-----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, TEfV8Lo4zG4WLNGCOo++lngNDjZiqm/nUueuaWUU1f1d8JyL7dXS8Duut7/Bk6KR MJ5RcExRk703mgE+R2xOVQ== 0001047469-98-012060.txt : 19980330 0001047469-98-012060.hdr.sgml : 19980330 ACCESSION NUMBER: 0001047469-98-012060 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K SEC ACT: SEC FILE NUMBER: 001-08461 FILM NUMBER: 98576284 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-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1997 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. / / 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 20, 1998 was $1,728,385,638. 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 20, 1998, there were outstanding 72,667,265 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, 1997 (the "1997 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, 1998 (the "1998 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 approximately 60%. The Company has manufactured and sold over 1,000 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-Registered Trademark- (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 20, 1998, the Forstmann Little Partnerships owned approximately 43.2% of the outstanding shares of the Company's Common Stock. PRINCIPAL PRODUCTS The business jet aircraft market is generally divided into four markets--light, medium, large and ultra-long range. These markets 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 final type certification from the Federal Aviation Administration ("FAA") on April 11, 1997. The Company had manufactured and delivered 32 Gulfstream Vs through 1997. Deliveries of the first outfitted aircraft to customers began in 1997. In its first six months in service, the Gulfstream V set 40 world and national records. 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. These capabilities 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 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 are designed to operate 7,000 flight hours between major overhauls and, due to fuel efficiency, operate at a lower cost than the engines of the Gulfstream IV-SP. The BR710 engine was certified by the Joint Aviation Authorities and the FAA in 1996. The aircraft utilizes dual cabin pressurization systems to minimize cabin altitude. At it's cruising altitude of 51,000 feet, the Gulfstream V cabin altitude is only 6,000 feet, the lowest cabin altitude of any jet aircraft. This low cabin altitude, together with a 100% fresh air ventilation system (instead of a recirculating air system) significantly reduces 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 Company had received a total of 81 orders through 1997 for the Gulfstream V. In 1997, the Gulfstream V was selected by the U. S. Air Force for its VCX program for use in the Special Mission Air Wing. The list price for a completed Gulfstream V is currently approximately $38,000,000 (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 114 Gulfstream IV-SPs from 1993 to 1997 and 213 Gulfstream IVs from 1985 to 1992. The Company continues 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 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 67 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 8,000 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 $28,600,000 (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 U. S. 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 $28,600,000 to $32,600,000. There are currently 8 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-REGISTERED 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-Registered 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-Registered 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. As of December 31, 1997, the Company had contracted to deliver to EJI 27 Gulfstream IV-SPs and 2 Gulfstream Vs in connection with the Gulfstream Shares-Registered Trademark- program, 15 of which had been delivered and 14 of which will be delivered through 2000. EJI also has an option to purchase two additional GIV-SPs. 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 3 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-Registered Trademark- has a term of three years from 1996 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-Registered 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-Registered Trademark- programs. In 1997, the Company and EJI announced the signing of letters of intent with a group of Middle East investors for the purchase of up to 12 Gulfstream IV-SP aircraft and the operation of a Middle East fractional ownership program. 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 1997. 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. 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. 5 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 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 has 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. In 1997, the Company expanded the Service Center operations in Savannah to 24 hours a day, 7 days a week. 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 6 (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 three years 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 95% of the Company's customers utilize this service. The Company has instituted a policy requiring third-party maintenance facilities to purchase factory technical support for scheduled maintenance performed on customer aircraft. SERVICECARE. In 1997, the Company introduced its ServiceCareSM program, the first comprehensive airframe, engine and avionics maintenance program to be offered in the business aircraft market, which provides customers of new Gulfstream IV-SPs with scheduled and unscheduled maintenance at guaranteed costs. Coverage is provided on a world-wide basis, with all work to be accomplished at Gulfstream or Gulfstream authorized service centers. AIRCRAFT MAINTENANCE SERVICES. The Company has developed a proactive marketing and sales effort in its maintenance services operations, which has supported an increase in market share to approximately 60% of the maintenance services market share for the Gulfstream fleet in 1997. The Company's estimated market share was approximately 55% in 1996. 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. In 1997, FSI completed a new 65,000 square foot training facility adjacent to the Gulfstream Service Center in Savannah. This facility, which became operational in January 1998, contains 21 classrooms, 16 briefing rooms and four CPM (cockpit procedures modules) rooms. In addition, it houses 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 SimuFlite Training International ("SimuFlite") located at Dallas-Fort Worth International Airport, Texas. SimuFlite provides training services for Gulfstream II, Gulfstream III and Gulfstream IV aircraft. Gulfstream, in conjunction with SimuFlite, facilitates the operation of an additional Customer Training Advisory Board which provides direct customer and original equipment manufacturer input to SimuFlite training curriculums and course content. 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. 7 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 from 1996 with a minimum lending commitment of $250 million annually, and can be extended by mutual agreement of the parties. In 1997, over $300 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, 1997, the Company had a firm contract backlog of approximately $2.8 billion, representing a total of 45 contracts for Gulfstream Vs and 43 contracts for Gulfstream IV-SPs compared with $3.1 billion at the end of 1996, representing a total of 67 contracts for Gulfstream Vs and 27 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. Approximately 38% of the Company's contract backlog is scheduled for delivery beyond 1998. 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 7 and 39, respectively in 1997, 21 and 44, respectively, in 1996, and 12 and 30, respectively in 1995. 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 percent of the Gulfstream fleet is based in North America and 30% of the fleet is based in 45 countries worldwide. Current owners of Gulfstream aircraft include 31 of the Fortune 50 companies and 117 of the Fortune 500 companies. In addition, the United States government, including all branches of the United States military, and 38 foreign governments operate Gulfstream aircraft. Gulfstream aircraft provide air transportation for the President, Vice President and other senior members of the United States government. Over 42 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. 8 Gulfstream operates an International Advisory Board of 14 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. 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 both in North America and around the world. Internationally, the Company also utilizes independent agents who facilitate transactions in selected local markets. The Company pursues government and special mission business opportunities worldwide with a four 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 1997 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. 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 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. In addition, Airbus Industrie announced in June 1997 that it intends to manufacture a version of the A319CJ for the ultra-long range business jet market and expects certification and delivery of this aircraft in early 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, 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. 9 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 1997 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 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. 10 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. 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, 98% of which remain in service. 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, 69% of which remain in service. 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 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. 11 EMPLOYEES At March 1, 1998, the Company employed approximately 5,800 persons, of whom approximately 4,100 were employed at the Company's Savannah, Georgia facility, 100 were employed at the Brunswick, Georgia facility, 650 were employed at the Bethany, Oklahoma facility, 600 were employed at the Long Beach, California facility and 380 were employed at the Mexicali, Mexico facility. None of the workers at the Savannah, Brunswick, Long Beach, or Mexicali facilities are unionized. In 1996, the Company entered into a 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 were less than $1.0 million in 1997. 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 continuing expenses for the cleanup are not expected to be material. 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 Savannah facility has been in existence for 31 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 1,500,000 square feet and is the location of the Company's corporate 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 140,000 square feet, is adjacent to the aircraft production line and simultaneously accommodates completion of up to 10 Gulfstream IV-SP or six Gulfstream V aircraft. All of the land and buildings constituting the Savannah facility are owned by the Company. 12 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 53,000 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 completion facilities, which have capacity for eight aircraft, service center facilities, which have capacity for seven aircraft, and design and administrative functions. The Company owns the buildings and leases the land; the lease expires in 2014. During 1997, the Company entered into a lease for an additional 62,000 square foot hangar building located on the same airport and in close proximity to the Long Beach facility. The hangar is used for both service and completion operations and has a capacity for six aircraft; the lease expires in 1999. The Company continues to lease an adjacent facility of approximately 22,000 square feet used as a completion facility with a capacity for two aircraft; the lease expires in 2000. Also during 1997, the Long Beach facility expanded further by completing a 59,000 square foot aircraft paint facility. The Company owns this building, and leases the land at this facility; the lease expires in 2007. The expansions described above are part of the Company's overall plan to more than 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 1997 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. 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 2,000 twin engine Commander aircraft owners, all of these owners will not 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 $500 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 $500,000, other than claim expenses and insurance premiums, with respect to product liability occurrences taking place since January 1, 1991. 13 The Company is involved in tax audits by the Internal Revenue Service covering the years 1990 through 1994. The revenue agent's reports include 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. However, because the revenue agent's reports are 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 the 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 or incorporated by reference in this Form 10-K contain forward-looking information. These forward-looking statements are subject to risks and uncertainties. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those contained in the forward-looking statements is contained in Exhibit 99, CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 to this Form 10-K. 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, 1997. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information required by this item is contained on page 39 of Gulfstream's 1997 Annual Report, which information is incorporated herein by reference. The Company's Credit Agreement restricts its ability to pay dividends. 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, 1997. 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, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------ ------------ ------------ ---------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenues................................. $ 1,903,494 $ 1,063,713 $ 1,041,514 $ 901,638 $ 887,113 ------------ ------------ ------------ ---------- ------------ Costs and expenses: Cost of sales.............................. 1,557,250 839,254 835,547 710,554 737,361 Selling and administrative expenses........ 97,499 99,452 93,239 82,180 97,011 Stock option and compensation expense...... 1,640 7,186 Research and development expense........... 10,792 58,118 63,098 57,438 47,990 Amortization of intangibles and deferred charges.................................. 7,347 9,434 7,540 7,583 27,613 Restructuring charge (1)................... 203,911 ------------ ------------ ------------ ---------- ------------ Total costs and expenses..................... 1,674,798 1,013,444 999,424 857,755 1,113,886 ------------ ------------ ------------ ---------- ------------ Income (loss) from operations................ 228,696 50,269 42,090 43,883 (226,773) Interest income............................ 11,532 14,605 5,508 367 486 Interest expense........................... (31,159) (17,909) (18,704) (20,686) (48,940) ------------ ------------ ------------ ---------- ------------ Net income (loss) before income taxes........ 209,069 46,965 28,894 23,564 (275,227) ------------ ------------ ------------ ---------- ------------ Income tax expense (benefit) (2)............. (33,942) -- -- -- -- Net income (loss).......................... $ 243,011 $ 46,965 $ 28,894 $ 23,564 $ (275,227) ------------ ------------ ------------ ---------- ------------ ------------ ------------ ------------ ---------- ------------ Earnings Per Share: Net income per share--basic (3).............. $ 3.28 $ .64 $ .39 --diluted (3).............. $ 3.12 $ .60 $ .37
- ------------------------ (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) The Company recorded an income tax benefit net of $33.9 million for 1997. In the third quarter of 1997, the Company released its deferred tax valuation allowance, totaling $94.2 million. Of this amount, $29.4 million related to the exercise of stock options and was credited to additional paid-in capital and $64.8 million was recorded as a one-time non-cash income tax benefit. The Company had available at December 31, 1997 net operating loss carryforwards for regular federal income tax purposes of approximately $65.0 million, which will begin expiring in 2006. (3) Net income per share ("EPS") information for 1995 and 1996 is based on historical unadjusted net income divided by pro forma weighted average number of shares. Shares included for basic EPS give retroactive effect to the Recapitalization, the shares issued to option holders upon the exercise of options at the date of the Offering, and the shares issued pursuant to the Offering (all of which are described in Note 10 to the consolidated financial statements) as if such transactions had occurred at the beginning of the period. Diluted EPS further includes the effects of options granted in 1995 and 1996 as if such options had been outstanding for all periods presented. See also Note 14 to the consolidated financial statements for a reconciliation of per share data. 15
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ---------- ---------- ---------- (IN THOUSANDS, EXCEPT OPERATING DATA) BALANCE SHEET DATA (AT END OF PERIOD): Working capital................................ $ 295,811 $ 138,091 $ 356,976 $ 301,913 $ 302,369 Total assets................................... 1,473,667 1,313,215 981,253 745,761 799,470 Total debt (1) (2)............................. 380,000 400,000 146,331 178,145 206,145 Total stockholders' equity (deficit) (1)....... 92,757 (188,811) 217,540 188,950 164,395 OPERATING DATA: Depreciation and amortization.................. $ 33,022 $ 26,910 $ 23,094 $ 24,151 $ 47,866 OPERATING DATA: Units delivered during period: Gulfstream IV/IV-SP.......................... 22 24 26 22 26 Gulfstream V................................. 29 3 0 0 0 ------------ ------------ ---------- ---------- ---------- Total deliveries............................. 51 27 26 22 26 Units ordered during period: Gulfstream IV/IV-SP.......................... 39 44 30 25 26 Gulfstream V................................. 7 21 12 16 17 ------------ ------------ ---------- ---------- ---------- Total orders................................. 46 65 42 41 43 Units in backlog at end of period: Gulfstream IV/IV-SP (3)...................... 43 27 7 3 3 Gulfstream V (4)............................. 45 67 50 40 24 ------------ ------------ ---------- ---------- ---------- Total backlog (5)............................ 88 94 57 43 27 ESTIMATED BACKLOG (in billions) (3)(4)(5)........ $ 2.8 $ 3.1 $ 1.9 $ 1.5 $ 0.9
- ------------------------ (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 1997 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 cancellations of 1 in 1997 and 3 in 1994, 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 1997 Annual Report. 16 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 1997 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, 1997, 1996 and 1995, the notes to the consolidated financial statements, and the report of independent accountants thereon on pages 26 to 38 of the 1997 Annual Report, and in the Company's unaudited quarterly financial data for the years ended December 31, 1997 and 1996 on page 39 of Gulfstream's 1997 Annual Report, incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item is included in the 1998 Proxy Statement in the section captioned "Election of Directors," and such information is incorporated herein by reference. Information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is included in the 1998 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 1998 Proxy Statement in the sections 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 subsections 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 1998 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 1998 Proxy Statement in the sections captioned "Further Information Concerning the Board of the Directors and Committees--Compensation Committee Interlocks and Insider Participation" and "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 1997 Annual Report. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1997 FORM 10-K ANNUAL REPORT (PAGE) ( PAGE) ---------- --------------- (a) FINANCIAL STATEMENTS Consolidated Balance Sheets at December 31, 1997 and December 31, 1996...................................................... 26 For the years ended December 31, 1997, 1996, and 1995: Consolidated Statements of Income.......................................... 27 Consolidated Statements of Stockholders' Equity............................ 28 Consolidated Statements of Cash Flows...................................... 29 Notes to Consolidated Financial Statements................................. 30-37 Report of Independent Accountants............................................ 38 Supplementary Information (Unaudited) Quarterly Financial Results for 1997 and 1996.............................. 39 FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants............................................ 20 I. Condensed financial information......................................... 21-22 II. Valuation and qualifying accounts...................................... 23 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 27 to 29. (b) REPORTS ON FORM 8-K None
19 REPORT OF INDEPENDENT ACCOUNTANTS 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, 1997 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for the three years in the period ended December 31, 1997, and have issued our report thereon dated January 30, 1998; such financial statements and report are included in the Company's 1997 Annual Report 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 30, 1998 20 GULFSTREAM AEROSPACE CORPORATION (PARENT COMPANY ONLY) SCHEDULE I -- CONDENSED FINANCIAL INFORMATION BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
ASSETS 1997 1996 --------- --------- Investment in subsidiary.............................................. $ 200,895 $ (87,393) --------- --------- Total Assets...................................................... 200,895 (87,393) --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 --------- --------- Payable to subsidiary................................................. $ 8,138 $ 1,418 Note Payable to subsidiary............................................ 100,000 100,000 --------- --------- Total liabilities................................................. 108,138 101,418 --------- --------- Stockholders' equity: Preferred stock; Series A, 7% Cumulative; $.01 par value; 20,000,000 shares authorized; no shares outstanding in 1997 and 100 shares issued in 1996....... -- -- Common stock; $.01 par value; 300,000,000 shares authorized; 86,522,089 shares issued in 1997 and 85,890,212 shares issued in 1996............... 865 859 Additional paid-in capital............................................ 370,258 333,686 Accumulated deficit................................................... (225,960) (468,971) Minimum pension liability............................................. (762) (1,464) Unamortized stock plan expense........................................ (1,115) (2,432) Less: Treasury stock: 11,978,439 shares in 1997 and 1996.............. (50,489) (50,489) --------- --------- Total stockholders' equity........................................ 92,757 (188,811) --------- --------- Total Liabilities and Stockholders' Equity............................ $ 200,895 $ (87,393) --------- --------- --------- ---------
- ------------------------ Notes: (1) The Company accounts for its investment in its subsidiary using the equity method of accounting. (2) The Company received cash dividends in 1996 of approximately $355.0 million from its subsidiary in satisfaction of intercompany balances. See notes to consolidated financial statements included in the 1997 Annual Report, incorporated herein by reference. 21 GULFSTREAM AEROSPACE CORPORATION (PARENT COMPANY ONLY) SCHEDULE I -- CONDENSED FINANCIAL INFORMATION STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---------- --------- --------- Interest expense................................................................ $ (6,720) $ (1,418) $ -- Net income of subsidiary........................................................ 249,731 48,383 28,894 ---------- --------- --------- Net income...................................................................... $ 243,011 $ 46,965 $ 28,894 ---------- --------- --------- ---------- --------- ---------
- ------------------------ 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 1997 Annual Report, incorporated herein by reference. 22 GULFSTREAM AEROSPACE CORPORATION SCHEDULE II -- CONDENSED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 (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, 1995................................. $ 1,312 $ 2,506 $ 381 $ 3,437 Year ended December 31, 1996................................. 3,437 344 538 3,243 Year ended December 31, 1997................................. $ 3,243 $ (1,588) $ 511 $ 1,144
- ------------------------ (1) Deductions from the allowance for doubtful accounts represent the write-off of uncollectible accounts. 23 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 on this 25th day of March 1998. 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 25, 1998 Theodore J. Forstmann /s/ W. W. BOISTURE, JR. Executive Vice President; - ------------------------------ Director March 25, 1998 W. W. Boisture, Jr. Executive Vice President, Chief Financial Officer /s/ CHRIS A. DAVIS and Secretary; Director - ------------------------------ (Principal Financial March 25, 1998 Chris A. Davis Officer and Principal Accounting Officer) /s/ JAMES T. JOHNSON President and Chief - ------------------------------ Operating Officer; March 25, 1998 James T. Johnson Director /s/ BRYAN T. MOSS Vice Chairman of the Board; - ------------------------------ Director March 25, 1998 Bryan T. Moss /s/ ROBERT ANDERSON Director - ------------------------------ March 11, 1998 Robert Anderson /s/ CHARLOTTE L. BEERS Director - ------------------------------ March 25, 1998 Charlotte L. Beers 24 SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ THOMAS D. BELL, JR. Director - ------------------------------ March 25, 1998 Thomas D. Bell, Jr. /s/ LYNN FORESTER Director - ------------------------------ March 25, 1998 Lynn Forester /s/ NICHOLAS C. FORSTMANN Director - ------------------------------ March 25, 1998 Nicholas C. Forstmann /s/ SANDRA J. HORBACH Director - ------------------------------ March 25, 1998 Sandra J. Horbach /s/ HENRY A. KISSINGER Director - ------------------------------ March 25, 1998 Henry A. Kissinger /s/ DREW LEWIS Director - ------------------------------ March 25, 1998 Drew Lewis /s/ MARK H. MCCORMACK Director - ------------------------------ March 25, 1998 Mark H. McCormack /s/ MICHAEL S. OVITZ Director - ------------------------------ March 25, 1998 Michael S. Ovitz /s/ ALLEN E. PAULSON Director - ------------------------------ March 25, 1998 Allen E. Paulson /s/ ROGER S. PENSKE Director - ------------------------------ March 25, 1998 Roger S. Penske /s/ COLIN L. POWELL Director - ------------------------------ March 25, 1998 Colin L. Powell /s/ GERARD R. ROCHE Director - ------------------------------ March 10, 1998 Gerard R. Roche 25 SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ DONALD H. RUMSFELD Director - ------------------------------ March 25, 1998 Donald H. Rumsfeld /s/ GEORGE P. SHULTZ Director - ------------------------------ March 25, 1998 George P. Shultz /s/ ROBERT S. STRAUSS Director - ------------------------------ March 25, 1998 Robert S. Strauss 26 GULFSTREAM AEROSPACE CORPORATION INDEX TO EXHIBITS
EXHIBIT DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 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. (Incorporated herein by reference to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for the year ended December 31, 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 [Reserved] 10.9 Form of Employee Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.9 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.)A 10.10 Form of Employee Stockholder's Agreement. (Incorporated herein by reference to Exhibit 10.10 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.)A 10.11 Lease Agreement, dated as of February 22, 1995, between Oklahoma City Airport Trust and Gulfstream Aerospace Corporation.* 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.)
27
EXHIBIT DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 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.) 10.24 Outfitted Gulfstream V Sales Agreement dated June 13, 1997 between Gulfstream Aerospace Corporation and Allen E. Paulson. (Incorporated herein by reference to Exhibit 10.24 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.25 Marketing Services Agreement dated June 13, 1997 between Gulfstream Aerospace Corporation and Allen E. Paulson. (Incorporated herein by reference to Exhibit 10.25 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.26 Gulfstream IV Aircraft Purchase Agreement and amendment to Outfitted Gulfstream V Sales Agreement dated August 1, 1997 between Gulfstream Aerospace Corporation and Allen E. Paulson. (Incorporated herein by reference to Exhibit 10.26 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.27 Amended and Restated Gulfstream Aerospace Corporation 1990 Stock Option Plan, as further amended through July 30, 1997. (Incorporated herein by reference to Exhibit 10.27 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)A
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EXHIBIT DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 10.28 Amendment dated December 24, 1997 to Credit Agreement among Gulfstream Delaware Corporation, The Chase Manhattan Bank, and the banks and other financial institutions parties thereto.* 10.29 Agreement dated December 24, 1997 between Gulfstream Aerospace Corporation and its wholly owned subsidiaries, Gulfstream Delaware Corporation, Gulfstream Aerospace Corporation, a Georgia Corporation and the Pension Benefit Guaranty Corporation.* 10.30 Lease Agreement, dated April 11, 1997, between Aeroplex Aviation and Gulfstream Aerospace Corporation.* 13.1 Annual Report to Stockholders for fiscal year ended December 31, 1997. (The 1997 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--Fiscal 1997.* 27.2 Restated Financial Data Schedule--Fiscal 1996 and Third Quarter 1996.* 27.3 Restated Financial Data Schedule--First, Second and Third Quarter 1997.* 99.1 Cautionary Statement for Purpose of the "Safe Harbor" Provisions of The Private Securities Litigation Reform Act of 1995.*
- ------------------------ A Management contract or compensatory plan. * Filed herewith. 29 EX-10.11 2 LEASE AND OPERATION AGREEMENT Exhibit 10.11 LEASE AND OPERATIONS AGREEMENT THIS AGREEMENT, made and entered into this 22nd day of February, 1995, by and between the Trustees of the Oklahoma City Airport Trust, hereinafter referred to as LESSOR, and Gulfstream Aerospace Corporation, hereinafter referred to as LESSEE, W I T N E S S E T H: WHEREAS, the LESSOR now leases and operates a municipal airport designated as Wiley Post Airport, sometimes hereinafter referred to as "Airport," located in Oklahoma County, Oklahoma; and WHEREAS, by virtue of certain written agreements hereinafter set forth, LESSEE leased from LESSOR various premises, facilities and improvements at the Airport for the purpose of operating an aircraft manufacturing business; and WHEREAS, the term of the Lease Agreement for the leasing of Hangars 10 and 11 and associated premises will expire December 31, 1994, and LESSEE has requested to renew its lease of said hangars for the purpose of operating a fixed base operation in addition to its aircraft manufacturing business; and WHEREAS, LESSOR has determined that it is in its best interest to grant LESSEE's request. NOW, THEREFORE, in consideration of the mutual obligations and covenants contained herein, LESSOR and LESSEE do hereby agree to the terms, conditions and provisions set forth herein, to wit: ARTICLE I - PREMISES LESSOR does hereby grant, demise and lease to LESSEE, and LESSEE does hereby hire, accept and lease from LESSOR certain facilities located on Airport identified as Hangars 10 and 11, together with associated ramp and premises adjacent thereto, as well as certain ground space located immediately north of Northwest 44th Street for storage of materials and equipment, said premises and facilities described more specifically on Exhibits "A" and "B," which are attached hereto and made a part hereof. 1 ARTICLE II - TERM The term of this Agreement shall be for a five (5) year period commencing January 1, 1995, and terminating December 31, 1999. ARTICLE III - RENTALS It is understood and agreed by the parties hereto that the rental rates incorporated hereinafter are new rental rates based on LESSOR'S established formulae for Airport facilities. During the term of this Lease Agreement LESSEE shall pay LESSOR annual rental consisting of the amounts set forth in or computed in accordance with the provisions of Subparagraphs A, B, C, D, and E, infra, to wit: A. GROUND RENTAL: Ground rental for the total area designated on Exhibit "A" shall be based on 728,189 square feet of ground area. For the period commencing January 1, 1995, through December 31, 1999, ground rental shall be based on $.07 per square foot and shall be payable monthly as follows: Annual Monthly Square Footage Ground Rental Ground Rental -------------- ------------- ------------- 728,189 x $.07 p.s.f. = $50,973.23 $4,247.77 B. RAMP MAINTENANCE RENTAL: The rate for the use of improved ground for use as ramp or apron available for the parking or movement of aircraft as designated on Exhibit "A" shall be established at twenty percent (20%) of the average cost of replacement of the ramp or apron with an anticipated life of fifteen (15) years on a square footage basis payable monthly, to be calculated as follows: $5.00 x 20% = $.06 (rate) x 134,200 square feet = $8,052 ----------- 15 years per year, payable at $671 per month. C. BUILDING RENTAL: Building rental for Hangars 10 and 11 shall be based on four percent (4%) per annum of their "Appraised Actual Cash Value." Said rental, which is payable monthly, shall be computed as follows: 2 Appraised Annual Total Actual Cash Building Monthly Hangar Value Rental Rental ------ ----- ------ ------ 10 $119,920.50 x 4% = $ 4,796.82 $ 399.74 11 $424,986.40 x 4% = 16,999.46 1,416.62 ---------- --------- Total Building Rental $21,796.28 $1,816.36 --------------------- D. HANGAR MAINTENANCE RENTAL: In order to compensate LESSOR for structural and exterior maintenance obligations on the facilities hereunder, the annual hangar maintenance rental payable monthly by LESSEE for the facilities hereunder shall be based on two percent (2%) of their appraised market value. Said rental shall be computed as follows: Annual Hangar Total Market Maintenance Monthly Hangar Value Rental Rental ------ ----- -------- ------ 10 $119,920.50 x 2% = $ 2,398.41 $199.87 11 424,986.40 x 2% = 8,499.73 708.31 ---------- ------- Total Hangar Maintenance Rental $10,898.14 $908.18 ------------------------------- E. FUEL FLOWAGE FEES: In addition to the foregoing payments, the LESSEE further understands and agrees that all fuel purchases for use and benefit of LESSEE will be through fuel storage facilities at the Airport and all such purchases shall be made by LESSEE. In addition to the above enumerated rental charges, LESSEE agrees to pay LESSOR a fuel flowage fee, separate from any LESSEE charges by others for aviation fuel or aviation oil, which will be established annually by the Director of Airports, and which is currently five cents ($0.05) per gallon on all aviation fuel delivered into LESSEE'S trucks, and fifteen cents ($0.15) per gallon on all aviation oil purchased by LESSEE; provided, however, the fuel flowage fees payable by LESSEE hereunder shall be six cents ($0.06) per gallon on all aviation fuel and sixteen cents ($0.16) per gallon on all aviation oil, or one cent ($0.01) above the per gallon fee for aviation fuel and one cent ($0.01) above the per gallon fee for aviation oil established from time to time by the Director of Airports, whichever shall be greater, unless LESSEE'S contract with its fuel supplier requires said fuel supplier to 3 pay LESSOR one cent ($0.01) per gallon on all aviation fuel and oil delivered to the premises of the Airport. The fees herein specified shall be considered as rental in lieu of landing fees for noncommercial general aviation aircraft or airport use fees hereunder and shall be paid to the LESSOR not later than the twenty-fifth (25th) day of the month succeeding the month of purchase; in this connection, the LESSOR shall have the right and privilege on call to inspect and audit the bills, receipts and records pertaining to the purchase of aviation fuel and oil for the purpose of verifying the correctness of the fee payments tendered by LESSEE. Further, LESSEE agrees to file with the LESSOR through its Director of Airports, Will Rogers World Airport, 7100 Terminal Drive, Box 937, Oklahoma City, Oklahoma 73159-0937, on forms prescribed by the LESSOR, monthly reports showing the number of gallons of aviation fuel and oil so purchased by LESSEE in order that the money due as fees may be shown. This report shall be filed not later than the third (3rd) day of the month following the purchase of said aviation fuel and oil. All payments are to be made at the office of the Director of Airports, or such other places as the LESSOR may direct the LESSEE in writing. F. Rentals under Subparagraphs A, B, C, and D above shall be paid by LESSEE monthly in advance, and shall become due and payable on or before the twenty-fifth (25th) day of each month without further billing. G. The parties hereto agree that no language contained in this Article III shall ever be construed by the LESSEE to obligate or in any way require the LESSOR to renew this Lease and Operations Agreement nor to establish a formula for or otherwise fix rental amounts payable for any tenant of the LESSEE for the term hereof. ARTICLE IV - DELINQUENT RENTALS It is hereby agreed by and between the LESSOR and LESSEE that should LESSEE fail, for any reason whatsoever, to make timely 4 remittance of the monthly rentals as required under any of the provisions hereof, then the outstanding balance of such delinquency shall earn interest at the rate of one and one-half (1-1/2) percent per month; moreover, said interest shall be considered additional rental for the leased premises and shall become due and payable on or before the twenty-fifth (25th) day of each month. ARTICLE V - BOOKS AND RECORDS LESSEE shall keep and maintain a complete and adequate set of books and records of all receipts and all other income from said leased premises for three years and shall make such books available on leased premises for inspection by the LESSOR or its authorized representative at any and all reasonable hours and times. ARTICLE VI - INGRESS AND EGRESS Upon paying the rental hereunder and performing the covenants of this agreement, the LESSEE shall have the right of ingress to and egress from said leased premises for the LESSEE, its officers, employees, agents, servants, customers, vendors, suppliers, patrons, and invitees over the roadway provided by LESSOR serving said premises jointly with other tenants on the Airport and the LESSEE shall not interfere with the rights and privileges of other persons or firms using said Airport. ARTICLE VII - OBJECTS AND PURPOSES The purposes of this Agreement are to grant to LESSEE the right and privilege of conducting business related to LESSEE'S use of certain leased premises and facilities located south of N.W. 50th Street, as well as conducting business as a Fixed Base Operator on the Airport and LESSEE agrees that the leased facilities described on Exhibits "A" and "B" which are attached hereto shall never be used for any other purposes other than those described herein, except upon written approval by the LESSOR by and through its Director of Airports. As consideration for this right and privilege, LESSEE agrees to provide and is hereby obligated to provide the facilities and services described below; provided, however, the right and privilege to conduct a Fixed Base Operation hereby granted shall exist only so long as the character of the 5 facilities operated and/or the services furnished shall be consistent with the high quality of facilities and services provided by other Fixed Base Operator lessees at LESSOR'S airports. In the above connection, LESSEE shall be required to furnish the services specified below in Subparagraphs A, B, and C. In addition, LESSEE may, but shall not be required to, furnish and provide those services specified below in Subparagraphs D, E, and F. Provided, however, as consideration for this right and privilege, LESSEE agrees to provide and is hereby obligated to maintain and operate said facilities in accordance with the terms and conditions set forth herein. A. Public Sales and Services 1. Aviation fuel and jet fuel. 2. An adequate inventory of at least two brands of generally accepted grades of aviation engine oil and lubricants. 3. Proper mobile fuel dispensing equipment to service all types of aircraft. 4. Properly qualified and trained line personnel on duty at least eight hours of every calendar day, seven days a week, and on call by readily accessible means at other hours during the day or night. 5. Proper equipment for repairing and inflating aircraft tires, servicing oleo struts, changing engine oil, washing aircraft and aircraft windows and windshields, recharging or energizing discharged aircraft batteries and starters. 6. Conveniently located heated and air conditioned lounge or waiting rooms for passengers and airplane crews or itinerant aircraft, together with sanitary rest rooms and public telephones. 7. Adequate towing equipment and parking and tie-down areas to safely and efficiently move aircraft and store them in all reasonably expected weather conditions. 8. In conducting refueling operations, every operator shall install and use adequate grounding facilities at fueling 6 locations to eliminate the hazards of static electricity, and shall provide approved types of fire extinguishers or other equipment commensurate with the hazards involved in refueling and servicing aircraft. 9. Shall provide for the adequate and sanitary handling and disposal, away from the Airport, of all trash, waste, and other materials including, but not limited to, used oil, solvents, and other waste. The piling or storage of crates, boxes, barrels, and other containers will not be permitted within the leased premises. 10. Suitable hard surfaced aircraft parking, tie-down and hangar storage facilities. 11. Food - availability of food via vending machines or other arrangements. 12. Ground Transportation - agreements with local taxi or provide courtesy car. Rent-a-car operations will, if desired by LESSEE, be permitted by a separate agreement between LESSEE and LESSOR. 13. Motel - arrangements with at least one local motel operator for the transportation of overnight guest to motels. LESSEE may provide transportation if necessary. B. Aircraft Engine, Airframe and Accessory Sales and Maintenance. 1. In case of airframe or engine repairs, sufficient hangar space to house any aircraft upon which such service is being performed. 2. Suitable inside and outside storage space for aircraft awaiting repair or maintenance or delivery after repair and maintenance have been completed, other than major repairs or alterations of less than 24 hours duration. 3. Adequate shop space to house the equipment and adequate equipment and machine tools, jacks, lifts and testing equipment to perform top overhauls as required for FAA certification and repair of parts not needing replacement on all single engine land and light multi-engine land general aviation aircraft. 7 4. At least one FAA certificated airframe and power plane mechanic available during eight hours of the day, five days per week. 5. If painting is contemplated, facilities must meet Oklahoma City Building and Fire Codes. C. Aircraft Radio. Avionics, and Instrument Sales and Service. 1. Adequate shop space to house equipment. 2. Sufficient inventory of specialized test equipment and personnel as required for FAA certification and approval for servicing, repairing, replacing and/or installing said equipment. The following services are permitted, but not required: D. Aircraft Charter and Taxi Service. Persons conducting an aircraft charter and/or air taxi service shall be required to provide: 1. Passenger lounge, restroom and telephone facilities as required of a Fixed Base Operator for public sales and services. 2. Adequate table, desk or counter for checking in passengers, handling ticketing or fare collection and handling of luggage. 3. Suitable, properly certificated aircraft with properly certificated and qualified operating crew, one of which shall be located at the airport and ready for departure during at least eight hours of daylight operation daily and at other times, stand-by units and crew available upon call within one hour's notice. 4. Shall provide passenger liability insurance of at least $75,000 per passenger seat and property damage liability of at least $100,000. 5. Facilities for washing and cleaning aircraft if operator engages in said business. E. Aircraft Rental and Sales. 1. Suitable office space for consummating sales and/or 8 rentals and the keeping of the proper records in connection therewith. 2. Hangar storage space for at least one aircraft to be used for sales or rentals. 3. For rental, at least two airworthy aircraft suitably maintained and certificated. 4. For sales activity of a new aircraft, a sales or distributorship franchise from a recognized aircraft manufacturer of new aircraft and at least one demonstrator model of such aircraft. 5. Adequate facilities for servicing and repairing the aircraft or satisfactory arrangements with other operators licensed by the Trust or the Airport for such service and repair. 6. There shall be available, at least during eight hours of the working day, a properly certificated pilot capable of demonstrating new aircraft for sale or for checking out rental aircraft. 7. The minimum stock of readily expendable spare parts, or adequate arrangements for securing spare parts required for the type of aircraft and models sold. 8. Current up-to-date specifications and price lists for types and models of new aircraft sold. 9. Proper check lists and operating manuals on all aircraft rented and adequate parts catalogue and service manual on new aircraft sold. F. Flight Training. All persons conducting flight training activities shall provide: 1. At least one full-time (eight hours per day, six days per week) properly certificated flight instructor for single engine land airplanes. 2. At least one dual equipped single engine land aircraft properly equipped and maintained for flight instruction and such additional types of aircraft as may be required to give flight instruction of the kind advertised. 9 3. Adequate office and classroom space for at least ten students with proper restroom and seating facilities. 4. Adequate mock-ups, pictures, slides, film strips or other visual aids necessary to provide proper ground school instruction. 5. Properly certificated ground school instructor providing regularly scheduled ground school instructions sufficient to enable students to pass the FAA written examinations for private pilot and commercial ratings. 6. Continuing ability to meet certification requirements of the FAA for the flight training proposed. 7. Adequate public liability and property damage insurance sufficient to protect the operator and the City from legal liabilities involved. 8. Adequate facilities for storing, parking, servicing and repairing all its aircraft or satisfactory arrangements with other operators licensed or otherwise permitted by the Trust on the Airport for such services. 9. The Trust reserves the right to waive any of the above if in their opinion existing conditions justify such waiver. G. Crop Dusting and Spraying. Persons seeking to conduct crop dusting or spraying of agricultural chemicals shall be required to satisfy the Trust that: 1. Operator shall inform the Director of Airports and the appropriate control tower of the date and area to be sprayed or dusted prior to operations. 2. Suitable arrangements have been provided for the safe storage and containment of noxious chemical materials; no poisonous or inflammable materials shall be kept or stored in close proximity to other facility installations at the Airport. 3. The operator shall have available properly certificated aircraft suitably equipped for the agricultural operation undertaken. 4. The operator shall make suitable arrangements for 10 servicing, repairing, storing and parking its aircraft with adequate safeguards against spillage on runways and taxiways or pollution or disbursal of chemicals by wind to other operational areas on the Airport. 5. Operator shall provide adequate public liability insurance to protect the operator, the Trust and the City from liability in connection with such operations. ARTICLE VIII - MAINTENANCE AND OPERATIONS The LESSEE has examined the leased premises and the facilities and has accepted them in their present condition; and except as may be otherwise expressly provided herein, LESSOR makes no agreement whatsoever to make improvements, alterations or repairs to the leased premises or facilities. LESSOR shall not be liable for acts of injury or damage that may arise on said premises or may occur during the LESSEE'S tenancy or occupancy to persons or property. Notwithstanding anything to the contrary contained herein, it is understood and agreed that all maintenance responsibility is that of the LESSEE, at LESSEE'S sole expense, with the exception of exterior and structural maintenance on buildings owned by LESSOR and pavements owned by the LESSOR which are the responsibility of the LESSOR. Unless otherwise agreed in writing by the parties hereto, LESSEE shall never use the leased premises for any purpose other than that which is defined in Article VII above. Moreover, no sales to the public, whether wholesale or retail, shall be conducted from the leased premises in any manner prohibited by 60 O.S.A., Sections 178.4 through 178.6. In addition, LESSEE hereby covenants not to permit or introduce any Hazardous Material to be brought upon, kept or used in or about the leased premises by LESSEE, it agents, employees, contractors, or invitees without the prior written consent of LESSOR, which LESSOR shall not unreasonably withhold as long as LESSEE demonstrates to LESSOR'S reasonable satisfaction that such Hazardous Material is necessary or useful to LESSEE'S operation hereunder and will be used, kept and stored in a manner that complies with all laws regulating any such Hazardous Material so 11 brought upon or used or kept in or about the leased premises. If LESSEE breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the leased premises caused or permitted by LESSEE results in contamination or if contamination of the leased premises by Hazardous Material otherwise occurs for which LESSEE is legally liable to LESSOR for damage resulting therefrom, then LESSEE shall indemnify, defend and hold LESSOR, The City of Oklahoma City, and its officers, agents and employees harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including without limitation, diminution in value of the leased premises, damages for the loss or restriction on use of rentable or usable space or of any amenity of the leased premises, damages arising from any adverse impact on marketing of space, and sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the lease term hereof as a result of such contamination. This indemnification of LESSOR by LESSEE includes, without limitation, costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the leased premises. Without limiting the foregoing, if the presence of any Hazardous Material on the leased premises caused or permitted by LESSEE results in any contamination of the leased premises, LESSEE shall promptly take all actions at its sole expense as are necessary to return the leased premises to the condition existing prior to the introduction of any such Hazardous Material to the leased premises; provided that LESSOR'S approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the leased premises. The foregoing indemnity shall survive the expiration or earlier termination of this Agreement. As used herein, the term "Hazardous Material" means any 12 hazardous or toxic substance, material or waste, including, but not limited to, those substances, materials, and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto, or such substances, materials and wastes that are or become regulated under any applicable local, state or federal law. LESSOR and its agents shall have the right, but not the duty, to inspect the leased premises at any time to determine whether LESSEE is complying with the terms of this Agreement. If LESSEE is not in compliance with this Agreement, LESSOR shall have the right to immediately enter upon the leased premises to remedy any contamination caused by LESSEE'S failure to comply, notwithstanding any other provisions of this Agreement. LESSOR shall use its best efforts to minimize interference with LESSEE'S business but shall not be liable for any interference caused thereby. The LESSEE shall maintain the leased premises at all times in a safe, neat and sightly condition and shall not permit the accumulation of any trash, ashes, or debris on the premises of the Airport. The LESSEE shall be responsible for all maintenance including, but not limited to: A. Janitorial services, providing janitorial supplies, window washing, rubbish and trash removal. B. Supply and replacement of light bulbs in and on all buildings, (except obstructional lights) and for replacement of all glass in buildings. C. Cleaning of stoppages in interior plumbing fixtures and drain lines due to the use of the premises by the LESSEE up to the first manhole or clean out outside of the exterior of the building. D. Replacement of floor covering. E. Maintenance of all doors and door operating systems, including weather stripping and glass replacement. F. Building interior maintenance; including painting, repairing, and replacement not resulting from structural failure. G. Landscaping and grass cutting services within the leased premises; the supplies, and utilities including exterior building flood lighting and planter lighting. H. Repair or replacement of equipment and utilities in all buildings occupied by LESSEE under this Agreement, such as electrical, mechanical and plumbing equipment, and the heating and air conditioning system. All repairs to electrical and 13 mechanical equipment are to be made by licensed personnel. Other repairs required of LESSEE shall be made by skilled craftsmen who perform such work regularly as a trade. I. Cleaning trash and snow from driveway and sidewalk between building and parking lot. LESSEE will not dispose of any debris or waste materials on Airport property. J. Maintenance on LESSEE-owned structures, pavements and equipment; and all maintenance on utilities to the point where connected to the main source of supply or outlet. K. LESSEE shall advise the LESSOR and obtain LESSOR'S consent in writing before making changes involving partitions or structural changes to building or premises, modifications, or additions to plumbing, electrical or other utilities. Any penetration of the roof shall be considered a structural change. L. LESSEE is responsible for maintaining electrical loads within the designed capacity of the system. Prior to any change desired by LESSEE in the electrical loading which would exceed such capacity, written consent will be obtained from the Director of Airports. M. In the event of damage to building structures or equipment, streets or lighting systems and utilities, LESSEE shall assist the LESSOR in determining the cause of damage to LESSOR'S property. N. LESSEE shall maintain and re-lamp flood lights on the buildings. 0. Hand fire extinguishers will be provided and maintained by LESSEE. Further, sprinkler or fire suppression systems, as applicable, for the interior of all buildings will be maintained by LESSEE. P. LESSEE agrees to make its own arrangements for all utility services and to pay for such services on its leased premises. Q. No alterations or repairs shall be made in or on said leased premises except as provided in Article IX hereof. No waste shall be committed or damage done to the property of the LESSOR. LESSEE further agrees that upon the expiration of the terms of this Agreement, or sooner cancellation thereof, said premises subject to the provisions of Article IX hereof, will be delivered to the LESSOR in as good condition as when received, reasonable wear and tear excepted. Reasonable wear and tear shall be determined by LESSOR and LESSEE upon inspection of premises from time to time. LESSOR reserves the right to make periodic inspection of leased premises and improvements and equipment therein during normal business hours. If said leased premises and facilities are not maintained and kept in a safe, clean, sightly and healthful condition by LESSEE, as aforesaid, then as an alternative to termination of this 14 Agreement under the provisions of Article XIX infra, the LESSOR, after giving thirty (30) days' written notice to LESSEE, during which period LESSEE may abate or correct the omission or objection so set forth in LESSOR'S notice, may thereupon correct such omission or objection by entering the leased premises itself or by its agents, servants or employees, without such entering causing or constituting a termination of this Agreement or an interference with possession of the premises by the LESSEE, and the LESSOR may cause the leased premises or facilities thereon to be placed in a state of good repair or in a safe, clean, sightly, and/or healthful condition; and the LESSEE agrees to pay the LESSOR the expenses of LESSOR incurred in the above connection as additional rent within thirty (30) days after submission of an invoice showing the reasonable expenditure or the incurring of any such reasonable expenditure by the LESSOR. ARTICLE IX - ALTERATIONS AND REPAIRS TO PREMISES Further, the LESSEE agrees not to construct, install, remove, modify and/or repair any of the buildings or premises leased hereunder without prior written approval of the Director of Airports, such approval not to be unreasonably withheld but may be contingent upon approval by LESSOR of plans and specifications for the proposed project as well as other conditions considered by LESSOR to be necessary. Immediately upon completion of the repairs, alterations or new construction, LESSEE shall present to LESSOR for examination and approval a statement of the "Construction and/or Alteration Costs." Where such alterations or construction have been made on buildings owned by LESSOR, LESSEE shall within thirty (30) days following completion of the alterations or construction present to LESSOR a complete set of "as-built" drawings including, but not necessarily limited to, plumbing and electrical systems. LESSEE shall keep the premises leased hereunder free and clear of any and all liens in any way arising out of any construction, improvement, or use thereof by LESSEE. In the event that LESSEE makes further alterations or improvements to the leased premises, the use thereof shall be 15 enjoyed by LESSEE during the remaining term of this Agreement without the payment of additional rental therefor, but such alteration or improvements shall become the property of LESSOR upon the completion of the alteration or improvements. "Construction and alteration costs" for the purposes of Article IX are hereby defined as all money paid by LESSEE for actual demolition, construction or alteration, including architectural and engineering costs plus pertinent fees in connection therewith. ARTICLE X - DESTRUCTION OF PREMISES - TERMINATION In the event of damage to or destruction or loss of the building or buildings by an insured risk, which damage, destruction or loss is not capable of being repaired within six (6) months, LESSOR shall have the option, exercisable by written notice given to the LESSEE within thirty (30) days after the occurrence of such event, to terminate this Agreement forthwith, such termination to be effective as of the date of such damage, destruction, or loss. In the event the LESSOR does not exercise the foregoing option to terminate this Agreement, or in the event said damage, destruction or loss is capable of being repaired within six (6) months, this Agreement shall not terminate and the LESSOR shall promptly repair, replace, restore, or rebuild said building or buildings to the extent of the insurance proceeds received by it, as nearly as possible to the condition said building or buildings were in immediately prior to such damage, destruction or loss, or with such changes or alterations as may be approved by the LESSOR. If the building or buildings shall be damaged in such manner as to render them unusable in whole or in part, the rental provided to be paid under the terms of this Agreement shall be abated or reduced proportionately during the period from the date of such damage or destruction until the work of repairing, restoring or reconstructing said building or buildings is completed. In the event of damage to or destruction or loss of either the building or buildings by an uninsured risk, the LESSOR shall have the option, exercisable by written notice given to the LESSEE 16 within thirty (30) days after the occurrence of such event, to terminate this Agreement forthwith, such termination to be effective as of the date of such damage, destruction, or loss. ARTICLE XI - LESSOR'S RESERVED RIGHTS A. LESSOR reserves the right to further develop or improve the aircraft operating area of the Airport as it sees fit and to take any action it considers necessary to protect the aerial approaches of the Airport against obstructions, together with the right to prevent LESSEE from erecting or permitting to be erected, any building or other structure on the Airport which, in the opinion of LESSOR, would limit the usefulness of the Airport or constitute a hazard to aircraft. B. During the time of war or national emergency declared by Congress, LESSOR shall have the right to lease the Airport or any part thereof to the United States Government for military or naval use, and if any such lease is executed, the provisions of this instrument insofar as they are inconsistent with the lease to the Government shall be suspended and in that event a just and proportionate part of the rent hereunder shall be abated. C. Any other provision of this Agreement notwithstanding, this Agreement shall be subordinate to the provisions of any existing or future agreement between LESSOR and the United States, relative to the operation or maintenance of the Airport, the terms and execution of which has been or may be required as a condition precedent to the expenditure or reimbursement to LESSOR of Federal funds for the development of the Airport. D. LESSOR, through its duly authorized agent, shall have at any and all times the full and unrestricted right to enter the leased premises for the purpose of inspection or maintenance and for the purpose of doing any and all things which it is obligated and has a right to do under this Agreement. ARTICLE XII - NONINTERFERENCE WITH OPERATION OF AIRPORT LESSEE covenants and agrees that it will not allow any 17 condition on the leased premises, nor permit the conduct of any activity on such premises, which shall materially or adversely affect the development, improvement, operation, or maintenance of the Airport or its facilities; nor will LESSEE use or permit the leased premises to be used in any manner which might interfere with the landing and take-off of aircraft from the Airport or otherwise constitute a hazard. If any proscribed or prohibited condition or activity, as described above, shall be permitted to exist on the leased premises, or on any part thereof, then, as an alternative to termination of this Agreement under the provisions of Article XIX, the LESSOR, after giving thirty (30) days' written notice to LESSEE, during which period LESSEE may abate or correct the omission or objection so set forth in LESSOR'S notice, may thereupon correct such omission or objection by entering the leased premises itself, or by its agents, servants or employees, without such entering causing or constituting a termination of this Agreement or an interference with possession of premises by LESSEE, and the LESSOR may cause abatement of such proscribed or prohibited condition or activity; and, in such event, the LESSEE agrees to pay the LESSOR the expenses of the LESSOR incurred in the above connection as additional rent within thirty (30) days after submission of an invoice showing the reasonable expenditure or the incurring of any such reasonable expenditure by the LESSOR. ARTICLE XIII - UTILITIES TO BE FURNISHED BY LESSEE The LESSOR shall not be required to furnish any service to the leased premises, including by way of example but not of limitation, heat, water and power. Neither the LESSOR nor The City of Oklahoma City shall be liable for any failure of water supply or electric current or of any service by any utility; likewise, neither the LESSOR nor The City of Oklahoma City shall be liable for injury to persons (including wrongful death) or damage to property resulting from steam, gas, electricity, water, rain, or snow which may flow from any part of the leased premises or from any pipes, appliances, or plumbing works, from the street or subsurface, or from any other place; or for interference with any easements of whatsoever nature, 18 however caused. The LESSEE shall make all its own arrangements with utility companies and shall pay all charges for steam, gas, electricity, water, light, heat, power, and other services used in or about leased premises and shall defend and indemnify the LESSOR and The City of Oklahoma City against any and all liability on such account. ARTICLE XIV - PERSONS AND PROPERTY ON LEASED PREMISES AT RISK OF LESSEE All persons and property of every kind which may be on said leased premises during the term hereof shall be at the sole risk of the LESSEE or those claiming under it and the LESSOR shall not be liable to the LESSEE, or any person whatsoever, for any injury, loss, or damage to any persons or property in or upon said leased premises, or upon the sidewalks and alleyways contiguous thereto. The LESSEE hereby covenants and agrees to assume all liability for or on account of any injury, loss, or damage above described and to defend and to save the LESSOR and The City of Oklahoma City harmless therefrom. ARTICLE XV - REMOVAL OF PERSONAL PROPERTY It is mutually covenanted and agreed that all personal property owned and placed on the leased premises by the LESSEE may be removed by the LESSEE at the termination or expiration of this Agreement, even though the same may be attached to the premises; provided, the LESSEE shall not then be in default in performance of the covenants hereof. The removal of any such property, as aforesaid, shall be effected and all damage caused to said premises by such removal shall be repaired by LESSEE within thirty (30) days after the termination or expiration of the Agreement. Should the LESSEE fail to remove said personal property within the prescribed thirty (30) day period, title to all such property shall vest in the LESSOR and/or the LESSOR may cause the removal of all or any portion of such property at the sole risk and expense of the LESSEE. ARTICLE XVI - TAXES LESSEE agrees to pay all taxes or, in lieu of taxes, special 19 assessments now or hereafter levied or assessed (1) upon the leased premises and facilities, (2) upon property owned or possessed by LESSEE and situated on the leased premises, or (3) upon LESSEE'S interest in or use of the leased premises. LESSEE shall defend, indemnify and save LESSOR and The City of Oklahoma City harmless from any claims or liens in connection with such taxes or, in lieu of taxes, assessments. ARTICLE XVII - MISCELLANEOUS COVENANTS A. LESSEE shall observe and comply with any and all requirements of the constituted public authorities and with all federal, state, or local statutes, ordinances, regulations and standard rules applicable to LESSEE or its use of the leased premises, including by way of example, but not of limitation, all general rules and regulations promulgated from time to time by the Director of Airports of The City of Oklahoma City in connection with the administration of the Airport. B. LESSEE shall not erect, maintain, or display any signs or other advertising at or on the leased premises or other Airport premises without first obtaining the written approval of the Director of Airports, such approval not to be unreasonably withheld. C. LESSEE hereby agrees to make no claims or file or cause to be filed any legal or equitable actions against LESSOR or The City of Oklahoma City for any kind of damages which result from noise or sound shock waves due to aircraft use of said Airport's facilities. ARTICLE XVIII - INDEMNITY AND INSURANCE BY LESSEE A. Indemnity - LESSEE hereby agrees to release, to defend, to indemnify, and to save harmless the LESSOR and The City of Oklahoma City, and its officers, agents and employees, (i) from and against any and all loss of, or damage to, property, or injuries to, or death of, any person or persons, as well as, (ii) from and against any and all claims, damages, suits, costs, expense, liability, actions or proceedings of any kind or nature whatsoever (including, without limiting the 20 generality of the foregoing, Workers' Compensation), of or by anyone whomever; in matters resulting from, or arising out of, or alleged to have resulted from or to have arisen out of, directly or indirectly, LESSEE'S operations or activities under or in connection with this Agreement, or LESSEE'S use and occupancy of any portion of the Airport, and including, without limiting the generality of the foregoing, acts and omissions of LESSEE'S officers, employees, representatives, suppliers, invitees, contractors or agents. Provided, however, LESSEE shall not be liable for any loss occasioned by the sole negligence or wilful misconduct of the LESSOR, The City of Oklahoma City, or their officers, agents, and employees. LESSOR covenants to give LESSEE prompt notice of any claims. The minimum insurance requirements set forth below shall not be deemed to limit or define the obligations of LESSEE hereunder. B. Liability Insurance - LESSEE shall purchase, or cause to be purchased, and cause to be maintained in effect for the term of this Agreement with insurance carriers acceptable to LESSOR the following: (1) Workers' Compensation Insurance as required by the Statutes of the State of Oklahoma, or adequate Employers' Liability Insurance; and (2) General Public Liability in the amount of not less than $1,000,000 for any number of claims arising out of a single occurrence or accident, with a limit of $25,000 for any claim or to any claimant who has more than one claim for loss of property arising out of a single accident or occurrence and with a limit of $100,000 to any claimant for his claim for any other loss arising out of a single accident or occurrence. (3) Hangar Keepers Liability Insurance in the minimum amounts of $1,000,000 per aircraft and $1,000,000 per occurrence. (4) Aircraft Liability Insurance for each aircraft owned or regularly used in LESSEE's business, in the minimum 21 amount of $50,000 per seat for passengers and property damage insurance in the minimum amount of $4,000 for each 1,000 pounds (or fraction thereof) of maximum gross weight at which aircraft is certificated to operate, or $50,000, whichever is the greater amount for each particular aircraft concerned. Prior to the effectiveness of this Agreement, satisfactory proof of carriage of such insurance by way of a "Certificate of Insurance" must be submitted to LESSOR showing the Oklahoma City Airport Trust and The City of Oklahoma City to be named as additional insured under the policies and also containing a provision that coverages afforded under the policies will not be materially altered or cancelled except upon at least ten (10) days' prior written notice given to the Oklahoma City Airport Trust. The certificate shall also include coverage for LESSEE'S contractual liability set forth in Article XVIII(A) entitled Indemnity. C. Property Insurance - The LESSEE, in its own name and that of LESSOR, as their interests may appear, shall during the initial and renewal terms hereof purchase and maintain in effect, with responsible underwriters approved by LESSOR, a blanket "all-risks" form policy of fire insurance with the broadest extended coverage endorsements attainable, as well as vandalism and malicious mischief and boiler and machinery insurance on the building and improvements situated on the leased premises to the extent of not less than ninety percent (90%) of the full insurable value thereof. Also, LESSEE shall in connection with all hazards or risks required to be insured against in the immediately preceding sentence, purchase and maintain in effect rental insurance on the buildings and improvements on the leased premises, in an amount not less than debt service on such buildings. The LESSEE shall furnish the LESSOR, with certificates of such insurance, issued by insurance underwriters, evidencing the existence of valid policies of insurance with the coverage 22 specified, which certificates shall not be amended so as to decrease the protection below the limit specified herein or be subject to cancellation without at least ten (10) days advance written notice to LESSOR. In lieu of the above requirement of LESSEE to purchase and maintain property insurance as described above, the LESSOR may purchase such insurance. In the event LESSOR agrees to purchase such insurance, LESSEE shall reimburse the LESSOR for all expenses incurred by LESSOR in carrying and maintaining such insurance coverage. In this connection, LESSEE agrees to pay all premiums immediately upon receipt of an invoice for same from the LESSOR and the LESSEE shall assume and pay for or reimburse LESSOR for any property loss up to the amount of any deductible amount under any property insurance policy, regardless of whether such deductible amount is provided for in the property insurance policy purchased and maintained by LESSEE or by LESSOR. ARTICLE XIX - TERMINATION BY LESSOR IN EVENT OF DEFAULT A. The following are hereby defined as "Events of Default" under this Agreement: 1. If LESSEE shall fail to pay any installment of rent or any other sums or charges payable by LESSEE to LESSOR under this Agreement when and as the same become due and payable, and such failure shall continue for a period of thirty (30) days after the due date; or 2. If LESSEE shall fail to perform or comply with any other term, covenant or agreement hereof for a period of thirty (30) days after written notice thereof from LESSOR to LESSEE, or, in the case of a default or a contingency which cannot with due diligence be cured within such period, LESSEE fails to proceed with all due diligence within the time period to cure the same and thereafter to prosecute the curing of such default with all due diligence; or 3. If LESSEE shall make a general assignment for the benefit of creditors, or shall admit in writing LESSEE's 23 continuing inability to pay LESSEE's debts as they become due, or shall file a petition for bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file an answer admitting or not contesting the material allegations of a petition against LESSEE in any such proceeding, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of LESSEE or any material part of LESSEE's properties; or 4. If within sixty (60) days after the commencement of any proceeding against LESSEE seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed, or if, within sixty (60) days after appointment without the consent of such LESSEE or of any trustee, receiver or liquidator of such LESSEE or of any material part of LESSEE'S properties, such appointment shall not have been vacated; or 5. If the LESSEE shall voluntarily abandon any of the Leased Premises for a continuous period of thirty (30) days at any one time, except when such abandonment be caused by fire, earthquake, war, strike or other calamity beyond LESSEE'S control; THEN and in such event, LESSOR at any time thereafter (but prior to the curing of all such Events of Default) may give notice to LESSEE specifying such Event of Default or Events of Default and stating that this Agreement and the lease term shall expire and terminate on the date specified in such notice, which shall be at least ten (10) days after the giving of such notice, and on such date, unless all such Events of Default shall have been cured and there shall not exist any 24 other Event of Default, all of the right, title and interest of LESSEE under this Agreement shall terminate and LESSEE shall remain liable as hereinafter provided. Provided, however, in any case where LESSOR shall be entitled under this Article XIX to terminate this Agreement for failure of the LESSEE to correct or cure an Event of Default after due notice as herein provided, LESSOR, as an alternative to termination of this Agreement, may but shall be under no obligation to, perform the obligation imposed under this Agreement for the account of and at the expense of the LESSEE and the same shall be paid by LESSEE within thirty (30) days following the date of receipt by LESSEE of an invoice for said reasonable expense. B. If any Event of Default shall have occurred and be continuing, LESSOR, whether or not the lease term shall have been terminated pursuant to Section XIX.A, may, upon ten (10) days written notice, except in cases of emergency when no notice need be given and unless the default is cured, enter upon and repossess the leased premises or any part thereof and possess the improvements thereon, or any part thereof, and declare all rent remaining for the unexpired term of the Agreement to be due and owing (said repossession and possession being hereinafter referred to as "repossession") by force, summary proceedings, ejectment or otherwise without being deemed guilty of any manner of trespass, and may remove LESSEE and all other persons and property therefrom. LESSEE shall release, defend, indemnify and save harmless LESSOR and The City of Oklahoma City, and their officers, agents and employees, from all claims, damages, suits, actions, costs, expense or liability of whatsoever nature arising from the LESSOR'S repossession of the leased premises as authorized herein; provided, however, LESSEE shall not be liable for or release the LESSOR or The City of Oklahoma City from any loss or damage caused by the sole negligence or willful misconduct of the LESSOR, The City of Oklahoma City, or their officers, 25 agents or employees in connection with any repossession activities authorized herein. C. From time to time after the repossession of the leased premises or any part thereof, pursuant to Section XIX.B, whether or not the lease term has been terminated, (i) LESSOR may, but shall be under no obligation to, relet the leased premises or any part thereof, for the account of LESSEE in the name of LESSOR or otherwise, or (ii) the Director of Airports of The City of Oklahoma City may, but shall be under no obligation to, grant one or more revocable permits for the occupancy or use of the leased premises or any part thereof, for such term or terms (which may be greater or less than the period which otherwise would have constituted the balance of the lease term) and on such terms (which may include concessions or reduced rent or fees) and for such uses as LESSOR, or as the Director of Airports in the event of the issuance of a revocable permit, in LESSOR'S, or the Director of Airport's, sole discretion may determine, and may collect and receive as rent or fees therefor. LESSEE shall indemnify and hold LESSOR harmless for any deficiency received by LESSOR upon such reletting or grant of one or more revocable permits, all without prejudice to any other remedy available to LESSOR. D. No termination of this Agreement and no repossession of the leased premises or any part thereof pursuant to this Article XIX shall relieve the LESSEE of LESSEE'S obligations and liabilities under this Agreement, all of which shall survive any such termination or repossession. In the event of any such termination or repossession, whether or not the leased premises or any part thereof shall have been relet, or shall have been reoccupied or used pursuant to a revocable permit, LESSEE shall pay to LESSOR the rent and other sums and charges to be paid by LESSEE up to the time of such termination or repossession. Thereafter LESSEE, until the end of what would have been the full term of this Agreement, shall pay to LESSOR, as and for liquidated and agreed current damages for 26 LESSEE'S default, the equivalent amount of the rent and such other sums and charges which would be payable under this Agreement by LESSEE if this Agreement were still in effect, less the net proceeds, if any, of any reletting, or of any granting of a revocable permit, effected pursuant to the provisions of Paragraph C, supra after deducting therefrom all expenses in connection with such reletting by LESSOR, or in connection with such granting of a revocable permit by the Director of Airports, including, without limiting the generality thereof, all repossession costs, operating expenses, reasonable attorneys' fees, alteration costs, and expense of preparing for such reletting by LESSOR, or for the granting of a revocable permit by the Director of Airports. LESSEE shall pay such current damages to LESSOR monthly on those days on which the Rent would have been payable under this Lease if this Lease were still in effect, and LESSOR shall be entitled to recover the same from LESSEE on each such day. E. No failure by LESSOR to insist upon the strict performances of any term hereof or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. F. The various rights, powers, and remedies herein contained and reserved to LESSOR, or the Director of Airports, shall not be considered as exclusive of any other right, power or remedy, but the same shall be construed as cumulative and shall be in addition to every other right, power or remedy now or hereafter existing at law, in equity or by statute. No delay or omission of LESSOR, or of the Director of Airports, to exercise any right, power or remedy arising from any omission, neglect or default of LESSEE shall impair any such right, power or remedy or shall be construed as a waiver of any such default or an acquiescence therein. G. In the event of any breach or threatened breach by LESSEE of 27 any of the terms contained in this Agreement, LESSOR shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise, except this Agreement shall be terminated only in the manner set forth herein. ARTICLE XX - TRANSFER OF STOCK OWNERSHIP If any individual or group of individuals or any other entity presently owns in excess of a majority of shares in LESSEE Corporation, then a transfer of ownership of a majority or more of the stock in LESSEE Corporation without the prior written approval of LESSOR shall constitute a material breach of this Agreement for which LESSOR may terminate the same under the provisions of Article XIX hereof. Moreover, at least ninety (90) days prior to any contemplated stock transfer LESSEE shall submit a written request to LESSOR showing good and sufficient financial worth and adequate experience in the operation of the facilities on the part of the contemplated purchaser or purchasers of stock and evidencing the intent of such contemplated purchaser or purchasers to expressly assume in writing and agree to be bound by and fulfill all of the terms, covenants, obligations, and agreements contained in this Agreement. ARTICLE XXI - WAIVER OF STATUTORY NOTICE In the event LESSOR exercises its option to terminate this Agreement pursuant to the terms and happenings of any or all of the events set forth in Article XIX (Termination by LESSOR), any notice of termination given by LESSOR to LESSEE pursuant to the provisions of said Article XIX shall be sufficient to cancel and terminate this Agreement; and, upon such termination, LESSEE hereby agrees that it will forthwith surrender up possession of the demised premises to the Trustees of the Oklahoma City Airport Trust. In this connection, LESSEE hereby expressly waives the receipt of any notice to quit or notice of termination which would otherwise be given by LESSOR under any provisions of the laws of the State of Oklahoma, including, but not limited to, notices required to be given under any section of Title 41 of the Oklahoma Statutes. 28 ARTICLE XXII - ASSIGNMENT AND SUBLETTING The LESSEE may, with the prior written consent of LESSOR, assign or sublet all or a portion of the leased premises; provided, however, the term of any sublease shall not extend beyond a one year period. Except as specifically provided above, LESSEE shall not assign this Agreement or any interest therein by an operation of law, process or proceeding of any Court or otherwise, or sublet the leased premises or any portion thereof and/or the operation or maintenance of the leased premises without first obtaining the prior written approval of the LESSOR; moreover, at least ninety (90) days prior to any contemplated assignment of this Agreement by any operation of law, process or proceeding of any Court or otherwise, LESSEE shall submit a written request to the LESSOR, and LESSEE shall submit evidence showing good and sufficient financial worth and adequate experience in the operation of the facilities on the part of the contemplated assignee. In any event, no assignment shall be made or shall be effective unless LESSEE shall not be in default on any of the terms, provisions, covenants and conditions herein contained. Further, in no event shall any assignment be effective, regardless of any submissions to the LESSOR, without the prior written approval of the LESSOR. The party to whom such assignment is made shall expressly assume in writing and agree to be bound by and fulfill all of the terms, covenants, obligations and agreements contained in this Agreement. In the event of any approved assignment, LESSEE shall remain liable to LESSOR to pay to LESSOR any portion of the rental and fees provided for herein upon failure of the assignee to pay the same when due; moreover, no subleasing shall release the LESSEE from its obligations to pay all rental amounts hereunder or release LESSEE from any of the terms, covenants or conditions herein contained on the part of the LESSEE to be performed, kept and observed. Further, in the event of an approved assignment or subleasing, neither assignee or sublessee shall assign or sublet any portion of the leased premises except with the prior approval 29 of LESSOR and LESSEE herein, and any sublease or assignment by LESSEE shall contain a clause to this effect. LESSEE may rent or sublease portions of the demised premises and facilities for the storage of individual privately owned aircraft or the minor maintenance thereof without the prior written approval of the LESSOR; provided, however, the term of any sublease shall not extend beyond a one-year period and provided, further, that LESSEE shall from time to time and at any time at the request of the Director of Airports furnish the Director with the following information as to any and all subleases: (i) the name and address of such sublessee, (ii) the identity and location of the specific portion of LESSEE'S leased premises and facilities subleased to such sublessee, (iii) the identification of any aircraft stored or located in the subleased premises and facilities, and (iv) any and all other evidence deemed necessary by the Director of Airports to document that any such sublessee is at all times strictly complying with all the terms, provisions and restrictions contained in this Lease Agreement. ARTICLE XXIII - NONDISCRIMINATION IN EMPLOYMENT The LESSEE shall comply with all the following nondiscrimination provisions to the extent that LESSEE'S activities shall be subject to the same: A. Nondiscrimination in Employment The LESSEE agrees not to discriminate against any employee or applicant for employment because of race, creed, color, sex, national origin, ancestry, age or disability, as defined by the Americans With Disabilities Act 1990, Section 3 (2). The LESSEE shall take affirmative action to insure that employees are treated without regard to their race, creed, color, national origin, sex, ancestry, age or disability, as defined by the Americans With Disabilities Act 1990, Section 3 (2). Such actions shall include, but not be limited to, the following: employment, upgrading, demotion or transfer, recruiting or recruitment, advertising, lay-off or termination and selection for training, including apprenticeship. The 30 LESSEE, or any sublessee, hereby agrees to post, in a conspicuous place, available to employees and applicants for employment, notices setting forth the provisions of this Article. B. Facilities Nondiscrimination 1. LESSEE shall furnish its accommodations and/or services on fair, equal, and not unjustly discriminatory basis to all users thereof and it shall charge fair, reasonable, and not unjustly discriminatory prices for each unit or service; provided, that the LESSEE may be allowed to make reasonable and nondiscriminatory discounts, rebates, or other similar type of price reductions to volume purchasers. 2. LESSEE shall make its accommodations and/or services available to the public on fair and reasonable terms without unjust discrimination on the basis of sex, age, race, creed, ancestry, color, national origin, or disability, as defined by the Americans With Disabilities Act 1990, Section 3 (2); provided, however, nothing herein shall require the furnishing to the general public of the use of any facilities or accommodations customarily furnished by LESSEE solely to its employees, customers, clients, guests, and invitees. 3. Noncompliance with Provisions 1 and 2 above shall constitute a material breach thereof and, in the event of such noncompliance, LESSOR shall have the right to terminate this Agreement and the estate hereby created without liability therefor, or at the election of LESSOR or the United States, either or both said Governments, shall have the right to judicially enforce said Provisions 1 and 2. 4. LESSEE agrees to insert the above in any leases, agreements, or contracts, etc. by which said LESSEE grants a right or privilege to any person, firm, or 31 corporation to render accommodations and/or services to the public on the premises herein leased. C. Affirmative Action Program LESSEE assures that it will undertake an affirmative action program as required by 14 CFR Part 152, Subpart E, to insure that no person on the grounds of race, creed, color, national origin, ancestry, age, sex, or disability, as defined by the Americans With Disabilities Act 1990, Section 3 (2) be excluded from participation in any employment activities covered by 14 CFR Part 152, Subpart E. LESSEE assures that no person shall be excluded on these grounds from participating in or receiving the services or benefits of any program or activity covered by this Subpart. LESSEE assures that its covered suborganizations will give assurances to LESSEE that they similarly will undertake affirmative action programs and that they will require assurances from their suborganizations, as required by 14 CFR Part 152, Subpart E, to the same effect. The LESSEE agrees not to discriminate against any employee or applicant for employment because of race, creed, color, sex, national origin, ancestry or age. The LESSEE shall take affirmative action to insure that employees are treated without regard to their race, creed, color, national origin, sex, ancestry or age. Such actions shall include, but not be limited to, the following: employment, upgrading, demotion or transfer, recruiting or recruitment, advertising, lay-off or termination and selection for training, including apprenticeship. The LESSEE, or any Sublessee, hereby agrees to post, in a conspicuous place, available to employees and applicants for employment, notices setting forth the provisions of this Article. ARTICLE XXIV - NOTICES, CONSENTS, AND APPROVALS Notices or other communications to LESSOR pursuant to the provisions hereof shall be sufficient if sent by registered or certified mail, postage prepaid, addressed to the Oklahoma City Airport Trust, Will Rogers World Airport, 7100 Terminal Drive, Box 937, Oklahoma City, Oklahoma 73159-0937; and bills, statements, 32 and notices or communications to LESSEE shall be sufficient if sent by mail, postage prepaid, or if hand-delivered, to Gulfstream Aerospace Corporation, P.O. Box 22500, Oklahoma City, Oklahoma 73123; or to such respective addresses as the parties may designate in writing from time to time. IN WITNESS WHEREOF, the parties have hereunto set their hands to this Lease and Operations Agreement as of the day and year first above written. ATTEST: (SEAL) GULFSTREAM AEROSPACE CORPORATION /s/ A. Wayne Radko, CONTROLLER /s/ John E. Podger, President - ----------------------------------- ----------------------------------- Name/Title Name/Title APPROVAL RECOMMENDED: OKLAHOMA CITY AIRPORT TRUST /s/ Luther E. Trent /s/ Ken W. Townsend - ----------------------------------- ----------------------------------- Luther E. Trent Ken W. Townsend, Chairman Director of Airports ATTEST: (SEAL) /s/ Thomas Hurley - ----------------------------------- Trust Secretary APPROVED by the Council and signed by the Mayor of The City of Oklahoma City this 7th day of March, 1995. /s/ Ronald J. Norick ----------------------------------- Mayor ATTEST: (SEAL) /s/ Thomas Hurley - ----------------------------------- City Clerk APPROVED as to form and legality this 21st day of February 1995. /s/ William O. West ----------------------------------- Assistant Municipal Counselor 33 EXHIBIT A GULFSTREAM AEROSPACE CORPORATION Parcel 1 - Hangars 10 and 11 A part of the Southeast Quarter of Section 8, Township 12 North, Range 4 West, of the Indian Meridian in Oklahoma County, Oklahoma, more particularly described as follows: COMMENCING at the Southeast corner of said Southeast Quarter; thence North 00 degrees 16'00" West along the East line of said quarter section a distance of 40.00 feet; thence South 89 degrees 26'OO" West along a line parallel to the South line of said quarter section a distance of 948.42 feet to a point or place of beginning of the tract of land herein described; THENCE continuing South 89 degrees 26'00" West a distance of 1059.08 feet; THENCE North 02 degrees 05'10" West a distance of 411.94 feet; THENCE North 43 degrees 26'00" East a distance of 86.00 feet; THENCE North 46 degrees 34'00" West a distance of 70.00 feet; THENCE North 43 degrees 26'00" East a distance of 332.00 feet; THENCE North 89 degrees 26'00" East a distance of 254.134 feet; THENCE South 00 degrees 34'00" East a distance of 320.00 feet; THENCE North 89 degrees 26'00" East a distance of 545.866 feet; THENCE South 00 degrees 34'00" East a distance of 440.81 feet to the point or place of beginning, said tract containing 587,189 square feet or 13.48 acres, more or less. Parcel 2 - Ground Lease The subject property is within an unplatted area and is legally described as follows: A part of the Southwest Quarter of Northeast Quarter of Section 17, Township 12 North, Range 4 West, more particularly described as beginning at a point at the Northeast Corner of Southwest Quarter of Northeast Quarter; thence West 470 feet; thence South 300 feet; thence East 470 feet; thence North 300 feet, to a point of beginning, or Lots 1, 2, 3, and East 80 feet of Lot 4 of Leavitt's unrecorded addition as shown on Exhibit B, Page 2 of 2. Said area containing 141,000 square feet or 3.24 acres, more or less. EXHIBIT A GULFSTREAM AEROSPACE CORPORATION EFFECTIVE JANUARY 1, 1995 EXHIBIT B, Page 1 of 2 --------------- LEASE AGREEMENT (Hangars 10 and 11) Gulfstream Aerospace Corporation Parcel 1 WILEY POST AIRPORT DATE: January 1, 1995 [MAP OMITTED] EXHIBIT B, Page 2 of 2 LEASE AGREEMENT (PARCEL 2) GULFSTREAM AEROSPACE CORPORATION WILEY POST AIRPORT January 1, 1995 EX-10.28 3 AMENDMENT DTD 12/24/97 Exhibit 10.28 EXECUTION COPY AMENDMENT AMENDMENT, dated as of December 24, 1997 (this "Amendment"), to the Credit Agreement, dated as of October 16, 1996 (as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among GULFSTREAM DELAWARE CORPORATION, a Delaware corporation, the several lenders from time to time parties thereto (the "Lenders"), THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the Company, the Lenders and the Administrative Agent are parties to the Credit Agreement; WHEREAS, the Company has requested that the Administrative Agent, with the consent of the Required Lenders, amend certain provisions of the Credit Agreement; and WHEREAS, the Administrative Agent, with the consent of the Required Lenders, is agreeable to the requested amendments, but only on the terms and subject to the conditions set forth herein; NOW THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein which are defined in the Credit Agreement are used herein as therein defined. 2. Amendments to Subsection 8.11. (a) Subsection 8.11(e) of the Credit Agreement is hereby amended by deleting the word "and" at the end of such subsection. (b) Subsection 8.11(f) of the Credit Agreement is hereby amended by deleting the existing subsection 8.11(f) in its entirety and by substituting in lieu thereof the following new subsection 8.11(f): "(f) so long as no Default or Event of Default has occurred or would occur after giving effect to such declaration or payment, the Company may, at any time that (i) the Leverage Ratio in effect is equal to or less than 1.5:1.0 or (ii) the aggregate principal amount of Term Loans then outstanding is less than $200,000,000, declare and pay cash 2 dividends to Holdings on the common stock of the Company, provided that the aggregate amount thereof paid in any fiscal year of the Company, together with any Stock Repurchase Dividends (as defined below) made under paragraph (g) of this subsection 8.11 during such fiscal year, does not exceed an amount equal to 25% of Consolidated Net Income for such fiscal year; and" (c) Subsection 8.11 of the Credit Agreement is hereby amended by adding the following new paragraph (g) to the end of such subsection: "(g) so long as no Default or Event of Default has occurred or would occur after giving effect to such declaration or payment, the Company may, at any time and from time to time, declare and pay cash dividends to Holdings on the common stock of the Company, in an aggregate amount of up to $200,000,000, in order to enable Holdings to repurchase shares of its own common stock for an aggregate purchase price of $200,000,000 pursuant to a share repurchase program (such cash dividends, the "Stock Repurchase Dividends"), provided that the Company does not use more than $100,000,000 in proceeds from Revolving Credit Loans to finance such Stock Repurchase Dividends (it being understood that this proviso shall in no way limit the Company from using proceeds from Revolving Credit Loans for any other purpose)." 3. Effectiveness. This Amendment shall become effective as of the date the Administrative Agent shall have received counterparts hereof duly executed by the Company, the Administrative Agent and the Required Lenders. 4. Representations and Warranties. The Company hereby represents and warrants that each of the representations and warranties in or pursuant to Section 5 of the Credit Agreement or which are contained in any other Credit Document or in any certificate, document or financial or other statement furnished by or on behalf of Holdings, the Company or any Subsidiary thereof shall be, after giving effect to this Amendment, true and correct in all material respects as if made on and as of the date hereof (unless such representations and warranties are stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date). 5. Continuing Effect of Credit Agreement. This Amendment shall not be construed as a waiver or consent to any further or future action on the part of the Company that would require a waiver or consent of the Administrative Agent and/or the Lenders. Except as amended hereby, the provisions of the Credit Agreement are and shall remain in full force and effect. 6. Counterparts. This Amendment may be executed in counterparts and all of the said counterparts taken together shall be deemed to constitute one and the same instrument. 3 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 8. Expenses. The Company agrees to pay or reimburse the Administrative Agent for all of its out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of this Amendment, including, without limitation, the fees and disbursements of counsel to the Administrative Agent. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers as of the date first written above. GULFSTREAM DELAWARE CORPORATION By: /s/ Robert L. Williams ---------------------------------- Title: Vice President & Treasurer THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By: /s/ William J. Caggiano ---------------------------------- Title: Managing Director ARAB BANKING CORP. By: /s/ Louise Bilbro ---------------------------------- Title: Vice President BANK OF AMERICA By: /s/ Debra Seiter ---------------------------------- Title: Vice President BANK OF NEW YORK By: /s/ David C. Siegel ---------------------------------- Title: Vice President BANK OF TOKYO-MITSUBISHI TRUST By: /s/ Joseph P. Devoe ---------------------------------- Title: Vice President 5 CAPTIVA FINANCE LTD. By: /s/ Illegible ---------------------------------- Title: Director CERES FINANCE, LTD. By: /s/ Illegible ---------------------------------- Title: Director MEDICAL LIABILITY MUTUAL INSURANCE By: /s/ Reginald J. Woodard ---------------------------------- Title: Assistant Vice President CREDITANSTALT CORPORATE FINANCE, INC. By: /s/ Clifford L. Weils ---------------------------------- Title: Vice President CITIBANK, N.A. By: /s/ Larry Farley ---------------------------------- Title: Attorney-In-Fact CREDIT LYONNAIS By: /s/ Philippe Soustra ---------------------------------- Title: Senior Vice President 6 DAI-ICHI KANGYO By: /s/ Stephanie Rogers ---------------------------------- Title: Vice President BANKBOSTON, N.A. By: /s/ Illegible ---------------------------------- Title: Division Executive THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Gregory J. Sjullie ---------------------------------- Title: Vice President INDUSTRIAL BANK OF JAPAN, LTD. By: /s/ Takuya Honjo ---------------------------------- Title: Senior Vice President KREDIETBANK By: /s/ Robert Seauffer ---------------------------------- Title: Vice President By: /s/ Tod R. Angus ---------------------------------- Title: Vice President LTCB TRUST COMPANY By: ---------------------------------- Title: 7 LEHMAN COMMERCIAL PAPER INC. By: /s/ Michele Swanson ---------------------------------- Title: Authorized Signatory MARINE MIDLAND BANK, N.A. By: /s/ Illegible ---------------------------------- Title: Authorized Signatory #8891 MERRILL LYNCH PRIME RATE PORTFOLIO By: Merrill Lynch Asset Management, L.P., as Investment Advisor By: /s/ Gilles Marchand ---------------------------------- Title: Authorized Signatory MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By: /s/ Gilles Marchand ---------------------------------- Title: Authorized Signatory MITSUBISHI TRUST & BANKING CORP. By: /s/ Scott J. Paige ---------------------------------- Title: Senior Vice President NATIONSBANK N.A. By: ---------------------------------- Title: 8 PNC BANK, N.A. By: /s/ Robert Mitchell ---------------------------------- Title: Vice President SOCIETE GENERALE By: /s/ Illegible ---------------------------------- Title: V.P., Manager U.S. BANK NATIONAL ASSOCIATION By: /s/ Mark R. Olman ---------------------------------- Title: Vice President VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST By: /s/ Jeffrey W. Maillet ---------------------------------- Title: Sr. Vice President & Director YASUDA TRUST & BANKING COMPANY By: ---------------------------------- Title: 9 The undersigned guarantors hereby consent to the foregoing Amendment: GULFSTREAM AEROSPACE CORPORATION, a Delaware Corporation By: /s/ Robert L. Williams ---------------------------------- Title: Vice President & Treasurer GULFSTREAM AEROSPACE CORPORATION, a Georgia Corporation GULFSTREAM AEROSPACE CORPORATION, D/B/A GULFSTREAM AEROSPACE TECHNOLOGIES, an Oklahoma Corporation GULFSTREAM AEROSPACE CORPORATION, a California Corporation By: /s/ Robert L. Williams ---------------------------------- Title: Vice President & Treasurer EX-10.29 4 AGREEMENT DTD 12/24/97 Exhibit 10.29 AGREEMENT THIS AGREEMENT ("Agreement") is entered into as of December 24, 1997, by and between Gulfstream Aerospace Corporation, a Delaware corporation ("Gulfstream"), Gulfstream Delaware Corporation, a Delaware corporation and a wholly-owned subsidiary of Gulfstream Aerospace Corporation ("GDC"), Gulfstream Aerospace Corporation, a Georgia corporation and a wholly-owned subsidiary of Gulfstream Delaware Corporation ("GAC") and the Pension Benefit Guaranty Corporation ("PBGC"). WITNESSETH: WHEREAS, PBGC is a wholly-owned United States government corporation, created under Title IV of the Employee Retirement Security Act of 1974, as amended ("ERISA"), which guarantees the payment of certain pension benefits upon termination of those pension plans to which Title IV of ERISA applies; and WHEREAS, GAC is the contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of the Gulfstream Aerospace Corporation Pension Plan, the Gulfstream Aerospace Technologies Hourly Employees Pension Plan and the Gulfstream Aerospace Technologies Salaried Employees Pension Plan (each, a "Plan" and collectively, the "Plans"); and WHEREAS, Gulfstream in 1996 engaged in an initial public offering, the repurchase of all outstanding preferred stock and the exchange, redesignation and 1.5-for-1 stock split of Gulfstream's common stock and certain related transactions including entering into a Credit Agreement (as hereinafter defined) for term loans and revolving credit and refinancing certain of the outstanding indebtedness of Gulfstream, as described in Securities and Exchange Commission Registration Statement on Form S-1 (Regis. No. 333-09897), as amended through October 9, 1996 (the "IPO Transactions"); and WHEREAS, PBGC has asserted that, as a result of the IPO Transactions, its long-run loss with respect to the Plans may reasonably be expected to increase unreasonably, within the meaning of Section 4042(a)(4) of ERISA; and WHEREAS, Gulfstream disputes that any of the IPO Transactions may reasonably be expected to increase unreasonably the PBGC's long-run loss, if any, within the meaning of Section 4042(a)(4) of ERISA; and WHEREAS, Gulfstream is willing to undertake the obligations set forth below in this Agreement to address PBGC's concerns and to resolve the parties' dispute as to whether there is long-run loss within the meaning of Section 4042 of ERISA in connection with the IPO Transactions. NOW, THEREFORE, in consideration of the foregoing and of the promises set forth herein, the receipt and adequacy of which are hereby acknowledged, Gulfstream, GDC, GAC and PBGC hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: "Adjusted Consolidated EBITDA" means for any Test Year, Consolidated Net Income for that Test Year ((i) including earnings and losses from discontinued operations, (ii) excluding extraordinary gains, and gains and losses arising - 2 - from the proposed or actual disposition of material assets, and (iii) excluding the non-cash portion of other non-recurring losses) of Gulfstream and its subsidiaries for such period, plus to the extent reflected as a charge in the statement of consolidated net income for such period, the sum of (a) interest expense (net of interest income), amortization (including accelerated amortization) and write-offs of debt discount and debt issuance costs, including such write-offs in connection with the prepayment of debt, and commissions, discounts and other fees and charges associated with letters of credit, (b) taxes measured by income, (c) depreciation and amortization expenses including acceleration thereof and including the amortization of the increase in inventory resulting from the application of APB 16 for transactions contemplated by the Credit Agreement including acquisitions permitted under the Credit Agreement, (d) non-cash compensation expenses arising from the sale of stock, the granting of stock options, the granting of stock appreciation rights and similar arrangements, (e) the excess of the expense in respect of post-retirement benefits and post-employment benefits accrued under Statement of Financial Accounting Standards No. 106 ("FASB 106") and Statement of Financial Accounting Standards No. 112 ("FASB 112") or any successor standards over the cash expense in respect of such post-retirement benefits and post-employment benefits and (f) the amount of any non-cash charges made or required to be made in connection with the refinancing (including, in the case of stock appreciation rights, any charge thereafter on a cumulative basis) in respect of (A) the charge to expense for compensation relating to stock options, stock appreciation rights and stock purchases by officers, directors and key employees of Gulfstream or any of its subsidiaries and (B) the charge to expense for deferred financing costs resulting from the prepayment of all amounts owing and payable under the Existing Credit Agreement and the 1996 Credit Agreement, plus the sum of (g) the cash expense in respect of post-retirement medical benefits and post-employment medical benefits and (h) the Normal Cost for Gulfstream's - 3 - defined benefit pension plans; provided, that Adjusted Consolidated EBITDA during any period shall be increased by research and development expense incurred during such period in respect of the Gulfstream V program (if the amount of such expense for such period is greater than $0), but only to the extent of customer deposits received, net of cancellations, during such period. "Agreement" shall have the meaning set forth in the Preamble hereto. "Code" means the Internal Revenue Code of 1986, as amended. "Consolidated Interest Expense" means for any Test Year, the amount of interest expense, both expensed and capitalized (excluding amortization and write-offs of debt discount, and debt issuance costs), net of interest income, of Gulfstream and its subsidiaries, determined on a consolidated basis in accordance with GAAP, for such period. "Consolidated Net Income" means for any Test Year, the net income or net loss of Gulfstream and its subsidiaries for such period, determined in accordance with GAAP on a consolidated basis, as reflected in Gulfstream's financial statements. "Contributions" shall have the meaning set forth in Section 2(a) hereof. "Credit Agreement" means the 1996 Credit Agreement or any subsequent refinancing of the 1996 Credit Agreement by Gulfstream or its subsidiaries. "Credit Balance" means the accumulated credit, if any, existing from time to time with respect to the Plans' funding standard accounts as established under Section 412(b)(1) of the Code. - 4 - "Credit Balance Adjustment" means the amount of the Credit Balance in a Plan's funding standard account that is excluded from the credit balance maintenance requirement set forth in Section 3 of this Agreement with respect to the Plans beginning in the first Plan Year commencing after December 31, 2000. The Credit Balance Adjustment for the Plans as of December 31, 2000 equals (i) $12 million, plus (ii) the amount of any contributions made from July 31, 1996 through December 31, 2000 that are in excess of the Contributions increased by interest to December 31, 2000 at the Interest Rate, minus (iii) that portion of any Contribution not contributed to any Plan on or before December 31, 2000 by virtue of the operation of Section 4(a) hereof. "Deduction Schedule Period" shall have the meaning set forth in Section 6(j) hereof. "Effective Date" means the latest date that this Agreement is executed by a party hereto. "ERISA" shall have the meaning set forth in the Recitals hereto. "Excess Contributions" means the excess of the Contributions over minimum funding obligations for a Plan under Code Section 412. "Existing Credit Agreement" means the collective reference to (i) the credit agreement, dated as of March 19, 1990, among GDC, the banks and other financial institutions parties thereto and The Chase Manhattan Bank, as amended, and (ii) the credit agreement, dated as of November 30, 1993, among GDC, the banks and other financial institutions parties thereto and The Chase Manhattan Bank, as amended. - 5 - "Fixed Charge Coverage Ratio" means as at the last day of any Test Year, the ratio of Adjusted Consolidated EBITDA to Fixed Charges, in each case determined cumulatively for the four fiscal quarters ending the last day of such Test Year. "Fixed Charges" means for any Test Year, the sum of (i) Consolidated Interest Expense incurred during the four fiscal quarters ending the last day of such Test Year, (ii) the Normal Cost for the Plans and (iii) the cash expense for post-retirement medical benefits and post-employment medical benefits incurred during the four fiscal quarters ending the last day of such Test Year. "GAAP" means generally accepted accounting principles in the United States of America in effect from time to time. "GAC" shall have the meaning set forth in the Preamble hereto. "GDC" shall have the meaning set forth in the Preamble hereto. "Gulfstream" shall have the meaning set forth in the Preamble hereto. "Interest Rate" shall have the meaning set forth in Section 3 hereof. "IPO Transactions" shall have the meaning set forth in the Recitals hereto. "1996 Credit Agreement" means the credit agreement, dated as of October 16, 1996, among Gulfstream Delaware Corporation, certain lenders and The Chase Manhattan Bank as Administrative Agent, as amended, supplemented or modified from time to time. - 6 - "Normal Cost", for any Plan means (i) for any Test Year that coincides with the Plan's Plan Year, the amount of normal cost in the funding standard account under Code Section 412(b)(2)(A) for the Plan Year determined as of the first day of the applicable Plan Year, and (ii) for any Test Year that does not coincide with the Plan's Plan Year, a proportionate amount of the normal cost (as specified above) for the portions of each of the Plan Years included in the Test Year. "PBGC" shall have the meaning set forth in the Preamble hereto. "Plan Year" means for each Plan, the calendar year, or such other period specified in each Plan as amended, supplemented or modified from time to time. "Plans" shall have the meaning set forth in the Recitals hereto. "Required Contribution" means a contribution provided for in Section 2 or a contribution made pursuant to the credit balance requirement of Section 3. "Term Loans" shall have the meaning set forth in Section 2.1 of the 1996 Credit Agreement or, in the event of a refinancing of the 1996 Credit Agreement while this Agreement is in effect, such term shall refer to all loans made pursuant to such refinancing agreement which may not be reborrowed after they are repaid thereunder. "Termination Date" shall have the meaning set forth in Section 5 hereof. "Test Year" means each year which is being measured for purposes of determining whether the Fixed Charge Coverage Ratio described in Section 5(a)(iii)(C) has been satisfied. "Total Unfunded Liabilities" means all unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA) with respect to the Plans, calculated using - 7 - PBGC assumptions for interest, mortality and the expected retirement ages for the Plans, including annual cost of living adjustments ("COLAs") projected at a 3% growth rate, to the extent the Plans provide for a COLA capped at 3%. To the extent that the COLA cap is modified, COLA adjustments will be projected at a rate equal to the new cap. To the extent that any Plan is overfunded under this definition, Total Unfunded Liabilities for that Plan will equal zero (0). 2. Gulfstream's Contributions to the Plans. (a) By the end of 1996, Gulfstream contributed to the Plans such amounts so that its aggregate contributions made after July 31, 1996 equaled $20 million. Gulfstream will contribute an additional $100 million to the Plans, inclusive of any minimum funding obligations, on or before December 31, 2000 (together, the "Contributions"). The Contributions as of the Effective Date have, and thereafter will, be paid in equal installments of $6.25 million by the last day of each calendar year quarter, with the first such payment due March 31, 1997 and the final such payment due December 31, 2000. The Contributions will be allocated to the Plans in the following order: (i) The Contributions in any Plan Year first will be applied to the minimum contributions, if any, required under Code Section 412. (ii) The Excess Contributions will be allocated among the Plans in a reasonable manner as determined by the Plan actuary in consultation with Gulfstream; provided, however, that no Excess Contribution will be allocated to a Plan once that Plan has reached a funded current liability percentage (as defined in Code Section 412(l)(9)(C)) of 100%, unless and until all Plans have a 100% funded current liability percentage. The funded current liability percentage shall be - 8 - calculated on an expected basis, i.e., with assets and liabilities projected from the first day of the prior Plan Year; provided, however, that once the actuarial valuation report for the current Plan Year has been delivered to Gulfstream, the funded current liability percentage shall be based on the assets and liabilities at the valuation date for the current Plan Year and shall be used for allocation of Excess Contributions after receipt of the actuarial valuation report. (b) The parties agree that, throughout the term of this Agreement, the Plans' Credit Balances may be used in calculating the minimum funding obligations consistent with the provisions of Code Section 412, e.g., for determining any deficit reduction contribution. 3. Credit Balance Maintenance Requirement. Beginning with the Plan Year ending December 31, 2001 and annually thereafter during the term of this Agreement, Gulfstream shall make any cash contributions to each of the Plans necessary to maintain the Plan's year end Credit Balance at the December 31, 2000 level increased by interest at the interest rate at which the Credit Balance increases pursuant to Code Section 412(b)(5)(A) (the "Interest Rate") and including Contributions required under Section 2 but excluding other contributions, if any, which have accrued but not been paid as of December 31, 2000, minus the portion of the Credit Balance Adjustment allocated to that Plan increased by interest at the Interest Rate. The Credit Balance Adjustment will be allocated among the Plans as of December 31, 2000 in proportion to each Plan's Credit Balance before taking the Credit Balance Adjustment into account. Any contributions required pursuant to this Section 3 shall be made on or before April 15 following the end of the Plan Year in issue; provided, - 9 - however, that any minimum funding contributions due shall be deemed made in accordance with Code Section 412(c)(10)(A). 4. Tax Deductibility Limitation on Contributions. (a) If any Contribution provided for in Section 2 hereof for a Plan would not be deductible in full for federal income tax purposes for the calendar year in which such Contribution is otherwise required to be made or for the previous calendar year, the portion that would not be deductible for that Plan shall be contributed to one or more of the other Plans, as designated by Gulfstream. If the Contribution still exceeds the maximum tax deductible limitations for all Plans, then any portion of the Contribution not contributed will be contributed in the first calendar year for which it is deductible. (b) To the extent permissible under Code Section 404(a)(6), any Contribution provided for in Section 2 hereof paid for a Plan in a calendar year shall be allocated, for the purpose of Code Section 404, to the previous calendar year. (c) If any of the contributions made pursuant to the credit balance maintenance requirement of Section 3 hereof for a Plan would not be deductible in full for federal income tax purposes for the calendar year for which such contribution is otherwise required to be made or for the previous calendar year, the portion that would not be deductible for that Plan shall be contributed to one or more of the other Plans, as designated by Gulfstream. If the contribution still exceeds the maximum tax deductible limitations for all Plans, then any portion of the contribution not contributed will be contributed for the first calendar year for which it is deductible. (d) To the extent permissible under Code Section 404(a)(6), any contribution provided for in Section 3 hereof paid for a Plan for a calendar year may be allocated, for the purpose of Code Section 404, to the prior calendar year; provided, however, - 10 - Gulfstream may not make such an allocation if, as a result of the allocation, the contribution to be paid for the current calendar year would be limited by Section 4(c). (e) Determination of current liability for tax deductibility purposes under this Section will be computed using the lowest interest rate in the permissible range prescribed in Code Section 412(b)(5)(B)(ii). 5. Term of Agreement. (a) This Agreement shall commence as of the Effective Date and will terminate on the later of (1) October 31, 2001 and (2) the earliest of the date that one of the following conditions have been satisfied (the later of (1) and (2), the "Termination Date"): (i) The Total Unfunded Liabilities, as calculated at the end of the Plan Year for two consecutive years, is zero (0); or (ii) A Plan undergoes a valid standard termination, but only with respect to such Plan; or (iii) Upon receipt by the PBGC on or after October 31, 2001 of satisfactory evidence that one of the following three conditions has been satisfied: (A) Gulfstream's unsecured debt is rated BBB- or better by Standard & Poor's and Baa3 or better by Moody's; or (B) In the event there is no rating as provided in subsection (A) above, Gulfstream has obtained a private rating on a hypothetical issue of unsecured debt at the rating level (or better) specified below from two of the following four rating agencies; provided, however, - 11 - that at least one of the two ratings is from Moody's or Standard & Poor's: Rating Agency Rating Standard & Poor's BBB- Moody's Baa3 Fitch BBB- Duff & Phelps BBB- For purposes of obtaining such private ratings analysis, the amount of the hypothetical debt issue will equal 95% of the Total Unfunded Liabilities determined as of December 31 of the preceding calendar year in which such private ratings analysis is made; or (C) The average of Gulfstream's Fixed Charge Coverage Ratio for three consecutive Test Years has been at least 7.5 to 1.0, and is at least 7.5 to 1.0 in the third such Test Year and the following conditions have been met: (1) Gulfstream has not received a rating on public unsecured debt by Standard & Poor's and Moody's; and (2) Gulfstream's Term Loan and revolving credit under the Credit Agreement remain unsecured (other than by the stock of certain of its subsidiaries and/or by intercompany notes) as provided in the Credit Agreement. - 12 - The first three Test Year period for this Section 5(a)(iii)(C) will commence on October 1, 1998 and end on September 30, 2001 (with each individual Test Year running from October 1 to September 30 of the next year). The second three Test Year period shall commence on January 1, 1999, and subsequent Test Years shall commence annually thereafter so long as this Agreement is in effect. (b) Upon the occurrence of the condition described in Sections 5(a)(iii)(A) or (B) above, Gulfstream shall provide PBGC with written evidence of such occurrence from the named rating agencies. Upon the occurrence of the condition described in Section 5(a)(iii)(C) above, Gulfstream shall provide PBGC with a letter from the independent certified public accountants responsible for reporting on Gulfstream's financial statements certifying that the Fixed Charge Coverage Ratio specified in Section 5(a)(iii)(C) has been satisfied, with calculations supporting such certificate, for the final Test Year of the three Test Year Period. (c) Gulfstream's obligations under this Agreement shall terminate on the Termination Date, provided that Gulfstream has given PBGC notice of which termination provision under this Section 5 has been satisfied and any written documentation required to be provided the PBGC under this Section 5. In connection with a condition described in Section 5(a)(iii)(C) above, within thirty (30) days of its receipt of the requisite documentation, PBGC will confirm the occurrence of such a condition in writing. The Termination Date for purposes of Section 5(a)(iii)(C) shall be the last day of the relevant three Test Year period. (d) The determination that the Fixed Charge Coverage Ratio has been satisfied as set forth in a certificate referenced in Section 6(l) hereof shall be conclusive for any - 13 - Test Year in a three Test Year period other than the final Test Year unless the PBGC provides written notice to Gulfstream within thirty (30) days after its receipt of such certificate that it believes the Fixed Charge Coverage Ratio reflected in the certificate has been erroneously calculated. If PBGC provides Gulfstream with such timely notice, Gulfstream, at its option, may elect to provide the PBGC with a letter from the independent certified public accountants responsible for reporting on Gulfstream's financial statements certifying that the Fixed Charge Coverage Ratio specified in Section 5(a)(iii)(C) has been satisfied. The certificate of the independent certified public accountants shall be conclusive that the Fixed Charge Coverage Ratio has been satisfied for that year. With respect to the third and final Test Year of any three Test Year period, the certificate from the independent certified public accountants required by Section 5(b) shall be deemed conclusive evidence that the Fixed Charge Coverage Ratio specified in Section 5(a)(iii)(C) has been satisfied. 6. Notice and Information to PBGC. Until this Agreement is terminated, Gulfstream shall deliver or cause to be delivered to PBGC the following: (a) Written notice of the amount and date of Contributions made within ten (10) days of payment, or failure to make Contributions specified herein within two (2) days of the due date; (b) Written notice thirty (30) days prior to any Plan merger which shall be subject to PBGC's consent in advance, such consent not to be unreasonably withheld; (c) Written notice thirty (30) days prior to any change in any of the Plans' actuarial assumptions or methods for the purpose of the minimum funding standard of - 14 - Code Section 412, which shall be subject to PBGC's consent in advance, such consent not to be unreasonably withheld; (d) For each Plan Year, the annual actuarial valuation report for the Plans within ten (10) days from such date as such reports are received by Gulfstream but no later than October 15 following the end of the Plan Year; (e) For each Plan Year, Form 5500 for each of the Plans (or their successors), promptly after filing with the IRS, but no later than October 15 of the following Plan Year; provided, however, that the Form 5500s for the 1995 Plan Year shall be filed within ten days of the Effective Date; (f) A copy of material plan amendments within ten (10) days after adoption; (g) A copy of any reportable event notice at the same time such notice is filed with the PBGC in accordance with ERISA Section 4043 (excluding enclosures filed in accordance with ERISA Section 4043); (h) The following certified actuarial statements: (i) By April 15, 2001 a certified actuarial statement specifying the December 31, 2000 Credit Balance for each Plan as adjusted in accordance with Section 3 hereof. (ii) By April 15, 2002 and annually thereafter for each Plan a certified actuarial statement specifying: (A) The contribution, if any, required by Section 3 hereof. - 15 - (B) The funding standard account charges and credits for the previous Plan Year. (C) If Gulfstream concludes that any portion of a Required Contribution must be deferred in accordance with Section 4 hereof, a determination (including intermediate calculations) of the maximum tax deductible contribution. (i) Written notice of the amount and date of contributions made to the Plan pursuant to the credit balance maintenance requirement of Section 3 hereof within thirty (30) days after the contributions are made or on May 15, whichever is sooner, or failure to make such contributions within ten (10) days of the due date; (j) Within thirty (30) days after Gulfstream files its U.S. Corporation Income Tax Return each year, a schedule covering the period which includes the 1997 calendar year through the taxable year for which the relevant income tax return has been filed (the "Deduction Schedule Period") that specifies the amount of the maximum tax deductible contribution that would be permitted in accordance with Code Section 404 for each Plan if the Required Contributions made during the Deduction Schedule Period had been allocated for purposes of Code Section 404 to the same year such contributions were made. (k) Written notice within ten (10) days after the occurrence of any Event of Default, as defined in the Credit Agreement; (l) Written notice within ten (10) days after reaching agreement on any change in Gulfstream's quarterly installments due under the Term Loans; and - 16 - (m) Within ninety (90) days after the end of each Test Year, a copy of the certificate of the chief financial officer of Gulfstream specifying the Fixed Charge Coverage Ratio, with calculations supporting such statement, for such Test Year. 7. PBGC Forbearance From Termination Proceedings. In consideration of Gulfstream's obligations hereunder, PBGC will forbear from instituting proceedings to terminate the Plans in connection with the IPO Transactions. In addition, PBGC agrees that the expiration of this Agreement pursuant to any provision of Section 5 hereof shall not constitute a basis for PBGC to seek termination of the Plans under ERISA Section 4042. Nothing in this Agreement shall affect or in any way diminish the PBGC's authority to seek termination of the Plans or any other pension plans sponsored by Gulfstream or any of its subsidiaries in existence on the date hereof (or hereafter created) for any reason other than by reason of the consummation of the IPO Transactions or expiration of this Agreement. 8. Remedies. (a) In the event any Contribution under this Agreement is not made when due and such failure to make the Contribution continues unremedied for a period of thirty (30) days after its due date, the remaining Contributions will become immediately due and payable upon PBGC's written demand providing Gulfstream with five (5) days advance notice that such Contributions are immediately due and payable; provided, however, that upon receipt of such demand from PBGC, Gulfstream hereby waives protest of any kind other than to dispute whether a Contribution has been made. (b) Except as expressly provided in this Agreement, nothing in this Agreement shall affect or in any way diminish or constitute a waiver of any rights and/or remedies of PBGC. Except as expressly provided in this Agreement, no remedy herein conferred - 17 - upon or reserved to PBGC is intended to be exclusive of any other remedy, and the remedy shall, to the extent permitted by law, be cumulative and in addition to any other remedy given hereunder or now or hereafter existing at law or in equity or otherwise. (c) Nothing in this Agreement shall affect or in any way diminish or constitute a waiver of any rights and/or remedies of Gulfstream in respect of the subject matter of this Agreement or any other matter relating to the PBGC or ERISA. 9. Gulfstream, GDC and GAC Representations and Warranties. Gulfstream, GDC and GAC each represent and warrant to PBGC as follows: (a) That it has full power and authority to enter into this Agreement and that this Agreement constitutes a legal, valid and binding obligation, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting creditors' rights generally and by principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law); (b) That as of the Effective Date, there are no past due minimum funding contributions owed to the Plans under ERISA Section 302 and Code Section 412; (c) That this Agreement has been duly authorized and executed; (d) That the execution, delivery and performance of this Agreement by it (i) does not and will not violate, conflict with, or result in a breach of any of the terms of any material indenture, agreement, or instrument to which it is a party or by which it is bound, or constitute a default thereunder; and (ii) to the best of its knowledge, does not and will - 18 - not violate any law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award presently in effect; and (e) That the execution, delivery and performance of this Agreement does not and will not violate any of the provision of any of its articles of incorporation or bylaws. 10. PBGC Representations and Warranties. PBGC represents and warrants to Gulfstream, GDC and GAC as follows: (a) That PBGC has full power and authority to enter into this Agreement and that this Agreement constitutes a legal, valid and binding obligation, enforceable against PBGC in accordance with its terms; and (b) That this Agreement has been duly authorized and executed. 11. No Admission of Liability. This Agreement is not and shall not be construed as or deemed to be an admission or concession by or on the part of any party of any liability or the applicability of any provision of ERISA in connection with any matter described in this Agreement, and each party expressly denies any liability whatsoever. 12. No Reliance. Except for the representations and warranties set forth in Sections 9 and 10 of this Agreement, each party to this Agreement has made its own independent inquiry concerning the matters, facts and circumstances material to the settlement embodied in this Agreement, including without limitation, the legal, tax, actuarial and accounting aspects of the transactions contemplated in the Agreement and any related transactions. No party to this Agreement has relied and no party will rely upon any other party to this - 19 - Agreement, or any other party's legal counsel or financial or actuarial advisors, for any information or advice of any kind in connection with any of the transactions contemplated in this Agreement or with any related transactions. 13. Limitation of Rights. This Agreement is intended to be and is for the sole and exclusive benefit of PBGC and Gulfstream and its consolidated subsidiaries. Nothing expressed or mentioned in or to be implied from the Agreement gives any person other than PBGC and Gulfstream and its consolidated subsidiaries any legal or equitable right, remedy or claim against PBGC or Gulfstream and its consolidated subsidiaries under or in respect of this Agreement. 14. No Change to Governing Plan Documents or Plan Administration. This Agreement is not a document or instrument governing the Plans nor does anything in this Agreement amend, supplement or derogate from the documents and instruments governing such Plans. Further, nothing in this Agreement alters, amends or otherwise modifies the operation or administration of those Plans. 15. Venue. Any dispute arising out of the execution or interpretation of this Agreement, or any proceeding to enforce this Agreement or to collect Required Contributions, shall be within the exclusive jurisdiction of the federal courts of the United States. PBGC may bring any such action in any federal court of competent jurisdiction or in any other jurisdiction where Gulfstream or any of its property may be found. 16. Governing Law. This Agreement and the rights and obligations or the parties hereunder shall be governed by and construed in accordance with the Code, ERISA and the laws of - 20 - Delaware (without reference to its conflict of law rules) except to the extent such laws are preempted by federal law. 17. Notices. Any notices, requests or other communication hereunder shall be in writing, and shall be deemed to have been duly given when mailed by registered or certified mail postage prepaid, or upon receipt if overnight delivery service or facsimile is used, addressed as follows: To the PBGC: Director Corporate Finance and Negotiations Department Pension Benefit Guaranty Corporation 1200 K Street N.W., Suite 270 Washington, D.C. 20005-4026 Facsimile: (202) 842-2643 With a copy to: General Counsel Pension Benefit Guaranty Corporation 1200 K Street, N.W. Washington, D.C. 20005-4026 Telephone: (202) 326-4020 Facsimile: (202) 326-4112 To Gulfstream: Gulfstream Aerospace Corporation P.O. Box 2206 500 Gulfstream Road Savannah, Georgia 31402-2206 Telephone: (912) 965-3000 Facsimile: (912) 965-3752 Attn: Chris A. Davis - 21 - With a copy to: Fried, Frank, Harris, Shriver & Jacobson 1001 Pennsylvania Avenue N.W., Suite 800 Washington, D.C. 20004-2505 Telephone: (202) 639-7309 Facsimile: (202) 639-7003 Attn: Diane E. Burkley 18. Weekends and Holidays. If the last date (whether measured by calendar days or business days) for performing any act or exercising any right provided for in this Agreement falls on a Saturday, Sunday or federal holiday, unless otherwise expressly provided in this Agreement, the act may be performed or the right exercised on the next day that is not a Saturday, Sunday or federal holiday with the same force and effect as if done on the date provided in the Agreement. 19. Captions. The captions used herein are for reference only and shall not in any way affect the meaning or construction of any provision of this Agreement. 20. Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision or provisions of this Agreement, which shall remain in full force and effect. 21. Execution. This Agreement may be executed in any number of identical counterparts, each of which shall be deemed an original as against the party who signed it, and all of which together shall constitute one and the same instrument. - 22 - 22. Survival. This Agreement shall inure to the benefit of, and may be enforced solely by the parties hereto, and, in each case, their respective successors and assigns. 23. Modifications. This Agreement shall not be modified or amended, except by a written instrument signed by all of the parties hereto. 24. Entire Agreement. This Agreement constitutes the entire final agreement between the parties hereto with respect to the matters provided for herein, and no other agreement or understanding, written or oral, exists except as expressly set forth herein. - 23 - IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the day and year indicated below. PENSION BENEFIT GUARANTY CORPORATION BY: ------------------------------- Its: Dated: GULFSTREAM AEROSPACE CORPORATION (Del) BY: /s/ Chris A. Davis ------------------------------- Its: Executive Vice President & Chief Financial Officer Dated: 12/24/97 GULFSTREAM DELAWARE CORPORATION BY: /s/ Chris A. Davis ------------------------------- Its: Executive Vice President & Chief Financial Officer Dated: 12/24/97 GULFSTREAM AEROSPACE CORPORATION (Ga) BY: /s/ Chris A. Davis ------------------------------- Its: Executive Vice President & Chief Financial Officer Dated: 12/24/97 - 24 - IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement to be duly executed and delivered by their respective duly authorized officers as of the day and year indicated below. PENSION BENEFIT GUARANTY CORPORATION BY: /s/ Andrea E. Schneider ------------------------------- Its: Director Corporate Finance & Negotiations Dated: Dec. 11, 1997 GULFSTREAM AEROSPACE CORPORATION (Del) BY: ------------------------------- Its: Dated: GULFSTREAM DELAWARE CORPORATION BY: ------------------------------- Its: Dated: GULFSTREAM AEROSPACE CORPORATION (Ga) BY: ------------------------------- Its: Dated: - 24 - EX-10.30 5 USE AND OCCUPANCY AGMT Exhibit 10.30 AEROLEASE LONG BEACH dba AEROPLEX AVIATION USE & OCCUPANCY AGREEMENT ------------------------- Schedule A 1. User 2. Commencement Date(s): (a) 30 days after execution of this Gulfstream Aerospace Corporation, agreement main hangar, shop/office a California Corporation (b) 15 days thereafter Hangar #3 4150 Donald Douglas Drive (c) 30 days after (b) Hangar #4 Long Beach, CA 90808 (d) 30 days after (c) Hangar #5 3. Utilities 4. Fee (per month) - -Electrical supplied by User a. Main hangar: $20,000 Meter #'s b. Lean to office/shop: $7,200 1st floor lighting & a/c: P264-11868 c. Hangar #3: $5,000 shop and floor utilities: P376-169 d. Hangar #4: $5,000 Hangar #3: Y367-7735 e. Hangar #5: $5,000 Hangar #4: Y367-7725 Security Deposit: $42,200 Hangar #5: Y367-7726 (Check # ) TOTAL MONTHLY FEE: $42,200 5. Term Two (2) years from date of occupancies 6. Aircraft Types: for the units listed in Item 2. Various Gulfstream aircraft for One (1)- Two (2) year renewal option related services and interior (180 day notice required for each unit) modifications 7. Space (office/hangar #) 8. Special Terms: a. Main hangar: 25,000 sq/ft Rent during the (2) year option b. 1st floor Lean to period will be "at market" as office/shop: 6,000 sq/ft mutually agreed. c. Hangar #3: 10,000 sq/ft d. Hangar #4: 10,000 sq/ft e. Hangar #5: 10,000 sq/ft AEROLEASE LONG BEACH, dba Authorization: The undersigned is AEROPLEX AVIATION authorized to accept the terms and conditions hereinabove GULFSTREAM AEROSPACE CORP., CALIFORNIA CORPORATION By: /s/ Milton A. Widelitz By: /s/ Ken Kelley ----------------------------- ------------------------------- Milton A. Widelitz, General Partner Ken Kelley, General Manager Date: 4/4/97 Date: April 10, 1997 ----------------------------- ------------------------------- TERMS & CONDITIONS This use and occupancy agreement is made between Aerolease Long Beach, dba Aeroplex Aviation, 3333 East Spring Street, Long Beach, CA 90806 ("Aeroplex") and User, identified in Item I of Schedule A. RECITALS A. Aeroplex leases certain facilities and Premises (the "Site") at the Long Beach Airport (the "Airport"). Gulfstream is entitled to ingress and egress to the facility at all times. Gulfstream is entitled to use, without charge, 15 parking spaces in the Aeroplex main parking lot, where designated by Aeroplex General Manager and agreed to by Gulfstream. B. Aeroplex leases the Site from the City of Long Beach, a municipal corporation (the "City"). Said Agreement is hereinafter referred to as the "Master Lease". C. Aeroplex desires to grant to User the right to use and occupy a portion of the Site (the "Premises"). D. In consideration of the mutual covenants herein stated: 1. Grant: Aeroplex upon the terms and conditions herein stated, grants to User, and User takes from Aeroplex, the Premises described in Schedule A above, Aeroplex is responsible for providing the premises and each additional portion of the premises as called for in Schedule A, attached hereto, free of all previous tenants and their belongings and equipment, in a timely manner. 2. Term: This agreement shall commence on the date set forth in Item 2 of Schedule A and continue for the period of time set forth in Item 5. In the event User holds over at the expiration of the term or any renewal, said holdover shall create a tenancy from month to month at one and one-half the monthly rental specified above and shall otherwise be on the terms and conditions hereunder. 3. Rental: User shall pay the fees set forth in Item 4 of Schedule A in advance on the first day of each month during the term of this Agreement. Fees shall be prorated in the event the commencement date shown in Item 2 falls on a day other than the first of the month. The fees shall be payable without deduction or setoff, and without prior notice or demand. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent or other sums due hereunder will cause Lessor to incur cost not contemplated by this Agreement, the exact amounts of which are extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the term of any mortgage or deed of trust covering the Premises. Accordingly, if any installment or rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) business days of its due date, then Lessee shall pay to Lessor a late charge equal to ten percent (10%) of such amount overdue. The parties hereby agree that such late charge represents a fair and reasonable estimate of the cost that the Lessor will incur by reason of the late payment by Lessee. 4. Adjustments to Fees: (a) The total monthly fee set forth in Item 4 of Schedule A shall, beginning with the second year of the term, be adjusted after the end of each year and during the term of this Agreement according to the changes in the Consumer Price Index (CPI) or the Bureau of Labor Statistics of the U.S. Department of Labor for all Urban Consumers, Los Angeles - Anaheim. Riverside California. "All Items". The CPI for February, 1997 is 159.2. Adjustments shall be made in the ratio that the change in CPI between February. 1997 and each succeeding February, has to the earlier year. Thus, if February, 1998 CPI will be 162.4, then the increase shall be (l62.4-l59.2)/159.2=.02 or 2%. 2 (b) The total monthly fee in Item 4 of Schedule A, as adjusted annually pursuant to this provision, shall be determined at the beginning of each annual term by multiplying the monthly fee as adjusted by a fraction, the numerator of which shall be the CPI for the same month, which is three (3) months prior to the end of the annual term, and the denominator of which shall be the CPI for the month which is three (3) months prior to the beginning of the term of this Agreement. Notwithstanding that Aeroplex may, at its sole discretion, elect not to adjust the fees, or to only partially adjust them, the adjustment to the fees hereunder shall be calculated as if Aeroplex had made the entire adjustment permitted hereunder. In no event shall the annual fee as adjusted be reduced. (c) In the event the compilation and/or publication of the CPI is to be changed or discontinued, then an index most nearly the same as the CPI shall be used to make the above calculations. 5. Use of Premises: Premises shall be used for the purpose set forth in Schedule A and any other purpose authorized under the Master Lease, except the sale of aircraft fuel by User. This agreement does not give User the right to conduct a business at the Airport; any such right can only be obtained from the City. 6. Aircraft Support: Aeroplex hereby authorizes User to utilize any vendor it chooses on the Premises, except for aircraft refueling. Aeroplex reserves the right to maintain this service or designate an exclusive fuel service provider for aircraft on the Premises only. At the time of this lease execution the aircraft refueling service provider on the Site and Premises is Million Air Long Beach, Inc. 7. Security Deposit: Prior to occupancy and upon execution of this Agreement, User will deposit with Aeroplex a sum equal to the fee for one (1) month. In the event User defaults in the performance of any of the terms and conditions herein, Aeroplex may use, apply or retain, the deposit for the payment of any fees, or for any sum which Aeroplex may be required to expend by reason of User's default. In the event User fully and faithfully complies with all terms and conditions of this Agreement the deposit shall be returned to User at its expiration and after delivery of the Premises to Aeroplex. User shall not apply the security deposit as rent, whether for first or subsequent months of tenancy, including the 30 day period after notice to vacate is provided by User to Aeroplex. 8. Alterations: User shall not make any alteration, improvements, additions or utility installations (including power panels) in or about the Premises, without Aeroplex's prior written consent, which consent shall not to be unreasonably withheld. Such approvals shall also require Aeroplex's obtaining, on behalf of User, the consent of the City. User acknowledges that consent may be conditioned upon User's agreement to restore Premises to the condition they were in at the commencement of the term of this Agreement. Any such improvements that Aeroplex wants removed at the termination of the Agreement shall be done solely at the User's expense. Aeroplex recognizes that User is contemplating the improvements shown in Exhibit A. Aeroplex and User agree to equally share (50% each) the cost associated with the recommendation made by User's insurance carrier (Factory Mutual) to provide additional support bracing to the existing fire protection system located in the Aeroplex hangars listed in Schedule A. 9. Repairs: User, at its sole cost and expense, shall keep the interior of the Premises and all glass therein in good condition and repair. Upon the expiration or sooner termination of this Agreement, the Premises shall be returned to Aeroplex in the same condition as they were in at the beginning of the term, normal wear and tear excepted. Except as set forth in an addendum, if any, attached and initialed by the parties hereto, Aeroplex makes no representation to User about the condition of the Premises. 10. Utilities: User shall supply at its own expense, the utilities named in Item 3 of Schedule A. Aeroplex shall not be liable for any damages caused as a result of its failure to supply said utility services, unless such failure is due to its gross negligence. User agrees to pay promptly all utility obligations incurred by it on the Premises. 11. Taxes: Aeroplex shall pay all Real Estate Taxes and/or possessory interest taxes, as presently assessed, or which may be assessed as a result of a reappraisal of the Premises, except for appraisals caused by improvements made by or requested to be made by User. In such event, User will only be responsible for any increase in the taxes associated with such reappraisal. Aeroplex will be responsible for any taxes assessed 3 on improvement made to the property which were not requested by User. User shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment, and all other personal property of User contained in the Premises or elsewhere on the Site. When possible, User shall cause said trade fixtures, furnishings, equipment, and all other personal property to be assessed and billed separately from the real property of User. Also, User shall pay Aeroplex any increase in Real Estate taxes attributable to the real property and improvements of the User located on the Premises over and above the taxes assessed on the Premises for the fiscal year of July 1, 1997 to June 30, 1998. By executing this Agreement and accepting the benefits thereof, a property interest may be created, known as a "possessory interest". If such property interest may be created, User, as the party in whom the possessory interest is vested, shall be responsible for the property taxes levied upon such interest. 12. Signs: User shall not erect or display any signs without prior written consent of Aeroplex, which consent shall not be unreasonably withheld. 13. Insurance/Indemnification: User agrees that at all times in which this Agreement is in effect it will maintain, in full force and effect, an airport (general) liability policy, including contractual, in an amount not less than $200,000,000 combined single limit, which will be used to indemnify and hold harmless Aeroplex Long Beach dba Aeroplex Aviation, the City of Long Beach, members of the City Council, all of the City's boards and commissions, and every officer and employee of the City (hereinafter the "Additional Insured") against liability resulting from any suits, claims, demands, actions or loss, including all costs and expense of litigation, brought or made by reason of the use and/or occupancy by User its officers, agents, employees, licensees, patrons, or visitors of the Site and Premises, and of the Long Beach Airport or any of its facilities, except for liability resulting from the sole negligence of Aeroplex, its officers, agents, employees, licensees, patrons, or visitors In the event Aeroplex contests User's contention that an incident is the result of Aeroplex' sole negligence, User shall defend Aeroplex and User's insurance carrier may subrogate against Aeroplex' insurance carrier. Aeroplex will reimburse User if it is determined that the negligence in an incident was solely that of Aeroplex. Aeroplex agrees to maintain $20,000,000 of general liability insurance to protect User in the event of an incident caused by Aeroplex' sole negligence. In such event User agrees to cap the maximum liability of Aeroplex in the amount of $20,000,000 and to waive any and all claims in excess of that amount. Aeroplex and User will equally share (50% each) the additional annual premium for the insurance necessary as a result of increasing Aeroplex' general liability insurance policy from $10,000,000 to $20,000,000. In addition, User will carry aircraft liability insurance, and adequate hangarskeepers, ground and flight, and adequate automobile liability insurance. User will carry worker's compensation insurance coverage for all of its employees. Except to the extent such liability has been caused by the sole negligence of Aeroplex, its officers, agents, employees, licensees, patrons, or visitors, all policies required by this provision shall include a severability of interest (cross liability) clause. Said coverage shall be primary with respect to Aeroplex. The Additional Insured shall be named as additional insured on said policy(ies) to the extent of the protection specified above. All insurance policies secured by User shall contain the following: "The inclusion herein of any person or entity as an insured shall not effect any right such person or entity would have as a claimant hereunder if not so included". All insurance policies shall require notification to Aeroplex by certified mail of any modification, termination, or cancellation by the insurance company of any policy of insurance no less than thirty (30) days prior to the effective date of such modification, termination, or cancellation. Notice by the insured shall be effective upon receipt of said notice by Aeroplex. In addition to any other requirements of this Agreement, the User shall notify Aeroplex of any modification, termination, or cancellation of any policy of insurance secured by User pursuant to this paragraph as soon as User learns of any such modification, termination, or cancellation. 4 The procuring of such insurance shall not be construed to be a limitation upon User's liability or as full performance on User's responsibility to indemnify and hold harmless Aeroplex for any and all claims brought by others due to the negligence of User. User understands and agrees that not withstanding any policies of insurance, User's obligation to protect and hold harmless the Additional Insured hereunder is for the full amount of any damage, injuries, loss expense, costs or liabilities caused by, or attributed to, the sole negligence of the User, its officers, agents, or employees. 14. Aircraft Ownership: Deleted - not necessary 15. Assignment and Subletting: This Agreement may not be voluntarily or by operation of law assigned, or the Premises transferred, mortgaged, sublet, or encumbered in whole or in part without Aeroplex's prior written consent which consent will not be unreasonably withheld. 16. Storage: No outside ramp, alleyway, or parking lot storage of aircraft parts or service equipment, lumber, metal, machinery, liquids, vehicles, trailers, or other materials will be permitted. No hazardous materials will be stored in any facility on the Site or Premises, except at the sole responsibility of User, and in accordance with all applicable Federal, State, and local laws and regulations. 17. FAA Regulations: User shall abide by Part 107 ("Airport Security") and Part 139 ("Airport Safety") of the Federal Aviation Regulations, and reimburse Aeroplex, and/or the City for the full amount of any fine, penalty or other financial loss resulting from its failure to do so. 18. Towing of Aircraft: User, or its designated agent, shall perform all aircraft towing at the Site. 19. Compliance with Laws: User, at its sole expense, shall comply with all applicable statutes, ordinances, rules, regulations, and orders regulating the use by User of the Premises. User also agrees to observe all reasonable rules which Aeroplex, or the City may make from time to time for the management, safety, care and cleanliness of the Premises, the common areas, the parking of vehicles and aircraft, and the preservation of good order therein, as well as for the convenience of other occupants and tenants. Aeroplex rules shall be presented to User for concurrence prior to being effected. 20. Right to Entry: Aeroplex and its designees shall have the right to enter the Premises at reasonable times and upon prior notice for the purpose of inspecting, showing to prospective purchasers, lenders or tenants, and making repairs or alterations as it may deem necessary or desirable, and at any time without notice in the event of any emergency. Such entry shall be in accordance with User's security policies and shall be accompanied by User's designee if User so requires, and entry shall not interfere with User's business or maintenance of aircraft. 21. Damage: In the event the Premises are totally destroyed by fire or other casualty, or are damaged to such an extent that Aeroplex, at its sole option, determines to raze or remodel the building(s) located thereon, then the term hereby created by this use and occupancy agreement shall end on the date of such fire or casualty, and the User shall pay the rent apportioned to the time of such fire or casualty and shall surrender possession of said Premises. If, however, said Premises, in Aeroplex's judgement, can be repaired with reasonable promptness so as to be in as good condition as they were at the beginning of the term, the Agreement and term herein created shall not be affected except that the rent shall be apportioned or suspended while such repairs are made. If, however, said Premises are slightly damaged by fire, accident, or casualty, and are not thereby rendered unfit for occupancy, then the same shall be repaired by Aeroplex with reasonable promptness and no abatement or apportionment of rent shall be made, except to the extent such damages prevent User from conducting the maintenance work or service work on the aircraft 22. Eminent Domain: If the whole of the buildings of which the Premises are part shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the term of this Agreement shall cease and terminate as of the date of title vesting in such proceeding, and all fees shall be paid 5 up to that date, and User shall have no claim against Aeroplex or the condemning authority with respect to any compensation for such taking awarded Aeroplex whether through a negotiated settlement or formal condemnation proceedings. If any part of the building of which the Premises are a part shall be acquired or condemned as aforesaid, and in the event that such partial taking or condemnation shall render the portion of the building occupied hereunder by the User unsuitable for the User's business, then the term of this Agreement shall cease and terminate as of the date of title vesting in such proceeding. User shall have no claim against Aeroplex, or the condemning authority with respect to any compensation for such taking awarded to Aeroplex, whether through a negotiated settlement or formal condemnation proceedings, and provided, however, fees shall be adjusted to the date of such termination. In the event a partial taking or condemnation, which is not extensive enough to render that portion of the building occupied hereunder to User unsuitable for the business of the User, at User's sole judgement, Aeroplex shall promptly restore said portion of said leased hereunder to its condition as nearly as possible as existed at the time of such condemnation less the portion lost in the taking, and this Agreement shall continue in full force and effect, and rent shall be adjusted on the basis of the number of square feet taken on a pro-rata basis. 23. Master Lease and Agreement: This Agreement is, and shall be at all times, subject to and subordinate to the Master Lease. Aeroplex agrees to maintain the Master Lease in full force and effect during the term of this Agreement, provided however that it shall not be liable for any earlier termination of the Sublease which is not due to its fault. 24. Default and Remedies: The occurrence of any one or more of the following events shall constitute a material default and breach of this Agreement by the User. (a) User shall default in the due and punctual payment of the fees payable hereunder, and such default shall continue for five (5) days after Aeroplex shall have given User written notice of such default. (b) User shall neglect or fail to perform or observe any of the covenants herein contained on User's part to be performed or observed other than described in subparagraph (a) above, and User shall fail to remedy same within thirty (30) days after Aeroplex shall have given to User written notice specifying such neglect or failure, or if such default is incapable of being cured within thirty (30) days, then in such event, if User shall fail to commence the cure of such default within thirty (30) days of receipt of written notice of same, and continue thereafter in good faith and with due diligence to cure same; or, (c) User shall be involved in financial difficulties as evidenced by (1) its admitting in writing its inability to pay its debts generally as they come due, or (2) by it its filing a petition in Bankruptcy or for reorganization or for the adoption of an arrangement under the Bankruptcy Act or an answer or other pleading to be filed by or on behalf or User admitting the material allegations of such a petition or seeking, consenting to or acquiescing in the relief provided for under such Act, or (3) by its approving a petition filed against it for the effecting of an arrangement in bankruptcy or for a reorganization pursuant to said Bankruptcy Act. In the event of any such material default or breach by User, Aeroplex may, at anytime thereafter, with or without notice or demand and without limiting Aeroplex in the exercise of any right or remedy which Aeroplex may have by reason of such default or breach. (i) Terminate User's right to possession of the Premises by any lawful means, in which case this Agreement shall terminate and User shall immediately surrender possession of the Premises to Aeroplex. In such event, Aeroplex shall be entitled to recover from User all damages incurred by Aeroplex by reason of User's default, including but not limited to, the cost of recovering possession of the Premises; expense of reletting, including removal of 5 the alterations User may have made during the occupancy of the Premises, reasonable attorney fees, and any real estate commission actually paid; that portion of any leasing commission paid by Aeroplex applicable to the unexpired term of this Agreement (ii) Pursue any other remedy now or hereafter available to Aeroplex under the laws or judicial decisions of the state wherein the Premises are located. 25. General Provisions: (a) Waiver: The waiver by either party of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant, or condition on any subsequent breach of same, or any other term, covenant, or condition herein contained. (b) Marginal Headings: The marginal headings and paragraph titles to the paragraphs of this Agreement are not a part of this Agreement, and shall have no effect upon the construction or interpretation of any part hereof. (c) Time: Time is of the essence in this Agreement, and each and all of its provisions in which performance is a factor. (d) Successors and Assigns: The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators, and assignees of the parties hereto. (e) Recordation: Neither Aeroplex nor User shall record this Agreement without prior written consent of the other party, but either party at the request of the other shall execute a short form memorandum of the Agreement for recording. (f) Quiet Possession: Upon User's paying the rent reserved hereunder, and observing and performing all of the covenants, conditions, and provisions on User's part to be observed and performed hereunder, User shall have quiet possession of Premises for the entire term hereof, subject to all provisions of this Agreement. (g) Prior Agreements: This Agreement contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Agreement, and no prior agreements or understandings pertaining to any such matters shall be effective for any purpose. No provision of this Agreement may be amended or added to, except by an agreement in writing assigned by the parties hereto or their respective successors in interest. This Agreement shall not be effective or binding upon any party until fully executed by both parties hereto. (h) Inability to Perform: This Agreement and the obligations of the User hereunder shall not be affected or impaired because Aeroplex is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by a reason of strike, labor troubles, acts of God, or any other caused beyond reasonable control of Aeroplex, except that rent shall not commence until the existing tenants have been vacated from the Premises. (i) Attorney Fees: In the event of any action or proceeding brought by either party against the other under this Agreement, the prevailing party shall be entitled to recover all costs and expenses, including the fees of its attorneys in such action or proceeding, in such amount as the court may deem just and proper as attorney fees. (j) Separability: Any provision of this Agreement which shall prove to be invalid, void, or illegal shall in no way affect, impair, or invalidate any other provision hereof, and such other provision shall remain in full force and effect. 7 (k) Cumulative Remedies: No remedy or election hereunder shall be deemed exclusive, but shall, wherever possible, be cumulative with all other remedies at law or in equity. (l) Choice of Law: This Agreement shall be governerd and construed in accordance with the laws of the State of California. 26. Premises Free of All Tenants: Deleted - not applicable. 27. Use of Premises: The Premises may be used, without approval of Aeroplex for interior refurbishing of fixed wing aircraft, completions and other service-related work for aircraft, or for any other use permitted under the Master Lease, or any use required by Gulfstream and currently being conducted by Gulfstream on its primary leased property, unless specifically excluded by the Master Lease. Gulfstream may not sell aircraft fuel or be fuel serviced on the premises by any provider other than Long Beach Million Air, Inc. 28. Right to Remove Equipment or Personal Property: All personal property and all trade fixtures placed on the Premises at the direction or with the consent of Gulfstream, its employees, agents, licensees or invitees, shall be the property of Gulfstream. Gulfstream may remove any such personal property or trade fixtures at the termination of the Agreement; provided, however, should Gulfstream cause any damage to the Premises upon the removal of such personal property or trade fixtures, Gulfstream shall immediately repair the damage resulting from the removal of the personal property or trade fixtures. 29. Notice and Requests: All notices and requests hereunder shall be in writing and shall be deemed to be effective when received at the addresses listed below (or such other addresses as may hereafter be designated in writing) For Gulfstream: Kenneth D. Kelley General Manager Long Beach Operations Gulfstream Aerospace Corporation, a California Corporation 4150 Donald Douglas Drive Long Beach, CA 90808 For Aeroplex: Milton A. Widelitz Aerolease Long Beach, A California General Partnership, dba Aeroplex Aviation 10850 Wilshire Boulevard, Suite 740 Los Angeles, CA 90024 30. Consent to Use and Occupancy agreement: This Agreement is contingent upon the receipt of consent to this Agreement by the City of Long Beach Airport Bureau. ACCEPTANCE OF TERMS AND CONDITIONS Aerolease Long Beach, A California Gulfstream Aerospace Corporation, General Partnership, dba Aeroplex a California Corporation Aviation By: /s/ Milton A. Widelitz /s/ Ken Kelley - ---------------------------------- ------------------------------------ General Partner General Manager, authorized signature DATE 4/4/97 DATE April 10, 1997 ------------------------------ ------------------------------ 8 EX-13.1 6 EXHIBIT 13.1 [COVER] Exhibit 13.1 Gulfstream Exceeding Expectations [Picture] 1997 Annual Report Exceeding Expectations Two simple, but powerful words which act as a common thread uniting the nearly 5,800 employees of Gulfstream Aerospace Corporation. Incorporating this theme into all that we do has resulted in Gulfstream setting the standard for business aviation through excellence in product, service and financial return. By continuing to do so, we will remain the leader in large cabin business aviation far into the future. On the Front Cover Nearly twice the size of the windows on other corporate jets, Gulfstream's signature oval windows offer exceptional interior lighting, panoramic views and enhance the already spacious cabin's appeal. GULFSTREAM AEROSPACE CORPORATION Financial Highlights
December 31, ------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- --------- --------- --------- (Dollars in millions, except per share amounts and units) Aircraft Deliveries............................................................ 51 27 26 Net Revenues................................................................... $ 1,903.5 $ 1,063.7 $ 1,041.5 Net Income..................................................................... $ 243.0 $ 47.0 $ 28.9 Earnings per Share (EPS)*...................................................... $ 3.12 $ 0.60 $ 0.37 Pro Forma Fully Taxed EPS*..................................................... $ 1.68 $ 0.37 $ 0.23 Contractual Backlog............................................................ $ 2,782.1 $ 3,104.0 $ 1,938.3
[BAR GRAPH] * Diluted EPS, see notes to the Consolidated Financial Statements. TABLE OF CONTENTS - ----------------- LETTER TO SHAREHOLDERS 2 GULFSTREAM V 7 GULFSTREAM IV-SP 11 GULFSTREAM SHARES 12 MANUFACTURING 13 CUSTOMIZED INTERIORS 15 AIRCRAFT SERVICES 16 BOARD OF DIRECTORS 18 1997 FINANCIAL REVIEW 19 CORPORATE INFORMATION 42 COLLIER TROPHY 43 DEAR SHAREHOLDERS As Gulfstream enters its fortieth year as the world's leading business aviation company, we are pleased to report that the Company's strong momentum continues. We met or exceeded all of our key operating and financial goals in 1997 and are positioned for significant growth going forward. Demand for our products remains strong as evidenced by the Company's backlog which totaled 88 aircraft valued at $2.8 billion at the end of 1997. Our production expansion plans are ahead of schedule and we are continuing to invest in new services and technology to position Gulfstream for the 21st century. 1997: Delivering On Our Promises For 1997, Gulfstream reported record revenues and earnings. Revenues increased nearly 80 percent over 1996 to $1.9 billion and earnings per share increased almost five-fold to $3.12 or $1.68 on a pro forma fully taxed basis. Net income was $243 million and we ended the year with a cash balance of $306 million. The Gulfstream V,-Registered Trademark- the world's only ultra-long range business jet in service, received final FAA certification in April and has already set 47 world and national records. The Gulfstream V has met or exceeded all performance specifications and customer reaction continues to be extremely positive. With a significant first-to-market advantage over the competition, we had taken 81 orders through December 31 and, in 1997, we delivered 29 Gulfstream Vs as planned. In a fitting tribute to the remarkable achievement of the Gulfstream V, Gulfstream and the Gulfstream V Industry Team received aviation's most prestigious award, the 1997 Robert J. Collier Trophy. Presented annually by the National Aeronautics Association, this award recognized Gulfstream for the successful application of advanced design, efficient manufacturing techniques and innovative international business partnerships, to place into customer service the Gulfstream V - the world's first ultra-long range business jet. Demand also remains strong for the Gulfstream IV-SP-Registered Trademark-. This outstanding aircraft has dominated the large cabin business jet category since its introduction. Its success continued as we ended the year with 43 aircraft in backlog and delivered the 327th Gulfstream IV/IV-SP. Aircraft on runway Mechanic working on landing gear Aircraft on tarmac [Picture] In total, we received firm orders for 46 new aircraft in 1997. Our customer base continues to be predominately Fortune 500 companies with nearly 80 percent of our backlog held by North American corporations and the Gulfstream Shares-Registered Trademark- program. In addition, we are continuing to enhance our network of international sales and service offices to support our growing business worldwide. The strong backlog and demand for Gulfstream products has led to an expansion of the Company's manufacturing and completion capacity. In 1997, in support of our announced production goal of 60 aircraft per year by 1999, we initiated cross-functional teams focused on quality and efficiency in product design, manufacturing and interior completion. As a result, we ended the year ahead of our initial production plans and delivered 51 new aircraft in 1997. We are now targeting production in excess of 60 aircraft for 1999. Setting The Stage For Future Growth Looking forward, we are investing for continued revenue and earnings growth. For 1998, we are targeting nearly a 70 percent increase in fully taxed earnings per share to $2.85 as we ramp up production, reduce costs and continue to expand the products and services offered under the Gulfstream brand. The Company is investing $35 million over 1997 and 1998 to support the targeted increase in our manufacturing and completion capabilities. These investments, along with our quality teams, are driving cost efficiencies ahead of our original forecast and we are on track to realize continued improvements in margins in 1998 and beyond. In our completions business, we are improving our processes while maintaining the quality craftsmanship and reliability which distinguish Gulfstream aircraft. We now provide aircraft interiors for nearly every aircraft we sell, up from 70 percent at the beginning of the decade. Anticipating and effectively meeting the aviation transportation needs of corporations, governments and leaders worldwide is a hallmark of Gulfstream's success. Gulfstream Shares and Gulfstream Financial Services Corporation (GFSC) are both examples of the Company's efforts to meet the changing needs of its customers. The Gulfstream Shares program has exceeded our initial expectations for market expansion by providing new customers the benefits of Gulfstream ownership at a fraction of the cost and by offering existing customers a cost effective means of expanding their aircraft fleet. In the U.S., 29 aircraft are either in service or under contract for the Gulfstream Shares program. GIV-SP flying Green aircraft in production GIV-SP flying [Picture] [Picture] Gulfstream Management Committee Our announced expansion of this program into the Middle East positions us for continued growth to other strategic areas of the world, including the Far East. Gulfstream Financial Services Corporation also positions the Company for future growth by making it easier to finance the purchase of Gulfstream aircraft. Today, GFSC has a portfolio of 27 aircraft, valued at $580 million, which have been financed through private label relationships. In 1997, GFSC provided financing for over $300 million of our products. We are also exploring new opportunities to complement our existing portfolio of products and services. These include comprehensive maintenance programs, aircraft management services and short-term operating lease capabilities. 1997 was a very strong year for Gulfstream, one in which we exceeded customer and shareholder expectations in all key areas of our business. We are proud of our accomplishments and of the nearly 5,800 Gulfstream employees who contributed to the Company's outstanding performance. We also want to thank our suppliers, customers, partners and investors for their continued support. Going forward, we will continue to capitalize on our growth opportunities and enhance shareholder value. Our decision, in early 1998, to initiate a Common Stock Repurchase Program for up to $200 million supports our investment strategy and our firm belief that Gulfstream is well positioned for earnings growth in 1998 and beyond. We intend to continue our commitment to setting the standards for business aviation and exceeding the expectations of our customers and our shareholders. Sincerely, /s/ THEODORE J. FORSTMANN ------------------------- THEODORE J. FORSTMANN Chairman of the Board Chairman of the Management Committee /s/ W. W. BOISTURE /s/ CHRIS A. DAVIS /s/ JAMES T. JOHNSON /s/ BRYAN T. MOSS ------------------ ------------------ -------------------- ----------------- W.W. BOISTURE, JR. CHRIS A. DAVIS JAMES T. JOHNSON BRYAN T. MOSS Executive Vice President Executive Vice President and President and Vice Chairman Member of the Chief Financial Officer Chief Operating Officer Member of the Management Committee Member of the Member of the Management Committee Management Committee Management Committee
February 28, 1998 [Picture] GV flying over water [Picture] (left to right/top to bottom) Cockpit of GV GV in flight Interior of GV GIV-SP at service center Gulfstream V: A TRADITION OF EXCELLENCE On April 11, 1997, Gulfstream introduced a new era in the history of business aviation with the final FAA certification of the Gulfstream V, the world's first ultra-long range, large cabin business jet. The Gulfstream V has already distinguished itself as the premier business jet by meeting or exceeding all performance specifications as promised. The Gulfstream V has set 47 world and national records for nonstop distance, speed, time to climb, cruise altitude and payload. As of December 31, 1997, Gulfstream had received 81 orders for the Gulfstream V. Twenty-nine Gulfstream Vs were delivered to customers in 1997, and at year end, the backlog for the Gulfstream V was 45 aircraft. Advanced Technology Leads To Unmatched Performance As a confirmation The Gulfstream V features the most sophisticated of its innovative technology available to support the rigorous demands of design and advanced intercontinental missions. From the unique engine technology, the design and highly advanced communications capabilities Gulfstream V was to the cabin that offers maximum passenger comfort and awarded the 1997 flexibility, the Gulfstream V continues the Gulfstream Robert J. Collier legacy of innovation and high quality. Trophy for aeronautical The Gulfstream V's ability to travel nonstop for achievement. 6,500 nautical miles at speeds up to Mach 0.885 sets the benchmark for world travel. For the first time, nonstop business travel between destinations such as New York and Tokyo, London and Beijing, Los Angeles and Moscow is routine. No other business jet in service can match the Gulfstream V's performance for distance. Additionally, we designed the Gulfstream V to provide maximum passenger and crew comfort and productivity. Featuring a spacious cabin with a 1,669 cubic foot interior, the Gulfstream V offers room for up to 19 passengers and more baggage capacity than any other corporate jet. The Gulfstream V also features a 100 percent fresh air ventilation system and maintains a constant cabin altitude pressure of 6,000 feet. Other corporate and commercial aircraft recirculate air, typically allowing less than 75 percent fresh air. Both of these features minimize the stress of long range travel by reducing passenger fatigue and offering a healthier travel environment. The Gulfstream V's ability to cruise at 51,000 feet, well above commercial traffic and adverse weather, permits more direct routing and shorter time en route. In contrast, commercial airliners are required to fly at considerably lower altitudes (31,000 to 37,000 feet), leaving them susceptible to turbulent conditions and rerouting due to weather and traffic. Able to fly Finally, the Gulfstream V offers significant comfortably technical advancements, including an innovative above weather aerodynamic design and an all new wing. Powered by twin and traffic, BMW Rolls-Royce BR710 turbofan engines, developed the Gulfstream V especially for the Gulfstream V, the aircraft can take connects key off under the most arduous conditions without fuel or cities such as payload restrictions. This gives the Gulfstream V more New York and travel flexibility than any other current or planned Tokyo, and corporate jet. The Gulfstream V is able to land and remote depart from thousands of airports worldwide, which locations larger corporate jets are unable to access, including worldwide. remote locations like Aspen, Bogota and Nairobi. With these enhanced features, the Gulfstream V offers a lower operating cost than other business jets in its class. Its excellent short runway [Picture] GV in flight Statue of Liberty and New York skyline GV flying over mountains performance, advanced flight control systems, low noise and clean emissions, combined with unmatched stability and maneuverability make the Gulfstream V an aircraft with truly exceptional performance standards. Superior Capabilities Meet Government and Special Mission Requirements In testimony to the Gulfstream V's exceptional performance, the United States Air Force (USAF) selected the Gulfstream V to provide intercontinental transportation for senior government officials and dignitaries. The versatility This builds on a long legacy of Gulfstream aircraft and exceptional used for special missions and provides the opportunity performance of for expansion to other governments worldwide. Over 130 the Gulfstream V Gulfstream aircraft are currently in service with 38 provides an nations in a variety of roles such as photo effective reconnaissance, maritime surveillance, medical platform for evacuation, weather research and astronaut training. special mission applications. The Gulfstream V was also chosen by Lockheed Martin and Northrop Grumman as the aircraft platform for bids for the United Kingdom's Royal Air Force Airborne Standoff Radar (ASTOR) program. The selection of the Gulfstream V by two of the ASTOR contenders underscores the flexibility and adaptability of this unique aircraft. [Picture] GV flying over water Mt. Fuji Frontview of GV in flight [Picture] GIV-SP on runway GULFSTREAM IV-SP: THE WORLD'S BEST-SELLING LARGE CABIN BUSINESS AIRCRAFT The Gulfstream IV-SP continues to dominate the long range, large cabin market. The 327th Gulfstream IV/IV-SP was delivered in 1997 and worldwide demand for the aircraft remained strong with 39 new orders and 43 aircraft in backlog at December 31, 1997. The Gulfstream IV-SP is the world's best selling large cabin business jet with a record for technical performance, safety and reliability. The aircraft holds 67 flight records, has more than 850,000 flight hours and boasts a 99.4 percent reliability rate. Unprecedented The Gulfstream IV-SP's range of 4,220 nautical miles demand for the connects many major North American cities with most of Gulfstream Western Europe, South America and Northern Africa. It IV-SP continued flies at 45,000 feet, maintaining a constant 6,500 foot in 1997 as we cabin pressure and a 100 percent fresh air received orders environmental control system to maximize passenger for 39 aircraft comfort. and ended the year with a Demand for pre-owned Gulfstream IV-SPs is also backlog of 43. strong. Like their predecessors, Gulfstream IV-SPs retain their value long after their depreciable life. Rugged and Reliable, A Proven Platform For Special Missions The Gulfstream IV-SP's robust construction and reputation for reliability allow the aircraft to be used for challenging special missions without sacrificing the Gulfstream performance advantage. The Gulfstream IV-SP is used as a hurricane tracker for the U.S. National Oceanic and Atmospheric Administration (NOAA) in Honolulu, Hawaii. With a cruising altitude of 45,000 feet, the Gulfstream IV-SP provides observation coverage at levels critical for defining weather systems in the upper atmosphere. The aircraft's extensive range allows NOAA to monitor and assess storm systems worldwide. Other key uses include special military missions and governmental use for VIP travel. The Gulfstream IV-SP's efficient short-field operations make it popular for medical evacuations. GULFSTREAM SHARES: EXPANDING OWNERSHIP OPPORTUNITIES WORLDWIDE Now in its fourth year, the Gulfstream Shares program continues to successfully expand the market for Gulfstream aircraft. The program offers eighth, quarter and half shares in Gulfstream IV-SP aircraft and allows customers with more limited aviation requirements to own the world's most prestigious business jet. For the individual or corporation that has not previously operated aircraft, the Gulfstream Shares program provides the opportunity to realize the benefits of a Gulfstream at a fraction of the cost. The program has also become popular as a way to supplement the fleets of existing aircraft operators. Growth of Gulfstream Shares, a joint program with Executive Jet International (EJI), has exceeded expectations. There are currently 15 Gulfstream Shares aircraft in service today. In total, 27 Gulfstream IV-SPs and two Gulfstream Vs have been ordered for the Gulfstream Shares program. Of these, eleven were ordered by EJI in 1997. Gulfstream sells the GIV-SPs into the program and provides supporting technical The highly services and maintenance, while EJI manages scheduling, successful customer service and daily flight operations. Gulfstream Shares The Gulfstream Shares program also provides an program provides opportunity to expand Gulfstream's presence worldwide. ownership of a In 1997, Gulfstream announced the expansion of the Gulfstream Gulfstream Shares program to the Middle East with a aircraft at a commitment of 12 aircraft to the region. This fraction of the represents the first step in creating a global cost and has fractional ownership network. Gulfstream is also significantly considering expanding the program into the Far East, as expanded the well as including Gulfstream V aircraft. market for our products. GIV-SP over water San Francisco Golden Gate bridge Front view of GIV-SP in flight [Picture] MANUFACTURING: MEETING THE CHALLENGES OF STRONG PRODUCT DEMAND The strong demand for Gulfstream products and services has challenged the Company to seek new ways of In 1997 we improving delivery while maintaining the highest established quality standards. For the first time in the Company's cross- history, we are producing two Gulfstream models functional simultaneously, the Gulfstream IV-SP and new ultra-long teams to focus range Gulfstream V. on quality and efficiency in By strategically redeploying resources and product design increasing productivity, we made significant strides in and 1997 toward achieving our goal of producing 60 aircraft manufacturing. by 1999 without having to add new manufacturing The Company is facilities. In 1997, 51 aircraft (22 Gulfstream IV-SPs now positioned and 29 Gulfstream Vs) were produced versus 27 in 1996 to cost (24 Gulfstream IV-SPs and three Gulfstream Vs). In effectively June, the Company delivered its 1,000th aircraft, produce 60 continuing a tradition of leadership in aviation that aircraft by spans forty years. 1999, more than double the 1996 In 1997, cross-functional teams were initiated to level. focus on quality and efficiency in product design, manufacturing and interior completions. Capitalizing on the collective expertise of Gulfstream's highly skilled work force, we reduced final assembly production time for the Gulfstream V from 75 to 30 days in just over six months. At the same time, the manufacturing process was redesigned to allow Gulfstream the flexibility to change its annual product mix between Gulfstream IV-SPs and Gulfstream Vs depending upon customer demand. As a result of these efficiencies and our focus on quality, the Company expects to produce 58 aircraft in 1998 and in excess of 60 aircraft in 1999. [Picture] GIV-SP in flight Big Ben, London skyview GIV-SP over cityscape [Picture] Interior of GV CUSTOMIZED INTERIORS: ENSURING THAT GULFSTREAM AIRCRAFT MEET CUSTOMER NEEDS For many customers, the look and feel of the aircraft interior and exterior are as important as the aircraft's performance specifications. Gulfstream understands this and has built a reputation for Gulfstream offering the finest quality craftsmanship available to continues to meet its customers' demand for superior quality, both invest in inside and outside the aircraft. Interiors designed for technology and business customers include the most advanced capability to communications technology to ensure that time spent provide the traveling is as productive as time spent in the office. highest quality Gulfstream has also certified configurations for and most government and military applications which include productive features such as oversized cargo doors, electronic and designs to meet optical airborne surveillance equipment and advanced the needs of medical technology. our customers. Today In 1997, Gulfstream invested significant capital to Gulfstream enhance its full-service design and completions completes capabilities. A new design presentation center was nearly 100 unveiled at the Company's completion center in percent of its Savannah, Georgia. Using advanced computer modeling, customer Gulfstream designers can manipulate a variety of cabin interiors. configurations and color schemes to match the customer's exact needs and specifications. Gulfstream's newly installed video conferencing technology enables the customer to participate in the design process from anywhere in the world. In addition, in 1997, the Company invested $8.5 million to build a state-of-the-art paint facility at its Long Beach, California location. The nearly 60,000 square foot facility gives Gulfstream the ability to paint up to 40 additional aircraft per year, doubling the Company's current paint capacity. The hangar, operating on a three shift, 24 hour a day basis, includes three individual bays which allow three aircraft to be worked on simultaneously. The new facility incorporates the latest technology in environmental air and water pollution control systems and exceeds current federal and state regulatory standards. Gulfstream's customized completions business is an important source of revenue. The Company now completes virtually 100 percent of customer interiors, up from 70 percent at the beginning of the decade. AIRCRAFT SERVICES: PROVIDING VALUE AND SECURITY FOR CUSTOMERS WORLDWIDE Manufacturing and completing the world's finest business jets is only part of what makes Gulfstream a leader in its industry. Gulfstream customers also know that they can count on outstanding service and support wherever their travels may take them. To support the Company's products, Gulfstream has built a 24 hour a day, seven day a week network of service providers. In Savannah, Georgia, the Company's flagship service center covers more than four football fields and can house up to 22 aircraft. Gulfstream also operates Company-owned service centers in Brunswick, Georgia and Long Gulfstream Beach, California. Outside the U.S., Gulfstream customers continues to will find five additional Gulfstream Authorized Service expand our Centers or Warranty Repair Facilities located on three worldwide continents. maintenance and technical In 1997, Gulfstream introduced the first phase of an support on-line spare parts system. This enables Gulfstream services, operators to order spare parts from anywhere in the world providing through the Company's website (www.gulfstreamaircraft.com). customers easy Also in 1997, the Company launched ServiceCare for access 24 hours Gulfstream IV-SP customers. ServiceCare is the industry's a day. most comprehensive nose-to-tail, guaranteed hourly maintenance program. ServiceCare covers virtually every part, component, assembly and system on the aircraft, offering customers predictable operating costs and around the clock service. With over 900 aircraft in the Gulfstream fleet worldwide, managing the service needs of Gulfstream customers is a growing and profitable source Gulfstream employee manufacturing GV on tarmac Landing gear [Picture] of revenue. At year end, Gulfstream had approximately 60 percent service market share and is on track to achieve its goal of 65 percent share in 1998. Comprehensive Training: Benefiting Customers Through Partnerships To ensure that customers take advantage of the full Gulfstream's capabilities of our aircraft, Gulfstream has formed focus is on long-term partnerships with FlightSafety International providing value (FSI) and SimuFlite Training International. Through these added products partnerships Gulfstream offers its customers comprehensive and service pilot and maintenance training. FSI maintains and operates offerings its training facilities which are co-located with which meet the Gulfstream operations in Savannah and Long Beach. In 1997, entire spectrum FSI opened a new 65,000-square-foot learning center in of our Savannah which incorporates fully computerized, automated customers' training on all Gulfstream products. SimuFlite training aviation needs. sessions are conducted at the Dallas-Ft. Worth International Airport. Aircraft Financing: Providing Customized Solutions To Funding Aircraft Acquisitions Gulfstream Financial Services Corporation (GFSC) makes it easier to acquire Gulfstream aircraft by offering customers a variety of financing alternatives such as capital and operating leases, loans, tax advantaged leases, like-kind exchange options and Export-Import Bank support. In 1997, GFSC provided financing, through private label relationships, for over $300 million of our products. Employee working Open engine Aircraft on tarmac Tech rep working on aircraft [Picture] Board of Directors [Full page picture]
[Photo] [Photo] BOARD OF DIRECTORS ROBERT ANDERSON CHARLOTTE L. BEERS Chairman Emeritus Chairman Emeritus Rockwell International Ogilvy and Mather Worldwide, Inc. [Photo] [Photo] [Photo] [Photo] THOMAS D. BELL, JR. W.W. BOISTURE, JR. CHRIS A. DAVIS LYNN FORESTER President & Executive Vice President Executive Vice President & President & Chief Executive Officer Gulfstream Aerospace Corporation Chief Financial Officer Chief Executive Officer Burson-Marsteller Gulfstream Aerospace FirstMark Holdings, Inc. Corporation [Photo] [Photo] [Photo] [Photo] NICHOLAS C. FORSTMANN THEODORE L. FORSTMANN SANDRA J. HORBACH JAMES T. JOHNSON Founding General Partner Chairman General Partner President & Forstmann Little & Co. Gulfstream Aerospace Corporation Forstmann Little & Co. Chief Operating Officer Founding General Partner Gulfstream Aerospace Forstmann Little & Co. Corporation [Photo] [Photo] [Photo] [Photo] HENRY A. KISSINGER DREW LEWIS MARK H. McCORMACK BRYAN T. MOSS Chairman Former Chairman & Chairman, President & Vice Chairman Kissinger Associates, Inc. Chief Executive Officer Chief Executive Officer Gulfstream Aerospace Former U.S. Secretary of Union Pacific Corporation International Management Group Corporation State [Photo] [Photo] [Photo] [Photo] MICHAEL S. OVITZ ALLEN E. PAULSON ROGER S. PENSKE COLIN L. POWELL Former Chairman & Co-Owner Chairman Emeritus Chairman Chairman, America's Creative Artists Agency, Inc. Gulfstream Aerospace Corporation Penske Corporation Promise-The Alliance for Youth Former Chairman Joint Chiefs of Staff [Photo] [Photo] [Photo] [Photo] GERARD R. ROCHE DONALD H. RUMSFELD GEORGE P. SHULTZ ROBERT S. STRAUSS Chairman Chairman Former U.S. Secretary Founder & Partner Heidrick & Struggles, Inc. Gilead Sciences, Inc. of State Akin, Gump, Strauss, Former U.S. Secretary Hauer & Feld of Defense Former U.S. Ambassador to Russia
GULFSTREAM AEROSPACE CORPORATION 1997 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 Report of Independent Accountants and Report of Management's Responsibilities 38 Quarterly Financial Results 39 Selected Financial Data 40 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 Gulfstream Aerospace Corporation's ("Gulfstream" or the "Company") principal products begin on page 7. 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 (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 for 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. The following sets forth certain statistical data concerning the Company's deliveries, orders and backlog for new aircraft.
Year ended December 31, ------------------------------- 1997 1996 1995 --------- ----------- --------- Operating Data: Units delivered during period: Gulfstream IV-SP.................................. 22 24 26 Gulfstream V...................................... 29 3 0 --- --- --- Total green deliveries............................ 51 27 26 Units ordered during period: Gulfstream IV-SP.................................. 39 44 30 Gulfstream V...................................... 7 21 12 --- --- --- Total orders...................................... 46 65 42 Units in backlog at end of period: Gulfstream IV-SP(1)............................... 43 27 7 Gulfstream V(2)................................... 45 67 50 --- --- --- Total backlog (in units)(3)....................... 88 94 57 Estimated backlog (in billions)(3)................ $ 2.8 $ 3.1 $ 1.9
- ------------------------ (1) Net of 1 cancellation in 1997, which relates to an order placed in that year. (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, 1997 and 1996 Net Revenues. Total net revenues increased by $839.8 million, or 79.0%, to $1,903.5 million in 1997 from $1,063.7 million in 1996. Revenues from green aircraft increased $739.3 million due primarily to the delivery of 29 Gulfstream V aircraft in 1997, as full scale production commenced, compared to three Gulfstream V aircraft in 1996. During 1997, a total of 51 green aircraft were delivered as compared to 27 in 1996. Also contributing to the revenue gain was a $57.1 million increase in the sale of pre-owned aircraft related to trade-ins on the higher level of Gulfstream V deliveries. In addition, completion revenues increased by $11.5 million in 1997 principally due to initial Gulfstream V completion deliveries. Aircraft Services revenue increased by $22.7 million in 1997, as the Company continues [BAR GRAPH] to aggressively market and expand its aftermarket products and maintenance services. Cost of Sales. Total cost of sales increased to $1,557.5 million in 1997 compared to $839.3 million in 1996. Excluding pre-owned aircraft, which are generally sold at break-even levels, the gross profit percentage for 1997 was 20.0% compared to 24.8% for 1996. The decline in gross profit percentage is primarily attributable to the introduction of the Gulfstream V aircraft into production and the higher costs associated with the early stages of the Gulfstream V production and completions. Timing of the learning curve on the Gulfstream V completions is expected to delay margin improvements somewhat in the first half of 1998. Overall the Company expects the margin percentage of revenue on the Gulfstream V to continue to improve as it realizes increased manufacturing efficiencies. Selling and Administrative Expense. Selling and administrative expense decreased by $2.0 million, or 2.0%, to $97.5 million in 1997 from $99.5 million in 1996 and, as a percentage of net revenues, decreased to 5.1% in 1997 from 9.4% in 1996. Expenses were higher in 1996 due principally to the level of advertising and marketing expense associated with the certification and initial customer deliveries of the Gulfstream V. [BAR GRAPH] Stock Option Compensation Expense. The issuance of options to purchase common stock of the Company resulted in a non-cash compensation charge of $1.6 million in 1997 and $7.2 million in 1996. Research and Development Expense. Research and development expense was $10.8 million in 1997 a decrease of $47.3 million from 1996, and as a percentage of net revenues was 0.6% versus 5.5%. Research and development expense decreased during 1997 principally as a result of the substantial completion of the Gulfstream V development program. Research and development expense for 1997 and 1996 are net of credits of $10.0 million and $8.0 million, respectively, for launch assistance funds received from vendors participating in the development of the Gulfstream V. Research and development expenditures in 1998 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 aftermarket 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 $7.3 million for 1997 were $2.1 million lower than 1996. This decrease was a result of the accelerated amortization in 1996 of financing charges associated with the Company's prior bank credit facilities, which were repaid in October 1996. See "Liquidity and Capital Resources." Interest Income and Expense. Interest income decreased by $3.1 million to $11.5 million in 1997 from $14.6 million in 1996 as a result of lower average cash balances the Company had invested in 1997 compared to 1996. Interest expense consists almost entirely of interest paid on long-term borrowings under the Company's bank credit facilities. Interest expense increased to $31.2 million for 1997 from $17.9 million in 1996. This increase was due to an increase in average borrowings partially offset by the Company's lower average borrowing costs of 7.7% in 1997 versus 9.0% in 1996. See "Liquidity and Capital Resources." Income Taxes. The Company recorded an income tax benefit of $33.9 million for 1997. No provision for income taxes was recorded in 1996, principally due to the utilization of net operating loss carryforwards. The Company, in estimating its ability to realize the benefit of its net deferred tax assets, considers both positive and negative evidence and gives greater weight to evidence that is objectively verifiable. As a result of numerous factors including, but not limited to, recent earnings trends and the size of its contractual backlog, the Company currently believes that its net deferred tax asset is more likely than not to be realized. In the third quarter of 1997, the Company released its deferred tax valuation allowance, totaling $94.2 million. Of this amount, $29.4 million related to the exercise of stock options and was credited to additional paid-in capital and $64.8 million was recorded as a one-time non-cash income tax benefit. During the fourth quarter of 1997, the Company recorded a provision for income taxes based on its overall estimated effective tax rate of 37.5%. The Company had available at December 31, 1997 and 1996, net operating loss carryforwards for regular federal income tax purposes of approximately $65.0 million and $228.0 million, respectively, which will begin expiring in 2006. Earnings Per Share. The Company reported diluted earnings per share of $3.12 during 1997, up from 1996 diluted earnings per share of $0.60. On a pro forma basis, assuming an effective tax rate of 37.5%, the Company's earnings per share would have been $1.68 and $0.37 for 1997 and 1996, respectively. [BAR GRAPH] Comparison of the Years Ended December 31, 1996 and 1995 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, Aircraft Services revenues increased by $33.2 million in 1996 principally due to international spares sales and the opening in 1996 of a new service center in Savannah. Offsetting these increases was a decrease of $67.3 million in the sale of pre-owned aircraft resulting from a reduced 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. 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. Amortization of Intangibles and Deferred Charges. This non-cash expense includes amortization of goodwill and other intangible assets consisting of aftermarket service and aftermarket 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. See "Liquidity and Capital Resources." Income Taxes. At December 31, 1996 and 1995 the Company had available 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. 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 the Company's share repurchase program described below. During 1997 and 1996, the Company relied on its available cash balances to fund these needs. [BAR GRAPH] Net cash generated by operating activities was $120.4 million, $243.4 million and $282.4 million in 1997, 1996 and 1995, respectively. The reduction in 1997 was primarily due to the decrease in customer progress payments associated with new aircraft in backlog. 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. During the year ended December 31, 1997, additions to property and equipment amounted to $26.7 million. At December 31, 1997, the Company was not committed to the purchase of any significant amount of property and equipment. Additions to property and equipment were $16.2 million in 1996 and $25.2 million in 1995. The increased level of spending of $10.5 million in 1997 over 1996, primarily related to the Company's strategic initiative 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, the Company's capital expenditures increased $15 million and in 1998 are expected to increase by approximately another $20 million above previously planned annual levels of approximately $15 million. At December 31, 1997, the Company was nearing completion on a new $8.5 million paint facility located at its Long Beach, California plant. This facility is part of the Company's 60 aircraft plan and will allow the Company to double its present volume of painting new, pre-owned and customer aircraft. 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 1997, 1996 and 1995 the Company invested $3.0 million, $2.1 million and $25.7 million, respectively, for tooling associated with the Gulfstream V program. As of December 31, 1997, the Company had recorded, net of amortization, an aggregate of $42.7 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. In January 1998, the Company established a program to repurchase up to $200 million of its common stock. The purchases will be made from time to time in the open market or through negotiated transactions as market conditions warrant. The Company expects to fund the stock purchases from cash on hand. As of January 30, 1998, approximately 2.5 million shares, at an average price of $30.01 per share, had been repurchased under this plan for an aggregate amount of $74.6 million. On October 16, 1996, Gulfstream Delaware Corporation, a wholly owned subsidiary of the Company, entered into a $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, 1997. 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, 1997, the Company was in compliance with the covenants contained in the Credit Agreement. Payments under the term loan facility were $20.0 million in 1997, and scheduled repayments are $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 totaled $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 had previously 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 from 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, based upon its analysis of its consolidated financial position, its cash flow during the past 12 months and its expected results of operations in the future, that operating cash flow and available borrowings under the Credit Agreement will be adequate to fund operations, capital expenditures, debt service and the Company's share repurchase program 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. As of December 31, 1997, in connection with orders for 21 Gulfstream V aircraft in the backlog, 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. Additionally, in connection with recorded sales of new aircraft, the Company has agreed to accept pre-owned aircraft with trade-in values totaling $174.6 million as of December 31, 1997. Management believes that the fair market value of all such aircraft exceeds the specified trade-in value. The Company is currently engaged in the monitoring and cleanup of certain ground water at its Savannah facility under the oversight of the Georgia Department of Natural Resources. Expenses incurred for cleanup have not been significant. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. 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 December 24, 1997, the Company executed final documents with the Pension Benefit Guaranty Corporation (the "PBGC") concerning funding of the Company's defined benefit pension plans. The terms were essentially the same as those set out in the agreement in principle reached between the PBGC and the Company during October 1996. Pursuant to this agreement, the Company contributed $25.0 million in 1997 and has agreed to contribute a total of $25.0 million annually from 1998 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 funding required under this agreement will not result in any increase in the Company's annual pension expense. The Company is involved in tax audits by the Internal Revenue Service covering the years 1990 through 1994. The revenue agent's report and the notice of proposed adjustments include 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. Contractual Backlog At December 31, 1997, the Company had a firm contract backlog of approximately $2.8 billion, representing a total of 43 contracts for Gulfstream IV-SPs and 45 contracts for Gulfstream Vs, compared with $3.1 billion at the end of 1996, representing a total of 27 contracts for Gulfstream IV-SPs and 67 contracts for Gulfstream Vs. The decline in backlog from 1996 is directly related to the increased level of Gulfstream V deliveries during 1997. [BAR GRAPH] 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. In total, approximately 38% of the Company's contractual backlog is scheduled for delivery beyond 1998. 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 expected 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. 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. Outlook The Company plans to deliver 58 green aircraft in 1998 and to double its completion rate. The gross margins are expected to improve from 20% in 1997 to the mid-20s by the end of 1998. Based on projections of increasing aircraft production and improving margins, Gulfstream now expects 1998 diluted earnings per share of approximately $2.85. The Company also expects diluted earnings per share to increase 15% per year in 1999 and 2000. Forward-Looking Information Is Subject To Risk and Uncertainty Certain statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations", including the statements under the heading "Outlook", as well as other statements elsewhere in this Annual Report to Stockholders, contain forward-looking information. These forward-looking statements are subject to risks and uncertainties. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Exhibit 99 to the Company's Securities and Exchange Commission filings. Consolidated Balance Sheets GULFSTREAM AEROSPACE CORPORATION
December 31, -------------------------- 1997 1996 - ------------------------------------------- ---------- ------------ (In thousands, except for share amounts) Assets Cash and cash equivalents.................. $306,451 $ 233,172 Accounts receivable (less allowance for doubtful accounts:$1,144 and $3,243)..... 177,228 137,342 Inventories................................ 629,876 655,237 Deferred income taxes...................... 33,795 -- Prepaids and other assets.................. 11,318 7,915 ---------- ----------- Total current assets..................... 1,158,668 1,033,666 Property and equipment, net................ 134,611 126,503 Tooling, net of accumulated amortization: $7,680 and $600.......................... 43,471 47,677 Goodwill, net of accumulated amortization: $8,433 and $7,322........................ 38,957 35,799 Other intangible assets, net............... 50,485 55,556 Deferred income taxes...................... 32,950 -- Other assets and deferred charges.......... 14,525 14,014 ---------- ----------- Total Assets............................... $1,473,667 $ 1,313,215 ---------- ----------- ---------- ----------- Liabilities and Stockholders' Equity Current portion of long-term debt.......... $75,000 $ 20,000 Accounts payable........................... 147,618 129,410 Accrued liabilities........................ 93,798 111,243 Customer deposits-current portion.......... 546,441 634,922 ---------- ----------- Total current liabilities.................. 862,857 895,575 Long-term debt............................. 305,000 380,000 Accrued postretirement benefit cost........ 115,405 108,705 Customer deposits-long-term................ 88,075 109,037 Other long-term liabilities................ 9,573 8,709 Commitments and contingencies Stockholders' equity Common stock; $.01 par value; 300,000,000 shares authorized; 86,522,089 shares issued in 1997 and 85,890,212 shares issued in 1996........................... 865 859 Additional paid-in capital................. 370,258 333,686 Accumulated deficit........................ (225,960) (468,971) Minimum pension liability.................. (762) (1,464) Unamortized stock plan expense............. (1,155) (2,432) Less: Treasury stock: 11,978,439 shares in 1997 and 1996............................ (50,489) (50,489) ---------- ----------- Total stockholders equity.................. 92,757 (188,811) ---------- ----------- Total Liabilities and Stockholders' Equity................................... $1,473,667 $1,313,215 ---------- ----------- ---------- -----------
See Notes to Consolidated Financial Statements Consolidated Statements of Income GULFSTREAM AEROSPACE CORPORATION
Year ended December 31, ---------------------------------- 1997 1996 1995 - ---------------------------------------------------------------- ---------- ---------- ---------- (In thousands, except per share amounts) Net revenues.................................................... $1,903,494 $1,063,713 $1,041,514 Cost and expenses Cost of sales................................................. 1,557,520 839,254 835,547 Selling and administrative.................................... 97,499 99,452 93,239 Stock option compensation expense............................. 1,640 7,186 -- Research and development...................................... 10,792 58,118 63,098 Amortization of intangibles and deferred charges.............. 7,347 9,434 7,540 ---------- ---------- ---------- Total costs and expenses.................................... 1,674,798 1,013,444 999,424 ---------- ---------- ---------- Income from operations.......................................... 228,696 50,269 42,090 Interest income................................................. 11,532 14,605 5,508 Interest expense................................................ (31,159) (17,909) (18,704) ---------- ---------- ---------- Income before income taxes...................................... 209,069 46,965 28,894 Income tax expense (benefit).................................... (33,942) -- -- ---------- ---------- ---------- Net income.................................................... $ 243,011 $ 46,965 $ 28,894 ---------- ---------- ---------- ---------- ---------- ---------- Earnings per share: Net income per share--basic................................... $ 3.28 $ .64 $ .39 ---------- ---------- ---------- ---------- ---------- ---------- Net income per share--diluted................................. $ 3.12 $ .60 $ .37 ---------- ---------- ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements 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, 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 adjustment............. (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 adjustment............. (14) (14) ---------- ----- ---------- ------------ --------- ------------ ---------- ------------ Balance as of December 31, 1996...... -- 859 333,686 (468,971) (1,464) (2,432) (50,489) (188,811) Net income for fiscal 1997................... 243,011 243,011 Issuance of compensatory common stock options... 363 (363) -- Amortization of stock plan expense........... 1,640 1,640 Tax benefit of exercised common stock options................ 33,682 33,682 Exercise of common stock options................ 6 2,527 2,533 Minimum pension liability adjustment............. 702 702 ---------- ----- ---------- ------------ --------- ------------ ---------- ------------ Balance as of December 31, 1997...... $ -- $ 865 $370,258 $(225,960) $ (762) $(1,155) $(50,489) $ 92,757 ---------- ----- ---------- ------------ --------- ------------ ---------- ------------ ---------- ----- ---------- ------------ --------- ------------ ---------- ------------
See Notes to Consolidated Financial Statements Consolidated Statements of Cash Flows GULFSTREAM AEROSPACE CORPORATION
Year ended December 31, ---------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ ---------- ---------- ---------- (In thousands) Cash Flows from Operating Activities Net income.................................................................... $ 243,011 $ 46,965 $ 28,894 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................... 33,022 26,910 23,094 Postretirement benefit cost................................................. 6,700 6,684 6,395 Provision for loss (recovery) on pre-owned aircraft......................... (1,600) 1,000 2,050 Non-cash stock option compensation expense.................................. 1,640 7,186 Deferred income tax benefit................................................. (37,867) Other, net.................................................................. 1,428 417 2,277 Change in assets and liabilities: Accounts receivable....................................................... (39,978) (55,029) 91,817 Inventories............................................................... 26,961 (263,112) (105,844) Prepaids, other assets, and deferred charges.............................. (5,080) (5,578) 1,368 Accounts payable and accrued liabilities.................................. 763 102,551 11,975 Customer deposits......................................................... (109,443) 432,365 217,934 Other long-term liabilities............................................... 864 (56,956) 2,412 ---------- ---------- ---------- Net Cash Provided by Operating Activities..................................... 120,421 243,403 282,372 Cash Flows from Investing Activities Expenditures for property and equipment....................................... (26,692) (16,167) (25,186) Dispositions of property and equipment........................................ 1 28 18 Expenditures for tooling...................................................... (2,984) (2,085) (25,693) ---------- ---------- ---------- Net Cash Used in Investing Activities......................................... (29,675) (18,224) (50,861) Cash Flows from Financing Activities Proceeds from issuance of common stock........................................ 99,603 Proceeds from exercise of common stock options................................ 2,533 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.......................................... (20,000) (146,331) (31,814) ---------- ---------- ---------- Net Cash Used in Financing Activities......................................... (17,467) (215,319) (31,804) ---------- ---------- ---------- Increase in cash and cash equivalents......................................... 73,279 9,860 199,707 Cash and cash equivalents, beginning of year.................................. 233,172 223,312 23,605 ---------- ---------- ---------- Cash and cash equivalents, end of year........................................ $ 306,451 $ 233,172 $ 223,312 ---------- ---------- ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements GULFSTREAM AEROSPACE CORPORATION NOTE 1 Summary of Significant Accounting Policies Business Gulfstream 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 world-wide 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 related to parts to be installed and services to be performed under the contract, after the delivery of the aircraft, which are not significant, 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. 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 32.0% and 34.0%, respectively, of accounts receivable outstanding at December 31, 1997 and 1996 are 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 reduces deferred tax assets when it is "more likely than not" that some portion or all of the deferred tax assets will not be realized. 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 fair value method or 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. Earnings per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which simplifies the standards for computing earnings per share (EPS) information and makes the computation comparable to international EPS standards. SFAS No. 128 replaces the presentation of "primary" (and when required "fully diluted") EPS with a presentation of "basic" and "diluted" EPS. Basic EPS is computed based on net income divided by the weighted average common shares outstanding. Diluted EPS is computed by dividing net income by the weighted average common shares outstanding plus the incremental shares that would have been outstanding under stock option plans. All EPS information for 1996 and 1995 has been restated to conform to the requirements of SFAS No. 128. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which are both effective no later than for the Company s 1998 fiscal year. Management believes that the adoption of these statements will not have a material effect on the Company's consolidated financial statements. NOTE 2 Inventories Inventories consisted of the following at:
December 31, -------------------------- 1997 1996 ------------ ------------ (In thousands) Work in process................................... $ 330,155 $355,198 Raw materials..................................... 134,973 108,041 Vendor progress payments.......................... 60,606 104,318 Pre-owned aircraft................................ 104,142 87,680 ------------ ----------- $ 629,876 $655,237 ------------ ----------- ------------ -----------
NOTE 3 Property and Equipment The major categories of property and equipment consisted of the following at:
December 31, -------------------------- 1997 1996 ------------- ----------- (In thousands) Land............................................. $ 4,109 $ 4,109 Buildings and improvements....................... 101,836 96,201 Machinery and equipment.......................... 118,077 107,428 Furniture and fixtures........................... 12,414 10,451 Construction in progress......................... 9,074 1,826 ------------ ---------- Total............................................ 245,510 220,015 Less accumulated depreciation.................... (110,899) (93,512) ------------ ---------- $ 134,611 $126,503 ------------ ---------- ------------ ----------
NOTE 4 Other Intangible Assets Other intangible assets were comprised of the following at:
December 31, --------------------------- 1997 1996 ----------- ----------- (In thousands) Aftermarket--Service Center...................... $ 15,000 $ 15,000 Aftermarket--Product Support..................... 75,000 75,000 ----------- ----------- Total............................................ 90,000 90,000 Less accumulated amortization.................... (39,515) (34,444) ----------- ------------ $ 50,485 $ 55,556 ----------- ------------ ----------- ------------
NOTE 5 Income Taxes The components of income tax expense (benefit) consisted of the following at:
December 31, -------------- 1997 ------------- (In thousands) Current......................................................... $ 3,925 Deferred........................................................ 26,934 Decrease in valuation allowance................................. (64,801) ------------- Income tax expense (benefit).................................... $(33,942) ------------- -------------
Although the Company recorded net income during 1996 and 1995, no provision for income taxes was recorded, principally as a result of utilization of net operating loss carryforwards. The Company made income tax payments of $4.8 million and $0.3 million for 1997 and 1996, respectively. No income tax payments were made in 1995. The Company's provision for income taxes differed from the amount computed by applying the U. S. federal income tax rate as follows:
December 31, -------------- 1997 -------------- (In thousands) Tax expense at statutory rates.................................. $ 73,174 Decrease in valuation allowance................................. (64,801) Net operating loss carryforwards................................ (43,613) Foreign Sales Corporation tax benefit........................... (1,888) State income taxes.............................................. 1,605 Other, net...................................................... 1,581 -------------- Income tax expense (benefit).................................... $(33,942) -------------- --------------
The tax effects of significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, -------------------------- 1997 1996 ------------- ----------- (In thousands) Deferred Tax Assets Postretirement benefits............................. $43,386 $40,873 Net operating loss carryforwards.................... 24,500 85,760 Intangible assets................................... 7,031 13,072 Pension and other benefits.......................... -- 3,253 Other............................................... 10,169 17,559 ---------- ---------- Total............................................... 85,086 160,517 Less valuation allowance............................ -- (145,490) --------- - ---------- 85,086 15,027 Deferred Tax Liabilities Property and equipment, principally due to basis difference.................................. (17,392) (15,027) Other............................................... (949) -- ---------- ---------- Net deferred tax assets............................. $ 66,745 $ -- ---------- ---------- ---------- ----------
At December 31, 1997, the Company had available a net operating loss carryforward for regular federal income tax purposes of approximately $65.0 million which will expire beginning in 2006. As a result of numerous factors, including, but not limited to recent earnings trends and the size of its contractual backlog, the Company currently believes that its net deferred tax asset is more likely than not to be realized, and in the third quarter of 1997 released its deferred tax valuation allowance, totaling $94.2 million. Of this amount, $29.4 million related to the exercise of stock options and was credited to additional paid-in capital and the remainder, $64.8 million, was recorded as a one-time, non-cash income tax benefit. The Company is involved in tax audits by the Internal Revenue Service covering the years 1990 through 1994. The revenue agent s report and the notice of proposed adjustments include 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 6 Accrued Liabilities Accrued liabilities were comprised of the following at:
December 31, --------------------------- 1997 1996 ------------- ------------ (In thousands) Employee compensation and benefits................ $ 33,245 $ 47,424 Accrued warranty.................................. 23,844 11,644 Uncompleted work on delivered aircraft............ 11,098 8,737 Deferred income................................... 9,499 18,758 Other............................................. 16,112 24,680 ------------- ------------ $ 93,798 $111,243 ------------- ------------ ------------- ------------
NOTE 7 Long-term Debt Long-term debt consisted of the following at:
December 31, --------------------------- 1997 1996 ------------- ------------ (In thousands) Term loans......................................... $380,000 $400,000 Less current portion............................... (75,000) (20,000) ------------- ------------ $305,000 $380,000 ------------- ------------ ------------- ------------
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 is 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 which commenced June 30, 1997 with a final maturity on September 30, 2002, in aggregate amounts for each of the following years as follows: 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 as to, amongst other things, the amount of additional indebtedness, contingent obligations, liens, capital expenditures, and dividends, and 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, 1997, 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 agreement, and the Company and certain of its subsidiaries have guaranteed repayment of amounts borrowed under the credit agreement. The available revolving credit commitment was $203.6 million at December 31, 1997. At December 31, 1997 and December 31, 1996, the Company had outstanding letters of credit totaling $46.4 million and $23.1 million, respectively. The effective interest rate on the Company's long-term debt at December 31, 1997 and 1996 was 6.93% and 7.44%, respectively. The Company paid interest of $32.3 million, $12.9 million and $19.4 million during the years 1997, 1996 and 1995, respectively. NOTE 8 Leases The Company has various operating leases for both real and personal property including Company aircraft. Rental expense for 1997, 1996 and 1995 was $10.9 million, $13.4 million and $14.9 million, respectively. Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year at December 31, 1997 aggregated approximately $40.3 million, and payments during the next five years are: 1998, $10.3 million; 1999, $8.7 million; 2000, $5.9 million; 2001, $4.3 million; 2002, $1.5 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 $25.0 million, $34.4 million and $14.3 million in 1997, 1996 and 1995, 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 $0.8 million, $1.5 million and $1.5 million in 1997, 1996 and 1995, respectively. Net periodic pension cost was as follows:
December 31, ----------------------------------------- 1997 1996 1995 ------------- ------------ ------------ (In thousands) Service cost--benefits earned during the period....... $ 12,466 $ 11,258 $ 9,232 Interest cost on projected benefit obligation.............. 16,743 14,966 13,158 Actual return on plan assets..................... (49,892) (14,431) (15,937) Net amortization and deferral.................... 33,974 1,794 5,570 ------------- ------------ ------------ $ 13,291 $ 13,587 $ 12,023 ------------- ------------ ------------ ------------- ------------ ------------
Actuarial assumptions used were:
December 31, ----------------------------------------- 1997 1996 1995 ------------- ------------ ------------ Discount rate................... 7.50% 8.00% 8.00% Rate of increase in future compensation levels............ 4.75% 4.75% 4.75% Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.50%
The following table sets forth the funded status at September 30 and amounts recognized in the Company's balance sheet at December 31:
1997 1996 --------- ---------- (In thousands) Actuarial present value of benefits: Vested............................................ $177,399 $151,048 Nonvested......................................... 26,879 20,623 --------- ---------- Accumulated benefit obligation......................... 204,278 171,671 Projected benefit obligation........................... 255,074 213,080 Plan assets at fair value.............................. 239,001 163,598 --------- ---------- Projected benefit obligation in excess of plan assets.......................... 16,073 49,482 Unrecognized prior service cost........................ (5,860) (6,327) Contributions paid in fourth quarter................... (6,250) (14,446) Unamortized loss resulting from changes in plan experience and actuarial assumptions......................... 3,900 (9,137) Adjustment required to recognize additional minimum liability...................... -- 3,612 --------- ---------- Accrued pension cost................................... $ 7,863 $ 23,184 --------- ---------- --------- ----------
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:
1997 1996 --------- ---------- (In thousands) Accumulated postretirement benefit obligation Retirees........................................... $28,696 $29,577 Fully eligible active plan participants............................. 3,371 1,645 Other active plan participants..................... 59,672 51,394 --------- ---------- Accumulated postretirement benefit obligation in excess of plan assets..................................... 91,739 82,616 Unrecognized prior service cost......................... 7,848 7,678 Unrecognized net loss................................... 15,818 18,411 --------- ---------- Accrued postretirement benefit cost..................... $115,405 $108,705 --------- ---------- --------- ----------
Net postretirement benefit cost included the following components:
1997 1996 1995 ------------- ------------ ------------ (In thousands) Service cost-benefits attributed to service during the period............... $4,091 $3,957 $3,795 Interest cost of postretirement benefit obligation.............. 6,467 6,237 6,268 Other net amortization and deferral.................... (1,527) (1,261) (1,139) ----------- ---------- ---------- $9,031 $ 8,933 $ 8,924 ----------- ---------- ---------- ----------- ---------- ----------
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.50% in 1997, 8.0% in 1996 and 8.0% in 1995. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation pre-age 65 was 8.50% in 1997, 9.25% in 1996 and 10.0% in 1995, declining annually 0.75% to a rate of 5.5%; and for post-age 65 was 6.50% in 1997, 7.25% in 1996 and 8.0% in 1995, declining annually 0.75% to a rate of 5.0%. If the health care cost trend rate assumptions were increased by 1.0%, the accumulated postretirement benefit obligation as of December 31, 1997 would be increased by 14.9%. The effect of this change on the sum of the service cost and interest cost components would be an increase of 16.2%. Investment Plan The Company sponsors two voluntary 401(k) investment plans which cover substantially all employees and are designed to enhance existing retirement plans. The Company generally matches between 37.5% to 50.0% of employee contributions up to a maximum of four percent. Total expense for the plans were $2.6 million, $2.2 million and $2.1 million for 1997, 1996 and 1995, 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 $0.9 million in 1997, $1.1 million in 1996 and $1.3 million in 1995. The accumulated benefit obligation related to these plans totaled approximately $5.0 million and $4.5 million, at December 31, 1997 and 1996, 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 1997, 1996 and 1995 provisions of approximately $5.8 million, $5.5 million and $4.5 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. Stock Options Under the Amended and Restated 1990 Stock Option Plan approved by its stockholders effective March 28, 1997, 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 executive officers, 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 $1.6 million and $7.2 million in 1997 and 1996, respectively, related to stock option grants. At December 31, 1997, approximately 7.8 million shares of common stock were reserved for issuance under the Stock Option Plan and non-plan options. The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Company s stock options granted 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:
1997 1996 1995 ------------- ------------ ------------ (In thousands, except per share amounts) Net income-- As reported...................... $243,011 $46,965 $28,894 Pro forma........................ 240,769 46,480 28,148 Net income per share-- basic--As reported................. $ 3.28 $ .64 $ .39 Pro forma.......................... 3.25 .63 .38 Net income per share- diluted--As reported............... $ 3.12 $ .60 $ .37 Pro forma.......................... 3.09 .59 .36
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 1997, 1996 and 1995, respectively: expected volatility of 32.01%, 36.02% and 36.02%, respectively; risk-free interest rate of 5.96%, 6.27% and 6.67%, respectively; expected lives of 3 years for all years; and no dividend yield. A summary of the status of the Company's stock option plans as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 ------------------- ------------------ -------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price - ------- --------- -------- --------- -------- --------- -------- Outstanding at beginning of year.. 5,673,029 $ 3.91 8,635,323 $3.88 7,918,691 $3.83 Granted........................... 1,566,000 26.72 1,020,000 4.10 1,740,000 4.10 Exercised......................... (631,877) 4.01 (3,949,346) 3.88 (2,914) 3.51 Forfeited......................... (168,424) 3.90 (32,948) 4.10 (1,020,454) 3.89 --------- -------- --------- -------- --------- -------- Outstanding at end of year........ 6,438,728 $ 9.45 5,673,029 $3.91 8,635,323 $3.88 --------- --------- --------- --------- --------- --------- Options exercisable at year-end... 4,112,728 3.86 3,817,582 3.80 5,630,948 3.81 Weighted average fair value of options granted during the year..................... $26.95 $13.53 $4.10
Information with respect to stock options outstanding and exercisable at December 31, 1997, is as follows:
Options Outstanding Options Exercisable ------------------------------------------------ ------------------------ Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price -------------- ----------- ----------- -------- ----------- -------- $ 3.11-$ 4.10 4,872,728 6.4 $ 3.90 4,112,728 $3.86 $21.50-$22.75 202,000 9.2 22.09 -- -- $26.93-$29.75 1,364,000 9.7 27.40 -- -- ----------- ----------- -------- ----------- -------- 6,438,728 7.2 $ 9.45 4,112,728 $3.86 ----------- ----------- -------- ----------- -------- ----------- ----------- -------- ----------- --------
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. NOTE 11 Related Party Transactions At December 31, 1997 and 1996, certain partnerships formed by Forstmann Little & Co. ("Forstmann Little") owned approximately 42.1% and 42.5%, respectively, of the Company's common stock. During 1997, the Company purchased a pre-owned aircraft for $21.0 million from a company controlled by a director of the Company. 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 in 1996 and $2.3 million in 1995. Beginning in August 1996, the Company engaged an affiliate of Forstmann Little to manage the operations of the Gulfstream IV aircraft discussed below. Total payments were $2.1 million and $0.7 million in 1997 and 1996, respectively. The Company also procures certain inventory items from a former 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 paid $0.8 million in 1997 and 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 cleanup of certain ground water at its Savannah facility under the oversight of the Georgia Department of Natural Resources. Expenses incurred for cleanup have not been significant. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. The Company believes the remainder 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. As of December 31, 1997, in connection with orders for 21 Gulfstream V aircraft in the backlog, 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. Additionally, in connection with recorded sales of new aircraft, at December 31, 1997 the Company has agreed to accept pre-owned aircraft totaling $174.6 million. Management believes that the fair market value of all such aircraft exceeds the specified trade-in value. 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, --------------------------- 1997 1996 1995 -------- --------- -------- (In thousands) Europe.......................................... $186,560 $ 24,764 $ 51,330 Asia............................................ 168,829 88,101 102,990 Latin America and Caribbean..................... 117,884 103,706 36,479 Africa.......................................... 3,827 73,155 6,773 Other........................................... 30,515 736 19,460 -------- --------- -------- $507,615 $290,462 $217,032 -------- --------- -------- -------- --------- --------
During 1997 and 1996, aircraft sales and services provided to one customer comprised 8.3% and 11.7%, respectively, of the Company's net revenues. NOTE 14 Earnings Per Share Net income per share ("EPS") information for 1996 and 1995 is based on historical unadjusted net income divided by pro forma weighted average number of shares. Shares included for basic EPS give retroactive effect to the Recapitalization, the shares issued to option holders upon the exercise of options at the date of the Offering, and the shares issued pursuant to the Offering (all of which are described in Note 10) as if such transactions had occurred at the beginning of the period. Diluted EPS further includes the effects of options granted in 1996 and 1995 as if such options had been outstanding for all periods presented. The following table sets forth the reconciliation of per share data as of:
Year ended December 31, --------------------------- 1997 1996 1995 -------- ------- ------- (In thousands, except per share amount) Net Income................................... $243,011 $46,965 $28,894 -------- ------- ------- -------- ------- ------- Basic EPS Average shares issued and outstanding (after giving effect to the Recapitalization)................... 74,095 67,530 65,403 Exercise of certain stock options with the Offering............................ 2,962 3,949 Shares issued pursuant to the Offering......................... 3,419 4,559 -------- ------- ------- Weighted average common shares outstanding...................... 74,095 73,911 73,911 Diluted EPS Incremental shares from stock options...................... 3,800 4,624 4,624 -------- ------- ------- Weighted average common and common equivalent shares outstanding............................. 77,895 78,535 78,535 -------- ------- ------- -------- ------- ------- Earnings Per Share: Net income per share--basic................... $ 3.28 $ .64 $ .39 -------- ------- ------- -------- ------- ------- Net income per share--diluted................. $ 3.12 $ .60 $ .37 -------- ------- ------- -------- ------- -------
NOTE 15 Subsequent Event During January 1998, the Company began the repurchase of up to $200 million of its common stock. The repurchase will be funded from the Company's available cash. As of January 30, 1998, the Company had repurchased approximately 2.5 million shares, at an average price of $30.01 per share, for an aggregate amount of $74.6 million. Report of Independent Accountants 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, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - -------------------------- Deloitte & Touche LLP Atlanta, Georgia January 30, 1998 Report of Management's Responsibilities 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 30, 1998 Quarterly Financial Results (Unaudited) The following table sets forth the unaudited consolidated statement of operating data for each quarter of 1997 and 1996. The operating results for any quarter are not indicative of results for any future period.
1997(1) ------------------------------------------------- First Second Third Fourth ---------- ---------- ----------- ---------- (In thousands, except deliveries and per share amounts) Net revenues.................................................... $ 375,626 $ 522,906 $ 464,036 $ 540,926 Gross profit.................................................... 70,474 76,010 91,053 108,437 Income from operations.......................................... 47,037 45,445 60,668 75,546 Net income...................................................... 40,030 39,504 119,088(2) 44,389(2) Earnings per share: Earnings per share--basic...................................... $ .54 $ .53 $ 1.61 $ .60 Earnings per share--diluted.................................... $ .51 $ .50 $ 1.54 $ .58 Pro forma (fully taxed) Earnings per share--diluted(3)................................. $ .33 $ .32 $ .45 $ .58 Aircraft deliveries (in units): Gulfstream IV-SP (green)....................................... 5 5 6 6 Gulfstream V (green)........................................... 6 7 8 8 Completion..................................................... 5 5 5 11 Pre-owned aircraft............................................. 1 9 2 2
1996(1) ------------------------------------------------ First Second Third Fourth ---------- ---------- ---------- ---------- (In thousands, except deliveries and per share amounts) 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 Earnings per share: Earnings per share--basic........................................ $ .08 $ .13 $ .23 $ .20 Earnings per share--diluted...................................... $ .08 $ .12 $ .22 $ .18 Pro forma (fully taxed) Earnings per share--diluted(3).................................. $ .05 $ .07 $ .14 $ .11 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
- ------------------------ (1) Non-cash compensation expense of $0.5 million, $0.5 million, $0.3 million and $0.3 million was recorded in each of the 1997 quarters, and $0.1 million, $5.1 million, $1.5 million and $0.5 million 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. (2) As described under the caption Income Taxes on page 21, the Company recorded a net income tax benefit of $63.1 million during the third quarter of 1997. During the fourth quarter of 1997, the Company recorded an income tax provision of $26.6 million based on an estimated effective tax rate of 37.5%. (3) Pro forma (fully taxed) Earnings per sharediluted is presented for all periods assuming an estimated effective tax rate of 37.5%. Quarterly Common Stock Price Range
1997 ------------------------------------------ First Second Third Fourth --------- --------- --------- --------- High............................................................. $ 24.13 $ 32.75 $ 31.13 $ 32.06 Low.............................................................. 21.25 21.75 26.00 26.50
1996 (Beginning October 10th) ------------------------------------------ First Second Third Fourth --------- --------- --------- --------- High............................................................. -- -- -- $ 26.00 Low.............................................................. -- -- -- 20.75
Gulfstream Aerospace Corporation's common stock is traded principally on the New York Stock Exchange under the symbol GAC. At March 5, 1998 there were approximately 220 holders of record. The Company has never paid cash dividends on the common stock and does not anticipate paying any cash dividends in the near future. Selected Financial Data
Fiscal Year 1997 1996 1995 1994 1993 - ---------------------------------------------- ------------ ------------ ------------ ---------- ----------- (In thousands, except per share data) Income Statement Data Revenues...................................... $ 1,903,494 $ 1,063,713 $ 1,041,514 $ 901,638 $ 887,113 Income (loss) from operations(1).............. 228,696 50,269 42,090 43,883 $ (226,773) Net income (loss)............................. 243,011 46,965 28,894 23,564 (275,227) Earnings per share: Earnings per share--basic(2).................. 3.28 .64 .39 N/A N/A --diluted(2)................ 3.12 .60 .37 N/A N/A ------------ ------------ ------------ ---------- ----------- Balance Sheet Data Working capital............................... $ 295,811 $ 138,091 $ 356,976 $ 301,913 $ 302,369 Total assets.................................. 1,473,667 1,313,215 981,253 745,761 799,470 Total debt(3)(4).............................. 380,000 400,000 146,331 178,145 206,145 Total stockholders' equity deficit(3)......... 92,757 (188,811) 217,540 188,950 164,395
- ------------------------ (1) In 1993, 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) Earnings per share ("EPS") information for 1996 and 1995 is based on historical unadjusted net income divided by pro forma weighted average number of shares. Shares included for basic EPS give retroactive effect to the Recapitalization, the shares issued to option holders upon the exercise of options at the date of the Offering, and the shares issued pursuant to the Offering (all of which are described in Note 10 to the consolidated financial statements) as if such transactions had occurred at the beginning of the period. Diluted EPS further includes the effects of options granted in 1996 and 1995 as if such options had been outstanding for all periods presented. See also Note 14 to the consolidated financial statements for a reconciliation of per share data. (3) 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 1997 Annual Report. (4) 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. GV flying [FULL PAGE PICTURE] Gulfstream Aerospace Corporation is a leading designer, developer, manufacturer and marketer of the world's most technologically advanced intercontinental business jet aircraft. Gulfstream has developed a range of products and services to meet the aviation needs of its customers, including the Gulfstream IV-SP, the Gulfstream V, Gulfstream Shares, Pre-owned Gulfstream Aircraft and Gulfstream Financial Services. In 1997, Gulfstream delivered its 1,000th aircraft, continuing a tradition of leadership in business aviation which spans forty years. Nearly two-thirds of all large cabin aircraft operated by Fortune 500 corporations bear the Gulfstream name. In addition, 38 governments around the world employ Gulfstream aircraft for a variety of special missions. Corporate Information Corporate Offices Gulfstream Aerospace Corporation 500 Gulfstream Road Savannah, Georgia 31408 (912) 965-3000 Website www.gulfstreamaircraft.com Annual Meeting 9:30 a.m. May 14, 1998 St. Regis Hotel Two East 55th Street New York, New York 10022 Transfer Agent and Registrar ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, New Jersey 07660 (800) 526-0801 www.chasemellon.com 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 visiting the Company's website or by written request to: Investor Relations P.O. Box 2206, Mail Stop B-14 Savannah, Georgia 31402-2206 Robert J. Collier Trophy [FULL PAGE PICTURE] GULFSTREAM AND THE GULFSTREAM V INDUSTRY TEAM ARE PROUD TO BE THE RECIPIENTS OF THE 1997 ROBERT J. COLLIER TROPHY. - ------------------------------------------------------------------------------ Awarded annually by the National Aeronautic Association, the Collier Trophy is recognized as the aviation industry's most prestigious award and honors the year's top aeronautical achievement. Gulfstream and the Gulfstream V Industry Team were recognized "for successful application of advanced design and efficient manufacturing techniques, together with innovative international business partnerships, to place into customer service the Gulfstream V -- the world's first ultra-long range business jet." Gulfstream joins a distinguished list of past Collier Trophy recipients which includes Orville Wright, Chuck Yeager, John Glenn and Neil Armstrong. The Collier Trophy is on permanent display at the Smithsonian Institute's National Air and Space Museum in Washington, D.C. EX-27.1 7 EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 DEC-31-1997 $306 0 177 1 630 1,159 135 111 1,474 863 305 0 0 1 92 1,474 1,903 1,912 1,558 1,675 0 0 20 209 (34) 243 0 0 0 243 3.28 3.12 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.
EX-27.2 8 EX-27.2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30 AND YEAR-ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 9-MOS DEC-31-1996 SEP-30-1996 SEP-30-1996 DEC-30-1996 233 264 0 0 137 148 0 0 655 598 1,034 1,016 127 124 0 0 1,313 1,288 896 848 400 40 0 0 0 450 1 1 (190) (317) 1,313 1,288 1,064 743 1,071 754 839 577 1,013 711 0 0 0 0 3 (1) 47 33 0 0 47 33 0 0 0 0 0 0 47 33 .64 0.44 .60 0.42 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.
EX-27.3 9 EX-27.3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, JUNE 30 AND SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 6-MOS 9-MOS MAR-31-1997 JUN-30-1997 SEP-30-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 201 249 242 0 0 0 125 105 129 0 1 1 630 610 654 964 974 1,087 124 122 122 0 102 107 1,238 1,246 1,397 797 758 798 400 343 323 0 0 0 0 0 0 1 1 1 (149) (109) 40 1,238 1,246 1,397 376 899 1,363 379 904 1,369 305 752 1,125 329 806 1,209 0 0 0 0 0 0 5 10 15 42 82 138 2 2 (61) 40 80 199 0 0 0 0 0 0 0 0 0 40 80 199 .54 1.07 2.68 .51 1.01 2.54 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.
EX-99.1 10 EXHIBIT 99.1 EXHIBIT 99.1 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES REFORM ACT OF 1995 Gulfstream Aerospace Corporation (the "Company" or "Gulfstream") cautions readers that the important factors set forth below, as well as factors discussed in other documents filed by the Company with the Securities and Exchange Commission (the "SEC"), among others, could cause the Company's actual results to differ materially from statements contained in this report, future filings by the Company with the SEC, the Company's press releases and oral statements made by or on behalf of the Company. The words "estimate", "project", "anticipate", "expect", "intend", "believe", "target" and similar expressions are intended to identify forward looking statements. In addition, these factors relate specifically to the Company's statements regarding earnings per share for 1998 and subsequent years and the assumptions underlying those statements, including assumptions regarding green aircraft deliveries, completions, margin improvements, new aircraft sales and backlog stability. Aircraft Production and Completion The Company records revenue from the sale of a new "green" aircraft (i.e., before exterior painting and installation of customer selected interiors and optional avionics) when the green aircraft is delivered to the customer. The Company records revenues from completion services when the outfitted aircraft is delivered to the customer. The Company is currently targeting 58 green aircraft deliveries in 1998 and in excess of 60 green aircraft deliveries in 1999. Completions are projected to double in 1998. Risks associated with green deliveries and completions include the following: Purchased Materials and Equipment. Approximately 70% of the production costs of both the Gulfstream IV-SP and the Gulfstream V consist of materials and equipment purchased from other manufacturers. While the Company's production activities have never been materially affected by its inability to obtain components, and while the Company maintains business interruption insurance in the event that a disruption should occur, the failure of the Company's suppliers to meet the Company's performance specifications, quality standards or delivery schedules could have a material adverse impact on the Company's delivery schedule. Workforce. The Company's ability to meet its production and completion schedules depends on the Company meeting its needs for skilled labor. Although the Company's ability to hire required skilled labor has not to date adversely affected its ability to meet its production and completion schedules, there can be no assurance that this favorable condition will continue. In 1996, the Company entered into a 5-year contract with a union representing certain of its employees at its Oklahoma Facility. Although employee relations are generally good, a work stoppage or other labor action could materially and adversely affect the Company's production schedule. Facilities. Green aircraft are assembled at one facility. Detailed parts and subassemblies are manufactured at two additional facilities. Completions are performed at three facilities. Although the Company maintains property and business interruption insurance, any severe property damage or other casualty loss at one of these facilities could materially and adversely affect the Company's delivery schedule. Gulfstream V Efficiency. The Company expects to become more efficient at producing and completing Gulfstream V aircraft as it gains more experience in this aircraft program. If the Company is unable to achieve anticipated efficiencies, its delivery schedule could be adversely impacted. Period-to-Period Fluctuations. Since the Company relies on the sales of a relatively small number of high unit selling price new aircraft to provide the substantial portion of its revenues, even a small decrease in the number of deliveries in any period could have a material adverse effect on the results of operation for that period. As a result, a delay or an acceleration in the delivery of new aircraft may affect the Company's revenues for a particular quarter or year and may make quarter-to-quarter or year-to-year comparisons difficult. Margin Improvements The Company expects gross margins (excluding pre-owned aircraft, which are typically sold at break-even levels) to improve from 20% in 1997 to the mid-20s by the end of 1998. Risks associated with projected margin improvement include the following: Gulfstream V Learning Curve. The Company expects production and completion costs to fall as the Company gains more experience in producing and completing Gulfstream V aircraft. Delays in anticipated cost reductions would adversely affect projected margin improvements. Additional costs associated with the learning curve on Gulfstream V completions are expected to delay margin improvements somewhat in the first half of 1998. If subsequent improvement is not achieved as quickly or to the extent anticipated, the Company may be unable to achieve its margin targets. Cost of Materials. Approximately 70% of the production costs of both the Gulfstream IV-SP and the Gulfstream V consist of materials and equipment purchased from other manufacturers. Although the Company has in place revenue share and long-term supply arrangements that help protect it against materials price increases, if the Company experiences price pressure on materials, margins could be adversely affected. Stability of Backlog At December 31, 1997, the Company had a backlog of $2.8 billion. The Company is currently selling outfitted Gulfstream IV-SPs for delivery in the fourth quarter of 1999 and outfitted Gulfstream Vs for delivery in the first half of 2000. Although the Company's revenues are, therefore, essentially under contract for the foreseeable future, the following factors could adversely affect the stability of the backlog: New Orders. The Company's principal business is the design, development, manufacture and marketing of large and ultra-long range business jet aircraft. Because of the high unit selling price of its aircraft products and the availability of commercial airlines and charters as alternative means of business travel, a downturn in general economic conditions could result in a reduction in the orders received by the Company for its new and pre-owned aircraft. The Company would not be able to rely on sales of other products to offset a reduction in sales of its aircraft. If a potential purchaser is experiencing a business downturn or is otherwise seeking to limit its capital expenditures, the high unit selling price of a new Gulfstream aircraft could result in the potential purchaser deferring its purchase or changing its operating requirements and electing to purchase a competitor's lower priced aircraft. In addition, if a significant number of customers resell their purchase contracts, the Company's new order intake could be adversely affected. If the Company's new order intake rate varies, the Company could be required to adjust its production rate. Production Delays. While the Company generally receives non-refundable deposits in connection with each order, an order may be canceled (and the deposit returned) under certain conditions if the delivery of a Gulfstream V aircraft is delayed more than six months after a customer's scheduled delivery date. An extended delay in the production or completion process could cause an increase in the number of cancellations of orders, which could have an adverse effect on the Company's results of operations. Business and Economic Conditions. Although 80% of the Company's backlog consists of North American customers and 65% of North American customers are Fortune 500 companies, adverse business and economic conditions could cause customers to be unable or unwilling to consummate the purchase of an aircraft and could, therefore, increase the number of cancellations experienced by the Company. 2 Year 2000 Compliance As part of the Company's initiatives, begun in 1996, to increase production rates and co-produce the Gulfstream IV and Gulfstream V, the Company has, and continues to, upgrade and replace business systems and facility infrastructure. These initiatives help to reduce the potential impact of the Year 2000 date issue on the Company's operations. In addition, the Company has implemented a Year 2000 Compliance Plan designed to ensure that all other hardware, software, systems, and products with microprocessors relevant to the Company's business are not adversely affected by the Year 2000 date issue. The Company is also reviewing compliance by suppliers and vendors and the impact of the Year 2000 issue on in-service customer aircraft. The Company does not believe that the implementation of this Year 2000 Compliance Plan will have a material effect on the Company's business operations, financial condition, liquidity or capital resources. However, there can be no assurance, with regard to compliance by customers and suppliers, that all aspects of their Year 2000 compliance plans will be successfully completed in a timely manner. Safety Record The Company believes that its reputation and the exemplary safety record of its aircraft are important selling points for new and pre-owned Gulfstream aircraft. However, if one or a number of catastrophic events were to occur with the Gulfstream fleet, Gulfstream's reputation and sales of Gulfstream aircraft could be adversely affected. Pre-Owned Aircraft Market In many cases, the Company has agreed to accept, at the customer's option, the customer's pre-owned aircraft as a trade-in in connection with the purchase of a Gulfstream IV-SP or Gulfstream V. Based on the current market for pre-owned aircraft, the Company expects to continue to be able to resell pre-owned aircraft taken in trade, and does not expect to suffer a loss with respect to these trade-ins and resales. However, an increased level of pre-owned aircraft or changes in the market for pre-owned aircraft may increase the Company's inventory costs and may result in the Company receiving lower prices for its pre-owned aircraft. Competition The market for large cabin business jet aircraft is highly competitive. The Gulfstream IV-SP competes in the large cabin business jet aircraft market segment, principally with Dassault Aviation S.A. and Bombardier Inc. ("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, according to published reports, is scheduled for certification in May 1998, 18 months after the initial delivery of the Gulfstream V. The Boeing Company, in partnership with General Electric Co., is marketing a version of the Boeing 737 into the ultra-long range business jet aircraft market segment. Boeing has indicated that it expects this aircraft to be available for delivery in the fourth quarter of 1998. In June 1997, Airbus Industrie announced it would market a version of the Airbus A319 into this market segment as well. Airbus has indicated that it expects the aircraft to be available in early 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's ability to compete successfully in the large business jet and ultra-long range business jet aircraft markets over the long term requires continued technological and performance enhancements to Gulfstream aircraft. No assurance can be given that the Company's competitors will not be able to produce aircraft capable of performance comparable or superior to Gulfstream aircraft in the future. Increased price-based competition by the Company's competitors could pressure the Company to also reduce its prices. Price reductions could have a significant impact on the Company's margins. In addition, if a significant number of customers were to cancel orders for the Company's aircraft in order to purchase a competitive product, there could be a material adverse effect on the Company's backlog. 3 Pending Tax Audit The Company is involved in tax audits by the Internal Revenue Service covering the years 1990 through 1994. The revenue agent's reports include 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. However, because the revenue agent's reports are 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. Leverage and Debt Service The degree to which the Company is leveraged at a particular time could have important consequences to the Company, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, product development, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a portion of the Company's and its subsidiaries' cash flow from operations must be dedicated to the payment of the principal of and interest on its indebtedness; (iii) the Company's credit agreement contains certain restrictive financial and operating covenants, including, among others, requirements that the Company satisfy certain financial ratios; (iv) a significant portion of Gulfstream's borrowings will be at floating rates of interest, causing Gulfstream to be vulnerable to increases in interest rates; (v) the Company's degree of leverage may make it more vulnerable in a downturn in general economic conditions; and (vi) the Company's financial position may limit its flexibility in responding to changing business and economic conditions. 4 -----END PRIVACY-ENHANCED MESSAGE-----