##### Table of Contents



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 June 30, 2005
 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
    
    98-0432892(State of Incorporation)
    
    (I.R.S. EmployerIdentification Number)
 145 Duncan Drive, Suite 1000
San Antonio, Texas 78226
(Address of Principal Executive Offices and Zip Code)
 (210) 334-6105
(Registrants Telephone Number, Including Area Code)
 o þ
 o þ
 o þ




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INDEX
 PageNo.PART IFINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited).
    
    
    2  4Notes to Condensed Consolidated Financial Statements (Unaudited).
    
    
    5  25Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations.
    
    
    26  42Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
    
    
    43Item 4.
    
    Controls and Procedures.
    
    
    44PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings.
    
    
    46Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.Item 4.
    
    Submission of Matters to a Vote of Security Holders.Item 6.
    
    Exhibits.SIGNATURES
    
    
    48EX-31.1EX-31.2EX-32




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Standard Aero Holdings, Inc.
 Condensed Consolidated Statement of Operations (Successor) (Unaudited)/
Condensed Combined Statement of Operations (Predecessor) (Unaudited)
For the three months ended June 30, 2005 and 2004 and the six months ended June 30, 2005 and 2004
(In thousands of U.S. dollars)
 Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004(Successor)
    
    (Predecessor)
    
    (Successor)
    
    (Predecessor)Revenues
    
    $
    171,781
    
    
    $
    189,917
    
    
    $
    359,195
    
    
    $
    367,868Operating expensesCost of revenues
    
    
    (145,264
    )
    
    
    (154,748
    )
    
    
    (299,569
    )
    
    
    (301,978
    )Selling, general and administrative
expense
    
    
    (12,851
    )
    
    
    (11,531
    )
    
    
    (25,395
    )
    
    
    (22,440
    )Amortization of intangible assets
    
    
    (2,446
    )
    
    
    (688
    )
    
    
    (4,892
    )
    
    
    (1,376
    )Total operating expenses
    
    
    (160,561
    )
    
    
    (166,967
    )
    
    
    (329,856
    )
    
    
    (325,794
    )Income from operations
    
    
    11,220
    
    
    
    22,950
    
    
    
    29,339
    
    
    
    42,074Interest expense
    
    
    (8,547
    )
    
    
    (1,896
    )
    
    
    (17,475
    )
    
    
    (3,835
    )Income before income taxes
    
    
    2,673
    
    
    
    21,054
    
    
    
    11,864
    
    
    
    38,239Benefit (provision) for income taxes
    
    
    126
    
    
    
    (7,924
    )
    
    
    (2,587
    )
    
    
    (14,418
    )Net income
    
    $
    2,799
    
    
    $
    13,130
    
    
    $
    9,277
    
    
    $
    23,821
 The accompanying notes are an integral part of these statements.
 2




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Standard Aero Holdings, Inc.
 Condensed Consolidated Balance Sheet (Successor)
As at June 30, 2005 (Unaudited) and December 31, 2004
(In thousands of U.S. dollars)
 June 30,
    
    
    December 31,2005
    
    
    2004(Successor)
    
    
    (Successor)AssetsCurrent assetsCash and cash equivalents
    
    $
    83
    
    
    
    $
    27,891Accounts receivable (less allowance for
doubtful accounts of $3,932 and $3,909 at
December 31, 2004 and June 30, 2005,
respectively)
    
    
    102,022
    
    
    
    
    111,992Inventories (note 3)
    
    
    150,026
    
    
    
    
    146,875Prepaid expenses and other current assets
    
    
    7,705
    
    
    
    
    10,994Income taxes receivable
    
    
    7,225
    
    
    
    
    4,563Deferred income taxes
    
    
    3,584
    
    
    
    
    4,118Total current assets
    
    
    270,645
    
    
    
    
    306,433Deferred finance charges
    
    
    19,446
    
    
    
    
    21,215Deferred income taxes
    
    
    3,545
    
    
    
    
    3,856Property, plant and equipment, net
    
    
    139,740
    
    
    
    
    136,140Intangible assets, net(note 4)
    
    
    230,874
    
    
    
    
    237,280Goodwill
    
    
    240,490
    
    
    
    
    240,490Total assets
    
    $
    904,740
    
    
    
    $
    945,414Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    77,614
    
    
    
    $
    106,419Other accrued liabilities
    
    
    23,481
    
    
    
    
    24,015Due to related party
    
    
    3,940
    
    
    
    
    2,808Unearned revenue
    
    
    12,092
    
    
    
    
    12,519Accrued warranty provision
    
    
    5,752
    
    
    
    
    6,907Income taxes payable
    
    
    6,640
    
    
    
    
    8,608Current portion of long-term debt (note 5)
    
    
    1,825
    
    
    
    
    1,985Total current liabilities
    
    
    131,344
    
    
    
    
    163,261Deferred income taxes
    
    
    82,193
    
    
    
    
    84,522Long-term debt(note 5)
    
    
    471,570
    
    
    
    
    487,261Total liabilities
    
    
    685,107
    
    
    
    
    735,044Commitments 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
    
    
    
    
    215,000Retained earnings / (deficit)
    
    
    4,595
    
    
    
    
    (4,682
    )Accumulated other comprehensive income
    
    
    38
    
    
    
    
    52Total stockholders equity
    
    
    219,633
    
    
    
    
    210,370Total liabilities and stockholders equity
    
    $
    904,740
    
    
    
    $
    945,414
 The accompanying notes are an integral part of these statements.
 3




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Standard Aero Holdings, Inc.
 Condensed Consolidated Statement of Cash Flows (Successor) (Unaudited)/
Condensed Combined Statements of Cash Flows (Predecessor) (Unaudited)
(In thousands of U.S. dollars)
 Six months ended June 30,2005
    
    
    2004(Successor)
    
    
    (Predecessor)Cash provided by (used in)Operating activitiesNet income for the period
    
    $
    9,277
    
    
    
    $
    23,821Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation and amortization
    
    
    13,218
    
    
    
    
    10,151Amortization of deferred finance charges
    
    
    1,769
    
    
    
    
    272Deferred income taxes
    
    
    (505
    )
    
    
    
    (3,423
    )Gain on disposal of property, plant and equipment
    
    
    (9
    )
    
    
    
    Other
    
    
    
    
    
    
    
    47Changes in assets and liabilitiesAccounts receivable
    
    
    5,292
    
    
    
    
    (33,838
    )Inventories
    
    
    (3,151
    )
    
    
    
    (35,943
    )Prepaid expenses and other current assets
    
    
    3,275
    
    
    
    
    397Accounts payable and other current liabilities
    
    
    (30,921
    )
    
    
    
    66,742Income taxes payable and receivable
    
    
    (5,609
    )
    
    
    
    (657
    )Net cash
provided by (used in) operating activities
    
    
    (7,364
    )
    
    
    
    27,569Investing activitiesAcquisition
of intangibles  licenses
    
    
    
    
    
    
    
    (125
    )Acquisition of rental assets and spare engines
    
    
    (9,293
    )
    
    
    
    (6,889
    )Acquisition of property, plant and equipment
    
    
    (5,882
    )
    
    
    
    (4,202
    )Proceeds from disposals of rental assets and spare engines
    
    
    4,730
    
    
    
    
    4,845Proceeds from disposals of property, plant, and equipment
    
    
    42
    
    
    
    
    12Net cash used in investing activities
    
    
    (10,403
    )
    
    
    
    (6,359
    )Financing activitiesRepayment of long-term debt
    
    
    (15,851
    )
    
    
    
    (843
    )Change in due to and from related companies
    
    
    5,810
    
    
    
    
    2,366Net cash provided by (used in) financing activities
    
    
    (10,041
    )
    
    
    
    1,523Net (decrease) increase in cash and cash equivalents
    
    
    (27,808
    )
    
    
    
    22,733Cash and cash equivalents  Beginning of period
    
    
    27,891
    
    
    
    
    22,698Cash and cash equivalents  End of period
    
    $
    83
    
    
    
    $
    45,431Supplemental cash flow informationCash paid during the six months ended June 30, 2005 and 2004 for:Interest
    
    $
    16,253
    
    
    
    $
    3,562Income taxes
    
    
    7,805
    
    
    
    
    16,862
 The accompanying notes are an integral part of these statements.
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STANDARD
AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1
    
    Nature of operationsSuccessorStandard Aero Holdings, Inc. was incorporated on June 20, 2004 in the State of Delaware to
acquire the MRO business (as described below). Standard Aero Holdings, Inc. and its
subsidiaries (the Company or the Successor) commenced operations on August 25, 2004.The Company is an independent provider of aftermarket maintenance repair and overhaul (MRO)
services for gas turbine engines used primarily for military, regional and business aircraft.
The Company repairs and overhauls a wide range of aircraft engines and provides its customers
with comprehensive, value-added maintenance solutions.The AcquisitionOn August 24, 2004, pursuant to a purchase agreement with Meggitt plc, the Company acquired from
Meggitt the MRO Division of Dunlop Standard Aerospace Group Limited (the Predecessor) for cash
consideration of $699.7 million, including direct costs of the Acquisition of $28.0 million.
This transaction is referred to as the Acquisition. The Company is a wholly owned subsidiary of
Standard Aero Acquisition Holdings, Inc., which is a corporation formed at the direction of The
Carlyle Group. Affiliates of The Carlyle Group own 98.2% of Standard Aero Acquisition Holdings,
Inc. common stock. The purchase price was financed by a $215.0 million equity investment from
the Companys parent company, Standard Aero Acquisition Holdings, Inc., $325.0 million of term
loans and $200.0 million of senior subordinated notes.The Acquisition forms part of The Carlyle Groups aerospace and defence portfolio and expands
The Carlyle Groups presence and expertise in a wide range of global aerospace markets.The accompanying financial statements include the consolidated accounts of the Company and its
subsidiaries subsequent to the Acquisition and also include the combined accounts of the
Predecessor prior to the Acquisition. All significant intercompany accounts and transactions,
including profit and loss as a result of those transactions, have been eliminated in the
consolidation. The financial statements of the Predecessor are presented for comparative
purposes and include the combined historical financial statements of the MRO Division of Dunlop
Standard Aerospace Group Limited. As a result of the Acquisition, the combined financial
statements of the Predecessor Company are not fully comparable to the consolidated financial
statements of the Successor Company due to the different basis of accounting and change in
capital structures.
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STANDARD
AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 The Company accounted for the Acquisition using the purchase method of accounting in accordance
with SFAS No. 141, Business Combinations and, accordingly, the Acquisition resulted in a new
basis of accounting for the Company. The Company allocated the purchase price based on the fair
values of the assets acquired and liabilities assumed at the Acquisition date, as follows:
 August 25, 2004Current assetsCash and cash equivalents
    
    $
    35,700Accounts receivable
    
    
    106,372Inventories
    
    
    186,718Prepaid expenses and other current assets
    
    
    3,205Property, plant and equipment
    
    
    136,123Goodwill
    
    
    240,490Intangible assets
    
    
    241,550Total assets acquired
    
    
    950,158Current liabilitiesAccounts payable
    
    
    120,415Other current liabilities
    
    
    15,653Unearned revenue
    
    
    17,120Accrued warranty provision
    
    
    6,740Long-term debt
    
    
    4,872Deferred income taxes
    
    
    85,647Total liabilities assumed
    
    
    250,447Net assets acquired for cash
    
    $
    699,711
 The excess of the cost of the Acquisition over the fair values of the net tangible and
intangible assets acquired of $240.5 million has been allocated to goodwill. All of the
goodwill has been allocated to the Aviation Maintenance, Repair and Overhaul reporting segment
of the Company. As at June 30, 2005, the goodwill had not yet been assigned to reporting units.
In accordance with SFAS No. 142, this goodwill will not be amortized but will be reviewed
annually for impairment. The majority of the goodwill will not be deductible for income tax
purposes. Of the $241.6 million of acquired intangible assets, $97.3 million was assigned to
trademarks that have indefinite lives, $98.0 million was assigned to customer relationships that
have an estimated weighted average useful life of 17.4 years, $38.4 million was assigned to OEM
authorizations and licenses that have an estimated weighted average useful life of 14.2 years,
and $7.9 million was assigned to technology and other that have an estimated average useful life
of 5 years.
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STANDARD
AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 PredecessorThe financial statements of the Predecessor reflect the combined financial position, combined
results of operations and combined cash flows of the Predecessor business which includes the
accounts of Standard Aero (US) Inc. (formerly Dunlop Standard Aerospace (US) Inc.), related to
the MRO business and the accounts of the following entities:
 Name
    
    Country of IncorporationStandard Aero, Inc.
    
    USAStandard Aero (San Antonio) Inc.
    
    USAStandard Aero (Alliance) Inc.
    
    USAStandard Aero Limited
    
    CanadaStandard Aero de Mexico de C.V.
    
    MexicoStandard Aero (Australia) Pty Limited
    
    AustraliaStandard Aero International Pty Limited
    
    AustraliaStandard Aero BV
    
    NetherlandsStandard Aero (Asia) Pte Limited
    
    SingaporeStandard Aero (Netherlands) BV (formerly Dunlop
Standard Aerospace (Nederland) BV)
    
    NetherlandsStandard Aero (US) Legal Inc. (formerly Dunlop
Standard Aerospace (US) Legal Inc.)
    
    USAStandard Aero Materials Inc. (formerly Dunlop
Aerospace Parts Inc.)
    
    USANot FM Canada Inc.
    
    CanadaStandard Aerospace BV
    
    NetherlandsStandard Aero vof
    
    Netherlands
 Standard Aero (US) Inc.s (formerly Dunlop Standard Aerospace (US) Inc.) accounts include
investments in two wholly-owned subsidiaries which carry on business not related to the MRO
Division and, therefore, these investments have been excluded from the Predecessors financial
statements. All material intra-group balances and transactions have been eliminated in the
combination. The combined financial statements reflect a divisional equity account which
represents the parent companys initial investments, accumulated earnings less distributions and
advances to and from the parent company. Divisional equity also includes advances to or from
related companies made at the discretion of the parent company that are considered investing and
financing activities in these financial statements.Certain administration, management and other services were provided by Dunlop Standard Aerospace
Group Limited including, but not limited to, executive and strategic management, accounting and
financial reporting, treasury, cash management, employee benefit administration, training and
redesign services. The Predecessor was charged an allocation for these services by Dunlop
Standard Aerospace Group Limited. All allocations and estimates are based on assumptions that
management believes are reasonable. However, the combined results of operations, combined
divisional equity and combined cash flows of the Predecessor for the period from January 1, 2004
to June 30, 2004, may not necessarily reflect those that would have occurred had the Predecessor
operated autonomously as an entity independent of Dunlop Standard Aerospace Group Limited.SeasonalityThe Company does not experience significant fluctuations in earnings or cash flows due to
seasonality.
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STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Basis of presentationThe unaudited condensed consolidated financial statements of the Successor and the unaudited
condensed combined consolidated financial statements of the Predecessor included herein have
been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, the unaudited consolidated
financial statements and the unaudited combined financial statements include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation of the results
of operations for the interim periods. Results for the interim periods are not necessarily
indicative of results that may be expected for the fiscal year ending December 31, 2005. These
interim financial statements should be read in conjunction with the consolidated financial
statements and footnotes of the Company as of December 31, 2004 and for the period from August
25, 2004 to December 31, 2004 and the combined financial statements and footnotes of the MRO
Division of Dunlop Standard Aerospace Group Limited as of December 31, 2003 and for the period
from January 1, 2004 to August 24, 2004 and the years ended December 31, 2003 and December 31,
2002.2
    
    Summary of significant accounting policiesThe consolidated and combined financial statements of the Company and the Predecessor,
respectively, have been prepared in accordance with accounting principles generally accepted in
the United States (US GAAP) and are reported in U.S. dollars.
 a)
    
    Revenue recognitionThe Companys revenues related to engine maintenance, repair and overhaul
services includes the provision of services and parts which are accounted for as a
single accounting unit. These revenues and related cost of revenues are recognized
when the services are completed or repaired parts are shipped to the customer. The
Companys standard terms and conditions provide that title and risk of loss passes to
the customer when the customer owned material is shipped to the customer. Amounts
received in advance from customers are recorded as unearned revenue.Certain of the Companys arrangements may include multiple elements consisting both of
engine repair and overhaul services and engine rentals. In these arrangements, the
service and rental elements are divided into separate units of accounting based on the
relative fair values of each unit and each unit is accounted for in accordance with the
policies noted above.Lease income associated with the rental of engines or engine modules to customers is
recorded based on time incurred (i.e., on the number of hours flown) as reported to the
Company by the customer. Provisions for estimated loss on work orders in progress are provided in the period the
loss is probable and can be reasonably estimated.
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STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 b)
    
    Goodwill and intangible assetsIntangibles with definite lives of the Successor are being amortized over 1 to 20 years
with a weighted average of 12.6 years. Intangibles with definite lives of the Predecessor
were being amortized over 3 to 40 years with a weighted average of 31.5 years. The
goodwill and intangible assets determined to have indefinite lives are tested for
impairment annually or if the situation indicates that the asset might be impaired.Intangible assets having definite lives are recorded at cost and amortized over their
estimated useful lives or terms of licenses, using the straight-line method, as summarized
below:
 Successor
    
    PredecessorCustomer relationships
    
    1 to 20 years
    
    13 to 40 yearsOEM authorizations and licenses
    
    4 to 17 years
    
    3 to 10 yearsTechnology and other
    
    5 years
    
    
 c)
    
    Income taxesThe Company recognizes deferred tax assets and liabilities using the liability method.
Under this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to record the deferred tax
assets at an amount expected more likely than not to be recoverable. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and rates on the date
of enactment.Investment tax credits are accounted as a reduction in the cost of the asset or as a
reduction in associated operating costs when it is likely that such credits will be
realized. These investment tax credits are used to reduce current and future taxes
payable.d)
    
    Share-based compensationThe Company does not have a share-based compensation plan. However, certain employees of
the Company participate in the Stock Option and Purchase Plan of the Companys parent,
Standard Aero Acquisition Holdings, Inc. Options granted by Standard Aero Acquisition
Holdings, Inc. had an exercise price equal to fair value of the underlying stock on the
date of the grant. The parent company accounts for stock-based employee compensation
using the intrinsic value method under Accounting Principles Board Opinion No. 25,
Accounting to Stock Issued to Employees.The following table illustrates the effect on net income of the Successor if Standard Aero
Acquisition Holdings, Inc. had applied the fair value recognition provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation:
 January 1, 2005to June 30, 2005Net income, as reported
    
    $
    9,277Deduct: Stock-based compensation expense calculated in
accordance with SFAS No. 123
    
    
    (253
    )Pro forma net income
    
    $
    9,024
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STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 e)
    
    New accounting standards
   f)
    
    Comparative Figures
  3 Inventories
 June 30,
    
    December 31,2005
    
    2004(Successor)
    
    (Successor)Raw materials
    
    $
    76,302
    
    
    $
    74,897Work in process
    
    
    73,724
    
    
    
    71,978$
    150,026
    
    
    $
    146,875
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STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 4 Intangible assets
  Gross carrying
    
    Accumulated
    
    Net carryingAt June 30, 2005 (Successor)
    
    amount
    
    Amortization
    
    amountDefinite lived intangible assets
subject to amortization:Customer relationships
    
    $
    98,000
    
    
    $
    6,837
    
    
    $
    91,163OEM authorizations and licenses
    
    
    38,350
    
    
    
    2,522
    
    
    
    35,828Technology and other
    
    
    7,900
    
    
    
    1,317
    
    
    
    6,583144,250
    
    
    
    10,676
    
    
    
    133,574Indefinite lived intangible assets not
subject to amortization:Trademarks
    
    
    97,300
    
    
    
    
    
    
    
    97,300Total intangible assets
    
    $
    241,550
    
    
    $
    10,676
    
    
    $
    230,874
 Gross carrying
    
    Accumulated
    
    Net carryingAt December 31, 2004 (Successor)
    
    amount
    
    amortization
    
    amountDefinite lived intangible assets
subject to amortization:Customer relationships
    
    $
    98,000
    
    
    $
    2,735
    
    
    $
    95,265OEM authorizations and licenses
    
    
    38,350
    
    
    
    1,008
    
    
    
    37,342Technology and other
    
    
    7,900
    
    
    
    527
    
    
    
    7,373144,250
    
    
    
    4,270
    
    
    
    139,980Indefinite lived intangible assets not
subject to amortization:Trademarks
    
    
    97,300
    
    
    
    
    
    
    
    97,300Total intangible assets
    
    $
    241,550
    
    
    $
    4,270
    
    
    $
    237,280
    11




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STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 5 Long-term debt
  June 30,
    
    December 31,2005
    
    2004(Successor)
    
    (Successor)Term loans
    
    $
    270,000
    
    
    $
    285,000Senior subordinated notes
    
    
    200,000
    
    
    
    200,000Obligations under capital leases
    
    
    3,395
    
    
    
    4,246473,395
    
    
    
    489,246Less: Current portion
    
    
    1,825
    
    
    
    1,985Long-term debt
    
    $
    471,570
    
    
    $
    487,261
       12




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##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 6 Employee benefit plans
  7 Commitments and contingencies
 Commitments
  Contingent liabilities
   8 Stock options
   13




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STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Outstanding as of December 31, 2004
    
    
    206,071Granted
    
    
    3,000Exercised
    
    
    Cancelled
    
    
    Outstanding as of June 30, 2005
    
    
    209,071Weighted average remaining life as of June 30, 2005
    
    
    5.5Options exercisable as of June 30, 2005
    
    
    17,952
   9 Related party transactions
   10 Guarantees
   14




---



##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Warranty guarantee
   Balance at December 31, 2003 (Predecessor)
    
    $
    (4,627
    )Warranty costs incurred
    
    
    1,297Warranty accrued
    
    
    (1,853
    )Warranty reversal
    
    
    1,245Balance at June 30, 2004 (Predecessor)
    
    
    (3,938
    )Balance at December 31, 2004 (Successor)
    
    
    (6,907
    )Warranty costs incurred
    
    
    1,329Warranty accrued
    
    
    (174
    )Balance at June 30, 2005 (Successor)
    
    $
    (5,752
    )
 11 Segment information
     15




---



##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 As of and for the three months ended June 30, 2005 (Successor)
 Aviationmaintenancerepair andoverhaul
    
    Other Services
    
    Unallocated
    
    TotalRevenues
    
    $
    166,652
    
    
    $
    5,129
    
    
    $
    
    
    
    $
    171,781Income (loss) from operations
    
    
    15,569
    
    
    
    (1,811
    )
    
    
    (2,538
    )
    
    
    11,220Depreciation and amortization
    
    
    6,228
    
    
    
    232
    
    
    
    
    
    
    
    6,460Total assets
    
    
    849,018
    
    
    
    28,412
    
    
    
    27,310
    
    
    
    904,740Goodwill
    
    
    240,490
    
    
    
    
    
    
    
    
    
    
    
    240,490Capital and intangible
expenditures
    
    
    7,884
    
    
    
    429
    
    
    
    13
    
    
    
    8,326
 For the three months ended June 30, 2004 (Predecessor)
 Aviationmaintenancerepair andoverhaul
    
    Other Services
    
    Unallocated
    
    TotalRevenues
    
    $
    182,507
    
    
    $
    7,410
    
    
    $
    
    
    
    $
    189,917Income (loss) from operations
    
    
    25,855
    
    
    
    (1,229
    )
    
    
    (1,676
    )
    
    
    22,950Depreciation and amortization
    
    
    5,282
    
    
    
    239
    
    
    
    
    
    
    
    5,521Goodwill
    
    
    
    
    
    
    
    
    
    
    74,751
    
    
    
    74,751Capital and intangible
expenditures
    
    
    5,603
    
    
    
    425
    
    
    
    
    
    
    
    6,028
 16




---



##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 As of and for the six months ended June 30, 2005 (Successor)
 Aviationmaintenancerepair andoverhaul
    
    Other Services
    
    Unallocated
    
    TotalRevenues
    
    $
    349,156
    
    
    $
    10,039
    
    
    $
    
    
    
    $
    359,195Income (loss) from operations
    
    
    37,888
    
    
    
    (3,151
    )
    
    
    (5,398
    )
    
    
    29,339Depreciation and amortization
    
    
    12,725
    
    
    
    493
    
    
    
    
    
    
    
    13,218Total assets
    
    
    849,018
    
    
    
    28,412
    
    
    
    27,310
    
    
    
    904,740Goodwill
    
    
    240,490
    
    
    
    
    
    
    
    
    
    
    
    240,490Capital and intangible
expenditures
    
    
    14,481
    
    
    
    677
    
    
    
    26
    
    
    
    15,184
 For the six months ended June 30, 2004 (Predecessor)
 Aviationmaintenancerepair andoverhaul
    
    Other Services
    
    Unallocated
    
    TotalRevenues
    
    $
    353,881
    
    
    $
    13,987
    
    
    $
    
    
    
    $
    367,868Income (loss) from operations
    
    
    47,068
    
    
    
    (2,107
    )
    
    
    (2,887
    )
    
    
    42,074Depreciation and amortization
    
    
    9,668
    
    
    
    483
    
    
    
    
    
    
    
    10,151Goodwill
    
    
    
    
    
    
    
    
    
    
    74,751
    
    
    
    74,751Capital and intangible
expenditures
    
    
    10,432
    
    
    
    777
    
    
    
    7
    
    
    
    11,216
 17




---



##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 12 Guarantor Information
  Condensed Combining Statements of Operations (Successor)
For the three months ended June 30, 2005
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalRevenues
    
    $
    
    
    
    $
    145,952
    
    
    $
    27,405
    
    
    $
    (1,576
    )
    
    $
    171,781Operating ExpensesCost of revenues
    
    
    
    
    
    
    (121,819
    )
    
    
    (25,021
    )
    
    
    1,576
    
    
    
    (145,264
    )Selling, general and administrative
expense.
    
    
    (1,252
    )
    
    
    (9,304
    )
    
    
    (2,295
    )
    
    
    
    
    
    
    (12,851
    )Amortization of intangible assets
    
    
    
    
    
    
    (2,446
    )
    
    
    
    
    
    
    
    
    
    
    (2,446
    )Total operating expenses
    
    
    (1,252
    )
    
    
    (133,569
    )
    
    
    (27,316
    )
    
    
    1,576
    
    
    
    (160,561
    )Income (loss) from operations
    
    
    (1,252
    )
    
    
    12,383
    
    
    
    89
    
    
    
    
    
    
    
    11,220Interest expense
    
    
    (8,206
    )
    
    
    (125
    )
    
    
    (216
    )
    
    
    
    
    
    
    (8,547
    )Income (loss) before income taxes
    
    
    (9,458
    )
    
    
    12,258
    
    
    
    (127
    )
    
    
    
    
    
    
    2,673Benefit (provision) for income taxes
    
    
    3,404
    
    
    
    (3,609
    )
    
    
    331
    
    
    
    
    
    
    
    126Income before equity earnings in
Subsidiaries.
    
    
    (6,054
    )
    
    
    8,649
    
    
    
    204
    
    
    
    
    
    
    
    2,799Equity in Earnings of subsidiaries
    
    
    8,853
    
    
    
    (3
    )
    
    
    
    
    
    
    (8,850
    )
    
    
    Net income (loss)
    
    $
    2,799
    
    
    $
    8,646
    
    
    $
    204
    
    
    $
    (8,850
    )
    
    $
    2,799
  18




---



##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Combining Statement of Operations (Predecessor)
For the three months ended June 30, 2004
 Subsidiary
    
    Subsidiary
    
    CombiningGuarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalRevenues
    
    $
    177,137
    
    
    $
    14,083
    
    
    $
    (1,303
    )
    
    $
    189,917Operating Expenses.Cost of revenues
    
    
    (142,231
    )
    
    
    (13,820
    )
    
    
    1,303
    
    
    
    (154,748
    )Selling, general and administrative
    
    
    (9,676
    )
    
    
    (1,855
    )
    
    
    
    
    
    
    (11,531
    )Amortization of intangible assets
    
    
    (493
    )
    
    
    (195
    )
    
    
    
    
    
    
    (688
    )Total operating expenses
    
    
    (152,400
    )
    
    
    (15,870
    )
    
    
    1,303
    
    
    
    (166,967
    )Income (loss) from operations
    
    
    24,737
    
    
    
    (1,787
    )
    
    
    
    
    
    
    22,950Interest expense
    
    
    (1,921
    )
    
    
    25
    
    
    
    
    
    
    
    (1,896
    )Income (loss) before income taxes
    
    
    22,816
    
    
    
    (1,762
    )
    
    
    
    
    
    
    21,054Benefit (provision) for income taxes
    
    
    (8,451
    )
    
    
    527
    
    
    
    
    
    
    
    (7,924
    )Net income (loss)
    
    $
    14,365
    
    
    $
    (1,235
    )
    
    $
    
    
    
    $
    13,130
 19




---



##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Combining Statements of Operations (Successor)
For the six months ended June 30, 2005
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalRevenues
    
    $
    
    
    
    $
    311,232
    
    
    $
    53,089
    
    
    $
    (5,126
    )
    
    $
    359,195Operating ExpensesCost of revenues
    
    
    
    
    
    
    (255,133
    )
    
    
    (49,562
    )
    
    
    5,126
    
    
    
    (299,569
    )Selling, general and administrative
expense
    
    
    (1,986
    )
    
    
    (19,506
    )
    
    
    (3,903
    )
    
    
    
    
    
    
    (25,395
    )Amortization of intangible assets
    
    
    
    
    
    
    (4,892
    )
    
    
    
    
    
    
    
    
    
    
    (4,892
    )Total operating expenses
    
    
    (1,986
    )
    
    
    (279,531
    )
    
    
    (53,465
    )
    
    
    5,126
    
    
    
    (329,856
    )Income (loss) from operations
    
    
    (1,986
    )
    
    
    31,701
    
    
    
    (376
    )
    
    
    
    
    
    
    29,339Interest expense
    
    
    (16,509
    )
    
    
    (656
    )
    
    
    (310
    )
    
    
    
    
    
    
    (17,475
    )Income (loss) before income taxes
    
    
    (18,495
    )
    
    
    31,045
    
    
    
    (686
    )
    
    
    
    
    
    
    11,864Benefit (provision) for income taxes
    
    
    6,470
    
    
    
    (9,741
    )
    
    
    684
    
    
    
    
    
    
    
    (2,587
    )Income before equity earnings in
Subsidiaries
    
    
    (12,025
    )
    
    
    21,304
    
    
    
    (2
    )
    
    
    
    
    
    
    9,277Equity in Earnings of subsidiaries
    
    
    21,302
    
    
    
    (182
    )
    
    
    
    
    
    
    (21,120
    )
    
    
    Net income (loss)
    
    $
    9,277
    
    
    $
    21,122
    
    
    $
    (2
    )
    
    $
    (21,120
    )
    
    $
    9,277
 Condensed Combining Statement of Operations (Predecessor)
For the six months ended June 30, 2004
 Subsidiary
    
    Subsidiary
    
    CombiningGuarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalRevenues
    
    $
    339,119
    
    
    $
    30,951
    
    
    $
    (2,202
    )
    
    $
    367,868Operating ExpensesCost of revenues
    
    
    (275,284
    )
    
    
    (28,896
    )
    
    
    2,202
    
    
    
    (301,978
    )Selling, general and administrative
    
    
    (19,065
    )
    
    
    (3,375
    )
    
    
    
    
    
    
    (22,440
    )Amortization of intangible assets
    
    
    (1,086
    )
    
    
    (290
    )
    
    
    
    
    
    
    (1,376
    )Total operating expenses
    
    
    (295,435
    )
    
    
    (32,561
    )
    
    
    2,202
    
    
    
    (325,794
    )Income (loss) from operations
    
    
    43,684
    
    
    
    (1,610
    )
    
    
    
    
    
    
    42,074Interest expense
    
    
    (3,738
    )
    
    
    (97
    )
    
    
    
    
    
    
    (3,835
    )Income (loss) before income taxes
    
    
    39,946
    
    
    
    (1,707
    )
    
    
    
    
    
    
    38,239Benefit (provision) for income taxes
    
    
    (14,955
    )
    
    
    537
    
    
    
    
    
    
    
    (14,418
    )Net income (loss)
    
    $
    24,991
    
    
    $
    (1,170
    )
    
    $
    
    
    
    
    23,821
 20




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##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Balance Sheet (Successor)
June 30, 2005
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalAssetsCurrent AssetsCash and cash equivalents
    
    $
    102
    
    
    $
    (3,209
    )
    
    $
    3,190
    
    
    $
    
    
    
    $
    83Accounts Receivable
    
    
    
    
    
    
    82,013
    
    
    
    20,009
    
    
    
    
    
    
    
    102,022Due from related party
    
    
    21,274
    
    
    
    84,057
    
    
    
    1,485
    
    
    
    (106,816
    )
    
    
    Inventories
    
    
    
    
    
    
    119,790
    
    
    
    30,236
    
    
    
    
    
    
    
    150,026Prepaid expenses and other current
assets
    
    
    455
    
    
    
    6,546
    
    
    
    704
    
    
    
    
    
    
    
    7,705Income taxes receivable
    
    
    
    
    
    
    1,282
    
    
    
    5,943
    
    
    
    
    
    
    
    7,225Deferred income taxes
    
    
    
    
    
    
    2,460
    
    
    
    1,124
    
    
    
    
    
    
    
    3,584Total current assets
    
    
    21,831
    
    
    
    292,939
    
    
    
    62,691
    
    
    
    (106,816
    )
    
    
    270,645Deferred charges
    
    
    10,388
    
    
    
    9,058
    
    
    
    
    
    
    
    
    
    
    
    19,446Deferred income taxes
    
    
    
    
    
    
    3,545
    
    
    
    
    
    
    
    
    
    
    
    3,545Property, plant and equipment, net
    
    
    
    
    
    
    119,095
    
    
    
    20,645
    
    
    
    
    
    
    
    139,740Intangible assets, net
    
    
    
    
    
    
    226,328
    
    
    
    4,546
    
    
    
    
    
    
    
    230,874Due from related party
    
    
    
    
    
    
    5,292
    
    
    
    
    
    
    
    (5,292
    )
    
    
    Goodwill
    
    
    
    
    
    
    240,490
    
    
    
    
    
    
    
    
    
    
    
    240,490Investments in subsidiaries
    
    
    740,448
    
    
    
    37,410
    
    
    
    
    
    
    
    (777,858
    )
    
    
    Total assets
    
    $
    772,667
    
    
    $
    934,157
    
    
    $
    87,882
    
    
    $
    (889,966
    )
    
    $
    904,740Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    
    
    
    $
    70,549
    
    
    $
    7,065
    
    
    $
    
    
    
    $
    77,614Other accrued liabilities
    
    
    11,130
    
    
    
    10,180
    
    
    
    2,171
    
    
    
    
    
    
    
    23,481Unearned revenue
    
    
    
    
    
    
    10,653
    
    
    
    1,439
    
    
    
    
    
    
    
    12,092Accrued warranty provisions
    
    
    
    
    
    
    3,481
    
    
    
    2,271
    
    
    
    
    
    
    
    5,752Income taxes payable
    
    
    
    
    
    
    6,542
    
    
    
    98
    
    
    
    
    
    
    
    6,640Due to related party
    
    
    71,904
    
    
    
    17,789
    
    
    
    21,063
    
    
    
    (106,816
    )
    
    
    3,940Current portion of long-term debt
    
    
    
    
    
    
    1,356
    
    
    
    469
    
    
    
    
    
    
    
    1,825Total current liabilities
    
    
    83,034
    
    
    
    120,550
    
    
    
    34,576
    
    
    
    (106,816
    )
    
    
    131,344Deferred income taxes
    
    
    
    
    
    
    77,198
    
    
    
    4,995
    
    
    
    
    
    
    
    82,193Due to related party
    
    
    
    
    
    
    
    
    
    
    5,292
    
    
    
    (5,292
    )
    
    
    Long-term debt
    
    
    470,000
    
    
    
    1,570
    
    
    
    
    
    
    
    
    
    
    
    471,570Total liabilities
    
    
    553,034
    
    
    
    199,318
    
    
    
    44,863
    
    
    
    (112,108
    )
    
    
    685,107Stockholders equityCommon Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paid in capital
    
    
    215,000
    
    
    
    709,656
    
    
    
    47,612
    
    
    
    (757,268
    )
    
    
    215,000Retained earnings (deficit)
    
    
    4,595
    
    
    
    25,183
    
    
    
    (4,593
    )
    
    
    (20,590
    )
    
    
    4,595Accumulated other comprehensive
Income
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Total stockholders equity
    
    
    219,633
    
    
    
    734,839
    
    
    
    43,019
    
    
    
    (777,858
    )
    
    
    219,633Total liabilities and stockholders
equity / divisional equity
    
    $
    772,667
    
    
    $
    934,157
    
    
    $
    87,882
    
    
    $
    (889,966
    )
    
    $
    904,740
 21




---



##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Combining Balance Sheet (Successor)
December 31, 2004
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalAssetsCurrent AssetsCash and cash equivalents
    
    $
    4,116
    
    
    $
    18,521
    
    
    $
    5,254
    
    
    $
    
    
    
    $
    27,891Accounts Receivable
    
    
    4,678
    
    
    
    95,180
    
    
    
    12,134
    
    
    
    
    
    
    
    111,992Due from related party
    
    
    13,352
    
    
    
    52,090
    
    
    
    3,910
    
    
    
    (69,352
    )
    
    
    Inventories
    
    
    
    
    
    
    116,390
    
    
    
    30,485
    
    
    
    
    
    
    
    146,875Prepaid expenses and other current assets
    
    
    469
    
    
    
    9,485
    
    
    
    1,040
    
    
    
    
    
    
    
    10,994Income taxes receivable
    
    
    4,729
    
    
    
    
    
    
    
    4,563
    
    
    
    (4,729
    )
    
    
    4,563Deferred income taxes
    
    
    
    
    
    
    2,670
    
    
    
    1,448
    
    
    
    
    
    
    
    4,118Total current assets
    
    
    27,344
    
    
    
    294,336
    
    
    
    58,834
    
    
    
    (74,081
    )
    
    
    306,433Deferred charges
    
    
    11,304
    
    
    
    9,911
    
    
    
    
    
    
    
    
    
    
    
    21,215Deferred income taxes
    
    
    
    
    
    
    3,856
    
    
    
    
    
    
    
    
    
    
    
    3,856Property, plant and equipment, net
    
    
    
    
    
    
    116,630
    
    
    
    19,510
    
    
    
    
    
    
    
    136,140Intangible assets, net
    
    
    
    
    
    
    232,461
    
    
    
    4,819
    
    
    
    
    
    
    
    237,280Due from related party
    
    
    
    
    
    
    5,117
    
    
    
    
    
    
    
    (5,117
    )
    
    
    Goodwill
    
    
    
    
    
    
    240,490
    
    
    
    
    
    
    
    
    
    
    
    240,490Investments in subsidiaries
    
    
    719,146
    
    
    
    37,592
    
    
    
    
    
    
    
    (756,738
    )
    
    
    Total assets
    
    $
    757,794
    
    
    $
    940,393
    
    
    $
    83,163
    
    
    $
    (835,936
    )
    
    $
    945,414Liabilities and divisional equityCurrent liabilitiesAccounts payable
    
    $
    5,058
    
    
    $
    92,689
    
    
    $
    8,672
    
    
    $
    
    
    
    $
    106,419Other accrued liabilities
    
    
    7,349
    
    
    
    12,978
    
    
    
    3,688
    
    
    
    
    
    
    
    24,015Due to related party
    
    
    50,017
    
    
    
    12,291
    
    
    
    9,852
    
    
    
    (69,352
    )
    
    
    2,808Unearned revenue
    
    
    
    
    
    
    9,126
    
    
    
    3,393
    
    
    
    
    
    
    
    12,519Accrued warranty provisions
    
    
    
    
    
    
    3,784
    
    
    
    3,123
    
    
    
    
    
    
    
    6,907Income taxes payable
    
    
    
    
    
    
    13,126
    
    
    
    211
    
    
    
    (4,729
    )
    
    
    8,608Current portion of long-term debt
    
    
    
    
    
    
    1,304
    
    
    
    681
    
    
    
    
    
    
    
    1,985Total current liabilities
    
    
    62,424
    
    
    
    145,298
    
    
    
    29,620
    
    
    
    (74,081
    )
    
    
    163,261Deferred income taxes
    
    
    
    
    
    
    79,117
    
    
    
    5,405
    
    
    
    
    
    
    
    84,522Due to related party
    
    
    
    
    
    
    
    
    
    
    5,117
    
    
    
    (5,117
    )
    
    
    Long-term debt
    
    
    485,000
    
    
    
    2,261
    
    
    
    
    
    
    
    
    
    
    
    487,261Total liabilities
    
    
    547,424
    
    
    
    226,676
    
    
    
    40,142
    
    
    
    (79,198
    )
    
    
    735,044Stockholders equityCommon Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Paid in capital
    
    
    215,000
    
    
    
    709,656
    
    
    
    47,612
    
    
    
    (757,268
    )
    
    
    215,000Retained earnings (deficit)
    
    
    (4,682
    )
    
    
    4,061
    
    
    
    (4,591
    )
    
    
    530
    
    
    
    (4,682
    )Accumulated other comprehensive income
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52Total stockholders equity
    
    
    210,370
    
    
    
    713,717
    
    
    
    43,021
    
    
    
    (756,738
    )
    
    
    210,370Total liabilities and stockholders
    
    $
    757,794
    
    
    $
    940,393
    
    
    $
    83,163
    
    
    $
    (835,936
    )
    
    $
    945,414
 22




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##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statement of Operations (Successor)
For the six months ended June 30, 2005
 Subsidiary
    
    Subsidiary
    
    CombiningParent
    
    Guarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalCash provided by (used in)Operating activitiesNet income for the period
    
    $
    9,277
    
    
    $
    21,122
    
    
    $
    (2
    )
    
    $
    (21,120
    )
    
    $
    9,277Adjustments to reconcile net income to net
cashprovided by operating activitiesDepreciation and amortization
    
    
    
    
    
    
    11,608
    
    
    
    1,610
    
    
    
    
    
    
    
    13,218Amortization of deferred charges
    
    
    916
    
    
    
    853
    
    
    
    
    
    
    
    
    
    
    
    1,769Deferred income taxes
    
    
    
    
    
    
    (419
    )
    
    
    (86
    )
    
    
    
    
    
    
    (505
    )Gain on disposal of property, plant
and equipment
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )Equity in earnings of subsidiaries
    
    
    (21,302
    )
    
    
    182
    
    
    
    
    
    
    
    21,120
    
    
    
    Changes in assets and liabilitiesAccounts receivable
    
    
    
    
    
    
    13,167
    
    
    
    (7,875
    )
    
    
    
    
    
    
    5,292Inventories
    
    
    
    
    
    
    (3,400
    )
    
    
    249
    
    
    
    
    
    
    
    (3,151
    )Prepaid expenses
    
    
    
    
    
    
    2,939
    
    
    
    336
    
    
    
    
    
    
    
    3,275Accounts payable and other accrued
Liabilities
    
    
    (1,277
    )
    
    
    (23,714
    )
    
    
    (5,930
    )
    
    
    
    
    
    
    (30,921
    )Income taxes payable
    
    
    4,729
    
    
    
    (8,845
    )
    
    
    (1,493
    )
    
    
    
    
    
    
    (5,609
    )Net cash provided by operating activities
    
    
    (7,657
    )
    
    
    13,484
    
    
    
    (13,191
    )
    
    
    
    
    
    
    (7,364
    )Investing activitiesAcquisition
of intangibles  licenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisitions of rental assets and spare
engines
    
    
    
    
    
    
    (6,628
    )
    
    
    (2,665
    )
    
    
    
    
    
    
    (9,293
    )Acquisitions of property, plant and equipment
    
    
    
    
    
    
    (5,353
    )
    
    
    (529
    )
    
    
    
    
    
    
    (5,882
    )Proceeds on disposal of rental assets and
Spare engines
    
    
    
    
    
    
    4,015
    
    
    
    715
    
    
    
    
    
    
    
    4,730Proceeds on disposal of property, plant and
Equipment
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Net cash used in investing activities
    
    
    
    
    
    
    (7,924
    )
    
    
    (2,479
    )
    
    
    
    
    
    
    (10,403
    )Financing activitiesRepayment of debt
    
    
    (15,000
    )
    
    
    (639
    )
    
    
    (212
    )
    
    
    
    
    
    
    (15,851
    )Change in due to (from) related companies
    
    
    18,643
    
    
    
    (26,651
    )
    
    
    13,818
    
    
    
    
    
    
    
    5,810Net cash (used in) provided by financing
Activities
    
    
    3,643
    
    
    
    (27,290
    )
    
    
    13,606
    
    
    
    
    
    
    
    (10,041
    )Net (decrease) increase in cash and cash
Equivalents
    
    
    (4,014
    )
    
    
    (21,730
    )
    
    
    (2,064
    )
    
    
    
    
    
    
    (27,808
    )Cash and
cash equivalents  beginning of
Period
    
    
    4,116
    
    
    
    18,521
    
    
    
    5,254
    
    
    
    
    
    
    
    27,891Cash and
cash equivalents  end of period
    
    $
    102
    
    
    $
    (3,209
    )
    
    $
    3,190
    
    
    $
    
    
    
    $
    83
 23




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##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Condensed Consolidating Statement of Operations (Predecessor)
For the six months ended June 30, 2004
 Subsidiary
    
    Subsidiary
    
    CombiningGuarantors
    
    Non-Guarantors
    
    Adjustments
    
    TotalCash provided by (used in)Operating activitiesNet income for the period
    
    
    24,991
    
    
    
    (1,170
    )
    
    
    
    
    
    
    23,821Adjustments
to reconcile net income to net cash provided by
operating activitiesDepreciation and amortization
    
    
    8,677
    
    
    
    1,474
    
    
    
    
    
    
    
    10,151Amortization of deferred charges
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    272Deferred income taxes
    
    
    (3,345
    )
    
    
    (78
    )
    
    
    
    
    
    
    (3,423
    )Other
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    47Changes in assets and liabilitiesAccounts receivable
    
    
    (30,148
    )
    
    
    (3,690
    )
    
    
    
    
    
    
    (33,838
    )Inventories
    
    
    (23,570
    )
    
    
    (12,373
    )
    
    
    
    
    
    
    (35,943
    )Prepaid expenses
    
    
    (1,430
    )
    
    
    1,827
    
    
    
    
    
    
    
    397Accounts payable and other accrued liabilities
    
    
    50,923
    
    
    
    15,819
    
    
    
    
    
    
    
    66,742Income taxes receivable and payable
    
    
    5,538
    
    
    
    (6,195
    )
    
    
    
    
    
    
    (657
    )Net cash provided by operating activities
    
    
    31,955
    
    
    
    (4,386
    )
    
    
    
    
    
    
    27,569Investing activitiesAcquisitions of intangibles  licenses
    
    
    
    
    
    
    (125
    )
    
    
    
    
    
    
    (125
    )Acquisition of rental assets and spare engines
    
    
    (6,551
    )
    
    
    (338
    )
    
    
    
    
    
    
    (6,889
    )Acquisition of property, plant and equipment
    
    
    (4,077
    )
    
    
    (125
    )
    
    
    
    
    
    
    (4,202
    )Proceeds on disposal of rental assets and spare engines
    
    
    4,278
    
    
    
    567
    
    
    
    
    
    
    
    4,845Proceeds from disposals of property, plant and
equipment
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Net cash used in investing activities
    
    
    (6,338
    )
    
    
    (21
    )
    
    
    
    
    
    
    (6,359
    )Financing activitiesRepayment of debt
    
    
    (591
    )
    
    
    (252
    )
    
    
    
    
    
    
    (843
    )Change in due to (from) related companies
    
    
    (8,891
    )
    
    
    11,257
    
    
    
    
    
    
    
    2,366Net cash (used in) provided by financing activities
    
    
    (9,482
    )
    
    
    11,005
    
    
    
    
    
    
    
    1,523Net (decrease) increase in cash and cash equivalents
    
    
    16,135
    
    
    
    6,598
    
    
    
    
    
    
    
    22,733Cash and cash equivalents  beginning of period
    
    
    15,188
    
    
    
    7,510
    
    
    
    
    
    
    
    22,698Cash and cash equivalents  end of period
    
    
    31,323
    
    
    
    14,108
    
    
    
    
    
    
    
    45,431
 24




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##### Table of Contents



STANDARD AERO HOLDINGS, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 13
    
    Subsequent EventIn July 2005 the Company instituted a workforce reduction program, to address volume
reductions. As a result there was a reduction of approximately 100 employees with an estimate
cost of $2.0 million.
 25




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Basis of Presentation
   Overview
  Disclosures about Segments
of an Enterprise and Related Information
 26




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##### Table of Contents




    
    the number of engines in operation (the installed base);
    
    the age of the installed base; and
    
    the utilization rate of the installed base.
   Restatement
 Overview
  Accounting Errors and Reclassification
  27




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##### Table of Contents



Accounting for Income Taxes
 Effects of Restatement and Reclassification
   Three Months Ended
    
    August 25 -
    
    
    January 1 March 31
    
    December 31,
    
    
    August 24,
    
    Year Ended December 31,2005
    
    2004
    
    2004
    
    
    2004
    
    2003
    
    2002Successor
    
    Predecessor
    
    Successor
    
    
    
    
    
    
    Predecessor(In millions)Increase (decrease) in:Selling, general and
administrative expense
    
    
    $
    0.0
    
    
    $
    (0.2
    )
    
    $
    1.4
    
    
    
    $
    (0.2
    )
    
    $
    1.8
    
    
    $
    2.1Total operating expenses
    
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    1.4
    
    
    
    
    (0.2
    )
    
    
    1.8
    
    
    
    2.1Income from operations
    
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    1.4
    
    
    
    
    (0.2
    )
    
    
    1.8
    
    
    
    2.1Income before income taxes
    
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    1.4
    
    
    
    
    (0.2
    )
    
    
    1.8
    
    
    
    2.1Provision for income taxes
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    (2.9
    )
    
    
    
    0.2
    
    
    
    (1.8
    )
    
    
    (2.1
    )Net income (loss)
    
    
    $
    0.3
    
    
    $
    0.0
    
    
    $
    (1.5
    )
    
    
    $
    0.0
    
    
    $
    0.0
    
    
    $
    0.0
 Trends Affecting Our Business
   28




---



##### Table of Contents



rd
    Effect of the Acquisition
  29




---



##### Table of Contents



WeightedGross
    
    
    averagecarrying
    
    
    amortization(In millions of dollars)
    
    value
    
    
    periodCustomer
relationships
    
    $
    98.0
    
    
    17.4 yearsOEM authorizations
    
    
    38.4
    
    
    14.2 yearsTechnology
    
    
    2.0
    
    
    5 yearsDatabases
    
    
    5.9
    
    
    5 years
    Financial statement presentation
  Revenues.
 Cost of revenues.
 30




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##### Table of Contents



Selling, general and administrative expense.
 Critical accounting policies
  Revenue recognition.
 Reserves for losses on fixed-price work orders.
 Reserve for warranty costs.
 Reserve for doubtful accounts receivable.
 Goodwill and intangible assets.
 31




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##### Table of Contents



Impairment of long-lived assets. Accounting for the Impairment or Disposal of Long-Lived Assets.
 Inventory.
 Income taxes. Accounting for Income
Taxes.
 Results of operations
 Three Months Ended June 30, 2005 compared with Three Months Ended June 30, 2004
  32




---



##### Table of Contents



Three months endedJune 30,(In thousands of dollars)
    
    2005
    
    2004(Successor)
    
    (Predecessor)Revenues
    
    $
    171,781
    
    
    $
    189,917Cost of revenues
    
    
    (145,264
    )
    
    
    (154,748
    )Gross profit
    
    
    26,517
    
    
    
    35,169Selling, general and administrative
expense
    
    
    (12,851
    )
    
    
    (11,531
    )Amortization of intangible assets
    
    
    (2,446
    )
    
    
    (688
    )Income from operations
    
    
    11,220
    
    
    
    22,950Interest expense
    
    
    (8,547
    )
    
    
    (1,896
    )Income before income taxes
    
    
    2,673
    
    
    
    21,054Benefit (provision) for income taxes
    
    
    126
    
    
    
    (7,924
    )Net income
    
    $
    2,799
    
    
    $
    13,130
 Revenues.
 Gross profit.
 Selling, general and administration expense.
 Amortization of intangible assets.
 Income from operations.
 33




---



##### Table of Contents



Interest expense.
 Six Months Ended June 30, 2005 compared with Six Months Ended June 30, 2004
  Six months endedJune 30,(In thousands of dollars)
    
    2005
    
    2004(Successor)
    
    (Predecessor)Revenues
    
    $
    359,195
    
    
    $
    367,868Cost of revenues
    
    
    (299,569
    )
    
    
    (301,978
    )Gross profit
    
    
    59,626
    
    
    
    65,890Selling, general and administrative
expense
    
    
    (25,395
    )
    
    
    (22,440
    )Amortization of intangible assets
    
    
    (4,892
    )
    
    
    (1,376
    )Income from operations
    
    
    29,339
    
    
    
    42,074Interest expense
    
    
    (17,475
    )
    
    
    (3,835
    )Income before income taxes
    
    
    11,864
    
    
    
    38,239Provision for income taxes
    
    
    (2,587
    )
    
    
    (14,418
    )Net income
    
    $
    9,277
    
    
    $
    23,821
 Revenues.
 Gross profit.
 Selling, general and administration expense.
 34




---



##### Table of Contents



Amortization of intangible assets.
 Income from operations.
 Interest expense.
 35




---



##### Table of Contents



Segment Results of Operations
  Three months endedJune 30,(In thousands of dollars)
    
    2005
    
    2004(Successor)
    
    (Predecessor)Revenues:Aviation MRO
    
    $
    166,652
    
    
    $
    182,507Other Services
    
    
    5,129
    
    
    
    7,410Total Revenue
    
    
    171,781
    
    
    
    189,917Segment Income (Loss) From
Operations:Aviation MRO
    
    
    15,569
    
    
    
    25,855Other Services
    
    
    (1,811
    )
    
    
    (1,229
    )Segment income from operations
    
    
    13,758
    
    
    
    24,626Corporate expenses
    
    
    (2,538
    )
    
    
    (1,676
    )Income from operations
    
    
    11,220
    
    
    
    22,950Interest expense
    
    
    (8,547
    )
    
    
    (1,896
    )Income before income taxes
    
    
    2,673
    
    
    
    21,054Provision for income taxes
    
    
    126
    
    
    
    (7,924
    )Net income
    
    $
    2,799
    
    
    $
    13,130
 Aviation MRO
 Three Months Ended June 30, 2005 compared with Three Months Ended June 30, 2004
 Revenues.
 Segment income from operations.
 36




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##### Table of Contents



Six Months Ended June 30, 2005 compared with Six Months Ended June 30, 2004
  Six months endedJune 30,(In thousands of dollars)
    
    2005
    
    2004(Successor)
    
    (Predecessor)Revenues:Aviation MRO
    
    $
    349,156
    
    
    $
    353,881Other Services
    
    
    10,039
    
    
    
    13,987Total Revenue
    
    
    359,195
    
    
    
    367,868Segment Income (Loss) From
Operations:Aviation MRO
    
    
    37,888
    
    
    
    47,068Other Services
    
    
    (3,151
    )
    
    
    (2,107
    )Segment income from operations
    
    
    34,737
    
    
    
    44,961Corporate expenses
    
    
    (5,398
    )
    
    
    (2,887
    )Income from operations
    
    
    29,339
    
    
    
    42,074Interest expense
    
    
    (17,475
    )
    
    
    (3,835
    )Income before income taxes
    
    
    11,864
    
    
    
    38,239Provision for income taxes
    
    
    (2,587
    )
    
    
    (14,418
    )Net income
    
    $
    9,277
    
    
    $
    23,821
 Aviation MRO
 Six Months Ended June 30, 2005 compared with Six Months Ended June 30, 2004
 Revenues.
 Segment income from operations.
 37




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##### Table of Contents



Factors That May Affect Future Results
  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 $270.0 million and a $50.0 million six-year
revolving credit facility, under which we had $12.5 million outstanding indebtedness;
    
    $3.4 million in capital lease obligations; and
    
    $200.0 million in aggregate principal amount of our 81/4% Senior Subordinated Notes due 2014.
 Senior Credit Facilities
  38




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##### Table of Contents



Notional Amount
    
    Term
    
    Floor Strike Rate
    
    Cap Strike Rate$75,000,000
    
    March 28, 2005  September 26, 2005
    
    2.00% (plus applicable margin)
    
    3.50% (plus applicable margin)$75,000,000
    
    September 27, 2005  March 26, 2006
    
    2.00% (plus applicable margin)
    
    4.25% (plus applicable margin)$75,000,000
    
    March 27, 2006  December 27, 2006
    
    2.40% (plus applicable margin)
    
    5.25% (plus applicable margin)
 Senior Subordinated Notes
    39




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##### Table of Contents



Covenant Compliance
   1 4
   August 25 
    
    July 1 January 1  June
    
    December 31,
    
    August 24,
    
    Last 12 Months30, 2005
    
    2004
    
    2004
    
    June 30, 2005(In millions)
    
    Successor
    
    Successor
    
    Predecessor
    
    Combined(5)Net income
    
    $
    9.3
    
    
    $
    (4.7
    )
    
    $
    9.4
    
    
    
    14.0Add:Depreciation and amortization
    
    
    13.2
    
    
    
    9.1
    
    
    
    4.1
    
    
    
    26.4Interest expense, net
    
    
    17.5
    
    
    
    13.7
    
    
    
    1.0
    
    
    
    32.2Provision for income taxes
    
    
    2.6
    
    
    
    (0.2
    )
    
    
    1.4
    
    
    
    3.8Expenses associated with the disposal of Dunlop
Standard (1)
    
    
    
    
    
    
    
    
    
    
    2.3
    
    
    
    2.3Expenses associated with Acquisition (2)
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    2.4Effect of write-up of inventory and work in progress (3)
    
    
    
    
    
    
    21.4
    
    
    
    
    
    
    
    21.4Non-recurring expenses (4)
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    0.6Management fee
    
    
    0.8
    
    
    
    0.5
    
    
    
    
    
    
    
    1.3Adjusted EBITDA
    
    $
    43.9
    
    
    $
    42.2
    
    
    $
    18.2
    
    
    $
    104.3
 
 (1)
    
    The Predecessor incurred approximately $2.3 million in compensation expenses associated
with the disposal of Dunlop Standard. 40




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(2)
    
    We incurred approximately $2.4 million in fees and other expenses associated with negotiating,
financing and consummating the Acquisition that were not capitalized as part of the purchase price
or as deferred financing charges.(3)
    
    As a result of the Acquisition and the requirements of purchase accounting, our assets and
liabilities, including the amounts recorded for inventory and work in process, were adjusted
to their fair market values as of the closing date.(4)
    
    We incurred $0.2 million in severance costs during the quarter ended June 30, 2005. We
expect to incur an additional $1.8 million in severance costs during the remainder of 2005.
We have also incurred $0.4 million in costs associated with the exchange offer of our senior
subordinated notes and expect additional costs during the remainder of 2005.(5)
    
    Successor and Predecessor results have been combined to give twelve months results as
required under the senior credit facilities. Cash Flows
  Six months endedJune 30,2005
    
    2004(In thousands of dollars)
    
    (Successor)
    
    (Predecessor)Net cash provided by (used in) operating activities
    
    
    (7,364
    )
    
    $
    27,569Net cash used in investing activities
    
    
    (10,403
    )
    
    
    (6,359
    )Net cash provided from (used in) financing activities
    
    
    (10,041
    )
    
    
    1,523Net increase (decrease) in cash and cash equivalents
    
    
    (27,808
    )
    
    $
    22,733
 Net Cash (Used in) Provided by Operating Activities
   Net Cash Used in Investing Activities
  41




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Net Cash Provided by (Used in) Financing Activities
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  Interest rate risks.
  Notional
    
    
    
    Maximum
    
    Minimumamount
    
    Period hedged by interest rate collar
    
    interest rate(1)
    
    interest rate(1)$75.0 million
    
    March 28, 2005  September 26, 2005
    
    
    3.50
    %
    
    
    2.00
    %$75.0 million
    
    September 27, 2005  March 26, 2006
    
    
    4.25
    %
    
    
    2.00
    %$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.
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ITEM 4. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
     Changes in Internal Control over Financial Reporting
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PART II OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS.
  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).
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ExhibitNumber
    
    Description31.1
    
    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 and Chief Financial Officer pursuant to Rule
15d-14(b) (17 CFR 240.15d-14(b)) and 18 U.S.C. Section 1350.
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SIGNATURES
  STANDARD AERO HOLDINGS, INC.Dated: August 24, 2005
    
    /s/ DAVID SHAWName:
    
    David ShawTitle:
    
    Chief Executive Officer(principal executive officer)Dated: August 24, 2005
    
    /s/ BRADLEY BERTOUILLEName:
    
    Bradley BertouilleTitle:
    
    Chief Financial Officer(principal financial and accounting officer)
 48