##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 333-124394
 STANDARD AERO HOLDINGS, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
(State of Incorporation)
    
    98-0432892
(I.R.S. Employer
Identification Number)
 500-1780 Wellington Avenue
Winnipeg, Manitoba, Canada R3H 1B3
(Address of Principal Executive Offices and Zip Code)
 (204) 987-8860
(Registrants Telephone Number, Including Area Code)
 þ o
  o o þ
 o þ




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##### 



INDEX
 PageNo.PART IFINANCIAL INFORMATIONItem 1.
    
    Financial Statements.Unaudited Condensed Consolidated Statements of Operations for
the three months ended March 31, 2006 and March 31, 2005.
    
    
    1Unaudited Condensed Consolidated Balance Sheets as of March
31, 2006 and December 31, 2005
    
    
    2Unaudited Condensed Consolidated Statements of Stockholders
Equity for the three months ended March 31, 2006 and March
31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2006 and March 31, 2005
    
    
    4Unaudited Notes to Condensed Consolidated Financial Statements
    
    
    5  19Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations.
    
    
    20  32Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    33Item 4.
    
    Controls and Procedures.
    
    
    34  35PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    36Item 1A.
    
    Risk Factors.
    
    
    36Item 6.
    
    Exhibits.
    
    
    38SIGNATURES




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##### 



Explanatory Note




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
 Three Months EndedMarch 31,2006
    
    2005(restated)Revenues
    
    $
    185,798
    
    
    $
    187,414Operating expensesCost of revenues
    
    
    154,974
    
    
    
    153,788Selling, general and administrative expense
    
    
    13,553
    
    
    
    12,653Amortization of intangible assets
    
    
    2,146
    
    
    
    2,446Total operating expenses
    
    
    170,673
    
    
    
    168,887Income from operations
    
    
    15,125
    
    
    
    18,527Interest expense
    
    
    9,473
    
    
    
    9,101Income before income taxes
    
    
    5,652
    
    
    
    9,426Income tax expense
    
    
    1,878
    
    
    
    2,868Net income
    
    $
    3,774
    
    
    $
    6,558
 The accompanying notes are an integral part of the financial statements.
 1




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 March 31,
    
    December 31,2006
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    273
    
    
    $
    24,056Accounts receivable (less allowance for
doubtful accounts of $3,049 and $2,987 at
March 31, 2006 and December 31, 2005,
respectively)
    
    
    108,748
    
    
    
    120,456Inventories
    
    
    152,964
    
    
    
    134,011Prepaid expenses and other current assets
    
    
    7,670
    
    
    
    7,668Income taxes receivable
    
    
    4,118
    
    
    
    3,811Deferred income taxes
    
    
    2,605
    
    
    
    2,407Total current assets
    
    
    276,378
    
    
    
    292,409Deferred finance charges
    
    
    17,359
    
    
    
    18,272Deferred income taxes
    
    
    7,836
    
    
    
    7,920Property, plant and equipment, net
    
    
    137,553
    
    
    
    136,968Intangible assets, net
    
    
    192,266
    
    
    
    195,168Goodwill
    
    
    192,301
    
    
    
    192,301Total assets
    
    $
    823,693
    
    
    $
    843,038LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    80,392
    
    
    $
    75,301Other accrued liabilities
    
    
    22,156
    
    
    
    29,197Due to related party
    
    
    3,940
    
    
    
    3,940Unearned revenue
    
    
    15,835
    
    
    
    14,196Accrued warranty provision
    
    
    3,938
    
    
    
    3,986Income taxes payable
    
    
    7,443
    
    
    
    9,323Current portion of long-term debt
    
    
    2,198
    
    
    
    2,574Total current liabilities
    
    
    135,902
    
    
    
    138,517Deferred income taxes
    
    
    71,893
    
    
    
    72,542Long-term debt
    
    
    450,016
    
    
    
    470,000Total liabilities
    
    
    657,811
    
    
    
    681,059Commitments and contingencies (Note 7)Stockholders equityCommon stock(1,000 shares authorized,
issued and outstanding, par value $0.01)
    
    
    
    
    
    
    Additional paid in capital
    
    
    215,000
    
    
    
    215,000Accumulated deficit
    
    
    (49,308
    )
    
    
    (53,082
    )Accumulated other comprehensive income
    
    
    190
    
    
    
    61Total stockholders equity
    
    
    165,882
    
    
    
    161,979Total liabilities and stockholders equity
    
    $
    823,693
    
    
    $
    843,038
 The accompanying notes are an integral part of the financial statements.
 2




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
 Three months Ended March 31, 2005
 Retained
    
    AccumulatedEarnings /
    
    other
    
    TotalCommon
    
    
    
    
    
    (Accumulated
    
    comprehensive
    
    stockholdersstock
    
    Paid in capital
    
    deficit)
    
    income
    
    equityBalance as of December 31, 2004
    
    $
    
    
    
    $
    215,000
    
    
    $
    (3,901
    )
    
    $
    52
    
    
    $
    211,151Comprehensive incomeNet income (restated)
    
    
    
    
    
    
    
    
    
    
    6,558
    
    
    
    
    
    
    
    6,558Other comprehensive income
Unrealized gain on
cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    79Total comprehensive income
(restated)
    
    
    
    
    
    
    
    
    
    
    6,558
    
    
    
    79
    
    
    
    6,637Balance as of March 31, 2005
(restated)
    
    $
    
    
    
    $
    215,000
    
    
    $
    2,657
    
    
    $
    131
    
    
    $
    217,788
 Three months Ended March 31, 2006
 AccumulatedOther
    
    TotalCommon
    
    
    
    
    
    Accumulated
    
    comprehensive
    
    stockholdersstock
    
    Paid in capital
    
    Deficit
    
    income
    
    equityBalance as of December 31, 2005
    
    $
    
    
    
    $
    215,000
    
    
    $
    (53,082
    )
    
    $
    61
    
    
    $
    161,979Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    3,774
    
    
    
    
    
    
    
    3,774Other comprehensive income
Unrealized gain on
cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    129Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    3,774
    
    
    
    129
    
    
    
    3,903Balance as of March 31, 2006
    
    $
    
    
    
    $
    215,000
    
    
    $
    (49,308
    )
    
    $
    190
    
    
    $
    165,882
 The accompanying notes are an integral part of the financial statements.
 3




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##### 



STANDARD AERO HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Three Months Ended March 31,2006
    
    2005(restated)Operating activitiesNet income for the period
    
    $
    3,774
    
    
    $
    6,558Adjustments to reconcile net income to net cash provided
by operating activitiesDepreciation and amortization
    
    
    5,844
    
    
    
    6,758Amortization of deferred finance charges
    
    
    913
    
    
    
    1,181Deferred income taxes
    
    
    (763
    )
    
    
    (980
    )Gain on disposal of property, plant and equipment
    
    
    (2
    )
    
    
    Foreign exchange loss
    
    
    136
    
    
    
    245Changes in assets and liabilitiesAccounts
receivable, net
    
    
    11,708
    
    
    
    4,873Inventories
    
    
    (18,953
    )
    
    
    (6,412
    )Prepaid expenses and other current assets
    
    
    127
    
    
    
    623Accounts payable and other current liabilities
    
    
    (359
    )
    
    
    (13,606
    )Income taxes payable and receivable
    
    
    (2,187
    )
    
    
    1,044Net cash provided by operating activities
    
    
    238
    
    
    
    284Investing activitiesAcquisitions of property, plant and equipment
    
    
    (1,234
    )
    
    
    (3,062
    )Proceeds from disposals of property, plant, and equipment
    
    
    4
    
    
    
    Acquisition of rental assets
    
    
    (5,191
    )
    
    
    (3,796
    )Proceeds from disposals of rental assets
    
    
    2,896
    
    
    
    3,779Net cash used in investing activities
    
    
    (3,525
    )
    
    
    (3,079
    )Financing activitiesRepayment of debt
    
    
    (20,360
    )
    
    
    (15,392
    )Change in
due to related party
    
    
    
    
    
    
    4,688Net cash used in financing activities
    
    
    (20,360
    )
    
    
    (10,704
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (136
    )
    
    
    (245
    )Net decrease in cash and cash equivalents
    
    
    (23,783
    )
    
    
    (13,744
    )Cash and cash equivalents  Beginning of period
    
    
    24,056
    
    
    
    27,891Cash and cash equivalents  End of period
    
    $
    273
    
    
    $
    14,147
  4




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1 Nature of operations
 The Company
  Name
    
    Country of IncorporationStandard Aero, Inc.
    
    USAStandard Aero (US) Inc.
    
    USAStandard Aero (San Antonio) Inc.
    
    USAStandard Aero (Alliance) Inc.
    
    USAStandard Aero (US) Legal Inc.
    
    USAStandard Aero Materials Inc.
    
    USAStandard Aero Canada Inc.
    
    USAStandard Aero de Mexico
    
    MexicoStandard Aero Limited
    
    CanadaNot FM Canada Inc.
    
    Canada3091781 Nova Scotia Company
    
    Canada3091782 Nova Scotia Company
    
    Canada3091783 Nova Scotia Company
    
    CanadaStandard Aero (Australia) Pty Limited
    
    AustraliaStandard Aero International Pty Limited
    
    AustraliaStandard Aero (Asia) Pte Limited
    
    SingaporeStandard Aero BV
    
    NetherlandsStandard Aero (Netherlands) BV
    
    Netherlands
  Restatement
  Error in Recording Loss Contract
 Business
Combinations
 5




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   
    
    Changes to the Companys cost of revenues for the
restated period reflecting the
elimination of the actual losses recognized prior to the identification of the error and
charges to non-cash interest expense reflecting the present value accretion associated with
the Loss Contract liability. Accordingly, the restated period reflects: (1) reduction in
cost of revenues in the amount of $0.4 million for the three months ended March 31, 2005,
(2) an increase in interest expense in the amount of $0.2 million for the three months
ended March 31, 2005, and (3) an increase in income tax expense in the amount of $0.2
million for the three months ended March 31, 2005.
  INCOME STATEMENT
 Three months ended March 31, 2005As previouslyReported
    
    As restatedCost of revenues
    
    $
    154,305
    
    
    $
    153,903Selling, general and administrative expense
    
    
    12,544
    
    
    
    12,538Total operating expenses
    
    
    169,295
    
    
    
    168,887Income from operations
    
    
    18,119
    
    
    
    18,527Interest expense
    
    
    8,928
    
    
    
    9,101Loss before income taxes
    
    
    9,191
    
    
    
    9,426Income tax expense
    
    
    2,713
    
    
    
    2,866Net income
    
    $
    6,478
    
    
    $
    6,558
  Basis of presentation
  
 6




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 2
    
    Summary of significant accounting policiesThe condensed consolidated financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States of America (US GAAP) and
are reported in U.S. dollars.
 a)
    
    Stock based compensationEffective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R, Share-Based Payment, using the prospective method. The prospective method
requires compensation cost to be recognized for new awards and for
awards modified or
repurchased after the required effective date. Under the prospective
method, the Company will continue to account for any portion of awards outstanding at the
date of adoption using the provisions of APB No. 25 whereby no stock option compensation
expense was recognized in the determination of net income in the
accompanying Consolidated Statement of Operations. For the quarter ended March 31, 2006, there was no impact of adopting
Statement FAS 123R as no new awards were granted or existing awards modified or
repurchased.For all new awards granted, if any, in the future, SFAS 123R requires companies to
estimate the fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately expected
to vest is recognized as expense over the requisite service periods in the Companys
Consolidated Statement of Operations.b)
    
    Comparative figuresCertain comparative figures have been reclassified to conform with the current years
financial statement presentation.
 7




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 3
    
    Inventories
 March 31,
    
    December 31,2006
    
    2005(In thousands)Raw materials
    
    $
    68,000
    
    
    $
    66,241Work in process
    
    
    84,964
    
    
    
    67,770$
    152,964
    
    
    $
    134,011
 4
    
    Intangible assetsIntangible assets are comprised of:
 At March 31, 2006
 Gross carrying
    
    Accumulatedamount
    
    Amortization
    
    Net Balance(In thousands)Definite lived intangible assets:Customer relationships
    
    $
    98,000
    
    
    $
    12,291
    
    
    $
    85,709OEM authorizations and licenses
    
    
    38,350
    
    
    
    4,791
    
    
    
    33,559Technology and other
    
    
    7,900
    
    
    
    2,502
    
    
    
    5,398144,250
    
    
    
    19,584
    
    
    
    124,666Indefinite lived intangible assets:Trademarks
    
    
    67,600
    
    
    
    
    
    
    
    67,600Total intangible assets
    
    $
    211,850
    
    
    $
    19,584
    
    
    $
    192,266
 At December 31, 2005
 Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net BalanceDefinite lived intangible assets:Customer relationships
    
    $
    98,000
    
    
    $
    10,540
    
    
    $
    87,460OEM authorizations and licenses
    
    
    38,350
    
    
    
    4,035
    
    
    
    34,315Technology and other
    
    
    7,900
    
    
    
    2,107
    
    
    
    5,793144,250
    
    
    
    16,682
    
    
    
    127,568Indefinite lived intangible assets:Trademarks
    
    
    67,600
    
    
    
    
    
    
    
    67,600Total intangible assets
    
    $
    211,850
    
    
    $
    16,682
    
    
    $
    195,168
   8




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 5
    
    Long-term debtLong-term debt is summarized as follows:
 March 31,
    
    December 31,2006
    
    2005(In thousands)Term loans
    
    $
    250,000
    
    
    $
    270,000Senior subordinated notes
    
    
    200,000
    
    
    
    200,000Obligations under capital leases
    
    
    2,214
    
    
    
    2,574452,214
    
    
    
    472,574Less: Current portion
    
    
    (2,198
    )
    
    
    (2,574
    )Long-term debt
    
    $
    450,016
    
    
    $
    470,000
      9




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 6
    
    Employee benefit plansThe Company provides defined contribution pension plans and a defined benefit pension
plan covering substantially all of its employees. The Company does not provide any other
post retirement benefits or supplemental retirement plans.Costs for the defined contribution pension plans for the three months ended March 31, 2006
and March 31, 2005 were $1.6 million and $1.7 million, respectively.Costs for the defined benefit pension plans for the three months ended March 31, 2006 and
March 31, 2005 were $0.1 million and $0.1 million, respectively.7
    
    Commitments and contingenciesCommitmentsThe Company leases facilities, office equipment, machinery, computer, and rental engines under
non-cancellable operating leases having initial terms of more than one year.Contingent liabilitiesThe Company is involved, from time to time, in legal actions and claims arising in the ordinary
course of business. While the ultimate result of these claims cannot presently be determined,
management does not expect that these matters will have a material adverse effect on the
financial condition, statement of operations or cash flows of the Company.The Company has facilities that are located on land that has been used for industrial purposes
for an extended period of time. The Company has not been named as a defendant to any
environmental suit. Management believes
that the Company is currently in substantial compliance with environmental laws. The Company
incurs capital and operating costs relating to environmental compliance on an ongoing basis.
Management does not, however, believe that the Company will be required under existing
environmental laws to expend amounts that would have a material adverse effect to its financial
condition or results of operations as a whole.Kelly Air Force Base subcontractDuring the fourth quarter of 2005, Kelly Aviation Center LP
(KAC) indicated it disagreed with the Companys interpretation
of the subcontract entered into with KAC and that it did not intend to make a decision whether to exercise the option
to extend the subcontract for periods beyond February 2007. On January 25, 2006, the Company
was formally notified by KAC that it did not intend to extend the subcontract beyond February
2007.The Company believes that, under the terms of the subcontract, KAC is obligated to extend the
subcontract through at least 2009. The Company continues discussions with KAC and intends to
protect its legal and contractual rights under the subcontract as well as the intellectual
property it has made available to KAC under the subcontract.
 10




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 The potential loss of or changes to the subcontract, as identified during the fourth quarter of
2005, could have material adverse effects on the Companys revenues, income from operations,
net income and cash flow from operations. Further, the potential loss of or changes to the
subcontract could lead to material impairment losses on certain long-lived tangible and
intangible assets, including property, plant and equipment and customer relationships and/or
further material impairment losses on intangible assets, including trademarks and goodwill.During the year ended December 31, 2005, the Company recorded impairment charges on intangible
assets and goodwill, and reviewed for impairment certain other long-lived asset groups due to
the potential loss of or changes to the subcontract. These impairment reviews were based on a
series of probability-weighted cash flow forecasts. These projections were based on several
different potential outcomes that were weighted based upon managements best estimate of future
cash flows using all evidence available about the situation that prevailed as of December 31,
2005. The Companys estimates used during the year ended December 31, 2005 have not
materially changed during the period ended March 31, 2006.Events and changes in circumstances could result in material changes in projected cash flows
and could lead to further impairment charges, and there can be no assurance that any
discussions that the Company may engage in with KAC or the Companys other efforts to protect
its contractual rights and intellectual property will result in a satisfactory resolution of
this dispute.8
    
    Stock based compensationCertain employees of the Company are eligible to participate in the Companys parent Standard
Aero Acquisition Holdings, Inc.s (SAAHI) Stock Option Plan (the Plan) which was approved by
the Companys Board of Directors in December 2004. A total of 425,000 stock options have been
approved for issuance under this Plan. As of March 31, 2006, SAAHI has 177,036 stock options
outstanding, each of which may be used to purchase one share of SAAHI common stock. The
options have a ten year life and an exercise price of one hundred dollars per share, which was
equivalent to the exercise price at that date. Approximately 31% of the options are time
vesting options that will vest on or prior to December 31, 2008. Approximately 47% of the
options are performance vesting options that will vest on the day immediately preceding the
seventh anniversary of the date of grant, provided the option holder remains continuously
employed with the Company. However, all or a portion of such performance vesting options may
vest and become exercisable over a five-year period, starting with 2004, if certain performance
targets relating to earnings and debt repayment are met. Approximately 22% of the options are
performance vesting options that will vest between December 31, 2006 and December 31, 2008 if
certain performance targets relating to earnings are met. In addition, these options vest upon
the occurrence of certain stated liquidity events, as defined in the Plan.
 11




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Three months ended March 31,2006
    
    2005Opening balance as of January 1
    
    
    192,398
    
    
    
    206,071Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    15,362
    
    
    
    Outstanding as of March 31
    
    
    177,036
    
    
    
    206,071Weighted average remaining life as of March 31
    
    4.7 years
    
    5.7 yearsOptions exercisable as of March 31
    
    
    37,710
    
    
    
    17,952Weighted average exercise prices
    
    $100 per share
    
    $100 per shareAggregate intrinsic value
    
    
    
    
    
    
    
 9
    
    Related party transactionsAt March 31, 2006, the Company has an outstanding payable of $3.9 million to its parent,
Standard Aero Acquisition Holdings, Inc. (SAAHI), for cash advanced by SAAHI. The payable is
non-interest bearing and has no repayment terms.The Carlyle Group charges the Company a monthly management fee of $125,000.10
    
    GuaranteesThe Company issues letters of credit, performance bonds, bid bonds or guarantees in the
ordinary course of its business. These instruments are generally issued in conjunction with
contracts or other business requirements. The total of these instruments outstanding at March
31, 2006 was approximately $3.8 million (2005  $4.5 million).Warranty guaranteeReserves are recorded to reflect the Companys contractual liabilities relating to warranty
commitments to customers. Warranty coverage of various lengths and terms is provided to
customers depending on standard offerings and negotiated contractual agreements.Changes in the carrying amount of accrued warranty costs for the three-month period ended March
31 are summarized as follows:
 2006
    
    2005(In thousands)Balance at December 31
    
    $
    (3,986
    )
    
    $
    (6,907
    )Warranty costs incurred
    
    
    642
    
    
    
    862Warranty accrued
    
    
    (594
    )
    
    
    (49
    )Balance at March 31
    
    $
    (3,938
    )
    
    $
    (6,094
    )
 12




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 11
    
    Segment informationThe Company has two principal operating segments, which are Aviation Maintenance Repair
and Overhaul (MRO) and Enterprise Services. The Aviation MRO segment provides gas turbine
engine maintenance repair and overhaul services primarily for the aviation market. The
Enterprise Services segment provides services related to the design and implementation of lean
manufacturing operational redesigns. These operating segments were determined based on the
nature of the products and services offered. Operating segments are defined as components of
an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate resources and in
assessing performance. The Companys chief executive officer has been identified as the chief
operating decision-maker. The Companys chief operating decision-maker directs the allocation
of resources to operating segments based on profitability and cash flows of each respective
segment.Certain administrative and management services are shared by the segments and are
allocated based on direct usage, revenue and employee levels. Corporate management expenses
are not allocated to the segments.There are no revenues between segments.For the three months ended March 31, 2006
 EnterpriseAviation MRO
    
    Services
    
    Unallocated
    
    Total(In thousands)Revenues
    
    $
    177,270
    
    
    $
    8,528
    
    
    $
    
    
    
    $
    185,798Income (loss)
before income taxes
    
    
    19,143
    
    
    
    (483
    )
    
    
    (13,008
    )
    
    
    5,652
 For the three months ended March 31, 2005
 Aviation MRO
    
    EnterpriseServices
    
    Unallocated
    
    Total(restated)
    


    
    (restated)
    
    (restated)(In thousands)Revenues
    
    $
    187,011
    
    
    $
    403
    
    
    $
    
    
    
    $
    187,414Income (loss)
before income taxes
    
    
    22,635
    
    
    
    (1,248
    )
    
    
    (11,961
    )
    
    
    9,426
 13




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 12
    
    Guarantor informationSeparate financial statements of the Guarantor Subsidiaries are not presented because
guarantees of the Notes are full and unconditional and joint and several. The Guarantor
Subsidiaries guarantee the senior subordinated notes issued in
connection with the acquisition of the maintenance, repair and
overhaul business of Dunlop Standard Aerospace Group Limited.
The Guarantor Subsidiaries are 100% owned by the Company.
 Condensed Consolidating Statements of Operations
For the three months ended March 31, 2006
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)Revenues
    
    $
    
    
    
    $
    165,796
    
    
    $
    21,043
    
    
    $
    (1,041
    )
    
    $
    185,798Operating expensesCost of revenues
    
    
    
    
    
    
    136,742
    
    
    
    19,273
    
    
    
    (1,041
    )
    
    
    154,974Selling, general and
administrative expense
    
    
    2,019
    
    
    
    9,892
    
    
    
    1,642
    
    
    
    
    
    
    
    13,553Amortization of intangible assets
    
    
    
    
    
    
    2,146
    
    
    
    
    
    
    
    
    
    
    
    2,146Total operating expenses
    
    
    2,019
    
    
    
    148,780
    
    
    
    20,915
    
    
    
    (1,041
    )
    
    
    170,673Income (loss) from operations
    
    
    (2,019
    )
    
    
    17,016
    
    
    
    128
    
    
    
    
    
    
    
    15,125Interest expense
    
    
    7,639
    
    
    
    1,805
    
    
    
    29
    
    
    
    
    
    
    
    9,473Income (loss) before income taxes
    
    
    (9,658
    )
    
    
    15,211
    
    
    
    99
    
    
    
    
    
    
    
    5,652Income tax expense (benefit)
    
    
    (3,380
    )
    
    
    5,622
    
    
    
    (364
    )
    
    
    
    
    
    
    1,878Income (loss) before equity
earnings in Subsidiaries.
    
    
    (6,278
    )
    
    
    9,589
    
    
    
    463
    
    
    
    
    
    
    
    3,774Equity in earnings of subsidiaries
    
    
    10,052
    
    
    
    503
    
    
    
    
    
    
    
    (10,555
    )
    
    
    Net income (loss)
    
    $
    3,774
    
    
    $
    10,092
    
    
    $
    463
    
    
    $
    (10,555
    )
    
    $
    3,774
  14




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statements of Operations
For the three months ended March 31, 2005
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(restated)
    
    (restated)
    
    
    
    
    
    (restated)
    
    (restated)(In thousands)Revenues
    
    $
    
    
    
    $
    165,280
    
    
    $
    25,684
    
    
    $
    (3,550
    )
    
    $
    187,414Operating expensesCost of revenues
    
    
    
    
    
    
    132,912
    
    
    
    24,426
    
    
    
    (3,550
    )
    
    
    153,788Selling, general and
administrative expense
    
    
    734
    
    
    
    10,196
    
    
    
    1,723
    
    
    
    
    
    
    
    12,653Amortization of intangible assets
    
    
    
    
    
    
    2,446
    
    
    
    
    
    
    
    
    
    
    
    2,446Total operating expenses
    
    
    734
    
    
    
    145,554
    
    
    
    26,149
    
    
    
    (3,550
    )
    
    
    168,887Income (loss) from operations
    
    
    (734
    )
    
    
    19,726
    
    
    
    (465
    )
    
    
    
    
    
    
    18,527Interest expense
    
    
    8,303
    
    
    
    704
    
    
    
    94
    
    
    
    
    
    
    
    9,101Income (loss) before income taxes
    
    
    (9,037
    )
    
    
    19,022
    
    
    
    (559
    )
    
    
    
    
    
    
    9,426Income tax expense (benefit)
    
    
    (3,066
    )
    
    
    6,287
    
    
    
    (353
    )
    
    
    
    
    
    
    2,868Income (loss) before equity
earnings in Subsidiaries.
    
    
    (5,971
    )
    
    
    12,735
    
    
    
    (206
    )
    
    
    
    
    
    
    6,558Equity in earnings of subsidiaries
    
    
    12,529
    
    
    
    (179
    )
    
    
    
    
    
    
    (12,350
    )
    
    
    Net income (loss)
    
    $
    6,558
    
    
    $
    12,556
    
    
    $
    (206
    )
    
    $
    (12,350
    )
    
    $
    6,558
 15




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Balance Sheet
March 31, 2006
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)ASSETSCurrent assetsCash and cash equivalents
    
    $
    429
    
    
    $
    (3,832
    )
    
    $
    3,676
    
    
    $
    
    
    
    $
    273Accounts Receivable
    
    
    
    
    
    
    89,741
    
    
    
    19,007
    
    
    
    
    
    
    
    108,748Due from related party
    
    
    35,074
    
    
    
    155,321
    
    
    
    540
    
    
    
    (190,935
    )
    
    
    Inventories
    
    
    
    
    
    
    120,622
    
    
    
    32,342
    
    
    
    
    
    
    
    152,964Prepaid expenses and other current assets
    
    
    69
    
    
    
    6,229
    
    
    
    1,372
    
    
    
    
    
    
    
    7,670Income taxes receivable
    
    
    
    
    
    
    1,314
    
    
    
    2,804
    
    
    
    
    
    
    
    4,118Deferred income taxes
    
    
    
    
    
    
    1,808
    
    
    
    797
    
    
    
    
    
    
    
    2,605Total current assets
    
    
    35,572
    
    
    
    371,203
    
    
    
    60,538
    
    
    
    (190,935
    )
    
    
    276,378Deferred finance charges
    
    
    8,968
    
    
    
    8,391
    
    
    
    
    
    
    
    
    
    
    
    17,359Deferred income taxes
    
    
    
    
    
    
    6,140
    
    
    
    1,696
    
    
    
    
    
    
    
    7,836Property, plant and equipment, net
    
    
    
    
    
    
    116,822
    
    
    
    20,731
    
    
    
    
    
    
    
    137,553Intangible assets, net
    
    
    
    
    
    
    188,128
    
    
    
    4,138
    
    
    
    
    
    
    
    192,266Due from related party
    
    
    
    
    
    
    5,554
    
    
    
    
    
    
    
    (5,554
    )
    
    
    Goodwill
    
    
    
    
    
    
    192,301
    
    
    
    
    
    
    
    
    
    
    
    192,301Investments in subsidiaries
    
    
    708,992
    
    
    
    39,120
    
    
    
    
    
    
    
    (748,112
    )
    
    
    Total assets
    
    $
    753,532
    
    
    $
    927,659
    
    
    $
    87,103
    
    
    $
    (944,601
    )
    
    $
    823,693LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    599
    
    
    $
    72,115
    
    
    $
    7,678
    
    
    $
    
    
    
    $
    80,392Other accrued liabilities
    
    
    5,105
    
    
    
    13,621
    
    
    
    3,430
    
    
    
    
    
    
    
    22,156Unearned revenue
    
    
    
    
    
    
    9,642
    
    
    
    6,193
    
    
    
    
    
    
    
    15,835Accrued warranty provision
    
    
    
    
    
    
    2,551
    
    
    
    1,387
    
    
    
    
    
    
    
    3,938Income taxes payable
    
    
    
    
    
    
    7,296
    
    
    
    147
    
    
    
    
    
    
    
    7,443Due to related party
    
    
    131,769
    
    
    
    49,082
    
    
    
    14,024
    
    
    
    (190,935
    )
    
    
    3,940Current portion of long-term debt
    
    
    
    
    
    
    1,925
    
    
    
    273
    
    
    
    
    
    
    
    2,198Total current liabilities
    
    
    137,473
    
    
    
    156,232
    
    
    
    33,132
    
    
    
    (190,935
    )
    
    
    135,902Deferred income taxes
    
    
    322
    
    
    
    66,817
    
    
    
    4,754
    
    
    
    
    
    
    
    71,893Due to related party
    
    
    
    
    
    
    
    
    
    
    5,554
    
    
    
    (5,554
    )
    
    
    Long-term debt
    
    
    450,000
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    450,016Total liabilities
    
    
    587,795
    
    
    
    223,065
    
    
    
    43,440
    
    
    
    (196,489
    )
    
    
    657,811Stockholders equity
Common stock
    
    
    
    
    
    
    Additional paid in capital
    
    
    215,000
    
    
    
    709,656
    
    
    
    47,612
    
    
    
    (757,268
    )
    
    
    215,000Retained earnings / (deficit)
    
    
    (49,308
    )
    
    
    (5,068
    )
    
    
    (4,088
    )
    
    
    9,156
    
    
    
    (49,308
    )Accumulated other comprehensive income
    
    
    45
    
    
    
    6
    
    
    
    139
    
    
    
    
    
    
    
    190Total stockholders equity
    
    
    165,737
    
    
    
    704,594
    
    
    
    43,663
    
    
    
    (748,112
    )
    
    
    165,882Total liabilities and stockholders equity
    
    $
    753,532
    
    
    $
    927,659
    
    
    $
    87,103
    
    
    $
    (944,601
    )
    
    $
    823,693
 16




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Balance Sheet
December 31, 2005
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)ASSETSCurrent assetsCash and cash equivalents
    
    $
    557
    
    

    $
    20,519

    
    

    $
    2,980
    
    
    $
    
    
    
    $
    24,056Accounts Receivable
    
    
    
    
    
    
    101,271
    
    
    
    19,185
    
    
    
    
    
    
    
    120,456Due from related party
    
    
    34,635
    
    
    
    114,679
    
    
    
    3,451
    
    
    
    (152,765
    )
    
    
    Inventories
    
    
    
    
    
    
    103,986
    
    
    
    30,025
    
    
    
    
    
    
    
    134,011Prepaid expenses and other current assets
    
    
    100
    
    
    
    6,453
    
    
    
    1,115
    
    
    
    
    
    
    
    7,668Income taxes receivable
    
    
    
    
    
    
    1,389
    
    
    
    2,422
    
    
    
    
    
    
    
    3,811Deferred income taxes
    
    
    
    
    
    
    1,661
    
    
    
    746
    
    
    
    
    
    
    
    2,407Total current assets
    
    
    35,292
    
    
    
    349,958
    
    
    
    59,924
    
    
    
    (152,765
    )
    
    
    292,409Deferred finance charges
    
    
    8,968
    
    
    
    9,304
    
    
    
    
    
    
    
    
    
    
    
    18,272Deferred income taxes
    
    
    
    
    
    
    6,068
    
    
    
    1,852
    
    
    
    
    
    
    
    7,920Property, plant and equipment, net
    
    
    
    
    
    
    115,884
    
    
    
    21,084
    
    
    
    
    
    
    
    136,968Intangible assets, net
    
    
    
    
    
    
    190,894
    
    
    
    4,274
    
    
    
    
    
    
    
    195,168Due from related party
    
    
    
    
    
    
    5,467
    
    
    
    
    
    
    
    (5,467
    )
    
    
    Goodwill
    
    
    
    
    
    
    192,301
    
    
    
    
    
    
    
    
    
    
    
    192,301Investments in subsidiaries
    
    
    698,940
    
    
    
    38,617
    
    
    
    
    
    
    
    (737,557
    )
    
    
    Total assets
    
    $
    743,200
    
    
    $
    908,493
    
    
    $
    87,134
    
    
    $
    (895,789
    )
    
    $
    843,038LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    135
    
    
    $
    64,654
    
    
    $
    10,512
    
    
    $
    
    
    
    $
    75,301Other accrued liabilities
    
    
    9,980
    
    
    
    16,018
    
    
    
    3,199
    
    
    
    
    
    
    
    29,197Unearned revenue
    
    
    
    
    
    
    7,791
    
    
    
    6,405
    
    
    
    
    
    
    
    14,196Accrued warranty provision
    
    
    
    
    
    
    2,782
    
    
    
    1,204
    
    
    
    
    
    
    
    3,986Income taxes payable
    
    
    
    
    
    
    9,151
    
    
    
    172
    
    
    
    
    
    
    
    9,323Due to related party
    
    
    101,041
    
    
    
    43,708
    
    
    
    11,956
    
    
    
    (152,765
    )
    
    
    3,940Current portion of long-term debt
    
    
    
    
    
    
    2,261
    
    
    
    313
    
    
    
    
    
    
    
    2,574Total current liabilities
    
    
    111,156
    
    
    
    146,365
    
    
    
    33,761
    
    
    
    (152,765
    )
    
    
    138,517Deferred income taxes
    
    
    65
    
    
    
    67,632
    
    
    
    4,845
    
    
    
    
    
    
    
    72,542Due to related party
    
    
    
    
    
    
    
    
    
    
    5,467
    
    
    
    (5,467
    )
    
    
    Long-term debt
    
    
    470,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470,000Total liabilities
    
    
    581,221
    
    
    
    213,997
    
    
    
    44,073
    
    
    
    (158,232
    )
    
    
    681,059Stockholders equity
Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional paid in capital
    
    
    215,000
    
    
    
    709,656
    
    
    
    47,612
    
    
    
    (757,268
    )
    
    
    215,000Retained earnings / (deficit)
    
    
    (53,082
    )
    
    
    (15,160
    )
    
    
    (4,551
    )
    
    
    19,711
    
    
    
    (53,082
    )Accumulated other comprehensive income
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Total stockholders equity
    
    
    161,979
    
    
    
    694,496
    
    
    
    43,061
    
    
    
    (737,557
    )
    
    
    161,979Total liabilities and stockholders equity
    
    $
    743,200
    
    
    $
    908,493
    
    
    $
    87,134
    
    
    $
    (895,789
    )
    
    $
    843,038
 17




---



##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2006
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(In thousands)Operating activitiesNet income (loss) for the period
    
    $
    3,774
    
    
    $
    10,092
    
    
    $
    463
    
    
    $
    (10,555
    )
    
    $
    3,774Adjustments to reconcile net income to net
cash provided by operating activitiesDepreciation and amortization
    
    
    
    
    
    
    5,229
    
    
    
    615
    
    
    
    
    
    
    
    5,844Amortization of deferred finance charges
    
    
    
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    913Deferred income taxes
    
    
    257
    
    
    
    (1,034
    )
    
    
    14
    
    
    
    
    
    
    
    (763
    )Gain on disposal of property, plant and
equipment
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Foreign exchange loss/(gain)
    
    
    
    
    
    
    175
    
    
    
    (39
    )
    
    
    
    
    
    
    136Equity in earnings of subsidiaries
    
    
    (10,052
    )
    
    
    (503
    )
    
    
    
    
    
    
    10,555
    
    
    
    Changes in assets and liabilitiesAccounts
receivable, net
    
    
    
    
    
    
    11,530
    
    
    
    178
    
    
    
    
    
    
    
    11,708Inventories
    
    
    
    
    
    
    (16,636
    )
    
    
    (2,317
    )
    
    
    
    
    
    
    (18,953
    )Prepaid expenses and other current assets
    
    
    15
    
    
    
    230
    
    
    
    (118
    )
    
    
    
    
    
    
    127Accounts payable and other accrued
liabilities
    
    
    (4,411
    )
    
    
    6,684
    
    
    
    (2,632
    )
    
    
    
    
    
    
    (359
    )Income taxes payable and receivable
    
    
    
    
    
    
    (1,780
    )
    
    
    (407
    )
    
    
    
    
    
    
    (2,187
    )Net cash provided by operating activities
    
    
    (10,417
    )
    
    
    14,898
    
    
    
    (4,243
    )
    
    
    
    
    
    
    238Investing activitiesAcquisitions of property, plant and equipment
    
    
    
    
    
    
    (1,134
    )
    
    
    (100
    )
    
    
    
    
    
    
    (1,234
    )Proceeds on disposal of property, plant and
equipment
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Acquisition of rental assets
    
    
    
    
    
    
    (4,653
    )
    
    
    (538
    )
    
    
    
    
    
    
    (5,191
    )Proceeds on disposal of rental assets
    
    
    
    
    
    
    2,297
    
    
    
    599
    
    
    
    
    
    
    
    2,896Net cash used in investing activities
    
    
    
    
    
    
    (3,486
    )
    
    
    (39
    )
    
    
    
    
    
    
    (3,525
    )Financing activitiesRepayment of debt
    
    
    (20,000
    )
    
    
    (320
    )
    
    
    (40
    )
    
    
    
    
    
    
    (20,360
    )Change in due to and (from) related companies
    
    
    30,289
    
    
    
    (35,268
    )
    
    
    4,979
    
    
    
    
    
    
    
    Net cash (used in) provided by financing
activities
    
    
    10,289
    
    
    
    (35,588
    )
    
    
    4,939
    
    
    
    
    
    
    
    (20,360
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    (175
    )
    
    
    39
    
    
    
    
    
    
    
    (136
    )Net (decrease) increase in cash and cash
Equivalents
    
    
    (128
    )
    
    
    (24,351
    )
    
    
    696
    
    
    
    
    
    
    
    (23,783
    )Cash and cash equivalents  Beginning of
Period
    
    
    557
    
    
    
    20,519
    
    
    
    2,980
    
    
    
    
    
    
    
    24,056Cash and cash equivalents  End of period
    
    $
    429
    
    
    $
    (3,832
    )
    
    $
    3,676
    
    
    $
    
    
    
    $
    273
 18




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##### 



STANDARD AERO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2005
 Subsidiary
    
    Subsidiary
    

    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    Total(restated)
    
    (restated)
    
    
    
    
    
    (restated)
    
    (restated)(In thousands)Operating activitiesNet income (loss) for the period
    
    $
    6,558
    
    
    $
    12,556
    
    
    $
    (206
    )
    
    $
    (12,350
    )
    
    $
    6,558Adjustments to reconcile net income to net
cash provided by operating activitiesDepreciation and amortization
    
    
    
    
    
    
    5,875
    
    
    
    883
    
    
    
    
    
    
    
    6,758Amortization of deferred finance charges
    
    
    610
    
    
    
    571
    
    
    
    
    
    
    
    
    
    
    
    1,181Deferred income taxes
    
    
    
    
    
    
    (600
    )
    
    
    (380
    )
    
    
    
    
    
    
    (980
    )Foreign exchange loss
    
    
    
    
    
    
    213
    
    
    
    32
    
    
    
    
    
    
    
    245Equity in earnings of subsidiaries
    
    
    (12,529
    )
    
    
    179
    
    
    
    
    
    
    
    12,350
    
    
    
    Changes in assets and liabilitiesAccounts
receivable, net
    
    
    
    
    
    
    10,120
    
    
    
    (5,247
    )
    
    
    
    
    
    
    4,873Inventories
    
    
    
    
    
    
    (6,601
    )
    
    
    189
    
    
    
    
    
    
    
    (6,412
    )Prepaid expenses and other current assets
    
    
    
    
    
    
    531
    
    
    
    92
    
    
    
    
    
    
    
    623Accounts payable and other accrued
liabilities
    
    
    (3,951
    )
    
    
    (8,782
    )
    
    
    (873
    )
    
    
    
    
    
    
    (13,606
    )Income taxes payable and receivable
    
    
    4,729
    
    
    
    (2,627
    )
    
    
    (1,058
    )
    
    
    
    
    
    
    1,044Net cash provided by operating activities
    
    
    (4,583
    )
    
    
    11,435
    
    
    
    (6,568
    )
    
    
    
    
    
    
    284Investing activitiesAcquisitions of property, plant and equipment
    
    
    
    
    
    
    (2,786
    )
    
    
    (276
    )
    
    
    
    
    
    
    (3,062
    )Proceeds on disposal of property, plant and
equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of rental assets
    
    
    
    
    
    
    (2,557
    )
    
    
    (1,239
    )
    
    
    
    
    
    
    (3,796
    )Proceeds on disposal of rental assets
    
    
    
    
    
    
    3,164
    
    
    
    615
    
    
    
    
    
    
    
    3,779Net cash used in investing activities
    
    
    
    
    
    
    (2,179
    )
    
    
    (900
    )
    
    
    
    
    
    
    (3,079
    )Financing activitiesRepayment of debt
    
    
    (15,000
    )
    
    
    (317
    )
    
    
    (75
    )
    
    
    
    
    
    
    (15,392
    )Change in due to and (from) related companies
    
    
    15,592
    
    
    
    (15,161
    )
    
    
    4,257
    
    
    
    
    
    
    
    4,688Net cash (used in) provided by financing
activities
    
    
    592
    
    
    
    (15,478
    )
    
    
    4,182
    
    
    
    
    
    
    
    (10,704
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    
    
    
    
    (213
    )
    
    
    (32
    )
    
    
    
    
    
    
    (245
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (3,991
    )
    
    
    (6,435
    )
    
    
    (3,318
    )
    
    
    
    
    
    
    (13,744
    )Cash and
cash equivalents  Beginning of
period
    
    
    4,116
    
    
    
    18,521
    
    
    
    5,254
    
    
    
    
    
    
    
    27,891Cash and
cash equivalents  End of period
    
    $
    125
    
    
    $
    12,086
    
    
    $
    1,936
    
    
    $
    
    
    
    $
    14,147
 19




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Special Note Regarding Forward Looking Statements
 Certain statements included in Managements Discussion and Analysis of Financial Condition and
Results of Operations, other than purely historical information, including estimates, projections,
statements relating to our business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements
generally are identified by the words believes, project, expects, anticipates, estimates,
intends, strategy, plan, may, will, would, will be, will continue, will likely
result, and similar expressions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual results to differ
materially from the forward-looking statements, including those risks and uncertainties described
under the caption  Risk Factors In our Annual Report on Form 10-K for the year ended December
31, 2005. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
 Overview
   
    
    the number of engines in operation (the installed base);
    
    the age of the installed base; and
    
    the utilization rate of the installed base.
   20




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##### 



Restatement
  Error in Recording Loss Contract
 Business Combinations
  
    
    Changes to the our cost of revenues for the restated period reflects the elimination of
the actual losses recognized prior to the identification of the error and charges to
non-cash interest expense reflecting the present value accretion associated with the Loss
Contract liability. Accordingly, the restated period reflects: (1) reduction in cost of
revenues in the amount of $0.4 million for the three months ended March 31, 2005, (2) an
increase in interest expense in the amount of $0.2 million for the three months ended March
31, 2005, and (3) an increase in income tax expense in the amount of $0.2 million for the
three months ended March 31, 2005.
  INCOME STATEMENT
 Three months ended March 31, 2005As previouslyReported
    
    As restatedCost of revenues
    
    $
    154,305
    
    
    $
    153,903Selling, general and administrative expense
    
    
    12,544
    
    
    
    12,538Total operating expenses
    
    
    169,295
    
    
    
    168,887Income from operations
    
    
    18,119
    
    
    
    18,527Interest expense
    
    
    8,928
    
    
    
    9,101Loss before income taxes
    
    
    9,191
    
    
    
    9,426Income tax expense
    
    
    2,713
    
    
    
    2,866Net income
    
    $
    6,478
    
    
    $
    6,558
  21




---



##### 



Kelly Air Force Base Subcontract
    Trends Affecting Our Business
 Military MRO.
   22




---



##### 



Regional Jet Engine MRO.
   23




---



##### 



Turboprop MRO.
 Financial statement presentation
  Revenues.
 Cost of revenues.
 Selling, general and administrative expense.
 Critical accounting policies
  24




---



##### 



Revenue recognition.
 Reserve for warranty costs.
 Reserve for doubtful accounts receivable.
 Goodwill and intangible assets.
 Impairment of long-lived assets. Accounting for the Impairment or Disposal of Long-Lived Assets.
 25




---



##### 



Inventory.
 Income taxes. Accounting for
Income Taxes.
 Results of Operations
 Three Months Ended March 31, 2006 compared with the Three Months ended March 31, 2005
  Three months
    
    Three monthsended March 31,
    
    ended March 31,2006
    
    2005(restated)(In thousands)Revenues
    
    $
    185,798
    
    
    $
    187,414Cost of revenues Cost of revenues
    
    
    154,974
    
    
    
    153,788Gross profit
    
    
    30,824
    
    
    
    33,626Selling, general and administrative
expense
    
    
    13,553
    
    
    
    12,653Amortization of intangible assets
    
    
    2,146
    
    
    
    2,446Income from operations
    
    
    15,125
    
    
    
    18,527Interest expense
    
    
    9,473
    
    
    
    9,101Income before income taxes
    
    
    5,652
    
    
    
    9,426Income tax expense
    
    
    1,878
    
    
    
    2,868Net income
    
    $
    3,774
    
    
    $
    6,558
 Revenues.
 26




---



##### 



Gross profit.
 Selling, general and administration expense.
 Amortization of intangible assets.
 Income from operations.
 Interest expense.
 27




---



##### 



Segment Results of Operations
 Three Months Ended March 31, 2006 compared to the Three Months ended March 31, 2005
  Three months
    
    Three monthsended March 31,
    
    ended March 31,2006
    
    2005(restated)(In thousands)Revenues:Aviation MRO
    
    $
    177,270
    
    
    $
    187,011Enterprise Services
    
    
    8,528
    
    
    
    403Total revenue
    
    
    185,798
    
    
    
    187,414Segment Income (loss) from Operations:Aviation MRO
    
    
    19,143
    
    
    
    22,635Enterprise Services
    
    
    (483
    )
    
    
    (1,248
    )Segment income from operations
    
    
    18,660
    
    
    
    21,387Corporate expenses
    
    
    3,535
    
    
    
    2,860Interest expense
    
    
    9,473
    
    
    
    9,101Income before income taxes
    
    
    5,652
    
    
    
    9,426Income tax expense
    
    
    1,878
    
    
    
    2,868Net income
    
    $
    3,774
    
    
    $
    6,558
 Aviation MRO
 Three Months Ended March 31, 2006 compared to the Three Months ended March 31, 2005
 Revenues.
 28




---



##### 



Segment income from operations.
 Enterprise Services
 Three Months Ended March 31, 2006 compared to the Three Months ended March 31, 2005
 Revenues.
 Segment loss from operations.
 Liquidity and capital resources
 Liquidity requirements
    
    
    our senior credit facilities, consisting of an eight-year term loan facility, under
which we had outstanding indebtedness of $250.0 million and a $50.0 million six-year
revolving credit facility, under which we had $12.5 million of outstanding indebtedness;
    
    $2.0 million in capital lease obligations; and
    
    $200.0 million in aggregate principal amount of our 81/4% senior subordinated notes due 2014.
  29




---



##### 



Senior credit facilities
     Notional Amount
    
    Term
    
    Floor Strike Rate
    
    Cap Strike Rate$75,000,000
    
    March 27, 2006 
December 27, 2006
    
    2.40% (plus applicable margin)
    
    5.25% (plus applicable margin)
 Senior credit agreement covenant compliance
   30




---



##### 



Last 12 monthsApril 1 
    
    
    endedJanuary 1 
    
    
    December 31,
    
    
    March 31,March 31, 2006
    
    
    2005
    
    
    2006(In millions)Net income
    
    $
    3.8
    
    
    $
    (55.7
    )
    
    $
    (51.9
    )Add:Depreciation and amortization
    
    
    5.8
    
    
    
    18.5
    
    
    
    24.3Interest expense, net
    
    
    9.5
    
    
    
    27.3
    
    
    
    36.8Provision for income taxes
    
    
    1.9
    
    
    
    (3.2
    )
    
    
    (1.3
    )Non-recurring expenses
(1)
    
    
    0.9
    
    
    
    6.9
    
    
    
    7.8Non-recurring impairment
(2)
    
    
    
    
    
    
    77.1
    
    
    
    77.1Management fee
    
    
    0.4
    
    
    
    1.3
    
    
    
    1.7Adjusted EBITDA
    
    $
    22.3
    
    
    $
    72.2
    
    
    $
    94.5
 
 (1)
    
    We incurred $0.9 million in professional fees associated with a contractual review during the
period ended March 31, 2006. We incurred $3.9 million in employee exit costs and $3.0 million
in non-recurring professional fees associated with contractual review, potential acquisitions
and the exchange offer of our senior subordinated notes during the period ended December 31,
2005.(2)
    
    We incurred $77.1 million in goodwill and intangible asset impairment in accordance with SFAS
144 and SFAS 142 related to the potential loss of, or changes to, the Kelly Air Force Base
subcontract during the period ended December 31, 2005. 31




---



##### 



Senior subordinated notes
 1 4
 Cash flows
  Three months
    
    
    Three monthsended March 31,
    
    
    ended March 31,2006
    
    
    2005(restated)(In thousands)Net cash provided by operating activities
    
    $
    238
    
    
    $
    284Net cash used in investing activities
    
    
    (3,525
    )
    
    
    (3,079
    )Net cash used in financing activities
    
    
    (20,360
    )
    
    
    (10,704
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    (136
    )
    
    
    (245
    )Net decrease in cash and cash equivalents
    
    $
    (23,783
    )
    
    $
    (13,744
    )
 Net cash provided by operating activities
   Net cash used in investing activities
  Net cash used in financing activities
   32




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Interest rate risks.
  Maximum interest
    
    Minimum interestNotional amount
    
    Period hedged by interest rate collar
    
    rate(1)
    
    rate(1)$75.0 million
    
    March 27, 2006 - December 27, 2006
    
    
    5.25
    %
    
    
    2.40
    %
 
 (1) Maximum and minimum interest rates exclude the effect of the Companys credit
spread on the variable rate debt. Currency risks.
 33




---



##### 



ITEM 4. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
   Material
Weaknesses
   
    We failed to maintain effective controls over the valuation
    and presentation of our loss-contract accrued liability.
    Specifically, our controls over the application and monitoring
    of accounting policies with respect to loss contracts acquired
    in connection with a purchase business combination were
    ineffective to ensure that such contracts were recorded in
    accordance with generally accepted accounting principles.   
    We failed to maintain effective controls over the valuation
    of discounts for parts that are recorded within our accounts
    receivable account. Specifically, we lacked effective controls,
    including monitoring, to ensure that our receivable account
    relating to the embodiment discount was appropriately valued and
    recorded.  34




---



##### 



Plans for Remediation
  
    
    that certain members of our accounting staff receive training regarding the application of SFAS
141;
    
    our accounting staff to take prescribed steps in the event of certain non-routine transactions,
which steps will include: engaging external accounting advisors, establishing working groups,
action plans, or monitoring meetings based on the nature of the event, in each case in an effort to
ensure that individuals from the appropriate departments are involved, communication is thorough,
and action items are addressed; and
    
    that significant and nonrecurring events be brought to the attention of senior management and the
audit committee.
  
    
    that the calculation of the discount be performed by a member of our accounting team and be
confirmed by our assistant controller and that each of them be properly trained with respect to
such calculation and confirmation;
    
    that the discount calculation and confirmation functions be centralized in Winnipeg; and
    
    that issues arising with respect to calculation of the discount be brought to the attention of
senior management and the audit committee.
  Changes in Internal Control over Financial Reporting
  35




---



##### 



PART II OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS.
   ITEM 1A. RISK FACTORS.
 
 36




---



##### 



ITEM 6. EXHIBITS.
 ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation of Standard Aero Holdings, Inc. (incorporated by reference to
Exhibit 3.1 of Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).3.2
    
    Bylaws of Standard Aero Holdings, Inc. (incorporated by reference to Exhibit 3.17 of
Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).4.1
    
    Senior Subordinated Note Indenture with respect to the 8 1/ 4 %
Senior Subordinated Notes due 2014, between Standard Aero Holdings, Inc., Wells Fargo Bank
Minnesota, National Association, as trustee, and the Guarantors listed on the signature
pages thereto, dated as of August 20, 2004 (incorporated by reference to Exhibit 4.1 of
Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).4.2
    
    Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace
(Nederland) BV and Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank,
National Association, as trustee (incorporated by reference to Exhibit 4.2 of Standard
Aero Holdings, Inc.s Registration Statement No. 333-124394).4.3
    
    Supplemental Indenture, dated as of August 24, 2004, among Dunlop Standard Aerospace (US)
Inc., Dunlop Standard Aerospace (US) Legal Inc., Standard Aero, Inc., Dunlop Aerospace
Parts, Inc., Standard Aero (San Antonio) Inc., Standard Aero (Alliance) Inc., Standard
Aero Canada, Inc., 3091781 Nova Scotia Company, 3091782 Nova Scotia Company, 3091783 Nova
Scotia Company, Standard Aero Limited, Not FM Canada Inc., Standard Aero Holdings, Inc.
and Wells Fargo Bank, National Association, as trustee (incorporated by reference to
Exhibit 4.3 of Standard Aero Holdings, Inc.s Registration Statement No. 333-124394).4.4
    
    Supplemental Indenture, dated as of March 3, 2005, among Standard Aero (US), Inc. (f/k/a
Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop
Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc.
(f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero
(Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova
Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc.;
Standard Aero (Netherlands) B.V. (f/k/a Dunlop Standard Aerospace (Nederland) BV) and
Standard Aero BV, Standard Aero Holdings, Inc. and Wells Fargo Bank, National Association,
as trustee (incorporated by reference to Exhibit 4.4 of Standard Aero Holdings, Inc.s
Registration Statement No. 333-124394).4.5
    
    Supplemental Indenture, dated as of March 31, 2005, among Standard Aero (US), Inc. (f/k/a
Dunlop Standard Aerospace (U.S.) Inc.); Standard Aero (US) Legal, Inc. (f/k/a Dunlop
Standard Aerospace (US) Legal, Inc.); Standard Aero Inc.; Standard Aero Materials, Inc.
(f/k/a Dunlop Aerospace Parts Inc.); Standard Aero (San Antonio) Inc.; Standard Aero
(Alliance) Inc.; Standard Aero Canada, Inc.; 3091781 Nova Scotia Company; 3091782 Nova
Scotia Company; 3091783 Nova Scotia Company; Standard Aero Limited; Not FM Canada Inc. and
Standard Aero Redesign Services Inc., Standard Aero Holdings, Inc. and Wells Fargo Bank,
National Association, as trustee (incorporated by reference to Exhibit 4.5 of Standard
Aero Holdings, Inc.s Registration Statement No. 333-124394).31.1
    
    Certification of Chief Executive Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).31.2
    
    Certification of Chief Financial Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)).32.1
    
    Certification of Chief Executive Officer pursuant to Rule 15d-14(b) (17 CFR 240.15d-14(b))
and 18 U.S.C. Section 1350.32.2
    
    Certification of Chief Financial Officer pursuant to Rule 15d-14(b) (17 CFR 240.15d-14(b))
and 18 U.S.C. Section 1350.
 37




---



##### 



SIGNATURES
  STANDARD AERO HOLDINGS, INC.Dated: May 12, 2006
    /s/ DAVID SHAWName:
    David ShawTitle:
    Chief Executive Officer
(principal executive officer) Dated: May 12, 2006
    /s/ BRADLEY BERTOUILLEName:
    Bradley BertouilleTitle:
    Chief Financial Officer
(principal financial and accounting officer) 38