UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission File Number 001-31617

Offshore Logistics, Inc.

(Exact name of registrant as specified in its Charter)

 

 

Registrant’s telephone number, including area code: (713) 267-7600

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES o     NO þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES o     NO þ

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES o     NO þ

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934.)  YES þ     NO o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o     NO þ

 

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price on the New York Stock Exchange, as of September 30, 2004 was $753,159,268.

 

The number of shares outstanding of the registrant’s Common Stock as of October 31, 2005 was 23,344,508.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

OFFSHORE LOGISTICS, INC.

 

INDEX — FORM 10-K

 

OFFSHORE LOGISTICS, INC.

 

ANNUAL REPORT (FORM 10-K)

 

This Annual Report on Form 10-K is filed by Offshore Logistics, Inc., a Delaware corporation, which we refer to separately as Offshore Logistics, the Company or the registrant. We operate in two business segments — Helicopter Services and Production Management Services. During fiscal year 2005, we conducted our Helicopter Services through four business units: North American Operations, North Sea Operations, International Operations and Technical Services. We currently conduct our Helicopter Services through six business units:

 

North American Operations;

 

South and Central American Operations;

 

European Operations;

 

West African Operations;

 

Southeast Asian Operations; and

 

Other International Operations.

 

We use the pronouns “we,” “our” and “us” to refer collectively to Offshore Logistics and our consolidated subsidiaries and affiliates. We also own interests in other entities that we do not consolidate for financial reporting purposes, which we refer to as unconsolidated affiliates. Offshore Logistics, Bristow Aviation Holdings, Ltd. its consolidated subsidiaries and affiliates and the unconsolidated affiliates is each a separate corporation, limited liability company or other legal entity, and our use of the terms “we,” “our” and “us” does not suggest that we have abandoned their separate identities or the legal protections given to them as separate legal entities.

 

THE INTERNAL REVIEW

 

In February 2005, we voluntarily advised the staff of the United States Securities and Exchange Commission (the “SEC”) that the Audit Committee of our Board of Directors had engaged special outside counsel to undertake a review of certain payments made by two of our affiliated entities in a foreign country. The review of these payments, which initially focused on Foreign Corrupt Practices Act matters, was subsequently expanded to cover operations in other countries and other issues (the “Internal Review”).

 

The SEC then notified us that it had initiated an informal inquiry and requested that we provide certain documents on a voluntary basis. Subsequently, the SEC advised us that the inquiry had become an investigation. We have responded to the SEC’s requests for documents and are continuing to do so.

 

The Internal Review is complete and the accompanying financial statements reflect all known required restatements. As a follow-up to matters identified during the course of the Internal Review, Special Counsel to the Audit Committee is completing certain work, and may be called upon to undertake additional work in the future to assist in responding to inquiries from the SEC, from other governmental authorities or customers, or as follow-up to the steps being performed by Special Counsel.

 

RESTATEMENT

 

As a result of the Internal Review findings, we have restated our historical financial statements to accrue for payroll taxes, penalties and interest attributable to underreported employee payroll. In connection with this matter, our restated consolidated statements of income reflect reductions in operating income of $4.2 million and $3.2 million for fiscal years 2004 and 2003, respectively, and $4.6 million for earlier fiscal years from previously reported amounts. In addition, our consolidated statements of income reflect a reduction in operating income of $3.8 million for fiscal year 2005 from the previously announced amount. At this time, we cannot estimate what additional payments, fines and/or penalties may be required in connection with the matters identified as a result of

the Internal Review or the SEC investigation; however, such payments, fines and/or penalties could have a material adverse effect on our business, financial condition and results of operations.

 

Our management has separately determined that we were not reporting reimbursements received from our customers for costs incurred on their behalf in accordance with United States generally accepted accounting principles (“GAAP”). Our customers reimburse us for certain costs incurred on their behalf, which have historically been recorded by offsetting such amounts against the related expenses. In addition, our management has determined that we did not properly record expenses related to severance benefits for certain employees of a foreign subsidiary and we did not properly record expenses related to payroll taxes incurred by one of our foreign subsidiaries. In accordance with GAAP, we have restated our historical financial statements for fiscal years 2004 and 2003 to reflect such reimbursement as an increase in revenue and a corresponding increase in expense, and we increased direct costs to reflect the severance obligation and payroll taxes in the applicable periods. With respect to customer reimbursements, operating revenues and direct costs were increased $53.4 million and $46.4 million for fiscal years 2004 and 2003, respectively, from previously reported amounts, with no impact on income from operations or net income. With respect to the severance benefits and payroll taxes, direct costs were increased by $0.5 million and $0.2 million in fiscal years 2004 and 2003, respectively. For all three items, operating revenues were increased $55.3 million and direct costs were increased by $56.3 million from the previously announced amount for fiscal year 2005.

 

See Note A to the “Notes to Consolidated Financial Statements” in “Item 8. Consolidated Financial Statements and Supplementary Data.”

 

This Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are statements about our future business, strategy, operations, capabilities and results; financial projections; plans and objectives of our management; expected actions by us and by third parties, including our customers, competitors and regulators; and other matters. Some of the forward-looking statements can be identified by the use of words such as “believes”, “belief”, “expects”, “plans”, “anticipates”, “intends”, “projects”, “estimates”, “may”, “might”, “would”, “could” or other similar words; however, all statements in this Annual Report, other than statements of historical fact or historical financial results are forward-looking statements.

 

Our forward-looking statements reflect our views and assumptions on the date we are filing this Annual Report regarding future events and operating performance. We believe that they are reasonable, but they involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control, that may cause actual results to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements. Accordingly, you should not put undue reliance on any forward-looking statements. Factors that could cause our forward-looking statements to be incorrect and actual events or our actual results to differ from those that are anticipated include all of the following:

 

 

 

All forward-looking statements in this Annual Report are qualified by these cautionary statements and are only made as of the date of this Annual Report. We do not undertake any obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

If you hold our securities or are considering an investment in our securities, you should carefully consider the following risks, together with the other information contained in this Annual Report.

 

The SEC investigation, any related proceedings in other countries and the consequences of the activities identified in the Internal Review could result in civil or criminal proceedings, the imposition of fines and penalties, the commencement of third-party litigation, the incurrence of expenses, the loss of business and other adverse effects on our Company.

 

In October 2005, the Audit Committee reached certain conclusions with respect to findings to date from the Internal Review. The Audit Committee concluded that, over a considerable period of time, (a) improper payments were made by, and on behalf of, certain foreign affiliated entities directly or indirectly to employees of the Nigerian government, (b) improper payments were made by certain foreign affiliated entities to Nigerian employees of certain customers with whom we have contracts, (c) inadequate employee payroll declarations and, in certain instances, tax payments were made by us or our affiliated entities in certain jurisdictions, (d) inadequate valuations for customs purposes may have been declared in certain jurisdictions resulting in the underpayment of import duties, and (e) an affiliated entity in a South American country, with the assistance of our personnel and two of our other affiliated entities, engaged in transactions which appear to have assisted the South American entity in the circumvention of currency transfer restrictions and other regulations. In addition, as a result of the Internal Review, the Audit Committee and management determined that there were deficiencies in our books and records and internal controls with respect to the foregoing and certain other activities.

 

Based on the Audit Committee’s findings and recommendations, the Board of Directors has taken disciplinary action with respect to our personnel who it determined bore responsibility for these matters. The disciplinary actions included termination or resignation of employment (including certain members of senior management), changes of job responsibility, reductions in incentive compensation payments and reprimands. One of our affiliates has also obtained the resignation of certain of its personnel.

 

We have initiated remedial action, including initiating action to correct underreporting of payroll tax, disclose to certain customers inappropriate payments made to customer personnel and terminate certain agency, business and joint venture relationships. We also have taken steps to reinforce our commitment to conduct our business with integrity by creating an internal corporate compliance function, instituting a new code of business conduct (our new code of business conduct entitled “Code of Business Integrity” is available on our website, http://www.olog.com) and developing and implementing a training program for all employees. In addition to the disciplinary actions referred to above, we have also taken steps to strengthen our control environment by hiring new personnel and realigning reporting lines within the accounting function so that field accounting reports directly to the corporate accounting function instead of operations management.

 

Following the Audit Committee’s conclusions, we initiated the process of voluntarily advising governmental authorities in certain countries of the Audit Committee’s findings. We have not yet advised such foreign governmental authorities of the Audit Committee findings, but intend to do so. Such disclosure may result in legal and administrative proceedings, the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors who are within the jurisdictions of such authorities, the imposition of fines and other penalties, remedies and/or sanctions, including precluding us from participating in business operations in their countries. To the extent that violations of the law may have occurred in several countries in which we operate, we do not yet know whether such violations can be cured merely by the payment of fines or whether other actions may be taken against us, including requiring us to curtail our business

operations in one or more such countries for a period of time. In the event that we curtail our business operations in any such country, we may face difficulties exporting our aircraft. As of September 30, 2005, the book values of our aircraft in Nigeria and the South American country where certain improper activities took place were approximately $79.4 million and $2.9 million, respectively.

 

We cannot predict the ultimate outcome of the SEC investigation, nor can we predict whether other applicable U.S. and foreign governmental authorities will initiate separate investigations. The outcome of the SEC investigation and any related legal and administrative proceedings could include the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors, the imposition of fines and other penalties, remedies and/or sanctions, modifications to business practices and compliance programs and/or referral to other governmental agencies for other appropriate actions. It is not possible to accurately predict at this time when matters relating to the SEC investigation will be completed, the final outcome of the SEC investigation, what if any actions may be taken by the SEC or by other governmental agencies in the U.S. or in foreign jurisdictions, or the effect that such actions may have on our consolidated financial statements. In addition, in view of the findings of the Internal Review, we expect to encounter difficulties in the future conducting business in Nigeria and a South American country, and with certain customers. It is also possible that certain of our existing contracts may be cancelled and that we may become subject to claims by third parties, possibly resulting in litigation. The matters identified in the Internal Review and their effects could have a material adverse effect on our business, financial condition and results of operations.

 

In connection with its conclusions regarding payroll declarations and tax payments, the Audit Committee determined on November 23, 2005, following the recommendation of our senior management, that there is a need to restate our historical consolidated financial statements for fiscal years 2000, 2001, 2002, 2003 and 2004 and for quarterly periods in fiscal year 2005. We have accrued $15.8 million for the taxes, penalties and interest attributable to underreported employee payroll. Operating income for fiscal year 2005 includes $3.8 million attributable to this accrual, and the remainder has been reported as adjustments to amounts previously reported for fiscal year 2004 and earlier. At this time, we cannot estimate what additional payments, fines, penalties and/or litigation and related expenses may be required in connection with the matters identified as a result of the Internal Review, the SEC investigation, any other regulatory investigation that may be instituted or third-party litigation; however, such payments, fines, penalties and/or expenses could have a material adverse effect on our business, financial condition and results of operations.

 

As we continue to respond to the SEC investigation and other governmental authorities and take other actions relating to improper activities that have been identified in connection with the Internal Review, there can be no assurance that additional restatements will not be required or that the historical financial statements included in this Annual Report will not change or require amendment. In addition, new issues may be identified that may impact our financial statements and the scope of the restatements described in this Annual Report and lead us to take other remedial actions or otherwise adversely impact our Company.

 

The disclosure and remediation of activities identified in the Internal Review could result in the loss of business relationships and adversely affect our business.

 

As a result of the disclosure and remediation of a number of activities identified in the Internal Review, we expect to encounter difficulties conducting business in certain foreign countries and retaining and attracting additional business with certain customers. We cannot predict the extent of these difficulties; however, our ability to continue conducting business in these countries and with these customers may be significantly impacted.

 

We have commenced actions to disclose activities in Nigeria identified in the Internal Review to affected customers, and one or more of these customers may seek to cancel their contracts with us. One of such customers already has commenced its own investigation. Among other things, we have been advised that such customer intends to exercise its rights to audit a specific contract, as well as to review its other relations with us. Although we have no indication as to what the final outcome of the audit and review will be, it is possible that such customer may seek to cancel one or more existing contracts if it believes that they were improperly obtained or that we breached any of their terms. Since our customers in Nigeria are affiliates of major international petroleum companies, with whom we do business throughout the world, any actions which are taken by certain customers could have a material

adverse effect on our business, financial position and results of operations, and these customers may preclude us from bidding on future business with them either locally or on a worldwide basis. In addition, applicable governmental authorities may preclude us from bidding on contracts to provide services in the countries where improper activities took place.

 

In connection with the Internal Review, we also have terminated our business relationship with certain agents and have taken actions to terminate business relationships with other agents. One of the terminated agents has commenced litigation against two of our foreign affiliated entities claiming damages of $16.3 million for breach of contract. We may be required to indemnify certain of our agents to the extent that regulatory authorities seek to hold them responsible in connection with activities identified in the Internal Review.

 

In a South American country where certain improper activities took place, we are negotiating to terminate our ownership interest in the joint venture that provides us with the local ownership content necessary to meet local regulatory requirements for operating in that country. During fiscal year 2005, we derived approximately $9.9 million of leasing and other revenues, of which $3.2 million was paid by us to a third party for the use of the aircraft, and approximately $0.3 million of dividend income from this joint venture. Without a joint venture partner, we will be unable to maintain an operating license and our future activities in that country may be limited to leasing our aircraft to unrelated operating companies. Our joint venture partners and agents are typically influential members of the local business community and instrumental in aiding us in obtaining contracts and managing our affairs in the local country. As a result of terminating these relationships, our ability to continue conducting business in these countries where the improper activities took place may be negatively affected. We may not be successful in our negotiations to terminate our ownership interest in the joint venture, and the outcome of such negotiations may negatively affect our ability to continue leasing our aircraft to the joint venture or other unrelated operating companies or conducting other business in that country, to export our aircraft or to recover our investment in the joint venture.

 

We expect to incur higher costs and lower profit margins as a result of the remediation of activities identified in the Internal Review.

 

Many of the improper actions identified in the Internal Review resulted in decreasing the costs incurred by us in performing our services. The remedial actions we are taking will result in an increase in these costs and, if we cannot raise our prices simultaneously and to the same extent of our increased costs, our operating income will decrease.

 

The demand for our services is substantially dependent on the level of offshore oil and gas exploration, development and production activity.

 

We provide helicopter services to companies engaged in offshore oil and gas exploration, development and production activities. As a result, demand for our services, as well as our revenue and our profitability, are substantially dependent on the worldwide levels of activity in offshore oil and gas exploration, development and production. These activity levels are principally affected by trends in, and expectations regarding, oil and gas prices, as well as the capital expenditure budgets of oil and gas companies. We cannot predict future exploration, development and production activity or oil and gas price movements. Historically, the prices for oil and gas and activity levels have been volatile and are subject to factors beyond our control, such as:

 

 

 

Our industry is highly competitive and cyclical, with intense price competition.

 

Our industry has historically been cyclical and is affected by the volatility of oil and gas price levels. There have been periods of high demand for our services, followed by periods of low demand for our services. Changes in commodity prices can have a dramatic effect on demand for our services, and periods of low activity intensify price competition in the industry and often result in our aircraft being idle for long periods of time.

 

The implementation by our customers of cost-saving measures could reduce the demand for our services.

 

Oil and gas companies are continually seeking to implement measures aimed at greater cost savings. As part of these measures, these companies are attempting to improve cost efficiencies with respect to helicopter transportation services. For example, these companies may reduce staffing levels on both old and new installations by using new technology to permit unmanned installations and may reduce the frequency of transportation of employees by increasing the length of shifts offshore. In addition, these companies could initiate their own helicopter or other alternative transportation methods. The continued implementation of these kinds of measures could reduce the demand for helicopter transportation services and have a material adverse effect on our business, financial condition and results of operations.

 

We are highly dependent upon the level of activity in North America and the North Sea.

 

Approximately 55% of our fiscal year 2005 operating revenue was derived from helicopter services provided to customers operating in North America and the North Sea. North America and the North Sea are mature exploration and production regions that have experienced substantial seismic survey and exploration activity for many years. Hurricanes Katrina and Rita have resulted in, or may result in, the plugging and abandonment of many wells in the U.S. Gulf of Mexico. Because a large number of oil and gas prospects in these regions have already been drilled, additional prospects of sufficient size and quality could be more difficult to identify. In addition, the U.S. government’s exercise of authority under the Outer Continental Shelf Lands Act, as amended, to restrict the availability of offshore oil and gas leases could adversely impact exploration and production activity in the U.S. Gulf of Mexico. If activity in oil and gas exploration, development and production in either North America or the North Sea materially declines, our business, financial condition and results of operations could be materially and adversely affected. We cannot predict the levels of activity in these areas.

 

Our future growth depends on the level of international oil and gas activity and our ability to operate outside of North America and the North Sea.

 

Our future growth will depend significantly on our ability to expand into international markets outside of North America and the North Sea. Expansion of our business depends on the level of offshore oil and gas exploration, development and production activity and our ability to operate in these regions.

 

Expansion of our business outside of North America and the North Sea may be adversely affected by:

 

 

We can predict neither the level of activity in these areas nor the restrictions or requirements that may be imposed in the countries in which we operate. If we are unable to continue to operate or retain contracts in operations outside of North America and the North Sea, our future business, financial condition and results of

operations may be adversely affected, and our operations outside of North America and the North Sea may not grow. Our operations in Nigeria and South America are likely to be negatively affected by actions that we are taking as a result of the activities identified in the Internal Review, as discussed above under “— The disclosure and remediation of activities identified in the Internal Review could result in the loss of business relationships and adversely affect our business.”

 

In order to grow our business, we may require additional capital in the future, which may not be available to us.

 

Our business is capital intensive and, to the extent we do not generate sufficient cash from operations, we need to raise additional funds through public or private debt or equity financings to execute our growth strategy. Adequate sources of capital funding may not be available when needed, or may not be available on favorable terms. In addition, the SEC investigation, any related proceedings in other countries and the consequences of the activities identified in the Internal Review could adversely affect our ability to raise additional funds. If we raise additional funds by issuing equity securities, dilution to the holdings of existing stockholders may result. If funding is insufficient at any time in the future, we may be unable to acquire additional aircraft, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

 

Our operations outside of North America and the North Sea are subject to additional risks.

 

Approximately 33% of our fiscal year 2005 operating revenue was attributable to helicopter services provided to oil and gas customers operating outside of North America and the North Sea. Operations in most of these areas are subject to various risks inherent in conducting business in international locations, including:

 

 

For example, there has been continuing unrest in Nigeria, where we derived 14% of our fiscal year 2005 operating revenue. While this unrest has not adversely affected our International Operations, any future unrest in Nigeria or our other operating regions could adversely affect our business, financial condition and results of operations. We cannot predict whether any of these events will occur in the future in Nigeria or elsewhere.

 

Foreign exchange risks and controls may affect our financial position and results of operations.

 

Through our operations outside the U.S., we are exposed to currency fluctuations and exchange rate risks. The majority of both our revenue and expenses from our North Sea Operations is denominated in British pounds sterling. Our foreign exchange rate risk is even greater when our revenue is denominated in a currency different from that associated with the corresponding expenses. In addition, some of our contracts provide for payment in currencies other than British pounds sterling or U.S. dollars. We attempt to minimize our exposure to foreign exchange rate risk by contracting the majority of our services, other than in our North Sea Operations, in U.S. dollars. As a result, a strong U.S. dollar may increase the local cost of our services that are provided under U.S. dollar-denominated contracts, which may reduce the demand for our services in foreign countries. Generally, we do not enter into hedging transactions to protect against foreign exchange risks related to our operating revenue.

 

Because we maintain our financial statements in U.S. dollars, we are vulnerable to fluctuations in the exchange rate between the U.S. dollar and foreign currencies, such as the British pound sterling. In preparing our financial statements, we must convert all non-U.S. dollar currencies to U.S. dollars. The effect of foreign currency translation is reflected in a component of stockholders’ investment, while foreign currency transaction gains or losses are credited or charged to income and reflected in other income (expense). In the past three fiscal years, our

stockholders’ investment has increased by $66.2 million as a result of translation adjustments. Changes in exchange rates could cause significant changes in our financial position and results of operations in the future.

 

We operate in countries with foreign exchange controls. These controls may limit our ability to repatriate funds from our International Operations and unconsolidated affiliates or otherwise convert local currencies into U.S. dollars. These limitations could adversely affect our ability to access cash from these operations.

 

We operate in many international areas through entities that we do not control.

 

We conduct many of our international operations through entities in which we have a minority investment or through strategic alliances with foreign partners. For example, we have acquired interests in, and in some cases have lease and service agreements with, entities that operate aircraft in Egypt, Mexico and Norway, and, as indicated above, we are negotiating to terminate our ownership interest in a joint venture in a South American country. We derive significant amounts of lease revenue, service revenue and dividend income from these entities. In fiscal year 2005, we derived approximately $3.4 million of dividend income from our unconsolidated affiliates, of which approximately $0.3 million was derived from the joint venture in such South American country. More significantly, we received approximately $46.6 million of revenues in fiscal year 2005 from the provision of aircraft and other services to unconsolidated affiliates, of which approximately $9.9 million was derived from the joint venture in such South American country. Because we do not own a majority or maintain voting control of these entities, we do not have the ability to control their policies, management or affairs. The interests of persons who control these entities or partners may differ from ours, and may cause such entities to take actions that are not in our best interest. If we are unable to maintain our relationships with our partners in these entities, we could lose our ability to operate in these areas, potentially causing a material adverse affect on our business and results of operations.

 

Helicopter operations involve risks that may not be covered by our insurance or may increase our operating costs.

 

The operation of helicopters inherently involves a degree of risk. Hazards such as harsh weather and marine conditions, mechanical failures, crashes and collisions are inherent in our business and may result in personal injury, loss of life, damage to property and equipment and suspension or reduction of operations. Our aircraft have been involved in accidents in the past, some of which have included loss of life and property damage. We may experience similar accidents in the future. In addition, our Production Management Services are subject to the normal risks associated with working on oil and gas production facilities. These risks include injury to or death of personnel and damage to or loss of property.

 

We attempt to protect ourselves against these losses and damage by carrying insurance, including hull and liability, general liability, workers’ compensation, and property and casualty insurance. Our insurance coverage is subject to deductibles and maximum coverage amounts, and we do not carry insurance against all types of losses, including business interruption. We cannot assure you that our existing coverage will be sufficient to protect against all losses, that we will be able to maintain our existing coverage in the future or that the premiums will not increase substantially. In addition, future terrorist activity, accidents or other events could increase our insurance premiums. The loss of our liability insurance coverage, inadequate coverage from our liability insurance or substantial increases in future premiums could materially adversely affect our business, financial condition and results of operations.

 

We are subject to government regulation that limits foreign ownership of aircraft companies.

 

United States.  We are subject to regulations pursuant to the Federal Aviation Act of 1958, as amended, and other statutes. Under the Federal Aviation Act, it is unlawful to operate certain aircraft for hire within the U.S. unless such aircraft are registered with the Federal Aviation Administration (“FAA”) and the operator of such aircraft has been issued an operating certificate by the FAA. As a general rule, an aircraft may be registered under the Federal Aviation Act only if the aircraft is owned or controlled by one or more citizens of the United States. In addition, an operating certificate may be granted only to a citizen of the United States. For purposes of these requirements, a corporation is deemed to be a citizen of the United States only if, among other things, at least 75% of its voting interests are owned or controlled by U.S. citizens. If persons other than U.S. citizens should come to own or control

more than 25% of the voting interests in us, we have been advised that our aircraft may be subject to deregistration under the Federal Aviation Act, and we may lose the privilege of operating within the United States. Deregistration of our aircraft or loss of our operating license for any reason, including foreign ownership in excess of the permitted levels, would materially adversely affect our ability to conduct our North American Operations. Our organizational documents currently provide for the automatic suspension of voting rights of shares of our Common Stock owned or controlled by a non-U.S. citizen and our right to redeem those shares, to the extent necessary to comply with these requirements. As of September 30, 2005, approximately 6.2% of our outstanding Common Stock was held by persons with foreign addresses. Because a substantial portion of our Common Stock is publicly traded, our foreign ownership may fluctuate on each trading day. In addition, these foreign ownership limitations restricting our ability to issue or sell our Common Stock to non-U.S. citizens may hurt our ability to raise equity or acquire assets or businesses for Common Stock in the future.

 

United Kingdom.  We are subject to the Civil Aviation Act 1982, other U.K. and European statutes and regulations made thereunder. We carry persons and property in our helicopters pursuant to an operating license issued by the Civil Aviation Authority (“CAA”).

 

Under the European Council Regulation 2407/92, U.K. license holders must be in possession of a valid air operator’s certificate and must operate aircraft registered in the U.K. or obtain CAA approval for their use. The holder of an operating license must meet the ownership and control requirements of Council Regulation 2407/92. This means that the entity that operates under the license must be owned directly or through majority ownership, and must at all times be effectively controlled, by United Kingdom or European Union nationals. We own 49% of the Common Stock of our U.K. operating affiliate, Bristow Aviation Holdings, Ltd., or Bristow, and have put/call arrangements with the other two stockholders that allow us to acquire ownership of the remaining Common Stock from these stockholders. If we were to purchase any Bristow shares pursuant to this arrangement, we would be required to find a qualified European owner to acquire those shares in order for Bristow to retain its CAA operating license. Revocation of the CAA operating license for any reason would have a material adverse effect on our North Sea Operations.

 

International Operations.  Certain of our International Operations are subject to restrictions on foreign ownership. Because of this, these operations are conducted primarily through unconsolidated affiliates in which local citizens own interests or pursuant to arrangements through which we operate assets or conduct operations under contracts with local entities. If changes in local regulations further limit foreign ownership or otherwise restrict our ability to conduct operations or operate assets under contracts with local entities, we may not be permitted to continue operating in these regions.

 

We cannot assure you that there will be no changes in aviation laws, regulations or administrative requirements or the interpretations thereof, that could restrict or prohibit our ability to operate in certain regions. Any such restriction or prohibition on our ability to operate may materially adversely affect our business, financial condition and results of operations.

 

Our failure to attract and retain qualified personnel could have an adverse effect on us.

 

Our ability to attract and retain qualified pilots, mechanics and other highly-trained personnel is an important factor in determining our future success. For example, many of our customers require pilots with very high levels of flight experience. The market for these experienced and highly-trained personnel is competitive and will become more competitive if oil and gas industry activity levels increase. Accordingly, we cannot assure you that we will be successful in our efforts to attract and retain such personnel. In addition, some of our pilots, mechanics and other personnel, as well as those of our competitors, are members of the U.S. or U.K. Military Reserves who have been, or could be, called to active duty. If significant numbers of such personnel are called to active duty, it would reduce the supply of such workers and likely increase our labor costs. As a result of the disclosure and remediation of activities identified in the Internal Review, we may have difficulty attracting and retaining qualified personnel, and we may incur increased expenses.

We face substantial competition in both of our business segments.

 

The helicopter business is highly competitive. Chartering of helicopters is usually done on the basis of competitive bidding among those providers having the necessary equipment, experience and resources. Factors that affect competition in our industry include price, reliability, safety, reputation, availability, equipment and quality of service. In addition, many of our customers have the capability to perform their own helicopter operations should they elect to do so, which has a limiting effect on our rates.

 

Our competitors may not face the same regulatory requirements that we face and may not be required to incur the same costs to comply with those requirements and otherwise operate their businesses.

 

In our North American Operations, we face competition from a number of providers, including one U.S. competitor with a comparable number of helicopters servicing the Gulf of Mexico. We have two significant competitors in the North Sea. In our International Operations, we also face significant competition. In addition, foreign regulations may also require the awarding of contracts to local operators.

 

The production management services business is also highly competitive. There are a number of competitors that maintain a presence throughout the U.S. Gulf of Mexico. In addition, there are many smaller operators that compete with us on a local basis or for single projects or jobs. Contracts for our Production Management Services are generally for terms of a year or less and could be awarded to our competitors upon expiration. Many of our customers are also able to perform their own production management services, should they choose to do so.

 

As a result of significant competition, we must continue to provide safe and efficient service or we will lose market share, which could materially adversely affect our business, financial condition and results of operations. The loss of a significant number of our customers or termination of a significant number of our contracts could materially adversely affect our business, financial condition and results of operations.

 

We depend on a small number of large oil and gas industry customers for a significant portion of our revenues.

 

We derive a significant amount of our revenue from a small number of major and independent oil and gas companies. Our loss of one of these significant customers, if not offset by sales to new or other existing customers, could materially adversely affect our business, financial condition and results of operations. See “Item 1. Business — Customers and Contracts.” The results of the Internal Review may impact our ability to retain some or all of the business we have with certain of these customers. See “— The disclosure and remediation of activities identified in the Internal Review could result in the loss of business relationships and adversely affect our business.”

 

Our operations are subject to weather-related and seasonal fluctuations.

 

Generally, our operations can be impaired by harsh weather conditions. Poor visibility, high wind and heavy precipitation can affect the operation of helicopters and result in a reduced number of flight hours. A significant portion of our operating revenue is dependent on actual flight hours, and a substantial portion of our direct cost is fixed. Thus, prolonged periods of harsh weather can materially and adversely affect our business, financial condition and results of operations.

 

In the Gulf of Mexico, the months of December through March have more days of harsh weather conditions than the other months of the year. Heavy fog during those months often limits visibility. In addition, in the Gulf of Mexico, June through November is tropical storm and hurricane season. When a tropical storm or hurricane is about to enter or begins developing in the Gulf of Mexico, flight activity may increase because of evacuations of offshore workers. However, during a tropical storm or hurricane, we are unable to operate in the area of the storm. In addition, as a significant portion of our facilities are located along the coast of the U.S. Gulf of Mexico, tropical storms and hurricanes may cause substantial damage to our property there, including helicopters. For example, during the summer and fall of 2005, Hurricanes Katrina and Rita caused damage to several Louisiana facilities. See “Item 1. Business — Helicopter Services-North American Operations.” Additionally, we incur costs in evacuating our aircraft, personnel and equipment prior to tropical storms and hurricanes.

The fall and winter months have fewer hours of daylight, particularly in the North Sea. While some of our aircraft are equipped to fly at night, we generally do not do so. In addition, drilling activity in the North Sea is lower during the winter months than the rest of the year. Anticipation of harsh weather during this period causes many oil companies to limit activity during the winter months. Consequently, flight hours are generally lower during these periods, typically resulting in a reduction in operating revenue during those months. Accordingly, our reduced ability to operate in harsh weather conditions and darkness may adversely affect our business, financial condition and results of operations.

 

Environmental regulations and liabilities may increase our costs and adversely affect us.

 

All of our operations are subject to local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage, recycling and disposal of toxic and hazardous wastes. The nature of the business of operating and maintaining helicopters requires that we use, store and dispose of materials that are subject to environmental regulation. Liabilities associated with environmental matters could have a material adverse impact on our business, financial condition and results of operations. For additional information see “Item 3. Legal Proceedings.”

 

The DOJ investigation could result in criminal proceedings and the imposition of fines and penalties.

 

On June 15, 2005, we issued a press release stating that one of our subsidiaries had received a document subpoena from the Antitrust Division of the DOJ. The subpoena relates to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the U.S. Gulf of Mexico.

 

While we intend to comply with requests for information from the DOJ in connection with this investigation, we cannot predict the ultimate outcome of the DOJ investigation. The outcome of the DOJ investigation and any related legal proceedings could include civil injunctive or criminal proceedings, the imposition of fines and other penalties, remedies and/or sanctions, referral to other governmental agencies and/or the payment of damages in civil litigation, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

OVERVIEW

 

We are a leading provider of helicopter transportation services to the worldwide offshore oil and gas industry with major operations in the U.S. Gulf of Mexico and the North Sea. We also have operations, both directly and indirectly, in all of the other major offshore oil and gas producing regions of the world, including Australia, Brazil, China, Mexico, Nigeria, Russia and Trinidad. As of March 31, 2005, we operated 320 aircraft, and our unconsolidated affiliates operated an additional 113 aircraft throughout the world. As of September 30, 2005, we operated 331 aircraft, and our unconsolidated affiliates operated an additional 140 aircraft throughout the world. We also provide production management services for oil and gas production facilities in the U.S. Gulf of Mexico.

 

We operate our business in two segments: Helicopter Services and Production Management Services. During fiscal year 2005, we conducted our Helicopter Services through four business units:

 

 

We currently conduct our Helicopter Services through six business units:

 

 

For additional information about our two segments, see Note K in our “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report. For a description of certain risks affecting our business and operations, see “Risk Factors” included elsewhere in this Annual Report.

 

We are a Delaware corporation incorporated in 1969. On August 22, 2005, we moved our corporate headquarters from Lafayette, Louisiana to Houston, Texas. Our executive offices are now located at 2000 W. Sam Houston Parkway South, Suite 1700, Houston, Texas 77042. Our telephone number is (713) 267-7600.

 

Our Internet website address is http://www.olog.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Annual Report. All of our periodic report filings with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 for fiscal periods ending on or after December 15, 2002 are made available, free of charge, through our website, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and any amendments to these reports. These reports are available through our website as soon as reasonably practicable after we electronically file or furnish such material to the SEC. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549 or on their Internet website located at http://www.sec.gov. The public may obtain information on the operation of the Public Reference Room and the SEC’s Internet website by calling the SEC at 1-800-SEC-0330.

HELICOPTER SERVICES

 

Our customers charter our helicopters to transport personnel and time-sensitive equipment from onshore bases to offshore drilling rigs, platforms and other installations. We classify our helicopter fleet into three categories: small, medium and large. Small helicopters hold four to six passengers and are better suited for support of production management activities and for daytime flights and shorter routes. With more than 4,000 active production facilities, many of which are unable to accommodate medium or large helicopters, the U.S. Gulf of Mexico is a significant market for helicopters of this type. Medium helicopters hold up to 13 passengers and are the most versatile part of our fleet. Generally, they are equipped to fly in a variety of different operating conditions and are capable of flying longer distances and carrying larger payloads than small helicopters. Similarly, large helicopters, which can hold up to 25 passengers, are generally equipped to fly in a variety of conditions including harsh weather conditions, carry larger payloads and fly longer distances. Medium and large helicopters are most commonly used for crew changes on large offshore production facilities and drilling rigs. With their ability to carry greater payloads, travel greater distances and move at higher speeds, medium and large helicopters are preferred in international markets, where the offshore facilities tend to be larger, the drilling locations tend to be more remote and the onshore infrastructure tends to be more limited. As a result of the greater distances offshore, demand for medium and large helicopters is also driven by drilling, development and production activity levels in deepwater throughout the world.

 

We are able to deploy our aircraft to the regions with the greatest demand, subject to the satisfaction of local governmental regulations. There are also additional markets for helicopter services beyond the oil and gas industry, including search and rescue services. Markets which we do not serve include emergency medical transportation, agricultural and forestry support and general aviation activities. The existence of these alternative markets enables us to better manage our helicopter fleet by providing both a source of additional aircraft during times of high demand in the oil and gas industry and potential purchasers for our excess aircraft during times of reduced demand in the oil and gas industry.

 

The composition of our fleet as of March 31 and September 30, 2005, and some of the characteristics of the individual types of aircraft we own or lease are as follows:

 

We owned 315 of the 320 aircraft that we operated as of March 31, 2005. We held the remaining five aircraft under operating leases. We owned 327 of the 331 aircraft that we operated on September 30, 2005, with the remaining four aircraft held under operating leases.

 

The following table shows the distribution of our small, medium and large aircraft among our business units as of March 31, 2005 and September 30, 2005:

 

 

The following table sets forth the number of our aircraft operated as of the dates indicated:

 

 

Fleet Update

 

During fiscal year 2003, we initiated a fleet renewal program. In December 2002, we entered into a contract with Sikorsky Aircraft Corporation, a major helicopter manufacturer, to acquire 15 new medium-sized helicopters, which are our most versatile aircraft. Six of the 15 initial aircraft were delivered in fiscal year 2004. Four of the 15 initial aircraft were delivered in fiscal year 2005. Two of the 15 initial aircraft were delivered in the first half of fiscal year 2006, and one is expected to be delivered in the fourth quarter of fiscal year 2006. The remaining two of the 15 initial aircraft are expected to be delivered in early fiscal year 2007. In June 2005, we amended the initial contract to acquire 32 additional medium-sized helicopters as part of our ongoing fleet renewal program. The first helicopter under the amended contract is due to be delivered early in fiscal year 2007, and a total of 17 additional aircraft are to be delivered in fiscal years 2007 and 2008. The remaining helicopters are slated for delivery between fiscal years 2009 and 2013. The agreement allows us to trade in one previously purchased Sikorsky aircraft for each new aircraft purchased. The agreement also gives us the option to purchase up to 24 additional aircraft with deliveries through fiscal year 2013, provided we exercise the options by an annual deadline. Thereafter, the option aircraft are subject to availability. As of September 30, 2005, the options with respect to six of the aircraft are now subject to availability.

 

In connection with our fleet renewal program, in March 2003, we also entered into a contract with Bell Helicopter Textron Canada Ltd., or Bell Helicopter, a major helicopter manufacturer, to acquire 14 new small helicopters. Two of these aircraft were delivered in fiscal year 2004, seven were delivered in fiscal year 2005, four were delivered subsequent to March 31, 2005, and the final helicopter under this agreement is expected to be delivered in the third quarter of fiscal year 2006.

 

In January 2004, we entered into a purchase agreement with Eurocopter for two new large aircraft to be delivered in calendar year 2005. In connection with this purchase agreement, Eurocopter has found a purchaser for four of our used large aircraft. The proceeds from the sale of the four used aircraft and some surplus spares will principally fund the purchase of the two new aircraft. We took delivery of both of these aircraft during the second quarter of fiscal year 2006.

Subsequent to March 31, 2005, we entered into agreements with Eurocopter for the purchase of four large aircraft, all of which are expected to be delivered in the third quarter of fiscal year 2007, and for the purchase of four medium aircraft, three of which are expected to be delivered in the second half of fiscal year 2007 and one of which is expected to be delivered in the first quarter of fiscal year 2008. In addition, we entered into an agreement with Bell Helicopter for the purchase of six medium aircraft to be delivered in fiscal year 2006, two of which were delivered in the first half of fiscal year 2006. We also purchased five small used aircraft that were delivered in the first and second quarters of fiscal year 2006.

 

Also subsequent to March 31, 2005, we entered into an agreement regarding the purchase of three large aircraft to be utilized and owned by our unconsolidated Norwegian affiliate, Norsk Helikopter AS. We agreed to fund the purchase of one aircraft, and Norsk Helikopter AS and the other equity owner in that entity each agreed to fund the purchase of one of the two other aircraft. One is expected to be delivered in the third quarter of fiscal year 2006 and the remaining two are expected to be delivered in fiscal year 2007.

 

During fiscal year 2006, we expect to take delivery of 21 new aircraft, of which ten are small aircraft, nine are medium aircraft and two are large aircraft. As of September 30, 2005 we had taken delivery of nine small aircraft, four medium aircraft and two large aircraft.

 

North American Operations

 

As of March 31, 2005, we conducted our North American Helicopter Services primarily from 12 operating facilities along the U.S. Gulf of Mexico, with additional operations in Alaska. As of March 31, 2005, we operated 150 aircraft in the U.S. Gulf of Mexico and 16 aircraft in Alaska. We are the second largest supplier of helicopter services in the U.S. Gulf of Mexico and a major supplier in Alaska, where we fly the entire length of the Alyeska pipeline. The U.S. Gulf of Mexico is a major offshore oil and gas producing region with approximately 4,000 production platforms. These platforms are typically unmanned and are serviced by our small aircraft. Subsequent to March 31, 2005, Hurricane Katrina caused a total loss of our Venice, Louisiana shorebase facility, and Hurricane Rita severely damaged our Creole, Louisiana base and flooded our Intracoastal City, Louisiana base. At this time, we are in the process of evaluating what actions will be taken with regard to the Venice and Creole bases, and we currently expect that we will reestablish these bases. We intend to repair the damage at the Intracoastal City base as well as the minor damage at our other facilities. We expect to record a $0.3 million net gain ($2.9 million in anticipated insurance recoveries offset by $2.6 million of involuntary conversion losses) related to property damage to these facilities.

 

North Sea Operations

 

We are the second largest provider of helicopter services in the North Sea, where there are harsh weather conditions and geographically concentrated offshore facilities. The facilities in the North Sea are large and require frequent crew change flight services. We deploy the majority of our large aircraft in this region. In addition to our oil and gas helicopter services, we are the sole civil supplier of search and rescue services to Her Majesty’s Coast Guard in the U.K. As of March 31, 2005, we operated 45 aircraft in the North Sea. We also have an ownership interest in and lease aircraft to an unconsolidated affiliate in Norway for use in its North Sea operations.

 

International Operations

 

We provide helicopter services to all of the major offshore oil and gas producing regions of the world outside of North America and the North Sea. Our International Operations are conducted in a variety of different locales, where we deploy small, medium and large aircraft in response to the market requirements and local operating conditions. As of March 31, 2005, our international fleet was composed of 109 aircraft in 12 different countries. Of these aircraft, we operated 34 helicopters in Central and South America (eight in Brazil, two in Colombia, 15 in Mexico and nine in Trinidad), 40 aircraft in Nigeria, ten aircraft in Australia, ten aircraft in Russia and 15 aircraft elsewhere in the world.

Technical Services

 

Our Technical Services business unit provides helicopter repair and overhaul services from facilities located in Tucson, Arizona, New Iberia, Louisiana, and Redhill, England. In November 2004, we sold certain contracts within the United Kingdom Technical Services business unit to an existing joint venture. Additionally, we began downsizing the remaining operations of technical services in the United Kingdom by ceasing to perform certain types of third-party work that had generated poor financial results during the previous two years. The remaining services include engine overhauls, engineering and design services, technical manpower support and transmission testing. While a portion of this work is performed on our own aircraft, some of these services are performed for third parties. Our Technical Services business unit also provides engineering and administrative support to the 59 aircraft operated by FBS Limited (“FBS”), FB Heliservices Limited (“FBH”) and FB Leasing Limited (“FBL”) for training the British military.

 

PRODUCTION MANAGEMENT SERVICES

 

We are a leading independent contract operator of oil and gas production facilities in the U.S. Gulf of Mexico. As of March 31, 2005, we managed or had personnel assigned to 305 production facilities in the U.S. Gulf of Mexico. Our customers are typically independent oil and gas companies who hire us to monitor and maintain their offshore production facilities and provide other services for certain onshore facilities. When servicing offshore oil and gas production facilities, our employees normally live on the facility in seven-day rotations. Our services include furnishing personnel, engineering services, production operating services, paramedic services and providing transportation of personnel and supplies between onshore bases and offshore facilities. This provides us additional opportunities to use our Helicopter Transportation Services. We also handle regulatory and production reporting for some of our customers.

 

The production management business depends primarily on production activity levels in the offshore U.S. oil and gas industry. Since 90% of our production management costs consist of labor and contracted transportation services, we are able to scale our operations to changing market conditions.

 

CUSTOMERS AND CONTRACTS

 

Helicopter Services

 

The principal customers for our Helicopter Services are national and international oil and gas companies. During fiscal years 2005, 2004 and 2003, Shell Oil Company accounted for 11%, 11% and 15%, respectively, of our operating revenue, excluding revenues associated with reimbursements for costs incurred on behalf of customers. No other customer accounted for 10% or more of our operating revenue during those fiscal years. During fiscal year 2005, our top ten customers accounted for 48% of our operating revenue, excluding revenues associated with reimbursements for costs incurred on behalf of customers.

 

Our helicopter contracts are generally based on a two-tier rate structure consisting of a daily or monthly fixed fee plus additional fees for each hour flown. Generally, these contracts permit the customer to cancel the charter before the end of the contract term. We also provide services to customers on an “ad hoc” basis, which usually entails a shorter notice period and shorter duration. Our charges for ad hoc services are generally based on an hourly rate, or a daily or monthly fixed fee plus additional fees for each hour flown. Generally, our ad hoc services have a higher margin than our other helicopter contracts due to supply and demand dynamics. Our rate structure is based on fuel costs remaining at or below a predetermined threshold. Fuel costs in excess of this threshold are generally recharged to the customer.

 

Production Management Services

 

Customers of our Production Management Services are primarily independent oil and gas companies that own oil and gas production facilities in the U.S. Gulf of Mexico but outsource production management of their facilities to companies such as our own. This allows these customers to focus on the exploration for and development of additional oil and gas reserves. During the past three fiscal years, no single production management customer accounted for more

than 10% of our operating revenue. We enter into a master service agreement with each new production management customer. When work is awarded to us, the pricing agreement included in the bid submission, which details the monthly rates for contract personnel and transportation services as well as hourly rates for services provided outside the scope of the contract, becomes a part of the master service agreement with the customer.

 

GOVERNMENT REGULATION

 

United States.  As a commercial operator of small aircraft, our U.S. operations are subject to regulations under the Federal Aviation Act of 1958, as amended, and other laws. We carry persons and property in our helicopters under an Air Taxi Certificate granted by the FAA. The FAA regulates our U.S. flight operations and, in this respect, exercises jurisdiction over personnel, aircraft, ground facilities and certain technical aspects of our operations. The National Transportation Safety Board is authorized to investigate aircraft accidents and to recommend improved safety standards. Our U.S. operations are also subject to the Federal Communications Act of 1934 because we use radio facilities in our operations.

 

Under the Federal Aviation Act, it is unlawful to operate certain aircraft for hire within the United States unless such aircraft are registered with the FAA and the FAA has issued an operating certificate to the operator. As a general rule, aircraft may be registered under the Federal Aviation Act only if the aircraft are owned or controlled by one or more citizens of the United States and an operating certificate may be granted only to a citizen of the United States. For purposes of these requirements, a corporation is deemed to be a citizen of the United States only if, among other things, at least 75% of its voting interests are owned or controlled by United States citizens. If persons other than United States citizens should come to own or control more than 25% of our voting interest, we have been advised that our aircraft may be subject to deregistration under the Federal Aviation Act and we may lose our ability to operate within the United States. Deregistration of our aircraft for any reason, including foreign ownership in excess of permitted levels, would materially adversely affect our ability to conduct our North American Operations. Our organizational documents currently provide for the automatic suspension of voting rights of shares of our Common Stock owned or controlled by non-U.S. citizens, and our right to redeem those shares, to the extent necessary to comply with these requirements. As of September 30, 2005, approximately 1,450,500 shares of our Common Stock were held by persons with foreign addresses. These shares represented approximately 6.2% of our total outstanding common shares as of September 30, 2005. Because a substantial portion of our Common Stock is publicly traded, our foreign ownership may fluctuate on each trading day.

 

United Kingdom.  Our U.K. operations are subject to the Civil Aviation Act 1982 and other U.K. and European statutes and regulations made thereunder. We carry persons and property in our helicopters pursuant to an operating license issued by the CAA. The holder of an operating license must meet the ownership and control requirements of Council Regulation 2407/92. This means that the entity that operates under the license must be owned directly or through majority ownership by European Union nationals, and must at all times be effectively controlled by them.

 

The CAA regulates our U.K. flight operations and exercises jurisdiction over personnel, aircraft, ground facilities and certain technical aspects of those operations. Accident investigations are carried out by an inspector from the Air Accidents Investigation Branch of the Department for Transport. The CAA often imposes improved safety standards on the basis of a report of the inspector. Under the Licensing of Air Carriers Regulations 1992, it is unlawful to operate certain aircraft for hire within the United Kingdom unless such aircraft are approved by the CAA. Changes in U.K. or European laws or regulations, administrative requirements or their interpretation may have a material adverse effect on our business or financial condition or on our ability to continue operations in these areas.

 

International.  Our operations in areas other than the United States and the United Kingdom are subject to local governmental regulations that may limit foreign ownership of aviation companies. Because of these local regulations, we conduct some of our operations through entities in which local citizens own a majority interest and we hold only a minority interest, or under contracts that provide for us to operate assets for the local companies or to conduct their flight operations. Changes in local laws, regulations or administrative requirements or their interpretation may have a material adverse effect on our business or financial condition or on our ability to continue operations in these areas.

Production Management.  The Minerals Management Service Bureau of the United States Department of the Interior regulates the operations of oil and gas producers in the outer continental shelf of the Gulf of Mexico and, in this respect, exercises jurisdiction over personnel, production facilities and certain technical aspects of our operations.

 

COMPETITION

 

The helicopter transportation business is highly competitive throughout the world. We compete against several providers in almost all of our regions of operations. We have one significant competitor of comparable size in the U.S. Gulf of Mexico and two significant competitors in the North Sea. We believe that it is difficult for additional significant competitors to enter our industry because it requires considerable working capital, a complex system of onshore and offshore bases, personnel and operating experience. However, these requirements can be overcome with the appropriate level of customer support and commitment. In addition, while not the predominant practice, many of our customers in the oil and gas industry have the capability to perform their own helicopter services should they elect to do so.

 

Generally, customers charter helicopters on the basis of competitive bidding. In some situations, our customers may renew or extend existing contracts without employing a competitive bid process. However, customers may solicit new bids. Contracts in our North American Operations are generally renewable on an annual or shorter basis. In our North Sea and International Operations, contracts tend to be of longer duration. While price is a key determinant in the award of a contract to a successful bidder, operational experience, quality and type of equipment, customer relationship and professional reputation are also factors taken into consideration. Since many of our customers in the oil and gas industry have the capability to perform their own helicopter services, our ability to increase charter rates may be limited under certain circumstances.

 

The production management business is also highly competitive. There are a number of competitors that operate throughout the U.S. Gulf of Mexico. In addition, there are many smaller competitors that compete locally or for single projects or jobs. Two key elements in competing for production management contracts are personnel costs and transportation costs. In addition, the reliability of the production manager and the quality of its personnel, training programs and safety record are important competitive factors.

 

INDUSTRY HAZARDS AND INSURANCE

 

Hazards, such as harsh weather and marine conditions, mechanical failures, crashes and collisions are inherent in the offshore transportation industry and may cause losses of equipment and revenue and death or injury to personnel.

 

In fiscal year 2005, we had two helicopter accidents involving fatalities: an accident in Alaska that resulted in one fatality and an accident in the Gulf of Guinea, offshore Nigeria, that resulted in four fatalities. Subsequent to March 31, 2005, we had one helicopter accident in the U.S. Gulf of Mexico resulting in two fatalities. In fiscal year 2004, we did not have any helicopter accidents involving fatalities. We maintain insurance with respect to the aircraft involved and related liabilities and believe that our insurance coverage will be adequate to cover any claims ultimately paid.

 

We maintain hull and liability insurance, which generally insures us against damage to our aircraft, as well as certain legal liabilities to others. We also carry workers’ compensation, auto liability, property and casualty coverages for most of our U.S. and U.K. operations. It is also our policy to carry insurance for, or require our customers to indemnify us against, expropriation, war risk and confiscation of the helicopters we use in our International Operations.

 

Terrorist attacks, the continuing threat of terrorist activity and economic and political uncertainties have led to significant increases in our premiums for much of our insurance protection. There is no assurance that in the future we will be able to maintain our existing coverage or that we will not experience further substantial increases in premiums. There is no assurance that our liability coverage will be adequate to cover all potential claims that may arise.

Our Production Management operations are subject to the normal risks associated with working on oil and gas production facilities. These risks could result in damage to or loss of property and injury to or death of personnel. We carry customary business insurance including general liability, workers’ compensation, automobile liability and property and casualty coverages.

 

ENVIRONMENTAL

 

All of our operations are subject to national and local laws and regulations controlling the discharge of materials into the environment or otherwise relating to the protection of the environment. To date, such laws and regulations have not had a material adverse effect on our business, results of operations or financial condition. Increased public awareness and concern over the environment, however, may result in future changes in the regulation of the oil and gas industry, which in turn could adversely affect us. We have been named as a potentially responsible party in connection with certain sites. See “Item 3. Legal Proceedings.”

 

EMPLOYEES

 

As of September 30, 2005, we employed approximately 3,300 employees. Approximately 2,825 of these employees are employed in our Helicopter Services segment, approximately 450 are employed in our Production Management Services segment and approximately 25 are employed in the corporate office.

 

We employ approximately 300 pilots in our North American Operations who are represented by the Office and Professional Employees International Union (“OPEIU”) under a collective bargaining agreement. We and the pilots represented by the OPEIU ratified an amended collective bargaining agreement on April 4, 2005. The terms under the amended agreement are fixed until October 3, 2008 and include a wage increase for the pilot group and improvements to several benefit plans. We do not believe that these increases will place us at a competitive, financial or operational disadvantage.

 

We employ approximately 700 employees (pilots, air crewmen, mechanics, and support staff) in our North Sea Operations and certain Technical Services Operations who are represented by collective bargaining agreements which are ongoing with no specific termination dates.

 

We employ approximately 75 employees (pilots and aircraft engineers) in our Australian operations who are represented by collective bargaining agreements which are ongoing with no specific termination dates.

 

In addition, many of the employees of our affiliates are represented by collective bargaining agreements.

 

Activities engaged in by certain of our current and former employees have been examined in the Internal Review, some of which are discussed in greater detail in “Item 3. Legal Proceedings.” We have taken corrective actions intended to ensure that each of our employees complies with the laws of the countries in which we operate and with our own ethical guidelines. See “Item 9a. Controls and Procedures” and “Risk Factors — The SEC investigation, any related proceedings in other countries and the consequences of the activities identified in the Internal Review could result in civil or criminal proceedings, the imposition of fines and penalties the commencement of third-party litigation, the incurrence of expenses, the loss of business and other adverse effects on our Company” included elsewhere in this Annual Report.

 

We believe that our relations with our employees are satisfactory.

 

CONSOLIDATED AND UNCONSOLIDATED AFFILIATES

 

Most countries limit foreign ownership of aviation companies. To comply with these regulations and yet expand internationally, we have formed or acquired interests in numerous foreign helicopter operations. These investments typically combine a local ownership interest with our experience in providing helicopter services to the oil and gas industry. These arrangements have allowed us to expand operations while diversifying the risks and reducing the capital outlays associated with independent expansion. Because we do not own a majority of the equity or maintain voting control of these entities, we may not have the ability to control their policies, management or

affairs. We refer to these entities as unconsolidated affiliates. We lease our aircraft to these unconsolidated affiliates to service customers for providing helicopter services in their home country.

 

For a further description of our unconsolidated affiliates, see the statements under “Introduction” and “Risk Factors” and Note C in our “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report. For a further discussion of Bristow Aviation Holdings, Ltd., or Bristow, our consolidated affiliate, see Note J in our “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report.

 

Consolidated Affiliate.  The United Kingdom, as do most countries, limits foreign ownership of aviation companies. To comply with these restrictions, we own only 49% of the Common Stock of Bristow, but we own 100% of Bristow’s subordinated debt. In addition, we have a put/call agreement with the other two stockholders of Bristow which grants us the right to buy all of their shares of Bristow Common Stock (and them the right to require us to buy all of their shares). Under U.K. regulations, to maintain Bristow’s operating license, we would be required to find a qualified European Union owner to acquire any of the Bristow shares that we have the right or obligation to acquire under the put/call agreement.

 

Unconsolidated Affiliates.  Set forth below is a brief description of our significant unconsolidated affiliates as of March 31, 2005:

 

Mexico.  We own a 49% interest in Heliservicio Campeche, S.A. de C.V., or HC, a Mexican corporation that provides onshore helicopter services to the Mexican Federal Electric Commission and offshore helicopter transportation to other companies on a contract and ad hoc basis. HC owned four aircraft and leased 12 aircraft from us to provide helicopter services its customers.

 

We own a 49% interest in Rotorwing Leasing Resources, L.L.C., or RLR, a Louisiana limited liability company. RLR owned six aircraft and leased three aircraft from us, all of which it leases to HC.

 

Brazil.  We own a 50% interest in Aeroleo Taxi Aereo S.A., or Aeroleo, a Brazilian corporation. Aeroleo provides offshore helicopter transportation services primarily to the Brazilian national oil company and also serves other oil and gas companies. Aeroleo owned two aircraft and leased eight aircraft from us. We are currently negotiating the termination of our ownership interest in this entity.

 

We own a 50% interest in Helicopter Leasing Associates, or HLA, a Louisiana limited liability company. HLA leased three aircraft from a third party which it leases to Aeroleo.

 

Egypt.  We own a 25% interest in Petroleum Air Services, or PAS, an Egyptian corporation. PAS provides helicopter and fixed wing transportation to the oil and gas industry. Additionally, spare fixed-wing capacity is chartered to tourism operators. PAS owned 33 aircraft and leased one aircraft from us.

 

Norway.  We own a 49% interest in Norsk Helikopter AS, a Norwegian corporation that provides helicopter transportation services in the Norwegian sector of the North Sea. Norsk operated 11 aircraft, five of which are leased from us. During the first quarter of fiscal year 2006, Norsk completed the acquisition of Lufttransport A/S, a Norwegian company, and its sister company, Lufttransport AB, in Sweden, collectively operating 28 aircraft and engaged in providing air ambulance services in Scandinavia. In addition, subsequent to March 31, 2005, we entered into an agreement regarding the purchase of three large aircraft to be utilized and owned by Norsk Helikopter AS. The purchase of these aircraft, supported by a multi-year contract to provide helicopter services offshore in Norway, will be funded through additional borrowings by Norsk and additional funding by both shareholders.

 

United Kingdom.  We own a 50% interest in each of FBS Limited, or FBS, FB Heliservices Limited, or FBH, and FB Leasing Limited, or FBL, British corporations which principally provide pilot training, maintenance and support services to the British military. FBS and FBL owned a total of 59 aircraft.

 

 

A discussion of risk factors applicable to us is set forth under “Risk Factors” above.

 

Not applicable.

 

 

The United States Environmental Protection Agency (“EPA”) has in the past notified us that we are a potential responsible party, or PRP, at four former waste disposal facilities that are on the National Priorities List of contaminated sites. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act, also known as the Superfund law, persons who are identified as PRPs may be subject to strict, joint and several liability for the costs of cleaning up environmental contamination resulting from releases of hazardous substances at National Priorities List sites. We were identified by the EPA as a PRP at the Western Sand and Gravel Superfund site in Rhode Island in 1984, at the Sheridan Disposal Services Superfund site in Waller County, Texas in 1989, at the Gulf Coast Vacuum Services Superfund site near Abbeville, Louisiana in 1989, and at the Operating Industries, Inc. Superfund site in Monterey Park, California in 2003. We have not received any correspondence from the EPA with respect to the Western Sand and Gravel Superfund site since February 1991, nor with respect to the Sheridan Disposal Services Superfund site since 1989. Remedial activities at the Gulf Coast Vacuum Services Superfund site were completed in September 1999 and the site was removed from the National Priorities List in July 2001. The EPA has offered to submit a settlement offer to us in return for which we would be recognized as a “de minimis” party in regard to the Operating Industries Superfund site, but we have not yet received this settlement proposal. Although we have not obtained a formal release of liability from the EPA with respect to any of these sites, we believe that our potential liability in connection with these sites is not likely to have a material adverse effect on our business or financial condition.

 

On June 15, 2005, we issued a press release stating that one of our subsidiaries had received a document subpoena from the Antitrust Division of the DOJ. Contemporaneously, similar subpoenas were served on two of our former executive officers. The subpoena relates to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the U.S. Gulf of Mexico. We are continuing to investigate this matter and intend to comply with requests for information from the DOJ in connection with this investigation. The outcome of the DOJ investigation and any related legal and administrative proceedings could include civil

injunctive or criminal proceedings, the imposition of fines and other penalties, remedies and/or sanctions, referral to other governmental agencies and/or the payment of damages in civil litigation. It is not possible to accurately predict at this time when the government investigation described above will be completed. Based on current information, we cannot predict the outcome of such investigation or what, if any, actions may be taken by the DOJ or other U.S. agencies or authorities or the effect that it may have on us.

 

In February 2005, we voluntarily advised the staff of the SEC that the Audit Committee of our Board of Directors had engaged special outside counsel to undertake a review of certain payments made by two of our affiliated entities in a foreign country. The Internal Review, which initially focused on Foreign Corrupt Practices Act matters, was subsequently expanded to cover operations in other countries and other issues. In connection with this review, special outside counsel to the Audit Committee retained forensic accountants.

 

The SEC then notified us that it had initiated an informal inquiry and requested that we provide certain documents on a voluntary basis. Subsequently, the SEC advised us that the inquiry had become an investigation. We have responded to the SEC’s requests for documents and are continuing to do so.

 

The Internal Review is complete and the accompanying financial statements reflect all known required restatements. As a follow-up to matters identified during the course of the Internal Review, Special Counsel to the Audit Committee is completing certain work, and may be called upon to undertake additional work in the future to assist in responding to inquiries from the SEC, from other governmental authorities or customers, or as follow-up to the steps being performed by Special Counsel.

 

In October 2005, the Audit Committee reached certain conclusions with respect to findings to date from the Internal Review. The Audit Committee concluded that, over a considerable period of time, (a) improper payments were made by, and on behalf of, certain foreign affiliated entities directly or indirectly to employees of the Nigerian government, (b) improper payments were made by certain foreign affiliated entities to Nigerian employees of certain customers with whom we have contracts, (c) inadequate employee payroll declarations and, in certain instances, tax payments were made by us or our affiliated entities in certain jurisdictions, (d) inadequate valuations for customs purposes may have been declared in certain jurisdictions resulting in the underpayment of import duties, and (e) an affiliated entity in a South American country, with the assistance of our personnel and two of our other affiliated entities, engaged in transactions which appear to have assisted the South American entity in the circumvention of currency transfer restrictions and other regulations. In addition, as a result of the Internal Review, the Audit Committee and management determined that there were deficiencies in our books and records and internal controls with respect to the foregoing and certain other activities.

 

Based on the Audit Committee’s findings and recommendations, the Board of Directors has taken disciplinary action with respect to our personnel who it determined bore responsibility for these matters. The disciplinary actions included termination or resignation of employment (including certain members of senior management), changes of job responsibility, reductions in incentive compensation payments and reprimands. One of our affiliates has also obtained the resignation of certain of its personnel.

 

We have initiated remedial action, including initiating action to correct underreporting of payroll tax, disclose to certain customers inappropriate payments made to customer personnel and terminate certain agency, business and joint venture relationships. We also have taken steps to reinforce our commitment to conduct our business with integrity by creating an internal corporate compliance function, instituting a new code of business conduct (our new code of business conduct entitled “Code of Business Integrity” is available on our website, http://www.olog.com), and developing and implementing a training program for all employees. In addition to the disciplinary actions referred to above, we have also taken steps to strengthen our control environment by hiring new personnel and realigning reporting lines within the accounting function so that field accounting reports directly to the corporate accounting function instead of operations management.

 

Following the Audit Committee’s conclusions, we initiated the process of voluntarily advising governmental authorities in certain countries of the Audit Committee’s findings. We have not yet advised such foreign governmental authorities of the Audit Committee findings, but intend to do so. Such disclosure may result in legal and administrative proceedings, the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors who are within the jurisdictions of such

authorities, the imposition of fines and other penalties, remedies and/or sanctions, including precluding us from participating in business operations in their countries. To the extent that violations of the law may have occurred in several countries in which we operate, we do not yet know whether such violations can be cured merely by the payment of fines or whether other actions may be taken against us, including requiring us to curtail our business operations in one or more such countries for a period of time. In the event that we curtail our business operations in any such country, we may face difficulties exporting our aircraft. As of September 30, 2005, the book values of our aircraft in Nigeria and the South American country where certain improper activities took place were approximately $79.4 million and $2.9 million, respectively.

 

We cannot predict the ultimate outcome of the SEC investigation, nor can we predict whether other applicable U.S. and foreign governmental authorities will initiate separate investigations. The outcome of the SEC investigation and any related legal and administrative proceedings could include the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors, the imposition of fines and other penalties, remedies and/or sanctions, modifications to business practices and compliance programs and/or referral to other governmental agencies for other appropriate actions. It is not possible to accurately predict at this time when matters relating to the SEC investigation will be completed, the final outcome of the SEC investigation, what if any actions may be taken by the SEC or by other governmental agencies in the U.S. or in foreign jurisdictions, or the effect that such actions may have on our consolidated financial statements. In addition, in view of the findings of the Internal Review, we expect to encounter difficulties in the future conducting business in Nigeria and a South American country, and with certain customers. It is also possible that certain of our existing contracts may be cancelled and that we may become subject to claims by third parties, possibly resulting in litigation. The matters identified in the Internal Review and their effects could have a material adverse effect on our business, financial condition and results of operations.

 

In connection with its conclusions regarding payroll declarations and tax payments, the Audit Committee determined on November 23, 2005, following the recommendation of our senior management, that there is a need to restate our historical consolidated financial statements for fiscal years 2000, 2001, 2002, 2003 and 2004 and for quarterly periods in fiscal year 2005. We have accrued $15.8 million for the taxes, penalties and interest attributable to underreported employee payroll. Operating income for fiscal year 2005 includes $3.8 million attributable to this accrual, and the remainder has been reported as adjustments to amounts previously reported for fiscal year 2004 and earlier. At this time, we cannot estimate what additional payments, fines, penalties and/or litigation and related expenses may be required in connection with the matters identified as a result of the Internal Review, the SEC investigation, any other regulatory investigation that may be instituted or third-party litigation; however, such payments, fines, penalties and/or expenses could have a material adverse effect on our business, financial condition and results of operations.

 

As we continue to respond to the SEC investigation and other governmental authorities and take other actions relating to improper activities that have been identified in connection with the Internal Review, there can be no assurance that additional restatements will not be required or that the historical financial statements included in this Annual Report will not change or require amendment. In addition, new issues may be identified that may impact our financial statements and the scope of the restatements described in this Annual Report and lead us to take other remedial actions or otherwise adversely impact our Company.

 

In November 2005, certain of our consolidated affiliates were named in a lawsuit filed with the High Court of Lagos State, Nigeria by Mr. Benneth Osita Onwubalili and Kensit Nigeria Limited, which allegedly acted as agents of the affiliates in Nigeria. The claimants allege that an agreement between the parties was terminated without justification by the defendants and seek damages of $16.3 million. We are continuing to investigate this matter.

 

We are involved from time to time in various litigation and regulatory matters arising in the ordinary course of business. The amount, if any, of our ultimate liability with respect to these matters cannot be determined, but we do not expect the resolution of any pending matters to have a material adverse effect on our business or financial condition.

 

 

Not applicable.

 

Since March 12, 2003, our Common Stock has been listed on the New York Stock Exchange under the symbol “OLG.” Prior to becoming listed on the NYSE, our Common Stock had been quoted on the NASDAQ National Market system since 1984.

 

The following table shows the range of closing prices for our Common Stock during each quarter of our last two fiscal years.

 

 

As of September 30, 2005, there were 737 holders of record of our Common Stock.

 

We have not paid dividends on our Common Stock since January 1984. We do not intend to declare or pay regular dividends on our Common Stock in the foreseeable future. Instead, we generally intend to invest any future earnings in our business. Subject to Delaware law, our Board of Directors will determine the payment of future dividends on our Common Stock, if any, and the amount of any dividends in light of:

 

 

On June 20, 2003, we issued $230 million of 61/8% Senior Notes due 2013. The terms of these Senior Notes restrict our payment of cash dividends to shareholders.

 

Please refer to Item 12 of this Annual Report for information concerning securities authorized under our equity compensation plans.

 

During fiscal year 2005, we issued securities without registration under the Securities Act of 1933 that were not previously reported on the quarterly reports on Form 10-Q filed by us. In January 2005 we issued general contractual obligations (the “Deferred Compensation Obligations”) to pay or distribute to the participants in our Deferred Compensation Plan an indeterminate amount of future compensation, the receipt of which the participants elected to defer in accordance with the terms of the Plan. The Deferred Compensation Obligations are payable in cash in a lump-sum distribution or in installments, in accordance with the terms of the Plan, upon a participant’s termination of employment for any reason, including but not limited to death, disability or retirement. The Deferred Compensation Obligations are not convertible into any other security of ours. As of March 31, 2005, our outstanding Deferred Compensation Obligations were $1.2 million.

 

The above private issuances of securities were issued in reliance upon the exemption for sales of securities not involving a public offering, under section 4(2) of the Securities Act of 1933. The transactions were made in accordance with Rule 506 of Regulation D, and we filed a Notice of Sale on Form D with the SEC on June 9, 2005.

 

The following table contains selected historical consolidated financial data for us. You should read this table along with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the

Consolidated Financial Statements and “Notes to Consolidated Financial Statements” that are included elsewhere in this Annual Report.

 

Amounts previously reported for fiscal years 2004, 2003, 2002 and 2001 have been restated to reflect adjustments to accrue for liabilities and expenses identified in connection with the Internal Review, to properly report customer reimbursables as revenues rather than offsetting such amounts against the related expenses and to properly record expenses for severance benefits and payroll taxes associated with certain foreign subsidiaries. See “Item 3. Legal Proceedings” above and “Restatement of Previously Reported Amounts” in Note A and “Internal Review” in Note D in the “Notes to Consolidated Financial Statements” for further discussion of these matters. Amounts for fiscal year 2005 were not previously audited or filed with the SEC, but had been announced. Amounts for the first three fiscal quarters in that year had been filed.

 

 

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Forward-Looking Statements”, “Risk Factors” and our Consolidated Financial Statements for fiscal years 2005, 2004 and 2003, and the related notes thereto, included elsewhere in this Annual Report.

 

Amounts previously reported for fiscal years 2004 and 2003 have been restated to reflect adjustments to accrue for liabilities and expenses identified in connection with the Internal Review, to properly report customer reimbursables as revenues rather than offsetting such amounts against the related expenses and to properly record expenses for severance benefits and payroll taxes associated with certain foreign subsidiaries. See “Item 3. Legal Proceedings” above and “Restatement of Previously Reported Amounts” in Note A and “Internal Review” in Note D in the “Notes to Consolidated Financial Statements” for further discussion of these matters. Amounts for fiscal year 2005 were not previously audited or filed with the SEC, but had been announced. Amounts for the first three fiscal quarters in that year had been filed.

 

Executive Overview

 

We are a leading provider of helicopter transportation services to the worldwide offshore oil and gas industry with major operations in the U.S. Gulf of Mexico and the North Sea. We also have operations, both directly and indirectly, in most of the other major offshore oil and gas producing regions of the world, including Australia, Brazil, China, Mexico, Nigeria, Russia and Trinidad. Additionally, we are a leading provider of production

management services for oil and gas production facilities in the U.S. Gulf of Mexico. As of March 31, 2005, we operated 320 aircraft and our unconsolidated affiliates operated an additional 113 aircraft throughout the world.

 

Market Outlook

 

Worldwide demand for hydrocarbons is expected to continue to grow for the foreseeable future. This growth, driven largely by economic expansion, is expected to result in sustained strength in oil and natural gas prices, driving further increases in offshore exploration and development activity by our customers. This increase in offshore exploration and development activity is also likely to lead to growth in production related activities as these development projects come on stream. As a result of the current commodity price environment, we have experienced an increase in aircraft fleet utilization in all of our present markets and expect this trend to continue. In addition, as operators increasingly pursue prospects in deepwater and push further offshore, we expect demand for medium and large helicopters to be further stimulated.

 

In particular, we expect growth in demand for additional helicopter support in North and South America, West Africa and Asia, including the Caspian Sea region. This growth will provide us with opportunities to add new aircraft to our fleet, as well as opportunities to redeploy aircraft from weaker markets into markets that will sustain higher rates for our services. Currently, helicopter manufacturers are indicating very limited supply availability during the next three years. We expect that this tightness in aircraft availability from the manufacturers and the lack of suitable aircraft in the secondary market, coupled with the increase in demand for helicopter support, will result in upward pressure on the rates we charge for our services. At the same time, we believe that our recent aircraft acquisitions and commitments position us to capture a portion of the upside created by the current market conditions.

 

Current activity levels in the Gulf of Mexico are at or near all-time highs. In the near term, we also believe that the impact of hurricanes Katrina and Rita will result in higher activity levels as operators repair facilities and work to bring production back on line. Furthermore, our North Sea activities are under strong pricing pressure as one particular competitor is aggressively seeking to gain market share with lower rates. At the same time, while contracts in the North Sea are generally long term, we have experienced a recent trend of increased spot market contracting of helicopters as exploration activity has increased in the North Sea. Our other International Operations have experienced high aircraft utilization and we expect this trend to continue. Due to the current high levels of fleet utilization, we have experienced, along with other helicopter operators, some difficulty in meeting our customers’ needs for short notice exploration drilling support, particularly in remote international locations. Our operations in Nigeria and a South American country are likely to be negatively affected as a result of our actions taken in connection with the Internal Review, as discussed in more detail below under “Investigations.”

Operating Results

 

The following table presents our restated operating results and other income statement information for fiscal years 2005, 2004 and 2003:

 

 

 

 

Investigations

 

In February 2005, we voluntarily advised the staff of the SEC that the Audit Committee of our Board of Directors had engaged special outside counsel to undertake a review of certain payments made by two of our affiliated entities in a foreign country. The Internal Review, which initially focused on Foreign Corrupt Practices Act matters, was subsequently expanded to cover operations in other countries and other issues. In connection with this review, special outside counsel to the Audit Committee retained forensic accountants.

 

The SEC then notified us that it had initiated an informal inquiry and requested that we provide certain documents on a voluntary basis. Subsequently, the SEC advised us that the inquiry had become an investigation. We have responded to the SEC’s requests for documents and are continuing to do so.

 

The Internal Review is complete and the accompanying financial statements reflect all known required restatements. As a follow-up to matters identified during the course of the Internal Review, Special Counsel to the Audit Committee is completing certain work, and may be called upon to undertake additional work in the future to

assist in responding to inquiries from the SEC, from other governmental authorities or customers, or as follow-up to the steps being performed by Special Counsel.

 

In October 2005, the Audit Committee reached certain conclusions with respect to findings to date from the Internal Review. The Audit Committee concluded that, over a considerable period of time, (a) improper payments were made by, and on behalf of, certain foreign affiliated entities directly or indirectly to employees of the Nigerian government, (b) improper payments were made by certain foreign affiliated entities to Nigerian employees of certain customers with whom we have contracts, (c) inadequate employee payroll declarations and, in certain instances, tax payments were made by us or our affiliated entities in certain jurisdictions, (d) inadequate valuations for customs purposes may have been declared in certain jurisdictions resulting in the underpayment of import duties, and (e) an affiliated entity in a South American country, with the assistance of our personnel and two of our other affiliated entities, engaged in transactions which appear to have assisted the South American entity in the circumvention of currency transfer restrictions and other regulations. In addition, as a result of the Internal Review, the Audit Committee and management determined that there were deficiencies in our books and records and internal controls with respect to the foregoing and certain other activities.

 

Based on the Audit Committee’s findings and recommendations, the Board of Directors has taken disciplinary action with respect to our personnel who it determined bore responsibility for these matters. The disciplinary actions included termination or resignation of employment (including certain members of senior management), changes of job responsibility, reductions in incentive compensation payments and reprimands. One of our affiliates has also obtained the resignation of certain of its personnel.

 

We have initiated remedial action, including initiating action to correct underreporting of payroll tax, disclose to certain customers inappropriate payments made to customer personnel and terminate certain agency, business and joint venture relationships. We also have taken steps to reinforce our commitment to conduct our business with integrity by creating an internal corporate compliance function, instituting a new code of business conduct (our new code of business conduct entitled “Code of Business Integrity” is available on our website, http://www.olog.com), and developing and implementing a training program for all employees. In addition to the disciplinary actions referred to above, we have also taken steps to strengthen our control environment by hiring new personnel and realigning reporting lines within the accounting function so that field accounting reports directly to the corporate accounting function instead of operations management.

 

Following the Audit Committee’s conclusions, we initiated the process of voluntarily advising governmental authorities in certain countries of the Audit Committee’s findings. We have not yet advised such foreign governmental authorities of the Audit Committee findings, but intend to do so. Such disclosure may result in legal and administrative proceedings, the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors who are within the jurisdictions of such authorities, the imposition of fines and other penalties, remedies and/or sanctions, including precluding us from participating in business operations in their countries. To the extent that violations of the law may have occurred in several countries in which we operate, we do not yet know whether such violations can be cured merely by the payment of fines or whether other actions may be taken against us, including requiring us to curtail our business operations in one or more such countries for a period of time. In the event that we curtail our business operations in any such country, we may face difficulties exporting our aircraft. As of September 30, 2005, the book values of our aircraft in Nigeria and the South American country where certain improper activities took place were approximately $79.4 million and $2.9 million, respectively.

 

We cannot predict the ultimate outcome of the SEC investigation, nor can we predict whether other applicable U.S. and foreign governmental authorities will initiate separate investigations. The outcome of the SEC investigation and any related legal and administrative proceedings could include the institution of administrative, civil injunctive or criminal proceedings involving us and/or current or former employees, officers and/or directors, the imposition of fines and other penalties, remedies and/or sanctions, modifications to business practices and compliance programs and/or referral to other governmental agencies for other appropriate actions. It is not possible to accurately predict at this time when matters relating to the SEC investigation will be completed, the final outcome of the SEC investigation, what if any actions may be taken by the SEC or by other governmental agencies in the U.S. or in foreign jurisdictions, or the effect that such actions may have on our consolidated financial

statements. In addition, in view of the findings of the Internal Review, we expect to encounter difficulties in the future conducting business in Nigeria and a South American country, and with certain customers. It is also possible that certain of our existing contracts may be cancelled and that we may become subject to claims by third parties, possibly resulting in litigation. The matters identified in the Internal Review and their effects could have a material adverse effect on our business, financial condition and results of operations.

 

In connection with its conclusions regarding payroll declarations and tax payments, the Audit Committee determined on November 23, 2005, following the recommendation of our senior management, that there is a need to restate our historical consolidated financial statements for fiscal years 2000, 2001, 2002, 2003 and 2004 and for quarterly periods in fiscal year 2005. We have accrued $15.8 million for the taxes, penalties and interest attributable to underreported employee payroll. Operating income for fiscal year 2005 includes $3.8 million attributable to this accrual, and the remainder has been reported as adjustments to amounts previously reported for fiscal year 2004 and earlier. At this time, we cannot estimate what additional payments, fines, penalties and/or litigation and related expenses may be required in connection with the matters identified as a result of the Internal Review, the SEC investigation, any other regulatory investigation that may be instituted or third-party litigation; however, such payments, fines, penalties and/or expenses could have a material adverse effect on our business, financial condition and results of operations.

 

As we continue to respond to the SEC investigation and other governmental authorities and take other actions relating to improper activities that have been identified in connection with the Internal Review, there can be no assurance that additional restatements will not be required or that the historical financial statements included in this Annual Report will not change or require amendment. In addition, new issues may be identified that may impact our financial statements and the scope of the restatements described in this Annual Report and lead us to take other remedial actions or otherwise adversely impact our Company.

 

For fiscal year 2005, we have incurred approximately $1.9 million in legal and other professional costs in connection with the Internal Review. During the first two quarters of fiscal year 2006, we incurred an additional $7.0 million in legal and other professional costs related to the Internal Review. We expect to incur additional costs associated with the Internal Review, which will be expensed as incurred and which could be significant in the fiscal quarters in which they are recorded.

 

As a result of the disclosure and remediation of a number of activities identified in the Internal Review, we expect to encounter difficulties conducting business in certain foreign countries and retaining and attracting additional business with certain customers. We cannot predict the extent of these difficulties; however, our ability to continue conducting business in these countries and with these customers may be significantly impacted.

 

We have commenced actions to disclose activities in Nigeria identified in the Internal Review to affected customers, and one or more of these customers may seek to cancel their contracts with us. One of such customers already has commenced its own investigation. Among other things, we have been advised that such customer intends to exercise its rights to audit a specific contract, as well as to review its other relations with us. Although we have no indication as to what the final outcome of the audit and review will be, it is possible that such customer may seek to cancel one or more existing contracts if it believes that they were improperly obtained or that we breached any of their terms. Since our customers in Nigeria are affiliates of major international petroleum companies, with whom we do business throughout the world, any actions which are taken by certain customers could have a material adverse effect on our business, financial position and results of operations, and these customers may preclude us from bidding on future business with them either locally or on a worldwide basis. In addition, applicable governmental authorities may preclude us from bidding on contracts to provide services in the countries where improper activities took place.

 

In connection with the Internal Review, we also have terminated our business relationship with certain agents and have taken actions to terminate business relationships with other agents. One of the terminated agents has commenced litigation against two of our foreign affiliated entities claiming damages of $16.3 million for breach of contract. We may be required to indemnify certain of our agents to the extent that regulatory authorities seek to hold them responsible in connection with activities identified in the Internal Review.

In a South American country where certain improper activities took place, we are negotiating to terminate our ownership interest in the joint venture that provides us with the local ownership content necessary to meet local regulatory requirements for operating in that country. During fiscal year 2005, we derived approximately $9.9 million of leasing and other revenues, of which $3.2 million was paid by us to a third party for the use of the aircraft, and approximately $0.3 million of dividend income from this joint venture. Without a joint venture partner, we will be unable to maintain an operating license and our future activities in that country may be limited to leasing our aircraft to unrelated operating companies. Our joint venture partners and agents are typically influential members of the local business community and instrumental in aiding us in obtaining contracts and managing our affairs in the local country. As a result of terminating these relationships, our ability to continue conducting business in these countries where the improper activities took place may be negatively affected. We may not be successful in our negotiations to terminate our ownership interest in the joint venture, and the outcome of such negotiations may negatively affect our ability to continue leasing our aircraft to the joint venture or other unrelated operating companies or conducting other business in that country, to export our aircraft or to recover our investment in the joint venture.

 

Many of the improper actions identified in the Internal Review resulted in decreasing the costs incurred by us in performing our services. The remedial actions we are taking will result in an increase in these costs and, if we cannot raise our prices simultaneously and to the same extent of our increased costs, our operating income will decrease.

 

On June 15, 2005, we issued a press release disclosing that one of our subsidiaries received a document subpoena from the Antitrust Division of the DOJ. The subpoena pertains to a grand jury investigation of potential antitrust violations among providers of helicopter transportation services in the U.S. Gulf of Mexico. We are continuing to investigate this matter and intend to comply with requests for information from the DOJ in connection with this investigation. The outcome of the DOJ investigation and any related legal and administrative proceedings could include civil injunctive or criminal proceedings, the imposition of fines and other penalties, remedies and/or sanctions, referral to other governmental agencies and/or the payment of damages in civil litigation. To date, we have not identified any material adjustments to our financial statements in connection with the investigation and do not expect, based on information developed to date, that any such adjustment is likely to be required. We expect to incur costs associated with this investigation, which will be expensed as incurred and which could be significant in the fiscal quarters in which they are recorded. For additional information regarding the SEC and DOJ investigations, see “Item 3. Legal Proceedings.”

 

Restatement of Previously Reported Amounts

 

As a result of the Internal Review findings discussed above, we have restated our historical financial statements to accrue for payroll taxes, penalties and interest attributable to underreported employee payroll. In connection with this matter, our restated consolidated statements of income reflect reductions in operating income of $4.2 million and $3.2 million for fiscal years 2004 and 2003, respectively, and $4.6 million for earlier fiscal years from previously reported amounts. In addition, our consolidated statements of income reflect reductions in operating income of $3.8 million for fiscal year 2005 from the previously announced amount. At this time, we cannot estimate what additional payments, fines and/or penalties may be required in connection with the matters identified as a result of the Internal Review or the SEC investigation; however, such payments, fines and/or penalties could have a material adverse effect on our business, financial condition and results of operations.

 

Our management has separately determined that we were not reporting reimbursements received from our customers for costs incurred on their behalf in accordance with GAAP. Our customers reimburse us for certain costs incurred on their behalf, which have historically been recorded by offsetting such amounts against the related expenses. In addition, our management has determined that we did not properly record expenses related to severance benefits for certain employees of a foreign subsidiary and we did not properly record expenses related to payroll taxes incurred by one of our foreign subsidiaries. In accordance with GAAP, we have restated our historical financial statements for fiscal years 2004 and 2003 to reflect such reimbursement as an increase in revenue and a corresponding increase in expense, and we increased direct costs to reflect the severance obligation and payroll taxes in the applicable periods. With respect to customer reimbursements, operating revenues and direct costs were increased $53.4 million and $46.4 million for fiscal years 2004 and 2003, respectively, from previously reported

Other Matters

 

Fiscal Year 2005 and Following

 

In December 2005, we were informed that we were not awarded the contract extension commencing in mid 2007 to provide search and rescue services using seven S-61 aircraft and operate four helicopter bases for the U.K. Maritime and Coastguard Agency.

 

We employ approximately 300 pilots in our North American Operations who are represented by the Office and Professional Employees International Union (“OPEIU”) under a collective bargaining agreement. We and the pilots represented by the OPEIU ratified an amended collective bargaining agreement on April 4, 2005. The terms under the amended agreement are fixed until October 3, 2008 and include a wage increase for the pilot group and improvements to several benefit plans that we do not expect to have a material effect on our future operating expenses.

 

In January 2005, Bristow was awarded two contracts to provide helicopter services in the North Sea. The first is a seven-year contract that began on July 1, 2005 at the conclusion of the current seven-year contract, and is for a total of two large and four medium aircraft. The second contract is a five-year contract that commenced on April 1, 2005 and utilizes two large aircraft. Additionally, Bristow was awarded the renewal of a contract in Nigeria with an international oil company in January 2005 for a minimum of five medium aircraft. The contract term is for five years beginning on April 1, 2005.

 

In November 2004, we sold certain contracts held by our Technical Services business to an existing joint venture. The remaining operations of the Technical Services business were downsized by ceasing to perform certain services for third parties that had generated poor financial results during the prior two years. As a result of the downsizing, we reduced staffing levels by an additional 80 positions in the Technical Services business unit over a nine-month period ending on December 31, 2004. Approximately £1.5 million ($2.8 million) in severance costs and approximately $76,000 in other related costs have been incurred as of March 31, 2005.

 

On July 15, 2004, we purchased a 48.5% interest in Aviashelf, a Russian helicopter company that owns five large twin-engine helicopters and simultaneously, through two 51% owned companies, purchased two large twin-engine helicopters and two fixed-wing aircraft, for an aggregate purchase price of $10.7 million. The acquisition was accounted for under the purchase method, and we have consolidated the results of the Russian helicopter company from the date of acquisition. The acquisition was financed with $2.0 million of existing cash and the assumption of $8.7 million in debt. The purchase price was allocated to the assets and liabilities acquired based upon estimated fair values. No goodwill was recorded. The pro forma effect on operations of the acquisition when presented, as of the beginning of the periods presented, was not material to our consolidated statements of income.

 

In May 2005, Bristow was awarded a three-year extension to the Integrated Aviation Consortium (“IAC”) contract. This extension began on July 1, 2005 and will continue the utilization of five large aircraft.

 

Prior to Fiscal Year 2005

 

As part of the restructuring, in January 2004, we amended our defined benefit pension plan covering certain United Kingdom and other overseas employees. The amendment, which was effective February 1, 2004, essentially removed the defined benefit feature for a participant’s future services and replaced it with a defined contribution arrangement. Under the new defined contribution feature, we contribute a maximum of 7% of a participant’s non-variable salary to a defined contribution section of the plans. The participant is required to contribute a minimum of 5% of non-variable salary for us to match the contribution. Participants were also given the option to transfer out of the plans. The net impact on our statement of income as a result of these changes was a reduction in pension expense of approximately £1.4 million ($2.6 million) for our fourth quarter of fiscal year 2004. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, the above change to the plans constitutes a “curtailment” of benefits and, accordingly, all previously deferred service gains or losses are immediately recognized in the statement of income. At the date of the 2004 amendment, we had a deferred prior service gain of £11.9 million ($21.7 million), or $0.65 per diluted share, related to prior plan amendments, which was recognized as a curtailment gain in fiscal year 2004.

In November 2003, our 49%-owned Mexican affiliate was unsuccessful in renewing a contract for seven aircraft contracted to Petróleos Mexicanos, or PEMEX, that expired during calendar year 2004, although in October 2004, that affiliate was awarded a five-month contract for five of the seven aircraft mentioned above that concluded on February 28, 2005. Four of the seven aircraft continue to be used in Mexico for the ad hoc market, and the other three have been redeployed to other markets.

 

In October 2003, we announced that we had begun a restructuring of our North Sea Operations. The restructuring was designed to reduce costs and promote operational and managerial efficiencies to enable us to remain competitive in the North Sea offshore helicopter market. As part of the restructuring program, we reduced staffing levels by approximately 100 positions, or 11%, of our United Kingdom workforce over a twelve-month period. We incurred approximately $4.6 million in severance and other restructuring costs, of which $4.0 million was incurred in fiscal year 2004 and $0.6 million was expensed in fiscal year 2005.

 

In conjunction with our previously announced fleet and facilities renewal and refurbishment program, we changed the residual value estimate of certain aircraft and the useful lives estimate of certain aircraft, effective July 1, 2003. We believe that this new estimate more closely reflects the actual salvage values realized and useful lives experienced by us. The effect of this change was a reduction in depreciation expense of $3.9 million ($2.9 million net of tax) for fiscal year 2005 and $3.2 million ($2.3 million net of tax) for fiscal year 2004.

 

This Executive Overview only includes what management considers to be the most important information and analysis for evaluating our financial condition and operating performance. It provides the context for the discussion and analysis of the financial statements which follows and does not disclose every item bearing on our financial condition and operating performance.

 

General

 

We operate our business in two segments:  Helicopter Services and Production Management Services. During fiscal year 2005, our Helicopter Services were conducted through the following four business units:

 

 

 

 

During fiscal year 2005, our North American Operations, North Sea Operations, International Operations and Technical Services contributed approximately 22%, 33%, 33% and 3%, respectively, of our total operating revenue. Despite a decrease in flight hours in each of the last three years, our operating revenue has increased over the same time period. This increase in revenue was the result of the full impact in fiscal year 2005 of a 7% rate increase for the U.S. Gulf of Mexico that was phased in throughout fiscal year 2004 and an increase in ad hoc flights for hurricane evacuations during the second quarter of fiscal year 2005. We expect that the percentage of our operating revenue derived from our International Operations will continue to increase as the major oil and gas companies increasingly focus on prospects outside of North America and the North Sea.

Our Production Management Services segment contributed the remaining 9% of our operating revenue in fiscal year 2005. Operating revenue from this segment in fiscal year 2005 increased from fiscal year 2004 primarily due to additional work for a major customer.

 

Helicopter Services are seasonal in nature, as our flight activities are influenced by the length of daylight hours and weather conditions. The worst of these conditions typically occurs during the winter months when our ability to safely fly, and our customers’ ability to safely conduct their operations is inhibited. Accordingly, our flight activity is generally lower in the fourth fiscal quarter.

 

Our operating revenue depends on the demand for our services and the pricing terms of our contracts. We measure the demand for our helicopter services in flight hours. Demand for our services depends on the level of worldwide offshore oil and gas exploration, development and production activities. We believe that our customers’ exploration and development activities are influenced by actual and expected trends in commodity prices for oil and gas. Exploration and development activities generally use medium-size and larger aircraft on which we typically earn higher margins. We believe that production-related activities are less sensitive to variances in commodity prices, and accordingly, provide more stable activity levels and revenue stream. We estimate that a majority of our operating revenue from Helicopter Services is related to the production activities of the oil and gas companies.

 

Our helicopter contracts are generally based on a two-tier rate structure consisting of a daily or monthly fixed fee plus additional fees for each hour flown. We also provide services to customers on an “ad hoc” basis, which usually entails a shorter notice period and shorter duration. Our charges for ad hoc services are generally based on an hourly rate, or a daily or monthly fixed fee plus additional fees for each hour flown. We estimate that our ad hoc services have a higher margin than our other helicopter contracts due to supply and demand dynamics. Our rate structure is based on fuel costs remaining at or below a predetermined threshold. Fuel costs in excess of this threshold are generally reimbursed by the customer.

 

Our helicopter contracts are for varying periods and generally permit the customer to cancel the charter before the end of the contract term. In our North American Operations, we typically enter into short-term contracts for 12 months or less, although we occasionally enter into longer-term contracts. In our North Sea Operations, contracts are longer term, generally between two and five years. In our International Operations, contract length generally ranges from three to five years. At the expiration of a contract, our customers often negotiate renewal terms with us for the next contract period. In other instances, customers solicit new bids at the expiration of a contract. Contracts are generally awarded based on a number of factors, including price, quality of service, equipment and record of safety. An incumbent operator has a competitive advantage in the bidding process based on its relationship with the customer, its knowledge of the site characteristics and its understanding of the cost structure for the operations.

 

Maintenance and repair expenses, training costs, employee wages and insurance premiums represent a significant portion of our overall expenses. Our production management costs also include contracted transportation services. We expense maintenance and repair costs, including major aircraft component overhaul costs, as the costs are incurred. In certain instances, major aircraft components, primarily engines and transmissions, are maintained by third-party vendors under contractual arrangements. The maintenance costs related to these contractual arrangements are recorded ratably as the components are used to generate flight revenue. As a result, our earnings in any given period are directly impacted by the amount of our maintenance and repair expenses for that period.

 

In addition to our variable operating expenses, we incur fixed charges for depreciation of our property and equipment. For accounting purposes, we depreciate our helicopters on a straight-line basis over their estimated useful lives, taking into account an estimated residual value of 30% to 50% of their original cost. We generally estimate the useful life of a helicopter to be seven to 15 years. Our estimates of useful lives and residual values are based upon our historical experience, aircraft type and aircraft condition, as well as our judgment and expectations regarding future operations and market conditions.

 

We own 49% of the Common Stock of Bristow, and we own 100% of Bristow’s subordinated debt. In addition, we have a put/call agreement with the other two stockholders of Bristow which grants us the right to buy all of their shares of Bristow Common Stock and grants to each of them the right to require us to buy their shares. The per share price upon the exercise of the put/call option by us or the other stockholders of Bristow would be equal to its par

value plus a factor representing a guaranteed return on investment. In March 2004, we prepaid a portion of the put/call option price representing the amount of guaranteed return since inception, amounting to $11.4 million. In consideration of this, the other shareholders of Bristow agreed to reduce the guaranteed return factor used in calculating the put/call option price, effective April 1, 2004, from 12% per annum to LIBOR plus 3%. In May 2004, we acquired eight million shares of deferred stock, essentially a subordinated class of stock with no voting rights, from Bristow for £1 per share ($14.4 million in total). Bristow used these proceeds to redeem £8 million ($14.4 million) of its ordinary share capital at par value on a pro rata basis from all of its outstanding shareholders, including ourselves. The result of these changes will be to reduce the cost of the guaranteed return to the other shareholders, which we record as minority interest expense, by approximately $2.3 million on an annual basis. Consequently, beginning in September 2004, we began paying the amount of guaranteed return on the put/call on a quarterly basis. In fiscal year 2005, the amount paid was £46,776 ($85,771) representing the amount due from May 8, 2004 to December 31, 2004. Subsequent to March 31, 2005, we paid £36,198 ($65,919) representing the amount due from January 1, 2005 to June 30, 2005. These payments were charged against minority interest on our balance sheet where this obligation had been accrued and included in minority interest expense in the Consolidated Statements of Income. Under U.K. regulations, to maintain Bristow’s operating license, we would be required to find a qualified European Union owner to acquire any of the Bristow shares that we have the right or obligation to acquire under the agreement. The only restriction under the put/call agreement limiting our ability to exercise the put/call option is a requirement to consult with the CAA regarding the suitability of the new holder of the Bristow shares. The put/call agreement does not contain any provisions should the CAA not approve the new holder of the Bristow shares. However, we would work diligently to find a European Union owner suitable to the CAA. As a result of our ownership and contractual arrangements, we consolidate the results of Bristow and its subsidiaries. For additional information about Bristow, see Note A and Note J in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report.

 

As a result of local laws limiting foreign ownership of aviation companies, we conduct helicopter services in many foreign countries through interests in unconsolidated affiliates. Generally, we realize revenue from these foreign operations by leasing aircraft and providing services and technical support to those entities. We also receive dividend income from the earnings of some of these entities. We report lease revenue as operating revenue and dividend income as part of earnings from unconsolidated affiliates, as the results of these foreign operations are not included in our revenue or operating income. For additional information about these unconsolidated affiliates, see Note C in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report.

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain operating information for our two segments, Helicopter Services and Production Management Services, and for the four business units comprising our Helicopter Services segment. The table also presents certain operating information about our corporate activities which primarily relate to intercompany leasing of aircraft and are eliminated in consolidation. For additional information about our business segments, see Note K in the “Notes to Consolidated Financial Statements” included elsewhere in this Annual Report. Amounts previously reported for fiscal years 2004 and 2003 have been restated to reflect adjustments to accrue for liabilities and expenses identified in connection with the Internal Review and to properly report customer reimbursables as revenues rather than offsetting such amounts against the related expenses. See above and “Restatement of Previously Reported Amounts” in Note A and “Internal Review” in Note D in the “Notes to Consolidated Financial Statements” for further discussion of these matters. Amounts for

fiscal year 2005 were not previously audited or filed with the SEC, but had been announced. Amounts for the first three fiscal quarters in that year had been filed.

 

 

 

 

 

 

 

 

Fiscal Year 2005 compared to Fiscal Year 2004

 

Consolidated Results

 

Our operating revenue increased to $673.6 million, or 9.2%, for fiscal year 2005 from $617.0 million for fiscal year 2004. The increase in operating revenue occurred in our Helicopter Services segment and our Production Management Services segment primarily due to higher third-party revenue from rate increases in our North American Operations and a favorable change in the mix of aircraft in our International Operations as compared to fiscal year 2004. Operating revenue from our Production Management Services segment increased due to additional activity from a major customer. Our operating expense for fiscal year 2005 increased to $596.0 million, or 8.4%, from $549.9 million in fiscal year 2004. The increase was primarily a result of higher labor and maintenance costs. Our operating income and operating margin for fiscal year 2005 decreased to $77.6 million and 11.5%, respectively, compared to $88.7 million and 14.4%, respectively, in fiscal year 2004. However, excluding the curtailment gain of $21.7 million in fiscal year 2004 discussed under “ — Fiscal Year 2004 compared to Fiscal Year 2003 — Consolidated Results”, our operating income and operating margin for fiscal year 2005 increased compared to fiscal year 2004 primarily as a result of higher revenue.

 

Net income for fiscal year 2005 was $51.6 million, compared to net income of $49.8 million in fiscal year 2004. Excluding the curtailment gain discussed above, our net income for fiscal year 2005 increased by $17.5 million compared to fiscal year 2004, primarily as a result of higher revenue and a decrease in other expense. Other expenses decreased due to lower foreign exchange losses in fiscal year 2005 as compared to fiscal year 2004 and the $6.2 million loss on extinguishment of debt charged to expense during fiscal year 2004. Set forth below is a discussion of the results of operations of our segments and business units.

 

Helicopter Services

 

Operating revenue from Helicopter Services increased to $621.2 million, or 8.5%, during fiscal year 2005 and operating expenses increased 7.6% to $544.9 million from $506.2 million. This resulted in an operating margin of 12.3% for fiscal year 2005 as compared to 15.2% for fiscal year 2004. Operating income in fiscal year 2004 included a $20.4 million curtailment gain allocated to Helicopter Services. Helicopter Services results are further explained below by business unit.

North American Operations.  Operating revenue from our North American Operations increased by 3.2% in fiscal year 2005 as compared to the prior fiscal year while flight activity decreased by 4.1%. Operating revenue increased despite a decrease in flight hours as a result of the full impact in the current fiscal year of a 7% rate increase for the U.S. Gulf of Mexico that was phased in throughout fiscal year 2004, and an increase in ad hoc flights for hurricane evacuations during the second quarter of fiscal year 2005.

 

Operating expense from our North American Operations increased to $142.8 million for fiscal year 2005 from $134.5 million for fiscal year 2004. The increase in operating expense was primarily in salary costs and additional depreciation expense. Depreciation expense for fiscal year 2005 was $15.6 million, or 16.8% higher than for fiscal year 2004, primarily due to additional aircraft added to the fleet during the past two fiscal years. The increase in depreciation expense was offset in part by a $3.0 million decrease resulting from a change in salvage value and useful lives on certain aircraft types. As a result of higher operating expense, our operating margin in our North American Operations decreased to 14.8% for fiscal year 2005 from 17.1% for fiscal year 2004.

 

North Sea Operations.  Operating revenue from North Sea Operations increased for fiscal year 2005 to $238.6 million, or 6.3%, from $224.4 million for fiscal year 2004. Included in fiscal year 2005 operating revenue is $19.5 million attributable to foreign exchange effects. Excluding the foreign exchange effects, revenue from North Sea Operations decreased 2.4% in fiscal year 2005 primarily due to lower flight activity during fiscal year 2005 as compared to fiscal year 2004. Flight hours decreased by 10.6% between the current fiscal year and the prior fiscal year. The reduction in flight hours is due primarily to a change in our lease arrangements in Norway. While we continue to lease aircraft to our unconsolidated affiliate, Norsk Helikopter AS, we no longer provide maintenance services for these aircraft. Therefore, we no longer report the flight hours. Excluding the flight hours for Norway, flight activity decreased by 4.4% from fiscal year 2004 to fiscal year 2005.

 

Operating expenses from North Sea Operations increased $4.2 million in fiscal year 2005. Included in the operating expense for the North Sea Operation is $17.6 million attributable to foreign exchange effects. Excluding the foreign exchange effects, operating expense decreased 6.5% in fiscal year 2005. This decrease was primarily in salary costs due to the restructuring of the North Sea Operations and the amendment of the pension plan. The operating margin in North Sea Operations increased to 12.0% from 8.3% between the current fiscal year and the prior fiscal year.

 

International Operations.  Operating revenue from International Operations increased in fiscal year 2005 to $222.5 million, or 21.1%, from $183.8 million in fiscal year 2004. Flight activity increased 1.1% from the prior fiscal year. Increases were primarily noted in Australia and Nigeria with a decrease in activity noted in Brazil.

 

Flight activity and operating revenue for Australia increased for fiscal year 2005 by 15.8% and 34.5%, respectively, over fiscal year 2004. The increase was primarily due to a 15-month contract that began in July 2004 and higher ad hoc flying for fiscal year 2005.

 

In Nigeria, flight activity and operating revenue for fiscal year 2005 increased 6.6% and 22.9%, respectively, compared to fiscal year 2004. The increase is primarily due to the addition of two medium aircraft in November 2003 and two large and one medium aircraft in April 2004. Again, the increase in revenue significantly exceeded the increase in flight activity as a result of a favorable change in the mix of aircraft. Nigeria accounted for approximately 43.2% of operating revenue from International Operations in fiscal year 2005. As a result of the potential cancellation by customers of their contracts with us, we may experience a substantial reduction in business activity in Nigeria in future periods.

 

In Brazil, flight activity decreased 14.4% and operating revenue decreased 1.9% for fiscal year 2005 compared to fiscal year 2004. Flight activity decreased significantly more than operating revenue primarily as a result of a change in the mix of aircraft operating in Brazil. While the decrease in flight activity negatively affected operating revenue, the addition of a large aircraft at higher rates largely offset the decrease. Brazil accounted for approximately 5% of operating revenue from International Operations in fiscal year 2005. We are negotiating the termination of our ownership interest in the joint venture that operates in Brazil, and upon such termination, absent our development of a satisfactory relationship with another local operating company, we expect to experience a substantial reduction in business activity in Brazil in future periods.

Operating expenses for our International Operations increased in fiscal year 2005 to $197.6 million, or 18.8%, from $166.3 million in fiscal year 2004. The increase was primarily due to higher salary costs, maintenance costs and lease fees related to an increase in activity in our international areas. The operating margin in our International Operations increased to 11.2% in the current fiscal year from 9.6% in the prior fiscal year.

 

Technical Services.  Operating revenue for Technical Services decreased to $34.3 million during fiscal year 2005 from $44.9 million for fiscal year 2004 primarily due to a restructuring of the technical service business and the sale of certain contracts to an existing joint venture in November 2004. Operating expenses decreased from $42.3 million for fiscal year 2004 to $36.1 million for fiscal year 2005. The decrease in operating expenses is primarily due to the reduction in activity caused by the restructuring and sale of contracts offset by severance costs of approximately $2.8 million recorded in the current fiscal year related to the downsizing of the Technical Services operations in the United Kingdom. The restructuring reduced staffing levels by approximately 80 positions over a nine-month period. As a result of lower operating revenues and the severance costs, our operating margin for Technical Services decreased to (5.4)% in fiscal year 2005 from 5.7% in fiscal year 2004.

 

Production Management Services

 

Operating revenue from the Production Management Services business increased to $59.0 million, or 18.5% in fiscal year 2005 from $49.8 million in fiscal year 2004 primarily due to increased activity with a major customer that needed additional production management services. Operating expenses increased to $55.1 million, or 16.5%, in fiscal year 2005 from $47.3 million in fiscal year 2004 primarily due to higher labor and helicopter transportation costs. As a result of the higher revenue, our operating margin increased to 6.6% from 5.0% in fiscal year 2004.

 

General and Administrative Costs

 

Consolidated general and administrative costs increased by $6.4 million for fiscal year 2005 primarily due to an increase in compensation costs and higher professional fees, partially offset by a decrease in restructuring charges for our North Sea Operations. Restructuring charges for our North Sea Operations in fiscal years 2005 and 2004 were approximately $1.1 million and $3.1 million, respectively. Professional fees in the current fiscal year included fees incurred in connection with the investigation by outside counsel of activities related to the Internal Review, an executive search, Sarbanes Oxley compliance initiatives and other projects requiring consulting services.

 

Earnings from Unconsolidated Affiliates

 

Earnings from unconsolidated affiliates decreased in fiscal year 2005 by $1.4 million primarily due to a decrease in dividends received from investments accounted for under the cost method of accounting. The decrease in dividends received was primarily related to a reduction in dividends from our unconsolidated affiliate in Mexico, which experienced a decline in activity as a result of the completion of the PEMEX contract as previously discussed.

 

Interest Expense, Net

 

Interest expense, net, decreased in fiscal year 2005 by $2.7 million from fiscal year 2004. Approximately $1.2 million of this decrease resulted from lower interest expense during fiscal year 2005 caused by the refinancing of our 6% Convertible Subordinated Notes and 77/8% Senior Notes with the issuance 61/8% Senior Notes during fiscal year 2004 and an increase in interest income of $1.5 million resulting from higher cash balances and investment returns in fiscal year 2005. Interest expense in fiscal year 2005 and fiscal year 2004 was offset by approximately $1.3 million and $1.2 million, respectively, of capitalized interest.

 

Loss on extinguishment of debt

 

In fiscal year 2005, no loss on extinguishment of debt was recognized, compared to a recognized loss on extinguishment of debt of $6.2 million in fiscal year 2004. The loss in fiscal year 2004 related to the redemption on July 29, 2003 of our 6% Convertible Subordinated Notes and our 77/8% Senior Notes. Approximately $4.7 million of the loss in fiscal year 2004 pertained to the payment of redemption premiums and $1.5 million pertained to the

payable, accrued liabilities and current deferred taxes. The increase in working capital in fiscal year 2004 was due primarily to the redemption in July 2003 of $90.9 million of the 6.0% Convertible Subordinated Notes due in December 2003 with proceeds from the issuance of the 61/8% Senior Notes. See “Financing Activities” below.

 

Net cash flows provided by operating activities were $104.5 million, $83.3 million, $62.4 million for fiscal years 2005, 2004, and 2003, respectively. The increase in cash flows provided by operating activities in fiscal year 2005 was primarily the result of an increase in net income after excluding the non-cash impact in fiscal year 2004 of the curtailment gain. The increase in cash flows in fiscal year 2004 from fiscal year 2003 was primarily the result of an increase in non-cash working capital.

 

Investing Activities

 

Cash flows used in investing activities were $46.5 million, $62.6 million and $48.2 million for fiscal years 2005, 2004 and 2003, respectively. The following table shows capital expenditures for fiscal years 2005, 2004 and 2003 (in thousands):

 

 

Fiscal Year 2005.  During fiscal year 2005, we received proceeds of $26.6 million primarily from the disposal of ten aircraft and certain equipment, which resulted in a net gain of $5.9 million. We also received proceeds of $15.1 million from the sale of seven aircraft and certain contracts in our Technical Services business unit to a 50% owned unconsolidated affiliate which resulted in a gain of $2.1 million. See Note J in the “Notes to Consolidated Financial Statements” for further discussion.

 

In fiscal year 2003, we initiated a fleet renewal program. Under the program, we expect to incur additional capital expenditures over the next five to seven fiscal years to replace certain of our aircraft and upgrade strategic base facilities. As of March 31, 2005, we have expended $99.6 million as deposits and progress payments toward firm purchase commitments of $142.0 million under the fleet renewal program. Subsequent to March 31, 2005, we made additional payments under this program of $51.4 million and incurred additional firm purchase commitments of $286.2 million. To the extent they occur, any sales and trade-ins of older aircraft will reduce these projected expenditures. We plan to use internally generated funds and alternative financing sources, if needed, to meet our obligations under the program.

 

Apart from commitments under our fleet renewal program, we purchased one large aircraft for $17.1 million. Additionally, subsequent to March 31, 2005, we purchased five small aircraft for $6.4 million and paid deposits of $17.8 million for five large aircraft and four medium aircraft. These aircraft acquisitions were made with existing cash and were made to fulfill customer contract requirements. Subsequent to March 31, 2005, we also entered into firm purchase commitments for aircraft outside of the fleet renewal program of $130.0 million.

 

Fiscal Year 2004.  During fiscal year 2004, we received proceeds of $6.9 million primarily from the disposal of aircraft and equipment, which resulted in a net gain of $3.9 million. Apart from commitments under our fleet and facilities renewal and refurbishment program, we purchased one small aircraft for $1.0 million and three medium aircraft for $12.6 million. These aircraft acquisitions were made with existing cash and were made to fulfill customer contract requirements.

 

In March 2004, we entered a purchase agreement with Bell Helicopter for a new medium sized aircraft. The total purchase price for the aircraft is $6.3 million, of which a deposit of $0.3 million was made in April 2004. The balance of the purchase price was paid with cash from operations in fiscal year 2005.

 

In January 2004, we entered into a purchase agreement with Eurocopter for two new large aircraft to be delivered in calendar 2005. In connection with this purchase agreement, Eurocopter has found a purchaser for four

of our used large aircraft. The proceeds from the sale of the four used aircraft and some surplus spares will principally fund the purchase of the two new aircraft.

 

In May 2003, we entered into a purchase agreement with Bell Helicopter for five new medium aircraft. The total purchase price of the five aircraft was $30.1 million. We funded $12.2 million of the purchase price from available cash and the balance of $17.9 million was financed by the manufacturer for 90 days with interest payable at 3-month LIBOR plus 2.95%. In addition, we purchased a sixth medium aircraft for $5.3 million. These aircraft were purchased to meet the contract renewal requirements of an existing customer of our unconsolidated affiliate in Mexico, and replaced older aircraft currently being used on the contract.

 

On July 11, 2003, we sold these six aircraft, at our cost, to a newly formed limited liability company, Rotorwing Leasing Resources, L.L.C. or RLR. The capital of RLR is owned 49% by us and 51% by the same principal with whom we have other jointly owned businesses operating in Mexico. RLR financed 90% of the purchase price of these aircraft through a five-year term loan of $31.8 million with a bank requiring monthly principal and interest payments of $346,047 and a balloon payment of $18.3 million due July 11, 2008 (the “RLR Note”). The RLR Note is secured by the six aircraft. We guaranteed 49% of the RLR Note ($15.6 million) and the other shareholder guaranteed the remaining 51% of the RLR Note ($16.2 million). In addition, we have given the bank a put option which the bank may exercise if the aircraft are not returned to the United States within 30 days of a default on the RLR Note. Any such exercise would require us to purchase the RLR Note from the bank. We simultaneously entered into a similar agreement with the other RLR shareholder which requires that, in event of exercise by the bank of its put option to us, the other shareholder will be required to purchase 51% of the RLR Note from us. As of March 31, 2005, a liability of $0.9 million representing the fair value of this guarantee was reflected in our balance sheet in other liabilities and deferred credits. The fair value of the guarantee being amortized over the term of the RLR Note.

 

As of June 30, 2005, we were in default of various financial information reporting covenants under the RLR Note for not providing financial information for fiscal year 2005 when due, and also for not providing similar information to other creditors. This situation resulted from the activities identified in the Internal Review discussed earlier which prevented us from filing our financial report for fiscal year 2005 on time. The bank initially provided a waiver through August 14, 2005, and subsequently provided a second waiver through November 15, 2005. Further, we extended the waiver at our election through December 15, 2005 upon payment of a fee, and we have elected to exercise our option to further extend these waivers through January 16, 2006 upon payment of an additional fee.

 

We used the proceeds received from the sale of the aircraft to RLR to repay the $17.9 million short-term note to the manufacturer in July 2003. No gain or loss was recognized on the sale.

 

As of March 31, 2004, we expended $57.4 million as deposits and progress payments, and incurred firm purchase commitments of $138.6 under the November 2002 fleet and facilities renewal and refurbishment program.

 

Fiscal Year 2003.  During fiscal year 2003, we received proceeds of $22.8 million primarily from the disposal of aircraft and equipment, which resulted in a gain of $5.0 million, and we purchased 12 small aircraft for $14.4 million and four medium aircraft for $8.5 million. In addition, we paid $3.5 million of the balance due on an AS 332L2 Super Puma. An additional approximately $4.4 million was paid in November 2003 on this aircraft.

 

As of March 31, 2003, we had expended $18.2 million as deposits and progress payments, and entered into incurred firm purchase commitments of $125.2 under the fleet renewal program discussed above.

 

Financing Activities

 

Cash flows provided by (used in) financing activities were $2.8 million, $3.5 million and ($1.1 million) in fiscal years 2005, 2004 and 2003, respectively. Total debt as of March 31, 2005 was $262.1 million as compared to $255.5 million and $232.8 million as of March 31, 2004 and 2003, respectively.

 

Revolving Credit Facility.  As of March 31, 2005, we had a $30.0 million revolving credit facility with a U.S. bank that expires on August 31, 2006. This credit facility is subject to a sublimit of $10.0 million for the issuance of letters of credit. Borrowings bear interest at a rate equal to one month LIBOR plus a spread ranging from 1.25% to 2.0%. The rate of the spread depends on a financial covenant ratio under the credit facility. Borrowings

under this credit facility are unsecured and are guaranteed by certain of our U.S. subsidiaries. We had no amounts drawn under this facility as of March 31, 2005, but did have $0.7 million of letters of credit utilized which reduced availability under the facility. As of March 31, 2005, we were in compliance with all of the covenants under this credit facility. As of June 30, 2005, however, we were in default of various financial information reporting covenants for not providing financial information for fiscal year 2005 when due, and also for not providing similar information to other creditors. This situation resulted from the activities identified in the Internal Review discussed earlier which prevented us from filing our financial report for fiscal year 2005 on time. The bank initially provided a waiver through August 14, 2005, and subsequently provided a second waiver through November 15, 2005. Waivers were extended through December 15, 2005 upon payment of a fee, and we have elected to exercise our option to further extend these waivers though January 16, 2006 upon payment of an additional fee.

 

U.K. Facilities.  As of March 31, 2005, Bristow had a £6 million ($11.3 million) facility for letters of credit, of which £3.4 million ($6.4 million) was outstanding, and a £1 million ($1.9 million) net overdraft facility, of which no borrowings were outstanding. The letter of credit facility is provided on an uncommitted basis and outstanding letters of credit bear a rate of 0.7% per annum. Borrowings under the net overdraft facility are payable on demand and bear interest at the bank’s base rate plus a spread that can vary between 1% and 3% per annum depending on the net overdraft amount. The net overdraft facility was scheduled to expire on August 31, 2005, but has been extended to August 31, 2006. The facilities are guaranteed by certain of Bristow’s subsidiaries and secured by several helicopter mortgages and a negative pledge of Bristow’s assets.

 

6.0% Convertible Subordinated Notes.  In December 1996, we issued $98.0 million aggregate principal amount of 6.0% convertible subordinated notes due 2003. During 1999, we repurchased $7.1 million in principal amount of the notes in the open market. The notes were convertible at any time into our Common Stock at a conversion price of $22.86 per share, or approximately 43.74 shares per $1,000 principal amount, and were redeemable at our option. In July 2003, we redeemed all the outstanding notes, $90.9 million, as discussed in Note B in the “Notes to Consolidated Financial Statements.”

 

77/8% Senior Notes.  In January 1998, we issued $100.0 million aggregate principal amount of 77/8% senior notes due 2008. The notes were unsecured and were guaranteed by certain of our U.S. subsidiaries. The notes became redeemable in full at our option beginning in January 2003. In July 2003, we redeemed all the outstanding notes, $100.0 million, as discussed in Note B in the “Notes to Consolidated Financial Statements.”

 

61/8% Senior Notes.  In June 2003, we issued $230.0 million aggregate principal amount of 61/8% senior notes due 2013 (“Senior Notes”). The Senior Notes are unsecured and are guaranteed by certain of our U.S. subsidiaries. The Senior Notes are redeemable at our option. A portion of the net proceeds from the issuance and sale of these notes was used to redeem all our outstanding 77/8% Senior Notes and 6.0% Convertible Subordinated Notes. The remaining net proceeds were used for general corporate purposes. On June 16, 2005, we received notice from the trustee that we were in default of financial reporting covenants in the indenture under which the Senior Notes were issued as we were not able to provide the required financial reporting information within the time period specified in the covenants and that, unless the deficiency was remedied within 60 days, an event of default would occur under the indenture. On August 16, 2005 we completed a consent solicitation with the holders of the Senior Notes to waive defaults under and make amendments to the indenture under which the Senior Notes were issued. Under the terms of the consent solicitation, a consent fee of $6.25 per $1,000 principal amount of Senior Notes, or $1.4 million, was paid on August 17, 2005 to holders of Senior Notes on July 25, 2005 that delivered (and not revoked) valid consents on or prior to August 15, 2005. The majority of Senior Note holders waived the defaults under the indenture through November 15, 2005. Further, we extended the waivers through December 15, 2005 upon payment of an additional fee, and we have elected to exercise our option to further extend these waivers through January 16, 2006 upon payment of another additional fee. See Note M in the “Notes to Consolidated Financial Statements” for further discussion.

 

Limited Recourse Term Loans.  Our debt includes two limited recourse term loans with a United Kingdom bank arising in connection with sale and lease transactions for two aircraft entered into with a special purpose entity in fiscal year 1999. The term loans are secured by both aircraft and our guarantee of the underlying lease obligations. In addition, we have provided asset value guarantees totaling up to $3.8 million, payable at expiration of the leases depending on the value received for the aircraft at the time of disposition. As a result of these

guarantees and the terms of the underlying leases, for financial statement purposes, the aircraft and associated term loans are reflected on our consolidated balance sheet. As of March 31, 2005, the aggregate balance of the term loans was $21.1 million. The term loans provide for rates of interest payable to the bank of 7.1% and 7.2%, quarterly amortization payments totaling $0.7 million and balloon payments of $9.8 million and $9.2 million in fiscal years 2007 and 2008, respectively.

 

Short term advance from customer.  Our debt includes a $3.4 million advance from a customer that is reimbursement for value added taxes paid by us, the ultimate obligation for which is currently under dispute between ourselves and the customer and the taxing authority. The advance is non-interest bearing and will be repaid as taxes are refunded to us by the applicable governmental agency.

 

Sakhalin Aviation Services Ltd. advance.  In connection with the acquisition of Aviashelf, a Russian helicopter company, we assumed the note to Sakhalin Aviation Services Ltd. (“SASL”). SASL is the former owner of Aviashelf. Our balance sheet reflects advances of approximately $0.6 million made to Aviashelf by SASL. The advances are in the form of a non-interest bearing note with no specific repayment terms. See Note I in the “Notes to Consolidated Financial Statements” for further discussion of the acquisition.

 

Sakhalin Debt.  On July 16, 2004, we assumed various existing debt liabilities that were outstanding and secured against assets purchased as part of our acquisition of a business in Sakhalin, Russia. See Note I in the “Notes to Consolidated Financial Statements” for further discussion of the acquisition. Two promissory notes totaling $1.7 million at March 31, 2005 are being repaid over five years at an interest rate of 8.5% and are scheduled to be fully paid in 2009 and 2010. The other liabilities assumed included a finance lease on an aircraft totaling $1.2 million at March 31, 2005, with an interest rate of 6.5% and expiring in 2007; a finance lease on an aircraft totaling $3.3 million at March 31, 2005, with an interest rate of 8.5% and expiring in 2009 with a final termination payment of $2.4 million; and two loan notes on spares packages totaling $0.8 million at March 31, 2005, with interest rates at 10% to 18% expiring in 2007.

 

Surety Bond.  As of March 31, 2005, we had a surety bond outstanding to the Mexican Federal Electric Commission in the amount of 77.4 million Mexican pesos ($6.9 million). The surety bond guarantees performance of our unconsolidated Mexican affiliate under its contract with the customer.

 

U.K. Taxes.  During January 2004, we reached a settlement with the United Kingdom Inland Revenue regarding the tax treatment for certain aircraft maintenance expenditures by our primary United Kingdom operating company. These expenditures are contractual cash payments made to certain repair and maintenance service providers in advance of the actual repair requirement. We have historically deducted these expenditures for tax purposes as the payments were made, but will now treat these expenditures as prepayments for United Kingdom income tax purposes to be deducted when the repair or maintenance service actually occurs. This change in treatment was made effective April 1, 2002, and resulted in a cash payment for taxes and interest of £4.0 million ($7.4 million) in fiscal year 2004, with a further payment during the first quarter of fiscal year 2005 of £4.6 million ($8.3 million). The payment of these taxes will not affect total tax expense on our income statement but will instead be treated as a deferred tax asset to be deducted in the future when the repair and maintenance services are provided.

 

Pension Plan.  As of March 31, 2005, we had recorded on our balance sheet a $158.0 million pension liability and a $36.5 million prepaid pension asset related to the Bristow pension plan. The liability represents the excess of the present value of the defined benefit pension plan liabilities over the fair value of plan assets that existed at that date. The asset represents the cumulative contributions made by Bristow in excess of accrued net periodic pension cost. In addition to the recognition of the minimum pension liability, the United Kingdom rules governing pension plan funding require us to make additional cash contributions to the plan. In February 2004, we agreed to a schedule of contributions for our defined benefit pension plan in order to comply with the minimum funding rules of the United Kingdom. Those rules require us to make scheduled contributions in amounts sufficient to bring the plan up to 90% funded (as defined by United Kingdom legislation) within three years and 100% funded within ten years. In recognition of participants’ concerns regarding the under-funded position of the plan as well as other changes we made to the plan (as more fully described under “— Executive Overview — Other Matters — Prior to Fiscal Year 2005”), on February 1, 2004, we contributed £5.2 million ($9.6 million) to the plan to reach the 90% funded level, and agreed to monthly contributions of £0.2 million ($0.4 million) for the next ten years to comply with the 100% funding requirement. The £5.2 million ($9.6 million) contribution was made from existing cash balances and did

not materially impact our working capital position. In March 2005, we agreed, subject to our review every three years, to increase the monthly contributions to £0.4 million ($0.8 million) for the next 20 years beginning May 2005. Nevertheless, regulatory agencies in the United Kingdom may require us to increase the monthly contributions further.

 

Minority Interest.  In March 2004, we prepaid $11.4 million, representing a portion of the put/call option price over the 51% of the ordinary share capital of Bristow that we do not own. This payment was made from existing cash balances. Beginning in September 2004, we began to pay the amount of guaranteed return on the put/call on a quarterly basis. In fiscal year 2005, the amount paid was £46,776 ($85,771) representing the amount due from May 8, 2004 to December 31, 2004. Subsequent to March 31, 2005, we paid £36,198 ($65,919) representing the amount due from January 1, 2005 to June 30, 2005. In May 2004, we acquired eight million shares of deferred stock (essentially a subordinated class of stock with no voting rights) from Bristow for £1 per share ($14.4 million in total). Bristow used the proceeds to redeem £8 million of its ordinary share capital at par value from all of its outstanding shareholders, including ourselves. The result of these changes will be to reduce the cost of the guaranteed return to the other shareholders, which we record as minority interest expense, by $2.3 million on an annual basis.

 

Contractual Obligations and Commercial Commitments.  We have the following contractual obligations and commercial commitments as of March 31, 2005: