhibit 10.12 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.13 Form of Lease Agreements, dated January 1, 1994 between Immuebles El Vigia, S.A., and Interiores Aeros, S.A. De C.V. (Incorporated herein by reference to Exhibit 10.13 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.14 Lease Agreement, dated May 1, 1996, between Immuebles El Vigia, S.A., and Interiores Aeros, S.A. De C.V. (Incorporated herein by reference to Exhibit 10.14 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.15 Sublease Agreement, dated June 1, 1992, between Brunswick and Glynn County Development Authority and Gulfstream Aerospace Corporation. (Incorporated herein by reference to Exhibit 10.15 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.16 Credit Agreement, dated as of October 16, 1996, among Gulfstream Delaware Corporation, The Chase Manhattan Bank, and the banks and other financial institutions parties thereto (including guaranty and pledge agreement). (Incorporated herein by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.) 10.17 Registration Rights Agreement, among Gulfstream Aerospace Corporation, Gulfstream Delaware Corporation, Gulfstream Partners, Gulfstream Partners II, L.P., and MBO-IV. (Incorporated herein by reference to Exhibit 10.17 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.18 Repurchase Agreement, dated as of May 15, 1996, between Gulfstream Aerospace Corporation and MBO-IV. (Incorporated herein by reference to Exhibit 10.18 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.19 Repurchase Agreement, dated as of August 8, 1996, between Gulfstream Aerospace Corporation and MBO-IV. (Incorporated herein by reference to Exhibit 10.19 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.20 Amendment No. 1 to Sublease Agreement, dated May 23, 1996, by and between Brunswick and Glynn County Development Authority and Gulfstream Aerospace Corporation. (Incorporated herein by reference to Exhibit 10.20 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.21 Amendment No. 2 to Sublease Agreement, dated May 25, 1996, by and between Brunswick and Glynn County Development Authority and Gulfstream Aerospace Corporation. (Incorporated herein by reference to Exhibit 10.21 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.22 Agreement, effective August 9, 1996, between Gulfstream Aerospace Technologies and the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America Local #2130. (Incorporated herein by reference to Exhibit 10.22 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 10.23 Lease Agreement, dated as of August 27, 1996, between Long Beach Million Air, Inc. and Gulfstream Aerospace Corporation. (Incorporated herein by reference to Exhibit 10.23 of Registrant's Registration Statement on Form S-1, No. 333-09897.) 11.1 Computation of Earnings per Common Share. *
31
Exhibit Description - ----------- --------------------------------------------------------------------------------------------------------- 13.1 Annual Report to Stockholders for fiscal year ended December 31, 1996. (The 1996 Annual Report, except for those portions thereof which are expressly incorporated by references in this Annual Report on Form 10-K, is being furnished for the information of the Commission and is not to be deemed "filed" as part of the Form 10-K.) * 21.1 Subsidiaries of the Company (Incorporated herein by reference to Exhibit 21.1 of Registrant's Registration Statement on Form S-1, No. 333-09827.) 27.1 Financial Data Schedule. * 99.1 Cautionary Statement for Purpose of the "Safe Harbor" Provisions of The Private Securities Litigation Reform Act of 1995. (Incorporated herein by reference to Exhibit 99.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
- ------------------------ A Management contract or compensatory plan. * Filed herewith. 32 EX-10.2 2 EX-10.2 First Amendment to the Gulfstream Aerospace Corporation Pension Plan This amendment to the Gulfstream Aerospace Corporation Pension Plan (the "Plan") is intended to clarify certain Plan provisions relating to the payment of preretirement death benefits and transfers of highly compensated employees to Gulfstream Aerospace Corporation (Oklahoma). The Plan was last amended and restated effective as of January 1, 1989. The Plan is hereby amended as follows: 1. Section 2.13 of the Plan is amended, effective January 1, 1994, by adding a new sentence to read as follows: The group of Eligible Employees shall also include any otherwise eligible Employee who transfers to employment with Gulfstream Aerospace Corporation (Oklahoma) and who is a Highly Compensated Employee with respect to the Plan Year beginning after the date of transfer based on his or her compensation during the Plan Year in which the transfer occurs. 2. Section 8.2(a)(1) of the Plan is amended in its entirety, effective January 1, 1989, to read as follows: (1) In the case of a Participant who dies while an Employee or on or after attaining Earliest Retirement Age, the amount of the benefit shall be the amount payable as a survivor annuity as if the Participant had retired with an immediate 100 percent joint and survivor annuity (as described in section 6.3(b)) on the day before his or her death. If the Participant dies while an Employee and if benefit payments to the spouse commence before the date on which the Participant would have attained the Normal Retirement Date, the amount of this 100 percent joint and survivor annuity shall be determined by applying-- (A) the reduction factors in section 5.3(b), where the benefit commences on or after the date on which the Participant attained or would have attained age 50; or (B) the reduction factors in Appendix A, where the benefit commences before the date on which the Participant would have attained age 50. 1 For purposes of this paragraph (1), a Participant who dies while receiving benefits under the long-term disability plan maintained by his or her Employer shall be considered to have died while an Employee. 3. Appendix A to the Plan is amended, effective January 1, 1989, by adding the following provisions at the end of the Appendix: Actuarial Factors for Employees Dying Before Age 50 --------------------------------------------------- The preretirement death benefit payable to a surviving spouse pursuant to section 8.2(a)(1) shall be calculated by applying the following factors for benefit commencement before the date on which the Participant would have attained age 50. _____________________________________________________ Age Factor Age Factor ______________________________________________________ Years Months Years Months ______________________________________________________ ______________________________________________________ 35 0 .240913 36 0 .251682 35 1 .241810 36 1 .252635 35 2 .242708 36 2 .253588 35 3 .243605 36 3 .254542 35 4 .244503 36 4 .255495 35 5 .245400 36 5 .256448 35 6 .246297 36 6 .257401 35 7 .247195 36 7 .258355 35 8 .248092 36 8 .259308 35 9 .248990 36 9 .260261 35 10 .249887 36 10 .261214 35 11 .250785 36 11 .262168 _____________________________________________________ 2 _____________________________________________________ Age Factor Age Factor ______________________________________________________ Years Months Years Months ______________________________________________________ ______________________________________________________ 37 0 .263121 38 0 .275290 37 1 .264135 38 1 .276370 37 2 .265149 38 2 .277450 37 3 .266163 38 3 .278530 37 4 .267177 38 4 .279610 37 5 .268191 38 5 .280690 37 6 .269205 38 6 .281770 37 7 .270220 38 7 .282850 37 8 .271234 38 8 .283930 37 9 .272248 38 9 .285010 37 10 .273862 38 10 .286090 37 11 .274276 38 11 .287170 ______________________________________________________ 39 0 .288250 40 0 .302071 39 1 .289402 40 1 .303301 39 2 .290553 40 2 .304531 39 3 .291705 40 3 .305761 39 4 .292857 40 4 .306991 39 5 .294009 40 5 .308221 39 6 .295160 40 6 .309451 39 7 .296312 40 7 .310682 39 8 .297464 40 8 .311912 39 9 .298616 40 9 .313142 39 10 .299767 40 10 .314372 39 11 .300919 40 11 .315602 ______________________________________________________ 41 0 .316832 42 0 .332617 41 1 .318147 42 1 .334026 41 2 .319463 42 2 .335435 41 3 .320778 42 3 .336844 41 4 .322094 42 4 .338253 41 5 .323409 42 5 .339662 41 6 .324724 42 6 .341071 41 7 .326040 42 7 .342480 41 8 .327355 42 8 .343889 41 9 .328671 42 9 .345298 41 10 .329986 42 10 .346707 41 11 .331302 42 11 .348116 3 _____________________________________________________ Age Factor Age Factor ______________________________________________________ Years Months Years Months ______________________________________________________ ______________________________________________________ 43 0 .349525 44 0 .367663 43 1 .351036 44 1 .369287 43 2 .352548 44 2 .370911 43 3 .354059 44 3 .372535 43 4 .355571 44 4 .374159 43 5 .357082 44 5 .375783 43 6 .358594 44 6 .377407 43 7 .360105 44 7 .379032 43 8 .361617 44 8 .380656 43 9 .363128 44 9 .382280 43 10 .364640 44 10 .383904 43 11 .366151 44 11 .385528 ______________________________________________________ 45 0 .387152 46 0 .408129 45 1 .388900 46 1 .410014 45 2 .390648 46 2 .411899 45 3 .392396 46 3 .413784 45 4 .394144 46 4 .415669 45 5 .395892 46 5 .417554 45 6 .397640 46 6 .419438 45 7 .399389 46 7 .421323 45 8 .401137 46 8 .423208 45 9 .402885 46 9 .425093 45 10 .404633 46 10 .426978 45 11 .406381 46 11 .428863 ______________________________________________________ 47 0 .430748 48 0 .455181 47 1 .432784 48 1 .457385 47 2 .434820 48 2 .459588 47 3 .436856 48 3 .461792 47 4 .438892 48 4 .463996 47 5 .440928 48 5 .466199 47 6 .442964 48 6 .468403 47 7 .445001 48 7 .470607 47 8 .447037 48 8 .472810 47 9 .449073 48 9 .475014 47 10 .451109 48 10 .477218 47 11 .453145 48 11 .479421 4 ________________________ Age Factor _________________________ Years Months _________________________ _________________________ 49 0 .481625 49 1 .484015 49 2 .486405 49 3 .488795 49 4 .491185 49 5 .493575 49 6 .495964 49 7 .498354 49 8 .500744 49 9 .503134 49 10 .505524 49 11 .507914 If preretirement death benefits commence before the date on which the Participant would have attained age 35, the benefit shall be calculated by extending the actuarial factors reflected in this table. In Witness Whereof, the authorized officers of Gulfstream Aerospace Corporation (Georgia) have signed this document and have affixed the corporate seal on December 10, 1996, effective as of the date set forth above. Attest: By /s/ Robert L. Williams -------------------------- Its Treasurer -------------------------- By /s/ Donald L. Mayer --------------------------- Its Secretary (Corporate Seal) ------------------------- EX-10.9 3 EXHIBIT 10.9 STOCK OPTION AGMT Exhibit 10.9 STOCK OPTION AGREEMENT (the "Agreement"), dated as of Date, 1997, between Gulfstream Aerospace Corporation, a Delaware corporation (together with its successors the "Corporation"), and Name (the "Optionee"). 1. Grant of Option. 1.1 The Corporation hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of an aggregate of Options whole shares of Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") (such number being subject to adjustment as provided in Section 8 hereof) on the terms and conditions set forth in this Agreement and in the Corporation's Stock Option Plan (the "Plan"), a copy of which has previously been provided to the Optionee. 1.2 This Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code. 1.3 Except as otherwise defined herein, capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan. 2. Purchase Price. The price at which the Optionee shall be entitled to purchase shares of Common Stock upon the exercise of this Option shall be $Price per share (such price being subject to adjustment as provided in Section 8 hereof) (the "Option Price"). 3. Duration of Option. The Option shall be exercisable to the extent and in the manner provided herein for a period of 10 years from the date hereof; provided, however, that the Option may be earlier terminated as provided in Section 4, Section 6, Section 7 or Section 9 hereof. 4. Exercisability of Options. Subject to the provisions of this Agreement and the Plan, the Option shall be exercisable in accordance with the following schedule: (a) on or after Date, 1998 but before Date, 1999, the Option may be exercised to acquire up to one-third of the total number of shares of Common Stock which may be purchased pursuant to the Option as set forth in Section 1.1 hereof, less any shares previously acquired pursuant to the Option; (b) on or after Date, 1999 but before Date, 2000, the Option may be exercised to acquire up to two-thirds of the total number of shares of Common Stock which may be purchased pursuant to the Option as set forth in Section 1.1, less any shares previously acquired pursuant to the Option; and (c) on or after Date, 2000 but before the expiration of the term of the Option, the Option may be exercised to acquire up to 100% of the total number of shares of Common Stock which may be purchased pursuant to the Option as set forth in Section 1.1, less any shares previously acquired pursuant to the Option. The Corporation shall give the Optionee 10 days' written notice (or, if not practicable, such shorter notice as may be practicable) prior to the anticipated date of the consummation of a Terminating Event (as hereinafter defined) or the anticipated date of the consummation of a Partial Sale (as hereinafter defined), and the Optionee shall be permitted to exercise the Option for a period of 5 days (or such shorter period as the Committee shall determine and so notify the Optionee) after the date of such notice of the Terminating Event or the Partial Sale. In the case of a Terminating Event, the Option may be exercised, in whole or in part, for the full amount of the shares of Common Stock covered thereby (less the number of shares previously issued to the Optionee upon exercise of the Option), whether or not the Option was otherwise so exercisable on the date such notice was given. In the case of a Partial Sale, the Option may be exercised in whole or in part, whether or not the Option was otherwise so exercisable on the date such notice was given, but not for more than the excess, if any, of (a) the number of shares with respect to which the Optionee will be entitled to, and will participate in the Partial Sale pursuant to Section 2.3 or 2.4 of the Stockholder's Agreement, as the case may be, over (b) the number of shares previously issued to the Optionee upon exercise of the Option and not disposed of in a prior Partial Sale. In the event the Terminating Event or Partial Sale is not consummated, the Option will be deemed not to have been exercised and shall be exercisable thereafter only to -2- the extent it would have been exercisable if no such notice had been given. In lieu of permitting the Optionee to exercise the Option in the event of a Terminating Event, the Committee, in its sole discretion, may instead cause the Corporation to redeem the unexercised portion of the Option pursuant to Section 9 hereof. For purposes hereof, (a) the term "Terminating Event" shall mean the consummation of any of the following transactions: (i) any merger or consolidation of the Corporation with or into another corporation (other than a merger or consolidation in which the Corporation is the surviving corporation and which does not result in any capital reorganization or reclassification or other change of the then outstanding shares of Common Stock), or (ii) the liquidation of the Corporation, or (iii) the sale to a Third Party of all or substantially all of the assets of the Corporation pursuant to a plan of liquidation or otherwise, or (iv) the sale to a Third Party of Class A Common Stock (including through one or more Public Offerings); provided, that, as a result thereof, the FL & Co. Companies (as defined below), the direct or indirect partners of any of the FL & Co. Companies, and any Affiliates of any of the foregoing cease to own, directly or indirectly, any shares of the voting stock of the Corporation, and (b) the term "Partial Sale" shall mean any sale by the FL & Co. Companies of all or a portion of their shares of Common Stock to a Third Party, including through any Public Offering, which sale is not a Terminating Event. The term "FL & Co. Companies" shall mean Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-IV, Gulfstream Partners and Gulfstream Partners II, L.P., each a New York limited partnership. Subject to the provisions of Section 9 hereof, the Option shall be canceled simultaneously with the consummation of a Terminating Event to the extent that the Option has not theretofore been exercised. 5. Manner of Exercise and Payment. 5.1 Notice of Exercise. Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written notice to the Committee, at the Corporation's principal office (or such other address as the Corporation may from time to time notify the Optionee in writing). Such notice shall state that the Optionee is electing to exercise the Option and the number of shares of Common Stock -3- in respect of which the Option is being exercised and shall be signed by the Optionee or by any guardian, executor, administrator or other legal representative (each, a "Legal Representative"). The Corporation may require proof satisfactory to it as to the right of such person to exercise the Option. 5.2 Deliveries. The notice of exercise described in Section 5.1 hereof shall be accompanied by (a) the full purchase price for the shares in respect of which the Option is being exercised, such purchase price to be paid by certified or bank check payable to the order of the Company or cash by wire transfer to an account designated by the Company, and (b) a fully executed Stockholder's Agreement (a copy of which will be supplied to the Optionee upon request) and an accompanying undated stock power. Not less than 250 shares of Common Stock may be purchased at any one time upon the exercise of an Option, unless the number of shares of Common Stock so purchased constitutes the total number of shares of Common Stock then purchasable under the Option. 5.3 Issuance of Shares. Upon receipt of notice of exercise, full payment for the shares of Common Stock in respect of which the Option is being exercised and a fully executed Stockholder's Agreement and accompanying stock power, and subject to Section 10 of the Plan, the Corporation shall take such action as may be necessary under applicable law to effect the issuance to the Optionee of the number of shares of Common Stock as to which such exercise was effective. 5.4 Stockholder Rights. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to the Option until: (a) the Option shall have been exercised pursuant to the terms of this Agreement and the Optionee shall have paid the full purchase price for the number of shares in respect of which the Option was exercised and any withholding taxes due in connection with such exercise, (b) the Optionee shall have delivered the fully executed Stockholder's Agreement and stock power to the Corporation, (c) the Corporation shall have issued the shares to the Optionee, and (d) the Optionee's name shall have been entered as a stockholder of record on the books of the Corporation. Upon the occurrence of all of the foregoing events, the Optionee shall have full voting and other ownership rights with respect to such shares, subject to the provisions of the Stockholder's Agreement. -4- 5.5 Partial Exercise. In the event the initial exercise of the Option is an exercise in part only, then, in the event of any further exercise of the Option, the Optionee, in lieu of executing a new Stockholder's Agreement, may, at the Corporation's option, re-execute the original Stockholder's Agreement, thereby re-affirming the representations and warranties contained in the Stockholder's Agreement as of the date of re-execution, but with an amended Schedule I completed to set forth the number of shares of Common Stock in respect of which the Option is then being exercised and the cumulative number of shares of Common Stock which would then be subject to the Stockholder's Agreement. If a further exercise of the Option is by a person who has not previously exercised the Option (as for example if the initial exercise was by the Optionee and the subsequent exercise was by a Legal Representative), then such person shall execute a counterpart of the original Stockholder's Agreement thereby agreeing to be bound by such agreement as though such person were an original signatory thereto and affirming the truth of the representations and warranties contained therein with respect to such person as of the date of his execution of such counterpart. 6. Certain Restrictions. 6.1 No Sale or Transfer. The Optionee shall not sell, transfer, assign, exchange, pledge, encumber or otherwise dispose of the Option, in whole or in part, except in accordance with the provisions of this Agreement. 6.2 Employment Termination. Except (i) as provided in this Section 6.2 or (ii) as may be agreed between the Committee and the Optionee, if the Optionee shall no longer be employed on a full-time basis by either the Corporation or any of its subsidiaries, or ceases to serve as a director of the Corporation or any of its subsidiaries, for any reason whatsoever (including by reason of death, permanent disability or adjudicated incompetency) ("Terminated" or a "Termination"), irrespective of whether the Optionee receives, in connection with the Termination, any severance or other payment from the Corporation or any of its subsidiaries under any employment agreement or otherwise (such Optionee being referred to herein as a "Terminated Optionee"), the portion of the Option that was not exercisable immediately prior to the Optionee's Termination shall terminate and shall be of no further force and effect from and -5- after the date of such Termination. Following a Termination, the Optionee may exercise the portion of the Option which was exercisable immediately prior to the date of the Optionee's Termination (the "Exercisable Portion of the Option") or any portion thereof on one occasion during the 90-day period following the date of Termination, but in no event after the expiration of the term of the Option; provided, however, that the shares acquired upon any such exercise shall be subject to the provisions of the Stockholder's Agreement including, without limitation, the employment and director termination provisions of Section 2.2 thereof. To the extent the Terminated Optionee does not so exercise the Exercisable Portion of the Option, the Exercisable Portion of the Option shall terminate and shall be of no force and effect. 7. Prohibited Activities. 7.1 Prohibition Against Certain Activities. The Optionee agrees that (a) he will not at any time during his employment (other than in the course of his employment) with the Corporation or any Affiliate thereof, or after any Termination, directly or indirectly disclose or furnish to any other person or use for his own or any other person's account any confidential or proprietary knowledge or any other information which is not a matter of public knowledge obtained during the course of his employment with, or other performance of services for (including service as a director of), the Corporation or any Affiliate thereof or any predecessor of any of the foregoing, no matter from where or in what manner the Optionee may have acquired such knowledge or information, and he shall retain all such knowledge and information in trust for the benefit of the Corporation, its Affiliates and the successors and assigns of any of them, (b) if he is Terminated, he will not for three years following the Termination directly or indirectly solicit for employment, including, without limitation, recommending to any subsequent employer the solicitation for employment of, any person who at the time of the solicitation is employed by the Corporation or any Affiliate thereof, (c) he will not at any time during his employment with, or performance of services for (including service as a director of), the Corporation or any Affiliate thereof or any predecessor of any of the foregoing, or after any Termination, publish any statement or make any statement (under circumstances reasonably likely to become public or that he might reasonably expect to become public) critical of the Corporation or any Affiliate of the Corporation, or in any way adversely -6- affecting or otherwise maligning the business or reputation of any of the foregoing, and (d) he will not breach the provisions of Section 6.1 hereof (any activity described in clause (a), (b), (c) or (d) of this Section 7.1 being herein referred to as a "Prohibited Activity"). 7.2 Right to Terminate Option. The Optionee understands that the Corporation is granting to the Optionee an option to purchase shares of Common Stock hereunder to reward the Optionee for the Optionee's future efforts and loyalty to the Corporation and its Affiliates by giving the Optionee the opportunity to participate in the potential future appreciation of the Corporation. Accordingly, (a) if the Optionee engages in any Prohibited Activity, or (b) if, at any time during the Optionee's employment with the Corporation or any Affiliate or during the three years following the Optionee's Termination, the Optionee engages in any Competitive Activity (as hereinafter defined), or (c) if, at any time (whether during the Optionee's employment or after any Termination), the Optionee is convicted of a crime against the Corporation or any of its Affiliates, then, in addition to any other rights and remedies available to the Corporation, the Corporation shall be entitled, at its option, to terminate the Option, which shall then be of no further force and effect. The term "Competitive Activity" shall mean engaging in any of the following activities: (i) serving as a director of any person (other than the Corporation or any of its subsidiaries) that competes either directly or indirectly through one or more Affiliates with any of the businesses conducted by the Corporation or any of its Affiliates (a "Competitor"), (ii) directly or indirectly through one or more intermediaries (X) controlling any Competitor or (Y) owning any equity or debt interests in any Competitor (other than equity or debt interests which are publicly traded and do not exceed 2% of the particular class of interests outstanding) (it being understood that, if interests in any Competitor are owned by an investment vehicle or other entity in which the Optionee owns an equity interest, a portion of the interests in such Competitor owned by such entity shall be attributed to the Optionee, such portion determined by applying the percentage of the equity interest in such entity owned by the Optionee to the interests in such Competitor owned by such entity), (iii) directly or indirectly soliciting, diverting, taking away, appropriating or otherwise interfering with any of the customers or suppliers of the Corporation or any Affiliate of the Corporation of which the Optionee owns shares of capital stock or any other equity -7- interest or (iv) employment by (including serving as an officer or director of) or providing consulting services to any Competitor. For purposes of this Section 7.2, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any Competitor, whether through the ownership of equity interests, by contract or otherwise. 8. Adjustments. In the event that the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation, whether through merger, consolidation, reorganization, recapitalization, stock dividend, stock split-up or other substitution of securities of the Corporation, the Committee shall make appropriate adjustments to the number and class of shares of stock subject to this Option and the Option Price for such shares. In the event that any shares of Common Stock are issued after the date of the Plan to any of the FL & Co. Companies for less than fair consideration, as determined finally by the Committee, the Committee shall make appropriate adjustments to the number of shares of stock subject to this Option and the Option Price for such shares. The Committee's adjustment shall be final and binding for all purposes of the Plan and this Agreement. No adjustment provided for in this Section 8 shall require the Corporation to issue a fractional share, and the total adjustment with respect to this Agreement shall be limited accordingly. 9. Terminating Events. (a) Upon the effective date of any Terminating Event, any unexercised portion of this Option shall terminate unless provision shall be made in writing in connection with such Terminating Event for the continuance of the Plan and such unexercised portion of the Option and for the assumption of such unexercised portion of this Option by a Successor Corporation or for the substitution for such unexercised portion of this Option of new options covering shares of such Successor Corporation with appropriate adjustments as to number and kind of shares and prices of shares subject to such new options; provided, however, that in connection with a Terminating Event involving the merger, consolidation or liquidation of the Corporation or the sale of capital stock of the Corporation covered by Section 2.5 of the Stockholder's Agreement, the Committee may, in its sole discretion, authorize the redemption of the unexercised portion -8- of the Option for a consideration per share of Common Stock issuable upon exercise of the unexercised portion of the Option equal to the excess of (i) the consideration payable per share of Common Stock in connection with such Terminating Event, adjusted as if all outstanding options and warrants had been exercised prior to the consummation of such Terminating Event, over (ii) the Option Price. In the event that provision for continuance of the Plan is made in writing in connection with a Terminating Event, the unexercised portion of this Option or the new options substituted therefor shall continue in the manner and under the terms provided in the Plan and this Agreement and in such writing. (b) In the event of a redemption pursuant to this Section 9, the Optionee shall be responsible for and shall be obligated to pay a proportionate amount (determined as if the Optionee were a holder of the number of shares of Common Stock which would have been issuable upon exercise of the portion of the Option redeemed pursuant to this Section 9) of the expenses, liabilities or obligations incurred or to be incurred by the stockholders of the Corporation in connection with such Terminating Event (including, without limitation, the fees and expenses of investment bankers, legal counsel and other outside advisors and experts retained by or on behalf of the stockholders of the Corporation in connection with the Terminating Event, amounts payable in respect of indemnification claims, amounts paid into escrow and amounts payable in respect of post-closing adjustments to the purchase price). 10. No Right to Continued Employment. This Option shall not confer upon the Optionee any right with respect to continuance of employment by the Corporation or any Affiliate, nor shall it interfere in any way with the right of the Corporation or any Affiliate to terminate the Optionee's employment at any time. 11. Optionee Bound by Plan; Entire Agreement. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof. This Agreement and the Plan and, upon execution thereof, the Stockholder's Agreement, constitute the entire agreement, and supersede all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof; provided, however, that in the event there is any conflict between the provisions of this Agreement or, upon -9- execution thereof, the Stockholder's Agreement, on the one hand, and the Plan, on the other hand, the provisions of this Agreement or the Stockholder's Agreement shall be binding. 12. Modification of Agreement. This Agreement may be modified, amended, suspended or terminated by the parties hereto; provided, that the Corporation may modify, amend, suspend or terminate this Agreement without any further action by the Optionee if such modification, amendment, suspension or termination does not adversely affect the Optionee's rights hereunder. Any terms, covenants, representations or conditions may be waived by the parties hereto, but only in a writing signed by the party which is entitled to the benefits of such waived term, covenant, representation or condition. 13. Severability. Should any provision of this Agreement be held by a court to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms. 14. Acknowledgment. By signing this Agreement, the Optionee acknowledges that he has reviewed the Plan and this Agreement and understands his rights and obligations thereunder and hereunder. The Optionee also acknowledges that he has been provided with such information concerning the Corporation, the Plan and this Agreement as he and his advisors have requested. 15. Successors in Interest. This Agreement shall inure to the benefit of and be binding upon each successor of the Corporation. All obligations imposed upon the Optionee and all rights granted to the Corporation under this Agreement shall be binding upon the Optionee's heirs, executors, administrators and successors. 16. Headings. The headings and captions contained herein are for convenience only and shall not control or affect the meaning or construction of any provision hereof. 17. Resolution of Disputes. Any dispute or disagreement which may arise under, or as a result of, or which may in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final and binding for all purposes. -10- 18. Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the principles of conflicts of laws thereof. GULFSTREAM AEROSPACE CORPORATION By:_____________________________ Title: _____________________________ Optionee The undersigned acknowledges that the undersigned has read the foregoing Agreement between Gulfstream Aerospace Corporation and the undersigned's spouse and the Stock Option Plan, understands that the undersigned's spouse has been granted an option to acquire shares of Gulfstream Aerospace Corporation Common Stock, which option is subject to certain restrictions reflected in such Agreement and such Plan and agrees to be bound by the foregoing Agreement and such Plan. _____________________________ Optionee's Spouse -11- EX-10.10 4 EXHIBIT 10.10 STOCKHOLDERS AGMT Exhibit 10.10 STOCKHOLDER'S AGREEMENT STOCKHOLDER'S AGREEMENT, dated as of _____________, 19__, between Gulfstream Aerospace Corporation, a Delaware corporation (the "Corporation"), and the undersigned (the "Stockholder"), who was granted the right and option (the "Option") to purchase shares of Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") pursuant to the terms and conditions of the Corporation's Stock Option Plan (the "Plan") and a Stock Option Agreement, dated as of ____________, 19__, between the Corporation and the Stockholder (the "Option Agreement"). WHEREAS, the Option Agreement requires the Stockholder to enter into a Stockholder's Agreement upon and as a condition to the exercise of the Option; WHEREAS, the Stockholder wishes to exercise the Option to purchase shares of Common Stock; and WHEREAS, the Stockholder and the Corporation wish to provide for certain arrangements with respect to the Stockholder's rights to hold and dispose of the shares of Common Stock acquired by the Stockholder upon the exercise of the Option. NOW, THEREFORE, the parties hereto agree as follows: 1. Purchase and Sale of Common Stock. The Stockholder hereby elects to exercise the Option in respect of the shares of Common Stock set forth in Schedule I hereto. Promptly upon payment in full of the purchase price for the shares of Common Stock in respect of which the Option is being exercised and compliance by the Stockholder with the other provisions of Section 5.3 of the Option Agreement, the Corporation shall issue to the Stockholder a stock certificate representing the shares of Common Stock in respect of which the Option is being exercised and shall enter the name of the Stockholder as a stockholder of record of such shares on the books of the Corporation (the "Closing"). 2. Rights and Restrictions on Disposition of Common Stock. 2.1. No Sale or Transfer. The Stockholder shall not sell, transfer, assign, exchange, pledge, encumber or otherwise dispose of any shares of Common Stock acquired hereunder, or grant any option or right to purchase such shares or any legal or beneficial interest therein, except in accordance with the provisions of this Agreement. 2.2. Employment Termination. (a) Except (i) as provided in this Section 2.2(a) or (ii) as may be agreed between the Corporation and the Stockholder, and subject to Section 2.6 hereof, if the Stockholder shall no longer be employed on a full-time basis by the Corporation or any of its subsidiaries, or shall cease to serve as a director of the Corporation or any of its subsidiaries, for any reason whatsoever other than as a result of death, permanent disability or Normal Retirement ("Terminated" or a "Termination"), irrespective of whether the Stockholder receives, in connection with the Termination, any severance or other payment from the Corporation or any of its subsidiaries under any employment agreement or otherwise (such Stockholder being referred to herein as a "Terminated Employee"), the Corporation shall be entitled, at its option exercisable upon written notice to the Terminated Employee within 30 days following the date of Termination (the "Election Notice"), to purchase all of the shares of Common Stock then held by (x) the Terminated Employee or (y) the guardian, executor, administrator or other legal representative (each, a "Legal Representative") of the Terminated Employee. All references herein to "Stockholder" shall be deemed to include references to the Legal Representative thereof, if any, unless the context otherwise requires. "Normal Retirement" means the voluntary retirement of the Stockholder on or after his 65th birthday. (b) The purchase price per share of the shares of Common Stock purchased pursuant to Section 2.2(a) hereof (the "Purchase Price") shall be equal to the average of the closing sales prices of a share of Common Stock on the New York Stock Exchange for the 30 trading days next preceding the date of Termination (the "Market Price Per Share"). The Election Notice shall be accompanied by a certificate of the chief financial officer of the Corporation setting forth the Market Price Per Share and stating that the Market Price Per Share has been computed in accordance with the first paragraph of this Section 2.2(b) hereof (the "Market Price Certificate"), and the Market Price Per Share set forth on the Market Price Certificate shall be final and binding on the Corporation and the Terminated Employee for purposes of this Agreement. (c) Subject to Section 2.2(d) hereof, the closing of any purchase of shares of Common Stock provided for in Section 2.2(a) hereof shall take place at the principal office of the Corporation on the later of (i) 40 days after the delivery of the Election Notice to the Terminated Employee or (ii) (if applicable) 70 days after the appointment of a Legal Representative. At the Closing, the Terminated Employee shall sell, convey, transfer, assign and deliver to the Corporation all right, title and interest in and to the shares of Common Stock, which shall constitute (and, at the Closing, the Terminated -2- Employee shall certify the same to the Corporation in writing) good and unencumbered title to such shares, free and clear of all liens, security interests, encumbrances and adverse claims of any kind and nature, and shall deliver to the Corporation a certificate representing the shares duly endorsed for transfer, or accompanied by appropriate stock transfer powers duly endorsed, with signatures guaranteed by a commercial bank, trust company or registered broker dealer, and with all necessary transfer tax stamps affixed thereto at the expense of the Terminated Employee. The Corporation shall deliver to the Terminated Employee, in full payment of the purchase price for the shares of Common Stock purchased, a check payable to the order of the Terminated Employee in the amount of the aggregate purchase price for the shares purchased from the Terminated Employee. (d) The Stockholder understands and agrees that any purchase of shares of Common Stock by the Corporation pursuant to this Section 2.2 may require the consent of some or all of the lenders pursuant to credit agreements to which the Corporation and/or any of its affiliates are now or hereafter may become parties. If the closing of any purchase provided for in this Section 2.2 cannot be consummated by the date which would otherwise be the closing date pursuant to Section 2.2(c) hereof (the "Original Closing Date") because of the failure of the Corporation or any of its affiliates, for whatever reason, to receive any necessary consent from the lenders (and the Corporation covenants to request, or cause its affiliates to request, the lenders to give any such consent) or for any other reason not within the control of the Corporation or any of its affiliates, then the closing shall take place on the third business day after which the purchase may be consummated (the "Deferred Closing Date"). In the case of any delay in the closing of any purchase provided for in this Section 2.2, there shall be paid on the Deferred Closing Date, together with any purchase price payable for the shares of Common Stock owned by the Terminated Employee, interest on the amount of such purchase price from (and including) the Original Closing Date to (but not including) the Deferred Closing Date, at an annual rate equal to the rate of interest publicly announced by The Chase Manhattan Bank from time to time as its reference rate. 2.3. Participation in Sale of Common Stock. The Stockholder shall participate proportionately (and the FL Partnerships (as defined in Section 5.1 hereof) shall allow the Stockholder to participate proportionately) in any sale of all or a portion of the shares of Common Stock owned by any of the FL Partnerships to any person who is not an affiliate or a partner of any of the FL Partnerships or an affiliate of such partner (a "Third Party"), by selling to the Third Party the same percentage of the Stockholder's shares of Common Stock as the FL Partnerships propose to sell to the Third Party of the aggregate shares of Common Stock owned by all of the FL Partnerships. For purposes of determining the number of shares of Common Stock in respect of which the Stockholder may participate pursuant to this Section 2.3, the Stockholder shall be deemed to own (a) the shares of Common Stock subject to this Agreement, (b) if the Stockholder has not been -3- Terminated, the shares of Common Stock issuable upon exercise of the unexercised portion of the Option and (c) if the Stockholder has been Terminated, the shares of Common Stock issuable upon the exercise of the Exercisable Portion of the Option (as defined in the Option Agreement), if any. The Corporation shall notify the Stockholder in writing of the FL Partnerships' intention to effect a sale to a Third Party, the identity of the Third Party and the nature and per share amount of consideration to be paid to each seller by such Third Party, at least 10 days (or such shorter time as the Corporation deems practicable) before the closing of any such proposed sale of Common Stock. Any sale of shares of Common Stock by the Stockholder pursuant to this Section 2.3 shall be for the same consideration per share, on the same terms and subject to the same conditions as the sale of shares of Common Stock owned by the FL Partnerships. The Stockholder shall pay a proportionate share of any of the expenses and shall be responsible for a proportionate share of any liabilities and obligations (including liabilities and obligations for indemnification, amounts paid into escrow and for post-closing purchase price adjustments) (collectively, "Expenses of Sale") incurred by the selling stockholders in connection with any sale pursuant to this Section 2.3 that are not paid by the Corporation. 2.4. Public Offering of Common Stock. (a) The Stockholder shall participate proportionately (and the FL Partnerships shall allow the Stockholder to participate proportionately) in any public offering of all or a portion of the shares of Common Stock owned by any of the FL Partnerships, by selling in the public offering the same percentage of the Stockholder's shares of Common Stock as the FL Partnerships propose to sell in the public offering of the aggregate shares of Common Stock owned by all of the FL Partnerships. For purposes of determining the number of shares of Common Stock in respect of which the Stockholder may participate pursuant to this Section 2.4, the Stockholder shall be deemed to own (a) the shares of Common Stock subject to this Agreement, (b) if the Stockholder has not been Terminated, the shares of Common Stock issuable upon exercise of the unexercised portion of the Option and (c) if the Stockholder has been Terminated, the shares of Common Stock issuable upon the exercise of the Exercisable Portion of the Option, if any. The Corporation shall cause the Stockholder's portion of the shares to be included in the offering. The Stockholder shall pay a proportionate share of all Expenses of Sale incurred by the selling stockholders in connection with such public offering that are not paid by the Corporation, including indemnifying the underwriters, on a proportionate basis, to the same extent as the FL Partnerships are required to indemnify such underwriters. (b) In connection with any proposed public offering of securities of the Corporation by any of the FL Partnerships or the Corporation, the Stockholder agrees (i) to supply any information reasonably requested by the Corporation in connection with the -4- preparation of a registration statement and/or any other documents relating to such public offering, and (ii) to execute and deliver any agreements and instruments reasonably requested by the Corporation to effectuate such public offering, including, without limitation, an underwriting agreement, a custody agreement and a "holdback" agreement pursuant to which the Stockholder will agree not to sell or purchase any securities of the Corporation (whether or not such securities are otherwise governed by this Agreement) for the same period of time following the public offering as is agreed to by the FL Partnerships with respect to themselves. If the Corporation requests that the Stockholder take any of the actions referred to in clause (i) or (ii) of the previous sentence, the Stockholder shall take such action promptly but in any event within three days following the date of such request. 2.5. Sale of All of their Capital Stock by the FL Partnerships. Notwithstanding any other provision of this Agreement, if the FL Partnerships shall propose to sell or exchange (in a business combination or otherwise) all of their shares of capital stock of the Corporation in a bona fide arm's-length transaction, the FL Partnerships, at their option, may require that the Stockholder sell all of its shares of Common Stock in the same transaction and, if stockholder approval of the transaction is required, that the Stockholder vote his shares in favor thereof. In calculating the aggregate consideration paid with respect to the Common Stock, the Board of Directors of the Corporation, in good faith, shall determine the fair market value of all property (other than cash) received in the sale or exchange and its determination shall be final and binding on the holders of capital stock of the Corporation. The Stockholder shall pay his proportionate share of all Expenses of Sale incurred by the selling stockholders in connection with such sale that are not paid by the Corporation. 2.6. Termination of Restrictions and Rights. Notwithstanding any other provision of this Agreement, but subject to the restrictions of all applicable federal and state securities laws, including the restrictions in this Agreement relating thereto, after one or more public offerings which result in the shares of capital stock of the Corporation owned by the FL Partnerships immediately thereafter constituting, in the aggregate, less than 20% of the then outstanding voting power of the Corporation, any and all shares of Common Stock owned by the Stockholder may be sold, transferred, assigned, exchanged, pledged, encumbered or otherwise disposed of, and the Stockholder may grant any option or right to purchase, or may continue to hold, such shares or any legal or beneficial interest therein, free of the restrictions contained in this Agreement, including the restriction requiring resale by the Stockholder to the Corporation of all or a portion of the shares of Common Stock owned by him, and the Stockholder shall no longer be entitled to any of the rights contained in this Agreement. -5- 3. Prohibited Activities. 3.1. Prohibition Against Certain Activities. The Stockholder agrees that (a) he will not at any time during his employment (other than in the course of his employment) with the Corporation or any affiliate thereof, or after any Termination, directly or indirectly disclose or furnish to any other person or use for his own or any other person's account any confidential or proprietary knowledge or any other information which is not a matter of public knowledge obtained during the course of his employment with, or other performance of services for, the Corporation or any affiliate thereof or any predecessor of any of the foregoing, no matter from where or in what manner the Stockholder may have acquired such knowledge or information, and he shall retain all such knowledge and information in trust for the benefit of the Corporation, its affiliates and the successors and assigns of any of them, (b) if he is Terminated, he will not for three years following the Termination directly or indirectly solicit for employment, including, without limitation, recommending to any subsequent employer the solicitation for employment of, any person who at the time of the solicitation is employed by the Corporation or any affiliate thereof, (c) he will not at any time during his employment or after any Termination publish any statement or make any statement (under circumstances reasonably likely to become public or that he might reasonably expect to become public) critical of the Corporation or any affiliate of the Corporation, or in any way adversely affecting or otherwise maligning the business or reputation of any of the foregoing entities, and (d) the Stockholder will not breach the provisions of Section 2.1 hereof (any activity described in clause (a), (b), (c) or (d) of this Section 3.1 being herein referred to as a "Prohibited Activity"). 3.2. Right to Purchase Shares. The Stockholder understands that the Corporation has granted the Option to the Stockholder to reward the Stockholder for the Stockholder's future efforts and loyalty to the Corporation and its affiliates by giving the Stockholder the opportunity to participate in the potential future appreciation of the Corporation. Accordingly, (a) if the Stockholder engages in any Prohibited Activity, or (b) if, at any time during the Stockholder's employment with the Corporation or any affiliate or during the three years following the Stockholder's Termination, the Stockholder engages in any Competitive Activity (as defined below), or (c) if, at any time (whether during the Stockholder's employment or after any Termination), the Stockholder is convicted of a crime against the Corporation or any affiliate, then, in addition to any other rights and remedies available to the Corporation, the Corporation shall be entitled, at its option, exercisable by written notice (the "Repurchase Notice") to the holder, to purchase all of the shares of Common Stock then held by the Stockholder. The term "Competitive Activity" shall mean engaging in any of the following activities: (i) serving as a director of any person (other than the Corporation or any of its affiliates) that competes either directly or indirectly through one or more affiliates with any of the -6- businesses conducted by the Corporation or any of its affiliates (a "Competitor"), (ii) directly or indirectly through one or more intermediaries (X) controlling any Competitor or (Y) owning any equity or debt interests in any Competitor (other than equity or debt interests which are publicly traded and do not exceed 2% of the particular class of interests outstanding) (it being understood that, if interests in any Competitor are owned by an investment vehicle or other entity in which the Stockholder owns an equity interest, a portion of the interests in such Competitor owned by such entity shall be attributed to the Stockholder, such portion determined by applying the percentage of the equity interest in such entity owned by the Stockholder to the interests in such Competitor owned by such entity), (iii) directly or indirectly soliciting, diverting, taking away, appropriating or otherwise interfering with any of the customers or suppliers of the Corporation or any subsidiary or any affiliate of the Corporation of which the Stockholder owns shares of capital stock or any other equity interest, or (iv) employment by (including serving as an officer or director of) or providing consulting services to any Competitor. For purposes of this Section 3.2, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of any Competitor, whether through the ownership of equity interests, by contract or otherwise. 3.3. Purchase Price. The purchase price per share of any shares of Common Stock purchased pursuant to this Article 3 shall be equal to the lesser of (x) the per share exercise price at which the shares acquired hereunder were purchased (adjusted to reflect any stock split, stock dividend or other capital transaction effected after the date hereof and prior to the date of the Repurchase Notice) and (y) the Market Price Per Share, except that the 30 day period shall be calculated with reference to the date of the Repurchase Notice (such purchase price per share being referred to herein as the "Termination Price"). The closing of such purchase shall take place at the principal office of the Corporation 30 days following the date of the Repurchase Notice, and the provisions of Section 2.2(c) (except for the first sentence thereof) shall apply to such closing. Notwithstanding anything herein to the contrary, from and after the date of the Repurchase Notice, the Stockholder shall have no rights with respect to any shares of Common Stock which he is required to sell to the Corporation pursuant to this Section 3.3, except to receive the Termination Price therefor. 3.4. Limitation of Purchase Price. Notwithstanding anything to the contrary set forth in Section 2.3, 2.4 or 2.5 hereof, the Stockholder shall not be entitled to receive as consideration for the Stockholder's shares of Common Stock in connection with any sale by the Stockholder of such shares pursuant to the provisions of Section 2.3, 2.4 or 2.5, as the case may be, an amount per share greater than the Termination Price (the "Greater Consideration") if, at or prior to the time such consideration is otherwise payable (the "Greater Consideration Closing"), the Corporation would be or would have been entitled -7- to exercise its right to purchase such shares of Common Stock pursuant to Section 3.2 hereof. The Corporation may request the Stockholder, if, at such time, the Stockholder has been Terminated, to provide the Corporation with evidence, reasonably satisfactory to the Corporation, of the identity of the employers of the Stockholder at any time during the period set forth in clause (b) of Section 3.2 hereof (or since the date hereof until the date of the request, if a shorter period), in which event, notwithstanding the provisions of Section 2.3, 2.4 or 2.5, as the case may be, the Stockholder shall not be entitled to receive the Greater Consideration unless and until the Stockholder first provides such evidence to the reasonable satisfaction of the Corporation. If the Stockholder fails to provide such evidence to the reasonable satisfaction of the Corporation prior to the date of the Greater Consideration Closing, or if the Corporation could have exercised its right to purchase by reason of Section 3.2 hereof, the Corporation on behalf of the Stockholder shall be entitled to receive the entire purchase price payable in respect of the Stockholder's shares of Common Stock and (i) shall remit to the Stockholder only an amount equal to (x) the Termination Price multiplied by (y) the number of shares of Common Stock sold by the Stockholder, and (ii) shall remit the balance of such purchase price to the other stockholders of the Corporation participating in the transaction referred to in Section 2.3, 2.4 or 2.5 hereof, as the case may be, pro rata in accordance with their respective participation in such transaction. 4. Stock Certificate Legend and Investment Representations; Other Representations. 4.1. All certificates representing shares of Common Stock acquired hereunder or hereafter by the Stockholder (unless registered under the Securities Act of 1933, as amended (the "Act")) shall bear the following legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any securities regulatory authority of any state, and may not be sold, transferred, assigned, exchanged, pledged, encumbered or otherwise disposed of except in accordance with applicable law and the provisions of a Stockholder's Agreement with the Corporation, a copy of which is available for inspection at the offices of the Corporation." 4.2. The Stockholder represents and warrants that: (a) the Stockholder understands that (i) the offer and sale of shares of Common Stock in accordance with this Agreement have not been and will not be registered under the Act, and it is the intention of the parties hereto that the offer and sale of the securities be exempt from registration under the Act and the rules promulgated thereunder by the Securities and Exchange Commission; and (ii) such shares cannot be sold, transferred, assigned, exchanged, -8- pledged, encumbered or otherwise disposed of unless they are registered under the Act or an exemption from registration is available; (b) the Stockholder is acquiring the shares of Common Stock to be acquired hereunder for investment for the Stockholder's own account and not with a view to the distribution thereof; (c) the Stockholder will not, directly or indirectly, sell, transfer, assign, exchange, pledge, encumber or otherwise dispose of any shares of Common Stock acquired hereunder except in accordance with this Agreement; (d) the Stockholder has, or the Stockholder together with the Stockholder's advisors, if any, have, such knowledge and experience in financial and business matters that the Stockholder is, or the Stockholder together with the Stockholder's advisors, if any, are, and will be capable of evaluating the merits and risks relating to the Stockholder's purchase of shares of Common Stock under this Agreement; (e) the Stockholder has been given the opportunity to obtain information and documents relating to the Corporation and to ask questions of and receive answers from representatives of the Corporation concerning the Corporation and the Stockholder's investment in the Common Stock; (f) the Stockholder is able to bear the economic risk of a total loss of the Stockholder's investment in the Corporation; and (g) the Stockholder has adequate means of providing for the Stockholder's current needs and foreseeable personal contingencies and has no need for the Stockholder's investment in the Common Stock to be liquid. 5. Miscellaneous. 5.1. Rules of Construction. (a) In this Agreement, unless the context otherwise requires, words in the singular number or in the plural number shall each include the singular number and the plural number, words of the masculine gender shall include the feminine and the neuter, and, when the sense so indicates, words of the neuter gender may refer to any gender. (b) The term "affiliate" shall mean any person directly or indirectly controlling, controlled by, or under common control with the person of which it is an affiliate. (c) The term "person" shall mean an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. (d) There shall be included within the term "Corporation" any successor to Gulfstream Aerospace Corporation by merger, consolidation, acquisition of substantially all the assets thereof, or otherwise. -9- (e) There shall be included within the term "Common Stock" any Common Stock now or hereafter authorized to be issued, and any and all securities of any kind whatsoever of the Corporation which may be issued after the date hereof in respect of, or in exchange for, shares of Common Stock pursuant to a merger, consolidation, stock split, stock dividend, recapitalization of the Corporation or otherwise. (f) The term "FL Partnerships" shall mean individually and collectively Gulfstream Partners, Gulfstream Partners II, L.P. and Forstmann Little & Co. Subordinated Debt and Equity Management Buyout Partnership-IV, each a New York limited partnership. 5.2. Distributions. In the event of any dividend, distribution or exchange paid or made in respect of the Common Stock consisting of securities (the "Affiliate Securities") of any affiliate of the Corporation (the "Affiliate"), (i) the restrictions and rights with respect to the Common Stock that are contained in Article 2 shall be applicable to the Affiliate Securities without further action of the parties (with the references to Common Stock being deemed references to the Affiliate Securities and the references to the Corporation being deemed references to the Affiliate), and (ii) as a condition precedent to the receipt of the Affiliate Securities by the Stockholder, the Stockholder shall enter into a stockholder's agreement containing substantially equivalent terms with respect to the Affiliate Securities (but reflecting the economics of the dividend, distribution or exchange and the capitalization of the Affiliate) as are contained in Section 2.2 and Article 3 hereof. The Board of Directors of the Corporation, in good faith, shall determine such economics and its determination shall be final and binding on the holders of the Common Stock. 5.3. Further Assurances. Each party hereto shall do and perform or cause to be done and performed all further acts and things and shall execute and deliver all other agreements, certificates, instruments and documents as any other party hereto reasonably may request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 5.4. Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by, and construed and enforced in accordance with, the laws of the State of New York, without giving effect to the principles of conflicts of law thereof. 5.5. Specific Performance. The parties hereto acknowledge that there will be no adequate remedy at law for a violation of any of the provisions of this Agreement and that, in addition to any other remedies which may be available, all of the provisions of this Agreement shall be specifically enforceable in accordance with their respective terms. -10- 5.6. Invalidity of Provision. The invalidity or unenforceability of any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. If any provision of this Agreement is held unlawful or unenforceable in any respect, such provision shall be revised or applied in a manner that renders it lawful and enforceable to the fullest extent possible. 5.7. Notice. All notices and other communications hereunder shall be in writing and, unless otherwise provided herein, shall be deemed to have been given when received by the party to whom such notice is to be given at its address set forth below, or such other address for the party as shall be specified by notice given pursuant hereto: (a) If to the Corporation, to: Gulfstream Aerospace Corporation 500 Gulfstream Road, Travis Field Savannah, Georgia 31408 Attention: Ms. Chris Davis with copies to: Forstmann Little & Co. 767 Fifth Avenue, 44th Floor New York, New York 10153 Attention: Ms. Sandra Horbach Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attention: Robert Schwenkel, Esq. (b) If to the Stockholder or Legal Representative, to such person at the address as reflected in the stock records of the Corporation. 5.8. Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns. In addition, each of the FL Partnerships shall be a third party beneficiary of this Agreement and shall be entitled to enforce this Agreement. -11- 5.9. Amendment and Modification. This Agreement may be amended, modified or supplemented only by written agreement of the party against whom enforcement of such amendment, modification or supplement is sought. 5.10. Heading; Execution in Counterparts. The headings and captions contained herein are for convenience only and shall not control or affect the meaning or construction of any provision hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and which together shall constitute one and the same instrument. 5.11. Entire Agreement. This Agreement, the Plan and, if any part of the Option continues to be outstanding, the Option Agreement constitute the entire agreement, and supersede all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof and thereof. 5.12. Withholding. The Corporation shall have the right to deduct from any amounts payable under this Agreement any taxes or other amounts required by applicable law to be withheld. The Stockholder agrees to indemnify the Corporation against any federal, state and local withholding taxes for which the Corporation may be liable in connection with the Stockholder's acquisition, ownership or disposition of Common Stock. 5.13. No Right to Continued Employment. This Agreement shall not confer upon the Stockholder any right with respect to continuance of employment by the Corporation or any affiliate thereof, nor shall it interfere in any way with the right of the Corporation or any affiliate thereof to terminate the Stockholder's employment at any time. 5.14. Possession of Certificates; Power of Attorney. (a) In order to provide for the safekeeping of the certificates representing the shares of Common Stock being purchased by the Stockholder and to facilitate the enforcement of the terms and conditions of this Agreement, (i) the Corporation shall retain physical possession of all certificates representing shares of Common Stock subject hereto and (ii) concurrently with the Stockholder's execution and delivery to the Corporation of this Agreement, the Stockholder shall deliver to the Corporation an undated stock power, duly executed in blank, for each such certificate. (b) The Stockholder hereby irrevocably appoints the FL Partnerships, and each of them (individually and collectively, the "Representative"), the Stockholder's true -12- and lawful agent and attorney-in-fact, with full powers of substitution, to act in the Stockholder's name, place and stead, to do or refrain from doing all such acts and things, and to execute and deliver all such documents, as the Representative shall deem necessary or appropriate in connection with a sale to the Corporation following a Termination or pursuant to Section 2.3, 2.4, 2.5 or 3.2 hereof, including, without in any way limiting the generality of the foregoing, in the case of a sale pursuant to Section 2.3, 2.4 or 2.5 to receive on behalf of the Stockholder any payments made in respect of the sale of his shares of Common Stock, to hold back from any such payments any amount that the Representative deems necessary to reserve against the Stockholder's share of any Expenses of Sale and pay any Expenses of Sale, and in the case of a sale pursuant to Section 2.3 or 2.5 hereof, to execute and deliver on behalf of the Stockholder a purchase and sale agreement and any other agreements and documents that the Representative deems necessary or desirable in connection with any such sale, and in the case of a public offering, to execute and deliver on behalf of the Stockholder an underwriting agreement, a "holdback" agreement, a custody agreement and any other agreements and documents that the Representative deems necessary or desirable in connection with any such public offering. The Stockholder hereby ratifies and confirms all that the Representative shall do or cause to be done by virtue of its appointment as the Stockholder's agent and attorney-in-fact. In acting for the Stockholder pursuant to the appointment set forth in this Section 5.14(b), the Representative shall not be responsible to the Stockholder for any loss or damage the Stockholder may suffer by reason of the performance by the Representative of its duties under this Agreement, except for loss or damage arising from willful violation of law or gross negligence in the performance of its duties hereunder. The appointment of the Representative shall be deemed coupled with an interest and as such shall be irrevocable and shall survive the death, incompetency or insanity of the Stockholder, and any person dealing with the Representative may conclusively and absolutely rely, without inquiry, upon any act of the Representative as the act of the Stockholder in all matters referred to in this Section 5.14(b). 5.15. Consent to Jurisdiction. The Stockholder hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and of the United States of America, in each case located in the County of New York, for any actions, suits or proceedings ("Litigation") arising out of or relating to this Agreement and the transactions contemplated hereby (and the Stockholder agrees not to commence any Litigation except in such courts), and further agrees that service of process, summons, notice of document by United States registered mail to the Stockholder in accordance with Section 5.7 hereof shall be effective service of process for any Litigation brought against the Stockholder in any such court. The Stockholder hereby irrevocably and unconditionally waives any objection to the laying of venue of any Litigation in the courts of the State of New York or of the United States of America, in each case located in the County of New York, and hereby further irrevocably and -13- unconditionally waives and agrees not to plead or claim in any such court that any Litigation brought in any such court has been brought in an inconvenient forum. IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each of the parties hereto, all as of the date first above written. ___________________________________ Stockholder GULFSTREAM AEROSPACE CORPORATION By:_______________________________ Title: -14- The undersigned hereby agree to be bound by the provisions of Sections 2.3 and 2.4 of the foregoing Stockholder's Agreement. GULFSTREAM PARTNERS By FLC XXI Partnership, as General Partner By:______________________________________ , General Partner GULFSTREAM PARTNERS II, L.P. By FLC XXIV Partnership, as General Partner By:______________________________________ , General Partner FORSTMANN LITTLE & CO. SUBORDINATED DEBT AND EQUITY MANAGEMENT BUYOUT PARTNERSHIP - IV By FLC Partnership, L.P., as General Partner By:______________________________________ , General Partner -15- (IF THE STOCKHOLDER RESIDES IN A COMMUNITY PROPERTY STATE) The undersigned acknowledges that the undersigned has read the foregoing Agreement, including the schedule thereto, between Gulfstream Aerospace Corporation and the undersigned's spouse, the Stock Option Plan and the Stock Option Agreement, understands that such agreement, plan and option agreement provide for the undersigned's spouse to purchase shares of Common Stock, which shares are subject to certain restrictions reflected in such agreement, plan and option agreement, and agrees to be bound by the foregoing agreement, plan and option agreement. ________________________________ Stockholder's Spouse -16- Schedule I Number Of Shares In Cumulative Number Of Respect Of Which Option Shares Subject To The Is Being Exercised On Stockholder's Agreement Date The Date Indicated On The Date Indicated - ---- ------------------ --------------------- -17- EX-11.1 5 EX-11.1 EXHIBIT 11.1 GULFSTREAM AEROSPACE CORPORATION AND SUBSIDIARIES Computation of Pro Forma Earnings per Common Share (In thousands, except per share data) (Unaudited)
Year Ended December 31, -------------------- 1996 1995 --------- --------- Net Income $ 46,965 $ 28,894 --------- --------- --------- --------- Average shares issued and outstanding (after giving effect to the Recapitalization) 65,403 65,403 Exercise of certain stock options with the Offering 3,949 3,949 Incremental shares applicable to stock options outstanding after the exercise of certain stock options with the Offering 4,624 4,624 Shares issued pursuant to the Offering 4,559 4,559 --------- --------- Weighted average common and common equivalent shares outstanding 78,535 78,535 --------- --------- --------- --------- Net income per common and common equivalent share $ 0.60 $ 0.37 --------- --------- --------- ---------
Note: Shares and stock options issued prior to October 16, 1996, date of the Offering (see Note 10 to the consolidated financial statements) are treated as outstanding for all reported periods. EX-13.1 6 ANNUAL REPORT Exhibit 13 GULFSTREAM AEROSPACE CORPORATION Financial Highlights December 31, -------------------------------------------- 1996 1995 1994 ================================================================================ (Dollars in millions, except per share amounts) Net Revenues $ 1,063.7 $ 1,041.5 $ 901.6 - -------------------------------------------------------------------------------- Net Income $ 47.0 $ 28.9 $ 23.6 - -------------------------------------------------------------------------------- Net Income per Share 0.60 0.37 N/A * - -------------------------------------------------------------------------------- Contractual Backlog $ 3,104.0 $ 1,938.3 $ 1,473.8 - -------------------------------------------------------------------------------- Research & Development $ 58.1 $ 63.1 $ 57.4 - -------------------------------------------------------------------------------- [The following tables were represented as bar charts in the printed material.] Contractual backlog Dollars in millions ================================================================================ 1994 1995 1996 $1,473.8 $1,938.3 $3,104.0 Net Revenues Dollars in millions ================================================================================ 1994 1995 1996 $ 901.6 $1,041.5 $1,063.7 Net Income Dollars in millions ================================================================================ 1994 1995 1996 $ 23.8 $ 28.9 $ 47.0 Net Income per Share In dollars ================================================================================ 1994 1995 1996 N/A $ 0.37 $ 0.60 *See Notes 1 and 10 to the Consolidated Financial Statements CONTENTS Letter to Shareholders 2 Globalization 4 Gulfstream Products 6 Leading Edge Technology 10 Aircraft Services 14 Board of Directors 18 1996 Financial Review 19 Corporate Information 40 Dear Shareholders 1996 was a great year for Gulfstream, building on the success of a multi-year program, begun in 1993, to revitalize the Company. We reported the largest number of orders in our 38-year history and ended the year with a record backlog. The Gulfstream V, our new ultra-long range business jet, received provisional certification from the Federal Aviation Administration and we began delivering the first Gulfstream Vs to our customers. In October, the Company completed its initial public offering and commenced trading on the New York Stock Exchange. Although we still have many challenges ahead, we believe we have built a strong foundation and that Gulfstream is well positioned to realize significant revenue and earnings growth in the years ahead. 1996 Was a Record Year In 1996, we achieved 65 orders for new Gulfstream IV-SP and Gulfstream V aircraft. This represented the highest number of annual orders in the Company's history, and included a record year of orders for the Gulfstream IV-SP. As a result of this strong demand for our products, Gulfstream ended the year with a total backlog of 94 units, valued at $3.1 billion. The Gulfstream IV-SP remains the world's most popular large cabin business jet, a testament to its outstanding performance and competitive pricing. In 1996, we delivered the 300th Gulfstream IV. With a year-end backlog of 27 Gulfstream IV-SPs, we look forward to selling this product well into the future. The company's Gulfstream V program, which has encompassed four years of work and over $250 million of R&D spending, is largely complete. Capable of flying 6,500 nautical miles, or New York to Tokyo non-stop, this aircraft significantly expands our market, enabling us to meet the growing needs of our customers for efficient intercontinental business travel. The Gulfstream V, which combines state-of-the-art technology with the conservative design philosophy of all Gulfstream aircraft, received provisional certification from the FAA in December 1996 and is expected to receive final certification in early 1997. The Gulfstream Shares program, launched in 1995, also contributed to our success this year. By offering customers the benefits of Gulfstream ownership at a fraction of the cost, we have significantly expanded the potential market for our products. To date, we have sold 16 Gulfstream IV-SPs and two Gulfstream Vs into the shares program. As we enter 1997, we are also developing a Gulfstream V shares program with our partner, Executive Jet International. Our financial performance for the year was on plan. We delivered a total of 27 aircraft, including our first three Gulfstream Vs. Combined with a 30 percent increase in the company's service and parts business, revenues reached $1.1 billion, and earnings increased 63% to $47 million, despite significant ongoing research and development spending for the Gulfstream V. Earnings per share for the year were $0.60 versus $0.37 in 1995. ---------- 2 1997 Outlook and Objectives In 1997, sales and profits are projected to increase as deliveries accelerate and research and development spending declines. In total, we are targeting the delivery of 46 aircraft in 1997, a 70% increase over 1996 deliveries. In response to customer demand, we have also announced plans to double our 1996 production level to 60 aircraft a year by 1999. This production plan includes an innovative factory layout which will give us the flexibility to optimize our production mix of Gulfstream IV-SPs and Gulfstream Vs. Having secured a dominant position in the domestic business jet market, we are now aggressively pursuing ways to further expand our international presence. As business becomes more global, we expect international sales to become increasingly important to our success. With its extended range, the Gulfstream V positions us to compete effectively in this growing market. Based on the success of our domestic Gulfstream Shares program, we are also exploring a number of opportunities to introduce shares programs overseas. The last four years have been a period of significant investment for Gulfstream. The company has expanded its product line, improved its marketing efforts and enhanced its customer service and support operations. We begin 1997 with a $3.1 billion backlog and plans to substantially increase our production and delivery schedules. This should result in strong financial performance in the years to come. We would like to take this opportunity to express our appreciation for the contributions of our dedicated employees and the continuing support of our customers, suppliers, partners and investors. We believe Gulfstream is in the best position in its history, and we are committed to achieving superior shareholder value in the years ahead. Gulfstream Management Committee pictured left to right Standing: Theodore J. Forstmann and Bryan T. Moss [PHOTO] Seated: W. W. Boisture, Jr., Chris A. Davis and Fred A. Breidenbach /s/ Theodore J. Forstmann Theodore J. Forstmann Chairman of the Board Chairman of the Management Committee /s/ W. W. Boisture, Jr. /s/ Fred A. Breidenbach W. W. Boisture, Jr. Fred A. Breidenbach Executive Vice President President and COO Member of the Member of the Management Committee Management Committee /s/ Chris A. Davis /s/ Bryan T. Moss Chris A. Davis Bryan T. Moss Executive Vice President Vice Chairman and CFO Member of the Member of the Management Committee Management Committee February 28, 1997 ---------- 3 [GRAPHIC OF GLOBE] ---------- 4 Globalization For nearly four decades, Gulfstream's aircraft performance, reliability, safety and service have resulted in strong customer loyalty and dominant market share. In 1958, we introduced the Gulfstream I as the first aircraft designed exclusively for corporate use. In 1966, the Company created the large cabin business jet market with the introduction of the Gulfstream II. From the Gulfstream II to our most recent product offering, the Gulfstream V, we have continued our long-standing tradition of product innovation, capturing a 60% cumulative market share. Looking ahead, we believe Gulfstream is well positioned for future growth and market share gains. Throughout the world, opportunities exist for businesses seeking to expand their own markets. Wealth is being created in new regions of the world as international markets open and businesses emerge in developing nations. This translates into a rapidly changing business environment which is fueling international business travel. [GRAPHIC OF GLOBE] As the world increasingly becomes one marketplace, the need for efficient air travel and uncompromised safety is more important than ever before. With the Gulfstream IV-SP, the Gulfstream V and the Gulfstream Shares program, we provide our customers with products that meet the challenges of globalization. In addition, our expanded network of international sales, service and support offices, located strategically around the globe, enables us to respond to the growing service requirements of our customers. Gulfstream produces the highest quality, most innovative and productive business jets in the market. We are meeting the challenges of customers worldwide and helping to redefine how the world does business. ---------- 5 The Gulfstream V, the world's first ultra-long range business jet, began [GRAPHIC] deliveries to customers in 1996. ---------- 6 [GRAPHIC OF GLOBE] ------------------- Gulfstream Products ---------- 7 Gulfstream Product Strategy The Gulfstream name has always been synonymous with preeminent business aircraft. Our products have successfully evolved over time by offering travelers more range, efficiency and comfort with each new generation of aircraft. Today, we offer a broad selection of transportation solutions to our customers. The Gulfstream IV-SP The Gulfstream IV-SP is the best-selling large cabin, long range business jet in the market. It is the aircraft chosen by nine of the top ten Fortune 500 companies and more than 30 world governments including the President of the United States. It is also frequently selected for demanding special missions by military and other operators. The Gulfstream IV was the first intercontinental business jet capable of flying non-stop between major U.S. and European cities. In 1987, the Gulfstream IV introduced the first all-glass cockpit and in 1993, the Special Performance (SP) model increased payload and boosted performance, setting new standards for the industry. Together the Gulfstream IV and Gulfstream IV-SP hold 79 national and world flight records, attesting not only to outstanding performance, but to ruggedness, reliability and design safety. The Gulfstream IV-SP can accommodate up to 19 passengers, has a range of 4,220 nautical miles and a cruising speed of 560 miles per hour. These capabilities permit routine international travel at cruising speeds comparable to commercial airlines. The Gulfstream IV-SP operates efficiently at altitudes as high as 45,000 feet, enabling it to fly above commercial airline traffic and adverse weather. The Gulfstream IV-SP leads the industry in resale value, years beyond its depreciable life. With over 300 aircraft in worldwide operation and a 1996 year-end backlog of 27 orders totaling over $700 million, the Gulfstream IV-SP remains the undisputed leader in the long range segment of the market. ---------- 8 The Gulfstream V In 1996, we delivered the world's first ultra-long range business jet, the Gulfstream V, to customers. This represented the culmination of four years of extensive research and development, which focused on delivering an airplane with the most advanced set of capabilities to the marketplace. The Gulfstream V features an innovative aerodynamic design which integrates an all-new wing, new BMW Rolls-Royce engines and an airframe specifically designed to meet the stringent performance requirements of ultra-long range business travel. It cruises nearly 600 miles per hour at 51,000 feet with a range of 6,500 nautical miles, allowing passengers to travel non-stop to city pairs such as New York to Tokyo, San Francisco to Beijing or Honolulu to London. It also provides outstanding short range efficiency, plus all the safety, reliability and comfort expected of a Gulfstream. In December 1996, provisional certification was received and the first three airplanes were delivered to customers. Final FAA certification is expected in early 1997. At year-end 1996, the Company had a backlog of 67 Gulfstream V orders totaling approximately $2.4 billion. The Gulfstream Shares Program In 1995, Gulfstream teamed with Executive Jet International (EJI) to offer an exciting new program for Gulfstream aircraft ownership - Gulfstream Shares. This program offers eighth and quarter share ownership in Gulfstream IV-SP aircraft and introduces new customers to the benefits of safe, reliable, productive business transportation. For a monthly operating and management fee, customers have all the benefits of Gulfstream ownership without the traditional investment in hangar facilities, equipment and flight crew personnel. In addition, Gulfstream Shares provides a cost-effective alternative to charter aircraft and supplemental lift for fleets of existing aircraft operators. Gulfstream Shares brings the Gulfstream name, quality, reputation and marketing strength together with EJI's operating experience and reputation as the leader in the business jet fractional ownership market, putting Gulfstream ownership within the reach of more businesses and individuals than ever before. Gulfstream Shares has vastly expanded the market for Gulfstream products with 16 Gulfstream IV-SPs and two Gulfstream Vs already sold into the program. We expect the worldwide demand for this product to continue to grow. To meet this opportunity, we are targeting the introduction of our Gulfstream Shares program into international markets in 1997. [CAPTIONS FOR PHOTOS ON THIS AND PREVIOUS PAGE] The Gulfstream IV-SP is the best-selling large cabin, long range business jet ever built. The Gulfstream V features a 100% fresh air system, a 6,000 foot cabin pressure altitude at 51,000 feet, an optional SATCOM satellite communication system and a quiet cabin environment. Gulfstream has manufactured more than 300 Gulfstream IVs and Gulfstream IV-SPs. Together the two aircraft hold 79 national and world flight records. ---------- 9 Gulfstream has consistently designed its aircraft using the most sophisticated technology available to maximize performance, safety and reliability. ---------- 10 ---------------- Leading Edge Technology [GRAPHIC OF GLOBE] ---------- 11 Research and Development Gulfstream has pioneered a record number of technological "firsts" in corporate aviation. From the world's first transcontinental corporate jet, the Gulfstream II, to the first ultra-long range business jet, the Gulfstream V, we have consistently designed our aircraft using the most sophisticated technology available in order to maximize performance, safety and reliability. Our research and development programs capitalize on state-of-the-art computerized design techniques, relationships with worldwide leaders in aviation equipment and an unwavering commitment to product excellence. In developing the Gulfstream V, our engineers built upon the proven design philosophy of the Gulfstream family of aircraft. Powerful computer tools, including CATIA (Computer-Aided Three Dimensional Interactive Application) and an electronic aircraft mock-up, enabled us to electronically design, build and test three dimensional models of the Gulfstream V. In addition, the Company invested in an Integrated Test Facility, which simulates all electrical and electronic systems and flight controls prior to installation on the aircraft. Rigorous up-front analysis and testing have helped facilitate a smooth transition from product design to product manufacturing. As a result, Gulfstream has a higher quality product with a significantly reduced time to market, a critical advantage in today's competitive environment. Research and development, however, does not end with new aircraft. Gulfstream is continually upgrading its products to satisfy evolving customer needs and changing regulatory environments. The primary focus is on improving operating efficiencies and aircraft performance while reducing pilot workloads and manufacturing cycle times. Looking ahead, several of the key aircraft innovations developed for the Gulfstream V will be incorporated into the production of the Gulfstream IV-SP. Specific improvements are also available as equipment upgrades to the entire family of Gulfstream business jets, maximizing total product performance while creating additional long-term value for our customers. Supplier Relationships A key element of Gulfstream's success has been its long-standing relationships with the leading aviation equipment manufacturers around the world. Rolls-Royce has a 38-year history with Gulfstream and has designed and manufactured all of our engines from the Gulfstream I to the BMW Rolls-Royce powered [CAPTION FOR PHOTO] Powerful computer tools including CATIA (Computer- Aided Three Dimensional Interactive Application) enabled us to electronically design, build and test three dimensional models in developing the Gulfstream V. ---------- 12 Gulfstream V. With over one million hours logged on the Gulfstream IV-SP Tay engines alone, this long-standing relationship has provided unmatched safety, operating efficiency and aircraft reliability. Our relationship with Aerostructures, formerly a division of Textron, spans over 30 years since it began manufacturing wings for the Gulfstream II. Since that time, Aerostructures has manufactured over 800 sets of wings for all Gulfstream II, Gulfstream III and Gulfstream IV aircraft. For the Gulfstream V, we entered into revenue sharing partnerships with two leading manufacturers - Northrop Grumman and Fokker Aviation - to develop our wing and empennage. These revenue sharing partners have fully funded the development and tooling costs for these systems in exchange for a fixed percentage of future Gulfstream V revenues. Finally, to ensure maximum customer safety and comfort, we have developed long-term relationships with the manufacturers of our flight management and environmental control systems. Honeywell produces the flight management and avionics systems for the Gulfstream IV-SP and Gulfstream V. Both systems are available with an optional, integrated Head-Up Display System which permits landing in near zero visibility conditions. AlliedSignal manufactures our state-of-the-art environmental control systems. On the Gulfstream V, this system provides 100 percent fresh air and pressurizes the cabin at 6,000 feet, significantly reducing passenger fatigue. With leading edge technology, strong supplier relationships and an ongoing commitment to research and development, Gulfstream is well positioned to continue to provide the world's finest large cabin, long range corporate aircraft. [CAPTIONS FOR PHOTOS] Gulfstream's Integrated Test Facility simulates all electrical systems and flight controls prior to installation on the aircraft. Gulfstream uses a host of durable materials, including titanium, aluminum alloys, carbon graphite and epoxy composites, to provide lighter airframe weight, greater strength and enhanced corrosion resistance. The Gulfstream V's aerodynamic design was tested and analyzed through the use of computational fluid dynamics to achieve maximum performance and meet the demands of ultra-long range travel. ---------- 13 At our corporate headquarters in Savannah, Georgia, Gulfstream has one of the world's largest service facilities for business aircraft. The new 200,000 square foot state-of-the-art Service Center accommodates up to 12 Gulfstream Vs or 16 Gulfstream IV/IV-SPs. ---------- 14 ------------------------- Aircraft Services ---------- 15 Aircraft Services Gulfstream has earned its reputation as the leading manufacturer of large cabin, long range corporate aircraft not only by building high quality business jets, but also by providing owners and operators with extremely reliable aircraft service and product support around the world. This has created a growing and profitable source of revenues for the Company, as Gulfstream provides ongoing services to the nearly 900 aircraft in the Gulfstream fleet. Worldwide Service and Parts The goal of Gulfstream's service and product support is to meet our customers' needs throughout the world, 24 hours a day, 7 days a week. We accomplish this by integrating a network of company-owned service centers, authorized third party service providers, worldwide parts depots and field representatives based in five countries. At the corporate headquarters in Savannah, Georgia, Gulfstream has one of the world's largest service facilities for business jets, a new 200,000 square foot, state-of-the-art Service Center which accommodates up to 16 Gulfstream IV-SPs or 12 Gulfstream Vs. In addition, Gulfstream operates full service facilities in Brunswick, Georgia, and Long Beach, California. Gulfstream offers a full warranty on the airframe structure and parts. The engines and other components are also fully warranted by their respective suppliers. Customized Interior Completions Nearly all new Gulfstream aircraft receive customized interiors at the Company's completion centers in Savannah, Long Beach and Brunswick, up from just 70 percent five years ago. Our completion centers allow customers to choose the aircraft interior which meets their business and personal needs. Not only does this provide the Company with profitable revenues, it also establishes the foundation for future aircraft maintenance services for our customers. ---------- 16 As part of our plan to double Gulfstream's production level to 60 aircraft a year by 1999, we recently announced the addition of a 64,000 square foot paint facility in Long Beach. This facility will help us meet our corporate goal of completing the interiors for all of the aircraft we build. Comprehensive Training Gulfstream provides comprehensive pilot and maintenance training services for its customers as an integral part of all Gulfstream sales. Through long-term relationships with FlightSafety International, co-located at Gulfstream's Savannah and Long Beach facilities, and SimuFlight based in Dallas, all aspects of aircraft operation and service are addressed. These programs entail classroom instruction, computer interactive training stations, cockpit systems simulators, extensive videotape libraries and on-the-job training. Premium Pre-Owned To facilitate the sale of new aircraft, Gulfstream takes pre-owned aircraft in trade. Pre-owned Gulfstream jets are refurbished and sold with a warranty by Gulfstream's sales force. These pre-owned aircraft compete favorably with new, lower priced aircraft and have enabled the Company to expand its customer base, particularly in international markets. Aircraft Financing Gulfstream Financial Services Corporation (GFSC) plays an important role in the Gulfstream sales process by combining aircraft financing expertise with technical and operational product knowledge. By offering customized financial products, GFSC facilitates aircraft ownership, enhances the residual value of the Gulfstream fleet and strengthens our ability to serve customers worldwide. In 1996, $270 million of aircraft purchases were financed through this program. [CAPTIONS FOR PHOTOS] Gulfstream's service, product and technical support programs meet our customers' needs throughout the world, 24 hours a day, seven days a week. Gulfstream's Authorized Service Centers and Warranty Repair Facilities are located in five countries. FlightSafety International instructors lead pilots and maintenance personnel through extensive training at their facility, which is co-located with our headquarters in Savannah, Georgia. ---------- 17 Board of Directors [PHOTO] William R. Acquavella President Aquavella Galleries, Inc. [PHOTO] Robert Anderson Chairman Emeritus Rockwell Corporation [PHOTO] Charlotte L. Beers Chairman Ogilvy and Mather Worldwide, Inc. [PHOTO] Thomas D. Bell, Jr. President and Chief Executive Officer Burson-Marsteller [PHOTO] W. W. Boisture, Jr. Executive Vice President Gulfstream Aerospace Corporation [PHOTO] Fred A. Breidenbach President & Chief Operating Officer Gulfstream Aerospace Corporation [PHOTO] Chris A. Davis* Executive Vice President & Chief Financial Officer Gulfstream Aerospace Corporation [PHOTO] Lynn Forester* President & Chief Executive Officer FirstMark Holdings, Inc. [PHOTO] Nicholas C. Forstmann Founding General Partner Forstmann Little & Co. [PHOTO] Theodore J. Forstmann Chairman Gulfstream Aerospace Corporation Founding General Partner Forstmann Little & Co. [PHOTO] Sandra J. Horbach General Partner Forstmann Little & Co. [PHOTO] Drew Lewis Former Chairman & Chief Executive Officer Union Pacific Corporation [PHOTO] Bryan T. Moss Vice Chairman Gulfstream Aerospace Corporation [PHOTO] Michael S. Ovitz* Former Chairman & Co-Owner Creative Artists Agency, Inc. [PHOTO] Allen E. Paulson Chairman Emeritus Gulfstream Aerospace Corporation [PHOTO] Roger S. Penske Chairman, Chief Executive Officer & President Penske Corporation [PHOTO] Colin L. Powell Former Chairman of the Joint Chiefs of Staff [PHOTO] Gerard R. Roche Chairman Heidrick & Struggles, Inc. [PHOTO] Donald H. Rumsfeld Former U.S. Secretary of Defense Former Chairman & Chief Executive Officer General Instrument Corporation [PHOTO] George P. Shultz Former U.S. Secretary of State [PHOTO] Robert S. Strauss Founder & Partner Akin, Gump, Strauss, Hauer & Feld Former U.S. Ambassador to Russia *Elected March 5, 1997 ---------- 18 GULFSTREAM AEROSPACE CORPORATION 1996 Financial Review Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Consolidated Balance Sheets 26 Consolidated Statements of Income 27 Consolidated Statements of Stockholders' Equity 28 Consolidated Statements of Cash Flows 29 Notes to Consolidated Financial Statements 30 Independent Auditor's Report 37 Report of Management's Responsibility 38 ---------- 19 Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements and notes thereto beginning on page 26, which are incorporated herein by reference. Narrative descriptions of the principal products of Gulfstream Aerospace Corporation ("Gulfstream" or the "Company") appear under the caption Gulfstream Products beginning on page 6. Business Gulfstream is recognized worldwide as a leading designer, developer, manufacturer and marketer of the most technologically advanced intercontinental business jet aircraft. The Company's current principal aircraft products are the Gulfstream IV-SP, the Gulfstream V, Gulfstream shares(SM) (fractional ownership interests in Gulfstream IV-SPs) and pre-owned Gulfstream aircraft. As an integral part of its aircraft product offerings, the Company offers aircraft completion and worldwide aircraft maintenance services and technical support for all Gulfstream aircraft. In addition, the Company's financial services subsidiary, Gulfstream Financial Services Corporation, through its private label relationship with a third-party aircraft financing provider, offers customized products to finance the worldwide sale of Gulfstream aircraft. Operating Data The Company recognizes revenue from the sale of a new "green" aircraft (i.e., before exterior painting and installation of customer selected interiors and optional avionics) when that aircraft is delivered to the customer. Revenues from completion services are recorded when the outfitted aircraft is delivered to the customer. Revenues on all other products and services, including pre-owned aircraft, are recognized when such products are delivered or such services are performed. Generally, production of aircraft for delivery remains relatively smooth throughout a year. However, deliveries of such aircraft can vary significantly depending upon the timing of contract execution and final customer acceptance. Accordingly, the Company's revenues can vary significantly from quarter to quarter. In addition, beginning in the fourth quarter of 1995, the Company dedicated a portion of its production capacity to the manufacture of Gulfstream Vs which the Company began delivering to customers in the fourth quarter of 1996. The following sets forth certain statistical data concerning the Company's deliveries, orders and backlog for new aircraft. Year ended December 31, -------------------------------- 1996 1995 1994 ================================================================================ Operating Data: Units delivered during period: Gulfstream IV-SP 24 26 22 Gulfstream V 3 0 0 Total green deliveries 27 26 22 Units ordered during period: Gulfstream IV-SP 44 30 25 Gulfstream V 21 12 16 Total orders 65 42 41 Units in backlog at end of period: Gulfstream IV-SP(1) 27 7 3 Gulfstream V(2) 67 50 40 Total backlog(3) 94 57 43 Estimated backlog (in billions)(3) $3.1 $1.9 $1.5 - ---------- (1) Net of 3 cancellations in 1994, which generally relate to orders placed in prior years. (2) Net of cancellations of 1 and 2 in 1996 and 1995, respectively, which generally relate to orders placed in prior years. (3) See discussion of contractual backlog on page 24. Comparison of the Years Ended December 31, 1996 and 1995 [The following table was represented as a bar graph in the printed material.] Net Revenues (Dollars in millions) ================================================================================ 1994 1995 1996 $901.6 $1,041.5 $1,063.7 Net Revenues. Total net revenues increased by $22.2 million, or 2.1%, to $1,063.7 million in 1996 from $1,041.5 million in 1995. Revenues from green aircraft increased $55.1 million due to the delivery of one more unit and the commencement of Gulfstream V deliveries which have higher selling prices. In 1996, a total of 27 green aircraft, 24 Gulfstream IV-SPs and 3 Gulfstream Vs, were delivered as compared to 26 Gulfstream IV-SP deliveries in 1995. In addition, product support revenues increased by $22.8 million in 1996 principally due to international spares sales, and aircraft service revenues increased by $10.4 million, attributable primarily to the opening in 1996 of a new service center in Savannah, allowing for increased service volume. Offsetting these increases was a decrease of $67.3 million in the sale of pre-owned aircraft resulting from a reduced ---------- 20 number of trade-ins and a decrease of $14.0 million in revenues attributable to the conclusion in 1995 of a U.S. Department of Defense logistical supply contract. Cost of Sales. Total cost of sales of $839.3 million in 1996 was relatively unchanged compared to $835.5 million in 1995. Excluding pre-owned aircraft, which are generally sold at break-even levels, the gross profit percentage for 1996 was 24.8% compared to 25.6% for 1995. This decline is primarily attributable to higher costs associated with the early part of the production learning curve on Gulfstream V aircraft. The Company expects these costs to decrease beginning in late 1997 and continuing into 1998 as it realizes manufacturing efficiencies. Selling and Administrative Expense. Selling and administrative expense increased by $6.3 million, or 6.8%, to $99.5 million in 1996 from $93.2 million in 1995 and, as a percentage of net revenues, increased to 9.4% in 1996 from 9.0% in 1995. The increase principally resulted from increased advertising and marketing expenses associated with the Gulfstream V program, higher sales commission and aircraft demonstration costs resulting from increased levels of sales activity, and continued emphasis on the expansion of international sales activities. Stock Option Compensation Expense. The issuance of options to purchase common stock of the Company during 1996 resulted in a non-cash compensation charge of $7.2 million. Research and Development Expense. Substantially all research and development expense during 1996 and 1995 was associated with the Gulfstream V development program, which was substantially completed at the end of 1996. Research and development expense was $58.1 million in 1996, a decrease of $5.0 million from 1995 and, as a percentage of net revenues, was 5.5% versus 6.1%. Research and development expense for 1996 is net of an $8.0 million credit for launch assistance funds received from vendors participating in the development of the Gulfstream V. As the Gulfstream V development program reaches conclusion, the Company's research and development costs are expected to decline significantly. Research and development expenditures in 1997 and the near-term future are expected to stem principally from product improvements and enhancements, rather than new aircraft development. Amortization of Intangibles and Deferred Charges. This non-cash expense includes amortization of goodwill and other intangible assets consisting of aftermarket service and after-market product support, as well as deferred financing charges related to the Company's pre-existing and new bank credit facilities. Amortization of intangibles and deferred charges of $9.4 million for the year ended December 31, 1996 was $1.9 million higher than 1995. This increase resulted from the accelerated amortization of financing charges associated with the Company's pre-existing bank credit facilities, which were repaid in October 1996. See "Liquidity and Capital Resources". Interest Income and Expense. Interest income increased by $9.1 million to $14.6 million in 1996 from $5.5 million in 1995 as a result of higher average cash balances the Company had invested in 1996 compared to 1995. The Company generated these higher cash levels from operations, principally through the receipt of customer deposits and associated progress payments on new aircraft orders. Interest expense consists almost entirely of interest paid on borrowings under the Company's new and pre-existing bank credit facilities. Interest expense decreased to $17.9 million for 1996 from $18.7 million in 1995. This decrease was due to the Company's lower average borrowing costs of 9.0% in 1996 versus 10.1% in 1995, partially offset by an increase in average borrowings. The Company expects to incur interest expense of approximately $34 million in 1997 resulting from the issuance of new debt during the fourth quarter of 1996. See "Liquidity and Capital Resources". [The following table was represented as a bar graph in the printed material.] Interest Income (Dollars in millions) ================================================================================ 1994 1995 1996 $ 0.4 $ 5.5 $14.6 Income Taxes. The Company had available at December 31, 1996 and 1995 net operating loss carryforwards for regular federal income tax purposes of approximately $228 million and $150 million, respectively, which will begin expiring in 2006. Although the Company recorded net income during 1996 and 1995, no provision for income taxes was recorded in either period principally as a result of the utilization of net operating loss carryforwards. [The following table was represented as a bar graph in the printed material.] Net Income (Dollars in millions) ================================================================================ 1994 1995 1996 $23.6 $28.9 $47.0 ---------- 21 Comparison of the Years Ended December 31, 1995 and 1994 Net Revenues. Total net revenues increased by $139.9 million, or 15.5%, to $1,041.5 million in 1995 from $901.6 million in 1994. Revenues from green Gulfstream IV-SP aircraft increased $116.7 million in 1995 due to the delivery of 4 more units and higher average selling prices. Three of the 4 additional units were deliveries of aircraft in 1995 which were produced in 1994. In addition, revenues from the sale of pre-owned aircraft increased $54.2 million in 1995 as a result of the Company's timing of receipt and resale of trade-in aircraft. Completion revenues increased by $8.1 million in 1995 as a result of the Company completing a higher percentage of new aircraft in 1995 than in 1994. These increases were partially offset by declines in revenues of $30.9 million primarily due to the delivery of special aircraft modifications on two contracts with governmental agencies in 1994, and a decline of $11.0 million due to the early termination in 1994 of a wing manufacturing contract with another aerospace manufacturer. Cost of Sales. Total costs of sales increased $124.9 million, or 17.6%, to $835.5 million in 1995 from $710.6 million in 1994 as a result of increased unit deliveries in 1995 of both green Gulfstream IV-SP aircraft and completions. Gross profit as a percentage of sales (excluding pre-owned aircraft and nonrecurring items) increased from 25.2% in 1994 to 25.6% in 1995 as a result of the restructuring of the Company's manufacturing process to obtain cycle time reductions and additional cost savings. Selling and Administrative Expense. Selling and administrative expense increased by $11.0 million, or 13.4%, to $93.2 million in 1995 from $82.2 million in 1994, but decreased as a percentage of net revenues to 9.0% in 1995 from 9.1% in 1994. The dollar increase was principally attributable to increases in marketing programs centered around the Company's new marketing strategies, including the roll out and first flight of the Gulfstream V, expansion of the Company's international sales activities, and, as a result of successful Company performance, higher payouts to employees under the Company's management and employee incentive plans. Research and Development Expense. Research and development expense increased by $5.7 million, or 9.9%, to $63.1 million in 1995 from $57.4 million in 1994, which was 6.1% and 6.4%, respectively, of net revenues. This increase in research and development expense was related to the continuing Gulfstream V development program. Amortization of Intangibles and Deferred Charges. Amortization of intangibles and deferred charges were $7.5 million in 1995 and $7.6 million in 1994. Interest Income and Expense. Interest income increased by $5.1 million to $5.5 million for 1995 from $0.4 million in 1994 as a result of the increased cash generated from operations in 1995. Interest expense decreased by $2.0 million, or 9.7%, to $18.7 million in 1995 from $20.7 million in 1994. This decrease resulted principally from a reduced level of average borrowings in 1995 compared to 1994, offset somewhat by an increase in the Company's average borrowing costs of 10.1% in 1995 versus 7.8% in 1994. Income Taxes. The Company had available at December 31, 1995 and 1994 net operating loss carryforwards for regular federal income tax purposes of approximately $150 million and $167 million, respectively, which will expire beginning in 2006. Although the Company recorded net income during 1995 and 1994, no provision for income taxes was recorded in either period principally as a result of the utilization of net operating loss carryforwards. Liquidity and Capital Resources The Company's liquidity needs arise from working capital requirements, capital expenditures, principal and interest payments on long-term debt, and in 1996, the payment of dividends on the 7% Cumulative Preferred Stock. During 1996 and 1995, the Company relied on cash flows from operations to finance these needs. (A portion of the preferred stock was repurchased in June 1996, and the remainder was repurchased in October 1996, simultaneously with the consummation of the initial public offering and recapitalization.) [The following table was represented as a bar graph in the printed material.] Cash and Cash Equivalents (Dollars in millions) ================================================================================ 1994 1995 1996 $23.6 $223.3 $233.2 Net cash generated by operating activities was $243.4 million, $282.4 million and $69.0 million in 1996, 1995 and 1994, respectively. The reduction in 1996 was primarily due to the temporary build-up in inventory associated with Gulfstream V production and the timing of cash receipts to satisfy customer receivables, partially offset by the increase in customer progress payments associated with aircraft in backlog and new sales activities. The substantial increase in 1995 was also principally attributable to higher progress payments partially offset by higher net inventories resulting from the commencement of Gulfstream V production. ---------- 22 During the year ended December 31, 1996, additions to property and equipment amounted to $16.2 million. At December 31, 1996, the Company was not committed to the purchase of any significant amount of property and equipment. Additions to property and equipment were $25.2 million in 1995 and $9.9 million in 1994. The increased level of spending in 1995 of $15.3 million over 1994, primarily related to the construction of a new $16.0 million, 200,000 square foot service center to support the Company's strategic initiative of expanding the Company's market share for servicing Gulfstream aircraft. As a result of continued strong demand for its products, and the Company's objective to make deliveries sooner to its new aircraft customers, Gulfstream announced, during the fourth quarter of 1996, plans to increase its annual production rate to approximately 60 aircraft by 1999, a twofold increase over its 1996 annual production rate. As a result, in 1997 and 1998, the Company's capital expenditures are expected to increase by a total of $25 to $35 million above previously planned annual levels of approximately $15 million to meet the requirements of the increased production capacity. The Company continually monitors its capital spending in relation to current and anticipated business needs. As circumstances dictate, facilities are added, consolidated or modernized. During 1996, 1995 and 1994, the Company invested $2.1 million, $25.7 million and $17.3 million, respectively for tooling associated with the Gulfstream V program. As of December 31, 1996, the Company had recorded, net of amortization, an aggregate of $46.8 million in tooling associated with the Gulfstream V program. Gulfstream V tooling is being amortized to cost of sales on a unit basis over the first 200 units of the Gulfstream V program. Tooling associated with the Gulfstream IV and IV-SP has been fully amortized to cost of sales. On October 16, 1996, Gulfstream Delaware Corporation, a wholly owned subsidiary of the Company, entered into a new $650 million credit facility (the "Credit Agreement"). The Credit Agreement consists of a $400 million term loan facility and a $250 million revolving credit facility. A portion of the revolving credit facility, in an amount not to exceed $150 million, may be used (to the extent available) for standby and commercial letters of credit, and up to $200 million of the revolving credit facility will be available to the Company for borrowings. In addition, up to $20 million of the revolving credit facility may be used for swing line loans. The revolving credit facility expires September 30, 2002 with any amounts outstanding due on that date. There were no amounts outstanding under the revolving credit facility on December 31, 1996. The Credit Agreement contains customary affirmative and negative covenants including restrictions on the ability of the Company and its subsidiaries to pay cash dividends, as well as financial covenants under which the Company must operate. As of December 31, 1996, the Company was in compliance with the covenants contained in the Credit Agreement. Scheduled repayments under the new term loan facility are $20.0 million in 1997, $75.0 million in each of the years 1998 through 2001 and $80.0 million in 2002. On October 16, 1996, the Company completed an initial public offering (the "Offering") from which the Company received net proceeds of approximately $100 million, after deducting underwriting discounts and other expenses. In connection with the Offering, certain members of senior management and other employees of the Company exercised options to purchase approximately 4 million shares of common stock of the Company and sold those shares in the Offering, resulting in additional net proceeds to the Company of $14.2 million. The Company used the net proceeds of the Offering, together with the $400 million term loan under the new Credit Agreement and available cash from operations, to (i) repurchase the remaining $450 million of 7% Cumulative Preferred Stock and pay accrued dividends, (ii) repay all the outstanding indebtedness under the Company's pre-existing credit facilities, which totalled $107.7 million and (iii) pay fees and expenses incurred in connection with the Offering and the refinancing of the Company's indebtedness. During 1996, the Company repurchased approximately four shares of 7% Cumulative Preferred Stock at their stated value of $18.9 million and paid accumulated dividends of $105.3 million out of available cash from operations. The Company's principal source of liquidity both on a short-term and long-term basis is cash flow provided by operations, including customer progress payments and deposits on new aircraft orders. Occasionally, however, the Company may borrow against the Credit Agreement to supplement cash flow from operations. The Company believes that based upon its analysis of its consolidated financial position, its cash flow during the past 12 months and the expected results of operations in the future, operating cash flow and available borrowings under the Credit Agreement will be adequate to fund operations, capital expenditures and debt service for at least the next 12 months. The Company intends to repay its remaining indebtedness primarily with cash flow from operations. There can be no assurance, however, that future industry specific developments or general economic trends will not adversely affect the Company's operations or its ability to meet its cash requirements. ---------- 23 In connection with orders for 28 Gulfstream V aircraft included in backlog, the Company has offered customers trade-in options (which may or may not be exercised) under which the Company will accept trade-in aircraft, primarily Gulfstream IVs and Gulfstream IV-SPs, at a guaranteed minimum trade-in price. In light of the current market for pre-owned Gulfstream aircraft, management believes that the fair market value of such aircraft exceeds the specified trade-in values. As such, Gulfstream does not believe the existence of such commitments will have a material adverse effect on its results of operations, cash flow or financial position. The Company is currently engaged in the monitoring and clean up of certain ground water at its Savannah facility under the oversight of the Georgia Department of Natural Resources. Expenses incurred for clean up have not been significant. The Company received in 1992, at its Long Beach facility, two inquiries from the U.S. Environmental Protection Agency and in 1991, at its Oklahoma facility, a soil contamination inquiry. The Company believes other aspects of the Savannah facility, as well as other Gulfstream properties, are being carefully monitored and are in substantial compliance with current federal, state and local environmental regulations. The Company believes the liabilities, if any, that will result from the above environmental matters will not have a material adverse effect on its financial statements. On October 10, 1996, the Company reached an agreement in principle with the Pension Benefit Guaranty Corporation (the "PBGC") concerning funding of the Company's defined benefit pension plans. Pursuant to this agreement, the Company contributed an additional $20.0 million in 1996 and has agreed to contribute a total of $25.0 million annually from 1997 through 2000 to its pension plans, which payments are expected to result in such plans being fully funded. The payments to be made under this agreement were already part of the Company's overall financial planning, and therefore, are not expected to have a material adverse effect on the Company's financial statements. The Company is involved in a tax audit by the Internal Revenue Service covering the years ended December 31, 1991 and 1990. The revenue agent's report includes several proposed adjustments involving the deductibility of certain compensation expense, items relating to the initial capitalization of the Company, as well as the allocation of the original purchase price for the acquisition by the Company of the Gulfstream business, including the treatment of advance payments with respect to and the cost of aircraft that were in backlog at the time of the acquisition, and the amortization of amounts allocated to intangible assets. The Company believes that the ultimate resolution of these issues will not have a material adverse effect on its financial statements because the financial statements already reflect what the Company currently believes is the expected loss of benefit arising from the resolution of these issues. Contractual Backlog At December 31, 1996, the Company had a firm contract backlog of approximately $3.1 billion, representing a total of 67 contracts for Gulfstream Vs and 27 contracts for Gulfstream IV-SPs, compared with $1.9 billion at the end of 1995, representing a total of 50 contracts for Gulfstream Vs and 7 contracts for Gulfstream IV-SPs. The Company includes an order in backlog only if the Company has entered into a purchase contract (with no contingencies) with the customer and has received a significant (generally non-refundable) deposit from the customer. Typically, the Company begins taking orders and building backlog two to three years prior to beginning production of a new aircraft model such as the Gulfstream V and receives a significant number of orders prior to delivering its initial aircraft in a program. In total, approximately 55% of the Company's contractual backlog is scheduled for delivery beyond 1997. [The following table was represented as a bar graph in the printed material.] Contractual Backlog (Dollars in millions) ================================================================================ 1994 1995 1996 $1,473.8 $1,938.3 $3,104.0 The Company continually monitors the condition of its backlog and believes, based on the nature of its customers and its historical experience, that there will not be a significant number of cancellations. However, to the extent that there is a lengthy period of time between a customer's aircraft order and its delivery date, there may be increased uncertainty as to changes in business and economic conditions which may affect customer cancellations. Foreign Exchange The Company does not have any significant assets located outside the United States. All the Company's sales and contracts have historically been and currently are denominated in U.S. dollars and, as a result, are not subject to changes in exchange rates. In addition, substantially all of the Company's material purchases are currently denominated in U.S. dollars. Inflation The Company continually attempts to minimize any effect of inflation on earnings by controlling its operating costs and selling prices. During the past few years, the rate of inflation has been low and has not had a significant impact on the results of the Company's operations. ---------- 24 A significant portion of the Company's Gulfstream V contracts contain an adjustment in the purchase price to account for inflation. Such adjustments are generally capped at an aggregate of 3% per year. These adjustments are intended to minimize the Company's cost risk associated with the small portion of material contracts which are not under long-term agreements. Forward-Looking Information Is Subject To Risk And Uncertainty Certain statements contained in this Annual Report to Stockholders contain "forward-looking" information that involves risk and uncertainty, including, but not limited to, statements regarding expected future deliveries and expenditures. Actual future results and trends may differ materially depending on a variety of factors. For discussion of these factors, see Exhibit 99, Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, included as part of the Company's Form 10-Q filed for the quarterly period ended September 30, 1996. Quarterly Results The following table sets forth the unaudited consolidated statement of operating data for each quarter of 1996, 1995 and 1994. This quarterly information has been prepared on the same basis as annual consolidated financial statements and, in the opinion of management, reflects all adjustments (consisting only of adjustments of a normal recurring nature) necessary to state fairly the information set forth therein. Since revenues from sales of new aircraft are recorded when deliveries of green aircraft are made and revenues from completion services are recorded when completed aircraft are delivered to the customer, the Company's revenues can vary significantly from quarter to quarter depending upon the timing of the deliveries. The operating results for any quarter are not indicative of results for any future period. 1996 (1) -------------------------------------- First Second Third Fourth ================================================================================ (In thousands, except deliveries data) Net revenues $215,063 $243,609 $283,834 $321,207 Gross profit 46,791 57,040 61,339 59,289 Income from operations 6,317 8,615 16,819 18,518 Net income 6,077 9,282 17,247 14,359 Aircraft deliveries (in units): Gulfstream IV-SP (green) 5 6 9 4 Gulfstream V (green) -- -- -- 3 Completion 6 6 5 10 Pre-owned aircraft 3 4 3 6 1995 -------------------------------------- First Second Third Fourth ================================================================================ (In thousands, except deliveries data) Net revenues $172,564 $302,320 $239,420 $327,210 Gross profit 39,072 57,790 44,207 64,898 Income (loss) from operations (1,301) 17,659 5,172 20,560 Net income (loss) (5,569) 13,408 2,118 18,937 Aircraft deliveries (in units): Gulfstream IV-SP (green) 5 9 5 7 Completion 3 4 8 14 Pre-owned aircraft 3 6 5 7 1994 -------------------------------------- First Second Third Fourth ================================================================================ (In thousands, except deliveries data) Net revenues $128,283 $235,502 $141,795 $396,058 Gross profit 26,840 34,132 35,831 94,281 Income (loss) from operations (4,491) 169 (3,567) 51,772 Net income (loss) (8,922) (4,528) (8,944) 45,958 Aircraft deliveries (in units): Gulfstream IV-SP (green) 2 5 2 13 Completion 6 4 7 9 Pre-owned aircraft 2 8 2 5 - ---------- (1) Non-cash compensation expense of $100,000, $5.1 million, $1.5 million and $500,000 was recorded in each of the 1996 quarters, respectively, related to the issuance of options to purchase common stock. See Note 10 to the consolidated financial statements. ---------- 25 Consolidated Balance Sheets GULFSTREAM AEROSPACE CORPORATION December 31, ------------------------ 1996 1995 ================================================================================ (In thousands, except for share amounts) Assets Cash and cash equivalents $ 233,172 $ 223,312 Accounts receivable (less allowance for doubtful accounts: $3,243 and $3,437) 137,342 82,613 Inventories 655,237 393,125 Prepaids and other assets 7,915 2,362 ----------- --------- Total current assets 1,033,666 701,412 Property and equipment, net 126,503 127,151 Tooling 47,677 46,412 Goodwill, net of accumulated amortization: $7,322 and $6,244 35,799 36,877 Other intangible assets, net 55,556 60,628 Other assets and deferred charges 14,014 8,773 ----------- --------- Total Assets $ 1,313,215 $ 981,253 =========== ========= Liabilities and Stockholders' Equity Current portion of long-term debt $ 20,000 $ 53,065 Accounts payable 129,410 58,191 Accrued liabilities 111,243 79,911 Customer deposits--current portion 634,922 153,269 ----------- --------- Total current liabilities 895,575 344,436 Long-term debt 380,000 93,266 Accrued postretirement benefit cost 108,705 102,021 Customer deposits--long-term 109,037 158,325 Other long-term liabilities 8,709 65,665 Commitments and contingencies Stockholders' equity Preferred stock; Series A, 7% Cumulative; $.01 par value; 20,000,000 shares authorized; no shares outstanding in 1996 and 100 shares issued in 1995 -- 468,938 Common stock; $.01 par value; 300,000,000 shares authorized; 85,890,212 shares issued in 1996 and 77,362,516 shares issued in 1995 859 523 Additional paid-in capital 333,686 210,631 Accumulated deficit (468,971) (410,613) Minimum pension liability (1,464) (1,450) Unamortized stock plan expense (2,432) -- Less: Treasury stock: 11,978,439 shares in 1996 and 1995 (50,489) (50,489) ----------- --------- Total stockholders' equity (188,811) 217,540 ----------- --------- Total Liabilities and Stockholders' Equity $ 1,313,215 $ 981,253 =========== ========= See notes to consolidated financial statements ---------- 26 Consolidated Statements of Income GULFSTREAM AEROSPACE CORPORATION
Year ended December 31, ------------------------------------- 1996 1995 1994 ========================================================================================== (In thousands, except per share amounts) Net revenues $ 1,063,713 $ 1,041,514 $ 901,638 Cost and expenses Cost of sales 839,254 835,547 710,554 Selling and administrative 99,452 93,239 82,180 Stock option compensation expense 7,186 -- -- Research and development 58,118 63,098 57,438 Amortization of intangibles and deferred charges 9,434 7,540 7,583 ----------- ----------- --------- Total costs and expenses 1,013,444 999,424 857,755 ----------- ----------- --------- Income from operations 50,269 42,090 43,883 Interest income 14,605 5,508 367 Interest expense (17,909) (18,704) (20,686) ----------- ----------- --------- Net income $ 46,965 $ 28,894 $ 23,564 =========== =========== ========= Earnings per share: Net income per share $ .60 $ .37 N/A =========== =========== Weighted average common and common equivalent shares outstanding 78,535 78,535 N/A =========== ===========
See notes to consolidated financial statements ---------- 27 Consolidated Statements of Stockholders' Equity GULFSTREAM AEROSPACE CORPORATION
Additional Minimum Unamortized Total Preferred Common Paid-In Accumulated Pension Stock Plan Treasury Stockholders' Stock Stock Capital Deficit Liability Expense Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Balance as of December 31, 1993 $ 468,938 $523 $210,621 $(463,071) $(2,127) $ -- $(50,489) $ 164,395 Net income for fiscal 1994 23,564 23,564 Minimum pension liability changes 991 991 - ------------------------------------------------------------------------------------------------------------------------------------ Balance as of December 31, 1994 468,938 523 210,621 (439,507) (1,136) (50,489) 188,950 Net income for fiscal 1995 28,894 28,894 Exercise of common stock options 10 10 Minimum pension liability changes (314) (314) - ------------------------------------------------------------------------------------------------------------------------------------ Balance as of December 31, 1995 468,938 523 210,631 (410,613) (1,450) (50,489) 217,540 Net income for fiscal 1996 46,965 46,965 Repurchase of preferred stock (468,938) (468,938) Dividends paid on preferred stock (105,323) (105,323) Issuance of compensatory common stock options 9,618 (9,618) -- Amortization of stock plan expense 7,186 7,186 Conversion of common stock (8) 8 -- Stock Split of 1.5 for 1 258 (258) -- Common stock offering, net of expenses 46 99,557 99,603 Exercise of common stock options 40 14,130 14,170 Minimum pension liability changes (14) (14) - ------------------------------------------------------------------------------------------------------------------------------------ Balance as of December 31, 1996 $ -- $859 $333,686 $(468,971) $(1,464) $(2,432) $(50,489) $(188,811) - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements ---------- 28 Consolidated Statements of Cash Flows GULFSTREAM AEROSPACE CORPORATION
Year ended December 31, ---------------------------------- 1996 1995 1994 ====================================================================================== (In thousands) Cash Flows from Operating Activities Net income $ 46,965 $ 28,894 $ 23,564 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,910 23,094 24,151 Postretirement benefit cost 6,684 6,395 6,624 Provision for loss on pre-owned aircraft 1,000 2,050 208 Non-cash stock option compensation expense 7,186 Other, net 417 2,277 453 Change in assets and liabilities: Accounts receivable (55,029) 91,817 (84,613) Inventories (263,112) (105,844) 155,009 Prepaids, other assets, and deferred charges (5,578) 1,368 1,131 Notes payable (29,682) Accounts payable and accrued liabilities 102,551 11,975 (30,204) Customer deposits 432,365 217,934 (3,109) Other long-term liabilities (56,956) 2,412 5,506 --------- --------- --------- Net Cash Provided by Operating Activities 243,403 282,372 69,038 Cash Flows from Investing Activities Expenditures for property and equipment (16,167) (25,186) (9,946) Dispositions of property and equipment 28 18 447 Expenditures for tooling (2,085) (25,693) (17,265) --------- --------- --------- Net Cash Used in Investing Activities (18,224) (50,861) (26,764) Cash Flows from Financing Activities Proceeds from issuance of common stock 99,603 Proceeds from exercise of common stock options 14,170 10 Repurchase of preferred stock (468,938) Dividends paid on preferred stock (105,323) Proceeds from issuance of long-term debt 400,000 Payment of financing costs (8,500) Principal payments on long-term debt (146,331) (31,814) Proceeds from revolving credit loans 432,000 Payments on revolving credit loans (460,000) --------- --------- --------- Net Cash Used in Financing Activities (215,319) (31,804) (28,000) --------- --------- --------- Increase in cash and cash equivalents 9,860 199,707 14,274 Cash and cash equivalents, beginning of year 223,312 23,605 9,331 --------- --------- --------- Cash and cash equivalents, end of year $ 233,172 $ 223,312 $ 23,605 ========= ========= =========
See notes to consolidated financial statements ---------- 29 Notes to Consolidated Financial Statements GULFSTREAM AEROSPACE CORPORATION NOTE 1 Summary of Significant Accounting Policies Business The Company is primarily engaged in the design, development, production, and sale of large business jet aircraft. The Company is also engaged in a number of related businesses, including: product support and services for customer-owned aircraft, which include maintenance services and replacement parts for the Company's worldwide fleet; aircraft completion services, which involve the installation of customized interiors and optional avionics as well as exterior painting; and the sale of pre-owned aircraft. The majority of the Company's aircraft are sold to domestic and multinational corporations and domestic and foreign governments. Basis of Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions and estimates that directly affect the amounts reported in the consolidated financial statements. Significant estimates, for which changes in the near term are considered reasonably possible and that may have a material effect on the financial statements, are addressed in these notes to the consolidated financial statements. Revenue Recognition Contracts for new aircraft are segmented between the manufacture of the "green" aircraft (i.e., before exterior painting and installation of customer selected interiors and optional avionics) and its completion. Sales of new Gulfstream green aircraft are recorded as deliveries are made to the customer prior to the aircraft entering the completion process. With respect to completed aircraft, any costs, which are not significant, related to parts to be installed and services to be performed under the contract after the delivery of the aircraft, are included as cost of sales at the time of the sale of the new aircraft. Sales of all other products and services, including pre-owned aircraft, are recognized when delivered or the service is performed. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid financial instruments which have maturities of less than three months upon purchase. The Company places its temporary cash investments with high credit quality financial institutions. Inventories Inventories of work in process and finished goods for aircraft are stated at the lower of cost (based on estimated average unit costs of the number of units in a production lot) or market. Raw materials, material components of other work in process and substantially all purchased parts inventories are stated at the lower of cost (first-in, first-out method) or market. Pre-owned aircraft acquired in connection with the sale of new aircraft are recorded at the lower of the trade-in value or estimated net realizable value. Property and Equipment Property and equipment are stated at cost and depreciated by the straight-line method over their estimated useful lives ranging from 15 to 25 years for buildings and improvements and 4 to 12 years for all other property and equipment. The cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Tooling Tooling is stated at cost and represents primarily production tooling relating to the Gulfstream V aircraft program. Tooling associated with the Gulfstream V is amortized to cost of sales on a unit basis over the first 200 units of the Gulfstream V program. Intangibles and Other Assets Goodwill is being amortized on a straight-line basis over 40 years. Other intangible assets consisting of aftermarket service and product support (i.e., customer lists) are being amortized on a straight-line basis over the expected useful lives which range from 10 to 21 years. The costs of obtaining bank financing have been included in other assets and deferred charges and are being amortized over the lives of the related bank borrowings. Research and Development Research and development expenses are charged directly to operations as incurred. Product Warranties Product warranty expense is recorded as aircraft are delivered based upon the estimated aggregate future warranty costs relating to the aircraft. Customer Deposits Substantially all customer deposits represent advance payments for new aircraft purchases. The deposits on aircraft that are expected to be delivered in the following year are classified as current in the accompanying consolidated balance sheets. ---------- 30 Concentrations of Credit Financial instruments which may potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade and contract receivables. Approximately 34.0% of accounts receivable outstanding at December 31, 1996 is represented by a contract receivable associated with the sale of multiple aircraft to one customer. Generally, contract receivables are satisfied prior to delivery of the outfitted aircraft. In the normal course of business the Company performs ongoing credit evaluations of its customers' financial position, and for trade receivables generally requires no collateral from its customers. Overall, credit risk with respect to trade receivables are limited due to the Company's large number of customers and their dispersion across many industries and geographic regions. Income Taxes Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These deferred income taxes are measured by applying enacted tax rates in the years in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets in accordance with Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS No. 109). Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements approximates fair value because of the short-term nature of these instruments. Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the Company estimates that the carrying value of its long-term debt approximates fair value. Impairment of Long-Lived Assets The Company periodically assesses the recoverability of assets based on its expectations of future profitability and undiscounted cash flow of the related operations and, when circumstances dictate, adjusts the carrying value of the asset. These factors, along with management's plans with respect to the operations, are considered in assessing the recoverability of goodwill, other purchased intangibles and property and equipment. Stock Options Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or of continuing to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25. The Company has elected to continue using the measurement method prescribed by APB Opinion No. 25, and accordingly, this pronouncement did not affect the Company's financial position or results of operations. Net Income per Share Net income per share is based on historical unadjusted net income divided by pro forma weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of the Company's stock issuable upon exercise of common stock options determined using the treasury stock method. All common stock options granted by the Company prior to the Company's Offering (See Note 10) and the shares issued in the Company's Offering have been included in the calculation of pro forma common and common equivalent shares outstanding as if they were outstanding for all periods presented. Also, all per share data included in the consolidated financial statements give retroactive effect to the Recapitalization (see Note 10). NOTE 2 Inventories Inventories consisted of the following at: December 31, -------------------------- 1996 1995 ================================================================================ (In thousands) Finished goods $ -- $ 17,996 Work in process 355,198 173,756 Raw materials 108,041 75,768 Vendor progress payments 104,318 67,855 Pre-owned aircraft 87,680 57,750 -------- -------- $655,237 $393,125 ======== ======== NOTE 3 Property and Equipment The major categories of property and equipment consisted of the following at: December 31, ---------------------------- 1996 1995 ================================================================================ (In thousands) Land $ 4,109 $ 4,109 Buildings and improvements 96,201 78,445 Machinery and equipment 107,428 97,405 Furniture and fixtures 10,451 9,729 Construction in progress 1,826 14,862 --------- --------- Total 220,015 204,550 Less accumulated depreciation (93,512) (77,399) --------- --------- $ 126,503 $ 127,151 ========= ========= ---------- 31 NOTE 4 Other Intangible Assets Other intangible assets were comprised of the following at: December 31, -------------------------- 1996 1995 ================================================================================ (In thousands) Aftermarket--service center $ 15,000 $ 15,000 Aftermarket--product support 75,000 75,000 Total 90,000 90,000 Less accumulated amortization (34,444) (29,372) $ 55,556 $ 60,628 NOTE 5 Accrued Liabilities Accrued liabilities were comprised of the following at: December 31, --------------------- 1996 1995 ================================================================================ (In thousands) Employee compensation and benefits $ 47,424 $18,732 Deferred income 18,758 19,945 Accrued warranty 11,644 9,637 Uncompleted work on delivered aircraft 8,737 12,655 Other 24,680 18,942 $111,243 $79,911 NOTE 6 Long-term Debt Long-term debt consisted of the following at: December 31, ------------------------------ 1996 1995 ================================================================================ (In thousands) Term loans $ 400,000 $ 146,331 Less current portion (20,000) (53,065) $ 380,000 $ 93,266 On October 16, 1996, the Company entered into a new long-term credit agreement under which the lenders, who are parties to the credit agreement, made available to the Company a $400 million term loan facility and a $250 million revolving credit facility. A portion of the revolving credit facility, in an amount not to exceed $150 million, may be used (to the extent available) for standby and commercial letters of credit and up to $200 million of the revolving credit facility will be available to the Company for borrowings. Concurrently with entering into the credit agreement, the Company repaid all amounts outstanding under its pre-existing credit agreements totaling $107.7 million, and terminated such agreements. The term loan is repayable in consecutive quarterly installments commencing June 30, 1997 with a final maturity on September 30, 2002, in aggregate amounts for each of the following years as follows: 1997--$20.0 million; 1998 through 2001--$75.0 million; 2002--$80.0 million. The revolving credit facility expires September 30, 2002 with any outstanding amounts due on that date. The Company is required to pay commitment fees on the average daily unutilized portion of the term loan facility and the revolving credit facility, which fees were initially set at 0.375% per annum. The credit agreement permits the Company to choose either the Adjusted Base Rate (the "ABR") interest option which is based on the greater of the prime rate or the federal funds rate, or a Eurodollar rate (LIBOR), in each case, plus an applied margin. The interest rates and commitment fees are subject to change based on the Company's performance with respect to certain financial ratios set forth in the credit agreement. The credit agreement includes restrictions relating to, amongst other things, the amount of additional indebtedness, contingent obligations, liens, capital expenditures and dividends, and it requires the maintenance of certain financial ratios. In addition, under the credit agreement, certain changes in control of the Company would cause an event of default and the banks could declare all outstanding borrowings under the credit agreement immediately due and payable. None of the restrictions contained in the credit agreement are expected to have a significant effect on the ability of the Company to operate. As of December 31, 1996, the Company was in compliance with all financial and operating covenants under the credit agreement. The Company has pledged the common stock of certain of its subsidiaries as well as certain intercompany notes as collateral under the credit agreements, and the Company and certain of its subsidiaries have guaranteed repayment of amounts borrowed under the credit agreement. The available revolving credit commitment was $226.9 million at December 31, 1996. At December 31, 1996 and December 31, 1995, the Company had outstanding letters of credit totaling $23.1 million and $24.4 million, respectively. The effective interest rate on the Company's long-term debt at December 31, 1996 and 1995 was 7.44% and 8.42%, respectively. The Company paid interest of $12.9 million, $19.4 million and $19.0 million during the years 1996, 1995 and 1994, respectively. NOTE 7 Income Taxes The tax effects of significant components of the Company's deferred income tax, liabilities and assets are as follows: December 31, -------------------------- 1996 1995 ================================================================================ (In thousands) Deferred Tax Assets Net operating loss carryforwards $ 85,760 $ 54,985 Postretirement benefits 40,873 37,381 Intangible assets 13,072 18,764 Pension and other benefits 3,253 8,670 Other 17,559 14,367 --------- --------- Total 160,517 134,167 Less valuation allowance (145,490) (124,843) --------- --------- 15,027 9,324 Deferred Tax Liability Property and equipment, principally due to basis difference (15,027) (9,324) --------- --------- Net deferred tax asset $ -- $ -- ========= ========= ---------- 32 At December 31, 1996, the Company had available a net operating loss carryforward for regular federal income tax purposes of approximately $228 million which will expire beginning in 2006. Although the Company recorded net income during 1996, 1995 and 1994, no provision for income taxes was recorded, principally as a result of utilization of net operating loss carryforwards. The Company has recorded a full valuation allowance for its net deferred tax assets. In estimating the realizability of its net deferred tax assets, the Company considers both positive and negative evidence and gives greater weight to evidence that is objectively verifiable. Due to the Company's cumulative losses for federal income tax purposes, the Company currently believes that the realization of its net deferred tax assets is uncertain. The Company will continue to monitor the realizability of such deferred tax assets on a quarterly basis. In the event that the tax benefits related to the valuation allowance are realized, $28 million of such benefits related to the exercise of stock options would be credited to additional paid-in capital. The Company is involved in a tax audit by the Internal Revenue Service covering the years ended December 31, 1991 and 1990. The revenue agent's report includes several proposed adjustments involving the deductibility of certain compensation expense, items relating to the initial capitalization of the Company, the allocation of the original purchase price for the acquisition by the Company of the Gulfstream business, including the treatment of advance payments with respect to and the cost of aircraft that were in backlog at the time of the acquisition, and the amortization of amounts allocated to intangible assets. The Company believes that the ultimate resolution of these issues will not have a material adverse effect on its financial statements because the financial statements already reflect what the Company currently believes is the expected loss of benefit arising from the resolution of these issues. NOTE 8 Leases The Company has various operating leases for both real and personal property including Company aircraft. Rental expense for 1996, 1995 and 1994 was $13.4 million, $14.9 million and $16.6 million, respectively. Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year at December 31, 1996 aggregated approximately $50.2 million, and payments during the next five years are: 1997, $11.8 million; 1998, $11.4 million; 1999, $9.1 million; 2000, $4.4 million; and 2001, $3.3 million. The Company also receives sub-lease rental income under an operating lease, which the approximate annual future minimum sub-rentals are $2.5 million through November 1999. NOTE 9 Employee Benefit Plans Pension Plans The Company maintains three noncontributory plans covering substantially all employees. Benefits paid to retirees are based primarily on age at retirement, years of credited service and compensation earned during employment. The Company's funding policy complies with the requirements of Federal law and regulations. The Company's total pension fund contributions were $34.4 million, $14.3 million and $9.8 million in 1996, 1995 and 1994, respectively. The Company's contributions are made to a master trust and invested in a diversified portfolio consisting primarily of equity and debt securities. The Company has recorded an additional minimum liability representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension liability. The additional liability has been offset by intangible assets to the extent of previously unrecognized prior service cost. Amounts in excess of previously unrecognized prior service cost are recorded as a reduction of stockholders' equity of $1.5 million, $1.5 million and $1.1 million in 1996, 1995 and 1994, respectively. Net periodic pension cost was as follows: December 31, ------------------------------------- 1996 1995 1994 ================================================================================ (In thousands) Service cost--benefits earned during the period $ 11,258 $ 9,232 $ 10,210 Interest cost on projected benefit obligation 14,966 13,158 12,533 Actual return on plan assets (14,431) (15,937) (5,384) Net amortization and deferral 1,794 5,570 (2,857) -------- -------- -------- $ 13,587 $ 12,023 $ 14,502 ======== ======== ======== Actuarial assumptions used were: December 31, --------------------------------- 1996 1995 1994 ================================================================================ Discount rate 8.00% 8.00% 8.50% Rate of increase in future compensation levels 4.75% 4.75% 5.00% Long-term rate of return on plan assets 9.50% 9.50% 9.00% The following table sets forth the funded status at December 31: 1996 1995 ================================================================================ (In thousands) Actuarial present value of benefits: Vested $ 151,048 $ 136,922 Nonvested 20,623 16,597 --------- --------- Accumulated benefit obligation 171,671 153,519 --------- --------- Projected benefit obligation 213,080 190,858 Plan assets at fair value 163,598 136,582 --------- --------- Projected benefit obligation in excess of plan assets 49,482 54,276 Unrecognized prior service cost (6,327) (4,479) Contributions (14,446) (97) Unamortized loss resulting from changes in plan experience and actuarial assumptions (9,137) (9,269) Adjustment required to recognize additional minimum liability 3,612 1,511 --------- --------- Accrued pension cost $ 23,184 $ 41,942 ========= ========= ---------- 33 Other Postretirement Benefits In addition to pension benefits, the Company provides certain health care insurance benefits to retired Company employees and their dependents. The Company currently funds these plans on a pay-as-you-go basis. Substantially all of the Company's salaried employees and certain hourly employees become eligible for such benefits when they attain certain age and service requirements while employed by the Company. The status of the Company's unfunded postretirement benefit obligation is as follows at December 31: 1996 1995 ================================================================================ (In thousands) Accumulated postretirement benefit obligation Retirees $ 29,577 $ 32,073 Fully eligible active plan participants 1,645 1,644 Active plan participants not fully eligible 51,394 46,090 -------- -------- Accumulated postretirement benefit obligation in excess of plan assets 82,616 79,807 Unrecognized prior service cost 7,678 8,496 Unrecognized net loss 18,411 13,718 -------- -------- Accrued postretirement benefit cost $108,705 $102,021 ======== ======== Net postretirement benefit cost included the following components: 1996 1995 1994 ================================================================================ (In thousands) Service cost--benefits attributed to service during the period $ 3,957 $ 3,795 $ 4,413 Interest cost of postretire- ment benefit obligation 6,237 6,268 5,949 Other net amortization and deferral (1,261) (1,139) (952) $ 8,933 $ 8,924 $ 9,410 The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.0% in 1996, 8.0% in 1995 and 8.5% in 1994. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation pre-age 65 was 9.25% in 1996, 10.0% in 1995 and 10.75% in 1994, declining annually 0.75% to a rate of 5.5%; and for post-age 65 was 7.25% in 1996, 8.0% in 1995 and 8.75% in 1994, declining annually 0.75% to a rate of 5.5%. If the health care cost trend rate assumptions were increased by 1.0%, the accumulated postretirement benefit obligation as of December 31, 1996 would be increased by 13.5%. The effect of this change on the sum of the service cost and interest cost components would be an increase of 14.7%. Investment Plan The Company sponsors a voluntary 401(k) investment plan designed to enhance existing retirement plans. The Company contributes amounts equal to 50.0% of the employee's contributions, up to a maximum of 4.0% of the employee's base salary. Total expense for the plan was $2.2 million, $2.1 million and $1.9 million for 1996, 1995 and 1994, respectively. Other Employee Benefits The Company has supplemental benefit plans covering certain key executives. These plans provide for benefits which supplement those provided by the Company's other retirement plans. The Supplemental Executive Retirement Plans are unfunded plans of deferred compensation for certain key executives. These supplemental plans are non-qualified and are being provided for by charges to operations sufficient to meet the projected benefit obligation. The Executive Insurance Plan provides additional death benefits to certain key executives. The Company acquired life insurance policies or annuity contracts to provide funding of the benefits. The costs for these plans are based on substantially the same actuarial methods and economic assumptions as those used for the defined benefit pension plans. The Company's expense for these plans was $1.1 million in 1996, $1.3 million in 1995 and $1.4 million in 1994. The accumulated benefit obligation related to these plans totaled approximately $4.5 million, $4.4 million and $4.1 million at December 31, 1996, 1995 and 1994, respectively, and is recorded in other long-term liabilities. The Company has an Incentive Compensation Plan administered by the Compensation Committee of the Board of Directors which provides for payment of cash awards to officers and key employees based upon achievement of specific goals by the Company and the participating employees. For the years ended 1996, 1995 and 1994 provisions of approximately $5.5 million, $4.5 million and $4.0 million, respectively, were charged against income related to the plan. Payouts are based entirely on achievement of financial and business objectives. NOTE 10 Stockholders' Equity On October 16, 1996, the Company issued 4,559,100 shares of common stock, and selling stockholders sold 37,940,900 shares of common stock, in an initial public offering pursuant to the Securities Act of 1933 (the "Offering"). In connection and simultaneously with the closing of the Offering, the Company (a) effected a recapitalization plan (the "Recapitalization") which included (i) the repurchase of all of its outstanding 7% Series A Cumulative Preferred Stock for a purchase price of $450 million plus approximately $1.3 million of unpaid dividends, (ii) the exchange of all outstanding shares of Class A, Series A-2 and Class B common stock for Class A, Series A-1 common stock, (iii) the redesignation of all Class A, Series A-1 common stock into common stock, (iv) a 1.5-for-1 stock split of the common stock and (v) the restatement of the Company's certificate of incorporation to provide that the authorized capital stock of the Company consists of 300,000,000 shares of common stock, par value of $.01 per share, and 20,000,000 shares of Preferred Stock, par value of $.01 per share, and (b) issued 3,949,346 shares of common stock to certain option holders pursuant to existing option agreements, who subsequently sold those shares in the Offering. ---------- 34 Stock Options Under a Stock Option Plan adopted by its stockholders effective March 20, 1990, the Company has granted options to purchase its common stock to certain Company employees, directors and advisors. Generally, options granted prior to July 1, 1994, vest 25.0% on date of issuance, 25.0% on the first anniversary of the date of issuance, and 25.0% annually thereafter. Generally, options granted on or after July 1, 1994, vest 33.3% on the first anniversary of the date of issuance, 33.3% on the second anniversary of the date of issuance and the last 33.3% on the third anniversary of the date of issuance. In addition, the Company has granted options to purchase its common stock to certain of its directors and advisors outside the Stock Option Plan with vesting periods ranging from immediately up to three years. Generally, such options expire ten years from date of grant. The Company recorded compensation expense of $7.2 million related to stock option grants during the year ended December 31, 1996. At December 31, 1996, approximately 5,100,000 shares of common stock were reserved for issuance under the Stock Option Plan. The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Company's stock options granted in 1996 and 1995 been determined based on the fair value at the grant dates for awards under those plans consistent with a method prescribed in SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1995 ================================================================================ (In thousands, except per share amounts) Net income--As reported $ 46,965 $ 28,894 Pro forma 43,816 26,600 Earnings per share--As reported $ .60 $ .37 Pro forma .56 .34 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1996 and 1995, respectively: expected volatility of 36.02% for both years; risk-free interest rate of 6.27% and 6.67%; expected lives of 3 years for both years; and no dividend yield. At December 31, 1996, the range of exercise prices was $3.11 to $4.10 with a weighted average remaining exercise period of 6.9 years. A summary of the status of the Company's stock option plans as of December 31, 1996, 1995, and 1994, and changes during the years ending on those dates is presented below:
1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price ========================================================================================================= Outstanding at beginning of year 8,635,323 $ 3.88 7,918,691 $ 3.83 4,027,019 $ 3.86 Granted 1,020,000 4.10 1,740,000 4.10 3,946,313 3.80 Exercised (3,949,346) 3.88 (2,914) 3.51 -- -- Forfeited (32,948) 4.10 (1,020,454) 3.89 (54,641) 3.51 ---------- ------ ---------- ------ --------- ------ Outstanding at end of year 5,673,029 $ 3.91 8,635,323 $ 3.88 7,918,691 $ 3.83 ========== ====== ========== ====== ========= ====== Options exercisable at year-end 3,817,582 3.80 5,630,948 3.81 4,064,807 3.77 Weighted average fair value of options granted during the year $13.53 $4.10 $3.51
---------- 35 The Company had granted stock appreciation rights (SARs) to certain officers and key employees. During 1996, the Company recorded compensation expense related to SARs of approximately $0.4 million and terminated its agreements with the holders of the SARs. There were 22,312 SARs outstanding as of December 31, 1995, with a base price ranging from approximately $3 to $4. NOTE 11 Related Party Transactions At December 31, 1996, certain partnerships formed by Forstmann Little & Co. ("Forstmann Little") owned approximately 42.5% of the Company's common stock. Under a usage agreement which ended in August 1996, the Company paid an affiliate of Forstmann Little for the use of a Gulfstream IV which was utilized as a demonstrator aircraft by the Company. Total expenses associated with this agreement were $1.6 million for 1996, and $2.3 million in each of 1995 and 1994. During 1994, the Company sold three aircraft totaling $58.6 million to two corporations whose presidents are directors of the Company and also sold a pre-owned Gulfstream II to an affiliate of Forstmann Little for $6.7 million. The Company also procures certain inventory items from another Forstmann Little affiliate engaged in the aircraft industry. Management believes all these transactions with related parties are on terms similar to those of other customers and vendors. In August 1996, the Company entered into agreements with the Company's Chairman pursuant to which the Company will provide the Chairman with the use of a Gulfstream V for a period of ten years. Until the Gulfstream V becomes available, the Company has made available to the Chairman a Gulfstream IV, which the Company received through an assumption of a lease from an affiliate of Forstmann Little. During January 1997, the Company exercised its early buy-out option under the lease and purchased the aircraft from the lessor, an international financial institution. The Chairman has agreed to pay the Company up to $1.0 million annually for non-company use of the aircraft. If the Chairman is no longer serving as a director or official of the Company, he has agreed to reimburse the Company $1,800 per hour for all use of the aircraft, or other such rate required so as not to exceed FAA regulatory requirements. NOTE 12 Commitments and Contingencies In the normal course of business, lawsuits, claims and proceedings have been or may be instituted or asserted against the Company relating to various matters, including product liability. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, management has made provision for all known probable losses related to lawsuits and claims and believes that the disposition of all matters which are pending or asserted will not have a material adverse effect on the financial statements of the Company. The Company is currently engaged in the monitoring and clean up of certain ground water at its Savannah facility under the oversight of the Georgia Department of Natural Resources. Expenses incurred for clean up have not been significant. The Company received in 1992, at its Long Beach facility, two inquiries from the U.S. Environmental Protection Agency and in 1991, at its Oklahoma facility, a soil contamination inquiry. The Company believes other aspects of the Savannah facility, as well as other Gulfstream properties, are being carefully monitored and are in substantial compliance with current federal, state and local environmental regulations. The Company believes the liabilities, if any, that will result from the above environmental matters will not have a material adverse effect on its financial statements. The Company has agreements with certain of its suppliers to procure major aircraft components such as engines, wings and avionics. The agreements vary in length from three to five years and generally provide for price and quantity of components to be supplied. In connection with the Gulfstream V program, the Company has entered into revenue sharing agreements with two suppliers. The terms of such agreements require the suppliers to design, manufacture and supply certain aircraft components in exchange for a fixed percentage of the revenues of each Gulfstream V sold. Progress payments under the revenue sharing agreements are generally required to be made on a pro rata basis concurrent with the associated deposits received on Gulfstream V contracts. In connection with orders for 28 Gulfstream V aircraft in the backlog, as of December 31, 1996 the Company has offered customers trade-in options (which may or may not be exercised by the customer) under which the Company will accept trade-in aircraft (primarily Gulfstream IVs and IV-SPs) at a guaranteed minimum trade-in price. Management believes that the fair market value of such aircraft exceeds the specified trade-in value. In connection with recorded sales of new aircraft, at December 31, 1996, the Company has agreed to accept pre-owned aircraft totaling $40.1 million. The Company purchases its major aircraft components from a limited number of suppliers. Although the Company purchases from a limited number of suppliers, management believes that there are other suppliers who could provide similar components on comparable terms without significant disruption of its production. NOTE 13 Export Sales and Major Customers Foreign sales by geographical area consisted of the following at: December 31, ---------------------------------------- 1996 1995 1994 ================================================================================ (In thousands) Latin America and Caribbean $103,706 $ 36,479 $ 28,337 Asia 88,101 102,990 64,630 Africa 73,155 6,773 5,977 Europe 24,764 51,330 22,201 Other 736 19,460 1,655 -------- -------- -------- $290,462 $217,032 $122,800 ======== ======== ======== During 1996, aircraft sales and services provided to one customer comprised approximately 12.0% of the Company's net revenues. ---------- 36 Independent Auditors' Report The Board of Directors and Stockholders of Gulfstream Aerospace Corporation: We have audited the consolidated balance sheets of Gulfstream Aerospace Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gulfstream Aerospace Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Atlanta, Georgia January 31, 1997 ---------- 37 GULFSTREAM AEROSPACE CORPORATION The management of Gulfstream Aerospace Corporation is responsible for the preparation and integrity of the consolidated financial statements of the Company. The financial statements and notes have been prepared by the Company in accordance with generally accepted accounting principles and, in the judgment of management, present fairly the Company's financial position and results of operations. The financial information contained elsewhere in this annual report is consistent with that in the financial statements. The financial statements and other financial information in this annual report include amounts that are based on management's best estimates and judgments and give due consideration to materiality. The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The Company's independent auditors were engaged to perform an audit of the consolidated financial statements. This audit provides an objective outside review of management's responsibility to report operating results and financial condition. They review and perform tests, as appropriate, of the data included in the financial statements. The Board of Directors discharges its responsibility for the Company's financial statements primarily through its Audit Committee. The Audit Committee, comprised solely of outside directors, meets periodically and privately with the independent auditors and representatives from management to appraise the adequacy and effectiveness of control systems and quality of our financial accounting and reporting. /s/ Chris A. Davis Chris A. Davis Executive Vice President and Chief Financial Officer January 31, 1997 ---------- 38 [ADVERTISEMENT] The advertisement above is one in a series of three ads,depicting the spirit of Gulfstream, which ran in the business press during 1996. ---------- 39 Corporate Information ------------------------------------------------------ Corporate Offices Gulfstream Aerospace Corporation 500 Gulfstream Road Savannah, Georgia 31402-2206 (912) 965-3000 ------------------------------------------------------ Annual Meeting 9:30 a.m. May 14, 1997 St. Regis Hotel Two East 55th Street New York, New York 10022 ------------------------------------------------------ Transfer Agent and Registrar Chase Mellon Shareholder Services, L.L.C. 450 West 33rd Street New York, New York 10001 ------------------------------------------------------ Stock Listing New York Stock Exchange Symbol "GAC" ------------------------------------------------------ Independent Accountants Deloitte & Touche LLP 100 Peachtree Street Atlanta, Georgia 30303-1943 ------------------------------------------------------ Financial Information Copies of Gulfstream's annual report and Form 10-K submitted to the Securities and Exchange Commission may be obtained by written request to: Investor Relations Mail Stop B-03, PO Box 2206 Savannah, Georgia 31402-2206 ---------- 40 EX-27.1 7 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 233 0 137 0 655 1,034 127 0 1,313 896 400 0 0 1 (190) 1,313 1,064 1,071 839 1,013 0 0 3 47 0 47 0 0 0 47 .60 .60 Notes and accounts receivable - trade are reported net of allowances for doubtful accounts in the Consolidated Balance Sheet. Property,plant and equipment are reported net of accumulated depreciation in the Consolidated Balance Sheet.
-----END PRIVACY-ENHANCED MESSAGE-----